International Datacasting Corporation

Transcription

1 International Datacasting Corporation Consolidated Financial Statements For the year ended January 31, 2015 The attached Consolidated Financial Statements have been prepared by Management of International Datacasting Corporation, recommended for approval by the Audit Committee and approved by the Board of Directors on April 29, International Datacasting Corporation Page 1

2 Table of Contents Management s Statement of Responsibility... 3 Independent Auditor s Report... 4 Consolidated Statements of Financial Position... 6 Consolidated Statements of Operations and Comprehensive Loss... 7 Consolidated Statements of Changes in Equity... 8 Consolidated Statements of Cash Flows... 9 Notes to Consolidated Financial Statements Note 1 Basis of Presentation and Going Concern Note 2 Summary of Significant Accounting Policies Note 3 Critical Accounting Estimates and Judgments Note 4 Financial Instruments and Risk Management Note 5 Inventories Note 6 Capital Assets Note 7 Credit Facilities Note 8 Provisions Note 9 Capital Stock Note 10 Share-Based Compensation Note 11 Research and Development Expense Note 12 Lease Commitments Note 13 Income Taxes Note 14 Segmented Information Note 15 Loss Per Share Note 16 Wages and Employee Benefits Expense Note 17 Related Party Transactions Note 18 Subsequent Events International Datacasting Corporation Page 2

3 April 29, 2015 Management s Statement of Responsibility To the Shareholders of International Datacasting Corporation Management is responsible for the preparation of the Consolidated Financial Statements of International Datacasting Corporation and its wholly-owned subsidiaries as well as all other information in the Management s Discussion & Analysis ( MD&A ) which is filed separately. The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board, and reflect management s best estimates and judgments. The financial information presented within the MD&A is consistent with the Consolidated Financial Statements. Management has developed and continues to maintain systems of internal controls. Although no costeffective system of internal controls will prevent or detect all errors and irregularities, these systems are designed to provide reasonable assurance that all assets are safeguarded from loss or unauthorized use, transactions are properly recorded, and the financial records are reliable for preparing the Consolidated Financial Statements. The Audit Committee, which is comprised of independent directors, reviews the Consolidated Financial Statements, considers the report of the external auditors, assesses the adequacy of the Corporation s internal controls, and recommends to the Board of Directors the independent auditors for appointment by the shareholders. The Consolidated Financial Statements and MD&A were reviewed and recommended for approval by the Audit Committee and approved by the Board of Directors. The Consolidated Financial Statements have been audited by PricewaterhouseCoopers LLP, Licensed Public Accountants, who have full access to the Audit Committee with and without the presence of management. Their report is presented on the next page. /s/ Doug Lowther CEO and President /s/ Steven Archambault Chief Financial Officer International Datacasting Corporation Page 3

4 April 29, 2015 Independent Auditor s Report To the Shareholders of International Datacasting Corporation We have audited the accompanying consolidated financial statements of International Datacasting Corporation and its subsidiaries, which comprise the consolidated statements of financial position as at January 31, 2015 and January 31, 2014 and the consolidated statements of operations and comprehensive loss, changes in equity and cash flows for the years then ended, and the related notes, which comprise 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. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. PricewaterhouseCoopers LLP 99 Bank Street, Suite 800, Ottawa, Ontario, Canada K1P 1E4 T: , F: PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

5 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 International Datacasting Corporation and its subsidiaries as at January 31, 2015 and January 31, 2014 and their financial performance and their 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 describes matters and conditions that indicate the existence of a material uncertainty that may cast significant doubt on the Corporation s ability to continue as a going concern. Chartered Professional Accountants, Licensed Public Accountants

