Slovenia Inc. -auditing Consolidated Financial Statements

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1 Audited Consolidated Financial Statements October 31, 2013 and 2012

2 MANAGEMENT S RESPONSIBILITY The accompanying consolidated financial statements of Synodon Inc. are the responsibility of the management and have been approved by the Board of Directors on recommendation by the Audit Committee. The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards. Where alternative accounting methods exist, management has chosen those which it deems most appropriate under the circumstances. Consolidated financial statements are not precise since they include certain amounts based on estimates and judgements. Management has determined such amounts on a reasonable basis in order to ensure that the consolidated financial statements are presented fairly, in all material respects. Management has prepared financial information presented elsewhere in the accompanying management discussion and analysis and has ensured that it is consistent with that in the consolidated financial statements. In support of its responsibility, management maintains a system of internal controls to provide reasonable assurance as to the reliability of financial information and the safeguarding of assets. The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the consolidated financial statements. The Board of Directors carries out this responsibility through its Audit Committee. The Audit Committee is comprised of financially literate directors, appointed by the Board of Directors. The Audit Committee meets periodically with management and the external auditors to discuss internal controls over the financial reporting processes, auditing matters and financial reporting issues to satisfy itself that each party is properly discharging its responsibilities, and to review the consolidated financial statements and the external auditors report. The Audit Committee reports its findings to the Board of Directors for consideration when approving the consolidated financial statements for issuance to the shareholders. The Audit Committee also considers, for review by the Board of Directors and approval by the shareholders, the engagement or re-appointment of the external auditors. These consolidated financial statements have been audited by Ernst & Young LLP, the external auditors, in accordance with Canadian generally accepted auditing standards on behalf of the shareholders. Ernst & Young LLP has full and free access to the Audit Committee. (signed) Adrian Banica Adrian Banica, Director Chief Executive Officer (signed) Nimal Rodrigo Nimal Rodrigo Chief Financial Officer Page 2 of 31

3 To the Shareholders of Synodon Inc. INDEPENDENT AUDITORS REPORT We have audited the accompanying consolidated financial statements of Synodon Inc., which comprise the consolidated statements of financial position as at October 31, 2013 and 2012, and the consolidated statements of comprehensive loss, changes in equity and cash flows for the years then ended and a summary of significant accounting policies and other explanatory information. 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, 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. Auditors 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 auditors 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 auditors consider 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 Synodon Inc. as at October 31, 2013 and 2012, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Emphasis of matter Without qualifying our opinion, we draw attention to Note 1 in the consolidated financial statements which indicates that the Company has incurred significant losses since incorporation and as at October 31, 2013, the Company has an accumulated deficit of $16,618,836. These conditions, along with other matters as set forth in Note 1, indicate the existence of a material uncertainty that may cast significant doubt about the Company s ability to continue as a going concern. Edmonton, Canada February 25, 2014 Chartered accountants

4 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at ASSETS Current Notes Cash and cash equivalents $ 1,250,183 $ 545,797 Accounts receivable 281, ,444 Unbilled revenue 109,578 84,958 Prepaid expenses and deposits 66,265 85,669 Work in progress 25,974 6,513 Total Current Assets 1,733,063 1,193,381 CAD October 31, CAD Equipment 4 50,553 59,183 Intangible assets 5 1,100 5,567 Total Assets $ 1,784,716 $ 1,258,131 LIABILITIES AND SHAREHOLDERS EQUITY Current Accounts payable and accrued liabilities $ 514,633 $ 516,744 Deposits on distribution rights option 6-10,004 Total Liabilities 514, ,748 Commitments 7 Shareholders equity Share capital 8 10,528,916 9,908,156 Warrants on issue of units 8 96,717 1,734,113 Foreign currency translation reserve 712 2,770 Contributed surplus 8 7,262,574 3,701,277 Deficit (16,618,836) (14,614,933) Total Shareholders' Equity 1,270, ,383 Total Liabilities and Shareholders' Equity $ 1,784,716 $ 1,258,131 See accompanying notes On behalf of the Board: (signed) Adrian Banica Adrian Banica, Director Chief Executive Officer (signed) John Pinsent, FCA John Pinsent, Director Audit Committee Chair Page 3 of 31

