DATA Communications Management Annual Report 2017

Plain-text annual report

2017 ANNUAL REPORT 1 MANAGEMENT’S DISCUSSION AND ANALYSIS2 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017TABLE OF CONTENTS 02 06 44 45 46 47 47 48 49 50 LETTER TO SHAREHOLDERS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL REPORTING RESPONSIBILITY OF MANAGEMENT INDEPENDENT AUDITOR’S REPORT CONSOLIDATED STATEMENTS OF FINANCIAL POSITION CONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT) CONSOLIDATED STATEMENTS OF CASH FLOW NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 119 CORPORATE INFORMATION 1 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017 LETTER TO SHAREHOLDERS Dear Fellow Shareholders, DCM completed 2017 with a strong fourth quarter. Revenues were $76.1 million, up 11.6% compared to a year ago; and Adjusted EBITDA was $5.6 million, up 154.5% versus a year ago. For the fiscal year ended December 31, 2017, total revenues were $289.5 million, up 4.0% versus a year ago, and Adjusted EBITDA was $16.1 million, compared to $14.4 million a year ago. This improvement in your business was driven by several initiatives: SALES PERFORMANCE We benefited from market share wins including a large North American financial institution. We achieved gains in “share of wallet”, essentially providing more services and products to long standing clients. MARGIN DISCIPLINE AND COST CONTROLS We undertook a number of initiatives to reduce our product price discounting with a focus to improve gross margins through “cost plus” discipline. ACQUISITIONS The Thistle and Eclipse acquisitions completed in February 2017 contributed strong results in the year and helped improve overall gross margins for the company. BOLDER Graphics, acquired in November 2017, chipped in for our last month of the year. BOLDER Graphics provides DCM with highly complementary large format platform capabilities in Western Canada and we expect a strong performance from the business in 2018. OPERATIONAL EFFICIENCIES We focused on five key areas: • • Announced and executed the move of Multiple Pakfold from its separate Mississauga, Ontario facility into our Brampton, Ontario location. Estimated annual savings in excess of $0.8 million are expected from this move. Announced and completed the move of our Granby, Québec warehousing operations into our Drummondville, Québec facility. Annual associated savings are estimated at $0.7 million. 2 LETTER TO SHAREHOLDERS • Announced and completed the move of BOLDER Graphics into our Calgary, Alberta location. Annual total savings are estimated at $0.8 million. • • Executed strategic selling, general and administrative cost reductions. The elimination of approximately 30 personnel will result in annualized estimated savings of approximately $3.5 million. Continued to progress with the implementation of our new ERP project. This is positioned for completion before the end of 2018. As a result of all of the above, we recently shared our outlook for fiscal 2018 with the market which incorporates the above initiatives together with positive revenue trends. The “Outlook” discussion in the enclosed management’s discussion and analysis of financial conditions and results of operations further describes our outlook and assumptions. We are quite encouraged by the momentum we have in the business. LEADERSHIP TRANSITION Reflecting on how the DCM team has successfully navigated its transformation over the last three years, as evidenced by the strong fourth quarter in 2017 and the positive outlook for 2018, I want to announce that I am stepping aside from the CEO role, effective June 2018 at the shareholders’ annual general meeting. I will however remain a director, subject to shareholder support, and continue as a significant and very supportive shareholder. I originally joined DCM with the intent to reposition the business for lasting success, and I am confident that the changes we have made to strengthen our team at all levels, and the course we have established, are now in place to do just that. Gregory J. Cochrane will add CEO to his current title of President. I have thoroughly enjoyed working with and learning from Greg since he joined us in November 2016. During this time Greg has made many important and transformative moves to propel DCM forward. His leadership, energy and keen “customer first” focus is what DCM needs as it continues to move from its strong historical role of being an operations-focused communications provider to becoming more of a marketing communications-focused provider and thought leader. LETTER TO SHAREHOLDERS 3 DATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017 As we approach this succession, I want to share my extreme gratitude to the whole DCM team. The company is made up of a highly talented, diverse, and extremely loyal team of individuals, all of whom have made my job enjoyable and successful. The caliber of the DCM team is a direct result of the leadership provided by many employees over the history of DCM. I consider it a once in a lifetime privilege to have spent three years working with you. In particular, I’d like to recognize my key confidants Alan Roberts, our Senior Vice-President of Operations, James Lorimer, our Chief Financial Officer, and Judy Holcomb-Williams, our Vice-President of People Experience and who has recently taken on the role of Senior Vice-President, Chief Cultural Officer. You folks have made my DCM journey a thrill and one I’m immensely proud of. Lastly, I’d like to thank our board of directors made up of seasoned, sound veterans, led by our Chairman J.R. Kingsley Ward. Your support has been an essential ingredient for our success. This will be the last DCM shareholder letter I write by myself for I will share this privilege with Greg for our first quarter of 2018 report. As such, I want to take this opportunity to thank you, our shareholders, for your tremendous support and patience as we have wrestled to transition and transform your company into a modern communications corporation with an appropriate capital structure. The journey is not over yet, but I truly now believe we know our destination and we have new sails with the wind at our backs. For a full description of our financial results for the fourth quarter and full year financial results for 2017, please refer to our audited consolidated financial statements for the year ended December 31, 2017 and related management’s discussion and analysis, copies of which are available at www.sedar.com. Kindest regards, (Signed) “Michael G. Sifton” Michael G. Sifton Chief Executive Officer DATA Communications Management Corp. March 2018 4 LETTER TO SHAREHOLDERS MANAGEMENT REPORTS MANAGEMENT REPORTS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management’s discussion and On July 4, 2016, DCM consolidated its issued and analysis (“MD&A”) is intended to assist readers outstanding common shares (“Common Shares”) in understanding the business environment, on the basis of one post-consolidation Common strategies, performance and risk factors of Share for each 100 pre-consolidation Common DATA Communications Management Corp. Shares (the “Share Consolidation”). All references (TSX: DCM.TO) and its subsidiaries (referred in this MD&A to Common Shares, restricted to herein as “DCM” or the “Company”) for share units and stock options reflect the Share the years ended December 31, 2017 and 2016. Consolidation, unless specified otherwise. This MD&A should be read in conjunction with the audited consolidated financial statements and accompanying notes of DCM for the years ended December 31, 2017 and 2016. Additional information about the Company, including its most recently filed audited consolidated financial statements, Annual Information Form and Management Information Circular may also be obtained on SEDAR (www.sedar.com). Unless otherwise indicated, all amounts are expressed in Canadian dollars. FORWARD-LOOKING STATEMENTS Certain statements in this MD&A constitute “forward-looking” statements that involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, objectives or achievements of DCM, or industry results, to be materially different from any future results, performance, objectives or achievements expressed or implied by such forward-looking statements. When used in this The Company’s Board of Directors, on the MD&A, words such as “may”, “would”, “could”, recommendation of its Audit Committee, approved “will”, “expect”, “anticipate”, “estimate”, the contents of this MD&A. This MD&A reflects “believe”, “intend”, “plan”, and other similar information as of March 8, 2018. expressions are intended to identify BASIS OF PRESENTATION The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). forward-looking statements. These statements reflect DCM’s current views regarding future events and operating performance, are based on information currently available to DCM, and speak only as of the date of this MD&A. These forward-looking statements involve a number of risks, uncertainties and assumptions and should not be read as guarantees of future performance 6 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017or results, and will not necessarily be accurate Should one or more of these risks or uncertainties indications of whether or not such performance materialize, or should assumptions underlying the or results will be achieved. Many factors could forward-looking statements prove incorrect, actual cause the actual results, performance, objectives results may vary materially from those described or achievements of DCM to be materially different in this MD&A as intended, planned, anticipated, from any future results, performance, objectives believed, estimated or expected. Unless required by or achievements that may be expressed or implied applicable securities law, DCM does not intend by such forward-looking statements. The principal and does not assume any obligation to update these factors, assumptions and risks that DCM made forward-looking statements. or took into account in the preparation of these forward-looking statements include: the limited growth in the traditional printing industry and the potential for further declines in sales of DCM’s printed business documents relative to historical sales levels for those products; the risk that changes in the mix of products and services sold by DCM will adversely affect DCM’s financial results; the risk that DCM may not be successful in reducing the size of its legacy print business, realizing the benefits expected from restructuring and business reorganization initiatives, reducing costs, reducing and repaying its long-term debt, and growing its digital and marketing communications businesses; the risk that DCM may not be successful in managing its organic growth; DCM’s ability to invest in, develop and successfully market new digital and other products and services; competition from competitors supplying similar products and services, some of whom have greater economic resources than DCM and are well-established suppliers; DCM’s ability to grow its sales or even maintain historical levels of its sales of printed business documents; the impact of economic conditions on DCM’s businesses; risks associated with acquisitions by DCM; the failure to realize the expected benefits from acquisitions and risks associated with the integration of acquired businesses; increases in the costs of paper and other raw materials used by DCM; and DCM’s ability to maintain relationships with its customers. Additional factors are discussed elsewhere in this MD&A and under the headings “Risk Factors” and “Risks and Uncertainties” in DCM’s publicly available disclosure documents, as filed by DCM on SEDAR (www.sedar.com). NON-IFRS MEASURES This MD&A includes certain non-IFRS measures as supplementary information. Except as otherwise noted, when used in this MD&A, EBITDA means earnings before interest and finance costs, taxes, depreciation and amortization and Adjusted net income (loss) means net income (loss) adjusted for the impact of certain non-cash items and certain items of note on an after-tax basis. Adjusted EBITDA means EBITDA adjusted for restructuring expenses, one-time business reorganization costs, goodwill impairment charges, gain on redemption of convertible debentures, gain on cancellation of convertible debentures, and acquisition costs. Adjusted net income (loss) means net income (loss) adjusted for restructuring expenses, one- time business reorganization costs, goodwill impairment charges, gain on redemption of convertible debentures, gain on cancellation of convertible debentures, acquisition costs and the tax effects of those items. Adjusted net income (loss) per