6 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at January 31, 2015 and 2014 (Canadian dollars) NOTES ASSETS Current Assets Cash and cash equivalents $ 615,403 $ 2,734,655 Restricted short-term investments 4 80,000 72,500 Accounts receivable 4 1,464,828 3,289,596 Inventories 5 3,603,125 3,793,347 Other assets 176, ,268 Total Current Assets 5,939,692 10,328,366 Non-Current Assets Capital assets 6 541, ,057 Total Non-Current Assets 541, ,057 TOTAL ASSETS $ 6,481,486 $ 10,864,423 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 838,531 $ 1,159,025 Secured borrowings 7 144,406 - Accrued liabilities 648,615 1,545,234 Customer deposits 50,712 30,654 Deferred revenue - current portion 275, ,870 Provisions 8 145, ,575 Current tax liability 13 10,450 9,496 Total Current Liabilities 2,114,144 3,348,854 Non-Current Liabilities Deferred tax liability 13 8,793 14,551 Deferred revenue 323, ,568 Total Non-Current Liabilities 332, ,119 TOTAL LIABILITIES 2,446,167 3,492,973 Shareholders' Equity Capital stock 9 24,131,627 23,637,259 Contributed surplus 3,901,345 3,401,345 Accumulated other comprehensive loss (229,729) (229,729) Accumulated deficit (23,767,924) (19,437,425) TOTAL SHAREHOLDERS' EQUITY 4,035,319 7,371,450 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,481,486 $ 10,864,423 See Note 1: Basis of Presentation and Going Concern The accompanying notes are an integral part of these Consolidated Financial Statements International Datacasting Corporation Page 6

7 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED JANUARY 31, 2015 and 2014 (Canadian dollars, except share data) NOTES REVENUE Products $ 8,267,993 $ 11,347,914 Services 2,046,344 4,953,767 Total revenue 14 10,314,337 16,301,681 COST OF REVENUE 5,525,534 9,469,094 GROSS PROFIT 4,788,803 6,832,587 OPERATING EXPENSES Selling, general and administrative 4,716,419 7,487,209 Research and development, net of investment tax credits 3,980,040 4,587,514 Restructuring costs 8 441,559 - Foreign exchange loss (gain) (35,598) 130,781 Total operating expenses 9,102,420 12,205,504 OPERATING LOSS BEFORE OTHER ITEMS (4,313,617) (5,372,917) Realized loss on sale of investments - (25,344) Interest Income 11,505 54,871 Interest expense (25,977) (1,182) LOSS BEFORE INCOME TAXES (4,328,089) (5,344,572) Income tax recovery (expense): Current (8,168) (37,700) Deferred 5,758 (2,791,488) NET AND COMPREHENSIVE LOSS $ (4,330,499) $ (8,173,760) NET LOSS PER SHARE Basic Diluted $ (0.07) $ (0.14) $ (0.07) $ (0.14) Weighted average number of shares outstanding - basic 60,690,473 58,294,779 Weighted average number of shares outstanding - diluted 15 60,690,473 58,294,779 The accompanying notes are an integral part of these Consolidated Financial Statements International Datacasting Corporation Page 7

8 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED JANUARY 31, 2015 AND 2014 (Canadian dollars, except share data) NOTES Number of Common Shares Common Shares Contributed Surplus Accumulated Other Comprehensive Loss Accumulated Deficit Total Shareholders' Equity Balance at February 1, ,384,642 $ 23,406,259 $ 3,263,245 $ (243,209) $ (11,263,665) $ 15,162,630 Net loss (8,173,760) (8,173,760) Stock-based compensation , ,100 Issuance of common shares 1,100, , ,000 Change in unrealized loss on available-for-sale investments ,480-13,480 Balance at January 31, ,484,642 $ 23,637,259 $ 3,401,345 $ (229,729) $ (19,437,425) $ 7,371,450 Balance at February 1, ,484,642 $ 23,637,259 $ 3,401,345 $ (229,729) $ (19,437,425) $ 7,371,450 Net loss (4,330,499) (4,330,499) Stock-based compensation , ,104 Issuance of common shares 9 4,281, , ,325 Issued upon conversion of Restricted Share Units ("RSUs") 9 1,111, ,043 (101,104) - - (1,061) Balance at January 31, ,877,752 $ 24,131,627 $ 3,901,345 $ (229,729) $ (23,767,924) $ 4,035,319 The accompanying notes are an integral part of these Consolidated Financial Statements International Datacasting Corporation Page 8

