report for the three months ended december 31, 2011 and … 31 2011-final.pdf · report for the...

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Report for the Three Months Ended December 31, 2011 and 2010

#7-13511 Crestwood Place, Richmond BC V6V 2E9 Canada Head Office: 604-303-7964 Fax: 604-303-7987

Investor Relations: 1-800-349-7964 ext. 219

[email protected]

www.pyng.com

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PYNG MEDICAL CORP.

CONDENSED INTERIM CONSOLIDATED FINANCIAL REPORT

For the Three Months Ended December 31, 2011 and 2010

(Unaudited)

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PYNG MEDICAL CORP.

Condensed Interim Consolidated Statements of Financial Position

As at December 31, 2011, September 30, 2011 and October 01, 2010(Expressed in Canadian Dollars - Unaudited)

December 31 September 30 October 01

ASSETS 2011 2011 2010

(Note 19) (Note 19)Current

Cash 117,462$ 195,414$ 282,993$ Accounts receivable 513,819 606,358 1,211,409 Other receivable 46,541 76,763 69,435

Inventories (Note 7) 1,014,445 1,036,492 441,063 Prepaid expenses 94,371 129,028 68,325

1,786,638 2,044,055 2,073,225

Non-currentProperty and equipment (Note 8) 119,724 126,942 151,734 Intangible assets (Note 9) 6,458,864 6,439,962 5,854,428

8,365,226$ 8,610,959$ 8,079,387$

LIABILITIES

Current

Bank line of credit (Note 10) 333,215$ 326,427 258,081$ Accounts payable 753,853 1,027,035 422,626 Accrued liabilities 414,290 417,922 350,011 Loan payable (Note 11) 82,452 158,961 281,251

1,583,810 1,930,345 1,311,969 Non-current

Loan payable (Note 11) - - 204,058 Convertible debentures (Note 12) 378,928 363,874 306,454 Other long-term liabilities (Note 13) 648,425 668,318 656,587

Deferred income tax liabilities 440,000 440,000 461,000

3,051,163 3,402,537 2,940,068

SHAREHOLDERS' EQUITYEquity portion of convertible debentures 191,825 191,825 191,825 Share capital (Note 14) 8,422,339 8,422,339 7,844,724

Share-based payments reserve (Note 14) 651,981 651,981 639,882 Accumulated deficit (3,952,082) (4,057,723) (3,537,112)

5,314,063 5,208,422 5,139,319

8,365,226$ 8,610,959$ 8,079,387$

Commitments (Note 17)Subsequent events (Note 18)

Approved and authorized for issue on behalf "L.J. (Bud) Evans" "Herbert A. Toms III"of the Board of Directors on March 27, 2012 Director Director

See accompanying notes to the consolidated financial statements

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PYNG MEDICAL CORP.

Condensed Interim Consolidated Statements of Comprehensive IncomeFor the Three Months Ended December 31, 2011 and 2010(Expressed in Canadian Dollars, except number of shares - Unaudited)

2011 2010

(Note 19)

Sales 1,327,190$ 2,041,737$

Cost of goods sold 508,699 643,388

Gross margin 818,491 1,398,349

Operating expensesResearch and product development 46,586 92,853General and administrative 343,157 407,353Sales and marketing 195,541 293,089Amortization of property and equipment 7,217 14,219 Amortization of intangible assets 113,936 108,919Royalties 1,757 4,865

708,194 921,298

Income from operations 110,297 477,051

Interest expenses 25,553 33,044Other finance costs 15,053 14,355Foreign exchange (gain) loss (35,950) 16,645

4,656 64,044

Net income and comprehensive income for the period 105,641$ 413,007$

Earnings per shareBasic 0.01$ 0.03$ Diluted 0.01$ 0.03$

Weighted average number of shares outstanding Basic 15,001,583 12,066,800 Diluted 15,001,583 14,802,527


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PYNG MEDICAL CORP.

Condensed Interim Consolidated Statements of Cash Flows


(Expressed in Canadian Dollars - Unaudited)

2011 2010

Cash provided from (used for)Operating activities

Net income for the period 105,641$ 413,007$

Items not involving cash

Amortization of property and equipment 7,217 14,219

Amortization of intangible assets 113,936 108,919

Amortization of deferred financing costs 5,415 5,517 Accreted interest on convertible debentures 9,639 8,838 Stock-based compensation - 8,958 Unrealized foreign exchange (gain) loss (20,270) 27,981

221,578 587,439 Net change in non-cash working capital items

Accounts receivable 76,983 158,564

Other receivable 30,223 24,563 Inventories (124,077) (9,961) Prepaid expenses 34,657 (12,713)

Accounts payable and accrued liabilities 25,012 29,309

264,376 777,201

Financing activities

Drawn down from bank line of credit 6,788 (68,467) Repayment on loan payable (76,509) (67,478) Proceeds from common shares issued - 600,000

Share issuance cost - (3,000)

(69,721) 461,055

Investing activities

Additions to intangible assets (269,031) (91,180) Acquistion of property and equipment - (18,171)

(269,031) (109,351)

Effect of exchange rate changes on cash (3,576) (29,441)

(Decrease) increase in cash (77,952) 1,099,464

Cash, beginning of period 195,414 282,993

Cash , end of period 117,462$ 1,382,457$

Supplemental information

Interest paid 25,553$ 30,360$


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PYNG MEDICAL CORP.

Condensed Interim Consolidated Statements of Changes in Equity


(Expressed in Canadian Dollars - Unaudited)

Number of

Shares Amount

Balance as of October 1, 2010 12,001,583 7,844,724 639,882 191,825 (3,537,112) 5,139,319

Shares issued for cash, gross proceeds 3,000,000 600,000 - - - 600,000

Share issuance cost - (22,385) - - - (22,385)

Stock-based compensation on options granted - - 8,958 - - 8,958

Net loss for the period - - - - 413,007 413,007

Balance as of December 31, 2010 15,001,583 8,422,339 648,840 191,825 (3,124,105) 6,138,899

Stock-based compensation on options granted - 3,141 - - 3,141

Net loss for the period - - - (933,618) (933,618)

Balance as of September 30, 2011 15,001,583 8,422,339$ 651,981$ 191,825$ (4,057,723) 5,208,422$

Net income for the period - - - 105,641 105,641

Balance as of December 31, 2011 15,001,583 8,422,339$ 651,981$ 191,825$ (3,952,082)$ 5,314,063$

Share Capital


Share-based

Payments

Reserve

Equtiy Portion of

Convertible

Debentures

Accumulated

Deficit

Total Shareholders'

Equity

PYNG MEDICAL CORP. Notes to Condensed Interim Consolidated Financial Statements For the Three Months Ended December 31, 2011 and 2010 (Unaudited) (Expressed in Canadian Dollars)

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1. CORPORATE INFORMATION

Pyng Medical Corp., (the Company or Pyng) is a public company incorporated under the British Columbia Business Corporations Act. PYNG is a reporting issuer in British Columbia and Alberta and its shares are listed on the TSX Venture Exchange (“TSX-V”) under the symbol PYT. The address of the Company’s registered office is 15th Floor, 1055 West Georgia Street, Vancouver, B.C., Canada. and its principal place of business is located at Unit 7, 13511 Crestwood Place, Richmond, B.C., Canada. Pyng is a global medical device company that discovers, develops, manufactures and markets a suite of innovative trauma and resuscitation products that can save lives in seconds. Each product in the portfolio meets the ease of clinician to use, safety, efficacy, and overall competitive value criteria essential for life saving trauma products. Currently, the Company is in the business of producing and selling the FAST1® Intraosseous Infusion System, TPOD® Pelvic Stabilizer, MAT® Tourniquet, and developing FASTx™ Sternal Intraosseous Device, and CRIC™ Cricothyrotomy System.