share (basic and diluted) is calculated by dividing Adjusted net income (loss) for the period by the weighted average number of Common Shares (basic and diluted) outstanding during the period. In addition to net income (loss), DCM uses non-IFRS measures including Adjusted net income (loss), Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA to provide investors with supplemental measures of DCM’s operating performance and thus highlight trends in its core business that may not otherwise be apparent when relying solely on IFRS financial measures. DCM also believes that securities analysts, 7 MANAGEMENT’S DISCUSSION AND ANALYSISinvestors, rating agencies and other interested is strategically located across Canada, including parties frequently use non-IFRS measures in the seven centres of excellence to support clients on evaluation of issuers. DCM’s management also uses a national basis, and serves the U.S. market non-IFRS measures in order to facilitate operating through its facilities in Chicago, Illinois. performance comparisons from period to period, prepare annual operating budgets and assess its ability to meet future debt service, capital expenditure and working capital requirements. Adjusted net income (loss), Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA are not earnings measures recognized by IFRS and do not have any standardized meanings prescribed by IFRS. Therefore, Adjusted net income (loss), Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA are unlikely to be comparable to similar measures presented by other issuers. Investors are cautioned that Adjusted net income (loss), Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA should not be construed as alternatives to net income (loss) determined in accordance with IFRS as an indicator of DCM’s performance. For a reconciliation of net income (loss) to EBITDA and a reconciliation of net income (loss) to Adjusted EBITDA, see Table 3 below. For a reconciliation of net income (loss) to Adjusted net income (loss) and a presentation of Adjusted net income (loss) per share, see Table 4 below. BUSINESS OF DCM OVERVIEW DCM derives its revenues from the following core capabilities: direct marketing, commercial print services, labels and asset tracking, event tickets and gift cards, logistics and fulfilment, content and workflow management, data management and analytics, and regulatory communications. The Company serves clients in key vertical markets such as financial services, retail, healthcare, lottery and gaming, not-for-profit, and energy. Customer agreements and terms typically include provisions consistent with industry practice, which allow DCM to pass along increases in the cost of paper and other raw materials used to manufacture products. DCM’s revenue is subject to the seasonal advertising and mailing patterns of certain customers. Typically, higher revenues and profit are generated in the fourth quarter relative to the other three quarters, however this can vary from time to time by changes in customers’ purchasing decisions throughout the year. As a result, DCM’s revenue and financial performance for any single quarter may not be indicative of revenue and financial performance which may be expected for the full year. DCM has approximately 1,411 employees in DCM is a leading provider of business Canada and the United States, and had revenues of communication solutions, bringing value and $289.5 million in 2017. Website: www.datacm.com collaboration to marketing and operations teams in companies across North America. DCM helps marketers and agencies unify and execute communications campaigns across multiple channels, and it helps operations teams streamline and automate document and communications management processes. DCM 8 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017 RECENT DEVELOPMENTS $1.6 million in cash, $0.8 million through the POST-INTEGRATION OF ACQUISITIONS COMPLETED As previously reported, DCM completed the acquisition of Eclipse Colour and Imaging Corp. (“Eclipse”) and Thistle Printing Limited (“Thistle”) in the first quarter of 2017 and completed the acquisition of BGI Holdings Inc. and 1416395 Alberta Limited, collectively “BOLDER Graphics” on November 10, 2017, (the “BOLDER Closing Date”). DCM reported revenues and net income (loss) for the year ended December 31, 2017 from Eclipse of $21.8 million and $2.1 million, from Thistle of $15.1 million and $0.8 million, and BOLDER Graphics of $1.0 million and $(0.1) million, all since their respective dates of acquisition. During the first quarter of 2018, DCM relocated BOLDER Graphics’ staff and operations into DCM’s 165,000 square foot Calgary, Alberta facility, which produces a wide array of sheet- fed lithography, digital and wide format print services, variable print-on-demand solutions and provides warehousing, fulfillment and distribution services. The combination of these two operations are expected to provide immediate annualized total cost savings synergies of approximately issuance of 704,424 Common Shares, and $1.1 million in the form of subordinated, unsecured, 6.0% interest bearing vendor take-back promissory notes, which are payable in twenty equal monthly blended payments of principal and interest commencing on February 28, 2018 and ending on September 30, 2019, and the assumption of approximately $0.9 million in outstanding long-term indebtedness. The post-closing adjustments to the purchase of $88 thousand have been finalized and were paid in February 2018 to the vendor and therefore have been included in trade payables and accrued liabilities in DCM’s consolidated statement of financial position as at December 31, 2017. Note 4 to the audited consolidated financial statements of DCM for the year ended December 31, 2017 contains additional information used to determine the fair value of the Common Shares and fair value of the vendor take-back promissory note issued on BOLDER Closing Date. On the BOLDER Closing Date, DCM also advanced $1.3 million to settle BOLDER Graphics’ bank indebtedness and amounts payable to the former owners of the company. $0.8 million. This acquisition strengthens DCM’s Total cash advanced on the BOLDER Graphics large and wide format printing capabilities in acquisition of $2.9 million, which was used to western Canada and complements its significantly finance the up-front cash component of the expanded large and wide format capabilities acquisition and settle the above noted debt. obtained through the acquisition of Eclipse in $2.0 million was financed with the proceeds eastern Canada earlier this year. from the IAM V Credit Facility (as defined in the BOLDER Graphics was acquired for a total purchase price of approximately $3.4 million, before giving effect to post-closing adjustments for changes in working capital and bank indebtedness, based on the final statement of financial position as of the BOLDER Closing Date. The purchase price was satisfied as follows on the BOLDER Closing Date: “Liquidity and Capital Resources” below) and $0.9 million was financed with a draw under DCM’s bank credit facility (see “Liquidity and Capital Resources” below for further details related to DCM’s bank credit facilities). 9 MANAGEMENT’S DISCUSSION AND ANALYSIS The valuation report for the BOLDER Graphics REVENUE RECOGNITION POLICY acquisition is still in progress, and therefore, the purchase price allocation remains preliminary. As such, there may be adjustments to the purchase accounting and those adjustments could be material. The post-closing adjustment for the Eclipse acquisition was completed during the second quarter of 2017 and did not change the purchase price significantly from the estimated amount previously used for the purchase accounting. The post-closing adjustment for the Thistle acquisition was completed during the third quarter of 2017 and resulted in a small increase in the purchase price previously used for the purchase accounting. OPERATIONAL INITIATIVES On January 25, 2018, DCM announced the DCM recognizes revenue from the sale of products upon shipment to the customer when costs and revenues can be reliably measured, collection is probable, the transfer of title occurs and the risk of loss passes to the buyer. When the customer requests a bill and hold arrangement, revenue is recognized when the goods are ultimately shipped to the customer. Since the majority of DCM’s products are customized, product returns are not significant. DCM may provide pre-production services to its customers; however, these services do not have standalone value and there is no objective and reliable evidence of their fair value. Therefore, these pre-production services and the final custom made printed product are considered to be one unit of accounting. DCM recognizes warehousing, administration and marketing integration of the Company’s Multiple Pakfold service fees when the services are provided, the operations into its Brampton, Ontario facility and amount of revenue can be measured reliably, it is the relocation of its Granby, Québec warehousing probable that economic benefits associated with operations into its Drummondville, Québec facility these services will flow to DCM and the costs were completed as planned with little business disruption. These facility moves, together with the labour force reductions DCM announced in October 2017 of approximately 30 individuals across the Company’s indirect labour, selling, associated with these services can be reliably measured. DCM occasionally provides warehousing services that are negotiated as a separate charge based on market rates, even if included in the overall selling price of its products. Warehousing general and administrative functions, and ongoing services represent a separate unit of accounting efforts to drive efficiencies throughout the because they can be sold separately, have value to Company, are expected to result in annualized the customer on a stand-alone basis, and there is total savings of approximately $5.0 million. objective and reliable evidence of the fair value of DCM expects to realize the full quarter effect of these services. If warehousing, administration and many of these improvements commencing in the marketing service fees are included in one overall first quarter of 2018. selling price of DCM’s custom print products, the consideration is allocated to each component based on relative selling prices. 10 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017SELECTED CONSOLIDATED FINANCIAL INFORMATION The following tables set out summary consolidated financial information and supplemental information for the periods indicated. The summary annual financial information for each of Fiscal 2017, Fiscal 2016 and Fiscal 2015 has been derived from consolidated financial statements, prepared in accordance with IFRS. The unaudited financial information presented has been prepared on a basis consistent with our audited consolidated financial statements. In the opinion of management, such unaudited financial data reflects all adjustments, consisting of normal and non-recurring adjustments, necessary for a fair presentation of the results for those periods. COST OF REVENUES AND EXPENSES DCM’s cost of revenues consists of raw materials, manufacturing salaries and benefits, occupancy, lease of equipment and depreciation. DCM’s raw material costs consist primarily of paper, carbon and ink. Manufacturing salaries and benefits costs consist of employee salaries and health benefits at DCM’s printing and warehousing facilities. Occupancy costs consist primarily of lease payments at DCM’s facilities, utilities, insurance and building maintenance. DCM’s expenses consist of selling, depreciation and amortization, and general and administration expenses. Selling expenses consist primarily of employee salaries, health benefits and commissions, and include related costs for travel, corporate communications, trade shows, and marketing programs. Depreciation and amortization represent the allocation to income of the cost of property, plant and equipment, and intangible assets over their estimated useful lives. General and administration expenses consist primarily of employee salaries, health benefits, and other personnel related expenses for executive, financial and administrative personnel, as well as facility, telecommunications, pension plan expenses and professional service fees. DCM has incurred restructuring expenses in each of the last four fiscal years, which primarily consisted of severance costs associated with headcount reductions and costs related to facilities closures. 