9 International Datacasting Corporation Page 9

10 1. Basis of Preparation and Going Concern Basis of presentation International Datacasting Corporation, together with its wholly-owned subsidiaries (herein referred to collectively as IDC or the Corporation ), offers a broad portfolio of advanced solutions for implementing broadcast content contribution and distribution applications. IDC s products and solutions are in demand for radio and television networks, targeted ad insertion, digital cinema, 3D live events, satellite news gathering, sports contribution, Video on Demand (VOD) and IPTV, among others. The Corporation has offices in Canada, the Netherlands, and the United States and sells its products globally. IDC is incorporated and domiciled in Canada. The address of its registered office is 50 Frank Nighbor Place, Kanata, Ontario, Canada K2V 1B9. IDC is publicly traded on the Toronto Stock Exchange ( TSX ) under the symbol IDC. These Consolidated Financial Statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value, including derivative instruments. The preparation of Consolidated Financial Statements requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent amounts of assets and liabilities as at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results may differ significantly from the estimates made by management. For areas involving a higher degree of judgment or complexity, refer to Note 3 for a summary of critical accounting estimates and judgments. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These Consolidated Financial Statements were approved by the Board of Directors on April 29, The Consolidated Financial Statements of the Corporation are expressed in Canadian dollars and are prepared in accordance with International Financial Reporting Standards ( IFRS ), as issued by the International Accounting Standards Board ( IASB ). The tabular disclosures herein are presented in thousands, except for share data. Going Concern Additionally, these Consolidated Financial Statements have been prepared on the going concern basis, which assumes the Corporation will be able to continue its operations and will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. However, there exists significant doubt regarding the validity of this assumption and, hence, the ultimate appropriateness of the use of accounting principles applicable to a going concern for the following reasons: The Corporation has incurred significant operating losses in the past three fiscal years as well as the year ended January 31, 2015, resulting in negative cash flows from operations over these respective periods; The Corporation s available liquid assets at January 31, 2015 may be insufficient to fund future required working capital; and International Datacasting Corporation Page 10

11 The Corporation s long and unpredictable sales cycles result in difficulty to reliably forecast future sales and related cash flows. The Board and management are taking steps to mitigate the going concern risk. In addition, in January 2015, the Board formed a Strategy Committee to evaluate strategic alternatives in response to receiving an unsolicited non-binding offer to purchase IDC s business. As disclosed in Note 18 Subsequent Events, on April 21, 2015, Pico Digital Inc. ( Pico Digital ) agreed to acquire the principal business assets and certain liabilities of IDC ( Asset Purchase ), including IDC s product portfolio, and customers and supplier relationships. IDC will retain all intellectual property related to its issued patents. Additionally, following the closing of the acquisition, the majority of IDC s employees are expected to join Pico Digital. In conjunction with this transaction, IDC expects to obtain a US $1 million bridge financing from Pico Digital. The bridge loan will become immediately due and payable if the Definitive Agreement is terminated. As the Asset Purchase transaction is subject to shareholders approval of IDC, there is no assurance that this transaction will be consummated. In the event IDC is unable to close this transaction, the Corporation anticipates that it will need to raise capital and/or debt in order to fund its operations over the next 12 months. There is no assurance such additional capital funding will be available to the Corporation. Due to the above circumstances, there exists significant doubt regarding the Corporation s ability to continue as a going concern. These audited Consolidated Financial Statements do not reflect any adjustments to the carrying values of assets and liabilities and the reported amounts of revenues and expenses and balance sheet classifications that would be necessary if the use of the going concern assumption was not appropriate and such adjustments could be material. 2. Summary of Significant Accounting Policies The significant accounting policies applied in the preparation of these Consolidated Financial Statements are described below. These policies have been consistently applied to all the years presented, unless otherwise noted. Consolidation These Consolidated Financial Statements consolidate the accounts of International Datacasting Corporation and its subsidiaries, International Datacasting of America, Inc. and PROFline B.V. All transactions and balances from these companies have been eliminated upon consolidation. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. This chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments. The Chief Executive Officer ( CEO ) has been determined to be the chief operating decision-maker for the Corporation. International Datacasting Corporation Page 11