2. BASIS OF PREPARATION

a) Statement of Compliance

These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standards (“IAS”) 34 Interim Financial Reporting. This is the first time that the Company has prepared its financial statements in accordance with International Financial Reporting Standards (“IFRS”). First-time Adoption of International Financial Reporting Standards (“IFRS 1”) has been applied. The condensed interim consolidated financial statements do not include all of the information required for full annual financial statements.

An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flow is provided in note 19. This note includes reconciliations of equity and total comprehensive income for comparative periods and of equity at the date of transition reported under previous Canadian Generally Accepted Accounting Principles (Canadian GAAP) to those reported under IFRS.

The financial statements were authorized for issue by the Board of Directors on March 27, 2012.

b) Basis of Measurement

These consolidated financial statements have been prepared on a historical cost basis and presented in Canadian dollars, which is also the Company’s functional currency. All values are rounded to the nearest dollar, unless otherwise indicated.

c) Going Concern of Operations

As at December 31, 2011, the Company has cash in the amount of $117,462 (September 30, 2011

- $195,414; October 1, 2010 - $282,993) and working capital in the amount of $202,828

(September 30, 2011 - $113,710; October 1, 2010 - $761,256). The Company is currently

pursuing additional debt and equity financing to fund its working capital needs.


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2. BASIS OF PREPARATION (Continued) c) Going Concern of Operations (Continued)

These condensed interim consolidated financial statements have been prepared in accordance

with International Financial Reporting Standards applicable to a going concern, which assumes

that the Company will be able to meet its obligations and continue its operations for the next

twelve months. The Company’s ability to continue as a going concern is dependent upon its

ability to achieve future profitable operations and to obtain the necessary financing to meet its

obligations and repay its liabilities arising from normal business operations when they become

due. Management plans to secure the necessary financing through the combination of new credit

facilities and issuance of new equity or convertible debt instruments. There can be no assurance

that these initiatives will be successful.

d) Use of Estimates and Judgements The presentation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the period. Significant areas requiring the use of estimates include the rates of amortization for property and equipment, deferred product development costs and intellectual property rights, impairment of long-lived assets, estimates of accounts payable and accrued liabilities, the assumptions used in the determination of fair value of stock-based payments, and the determination of valuation allowance for deferred income tax assets. These estimates and judgements are further discussed in note 5.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all years presented in these financial statements and in preparing the opening IFRS statement of financial position at October 1, 2010 for the purposes of the transition to IFRS, unless otherwise indicated.

a) Basis of Presentation

These consolidated financial statements include the accounts of the parent and its wholly-owned subsidiary, Pyng Medical USA Corp. All material inter-company transactions and balances have been eliminated on consolidation.

b) Cash and Cash Equivalents

Cash includes cash on hand and demand deposits. Cash equivalents comprise short-term, highly liquid investments that are readily convertible to known amounts of cash which are subject to insignificant risk of change and have maturities of three months or less from the date of acquisition, held for the purpose of meeting short-term cash commitments rather than for investing or other purposes.


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3. SIGNIFICANT ACCOUNTING POLICIES (Continued) c) Inventories

Raw materials, work-in-progress and finished goods are measured at the lower of cost and net realizable value. The cost of the inventory is determined on a weighted average basis and includes expenditures incurred in acquiring inventories, production cost and other cost incurred in bring them to their existing location and condition. In the case of finished goods and work in progress, the cost includes materials, labor and appropriate share of production overhead based on normal operating capacity. The net realizable value of inventory is generally considered to be the selling price in the ordinary course of business less the estimated costs of completion and estimated costs to make the sale. The amount of any write-down of inventories to net realizable value and all loss of inventories is recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.

d) Property and Equipment

Property and equipment are recorded at cost less accumulated amortization and accumulated impairment losses. Cost included expenditures that are directly attributable to the acquisition of the assets. Property and equipment are amortized from the date of acquisition over the estimated useful lives of the assets at the following annual rates and methods:

Assets Annual Rate Basis

Furniture and office equipment 20% Declining balance

Medical equipment 20% Declining balance

Computer equipment 30% Declining balance

Leasehold improvements 30% Straight-line

Software 100% Straight-line

Amortization methods, useful lives and residual values are reviewed at each fiscal year end and adjusted if appropriate. Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of the property and are recognized in profit and loss.

e) Intangible Assets Intangible assets consist of deferred product development costs, website development costs, patents and intellectual property rights.


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3. SIGNIFICANT ACCOUNTING POLICIES (Continued)

e) Intangible Assets (Continued)

Research costs are expensed as they are incurred. Product development costs are expensed as incurred except when they meet specific criteria under IFRS for capitalization. Capitalized development costs are amortized when commercial production begins, using the straight-line method over the estimated useful lives of the products (10-15 years).

Website development costs are stated at acquisition cost less accumulated amortization. Amortization is calculated over the estimated useful life of three years using the straight line method. Website hosting and maintenance costs are charged to operations as they are incurred.

Patents are recorded at cost and comprised of costs associated with preparing, filing and obtaining patents. Technology license costs are recorded at the fair value of consideration paid. Patents are amortized using the straight-line method over 10 years.

All the costs incurred to acquire patents, trademarks, and other intellectual and industrial property rights related to TPOD®, MAT®, FASTINFO and CRIC™ have been capitalized. The capitalized costs are amortized when commercial production begins using the straight-line method over the estimated useful lives of the products (15 years).

The estimated useful lives and amortization methods are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

f) Impairment of long-lived assets

On an annual basis and when impairment indicators arise, the Company evaluates the future recoverability of its long-lived assets, including property and equipment and intangible assets. If the changes in circumstances indicate that the carrying amount of an asset may not be recoverable, future cash flows expected to result from the use of the asset and its disposition must be estimated. The recoverable amount is the higher of the fair value less cost to sell and the value in use. In assessing value in use, the estimated future cash flow 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 assets. An impairment loss is recognized in net loss if carrying amount of an asset or its cash-generating unit exceed its estimated recoverable amount. Impairment loss recognized in prior periods will be reversed if there is any indications that the loss has decreased or no longer exists and the reversal of the impairment loss shall not exceed the carrying amount that would have been determined had no impairment loss been recognized for the assets in prior years.

g) Share-based Payments

The share option plan allows Company employees and consultants to acquire shares of the Company. The fair value of options granted is recognized as an employee or consultant expense with a corresponding increase in equity. An individual is classified as an employee when the individual is an employee for legal or tax purposes (direct employee) or provides services similar to those performed by a direct employee.