5 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS For the years ended October 31 Notes CAD CAD REVENUE $ 729,172 $ 654,649 COST OF SALES 362, ,212 GROSS MARGIN 366, ,437 EXPENSES Research and development, net of government assistance , ,558 Amortization of intangible assets 5 4,466 6,735 Depreciation of equipment 4 11,449 13,221 Sales and marketing 681, ,413 Financing charges and interest 15,028 6,250 Foreign exchange losses (gains) (20,508) (4,711) Stock-based compensation 8-142,233 Office, general and administrative 1,234, ,730 Bad debt expense ,306 - Operating loss 2,008,228 1,777,992 Other income, net of expenses (2,267) (3,874) Net loss for the year 2,005,961 1,774,118 Other comprehensive loss (income) (2,058) 2,770 Total comprehensive loss for the year $ 2,003,903 $ 1,776,888 Loss per share - basic and diluted ($0.03) ($0.03) Weighted average number of common shares outstanding 68,168,609 51,204,807 see accompanying notes Page 4 of 31

6 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the years ended WARRANTS O N FO REIGN CURRENCY SHARE ISSUE OF CO NTRIBUTED TRANSLATION CAD CAPITAL UNITS SURPLUS RESERVE DEFICIT TOTAL CAD CAD CAD CAD CAD CAD Balance, October 31, 2011 $ 8,881,885 $ 1,341,588 $ 3,475,971 $ - $ (12,838,045) $ 861,399 Private placements 1,580, ,580,843 Share issue cost (78,974) (78,974) Warrants issued on private placement (501,498) 501, Warrant issue costs 25,900 (25,900) Stock-based compensation , ,233 Warrants expired on 2010 private placement - (83,073) 83, Total comprehensive loss for the year ,770 (1,776,888) (1,774,118) Balance, October 31, ,908,156 1,734,113 3,701,277 2,770 (14,614,933) 731,383 Private placements 300, ,000 Share issue cost (27,464) (27,464) Warrants issued on private placement (106,779) 106, Warrant issue costs 10,062 (10,062) Warrants expired on 2010 private placement - (779,045) 779, Warrants expired on 2011 private placement - (445,082) 445, Warrants expired on 2012 private placement - (65,045) 65, Warrants exercised 444,941 (444,941) 2,272, ,272,125 Total comprehensive loss for the year (2,058) (2,003,903) (2,005,961) Balance, O ctober 31, 2013 $ 10,528,916 $ 96,717 $ 7,262,574 $ 712 $ (16,618,836) $ 1,270,083 Page 5 of 31

7 CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended October 31 OPERATING ACTIVITIES Net loss for the year $ (2,003,903) $ (1,776,888) Add charges to operations not requiring a current cash payment Translation from foreign operations (2,058) 2,770 Stock based compensation - 142,233 Amortization of intangible assets 4,466 6,735 Depreciation of equipment 11,449 13,221 Bad debt expense 266,306 - Funds used in operation (1,723,740) (1,611,929) CAD CAD Changes in non-cash working capital balances related to operations Accounts receivable (76,925) (406,039) Unbilled revenue (24,620) (23,038) Work in progress (19,461) 10,297 Deposits on distribution rights option (10,004) 91 Prepaid expenses and deposits 19,404 (26,661) Accounts payable and accrued liabilities (2,111) 102,368 Cash used in operating activities (1,837,457) (1,954,911) INVESTING ACTIVITIES Proceeds on disposal of equipment - 1,623 Purchase of equipment (2,818) (8,063) Cash used in investing activities (2,818) (6,440) FINANCING ACTIVITIES Issuance of shares 300,000 1,079,345 Issuance of warrants 2,272, ,498 Payment of share and warrant issuance costs (27,464) (78,974) Cash provided by financing activities 2,544,661 1,501,869 Net increase (decrease) in cash during the year 704,386 (459,482) Cash, beginning of year 545,797 1,005,279 Cash, end of year $ 1,250,183 $ 545,797 Supplemental cash flow information Interest paid $ 277 $ 3,459 See accompanying notes Page 6 of 31