12 Foreign currency translation a) Functional and presentation currency Items included in the financial statements of each consolidated entity in the IDC group are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). Management has determined the Canadian dollar to be the functional currency of the Parent company as well as its subsidiaries. Prior to July 31, 2010, management determined that PROFline B.V. s functional currency was the Euro and accordingly its financial statements were translated into Canadian dollars using the current rate method. The accumulated currency translation adjustment at July 31, 2010, was an unrealized loss of $230 thousand. This balance continues to be reported as part of accumulated other comprehensive loss in shareholders equity in the Consolidated Statements of Financial Position and will be recognized in the Corporation s earnings only when it disposes of its interest in PROFline B.V., or loses control or significant influence over its operation. b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Income and expense items are translated at the average exchange rates for the period, unless foreign exchange rates fluctuated significantly during the period, in which case, the exchange rates at the dates of the transactions are used. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at periodend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized as foreign exchange gains (losses) in the Consolidated Statements of Operations and Comprehensive Loss. Revenue recognition The Corporation recognizes revenue when it has transferred the significant risks and rewards of ownership, legal title has passed, it retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Corporation, and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Revenue is recognized when the Corporation has demonstrated delivery and compliance with the product specifications. Where final acceptance of the product is specified by the customer, revenue is deferred until acceptance criteria have been met. For instance, this is the case when the Corporation sells a head-end solution to customers. For other products, revenue is recognized when the Corporation has had a history of customer acceptance that makes it probable that acceptance upon delivery of the product will take place. Arrangements may be comprised of multiple product and service elements. Revenue for customer support and maintenance services, multi-year extended warranty, feature development and professional services included in a multiple element arrangement are unbundled from the total fee for the arrangement based on their relative fair value as determined by reliable objective evidence. Where reliable objective evidence does not exist, management estimates the cost of delivery plus a reasonable profit margin as a proxy for the fair value of the element. International Datacasting Corporation Page 12

13 Revenue associated with extended warranties is recognized ratably over the contractual life of the arrangement. Additionally, professional services revenue is recognized on a proportional performance basis taking into consideration the hours completed to date in relation to the total expected hours to complete the deliverable. Shipping and handling costs charged to customers are recorded as an offset in cost of revenue. Deferred revenue arises when customers are invoiced in advance of revenue recognition criteria being met. Cash Cash includes cash on hand, deposits held with banks, and other short-term highly liquid investments redeemable on demand or with original maturities of three months or less. Short-term investments Short-term investments include investments with a maturity period of more than three months and less than 12 months from the date of acquisition of the investment. Financial instruments a) Financial assets At initial recognition, the Corporation classifies its financial assets as: i) Financial assets at fair value through profit or loss. A financial asset is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term. It also includes derivatives not designated as hedges under IFRS. Financial assets in this category are recognized initially and subsequently at fair value. Gains and losses arising from changes in fair value and transaction costs are recorded in the Consolidated Statements of Operations and Comprehensive 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. These 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. See Note 4 Financial Instruments and Risk Management. iii) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives and are measured at fair value with the change in fair value, including the effect of changes in foreign exchange rates, recognized in accumulated other comprehensive income within shareholders equity in the Consolidated Statements of Financial Position. Purchases and sales of investments are recorded on a trade-date basis. Gains and losses realized on disposal of available-for-sale International Datacasting Corporation Page 13

14 investments and other-than-temporary impairments are included in net income. Interest and dividend income is recognized when earned. The classification depends on the purpose for which the financial instruments were acquired, their characteristics and management s intent. Financial assets are presented as current assets in the Consolidated Statements of Financial Position if expected to be settled within 12 months; otherwise, they are presented as non-current. b) Impairment of financial assets At each reporting date, the Corporation assesses whether there is objective evidence that a financial asset is impaired. Evidence of impairment may include indications that the debtors are experiencing significant financial difficulty, default or delinquency in payment, the probability that they will enter bankruptcy or other financial reorganization, and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. If such evidence exists, the Corporation recognizes an impairment loss, as follows: i) Financial assets carried at amortized cost The loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument s original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly through the use of an allowance account. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. ii) Available-for-sale financial assets The impairment loss is the difference between the original cost of the asset and its fair value at the measurement date, less any impairment losses previously recognized in the Consolidated Statements of Operations and Comprehensive Loss. This amount represents the cumulative loss in accumulated other comprehensive loss that is reclassified to net loss. Impairment losses on available-for-sale equity instruments are not reversed. c) Derivative financial instruments and hedging activities Derivatives are recognized at fair value on the date the Corporation enters into the derivative contract and are subsequently re-measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. At January 31, 2015 and 2014, the Corporation did not designate any derivative as a hedging instrument for achieving hedge accounting as defined under IFRS. As such, the change in fair value of a non- International Datacasting Corporation Page 14