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g) Share-based Payments (Continued) The fair value is measured at grant date, and each tranche is recognized using the graded vesting method over the period during which the options vest. The fair value of the options granted is measured using the Black-Scholes option pricing model taking into account the terms and conditions upon which the options were granted. At each financial position reporting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that are expected to vest. In situations where equity instruments are issued to non‐employees and some or all of the goods or services received by the entity as consideration cannot be specifically identified, they are measured at the fair value of the share‐based payment. Otherwise, share‐based payments are measured at the fair value of goods or services received.

h) Earnings Per Share

Basic and diluted earnings per share amounts are computed using the weighted average number of common shares outstanding during the period. The Company uses the treasury stock method to determine the dilutive effect of stock options and other dilutive instruments. Under the treasury stock method, only instruments with exercise amounts less than market prices impact the diluted calculations. This method assumes that common shares are issued for the exercise of warrants and options and that the assumed proceeds from the exercise of warrants and options are used to purchase common shares at the average market price during the period. The difference between the number of shares assumed issued and the number of shares assumed purchased is then added to the basic weighted average number of shares outstanding to determine the fully diluted number of common shares outstanding.

i) Revenue Recognition

The Company generates revenue primarily from product sales. Revenue from sales of the Company’s products is recognized at the time of shipment, at which point risks and rewards over ownership and title of transfer have been passed to the customer, provided that collection of the proceeds of sale is reasonably assured.

j) Foreign Currency Translation

The Company’s functional and reporting currency is the Canadian dollar. The transactions denominated in foreign currencies are translated into Canadian dollars at the rate of exchange in effect at the date of the transaction. At each reporting date, unsettled monetary assets and liabilities denominated in foreign currencies have been translated into Canadian dollars at the rate of exchange in effect at the reporting date and the related differences are recognized in net income. Non-monetary assets and liabilities that are measured at historical cost are translated into Canadian dollars by using the exchange rate in effect at the rate of the date of the initial transaction and are not subsequently restated.


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j) Foreign Currency Translation (Continued) The assets and liabilities of foreign operations are translated to the presentation currency at exchange rate at the reporting date. The income and expenses of foreign operations are translated to presentation currency at exchange rates at the dates of the transactions. Foreign currency differences are recognized in comprehensive income.

k) Financial Instruments All financial assets are classified into one of the following categories based on the nature and purpose of the financial assets and are determined at the time of initial recognition. Financial Assets at Fair Value through Profit or Loss Financial assets are classified at fair value through profit or loss if they are held for trading or if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company’s risk management or investment strategy. Financial assets at fair value through profit or loss are measured at fair value and changes therein are recognized in profit or loss. The Company has classified cash and cash equivalents as financial assets at fair value through profit or loss. Held-to-maturity investments Bills of exchange and debentures with fixed or determinable payments and fixed maturity dates that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity investments. Held-to-maturity investments are initially recorded at fair value and subsequently measured at amortized cost using the effective interest method less any impairment with revenue recognized on an effective yield basis. Currently, the Company does not have any assets classified as held-to-maturity investments. Loan and Receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value and subsequently at amortized cost using the effective interest method less any impairment loss. Loan and receivables are comprised of the Company’s accounts and other receivables. Available-for-sale Financial Assets Non-derivative financial assets that do not meet the definition of loans and receivables are classified as available-for-sale financial assets. Available-for-sale investments are carried at fair value with changes in fair value recognized in other comprehensive income/loss. When an investment is derecognized, the cumulative gain or loss in other comprehensive income is transferred to profit or loss. Currently, the Company does not have any assets classified as available-for-sale financial assets.


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k) Financial Instruments (Continued) Financial Liabilities Financial liabilities are classified as other financial liabilities, based on the purpose for which the liabilities was incurred, and comprised of trade payables, accrued liabilities, bank line of credit, bank loan, convertible debt and other long-term liabilities. These liabilities are initially recognized at fair value net of any transaction costs directly attributable to the issuance of the instrument and subsequently carried at amortized cost using the effective interest rate method.

Impairment of Financial Assets At each annual reporting date, the Company assess whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or group of financial assets is deemed to be impaired if there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset and that event has an impact on the estimated future cash flow of the financial asset or the group of the financial assets. For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the financial asset’s original effective interest rate.

l) Income Taxes Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that it relates to a business combination or items recognized directly in equity or in other comprehensive income or loss.

Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current period and any adjustment to income taxes payable in respect of previous periods. Current income taxes are determined using tax rates and tax laws that have been enacted or substantively enacted by the period-end date.

Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit or loss. Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available against which the deferred tax asset can be utilized. At the end of each reporting period, the Company reassesses unrecognized deferred tax assets. The Company recognizes a previously unrecognized deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.


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m) Comparative Figures

Certain comparative figures have been reclassified to conform with the current period’s presentation.

4. FUTURE ACCOUNTING PRONOUNCEMENTS

Certain pronouncements were issued by the International Accounting Standards Board (“IASB”) or the IFRS Interpretations Committee that are mandatory for accounting years beginning after January 1, 2011 or later years. The Company has not adopted the following standards and is in the process of evaluating the impact that these standards will have on the financial statements: a) IFRS 9 Financial Instruments

IFRS 9 Financial Instrument is part of the IASB’s wider project of replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortized cost and fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristic of the financial assets. The standard is effective for annual periods beginning on or after January 1, 2015.

b) IFRS 10 Consolidated Financial Statements

IFRS 10 builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. This standard is effective for annual periods beginning on or after January 1, 2013.

c) IFRS 11 Joint Arrangements

IFRS 11 describes the accounting for arrangement in which there is joint control by focusing on the rights and obligations of the arrangement rather than its legal form. Proportionate consolidation is not permitted for joint ventures and it requires a single method to account for interest in jointly control entities. The standard is effective for annual periods beginning on or after January 1, 2013.

d) IFRS 12 Disclosure of Interest in Other Entities

IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangement, associates, special purpose vehicles and other off balance sheet vehicles. The standard is effective for annual periods beginning on January 1, 2013.


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4. FUTURE ACCOUNTING PRONOUNCEMENTS (Continued)

e) IFRS 11 Joint Arrangements

IFRS 11 describes the accounting for arrangement in which there is joint control by focusing on the rights and obligations of the arrangement rather than its legal form. Proportionate consolidation is not permitted for joint ventures and it requires a single method to account for interest in jointly control entities. The standard is effective for annual periods beginning on or after January 1, 2013.

f) IFRS 12 Disclosure of Interest in Other Entities

IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangement, associates, special purpose vehicles and other off balance sheet vehicles. The standard is effective for annual periods beginning on January 1, 2013.

g) IFRS 13 Fair Value Measurement

IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The standard is effective for annual periods beginning on or after January 1, 2013.

5. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses for the periods reported. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in operations in the period in which they become known. We have identified the following as critical accounting estimates, which are defined as those that are reflective of significant judgments and uncertainties. These estimates are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions and conditions. a) Revenue Recognition

Revenue from sales of the Company’s products is recognized at the time of shipment, at which point risks and rewards over ownership and title of transfer have been passed to the customer, provided that collection of the proceeds of sale is reasonably assured.


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5. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued) b) Research and Development Costs

All product development costs that meet the specific criteria of capitalization under IFRS have been capitalized. In prior years, the accumulated capitalized costs were being amortized on a per unit basis based on the sales volume projection for the estimated remaining useful life of the product. During fiscal 2011, the Company changed the amortization method to straight line to better reflect the pattern of realization of the future economic benefits. The unamortized deferred product development costs are reviewed annually and should the review indicate that the basis of amortization requires modification, the change will be applied prospectively.

c) Patents

Patents are recorded at cost and comprised of costs associated with preparing, filing and obtaining patents. Technology license costs are recorded at the fair value of consideration paid. Patents are amortized using the straight-line method over 10 years. The amounts shown for patents do not necessarily reflect present or future values and the ultimate amount recoverable will be dependent upon the successful development and commercialization of products based on these rights. If management determines that such costs exceed estimated net recoverable value based on future cash flows, the excess of such costs is charged to operations.

d) Intellectual Property Rights

All the costs incurred to acquire patents, trademarks, and other intellectual and industrial property rights related to TPOD®, MAT®, FASTINFO and CRIC™ have been capitalized. During fiscal 2011, the Company changed the estimated useful life of these intellectual property rights from indefinite to 15 years based on the current market demand and other economic factors.

e) Property and Equipment

Property and equipment are recorded at cost less amortization provided for over the estimated useful lives of the assets at the following annual rates and methods: Assets Annual Rate Basis

Furniture and office equipment 20% Declining balance

Medical equipment 20% Declining balance

Computer equipment 30% Declining balance

Leasehold improvements 30% Straight-line

Software 100% Straight-line


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5. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)

f) Impairment of long-lived assets

On an annual basis and when impairment indicators arise, the Company evaluates the future recoverability of its long-lived assets, including deferred product development costs, property and equipment, website development costs, patents and intellectual property rights. If the changes in circumstances indicate that the carrying amount of an asset may not be recoverable, future cash flows expected to result from the use of the asset and its disposition must be estimated. The recoverable amount is the higher of the fair value less cost to sell and the value in use. In assessing value in use, the estimated future cash flow 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 assets. An impairment loss is recognized in net loss if carrying amount of an asset or its cash-generating unit exceed its estimated recoverable amount.

g) Stock-based Payments

The fair value is measured at grant date, and each tranche is recognized using the graded vesting method over the period during which the options vest. The fair value of the options granted is measured using the Black-Scholes option pricing model taking into account the terms and conditions upon which the options were granted. At each financial position reporting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that are expected to vest. This estimate requires determining the most appropriate inputs to the valuation model including the estimated dividend yield, expected volatility, the risk-free interest rate and the expected lives of the share purchase options.

h) Income taxes

Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit or loss. Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available against which the deferred tax asset can be utilized. At the end of each reporting period, the Company reassesses unrecognized deferred tax assets. The Company recognizes a previously unrecognized deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

6. FINANCIAL INSTRUMENTS AND RISKS

As at December 31, 2011 and 2010, the Company's financial instruments recognized on the statement of financial position consist of cash and cash equivalents, accounts receivable, other receivables, bank line of credit, accounts payable and accrued liabilities, bank credit facility, loan payable, convertible debentures and other long-term liabilities.


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6. FINANCIAL INSTRUMENTS AND RISKS (Continued) Determination of Fair Value The fair value of the Company’s cash, accounts receivable, other receivables, accounts payable, bank line of credit, accrued liabilities and bank loan approximate the carrying amounts due to their short-term nature. The fair value of the liability component of the convertible debenture was estimated by discounting future cash flow at the current market interest rates for agreements covering similar investments. Based on the quoted interest rates for borrowings of companies of similar level risk, in management’s estimation, the carrying value of the liability component of the convertible debenture approximates fair value. For the fair value of other long-term liabilities, it is impractical to estimate due to the nature of the financial instruments and the absence of the information needed. Fair Value Hierarchy Financial instruments that are measured subsequent to initial recognition at fair value are grouped in level 1 to 3 based on the degree to which the fair value is observable. Level 1 – observable inputs such as quoted price in active markets; Level 2 – inputs, other than the quoted market prices in active markets, which are observable, either

directly or indirectly, Level 3 – unobservable inputs for the assets or liabilities in which little or no market data exists,

therefore requiring an entity to develop its own assumptions. Financial Risk The Company is exposed in varying degrees of financial instrument related risks. The Board of Directors approves and monitors the risk management process. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Company’s competitiveness and flexibility. The type of risk exposure and the way in which such exposure is managed is provided as follows: a) Credit Risk

The Company’s exposure to credit risk related to accounts receivable arises from the possibility that a customer does not fulfil its obligation. This is minimized through certain credit evaluation procedures and limits on the amount of credit extended as deemed necessary. The Company does not require collateral for financial instruments subject to credit risk. The maximum exposure to credit risk is the net carrying value of accounts receivable. Credit risk also arises from cash with banks and financial institutions. This risk is limited because the counterparties are mainly Canadian banks with high credit rating. To minimize the risk, cash has been deposited in major financial institutions in Canada (subject to deposit insurance up to $100,000). The Company also acquires accounts receivable insurance coverage to mitigate collection risks.


- 19 -

6. FINANCIAL INSTRUMENTS AND RISKS (Continued)

a) Credit Risk (Continued)

The Company’s credit risk for accounts receivable is concentrated, as the Company presently derives a substantial amount of its revenues from one distributor which contributed approximately 65% (December 31, 2010 - 84%) of revenues for the three months ended December 31, 2011. The sales are made to the distributor under a distributorship agreement. The non-renewal or cancellation of the contract could have a material adverse short-term impact on the Company.

Amounts owing from one distributor comprised 57% (September 30, 2011 - 57%; October 1, 2010 – 79%) of the accounts receivable balance as at December 31, 2011.

b) Foreign Exchange Risk

The Company uses the Canadian dollar as its reporting currency for these consolidated financial statements. The Company’s revenues are denominated primarily in U.S. dollars, giving rise to the exposure to market risks from changes in foreign exchange rates. The Company is exposed to foreign currency fluctuation on its cash, accounts receivable, accounts payable, accrued liabilities as well as certain operating expenses and its other long-term liabilities. If the Canadian dollar appreciated one percent against U.S. dollar, with all other variables remain constant, the net income would have been increased by approximately $6,607 (December 31, 2010 – decreased by $4,244). If the Canadian dollar depreciated one percent against U.S. dollar, there would be an equal and opposite impact on net income.