8 1. NATURE OF BUSINESS AND GOING CONCERN Synodon Inc. (the Company ) was incorporated on August 14, 2000 in Alberta, Canada and commenced trading on the TSX Venture Exchange on January 19, The Company s registered office is located in Edmonton, Alberta. The Company s corporate office is located at 6916 Roper Road, Edmonton, Alberta T6B 3H9. The Company is an advanced remote sensing technology company which has developed a proprietary platform technology called realsens capable of measuring small ground-level gas concentrations from an aircraft flying up to 300 metres in altitude. The Company was previously considered a development stage company as at, and prior to October 31, These consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future. The Company has incurred significant losses since incorporation and as at October 31, 2013, the Company has an accumulated deficit of $16,618,836 (October 31, $14,614,933). The Company's ability to continue as a going concern is dependent upon its ability to obtain additional financing during the foreseeable future and ultimately upon its ability to achieve profitable operations. There can be no assurances that the Company will be able to raise sufficient financing or on terms acceptable to management. The above conditions result in a material uncertainty that may cast significant doubt about the Company s ability to continue as a going concern. These consolidated financial statements do not reflect any adjustments to the carrying values of assets and liabilities and the reported expenses and consolidated statements of financial position classifications that would be necessary if the going concern assumption were to be determined to be inappropriate. These consolidated financial statements were authorized for issuance by the Board of Directors on February 25, BASIS OF PREPARATION (a) Statement of compliance These consolidated financial statements have been prepared in accordance with and using accounting policies in full compliance with the International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ) and Interpretations of the International Financial Reporting Interpretations Committee ( IFRIC ). (b) Basis of consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Synodon Corporation, incorporated on November 15, 2011 in Delaware. Subsidiaries are all entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. The financial statements of Synodon Corporation are prepared for the same reporting year as the Company using consistent accounting policies. Inter-company transactions, balances and unrealized gains on transactions between subsidiary companies are eliminated in full on consolidation. Page 7 of 31

9 2. BASIS OF PREPARATION (continued) (c) Basis of measurement These consolidated financial statements have been prepared on the historical cost basis as explained in accounting policies set out in Note 3. (d) Functional and presentation currency The financial statements of the Company s subsidiary are measured using the currency of the primary economic environment in which the entity operates. The functional currency of the Company s subsidiary is U.S. dollars. These consolidated financial statements are presented in Canadian dollars, which is the Company s functional and presentation currency. (e) Use of estimates and judgements The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the amounts recognized in the consolidated financial statements or areas involving high degree of complexity are: Useful lives of equipment and intangible assets Management has estimated the useful lives of equipment and intangible assets as outlined in Note 3(f) and Note 3(g), respectively, based on their assessment of the time frame in which these assets will be used by the Company. Impairment of financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect 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. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognized in profit or loss in the consolidated statement of comprehensive loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortized cost the reversal is recognized in profit or loss in the consolidated statement of comprehensive loss. Impairment of non-financial assets At each reporting date, the Company assesses whether there are any indicators of impairment for all nonfinancial assets, as described in Note 3. Going concern The assessment of the Company s ability to execute its strategy by funding future working capital requirements involves judgment. The board of directors monitors future cash Page 8 of 31