15 designated derivative is recognized in the Consolidated Statements of Operations and Comprehensive Loss. The fair value of a non-designated derivative is classified as current other assets or accrued liabilities when the contract s maturity is less than 12 months; otherwise it is presented as non-current. d) Fair value hierarchy Fair value is defined as the price to sell an asset or transfer a liability (i.e. the exit price ) in an orderly transaction between market participants. Management uses a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The fair value hierarchy is broken down into the following three levels: Level 1: Fair value based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2: Fair value based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, etc.) or can be corroborated by observable market data. Level 3: Fair value based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect significant management judgments about assumptions that market participants might use. e) Financial liabilities at amortized cost Financial liabilities at amortized cost include accounts payable, accrued liabilities, and secured borrowings. These are initially recognized at the amount required to be paid, less a discount to reduce the payables to fair value. Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities. Inventories Inventories are stated at the lower of weighted average cost and net realizable value. The cost of finished goods and work in progress comprises design costs, raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. At each reporting period, management estimates the provision for obsolete and slowmoving inventory which may be reversed in subsequent periods, should the value subsequently be recovered. Capital assets Capital assets are stated at cost less accumulated depreciation and impairment losses, if any. The carrying value is net of related government assistance and investment tax credits. Repairs and maintenance costs on capital assets are charged to the Consolidated Statements of Operations and Comprehensive Loss during the period in which they are incurred. International Datacasting Corporation Page 15

16 Management has established the following estimated useful lives: Computers, peripherals and software: 4 7 years Demo and testing equipment: 3 10 years Furniture and fixtures: 5 10 years The estimated useful lives, residual values, and depreciation methods are reviewed annually, with the effect of any changes in estimate accounted for prospectively. Leasehold improvements are amortized on a straight-line basis over the shorter of the term of the lease and their estimated useful lives. At January 31, 2015, the estimated useful lives were less than two years. Management evaluates the carrying value of the Corporation s capital assets when events or changes in circumstances indicate that the carrying amount may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units or CGUs). The recoverable amount is the higher of an asset s fair value less costs to sell and value in use (being the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The Corporation evaluates impairment losses for potential reversals when events or circumstances warrant such consideration. Research and development costs The Corporation incurs research and development costs associated with the design of new technology. Expenditures during the research phase are expensed as incurred. Expenditures during the development phase are capitalized if certain criteria, including technical feasibility and intent and ability to develop and use the technology, are met; otherwise they are expensed as incurred. Such capitalized costs are amortized over their expected useful lives. No amounts have been capitalized to date. Leases Leases that transfer substantially all of the benefits and risks of ownership of the leased assets to the Corporation are capitalized by recording the present value of future minimum payments under the lease as a capital asset and a liability in the Consolidated Statements of Financial Position. Assets recorded under capital leases are amortized using the rates consistent with those used by the Corporation for similar assets. For leases which are classified as operating leases, lease payments are recognized as an expense on a straight-line basis over the lease term. Termination benefits The Corporation recognizes termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or providing benefits as a result of an offer made to encourage voluntary termination. Benefits falling due more than 12 months after the end of the reporting period are discounted to their present value. International Datacasting Corporation Page 16

17 Stock-based compensation The Corporation maintains multiple stock option and other stock-based incentive plans for directors, executives, and other employees. All grants are initially measured at fair value. For a stock option, the Black-Scholes option pricing model is used to estimate its fair value. For a restricted share unit ( RSU ) and deferred share unit ( DSU ), fair value is based on the five day volume weighted average closing price immediately prior to the grant date. For service-based grants, the compensation expense is recognized over the vesting period. For performance-based grants, the compensation expense is also recognized over the vesting period, provided that the outcome of the underlying performance condition is considered probable. When options are exercised, the Corporation issues new shares for which the net proceeds (proceeds less any directly attributable costs) are recorded under capital stock in the Consolidated Statements of Financial Position. Compensation expense, net of estimated forfeiture benefits at the time of grant, is recognized in the Consolidated Statements of Operations and Comprehensive Loss, with an offsetting credit to contributed surplus in the Consolidated Statements of Financial Position. Income taxes Income taxes comprise current and deferred income taxes. Income taxes are recognized in the Consolidated Statements of Operations and Comprehensive Loss except to the extent that they relate to items recognized directly in shareholders equity in the Consolidated Statements of Financial Position, in which case the income taxes are also recognized directly in equity. 1) Current income taxes The taxes currently payable are based on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years. Taxable profit differs from IFRS profit because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. 2) Deferred income taxes Deferred income taxes are recognized using the balance sheet method, providing for temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements. This is determined on a non-discounted basis using tax rates and laws that were enacted or substantively enacted at the dates of the Consolidated Statements of Financial Position and are expected to apply when the deferred income tax asset or liability is settled. Deferred income tax assets are recognized to the extent that it is more likely than not that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred income taxes are provided on temporary differences arising on investments in subsidiaries and associates, except, in the case of subsidiaries, where the timing of the reversal of the temporary difference is controlled by the Corporation and it is probable that the temporary difference will not reverse in the foreseeable future. International Datacasting Corporation Page 17