During fiscal 2011, the Company entered into foreign currency forward contracts to protect itself against foreign exchange rate fluctuations. The Company’s objective is to manage and control the exposures and secure the Company’s profitability on existing sales and anticipated future cash flows. The Company does not utilize derivative instruments for trading or speculative purposes.

The forward foreign exchange contracts primarily require the Company to sell U.S. dollars for Canadian dollars at contractual rates. As at December 31, 2011, all the forward contracts the Company entered into were settled.

c) Liquidity Risk

Liquidity risk is the risk the Company may not be able to meet its contractual obligations and financial liabilities as they become due. The Company is exposed to liquidity risk as its continued operations are dependent upon the Company realizing its accounts receivable and the ability to issue debt and equity instruments to satisfy its liabilities as they become due.

The Company controls liquidity risk by management of working capital, cash flow and availability of borrowing facilities. The customer credit evaluations are conducted based on trade references, bank reports, and periodic review of customers’ payment patterns to ensure irregularities are addressed promptly. As at December 31, 2011, the Company had cash of $117,462 (September 30, 2011 - $195,414; October 1, 2010 - $282,993) and working capital of $202,828 (September 30, 2011 - $113,710; October 1, 2010 - $761,256). The Company is actively pursuing new financing to continue the FASTx re-launch project (estimated at $2 million) and for general working capital purposes. It is not certain that such new financing can be obtained.


- 20 -

6. FINANCIAL INSTRUMENTS AND RISKS (Continued)

c) Liquidity Risk (Continued) The following is an analysis of the contractual maturities of the Company’s financial liabilities as at December 31, 2011:

Total <1 year 1-2 year 2-3 year 3-4 year 4-5 year >5 year

Accounts payable and

accrued liabilities 1,168,143 1,168,143 - - - - -

Bank line of credit 333,215 333,215 - - - - -

Loan payable 82,452 82,452 - - - - -

Convertible debenture 378,928 - 378,928 - - - Operating lease 40,113 40,113 - - - - -

Product development 565,803 565,803

2,568,654$ 2,189,726$ -$ 378,928$ -$ -$ -$

Due by period

d) Interest Rate Risk Bank line of credit, loan payable and convertible debentures are subject to interest rate risk as the required cash flow to service the debt will fluctuate as a result of the changing prime interest rate. The Company has estimated that one percent increase or decrease in the prime rate would have caused the net income decrease or increase by approximately $1,900 (December 31, 2010 - $2,530).

7. INVENTORIES

December 31, 2011 September 30, 2011 October 1, 2010

Raw materials and work in progress 529,173$ 438,511$ 407,002$

Inventory in transit - 58,613 1,426

Finished goods 485,272 539,368 32,635

1,014,445$ 1,036,492$ 441,063$ 8. PROPERTY AND EQUIPMENT

Furniture and

office

equipment

Medical

equipment

Computer

equipment

Leasehold

improvements Software Total

Cost

At October 01, 2010 179,150$ 312,722$ 87,935$ 108,190$ 218,214$ 906,211$

Additions - - 31,776 - 2,996 34,772

Disposals - - - - -

At September 30, 2011 179,150 312,722 119,711 108,190 221,210 940,983

Additions - - - - - -

Disposals - - - - - -

At December 31, 2011 179,150$ 312,722$ 119,711$ 108,190$ 221,210$ 940,983$


- 21 -

8. PROPERTY AND EQUIPMENT (Continued)

Furniture and

office

equipment

Medical

equipment

Computer

equipment

Leasehold


Accumulated amortization

At October 01, 2010 118,585$ 267,500$ 66,402$ 86,288$ 215,702$ 754,477$

Additions 12,113 9,044 11,226 21,902 5,279 59,564

Disposals - - - - -

At September 30, 2011 130,698 276,544 77,628 108,190 220,981 814,041

Additions 2,023 1,809 3,156 - 229 7,217

Disposals - - - - - -

At December 31, 2011 132,721$ 278,353$ 80,784$ 108,190$ 221,210$ 821,258$

Furniture and

office

equipment

Medical

equipment

Computer

equipment

Leasehold


Net carrying value

At October 01, 2010 60,565$ 45,222$ 21,533$ 21,902$ 2,512$ 151,734$

At September 30, 2011 48,452 36,178 42,083 - 229 126,942

At December 31, 2011 46,429$ 34,369$ 38,926$ -$ -$ 119,724$ 9. INTANGIBLE ASSETS

Deferred product

development costs

Website

development costs Patents

Intellectual

Property Rights Total

Cost

At October 01, 2010 5,575,926$ 58,244$ 464,114$ 2,520,567$ 8,618,851$

Additions 1,320,976 - 99,359 30,869 1,451,204

Disposals - - - -

At September 30, 2011 6,896,902 58,244 563,473 2,551,436 10,070,055

Additions 120,840 - 11,998 - 132,838

Disposals - - - - -

At December 31, 2011 7,017,742$ 58,244$ 575,471$ 2,551,436$ 10,202,893$


- 22 -

9. INTANGIBLE ASSETS (Continued)

Deferred product

development costs

Website


Intellectual


Accumulated amortization and impairment loss

At October 01, 2010 2,552,882$ 9,707$ 201,833$ -$ 2,764,422$

Additions 303,159 24,269 57,161 142,678 527,267

Impairment loss 338,404 - - - 338,404

Disposals - - - - -

At September 30, 2011 3,194,445 33,976 258,994 142,678 3,630,093

Additions 75,790 6,067 14,244 17,835 113,936

Impairment loss - - - - -

Disposals - - - - -

At December 31, 2011 3,270,235$ 40,043$ 273,238$ 160,513$ 3,744,029$

Deferred product

development costs

Website


Intellectual


Net carrying value

At October 01, 2010 3,023,044$ 48,536$ 262,281$ 2,520,567$ 5,854,428$

At September 30, 2011 3,702,457 24,268 304,479 2,408,758 6,439,962

At December 31, 2011 3,747,507$ 18,201$ 302,233$ 2,390,923$ 6,458,864$

10. BANK CREDIT FACILITY

The Company has established credit facilities for up to $1,000,000 under a line of credit with its bank. The line of credit bears interest at prime plus 2% per annum, is due on demand and secured under the general security agreement over all assets of the Company. The portion of the line of credit that is available to the Company is based on 90% of accounts receivable aged less than 90 days subtracted by salary and vacation payable at the end of each period. The line of credit is subject to financial covenants pertaining to three ratios: Working capital ratio of minimum 1.25:1, calculated as the average of the last two quarters; Debt service coverage of minimum 1.25:1, calculated on a rolling four quarter basis; Debt to equity ratio of maximum 1.5:1, calculated on a quarterly basis. As at December 31, 2011, the Company was not in compliance with the working capital ratio and debt service coverage and the creditor has the right to demand repayment as per the agreement. On March 16, 2012, the Company received a formal notice from the bank. The bank has decided not to renew the credit facility for the remainder of fiscal 2012 and the draw down needs to be fully paid out by May 15, 2012. The company is actively working to find a replacement. As at December 31, 2011, $333,215 have been drawn down from this credit facility (September 30, 2011 - $326,427; October 1, 2010 - $258,081).