10 2. BASIS OF PREPARATION (continued) requirements to assess the Company s ability to meet these future funding requirements. Further information regarding going concern is outlined in Note 1. Taxation The Company and its subsidiary are subject to taxation under the applicable tax laws in force in various jurisdictions. Provisions for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. Share-based payments The Company measures the cost of its share based payments to directors, officers, employees and consultants by reference to the fair value of equity instruments. The fair value of each share option is measured at the date of grant using the Black-Scholes option-pricing model based upon the option exercise price, the share price at the date of grant, expected volatility, risk free interest rate for the life of the option, the estimated life of the share option and the dividend yield. (Note 8) Changes to assumptions may have a material impact on the amounts presented. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been consistently applied to all periods presented in these consolidated financial statements. (a) Revenue recognition The Company s services are generally sold based upon purchase orders or contracts with customers that include fixed or determinable prices based upon kilometres or miles surveyed. Revenue is recognized on a percentage of completion basis. Contract revenue is recognized on the ratio of completed hours spent to estimated total hours for each contract. Unbilled revenue represents the revenue recognized on a percentage of completion basis for contracts in process. Provisions for estimated losses on all incomplete contracts are made in the period in which such losses are determined. The percentage of completion basis is based on management s best estimate to complete each contract; it is therefore possible that changes in future conditions could require a material change in the recognized amounts. The Company recognizes revenue on distribution rights options at the expiry of the term of the option unless the agreement has a non-extendable term and is non refundable, in which case the revenue is recognized over the term of the agreement. Until the amounts are recognized as revenue they are carried as deposits on distribution rights options on the statement of financial position. (b) Cash and cash equivalents Cash and cash equivalents for the purposes of the consolidated statements of financial position and the consolidated statements of cash flows consist of cash, and highly liquid interest bearing term deposits that are readily convertible to known amounts of cash with terms to maturity of up to three months. The cash and cash equivalents act as the Company s primary source of cash and fluctuate directly as a result of its cash flows from operating, investing and financing activities. Page 9 of 31

11 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Foreign currency The consolidated financial statements of entities that have a functional currency different from that of the Company ( foreign operations ) are translated into Canadian dollars as follows: assets and liabilities translated at the closing rate at the date of the consolidated statement of financial position, and income and expenses translated at the rate of exchange in effect when the assets are acquired or obligations incurred. All resulting exchange differences will be recognized in other comprehensive income (loss) and accumulated in a separate component of equity referred to as foreign currency translation reserve. When a foreign operation is disposed of, the cumulative amount of the exchange differences relating to that foreign operation accumulated in a separate component of equity is reclassified from equity to profit or loss. Monetary items denominated in foreign currencies are translated to Canadian dollars at exchange rates in effect at the statement of financial position date and non-monetary items are translated at rates of exchange in effect when the assets are acquired or obligations incurred. Revenue and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in profit or loss in the current period. (d) Financial instruments Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial assets and liabilities are offset and the net amount is reported on the consolidated statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. At initial recognition, the Company classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired: (i) Financial assets and liabilities at fair value through profit or loss A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term. Derivatives are also included in this category unless they are designated as hedges. Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are expensed in the consolidated statements of comprehensive loss. Gains and losses arising from changes in fair value are presented in the consolidated statements of comprehensive loss within other gains and losses in the period in which they arise. Financial assets and liabilities at fair value through profit or loss are classified as current except for the portion expected to be realized or paid beyond twelve months of the consolidated statement of financial position dates, which is classified as non-current. Financial assets at fair value through profit or loss comprise cash and cash equivalents. The Company does not have any financial liabilities at fair value through profit or loss. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are initially recognized at the amount expected to be received, less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment. The Company s loans and receivables comprise accounts receivable and unbilled revenue, and are included in current assets due to their short-term nature. Page 10 of 31

12 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (iii) Financial liabilities at amortized cost Financial liabilities classified at amortized cost are initially recognised at fair value less directly attributable transaction costs. After initial recognition, financial liabilities are subsequently measured at amortized cost using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Financial liabilities at amortized cost comprise accounts payable and accrued liabilities and deposits on distribution rights option. (e) Work in progress Work in progress, which is comprised of costs of labour and expenses incurred during the execution of customer contracts and prior to the completion of the contracts, is recorded at the lower of cost and net realizable value. (f) Equipment Equipment is recorded at cost less accumulated depreciation. Management assesses the carrying value of all equipment using its best estimate of undiscounted future cash flows whenever conditions arise which could indicate a possible impairment. Any impairment is recognized when it is identified and is measured by the amount by which the carrying value of the asset exceeds its estimated recoverable amount. Depreciation is provided over the estimated useful lives of the assets using the following methods and rates with half-year depreciation provided in the year of acquisition: Computer equipment Laboratory equipment realsens II equipment Furniture and fixtures 3 years straight-line 20% declining balance 10% declining balance 20% declining balance (g) Intangible assets Intangible assets are recorded at cost less accumulated amortization. Management assesses the carrying value of all intangible assets using its best estimate of discounted future cash flows whenever conditions arise which could indicate a possible impairment. Any impairment is recognized when it is identified and is measured by the amount by which the carrying value of the asset exceeds its estimated recoverable amount. Amortization is provided over the estimated useful lives of the assets using the following method and rate with halfyear depreciation provided in the year of acquisition: Computer software 3 years straight-line (h) Leases The Company records its lease obligations as either operating or finance. Finance leases are those where the Company has transferred substantially all of the benefits and risks of ownership, whereas under operating leases the Company has not transferred substantially all of the benefits and risks of ownership. Finance lease obligations are accounted for as the acquisition of property and equipment and a related obligation measured at the present value of Page 11 of 31