18 Deferred income tax assets and liabilities are presented as non-current. Investment tax credits Investment tax credits, which are earned as a result of qualifying research and development expenditures, are recognized when the expenditures are made and their realization is reasonably assured and are applied to reduce the related research and development capital costs and expenses. Recently Issued Accounting Standards Not Yet Adopted IFRS 9: Financial Instruments In July 2014, the IASB issued the final version of IFRS 9, bringing together the classification and measurement, impairment and hedge accounting phases of the project to replace IAS 39, Financial Instruments: Recognition and Measurement. This standard simplifies the classification of a financial asset as either at amortized cost or at fair value as opposed to the multiple classifications which were permitted under IAS 39. This standard also requires the use of a single impairment method as opposed to the multiple methods in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The standard also adds guidance on the classification and measurement of financial liabilities. IFRS 9 is to be applied retrospectively for annual periods beginning on or after January 1, Early application is permitted. The Company does not intend to adopt this standard early and is currently evaluating the impact of adopting this standard on the consolidated financial statements. IFRS 15: Revenue from Contracts with Customers In May 2014, the International Accounting Standards Board issued IFRS 15, Revenue from Contracts with Customers, which provides a single, principles-based five-step model for revenue recognition to be applied to all customer contracts, and requires enhanced disclosures. This standard is effective January 1, 2017 and allows early adoption. The Company does not intend to adopt this standard early and is currently evaluating the impact of adopting this standard on the consolidated financial statements. 3. Critical Accounting Estimates and Judgments The preparation of Consolidated Financial Statements requires management to make judgments, estimates and assumptions. The following are critical accounting estimates and judgments applied by management that most significantly affect the Corporation s Consolidated Financial Statements. Actual results could differ materially from those estimates. 1) Valuation of Inventories The valuation of inventories requires management to estimate a provision for obsolete and slow-moving inventory as well as inventory that is not of saleable quality. The inventory valuation process includes a review of future demand for IDC s products based on current sales pipeline; the stage of the product life cycle of IDC s product; customer acceptance; ability to repurpose slow-moving finished goods into other products showing greater market interest; and an assessment of the selling price in relation to the product cost. If management s demand forecast for specific products is greater than actual demand and management fails to reduce manufacturing output accordingly, IDC could be required to write off International Datacasting Corporation Page 18

19 inventory, which could negatively impact IDC s gross profit. Refer to Note 5 Inventories for total provision at January 31, 2015 and ) Impairment of finite lived assets Management is required to test for impairment of finite lived assets (e.g. capital assets) if events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Under IFRS, the recoverable amount is the higher of an asset s fair value less costs to sell and value in use (i.e. based on projected future cash flows). At January 31, 2015, the market capitalization of the Corporation s shares listed on the TSX was 53% ( %) lower than the carrying value of the Corporation s net assets at that same date. Under IAS 36: Impairment of Assets, this could constitute an indicator of impairment in the Corporation s long-lived assets. However, the Corporation s stock is thinly traded and has been trading below $0.10 per share for the past six months. Consequently, IDC s stock price and related market capitalization are subject to significant volatility. As disclosed in Note 18 Subsequent Events, subject to shareholders approval, the Corporation will sell its principal business assets for approximately $5 million, subject to purchase price adjustments, which is greater than the recorded net assets at year end. Based on the valuation of this pending sale transaction, for which a non-binding indication of interest was received prior to year end, management has concluded there was no impairment trigger at January 31, 2015 with respect to IDC s finite lived assets. 3) Valuation of deferred income tax assets At January 31, 2015, IDC had accumulated $25.7 million of unused R&D expenditures for Canadian income tax purposes. These deductions are available without expiry to reduce future years Canadian taxable income. Deferred income tax assets are recognized to the extent that it is probable that sufficient taxable profits will be available against which the unused R&D expenditures (i.e. tax credits) and the reversal of temporary differences (i.e. tax losses) can be deducted. At January 31, 2015, management considered the following factors in projecting the Corporation s future taxable profits: The Corporation incurred significant operating losses in the past three fiscal years ( $4.3 million; $5.4 million; and $1.0 million). The Corporation has experienced significant volatility in profitability and revenues. The Corporation s ability to generate future taxable profits is highly dependent on successfully bringing to market and selling new products. Accordingly, management concluded that the probable threshold for recognizing any deferred income tax asset was not met and as result no deferred tax asset was recognized at January 31, During the fourth quarter of Fiscal 2014, the Corporation recorded a full impairment charge of $2.8 million following management s conclusion that the probable recognition threshold was not met for same reasons as noted above. 4) Warranty provision At January 31, 2015 and 2014, the Corporation s product warranty provision was $146 thousand and $254 thousand. The Corporation generally provides a one-year warranty for its products at no additional International Datacasting Corporation Page 19