11 MANAGEMENT’S DISCUSSION AND ANALYSIS TABLE 1 The following table sets out selected historical consolidated financial information for the periods noted. For the years ended December 31, 2017, 2016 and 2015 (in thousands of Canadian dollars, except share and per share amounts, unaudited) January 1 to December 31 2017 January 1 to December 31 2016 January 1 to December 31 2015 Revenues Cost of revenues Gross profit Selling, general and administrative expenses Restructuring expenses Impairment of goodwill Gain on redemption of convertible debentures Acquisition costs $ 289,529 $ 278,363 $ 220,138 215,295 69,391 61,371 9,457 — — 1,368 72,196 63,068 55,934 4,200 31,066 — 68 91,268 304,575 233,505 71,070 56,663 13,560 26,000 (12,766) — 83,457 (Loss) before finance costs and income taxes (2,805) (28,200) (12,387) Finance costs (income) Interest expense Interest income Amortization of transaction costs 4,415 (6) 701 5,110 3,414 (8) 578 3,984 5,599 (11) 468 6,056 (Loss) before income taxes (7,915) (32,184) (18,443) Income tax (recovery) expense Current Deferred Net loss for the year Basic (loss) earnings per share Diluted (loss) earnings per share Weighted average number of common shares outstanding, basic Weighted average number of common shares outstanding, diluted As at December 31, 2017, 2016 and 2015 (in thousands of Canadian dollars, unaudited) Current assets Current liabilities Total assets Total non-current liabilities Shareholders’ deficit 12 725 (2,435) (1,710) (6,205) (0.38) (0.38) $ $ $ 1,572 (1,649) (77) (32,107) (2.89) (2.89) $ $ $ 1,191 (462) 729 (19,172) (40.33) (40.33) 16,330,837 11,125,518 475,382 16,330,837 11,125,518 475,382 As at December 31 2017 As at December 31 2016 As at December 31 2015 82,804 $ 68,620 $ 68,648 131,859 68,610 58,473 90,910 42,372 83,619 46,176 164,977 100,388 (5,399) $ (9,935) $ 18,413 $ $ $ $ $ MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017TABLE 2 The following table sets out selected historical consolidated financial information for the periods noted. See “Non-IFRS Measures”. For the years ended December 31, 2017, 2016 and 2015 (in thousands of Canadian dollars, except percentage amounts, unaudited) January 1 to December 31 2017 January 1 to December 31 2016 January 1 to December 31 2015 Revenues Gross profit Gross profit, as a percentage of revenues Selling, general and administrative expenses As a percentage of revenues Adjusted EBITDA (see Table 3) As a percentage of revenues Net loss for the year Adjusted net (loss) income (see Table 4) As a percentage of revenues TABLE 3 $ $ $ $ $ $ 289,529 69,391 24.0% 61,371 21.2% 16,104 5.6% (6,205) 2,472 0.9% $ $ $ $ $ $ 278,363 63,068 22.7% 55,934 20.1% 14,381 5.2% (32,107) 2,944 1.1% $ $ $ $ $ $ 304,575 71,070 23.3% 56,663 18.6% 21,110 6.9% (19,172) 5,764 1.9% The following table provides reconciliations of net (loss) income to EBITDA and of net (loss) income to Adjusted EBITDA for the periods noted. See “Non-IFRS Measures”. EBITDA AND ADJUSTED EBITDA RECONCILIATION For the years ended December 31, 2017, 2016 and 2015 (in thousands of Canadian dollars, unaudited) January 1 to December 31 2017 January 1 to December 31 2016 January 1 to December 31 2015 Net (loss) income for the year $ (6,205) $ (32,107) $ (19,172) Interest expense Interest income Amortization of transaction costs Current income tax expense Deferred income tax recovery Depreciation of property, plant and equipment Amortization of intangible assets EBITDA Restructuring expenses One-time business reorganization costs Impairment of goodwill Gain on redemption of convertible debentures Acquisition costs Adjusted EBITDA 4,415 (6) 701 725 (2,435) 4,143 3,509 3,414 (8) 578 1,572 (1,649) 4,052 2,092 5,599 (11) 468 1,191 (462) 4,754 1,949 $ 4,847 $ (22,056) $ (5,684) 9,457 432 — — 1,368 4,200 1,103 31,066 — 68 13,560 — 26,000 (12,766) — $ 16,104 $ 14,381 $ 21,110 13 MANAGEMENT’S DISCUSSION AND ANALYSISTABLE 4 The following table provides reconciliations of net (loss) income to Adjusted net (loss) income and a presentation of Adjusted net (loss) income per share for the periods noted. See “Non-IFRS Measures” ADJUSTED NET (LOSS) INCOME RECONCILIATION For the years ended December 31, 2017, 2016 and 2015 (in thousands of Canadian dollars, except share and per share amounts, unaudited) January 1 to December 31 2017 January 1 to December 31 2016 January 1 to December 31 2015 Net (loss) income for the year $ (6,205) $ (32,107) $ (19,172) Restructuring expenses One-time business reorganization costs Impairment of goodwill Gain on redemption of convertible debentures Acquisition costs Tax effect of the above adjustments Adjusted net (loss) income Adjusted net (loss) income per share, basic Adjusted net (loss) income per share, diluted Weighted average number of common shares outstanding, basic Weighted average number of common shares outstanding, diluted 9,457 432 — — 1,368 (2,580) 2,472 0.15 0.15 $ $ $ 4,200 1,103 31,066 — 68 (1,386) 2,944 0.26 0.26 $ $ $ 13,560 — 26,000 (12,766) — (1,858) 5,764 12.12 12.12 $ $ $ 16,330,837 11,125,518 475,382 16,445,831 11,125,518 475,382 Number of common shares outstanding, basic 20,039,159 11,975,053 9,987,528 Number of common shares outstanding, diluted 20,154,153 12,545,015 9,987,528 RESULTS OF OPERATIONS REVENUES For the year ended December 31, 2017, DCM recorded revenues of $289.5 million, an increase of $11.2 million or 4.0% compared with the same period in 2016. The increase in revenues for the of orders related to the forms and labels business, from which DCM benefited last year, resulting in the overall increase in revenues compared to 2016. COST OF REVENUES AND GROSS PROFIT year ended December 31, 2017 was primarily due For the year ended December 31, 2017, cost to the additions of revenues from the acquisitions of revenues increased to $220.1 million from of Eclipse, Thistle and BOLDER Graphics and $215.3 million for the same period in 2016. Gross new customer wins in DCM’s core business. This profit for the year ended December 31, 2017 was increase in revenue was partially offset by lower $69.4 million, which represented an increase of volumes and pricing pressures from certain $6.3 million or 10.0% from $63.1 million for the customers that reduced their overall spend, same period in 2016. Gross profit as a percentage particularly in the financial services sector, and of revenues increased to 24.0% for the year was also due to non-recurring work and timing ended December 31, 2017 compared to 22.7% for 14 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017the same period in 2016. The increase in gross 2016. $6.8 million of restructuring costs were profit as a percentage of revenues for the year related to headcount reductions in DCM’s ended December 31, 2017 was due to higher gross indirect labour force, in order to streamline margins attributed to Eclipse, Thistle and BOLDER the order-to-production process, in addition to Graphics, refinement of our pricing discipline, headcount reductions in the sales, general and cost reductions realized from prior cost savings administrative functions, facility closure costs, initiatives implemented in 2016 and additional and costs to move equipment and inventory from process improvement savings implemented in the closed facilities. These restructuring costs were January 2017. The increase in gross profit as a offset by a recovery of $0.3 million related percentage of revenues was partially offset by to a sub-lease of a closed facility in Richmond Hill, changes in product mix, and compressed margins Ontario and DCM also incurred lease exit charges on recently negotiated large contracts with certain associated with the closures of its facilities in existing customers. Regina, Saskatchewan, in Mississauga, Ontario, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES and $2.4 million, respectively. For the year ended December 31, 2016, DCM incurred and in Granby, Québec of $0.3 million, $0.3 million Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2017 restructuring expenses related to headcount reductions of $4.2 million. increased $5.4 million or 9.7% to $61.4 million DCM will continue to evaluate its operating costs compared to $55.9 million for the same period for further efficiencies as part of its commitment of 2016. As a percentage of revenues, these costs to making its business more agile, focused, were 21.2% and 20.1% of revenues for the years optimized and unified. ended December 31, 2017 and 2016, respectively. The increase in SG&A expenses for the year ended IMPAIRMENT OF GOODWILL December 31, 2017 was primarily attributable to the acquisitions of Eclipse, Thistle and BOLDER Graphics. This was partially offset by cost savings initiatives that were implemented in 2017, primarily related to headcount reductions made during the year, in addition to increased professional fees to complete the various acquisitions and related financing arrangements. RESTRUCTURING EXPENSES Cost reductions and enhancement of operating efficiencies have been an area of focus for DCM over the past four years in order to improve margins and better align costs with the declining revenues experienced by the Company, a trend that has been faced by the traditional printing industry for several years now. For the year ended December 31, 2017, DCM incurred restructuring expenses of $9.5 million compared to $4.2 million in the same period in During the fourth quarter of 2017, DCM performed its annual review of impairment of goodwill by comparing the fair value of each cash generating unit (“CGU”) to the CGU’s carrying value. The CGUs were defined as follows: DCM North America, Eclipse, Thistle and BOLDER Graphics. Given the purchase price accounting for BOLDER Graphics is still being finalized, the goodwill recognized on acquisition was not tested for impairment as of December 31, 2017. Furthermore, DCM recorded a non-cash impairment of goodwill for $31,066 related to the DCM North America CGU during the fourth quarter of 2016, therefore, there was no further goodwill remaining for this CGU in 2017. The recoverable amounts of all CGU’s were determined based on their respective fair value less cost to sell. DCM used the income approach to estimate the recoverable value of each CGU which 15 MANAGEMENT’S DISCUSSION AND ANALYSISis predicated on the value of the future cash flows INTEREST EXPENSE that a business will generate going forward and converting them into a present value through discounting. Discounting uses a rate of return that is commensurate with the risk associated with the business and the time value of money. This approach requires assumptions about revenue growth rates, operating margins, tax rates and discount rates. Interest expense, including interest on debt outstanding under DCM’s credit facilities, on outstanding 6.00% Convertible Unsecured Subordinated Debentures (the “6.00% Convertible Debentures”), on certain unfavourable lease obligations related to closed facilities, and on DCM’s employee benefit plans and including interest accretion expense related to certain debt Revenue growth rates and operating margins obligations recorded at fair value, was $4.4 million were based on the 2018 budget approved by the for the year ended December 31, 2017 compared to Board and projected over a five-year period. For $3.4 million for the same period in 2016. Interest the Eclipse and Thistle CGUs, a conservative expense for the year ended December 31, 2017 growth rate of 1% was applied to revenue for 2019 was higher than the same period in the prior to 2021, in consideration of the current economic year primarily due to the increase in the debt conditions and the specific trends of the printing outstanding under DCM’s credit facilities in order industry, and a perpetual long-term growth rate to fund a portion of the upfront cash components of 0% was used thereafter to derive the recoverable of the purchase prices, settle certain debt assumed amount of these CGUs. Furthermore, a discount and pay for related acquisition costs associated rate of 15.0% (2016 – N/A) was used for the Eclipse with the Eclipse, Thistle and BOLDER Graphics and Thistle CGUs. As a result of this review, DCM acquisitions and was favourably impacted by the concluded that the fair value of its CGUs were repayment of DCM’s 6.00% Convertible Debentures greater than their carrying values and no goodwill in June 2017. impairment charges were required. ADJUSTED EBITDA INCOME TAXES DATA reported a loss before income taxes of For the year ended December 31, 2017, Adjusted $7.9 million and a net income tax recovery of EBITDA was $16.1 million, or 5.6% of revenues, $1.7 million for the year ended December 31, 2017 after adjusting EBITDA for the $9.5 million in compared to a loss before income taxes of restructuring charges, $1.4 