13 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) future minimum lease payments. The related assets are depreciated over their estimated useful lives and finance expense is recognized as a component of periodic lease payments. Operating leases are expensed on a straight-line basis over the lease term. As at October 31, 2013 (October 31, 2012 all operating), all leases entered into by the Company were operating in nature. (i) Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the obligation. The increase in the provision due to passage of time is recognized as a finance expense. (j) Research and development Development costs and existing product enhancement costs are recognized as equipment when the product or process is clearly defined, the technical feasibility has been established, management intends to market the product or process, a market exists for the product or process, and adequate resources exist to complete the project. Commencing from this time, deferred development costs are amortized over the period of expected benefit. Research, as well as development costs that do not meet the preceding criteria are expensed in the period incurred. Research and development investment tax credits and government grants, if received, are applied against the deferred costs or are a reduction in the related expense, as applicable, in the period in which the investment tax credits and government grants are received. (k) Government assistance Government assistance in connection with research activities is recognized as an expense reduction in the period that the related expenditure is incurred. Federal and provincial investment tax credits are accounted for as a reduction of expenditures in the period in which the credits are earned and when there is likely assurance of their recovery. Assistance related to future periods is deferred and recognized as an expense reduction as the related expenses are incurred. Repayments of assistance are recorded in the period the repayment becomes payable as an increase of the related expense. Repayments related to future periods are treated as contingent liabilities until such time the ultimate obligation can be measured with sufficient reliability to recognize a liability. (l) Income taxes Tax expense comprises current and deferred tax. Tax is recognized in profit or loss except to the extent it relates to items recognized in other comprehensive income or directly in equity. (m) Deferred tax Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated statements of financial position. Deferred tax is calculated using tax rates and laws that have been enacted or substantively enacted at the end of the reporting period, and which are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Page 12 of 31

14 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Deferred tax liabilities are recognized for all temporary differences, except: in respect of taxable temporary differences associated with investments in subsidiaries, when the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future; and, when the deferred tax liability arises from the initial recognition of goodwill which is not deductible for tax purposes or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. Deferred tax assets are recognized for all deductible temporary differences, the carry-forward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilized, except: In respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized ; and, When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. (n) Stock-based compensation Employees (including directors and executives) and consultants receive remuneration in the form of stock-based compensation, whereby employees and consultants render services as consideration for options (equity-settled transactions). The cost of equity-settled transactions is recognized, together with a corresponding increase in contributed surplus in equity, over the period in which the performance and/or service conditions are fulfilled. The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company s best estimate of the number of equity instruments that will ultimately vest. The expense or credit for a period recognized in profit or loss represents the movement in cumulative expense recognized as at the beginning and end of that period and is recognised in stockbased compensation expense. No expense is recognized for awards that do not ultimately vest, except for equitysettled transactions for which vesting are conditional upon a market or non-vesting condition. These are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. Equity-settled stock-based compensation is measured at fair value at the grant date using the Black-Scholes option pricing model with assumptions as described in Note 8, unless fair value is not reliably estimable. In such cases, the fair value of the equity instrument is used. Any consideration paid by employees upon exercise of stock options is recorded as an increase to share capital. The Company s stock-based compensation plan is more fully described in Note 8. (o) Loss per share The Company presents basic and diluted loss per share data for its common shares. Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the year. Diluted loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the quarter after giving effect to potentially dilutive instruments. The dilutive effect of stock options and warrants is Page 13 of 31