20 cost to the customer. Estimates of future warranty costs are accrued at the time of product shipment and included in cost of revenues in the Consolidated Statements of Operations and Comprehensive Loss. Management periodically review the provision for product warranty and records adjustments based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, and estimates of the timing and cost of warranty claims. Factors that could impact the provision for product warranty include the success of the Corporation s productivity and quality initiatives, as well as parts and labour costs. A higher degree of scrutiny is exercised in establishing product warranty provision related to sales of new products. Refer to Note 8 Provisions for a summary of activities relating to the warranty provision. 4. Financial Instruments and Risk Management Capital risk management The Corporation s objective is to maintain a strong capital base to sustain future development of the business and provide the ability to continue as a going concern. See Note 18 Subsequent Events. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates, and equity prices, will affect the Corporation s earnings or the value of its holdings of financial instruments. 1) Foreign currency risk The Corporation is exposed to foreign currency fluctuations on its monetary assets and liabilities (cash balance, accounts receivable, and accounts payable) denominated in the US dollar and the Euro. The Corporation s revenues are generally denominated in either US dollars or Euros as are certain direct and operating costs. The Corporation may use foreign currency forward contracts to economically hedge the currency fluctuations on its net monetary assets, where natural hedges are insufficient. Speculative currency trading is prohibited. The company held no foreign currency forward contracts at January 31, At January 31, 2014, the Corporation had the following foreign currency forward contracts: Type Notional Currency Maturity Equivalent Canadian $ Fair value Sell 1,000,000 USD February 6, 2014 $ 1,064 $ (50) Sell 400,000 EURO February 10, (16) Sell 500,000 USD February 27, (3) Sell 250,000 EURO March 3, (8) Derivative financial liabilities $ (77) The above notional amounts of derivative contracts represent the basis upon which pay or receive International Datacasting Corporation Page 20

21 amounts are calculated and are presented in the table to quantify the volume of the Corporation s derivative activities. Notional amounts are not reflective of credit risk. For the year ended January 31, 2015, total unrealized losses on foreign currency forward contracts were $nil and ( $77 thousand). These are included in the foreign exchange loss (gain) in the Consolidated Statements of Operations and Comprehensive Loss, partially offsetting the foreign exchange gain or loss resulting from the settlement of foreign currency transactions and from the translation at period-end exchange rates of foreign currency denominated monetary assets and liabilities. A five percent strengthening of the Canadian dollar against the Corporation s net un-hedged currency exposures at January 31 would have increased the net loss by the amounts shown below: USD $ 27 $ 2 EURO 10 (5) $ 37 $ (3) 2) Credit risk Credit risk is the risk of financial loss to the Corporation if a customer or counter-party to a financial instrument fails to meet its contractual obligations. The Corporation s credit risk exposure is primarily with respect to its cash, accounts receivable, and derivative financial instruments. The Corporation does not use credit derivatives or similar instruments to mitigate credit risk. Accordingly, the maximum exposure at January 31 is the full carrying value of the financial assets as follows (in 000s): The Corporation minimizes credit risk on cash and derivative instruments by depositing or engaging in derivative instruments with financial institutions management considers reputable. The Corporation generally does not hold any collateral as security for trade receivables; however it minimizes its credit risk associated with its trade receivables by: requiring customer deposits in some cases; obtaining credit insurance from Export Development Canada (EDC) for foreign sales; and performing credit evaluation, approval and monitoring processes. International Datacasting Corporation Page 21