- 23 -

11. LOAN PAYABLE


Promissory note payable in Canadian dollars,

interest at prime plus 8% per annum, monthly

blended payments of $26,724 until March 15,

2012, common share purchase warrants of

110,000 attached, (Note 14) 82,452$ 158,961$ 485,309$

Less: current portion (82,452) (158,961) (281,251)

-$ -$ 204,058$ The loan is secured by a general security agreement over all assets of the Company and subject to financial covenants pertaining to three ratios: Working capital ratio of minimum 1.25:1 at any time; Debt service coverage of minimum 1.25:1 at any time; Debt to equity ratio of maximum 1.5:1 at any time. As at December 31, 2011, the Company was not in compliance with the working capital ratio and debt service coverage. The creditor has the right to demand repayment as per the agreement, but no formal notice has been received. As at March 15, 2012, the loan has been paid in full.

12. CONVERTIBLE DEBENTURES


Convertible debentures issued 545,000$ 545,000$ 545,000$

Equity portion of convertible debentures (191,825) (191,825) (191,825)

353,175 353,175 353,175

Deferred financing costs (net of amortization) (56,128) (61,543) (83,611)

Interest accretion 81,881 72,242 36,890

Debt portion of convertible debentures 378,928$ 363,874$ 306,454$ On August 10, 2009, the Company issued convertible debentures in the amount of $545,000, which are due and payable on August 10, 2014. The amount of $495,000 out of $545,000 was issued to directors and officers of the Company. The debentures are convertible into common shares of the Company at $0.20 per share. The Company issued 2,725,000 common share purchase warrants at $0.001 per warrant as part of the convertible debt financing agreement. Each warrant is exercisable to purchase one common share of the Company at $0.22 per share until the date the loan is repaid or no later than August 10, 2014. Interest on the debentures is calculated at prime plus 10% per annum. The interest is payable quarterly in Canadian dollars. The debentures are secured by all assets of the Company, subordinated to the Company’s bank credit facility and loan payable.


- 24 -

12. CONVERTIBLE DEBENTURES (Continued)

The liability component of the convertible debt is calculated as the present value of the principal, discounted at a rate approximating the interest rate that was estimated would have been applicable to non-convertible debt at the time the debt was issued. This portion of the convertible debt is accreted over its term to the full face value by charges to interest expense. The accretion is a non-cash transaction and has been excluded from the statement of cash flows. The equity element of the convertible debt comprises the value of the conversion option, being the difference between the face value of the convertible debt and the liability component.

13. OTHER LONG-TERM LIABILITIES

On May 31, 2008, the Company completed the acquisition of the trauma assets of Bio Cybernetics International (“BCI”) (dba “Cybertech Medical“), including Trauma Pelvic Orthotic Device (TPOD®), Mechanical Advantage Tourniquet (MAT®), and Cricothyrotomy Kit (CRIC™). The purchase price was $2,737,913, of which $1,784,003 was paid in cash on closing and the balance of $953,910, recorded in accrued liabilities, is the contingent payments subject to achievement of certain milestones.

In February 2009, the Company became aware that the achievement of certain milestones will most likely not occur within the next twelve months. As a result, US$637,586 was reclassified as other long term liabilities. During the first quarter of fiscal 2012, there has been no change on these liabilities and the Canadian equivalent of $648,425 (September 30, 2011 - $ 668,318; October 1, 2010 - $656,587) was reported as at December 31, 2011.

14. SHARE CAPITAL

a) Authorized

100,000,000 common shares without par value.

b) Issued and Outstanding

On December 30, 2010, the Company closed a non-brokered private placement and issued 3,000,000 common shares at $0.20 per share for gross proceeds of $600,000 to a single investor. There was no finder’s fees payable in connection with the placement but $22,385 of legal cost and filing fee was paid as share issuance cost for the placement. All securities issued in connection with the placement were subject to a statutory hold period of four months plus a day from the date of issuance in accordance with applicable securities legislation. The proceeds of the placement were used for general working capital and to pursue international sales opportunities.

c) Escrow Shares

In March 2011, 300,000 shares held in escrow were released in accordance with TSX Venture Exchange policies.

As at December 31, 2011, all the shares held in escrow have been released in accordance with TSX Venture policies.


- 25 -

14. SHARE CAPITAL (Continued) d) Warrants

A summary of warrant activities for the period presented is as follows:

Number of

Warrants

Weighted

Average

Exercise Price

Number of

Warrants

Weighted

Average

Exercise Price

Number of

Warrants

Weighted

Average Exercise

Price

Outstanding,

beginning of period 2,835,000 $ 0.23 2,835,000 $ 0.23 2,835,000 $ 0.23

Issued - - - - - -

Outstanding, end of

period 2,835,000 $ 0.23 2,835,000 $ 0.23 2,835,000 $ 0.23

December 31, 2011 October 1, 2010September 30, 2011

As at December 31, 2011, the following warrants were outstanding:

Exercise Price Expiring Date

0.55$ 6-Jun-13

0.22$ 10-Aug-142,725,000

2,835,000

Number of Warrants

110,000

e) Stock Options

The Company has a rolling stock option plan, which follows the policies of the TSX Venture Exchange (“TSXV”) regarding stock option awards granted to employees, directors and consultants. The stock option plan allows a maximum of 10% of the issued shares to be reserved for issuance under the plan. As at December 31, 2011, a total of 401,200 (September 30, 2011 – 401,200; October 1, 2010 - 1,166,200) stock options have been granted out of the 1,500,158 (September 30, 2011– 1,500,158; October 1, 2010 - 1,200,158) pool under this plan, with the balance of 1,098,958 (September 30, 2011 – 1,098,958; October 1, 2010 - 33,958) stock options available to grant. The Company’s stock options vest as follows: 1/3 six months after the date of grant, 1/3 twelve months after the date of grant, and 1/3 eighteen months after the date of grant.