15 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) determined using the treasury stock method, whereby options and warrants that are anti-dilutive are excluded from the calculation of the diluted loss per share. (p) Geographical segments As at October 31, 2013, the Company operates in two geographical segments providing pipeline leak detection services to the Oil and Gas sector in Canada and the U.S. Revenue related to each geographical segment are as follows: For the year ended Canada U.S. Total CAD CAD CAD October 31, 2013 $ 528,149 $ 201,023 $ 729,172 October 31, 2012 $ 448,074 $ 206,575 $ 654,649 Currently, U.S. operations are made up solely of customer contracts that are executed by shared resources. As well, the U.S. operation is not separately reviewed by management to make decisions about resources to be allocated to the operation. As a result, the Company does not regard its U.S. operations as an operating segment for financial statement reporting purposes. Five (2012 three) customers accounted for 73% ( %) of the Company s consolidated revenue. (q) Recent accounting pronouncements issued but not yet adopted Standards issued but not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Company s consolidated financial statements are disclosed below. The Company intends to adopt these standards, if applicable, when they become effective. IFRS 7 Disclosures - Offsetting Financial Assets and Financial Liabilities Amendments to IFRS 7 These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity s financial position. The new disclosures are required for all recognized financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These amendments will become effective for annual periods beginning on or after January 1, The IFRS 7 amendments are not expected to have a material impact on the financial statements of the Company; however the standard will result in additional disclosures. The IAS 32 amendments are not expected to have a material impact on the financial position, cash flows or earnings of the Company. IFRS 9, Financial Instruments (IFRS 9) IFRS 9, Financial Instruments (IFRS 9), reflects the IASB s work on the replacement of IAS 39, Financial Instruments: Recognition and Measurement (IAS 39) and will be completed and implemented in three separate Page 14 of 31

16 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) phases: 1) Classification and measurement of financial assets and liabilities; 2) Impairment methodology; and 3) Hedge accounting. General hedge accounting requirements will be added as part of phase 3 of the IFRS 9 project, while accounting for macro hedging has been decoupled from IFRS 9 and will now be considered and issued as a separate standard. The IASB decided in November 2013 to delay the mandatory effective date of IFRS 9 and to leave open the mandatory effective date pending the finalization of the impairment requirements. The Company is currently monitoring the impact of adopting IFRS 9, as well as any potential future amendments thereto, including the proposed accounting for macro hedging. Novation of Derivatives and Continuation of Hedge Accounting In June 2013, the IASB issued amendments to IAS 39, Financial Instruments: Recognition and Measurement which provides relief from discontinuing hedge accounting when novation of a derivative designated as a hedge accounting instrument meets certain criteria. The IAS 39 amendments are effective for annual periods beginning on or after January 1, 2014, which will be November 1, 2014 for the Company, and is to be applied retrospectively. The IAS 39 amendments are not expected to have a material impact on the financial position, cash flows or earnings of the Company. Levies In May 2013, the IFRS Interpretations Committee (IFRIC), with the approval by the IASB, issued IFRIC 21, Levies (IFRIC 21). IFRIC 21 provides guidance on when to recognize a liability to pay a levy imposed by government that is accounted for in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 is effective for annual periods beginning on or after January 1, 2014, which will be November 1, 2014 for the Company, and is to be applied retrospectively. The Company is currently assessing the impact of adopting this interpretation. IFRS 13 Fair Value Measurement In May 2011, the IASB published IFRS 13 Fair Value Measurement, which is effective prospectively for annual periods beginning on or after January 1, IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure the fair value of financial and non-financial assets and liabilities when required or permitted by IFRS. This new standard is not expected to have a material impact on the financial position, cash flows or earnings of the Company; however the standard will result in additional fair value disclosures. IAS 32 Offsetting Financial Assets and Financial Liabilities Amendments to IAS 32 These amendments clarify the meaning of currently has a legally enforceable right to set-off. It will be necessary to assess the impact to the Company by reviewing settlement procedures and legal documentation to ensure that offsetting is still possible in cases where it has been achieved in the past. In certain cases, offsetting may no longer be achieved. In other cases, contracts may have to be renegotiated. The requirement that the right of set-off be available for all counterparties to the netting agreement may prove to be a challenge for contracts where only one party has the right to offset in the event of default. The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. Currently, transactions settled through clearing systems are, in most cases, deemed to achieve simultaneous settlement. While many settlement systems are expected to meet the new criteria, some may not. Any changes in offsetting are expected to impact leverage ratios, regulatory capital requirements, etc. As the impact of the adoption depends on the Page 15 of 31