22 The aging of trade receivables, net of the allowance for doubtful accounts, at the reporting date was (in 000 s): At January 31, 2015, three customers accounted for 52% of total trade receivables ( four customers - 50%). The Corporation has purchased credit insurance from EDC for most of the outstanding foreign trade receivables to mitigate credit risk. However, EDC insurance does not apply in the event of a dispute or settlement with a customer. At January 31, 2015, the Corporation had no outstanding customer disputes. Since January 31, 2015 and through April 24, 2015, the Corporation has collected approximately $945 thousand from the above outstanding trade receivables, including the entire balance greater than 90 days. At January 31, the Corporation s allowance for doubtful accounts was as follows: Management has no reason to believe that accounts receivable not provided for are not collectible either directly from the customers or indirectly from EDC. 3) Interest rate risk Interest rate risk is the risk of financial loss to the Corporation due to an increase in interest rates. At January 31, 2015, the Corporation s interest rate risk exposure was limited to its cash and cash equivalents and short-term investments. Due to the short term nature of these financial instruments, the Corporation is not exposed to significant interest rate risk. The Corporation has no interest rate risk exposure on its secured borrowings as the charge associated with the accounts receivable factoring facility is based on a fixed percentage of the factored accounts receivable and is not linked to credit market (see Note 7 (a)). International Datacasting Corporation Page 22

23 Liquidity risk Liquidity risk is the risk the Corporation will not be able to meet its financial obligations as they come due. At January 31, 2015, the Corporation had the following contractual obligations and commitments: (in thousands) Within 1 to 3 to Payment due: Total 1 year 3 years 5 years Operating leases (1) $ 1,211 $ 945 $ 266 $ - Accounts payable Secured borrowings Accrued liabilities Customer deposits Provisions Other $ 3,050 $ 2,784 $ 266 $ - (1) Includes buildings, equipment, and vehicles. At January 31, 2015, the Corporation s had liquid assets (cash and accounts receivable) of $2.1 million to cover future contractual obligations and commitments. The Board and management are actively pursuing strategic alternatives to mitigate liquidity risk. See Note 1 Basis of Presentation and Going Concern and Note 18 Subsequent Events. Financial instruments Categories The following tables present the Corporation s total financial assets and liabilities by category: At January 31, 2015 Other financial Assets / Liabilities Loans and liabilities at at fair value through receivables amortized cost the profit and loss Total Cash $ 615 $ - $ - $ 615 Short-term investments Accounts receivable 1, ,008 Total financial assets $ 1,623 $ - $ 80 $ 1,703 Accounts payable $ - $ 764 $ - $ 764 Secured borrowings Accrued liabilities: Derivative financial liabilities Other accrued liabilities Total financial liabilities $ - $ 1,438 $ - $ 1,438 International Datacasting Corporation Page 23

24 At January 31, 2014 Other financial Assets at fair Loans and liabilities at value through receivables amortized cost the profit and loss Total Cash $ 2,734 $ - $ - $ 2,734 Short-term investments Accounts receivable 2, ,864 Total financial assets $ 5,598 $ - $ 73 $ 5,671 Accounts payable $ - $ 1,095 $ - $ 1,095 Accrued liabilities: Derivative financial liabilities Other accrued liabilities - 1,468-1,468 Total financial liabilities $ - $ 2,563 $ 77 $ 2,640 Fair value estimation The following tables present the Corporation s financial assets and liabilities that are measured at estimated fair value: At January 31, 2015: Level 1 Level 2 Level 3 Total Short-term investments $ 80 $ - $ - $ 80 At January 31, 2014: Level 1 Level 2 Level 3 Total Short-term investments $ 73 $ - $ - $ 73 Derivative financial liabilities $ - $ (77) $ - $ (77) There were no movements between Level 1 and Level 2 in either Fiscal 2015 or Fiscal During Fiscal 2014, the Corporation sold its $2 million available-for-sale investment, consisting of an ETF bond fund, at a loss of $25 thousand. The proceeds were reinvested in a money-market fund. The following describes the valuation technique and assumptions to estimate fair value: a) Short-term investments At January 31, 2015, the short-term investments consisted of one redeemable guaranteed investment certificate ( GIC ) of $25 thousand and a three-month deposit of $55 thousand. At January 31, 2014, the short-term investments consisted of one redeemable GIC of $73 thousand. The GIC serves as security for a letter of guarantee issued in favor of the Corporation s landlord and the three-month deposit serves as security for the Corporation s credit card facility (see Note 7 Credit Facilities ). International Datacasting Corporation Page 24