million related to $32.2 million and a net income tax recovery of non-recurring business acquisition costs and $0.1 million for the year ended December 31, 2016. $0.4 million of one-time business reorganization The current income tax expense was due to the costs. Adjusted EBITDA for the year ended taxes payable on DCM’s estimated taxable income December 31, 2017 increased $1.7 million or 12.0% for the years ended December 31, 2017 and 2016, from the same period in the prior year which was respectively. In addition, the current tax expense 5.2% of revenues in 2016. The increase in Adjusted for the year ended December 31, 2016 included EBITDA for the year ended December 31, 2017 was a recovery of taxes paid in a prior period offset attributable to higher gross profit as a result of by a reclassification from deferred taxes related revenues contributed by the Eclipse, Thistle and to an adjustment of a tax filing in a prior year. BOLDER Graphics acquisitions, improved pricing The deferred income tax recoveries primarily initiatives implemented part-way through the related to changes in estimates of future reversals year, and cost savings from the restructuring of temporary differences and new temporary efforts carried out in the second half of 2017. This differences that arose during the years ended was partially offset by higher SG&A expenses. December 31, 2017 and 2016, respectively. The 16 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017deferred income tax recovery for the year ended credit agreements, between DCM and the Bank December 31, 2016 included a reclassification to (as amended, the “Bank Credit Agreement”) current income taxes related to an adjustment of and IAM (as amended, the “IAM IV Credit a tax filing in a prior year. Agreement”), respectively. Upon closing of the NET LOSS Net loss for the year ended December 31, 2017 was $6.2 million compared to a net loss of $32.1 million for the same period in 2016. The increase in comparable profitability for the year ended December 31, 2017 was primarily due to the inclusion of the post-acquisition financial results of Eclipse, Thistle and BOLDER Graphics, in addition to a refined discipline in our pricing strategy. This increase was partially offset by higher SG&A expenses and interest expense, a larger restructuring charge and business acquisition costs during the year ended December 31, 2017. During the year ended December 31, 2016, the net loss included a non-cash impairment of goodwill totaling $31.1 million which did not recur in 2017. ADJUSTED NET INCOME Adjusted net income for the year ended December 31, 2017 was $2.5 million compared to Adjusted net income of $2.9 million for the same period in 2016. The decrease in comparable profitability for the year ended December 31, 2017, despite higher revenues and gross margin, was primarily due to higher SG&A expenses and, to a lesser extent, higher interest expense in 2017. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY DCM has established a revolving credit facility (the “Bank Credit Facility”) with a Canadian chartered bank (the “Bank”) and an amortizing term loan facility (the “IAM IV Credit Facility”) with IAM IV, a loan managed by Integrated Asset Management Corp. (“IAM”), pursuant to separate Thistle acquisition, DCM became a co-borrower under an existing credit agreement (the “IAM III Credit Agreement”) between Thistle and Integrated Private Debt Fund III LP (“IAM III”), another loan managed by IAM, pursuant to which IAM III has advanced to Thistle a term loan facility (the “IAM III Credit Facility”). On November 10, 2017, DCM established a $5.0 million secured, non- revolving senior credit facility (the “IAM V Credit Facility”) with Integrated Private Debt Fund V LP (“IAM V”), a loan managed by IAM (the “IAM V Credit Agreement” and, together with the IAM III Credit Agreement and the IAM IV Credit Agreement, the “IAM Credit Agreements”) to fund the acquisition of BOLDER Graphics and to repay a portion of DCM’s outstanding principal under the Bank Credit Facility. The IAM III Credit Facility and the IAM V Credit Facility are subject to the same covenant conditions stipulated under the IAM IV Credit Agreement and are reported on a consolidated basis. On June 28, 2017, DCM established a subordinated debt facility with Bridging Finance Inc. for $3.5 million (“Bridging Credit Facility”). Advances under the Bridging Credit Facility are repayable on demand and bear interest at a rate equal to the prime rate of interest charged by DCM’s Bank lender from time to time plus 10.3% per annum, calculated and payable monthly. The Bridging Credit Facility has a term of one year and can be repaid at any time without any prepayment fee upon sixty days prior written notice to Bridging, subject to the prior written consent of DCM’s other senior lenders. The Bridging Credit Facility is subordinated in right of payment to the prior payment in full of DCM’s indebtedness under the Bank Credit Agreement and the IAM Credit Agreements and is secured by certain specified equipment together with certain other conventional security. The Bridging Credit Facility 17 MANAGEMENT’S DISCUSSION AND ANALYSISlimits spending on capital expenditures by DCM Under the terms of the IAM Credit Agreements, to an aggregate amount not to exceed $5.5 million the maximum aggregate principal amount which during any fiscal year. Transaction costs of may be outstanding at any time under the IAM III $0.1 million were capitalized and the unamortized Credit Facility, amended IAM IV Credit Facility, transaction costs as at December 31, 2017 were the IAM V Credit Facility and the amended Bank $0.1 million. These costs are being amortized over Credit Facility, calculated on a consolidated basis the term of the Bridging Credit Facility. in accordance with IFRS (“Senior Funded Debt”), is As at December 31, 2017, DCM had outstanding borrowings of $21.7 million and letters of credit $72.0 million (after giving effect to the provisions of the inter-creditor agreement described below). granted of $1.4 million under the Bank Credit The principal amount of the IAM III Credit Facility Facility, outstanding borrowings of $4.8 million amortizes in blended equal monthly repayments under the IAM III Credit Facility, outstanding of principal and interest over an nine year term borrowings of $22.2 million under the IAM ending in October 15, 2022. The principal amount IV Credit Facility, borrowings of $4.9 million of the amended IAM IV Credit Facility amortizes under the IAM V Credit Facility, and outstanding in blended equal monthly repayments of principal borrowings of $3.5 million under the Bridging and interest over a seven year term ending in Credit Facility. Under the Bank Credit Facility, March 10, 2023. The principal amount of the DCM had access to $6.6 million of available credit IAM V Credit Facility amortizes in blended equal at December 31, 2017. monthly repayments of principal and interest over Under the terms of the Bank Credit Agreement, the maximum principal amount available under the Bank Credit Facility is $35.0 million and matures on March 31, 2020. Advances under the amended Bank Credit Facility are subject to floating interest rates based upon the Canadian prime rate plus an applicable margin of 0.75%. DCM has capitalized transaction costs of $1.1 million related to the amended Bank Credit Facility, including a sixty six month term ending in May 15, 2023. As at December 31, 2017, all of DCM’s indebtedness outstanding under the IAM III Credit Facility was subject to a fixed interest rate equal to 6.10% per annum and all of DCM’s indebtedness outstanding under the amended IAM IV Credit Facility and under the IAM V Credit Facility were subject to a fixed interest rate equal to 6.95% per annum, respectively. $0.4 million of additional costs incurred as As at December 31, 2017, the unamortized a result of amendments made to the agreement, transaction costs related to the IAM III Credit and expensed unamortized transaction costs of Facility were $30.0 thousand. DCM has capitalized $0.2 million related to the portion of the Bank transaction costs of $0.8 million related to the Credit Facility paid during the year ended amended IAM IV Credit Facility, including December 31, 2017. The unamortized balance of $0.2 million of additional costs incurred as a result the transaction costs are being amortized over of the amendments to this agreement during the the remaining term of the amended Bank Credit year ended December 31, 2017. The unamortized Facility. As at December 31, 2017, the unamortized balance of the transaction costs is being amortized transaction costs related to this facility were over the remaining term of this facility. As at $0.5 million. As at December 31, 2017, all of DCM’s December 31, 2017, the unamortized transaction indebtedness outstanding under the amended Bank costs related to the amended IAM IV Credit Credit Facility was subject to a floating interest Facility were $0.6 million. DCM has capitalized rate of 3.95% per annum. transaction costs of $0.2 million related to the IAM V Credit Facility and the unamortized balance 18 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017of the transaction costs is being amortized over the Funded Debt to EBITDA of not greater than term of this facility. As at December 31, 2017, the the following levels: from October 1, 2017 to unamortized transaction costs related to the December 31, 2017 - 3.50 to 1; from January 1, 2018 IAM V Credit Facility were $0.2 million. up to March 31, 2018 - 3.25 to 1; and on and after Each of the amended Bank Credit Agreement, the IAM III Credit Agreement, the amended IAM IV Credit Agreement, the IAM V Credit Agreement and the Bridging Credit Agreement contain customary representations and warranties, as well as restrictive covenants which limit the discretion of the Board and management with respect to certain business matters including the declaration April 1, 2018 - 3.00 to 1; (ii) a debt service coverage ratio of not less than 1.50 to 1; and (iii) a working capital current ratio of not less than 1.1:1. The pro forma financial results from DCM’s acquisitions completed during the year are included on a trailing twelve month basis effective as of the closing date of the acquisitions for the purposes of DCM’s covenant calculations. or payment of dividends on the Common Shares As at December 31, 2017, the ratio of Senior Funded without the consent of the Bank, IAM III, IAM IV, Debt to EBITDA was 3.05, the debt service coverage IAM V and Bridging, as applicable. ratio was 2.00 and the working capital current Under the terms of the amended Bank Credit Agreement, DCM is required to maintain a fixed charge coverage ratio as follows: i) for the ratio was 1.21. As at December 31, 2017, DCM was in compliance with these covenants and it expects to be compliant with these covenants going forward. period commencing July 1, 2017 and ending A failure by DCM to comply with its obligations December 31, 2017, the ratio would not be less under any of the amended Bank Credit Agreement, than 0.9 to 1.0; ii) for the period commencing the IAM Credit Agreements or the Bridging Credit January 1, 2018 and ending March 31, 2018, the Agreement, together with certain other events, ratio would not be less than 1.0 to 1.0, and for including a change of control of DCM and a the periods ending after March 31, 2018, the change in DCM’s chief executive officer, president ratio would not be less than 1.1 to 1.0 at all times, or chief financial officer (unless a replacement calculated on a consolidated basis, in respect of officer acceptable to IAM III, IAM IV and IAM V, any particular trailing 12 month period, as EBITDA acting reasonably, is appointed within 60 days of for such period less cash taxes, cash distributions the effective date of such officer’s resignation), (including dividends paid) and non-financed could result in an event of default which, if not capital expenditures paid in such period, divided cured or waived, could permit acceleration of by the total amount required by DCM to service its the indebtedness outstanding under each of outstanding debt for such period. The pro forma those agreements. DCM anticipates it will be financial results for DCM’s acquisitions completed in compliance with the covenants in its credit during the year are included on a trailing twelve facilities for the next twelve months; however month basis effective as of the closing date of there can be no assurance that DCM will be the acquisitions for the purposes of DCM’s successful in achieving the results targeted in covenant calculations. As at December 31, 2017, its 2018 operating plan or in