17 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Company s examination of the operational procedures applied by the central clearing houses and settlement systems it deals with to determine if they meet the new criteria, it is not practical to quantify the effects. These amendments become effective for annual periods beginning on or after January 1, EQUIPMENT During the year ended October 31, 2011, the Company began production of a second realsens instrument. As at October 31, 2013, no depreciation has been recorded as the instrument has not been completed and as such is not available for use. Computer equipment Laboratory equipment realsens II equipment Furniture and fixtures Total Cost CAD CAD CAD CAD CAD Balance as at October 31, 2011 $ 37,028 $ 12,469 $ 34,932 $ 14,564 $ 98,993 Additions 2, ,595 8,063 Disposals (2,990) (2,990) Balance as at October 31, ,506 12,469 34,932 20, ,066 Additions 2, ,818 Balance as at October 31, 2013 $ 38,783 $ 12,469 $ 34,932 $ 20,700 $ 106,884 Computer equipment Laboratory equipment realsens II equipment Furniture and fixtures Total Depreciation Balance as at October 31, 2011 $ 15,565 $ 6,574 $ - $ 10,889 $ 33,028 Depreciation in year 10,925 1,107-1,189 13,221 Disposals (1,367) (1,367) Balance as at October 31, ,123 7,681-12,078 44,882 Depreciation in year 8,383 1,396-1,670 11,449 Balance as at October 31, 2013 $ 33,506 $ 9,077 $ - $ 13,748 $ 56,331 Computer equipment Laboratory equipment realsens II equipment Furniture and fixtures Total Carrying Amount Balance as at October 31, 2012 $ 11,383 $ 4,788 $ 34,932 $ 8,081 $ 59,184 Balance as at October 31, 2013 $ 5,277 $ 3,392 $ 34,932 $ 6,952 $ 50,553 During the year, no impairments of equipment were recorded ( $nil). Page 16 of 31

18 5. INTANGIBLE ASSETS Accumulated Accumulated Cost amortization Cost amortization Computer software $ 27,073 $ 25,973 $ 27,073 $ 21,506 Carrying Amount $ 1,100 $ 5,567 There were no additions or disposals during the years ended October 31, 2013 and October 31, During the year ended October 31, 2013, the Company recorded intangible assets depreciation of $4,466 ( $6,735). During the year, no impairments of intangible assets were recorded ( $nil). 6. DEPOSITS ON DISTRIBUTION RIGHTS OPTION On July 1, 2011, the Company signed a realsens TM service distribution option agreement with EHI Consulting, a Nigerian company and received the associated sign-up fee of USD $10,000 or CAD $9,548. The agreement gives the option holder the option to purchase the realsens TM pipeline leak detection rights for all countries in Africa with the exception of Morocco, Algeria, Libya and Egypt. If converted, the distributorship will be for a period of three years which can be automatically renewed for a further five years upon successful completion of annual performance targets. The conversion fee will be USD $20,000. The option expired December 31, As a result of the agreement, the associated sign-up fee of $9,967 was recognized as revenue in the quarter ending January 31, The small difference of $419 between the original sign-up fee on July 1, 2011 ($9,548) and the amount recognized as revenue in the quarter ending January 31, 2013 ($9,967) was due to foreign exchange differences. 7. COMMITMENTS The Company is committed to minimum lease payments on its office premises to September 30, 2014 totalling $64,900. In addition to minimum lease payments, the lease requires payment of the Company s proportionate share of real estate taxes and common area maintenance expenses. The commitments for each of the next five years for the lease and other contracts are as follows: CAD FY 2014 $ 64,900 FY Total $ 64,900 Page 17 of 31