- 26 -

14. SHARE CAPITAL (Continued) e) Stock Options (Continued)

A summary of stock option activities for the periods presented is as follows:

Number of

Options

Weighted

Average

Exercise Price

Number of

Options

Weighted

Average

Exercise Price

Number of

Options

Weighted

Average Exercise

Price

Outstanding,

beginning of period 401,200 $ 0.26 1,166,200 $ 0.31 1,066,200 $ 0.35

Granted - - - - 230,000 0.20

Expired - - (280,000) 0.45 - -

Cancelled - - (485,000) 0.27 (130,000) 0.43 Outstanding, end of

period 401,200 $ 0.26 401,200 $ 0.26 1,166,200 $ 0.31

October 1, 2010December 31, 2011 September 30, 2011

As at December 31, 2011, the following stock options were outstanding:

Options Exercisable

Number of Options Exercise Price Expiring Date Number of Options

81,200 0.23$ 10-May-13 81,200

60,000 0.56$ 12-Jun-13 60,000

60,000 0.41$ 8-Sep-13 60,000

50,000 0.20$ 18-May-14 50,000

150,000 0.20$ 9-Mar-15 150,000

401,200 401,200

Options Outstanding

As at December 31, 2011, 401,200 (September 30, 2011 – 401,200; October 1, 2010 - 879,133) stock options were vested and exercisable, and no stock based compensation (December 31, 2010 - $8,958) were expensed during the quarter. The fair value of stock options granted was estimated on the date of the grant using the Black-Scholes option-pricing model and is amortized over the vesting period of the underlying options with the following weighted-average assumptions used for options granted:

2011 2010

Nil Nil

- 82% - 83%

- 3.72%

- 4 - 5 years

Risk-free interest rate

Expected life

Dividend yield

Expected volatility


- 27 -

15. RELATED PARTY TRANSACTIONS Related party transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. a) Consulting fees

During the quarter ended December 31, 2011, consulting fees of $14,459 (December 31, 2010 - $16,970) were paid or accrued to a director for medical consulting services provided to the Company. As at December 31, 2011, $11,428 (September 30, 2011 - $1,572; October 1, 2010 - $9,393) was owing to him for consulting fees and expense reimbursements. The amount is included in accounts payable.

b) Compensation of key management personnel

Key management personnel are persons responsible for planning, directing and controlling the activities of the Company, which includes directors and other members of key management personnel. The compensation of key management for the three months ended December 31, 2011 and 2010 were as follows:

Three months ended

December 31, 2011

Three months ended

December 31, 2010

Salaries and benefits 42,500$ 23,277$

Consulting fees 27,000 18,000

Director fees 16,500 23,500

86,000$ 64,777$ 16. SEGMENTED INFORMATION

The Company’s operations are in Canada and U.S.A. and it operates in one industry segment. Sales by geographic region are as follows:

Percentage Amount Percentage Amount

U.S.A. 75% 995,126$ 93% 1,898,873$

Other 25% 332,064 7% 142,864

100% 1,327,190$ 100% 2,041,737$

Three months ended December 31,

2011

Three months ended December 31,

2010


- 28 -

17. COMMITMENTS a) Operating Lease

The Company has a one-year operating lease commitment on its Richmond production premises. The Company is required to pay base rent of $4,577 per month. The lease will expire on September 30, 2012.

b) Product Development and Manufacturing

During fiscal 2011, the Company has entered into various contracts with a strategic partner, Donatelle Plastics Inc. (“Donatelle”), a medical device development and manufacturing company in Minnesota U.S.A., to execute the product FASTX re-launch project and is committed to pay Donatelle about US$1.4 million for completion of the project. As at December 31, 2011, the amount of US$910,866 has been incurred towards the contracts and the balance US$489,071 is anticipated to be incurred in the next two quarters of fiscal 2012. As at December 31, 2011, US$219,938 was included in accounts payable as owing to Donatelle. In addition, the Company signed a manufacturing outsourcing agreement with Donatelle in May 2011. Pursuant to the agreement, upon market release, all FASTX products for commercial sale will be manufactured by and purchased exclusively from Donatelle during the life of the products. All products supplied by Donatelle will meet mutually agreed specification and will be charged at a mutually agreed unit price. If certain minimum volumes are not achieved, cancellation charges may apply to offset Donatelle’s investment (capacity and resource commitments) in this FASTx program.

18. SUBSEQUENT EVENTS

On February 3, 2012, the Company announced a loan in the amount of US$220,000 from its largest shareholder Excelera Corporation (“Excelera”). The loan carries interest at 11% per annum, is unsecured and does not include an equity component. The total principal and interest is due on April 12, 2012. Excelera currently beneficially owns or controls 19.99% of the outstanding common shares of Pyng. These shares were transferred to Excelera from MDR Specialty Distribution Corp. (“MDR”) as a result of a reorganization of MDR. Herb Toms, the Chairman of Pyng, beneficially owns or controls 80% of the common shares of Excelera and MDR.

Pyng also expects to develop a long-term financing arrangement of up to US$1,000,000 with Excelera, which the Loan will roll into, that is expected to provide additional funds to complete critical product development activity. Such financing will be subject to shareholders’ approval.


- 29 -

19. TRANSITION TO IFRS

As stated in note 2, these are the Company’s first condensed interim consolidated financial statements prepared in accordance with IFRS. The accounting policies set out in note 3 have been applied in preparing the interim financial statement for the three months end December 31, 2011, the comparative information presented in both the three months ended December 31, 2010 and year ended September 30, 2011, and the opening IFRS statement of financial position at the Company’s transition date October 1, 2010. The following is an explanation of how the transition from Canadian GAAP to IFRS has affected the Company’s financial position, financial performance and cash flows. a) IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 1, First-time Adoption of IFRS permits those companies adopting IFRS for the first time to take certain exemptions from the full requirements of IFRS at the time of transition. The following are the mandatory and optional exemptions applied by the Company upon the initial adoption of IFRS from Canadian GAAP. • Apply IFRS 3 Business Combination prospectively from the transition date, without restating

any prior business combination.

• Apply IFRS 2 Share-based Payments only to the equity instruments that were issued after November 7, 2002 and had not vested by the transition date.

• Apply IAS 23 Borrowing Costs prospectively from the transition date. IAS 23 requires the capitalization of borrowing costs directly attributable to the acquisition, production or construction of certain assets.

• IFRS 1 allows the first-time preparer to measure selected assets at fair value and use that fair value as deemed cost of those assets in the transition date statement of financial position. The Company did not utilize this optional exemption and continues to use the cost model for property, plant and equipment as of the date of the transition.


- 30 -

19. TRANSITION TO IFRS (Continued)

b) Reconciliation of Canadian GAAP to IFRS

Reconciliation of consolidated statement of financial position as at October 1, 2010, December 31, 2010 and September 30, 2011.