complying with its the fixed charge coverage ratio was 1.30. As at covenants over the next twelve months. December 31, 2017, DCM was in compliance with this covenant and it expects to be compliant with this covenant going forward. DCM’s obligations under the amended Bank Credit Facility, the IAM III Credit Facility, the amended IAM IV Credit Facility and the IAM V Credit Facility Under the terms of the IAM Credit Agreements, are secured by conventional security charging DCM is required to maintain (i) a ratio of Senior all of the property and assets of DCM and its 19 MANAGEMENT’S DISCUSSION AND ANALYSISaffiliates. On February 22, 2017, DCM entered into In assessing DCM’s liquidity requirements, DCM an amended inter-creditor agreement between takes into account its level of cash and cash the Bank, IAM III, IAM IV, and the parties to the equivalents, together with currently projected vendor take-back promissory notes (the “VTB cash to be provided by operating activities, Noteholders”) issued in connection with the cash available from its unused credit facilities, acquisitions of Eclipse and Thistle, respectively, cash from investing activities such as sales of which, among other things, establishes the redundant assets, access to the capital markets rights and priorities of the respective liens of the and anticipated reductions in operating costs Bank, IAM III, IAM IV and the VTB Noteholders projected to result from existing restructuring on the present and after-acquired property of activities, as well as its ongoing cash needs for DCM, Eclipse and Thistle. On June 28, 2017, the its existing operations, will be sufficient to fund inter-creditor agreement was amended to include its currently projected operating requirements Bridging and to separately address the priority of including expenditures related to its growth its liens on certain specified equipment as a result strategy, payments associated with various of the Bridging Credit Facility. On November 10, restructuring and productivity improvement 2017, the inter-creditor agreement was further initiatives, contributions to its pension plans, amended in connection with the BOLDER Graphics payment of income tax liabilities and cash required acquisition to include IAM V as a party to the to finance currently planned expenditures, and agreement and to establish the rights and priorities debt repayment obligations. Cash flows from of the respective liens of the Bank, IAM III, IAM IV, operations have been, and could continue to be, IAM V and the VTB Noteholders on the present and negatively impacted by decreased demand for after-acquired property of BOLDER Graphics. DCM’s products and services and pricing pressures Market conditions and DCM’s financial condition and capital structure could affect the availability and terms of any replacement credit facilities or other funding sought by DCM from time to time or upon the maturity of the amended Bank Credit Facility, the IAM III Credit Facility, the amended IAM IV Credit Facility, the IAM V Credit Facility, the Bridging Credit Facility or other indebtedness of DCM. As at December 31, 2017, DCM had a bank overdraft of $2.9 million compared to cash and cash equivalents of $1.5 million at December 31, 2016. Under the terms of the amended IAM IV Credit Agreement and IAM V Credit Agreement, DCM is required to deposit and hold cash in a blocked account to be used for repayments of principal and interest of indebtedness outstanding under the amended IAM IV Credit Facility and IAM V Credit Facility. As at December 31, 2017, there was a balance of $0.5 million in the blocked account, which is recognized as restricted cash in DCM’s consolidated statements of financial position. 20 from its existing and new customers, which could result from factors such as reduced demand for traditional business forms and other print-related products, adverse economic conditions and competition from competitors supplying similar products and services, increases in DCM’s operating costs (including interest expense on its outstanding indebtedness and restructuring expenses) and increased costs associated with the manufacturing and distribution of products or the provision of services. DCM’s ability to conduct its operations could be negatively impacted in the future should these or other adverse conditions affect its primary sources of liquidity. PENSION FUNDING OBLIGATIONS DCM maintains a defined benefit and defined contribution pension plan (the “DATA Communications Management Pension Plan”) for some of its employees. Effective January 1, 2008, no further service credits will accrue under the defined benefit provision of the DATA MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017Communications Management Pension Plan. Based upon the January 1, 2017 actuarial report, However, DCM is required under applicable DCM’s annual minimum funding obligation pension legislation to make monthly, annual for the defined benefit provision of the DATA and/or one-time cash contributions to the DATA Communications Management Pension Plan for Communications Management Pension Plan to 2017 decreased from $1.3 million to $0.6 million. fund current or future funding deficiencies which As of December 31, 2017, DCM has exceeded may emerge in the defined benefit provision of the its minimum required funding requirements DATA Communications Management Pension Plan. for the defined benefit provision of the DATA Applicable pension legislation requires that the Communications Management Pension Plan for funded status of the defined benefit provision of 2017 by $0.2 million. This excess funding will the DATA Communications Management Pension be applied to DCM’s future minimum funding Plan be determined periodically on both a going requirements for the defined benefit provision concern basis (i.e., essentially assuming indefinite of the DATA Communications Management plan continuation) and a solvency basis (i.e., Pension Plan. essentially assuming immediate plan termination). In May 2017 the Ontario Ministry of Finance The funded status of DCM’s pension plan is announced major reforms to the funding impacted by actuarial assumptions, the plan’s framework for defined benefit pension plans. investment performance, changes in economic The proposed new framework is based on an conditions and debt and equity markets, changes enhanced going-concern approach, whereby in long-term interest rates, estimates of the solvency funding requirements would be price of annuities, and other elements of pension eliminated except for plans that are less than plan experience such as demographic changes 85% funded. The regulations supporting the and administrative expenses, among others. transitional measures which assist plan sponsors Where an actuarial valuation reveals a solvency prior to the full reforms being implemented were deficit, current pension regulations require it to enacted into legislation in June 2017. The new be funded by equal payments over a maximum regulation allows plan administrators whose period of five years from the date of valuation. next filed valuation report is dated on or after Actuarial valuations are required on the DATA December 31, 2016 and before December 31, 2017 Communications Management Pension Plan every to elect to defer the start of new solvency special three years, beginning January 1, 2014. Based on payments by up to 24 months instead of the these valuations, the annual cash contributions to usual 12 months. this plan will be determined and will depend on the plan’s investment performance and changes in long-term interest rates, estimates of the price of annuities, and other elements of pension plan experience such as demographic changes and administration expenses, among others. DCM has elected to defer the start of new solvency special payments by 24 months and intends on completing an updated actuarial valuation of the DATA Communications Management Pension Plan as at January 1, 2018. DCM expects that its future minimum funding requirements During the year ended December 31, 2017, DCM for the defined benefit provision of the DATA engaged actuaries to complete an updated Communications Management Pension Plan for actuarial valuation of the DATA Communications 2018 will be approximately $0.4 million, after Management Pension Plan, which confirmed that, adjusting for the excess funding from 2017, and as at January 1, 2017, the DATA Communications for 2019 will be approximately $1.4 million. The Management Pension Plan had a solvency deficit. January 1, 2018 actuarial valuation report for the 21 MANAGEMENT’S DISCUSSION AND ANALYSISDATA Communications Management Pension Certain former senior executives of a predecessor Plan will not be completed until partway through corporation participated in a Supplementary 2018 and the funding reforms have not been Executive Retirement Plan (“SERP”), which finalized, therefore, the effect on DCM’s minimum provides for pension benefits payable as a single funding requirements for 2018 and forward is not life annuity with a five year guarantee. The SERP is determinable at this time. DCM’s final funding unfunded. DCM’s annual funding obligation under obligations for the defined benefit provision of the the SERP is approximately $0.6 million. DATA Communications Management Pension Plan for 2018 and future years will be determined based CASH FLOW FROM OPERATIONS on the actuarial valuation as at January 1, 2018, which will be completed within the first nine months of 2018. Accordingly, DCM continues to make contributions based on the January 1, 2017 valuation. DCM’s projected funding obligations for the defined benefit provision of this plan are set out below in the “Contractual obligations - Summary” table under the heading “Contractual obligations”. During the year ended December 31, 2017, cash flows generated by operating activities were $3.9 million compared to cash flows generated by operating activities of $10.1 million during the same period in 2016. $13.0 million of current year cash flows resulted from operations, after adjusting for non-cash items, compared with $12.1 million in 2016. Current period cash flows from operations were positively impacted by the DCM makes contributions to the Québec Graphics acquisitions of Eclipse, Thistle and BOLDER Graphics, Communications Supplemental Retirement and however this was offset by a $5.4 million increase Disability Fund of Canada (the “SRDF”) based on in SG&A expense over the prior year comparative a percentage of the wages of its unionized period, in addition to lower revenues from DCM’s employees covered by the respective collective core business. Changes in working capital during the bargaining agreements, all of whom are employed year ended December 31, 2017 used $0.5 million in at DCM facilities located in the Province of cash compared with $7.6 million of cash generated Québec. In addition, DCM makes contributions in the prior year primarily due to increases in to a number of multi-employer, defined benefit accounts receivable which was partially offset by employee pension and non-pension benefit increases in accounts payable due to the timing of plans which are administered by Unifor Local payments to suppliers for purchases and deferred 591G for the hourly employees of Thistle (“Unifor revenues, respectively. In addition, $7.0 million Pension & Benefit Plans”). The SRDF and Unifor of cash was used to make payments primarily Pension & Benefit Plans provide post-employment related to severances and lease termination costs, benefits to unionized employees in the printing compared with $7.4 million of payments in 2016. industry jointly-trusteed by representatives of the Contributions made to the Company’s pension employers and the unions. DCM’s obligation to plans were $1.4 million, which decreased from the SRDF and Unifor Pension & Benefit Plans are $1.9 million in the prior year. limited to the amounts agreed to in the respective collective bargaining agreements of each plan. INVESTING ACTIVITIES Based upon the terms of those applicable collective bargaining agreements, DCM’s estimated annual funding obligation for the SRDF and for the Unifor Pension & Benefit Plans for 2018 are $0.5 million and $0.1 million, respectively. DCM has accounted for these plans on a defined contribution basis. During the year ended December 31, 2017, $11.9 million in cash flows were used for investing activities compared with $2.9 million during the same period in 2016. In 2017, $2.4 million of cash was used to invest in label equipment with digital capabilities, digital press equipment, the 22 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017relocation of certain sales