19 8. SHARE CAPITAL Authorized Unlimited number of Class A voting common shares Unlimited number of Class B voting common shares Unlimited number of Class C non-voting common shares Unlimited number of Class D non-voting common shares Unlimited number of Class E non-voting, redeemable, retractable preferred shares Issued and outstanding Class A common shares - $ 10,528,916 9,908,156 Class A common shares - Shares 81,991,033 64,306,361 Number of shares Total # $ Balance, October 31, ,497,930 8,881,885 Issued in private placement, net of costs of issuance of $66,230 and net of fair value of warrants of $435,514 14,493, ,559 Issued in private placement, net of costs of issuance of $12,743 and net of fair value of warrants of $40,085 1,315,400 78,712 Balance, October 31, ,306,361 9,908,156 Issued in private placement, net of costs of issuance of $28,268 and net of fair value of warrants of $106,779 3,000, ,819 Issued on the exercise of warrants 14,684, ,941 Balance, October 31, ,991,033 10,528,916 In the year ended October 31, 2013, 14,684,672 warrants, of which 13,902,597 warrants (12,812,197 would have expired August 24, 2013 and 1,090,400 would have expired on September 24, 2013 all of which were at $0.15) and 782,075 warrants (532,075 at $0.21 and 250,000 at $0.30 all of which would expire June 27, 2013), were exercised. On December 13, 2012, the Company announced the completion of its previously announced private placement of 3,000,000 units (the Units ) at a price of $0.10 per Unit, for aggregate gross proceeds of $300,000. The Units are comprised of one Class A common share (a Share ) and one Share purchase warrant. Each warrant (a Warrant ) Page 18 of 31

20 8. SHARE CAPITAL (continued) entitles the holder to purchase one Share of the Corporation at an exercise price of $0.15 per Share until December 13, The Shares and Warrants comprising the Units were subject to a four month statutory hold period which expired on April 14, In connection with the closing of the first tranche of the private placement, finder s fees totaling $6,440 were paid and 64,400 warrants, having terms the same as the Warrants, were issued in accordance with the policies of the TSX-V. The proceeds were used by Synodon for general working capital. The fair value of the Warrants issued of $0.03 per Warrant and $0.03 per Broker Warrant were determined using the Black-Scholes option pricing model for warrants assuming a risk-free interest rate of 1.1%, a dividend yield of 0%, an expected volatility of 80.4% and an expected life of the warrants of twelve months. The resulting fair value of $106,779 ($104,535 for warrants and $2,244 for broker warrants) is included in the Warrants on issue of units. Costs of issuance were allocated to these Warrants in the amount of $10,062. Share options Under the Company's incentive stock option plan (the Plan ), options to purchase common shares may be granted by the Board of Directors to directors, officers, employees or consultants of the Company, or its subsidiaries. The Company has reserved up to 6,024,690 (was 4,581,118 prior to 2011 Annual General Meeting held April 27, 2011) shares available for the settlement of options. The exercise price per share and the vesting period shall be determined at the time of grant by the Board of Directors. Except for the first grant, which vested when specific performance criteria were met, options granted prior to October 31, 2006 have vested immediately. Options granted subsequent to October 31, 2006 generally vest over a period of three years. The option period for options granted as compensation to directors, officers, employees or consultants shall be a period of time fixed by the Board of Directors not to exceed five years. The option period for options granted in exchange for services is specified by the Board of Directors at the time of grant and ranged from three to ten years for options granted prior to April 30, There have not been any non-employee options granted in exchange for services after April 30, If an option has lapsed, the Board of Directors may grant new options covering the shares not purchased. If a participant is dismissed as an officer, employee or consultant by the Company for cause, all unexercised option rights of that participant under the Plan shall terminate immediately upon such dismissal. If a participant ceases to be an officer, employee or consultant of the Company as a result of reasons other than for cause (as set forth in the Plan) such participant shall have the right for a period not exceeding one year from the date of ceasing to be an officer, employee, consultant or director to exercise the option under the Plan with respect to all optioned shares of such participant to the extent that they were exercisable on the date of ceasing to be an officer, employee, consultant or director. Page 19 of 31