Note

Canadian

GAAP

Effect of

Transition

to IFRS IFRS

Canadian

GAAP

Effect of

Transition

to IFRS IFRS

Canadian

GAAP

Effect of

Transition

to IFRS IFRS

ASSETS

Current

Cash 282,993$ 282,993$ 1,382,457$ 1,382,457$ 195,414$ 195,414$

Accounts receivable 1,211,409 1,211,409 1,016,994 1,016,994 606,358 606,358

Other receivable 69,435 69,435 44,872 44,872 76,763 76,763

Inventories 441,063 441,063 520,680 520,680 1,036,492 1,036,492

Prepaid expenses 68,325 68,325 81,039 81,039 129,027 129,027

2,073,225 - 2,073,225 3,046,042 - 3,046,042 2,044,054 2,044,054

Property and equipment 151,734 151,734 155,686 155,686 126,942 126,942

Intangible assets i 5,854,428 5,854,428 5,802,442 5,802,442 6,778,366 (338,404) 6,439,962

8,079,387$ -$ 8,079,387$ 9,004,170$ -$ 9,004,170$ 8,949,362$ (338,404)$ 8,610,959$

LIABILITIES

Current

Bank line of credit 258,081$ 258,081$ 189,614$ 189,614$ 326,427 326,427$

Accounts payable 422,626 422,626 440,476 440,476 1,027,035 1,027,035

Accrued liabilities 350,011 350,011 396,888 396,888 417,922 417,922

Loan payable 281,251 281,251 289,036 289,036 158,961 158,961

1,311,969 - 1,311,969 1,316,014 - 1,316,014 1,930,345 - 1,930,345

Loan payable 204,058 204,058 128,797 128,797 -

Convertible debentures 306,454 306,454 320,809 320,809 363,874 363,874

Other long-term liabilities 656,587 656,587 634,143 634,143 668,318 668,318

Deferred income tax liabilities 461,000 461,000 461,000 461,000 440,000 440,000

2,940,068 - 2,940,068 2,860,763 - 2,860,763 3,402,537 3,402,537

SHAREHOLDERS' EQUITYEquity portion of convertible

debentures 191,825 191,825 191,825 191,825 191,825 191,825

Share capital 7,844,724 7,844,724 8,444,724 8,444,724 8,422,339 8,422,339

Share-based payments reserve ii 624,963 14,919 639,882 636,616 (5,654) 630,962 663,958 (11,977) 651,981

Deficit i, ii (3,522,193) (14,919) (3,537,112) (3,129,758) 5,654 (3,124,104) (3,731,297) (326,427) (4,057,723)

5,139,319 - 5,139,319 6,143,407 - 6,143,407 5,546,825 (338,404) 5,208,422

8,079,387$ -$ 8,079,387$ 9,004,170$ -$ 9,004,170$ 8,949,362$ (338,404)$ 8,610,959$

October 1, 2010 December 31, 2010 September 30, 2011


- 31 -

19. TRANSITION TO IFRS (Continued)

Reconciliation of consolidated statement of comprehensive income/loss for the three months ended December 31, 2010 and the year ended September 31, 2011.

Note

Canadian

GAAP

Effect of

Transition

to IFRS IFRS

Canadian

GAAP

Effect of

Transition

to IFRS IFRS

Sales 2,041,737$ 2,041,737$ 6,050,421$ 6,050,421$

Cost of goods sold 643,388 643,388 2,164,318 2,164,318

Gross margin 1,398,349 - 1,398,349 3,886,103 - 3,886,103

Operating expenses

Research and product development 92,853 92,853 305,375 305,375

General and administrative ii 413,007 (5,654) 407,353 1,793,510 (11,977) 1,781,533

Sales and marketing 293,089 293,089 1,133,042 1,133,042

Amortization of property and equipment 14,219 14,219 59,564 59,564

Amortization of intangible assets 108,919 108,919 527,266 527,266

Impairment loss on intangible assets i - - - 338,404 338,404

Royalties 4,865 4,865 15,294 15,294

926,952 (5,654) 921,298 3,834,051 326,427 4,160,478

(Loss) income from operations 471,397 5,654 477,051 52,052 (326,427) (274,375)

Interest expenses 33,044 33,044 114,919 114,919

Other finance costs 14,355 14,355 57,420 57,420

Bad debt - - 977 977

Foreign exchange (gain) loss 16,645 16,645 93,920 93,920

64,044 - 64,044 267,236 - 267,236

Net income (loss) before taxes 407,353 5,654 413,007 (215,184) (326,427) (541,611)

Current income tax expense - - - - -

Future income tax (recovery) expense - - - (21,000) (21,000)

- - - (21,000) - (21,000)

Net (loss) income and comprehensive (loss)

income for the perod 407,353$ 5,654$ 413,007$ (194,184)$ (326,427)$ (520,611)$

(Loss) earnings per share

Basic 0.03$ - 0.03$ (0.01)$ - (0.04)$

Diluted 0.03 - 0.03 (0.01) - (0.04)

Weighted average number of shares outstanding

Basic 12,066,800 - 12,066,800 14,261,857 - 14,261,857

Diluted 14,802,527 - 14,802,527 14,261,857 - 14,261,857

Three Months Ended December 31, 2010 Fiscal Year Ended September 30, 2011


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19. TRANSITION TO IFRS (Continued) The following is a summary of the effects of the differences between IFRS and Canadian GAAP which will impact the Company’s financial position, financial performance and cash flow for periods previously reported under Canadian GAAP. The adoption of IFRS did not change the Company’s actual cash flows but has resulted in changes to the Company’s statements of financial position and comprehensive loss. As a result, no reconciliation is presented for the consolidated statement of cash flows as there are no significant differences. i) Impairment of Assets

Under Canadian GAAP, impairment is recognized for non-financial assets based on estimated fair value when the undiscounted future cash flows from an asset, or group of assets, is less than the carrying value. It is a two-step process of comparing the carrying value to the undiscounted future cash flow and then writing down to the discounted cash flow. IFRS uses a one-step approach for testing and measuring asset impairment with asset carrying value being compared to the recoverable amount of the assets. The recoverable amount is the higher of the fair value less cost to sell and the value in use. In assessing value in use, the estimated future cash flow 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 assets. An impairment loss is recognized in net loss if carrying amount of an asset or its cash-generating unit exceed its estimated recoverable amount. The Company has several classes of intangibles that require annual impairment testing. This difference has resulted in an impairment loss of $338,404 recorded on the deferred product development costs for the fiscal year ended September 30, 2011.

ii) Share-based Payments

Under Canadian GAAP, the Company values stock-based compensation that vests in tranches as a single grant. IFRS requires that each tranche be valued as a separate grant with a separate vesting date. The fair value of each tranche will be amortized over each tranche’s vesting period instead of recognizing the entire award on a straight-line basis over the term of the grant. As a result of this difference, the Company has recorded the adjustment to the reserve account for unvested stock-based payments as at the transition date and the accumulated deficit decreased by $11,977 for the year ended September 30, 2011 (decreased by $5,654 for the three months ended December 31, 2010 and increased by $14,919 for the opening balance as at the transition date October 1, 2010).

iii) Functional Presentation Under IFRS, the statement of comprehensive income must be presented on a basis either by function or by nature. Under Canadian GAAP, the statement of comprehensive income could be presented using a mix of function and nature of expenditures. The Company has elected to use the functional classification for the presentation of its statement of comprehensive income. As a result, the operating expenses, which are individually presented under Canadian GAAP, have been reallocated to research and product development, general and administrative, and sales and marketing expenses under IFRS.

report for the three months ended december 31, 2011 and … 31 2011-final.pdf · report for the...

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