offices, certain leasehold On November 10, 2017, a total of 704,424 Common improvements as a result of the Multiple Pakfold Shares were issued to the vendors as partial and Granby facility moves and additional office consideration for the purchase of the shares of equipment. In 2017, $3.4 million of cash was used BOLDER Graphics. Each of those vendors have related primarily related to investments in DCM’s entered into a lock-up agreement with DCM ERP project. In 2017, $6.8 million of cash was used pursuant to which they have agreed not to sell to acquire the businesses of Eclipse, Thistle and the Common Shares issued to them pursuant BOLDER Graphics. to the BOLDER Graphics transaction until FINANCING ACTIVITIES November 10, 2018. On June 28, 2017, DCM completed a Private During the year ended December 31, 2017, cash flow Placement and issued 2,690,604 Units, with each generated by financing activities was $3.7 million Unit consisting of one Common Share and one-half compared to cash flow used for financing activities of a Warrant at a price per Unit of $1.40 for gross of $6.5 million during the same period in 2016. proceeds of $3.8 million. Among this, 550,650 Units DCM used net cash received from the issuance were issued to directors and officers of DCM for of common shares and warrants of $8.1 million total proceeds of $0.8 million. Each full Warrant and cash from advances under its various credit entitles the holder to acquire one Common Share facilities, totaling $27.4 million to repay a total (a “Warrant Share”) at an exercise price of $1.75 of $2.4 million to settle the outstanding balance for a period of two years from the closing of the on certain equipment leases that were assumed Private Placement. The exercise price is subject to upon the acquisition of Eclipse, to repay adjustment for certain capital events, as described $14.7 million in outstanding principal amounts in the warrant certificate, to preserve the relative under its senior term loan facilities, to settle rights of the existing shareholders of Common certain debt assumed upon the acquisition of Shares and the Warrant holders. In addition, if the Eclipse, Thistle and BOLDER Graphics, and to volume- weighted average price of the Common repay the 6.00% Convertible Debentures with Shares on the TSX equals or exceeds $2.75 for an outstanding principal amount totaling 20 consecutive trading days, DCM has the right $11.2 million on June 30, 2017. DCM also paid a (the “Acceleration Right”) to accelerate the expiry total of $1.4 million related to the promissory note date of the Warrants to a date that is 30 days issued in connection with the acquisition of Thistle from the date on which DCM notifies the Warrant and other loans payable in connection with the holders of its intent to exercise the Acceleration acquisitions of Thistle and BOLDER Graphics of Right. DCM did not exercise any of its Acceleration $1.1 million. Lastly, DCM incurred $0.9 million of Rights during 2017. The Common Shares, Warrants transaction costs related to the amendments to its and Warrant Shares are subject to a statutory senior credit facilities and costs to establish DCM’s hold period expiring four months and one day additional credit facility during the year ended after the closing of the Private Placement. December 31, 2017. OUTSTANDING SHARE DATA DCM issued a total of 2,690,604 Common Shares pursuant to the Private Placement (before giving effect to the exercise of any Warrants) and 1,345,300 Warrants pursuant to the Private At March 8, 2018, December 31, 2017 and Placement. The value of the Warrants and Common December 31, 2016, there were 20,039,159, Shares issued were determined based on an 20,039,159 and 11,975,053 Common Shares allocation of the gross proceeds of $3.8 million outstanding, respectively. by the relative fair values of each component on 23 MANAGEMENT’S DISCUSSION AND ANALYSISclosing of the Private Placement. The fair value of (“Right”) for each Common Share held as of the Warrants issued was estimated to be the Record Date. Every two Rights entitled the $0.3 million using the Black-Scholes option-pricing Eligible Holder to subscribe for one Common model, assuming a risk-free interest of 1.04%, Share upon payment of the subscription price a weighted average life of two years, a dividend of $1.40 per share. The Rights were transferable yield of nil and an expected volatility of 40%. and were represented by rights certificates. Total This was adjusted using a discount rate of 5% for transaction costs were $0.3 million which were the statutory hold period. The fair value of the classified net of the Common Shares issued under Common Shares issued was $3.4 million, based on the Rights Offering. The value of the Common the closing market price of the shares on closing Shares were increased by a deferred income tax of the Private Placement. This was adjusted using asset of $0.1 million. a discount rate of 5% for the statutory hold period. The proceeds allocated to the Common Shares was $3.4 million and the proceeds allocated to the Warrants was $0.3 million, net of transaction costs totaling $0.1 million. All of these transaction costs were allocated to the Common Shares. The value of the Common Shares were increased by a deferred income tax asset of $23.0 thousand. On July 13, 2017, DCM completed a second closing of the Private Placement to a director of DCM for 71,500 Units, raising additional gross proceeds of $100.0 thousand. The value of the 71,500 Common Shares and 35,750 Warrants issued were $72.0 thousand and $7.0 thousand, respectively, based on an allocation of the gross proceeds of $100.0 thousand by the relative fair values of each component of the second closing of the Private Placement, net of transaction costs totaling $21.0 thousand. All of these transaction costs were allocated to the Common Shares. The value of the Common Shares were increased by a deferred income tax asset of $6.0 thousand. On June 23, 2017, DCM completed a Rights Offering which was conducted by way of a rights offering circular (“Circular”). Under the offering, DCM issued 3,312,368 Common Shares at a price of $1.40 per share for gross proceeds of $4.6 million. Among this, 1,090,727 Common Shares were issued to directors, officers and related parties of DCM for total gross proceeds of $1.5 million. Under the terms of the Rights Offering, each eligible shareholder (“Eligible Holder”) on record as of May 31, 2017 (the “Record Date”) received one right 24 On May 5, 2017, 6,502 Common Shares were issued in connection with the net settlement of 19,505 stock options at an exercise price of $1.50 per Common Share and the net amount was recorded in contributed surplus in DCM’s consolidated statement of changes in equity (deficit). On February 22, 2017, a total of 1,278,708 Common Shares were issued to the vendors as partial consideration for the purchase of the assets of Eclipse and the purchase of the shares of Thistle. Each of those vendors have entered into a lock-up agreement with DCM, pursuant to which they have agreed not to sell the Common Shares issued to them pursuant to those sale transactions until February 22, 2018. On July 4, 2016, DCM completed the Share Consolidation and consolidated its issued and outstanding Common Shares on the basis of one post-consolidation Common Share for each 100 pre-consolidation Common Shares. On May 31, 2016, DCM completed a portion of a non-brokered private placement and issued a total of 1,678,567 Common Shares at a price of $1.40 per Common Share, of which 357,150 were purchased by the CEO of DCM. On July 4, 2016, following receipt of disinterested shareholder approval at the annual and special meeting of DCM’s shareholders held on June 30, 2016, DCM completed the remaining portion of the private placement and issued an additional 308,958 Common Shares to a minority interest shareholder (the “Minority Shareholder”) at a price of $1.40 per Common MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017Share pursuant to the exercise of anti-dilution rights held by the Minority Shareholder. The total number of Common Shares issued as a result of the FINANCIAL INSTRUMENTS AND RISK MANAGEMENT private placement was 1,987,525 or approximately DCM’s financial instruments consist of cash and 19.9% of the current number of outstanding cash equivalents, restricted cash, trade receivables, Common Shares on May 27, 2016. At March 8, 2018 and December 31, 2017, there were options outstanding to purchase up to 791,957 Common Shares and options outstanding to purchase up to 804,961 Common Shares, respectively. During the year ended December 31, 2016, the Board approved awards of options to purchase up to 987,011 Common Shares to the executive bank overdraft, trade payables and accrued liabilities, loan payable, bonuses payable, credit facilities, promissory notes, restricted share units and convertible debentures, as indicated in DCM’s statements of consolidated financial position as at December 31, 2017 and December 31, 2016, respectively. DCM does not enter into financial instruments for trading or speculative purposes. management team of DCM pursuant to the terms FAIR VALUE of DCM’s existing long-term incentive plan. Once vested, the options are exercisable for a period of DCM’s non-derivative financial instruments seven years from the grant date at an exercise price are comprised of cash and cash equivalents, of $1.50 per share, representing the fair value of the Common Shares on the date of grant. A total of 499,377 options were awarded to DCM’s CEO and vested on June 23, 2016 and a total of 487,634 options were awarded to the other members of DCM’s executive management team and vest at a rate of 1/24th per month beginning on June 23, 2016. During the year ended December 31, 2016, options to purchase 39,011 Common Shares were forfeited. During the year trade receivables, restricted cash, bank overdraft, trade payables and accrued liabilities, loan payable, bonuses payable, credit facilities, promissory notes restricted share units and convertible debentures. Non-derivative financial instruments are recognized initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured ended December 31, 2017, options to purchase as described below. 123,534 Common Shares were forfeited and 19,505 options were exercised. Subsequent to the year ended December 31, 2017, options to purchase 13,004 Common Shares were forfeited. During 2015, the Board approved the award of Non-derivative financial instruments at fair value through the profit and loss include restricted share units which are recorded as a liability at fair value on the grant date and are subsequently adjusted for changes in the price of DCM’s common shares options to purchase up to 11,745 Common Shares through the consolidated statements of operations. to the CEO of DCM pursuant to the terms of DCM’s existing long-term incentive plan which were granted on April 16, 2015 with an exercise price of $75 per share. During the year ended December 31, 2017, all of these options were forfeited. The fair value for other non-derivative financial instruments such as cash and cash equivalents, trade receivables, bank overdraft, trade payables and accrued liabilities, and loan payable approximates their carrying value because of the At March 8, 2018 and December 31, 2017, there were short-term maturity of these instruments. The fair Warrants outstanding to purchase up to 1,381,050 value of restricted cash approximates its carrying Common Shares outstanding, respectively. value because it is a deposit held with a Canadian chartered bank. Credit facilities, bonuses payable 25 MANAGEMENT’S DISCUSSION AND ANALYSISand promissory notes are initially recognized as agencies that are not concentrated in any specific the amount required to be paid less a discount geographic area. DCM does not believe that any to derive its fair value and are then measured single industry or geographic region represents at amortized costs using the effective interest significant credit risk. Credit risk concentration method, less any impairment losses. DCM’s with respect to trade receivables is mitigated by convertible debentures contained a host contract DCM’s large client base. and an embedded derivative. The host contract (the debt portion of the convertible debenture) was measured as the residual of the proceeds after deducting the fair value of the embedded derivative, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method. CREDIT RISK Based on historical experience, DCM records a reserve for estimated uncollectible amounts. Management assesses the adequacy of this reserve quarterly, taking into account historical experience, current collection trends, the age of receivables and, when warranted and available, the financial condition of specific counterparties. Management focuses on trade receivables outstanding for more than 90 days in assessing Credit risk is the risk of an unexpected loss DCM’s credit risk and records a reserve, when if a customer or counterparty to a financial required, to recognize that risk. When collection instrument fails to meet its contractual efforts have been reasonably exhausted, specific obligations. Financial instruments that potentially balances are written off. As at December 31, 2017, subjected DCM to credit risk consisted of cash 7.0% (or $2.9 million), of trade receivables were and cash equivalents and trade receivables. more than 90 days old, an increase from 3.7% The carrying amount of assets included in the (or $1.1 million), of trade receivables that were consolidated statements of financial position more than 90 days old at December 31, 2016. represents the maximum credit exposure. The cash equivalents consisted mainly of LIQUIDITY RISK short-term investments, such as money market Liquidity risk is the risk that DCM may encounter deposits. DCM has deposited the cash equivalents difficulties in meeting obligations associated with Canadian Schedule 1 banks, from which with financial liabilities as they become due. DCM management believes the risk of loss to be remote. believes that the currently projected cash flow DCM grants credit to customers in the normal course of business. DCM typically does not require collateral or other security from customers; however, credit evaluations are performed prior to the initial granting of credit terms when warranted and periodically thereafter. Normal credit terms for amounts due from customers call for payment within 0 to 90 days. DCM has trade receivables from clients engaged in various industries including financial institutions, insurance, healthcare, lottery and gaming, retailing, not-for-profit, energy and governmental from operations, cash on hand and anticipated lower operating costs resulting from existing restructuring initiatives will be sufficient to fund its currently projected operating requirements, including expenditures related to its growth strategy, payments associated with provisions as a result of on-going productivity improvement initiatives, payment of income tax liabilities, contributions to its pension plans, maintenance capital expenditures, and interest and scheduled repayments of borrowings under its credit facilities and scheduled repayments of promissory notes. See “Contractual obligations” section below which 26 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017contains additional information on the contractual course of business, DCM does not have significant undiscounted cash flows of DCM’s significant foreign exchange transactions and, accordingly, financial liabilities and the future commitments the amounts and currency risk are not expected of the Company. As at December 31, 2017, DCM had access to $8.0 million of additional available credit less letters of credit granted of $1.4 million under the to have adverse material impact on the operations of DCM. Management considers the currency risk to be low and does not hedge its currency risk and therefore sensitivity analysis is not presented. Bank Credit Facility. Note 17 to the audited consolidated financial MARKET RISK INTEREST RATE RISK Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the financial instrument will fluctuate due to changes in market interest rates. Interest rate risk arises from interest bearing financial assets and liabilities. Non-derivative interest bearing assets are primarily short term liquid assets. DCM’s interest rate risk arises from credit facilities issuances at floating interest rates. As at December 31, 2017, $25.2 million of DCM’s indebtedness outstanding was subject to floating interest rates of 3.95% per annum and of 13.50% per annum, $32.0 million of DCM’s indebtedness outstanding was subject to a fixed interest rate of 6.1% per annum and of 6.95% statements of DCM for the year ended December 31, 2017 contains additional information on DCM’s financial instruments. CONTRACTUAL OBLIGATIONS DCM believes that it will have sufficient resources from its operating cash flow, existing cash resources and borrowing under available credit facilities to meet its contractual obligations as they become due. Contractual obligations have been defined as contractual commitments in existence but not paid for as at December 31, 2017. Short-term commitments such as month-to-month office leases, which are easily cancelled, are excluded from this definition. Operating leases include payments to landlords for the rental of facilities and payments to vendors for the rental of equipment. per annum. Interest bearing promissory notes DCM believes that its existing cash resources related to the acquisition of BOLDER Graphics and projected cash flows from operations will be totaling $1.2 million was subject to a fixed rate sufficient to fund its currently projected operating of 6.0% per annum. CURRENCY RISK requirements and that it will continue to remain compliant with its covenants and other obligations under its credit facilities. Currency risk is the risk that the fair value of future cash flows arising from a financial instrument will fluctuate because of changes in foreign currency exchange rates. In the normal 27 MANAGEMENT’S DISCUSSION AND ANALYSISTABLE 6 The following table sets out DCM’s significant contractual obligations and commitments as of December 31, 2017. (in thousands of Canadian dollars, unaudited) Total 2018 2019 2020 2021 2022 2023 and thereafter Pension funding contributions (1) Bonuses payable (2) Long-term debt (3) Promissory notes (4) Operating leases Total $ $ $ $ $ $ 10,627 $ 1,176 $ 1,876 $ 1,889 $ 1,900 $ 1,893 $ 1,893 1,133 400 65,462 11,911 7,639 4,561 400 8,176 3,078 333 — — 29,206 7,317 7,123 — — — — 1,729 — 71,338 12,078 10,747 9,544 8,124 6,596 24,249 156,199 $ 30,126 $ 24,277 $ 40,972 $ 17,341 $ 15,612 $ 27,871 (1) DCM is required under applicable pension legislation to make monthly, annual and/or one-time cash contributions to the DATA Communications Management Pension Plan to fund current or future funding deficiencies which may emerge in the defined benefit provision of the DATA Communications Management Pension Plan. See “Liquidity and capital resources – Pension funding obligations” above. The table above includes amounts payable under the SERP. DCM’s obligations under the SERP consist of benefits payable as a single life annuity with a five year guarantee. The duration of these payments is dependent on the length of each participant’s life and, in certain cases, that of their designated beneficiary, and their age in any given year. (2) Bonuses payable to former employees of Thistle assumed in connection with DCM’s acquisition of Thistle on February 22, 2017. Monthly principal payments of $33 ending October 31 2020. (3) Long-term debt at December 31, 2017 subject to floating interest rates consisting of the Bank Credit Facility, expiring on March 31, 2020 and the Bridging Credit Facility expiring on June 28, 2018. As at December 31, 2017, the outstanding balances totaled $25,247 and bore interest at an average floating rate of 3.95% per annum and of 13.50% per annum. The amounts at December 31, 2017 include estimated interest totaling $1,095 for 2018, $859 for 2019 and $143 for 2020. The estimated interest was calculated based on the total borrowings outstanding during the period and the average annual floating interest rate in effect as at December 31, 2016. Long-term debt at December 31, 2017 subject to fixed interest rates consisting of the IAM III Credit Facility, expiring on October 15, 2022, the IAM IV Credit Facility, expiring on March 10, 2023 and the IAM V Credit Facility expiring on May 15, 2023. As at December 31, 2017, the outstanding balances totaled $31,992 and bore interest at a fixed rate of 6.1% per annum, of 6.95% per annum and of 6.95% per annum, respectively. Monthly blended principal and interest payments of $96, of $422 and of $91, respectively. (4) Promissory notes related to the acquisitions completed during the year. Non interest bearing promissory notes related to the acquisition of Eclipse totaling $4,566 and payable in two installments of $2,283 due on February 28, 2018 and February 28, 2019, respectively, and related to the acquisition of Thistle totaling $1,913 and payable in monthly installments of $137 ending February 28, 2019. Interest bearing promissory notes related to the acquisition of BOLDER totaling $1,160 and bore interest at a fixed rate of 6.0% per annum. Monthly blended principal and interest payments of $58, beginning February 28, 2018 and ending September 30, 2019. 28 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017 RIGHTS OFFERING AND PRIVATE PLACEMENT OF COMMON SHARES During the year ended December 31, 2017, directors, officers and related parties of DCM participated in a rights offering and a private placement of common shares (see “Outstanding share data” above), purchasing 1,712,877 common shares (or 28.2% of the 6,074,472 common shares issued as a result of the rights offering and private placement) for consideration of $2.3 million. OFFICE LEASE On December 21, 2016, DCM entered into a new agreement to lease approximately 2,000 square feet of office space in Toronto, Ontario from a company that the Chair of the Board and the President are Directors of. Under the lease agreement, the lease commences March 1, 2017, runs month-to-month and can be terminated by either party with reasonable notice. The monthly expense is $7 thousand per month. These transactions are provided in the normal course of operations and were measured at the exchange amount, which represents the amount of consideration established and agreed to by the related parties. OFF-BALANCE SHEET ARRANGEMENTS DCM’s off-balance sheet arrangements are operating leases. DCM leases real estate, printing equipment and office equipment in connection with its sales and manufacturing activities under non-cancellable lease agreements, which expire at various dates. TRANSACTIONS WITH RELATED PARTIES During the year ended December 31, 2017, there were regular intercompany activities between DCM and its subsidiary during the normal course of business. These transactions and balances are eliminated in the consolidated financial statements of DCM. Related parties are defined as individuals who can influence the direction or management of DCM or any of its subsidiaries and therefore the directors and officers of DCM’s subsidiaries are considered related parties. CORPORATE INSURANCE POLICIES Effective June 23, 2015, DCM appointed an insurance company as its broker of record for its corporate insurance policies and subsequently entered into new general corporate insurance policies, including the renewal of its directors and officers liability insurance later in the year. The insurance company continues as DCM’s broker of record and earns fees based on a percentage of the insurance expense paid by DCM. During the fiscal year, DCM recorded an insurance expense of $0.3 million (2016 – $0.5 million) related to these policies. As at December 31, 2017, prepaid expenses and other current assets included prepaid insurance to the insurance company of $0.3 million (2016 – $0.3 million). The insurance company is a related party whereby the Chair of the Board and the President of DCM each are Directors and indirectly have a minority interest in the insurance company, through companies controlled by them. 29 MANAGEMENT’S DISCUSSION AND ANALYSISOPERATING RESULTS FOR THE FORTH QUARTER OF 2017 AND 2016 TABLE 7 The following table sets out selected consolidated quarterly financial information for the periods noted. (in thousands of Canadian dollars, except share and per share amounts, unaudited) October 1 to December 31 2017 October 1 to December 31 2016 Revenues Cost of revenues Gross profit Selling, general and administrative expenses Restructuring expenses Impairment of goodwill Acquisition costs $ 76,125 $ 57,771 18,354 15,263 4,453 — 381 68,191 54,950 13,241 13,394 1,721 31,066 68 Loss before finance costs and income taxes (1,743) (33,008) Finance costs (income) Interest expense Interest income Amortization of transaction costs Loss before income taxes Income tax (recovery) expense Current Deferred Net loss for the period Net (loss) income attributable to common shareholders Adjusted EBITDA (see Table 8) Adjusted net income (see Table 9) Adjusted net income per share, basic and diluted 1,149 (6) 324 1,467 (3,210) 221 (972) (751) (2,459) (2,459) 5,643 1,533 0.08 $ $ $ $ $ 839 — 111 950 (33,958) 194 (1,037) (843) (33,115) (33,115) 2,217 25 0.00 $ $ $ $ $ Weighted average number of common shares outstanding, basic and diluted 19,732,888 11,975,053 Number of common shares outstanding, basic 20,039,159 11,975,053 Number of common shares outstanding, diluted 20,039,159 12,464,343 30 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017TABLE 8 The following table provides a reconciliation of net (loss) income to Adjusted EBITDA for the periods noted. See “Non-IFRS Measures”. (in thousands of Canadian dollars, unaudited) October 1 to December 31 2017 October 1 to December 31 2016 Net loss for the period $ (2,459) $ (33,115) Interest expense Interest income Amortization of transaction costs Current income tax expense Deferred income tax (recovery) Depreciation of property, plant and equipment Amortization of intangible assets EBITDA Restructuring expenses One-time business reorganization costs Impairment of goodwill Acquisition costs Adjusted EBITDA 1,149 (6) 324 221 (972) 1,116 1,004 839 — 111 194 (1,037) 815 560 $ $ 377 $ (31,633) 4,453 432 — 381 5,643 $ 1,721 995 31,066 68 2,217 TABLE 9 The following table provides a reconciliation of net (loss) income to Adjusted net income for the periods noted. See “Non-IFRS Measures”. (in thousands of Canadian dollars, unaudited) Net loss for the period Restructuring expenses One-time business reorganization costs Impairment of goodwill Acquisition costs Tax effect of above adjustments Adjusted net income October 1 to December 31 2017 October 1 to December 31 2016 $ (2,459) $ (33,115) 4,453 432 — 381 (1,274) $ 1,533 $ 1,721 995 31,066 68 (710) 25 31 MANAGEMENT’S DISCUSSION AND ANALYSISREVENUES For the quarter ended December 31, 2017, DCM recorded revenues of $76.1 million, an increase of $7.9 million or 11.6% compared with the same period in 2016. The increase in revenues for the quarter ended December 31, 2017 was primarily due to the inclusion of the financial results for Eclipse, Thistle and BOLDER and new customer wins. The increase in revenue was partially offset by lower revenues in DCM’s core business due to (i) lower volumes and pricing pressures from certain customers that reduced their overall spend, particularly in the financial services sector, and (ii) non-recurring work and the timing of orders related to forms for certain government agencies and labels for a major retailer, respectively. expenses for the quarter ended December 31, 2017 was primarily attributable to the acquisitions of Eclipse, Thistle and BOLDER Graphics. RESTRUCTURING EXPENSES For the quarter ended December 31, 2017, DCM incurred restructuring expenses of $4.5 million compared to $1.7 million in the same period in 2016. $1.7 million of restructuring costs were related to facility closure costs, costs to move equipment and inventory from the closed facilities, and headcount reductions across all areas of DCM’s operations including sales, general and administrative functions. DCM also incurred lease exit charges associated with the closures of its facilities in Mississauga, Ontario, and in Granby, Québec of $0.3 million COST OF REVENUES AND GROSS PROFIT and $2.4 million,respectively. For the quarter ended December 31, 2016, DCM incurred restructuring For the quarter ended December 31, 2017, cost expenses of $1.7 million primarily to related of revenues increased to $57.8 million from headcount reductions associated with the closure $55.0 million for the same period in 2016. Gross of its large Edmonton, Alberta manufacturing profit for the quarter ended December 31, 2017 facility, in addition to headcount reductions across was $18.4 million, which represented an increase other functions of the business. of $5.1 million or 38.6% from $13.2 million for the same period in 2016. Gross profit as a percentage IMPAIRMENT OF GOODWILL of revenues increased to 24.1% for the quarter ended December 31, 2017 compared to 19.4% for the same period in 2016. The increase in gross profit as a percentage of revenues for the quarter ended December 31, 2017 was due to higher gross margins attributed to Eclipse, Thistle and BOLDER During the fourth quarter of 2017, DCM performed its annual review for impairment of goodwill by comparing the fair value of its CGUs to their respective carrying values. As a result of this review, no impairment charges were recorded. Graphics and cost reductions realized from prior cost During the fourth quarter of 2016, DCM performed savings initiatives implemented early on in the year. its annual review for impairment of goodwill, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses for the quarter ended which resulted in DCM recognizing a non-cash impairment of goodwill charge of $31.1 million related to the DCM North America CGU. There was no further goodwill remaining for this CGU in 2017. December 31, 2017 increased $1.9 million or 14.0% to $15.3 million compared to $13.4 million in the same ADJUSTED EBITDA period in 2016. As a percentage of revenues, these For the quarter ended December 31, 2017, Adjusted costs were 20.0% of revenues for the quarter ended EBITDA was $5.6 million, or 7.4% of revenues, December 31, 2017 compared to 19.6% of revenues after adjusting EBITDA for the $4.5 million in for the same period in 2016. The increase in SG&A restructuring charges, adding back $0.4 million 32 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017related to business acquisition costs and the income tax payable on DCM’s estimated $0.4 million of one-time business reorganization taxable income for the quarters ended costs. Adjusted EBITDA for the quarter ended December 31, 2017 and 2016. The deferred income December 31, 2017 increased $3.4 million or tax recovery primarily related to changes in 154.5% from the same period in the prior year estimates of the timing of future reversals of and Adjusted EBITDA margin for the quarter, as temporary differences and new temporary a percentage of revenues, increased from 3.3% of differences that arose during the quarters ended revenues in 2016 to 7.4% of revenues in 2017. The December 31, 2017 and 2016, respectively. increase in Adjusted EBITDA for the quarter ended December 31, 2017 was due to higher gross profit as NET LOSS a result of the additional revenues at higher gross margins contributed by the acquisitions of Eclipse, Thistle and BOLDER Graphics. This was partially offset by higher SG&A expenses. INTEREST EXPENSE Interest expense, including interest on debt outstanding under DCM’s credit facilities, the 6.00% Convertible Debentures, on certain unfavourable lease obligations related to closed facilities, and on DCM’s employee benefit plans and including interest accretion expense related to certain debt obligations recorded at fair value, was $1.1 million for the quarter ended December 31, 2017 compared to $0.8 million for the same period in 2016. Interest expense for the quarter ended December 31, 2017 was higher than the same period in the prior year primarily due to the increase in debt outstanding Net loss for the quarter ended December 31, 2017 was $2.5 million compared to net loss of $33.1 million for the quarter ended December 31, 2016. The increase in comparable profitability for the quarter ended December 31, 2017 was primarily due to higher gross profit contributed by the additional revenue at higher gross margins from the acquisitions of Eclipse, Thistle and BOLDER Graphics. This was partially offset by higher SG&A expenses and interest expense, a larger restructuring charge incurred during the quarter ended December 31, 2017. The net loss for the quarter ended December 31, 2016 included a non-cash impairment of goodwill totaling $31.1 million which did not recur in 2017. ADJUSTED NET INCOME under DCM’s credit facilities in order to fund a Adjusted net income for the quarter ended portion of the upfront cash components of the December 31, 2017 was $1.5 million compared purchase price, settle certain debt assumed and to Adjusted net income of $25.0 thousand for pay for related acquisition costs associated with the same period in 2016. The increase in comparable profitability for the quarter ended December 31, 2017 was attributable primarily due to higher SG&A expenses and higher interest expense in 2017. the BOLDER acquisition. INCOME TAXES DCM reported a loss before income taxes of $3.2 million, a current income tax expense of $0.2 million and a deferred income tax recovery of $1.0 million for the quarter ended December 31, 2017 compared to a loss before income taxes of $34.0 million, a current income tax expense of $0.2 million and a deferred income tax recovery of $1.0 million for the quarter ended December 31, 2016. The current tax expense was primarily related to 33 MANAGEMENT’S DISCUSSION AND ANALYSISSUMMARY OF EIGHT QUARTER RESULTS TABLE 5 The following table summarizes quarterly financial information for the past eight quarters. (in thousands of Canadian dollars, except per share amounts, unaudited) 2017 2016 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Revenues $ 76,125 $ 70,212 $ 73,066 $ 70,126 $ 68,191 $ 65,842 $ 69,716 $ 74,614 Net income (loss) attributable to shareholders Basic earnings (loss) per share Diluted earnings (loss) per share (2,459) (1,068) (581) (2,097) (33,115) (1,865) 991 1,882 (0.12) (0.06) (0.04) (0.17) (2.77) (0.16) (0.12) (0.06) (0.04) (0.17) (2.77) (0.16) 0.09 0.09 0.19 0.19 The variations in DCM’s quarterly revenues $1.7 million and $1.0 million in one-time business and net income (loss) over the eight quarters ended reorganization costs related to its cost reduction December 31, 2017 can be attributed to several initiatives, and a non-cash impairment of goodwill principal factors: the acquisitions of Eclipse, Thistle of $31.1 million related to its DCM North America CGU. and BOLDER Graphics, revenue declines in DCM’s traditional print business due to production volume declines largely related to technological change, price concessions and competitive activity, seasonal variations in customer spending, restructuring expenses and business reorganization costs related to DCM’s ongoing productivity improvement and cost reduction initiatives, profitability improvements resulting from cost savings initiatives which lowered direct and indirect labour costs and improved utilization rates at DCM’s key plants, lower interest expense during 2016 as a result of the partial redemption of its outstanding 6.00% Convertible Debentures in 2015, non-cash goodwill impairment DCM’s net loss for the third quarter of 2017 included operating results of Eclipse and Thistle and restructuring expenses of $1.4 million related to its cost reduction initiatives. There were $1.8 million of restructuring expenses in the third quarter of 2016. DCM’s net loss for the second quarter of 2017 included operating results of Eclipse and Thistle and restructuring expenses of $1.7 million related to its cost reduction initiatives. DCM’s net income for the second quarter of 2016 included $0.4 million of restructuring expense related to its cost reduction initiatives. charges and business acquisition costs. DCM’s net loss for the first quarter of 2017 DCM’s net loss for the fourth quarter of 2017 included operating results of Eclipse, Thistle and BOLDER Graphics, restructuring expenses of $4.5 million, $0.4 million of one-time business reorganization costs related to its cost reduction initiatives and business acquisition costs of $0.4 million. DCM’s net loss for the fourth quarter of 2016 included restructuring expenses of 34 included operating results of Eclipse and Thistle post-acquisition (after February 22, 2017), restructuring expenses of $1.9 million related to its cost reduction initiatives and business acquisition costs of $1.0 million. DCM incurred $0.3 million of restructuring expenses in the first quarter of 2016. MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017ACCOUNTING POLICIES CHANGES IN ACCOUNTING POLICIES FUTURE ACCOUNTING STANDARDS NOT YET ADOPTED DCM has not yet determined the impact of The accounting policies used in the preparation of adopting the changes in accounting standards the consolidated financial statements are outlined listed below. The assessment of the impact on in notes 2 and 3 of the Notes to the condensed our consolidated financial statements of these interim consolidated financial statements of DCM new standards or the amendments to these for the year ended December 31, 2017. DCM adopt standards is ongoing. the following new accounting policies: (i) IFRS 9 Financial Instruments was issued in (i) On January 19, 2016 the IASB issued Recognition July 2014. IFRS 9 sets out the requirements for of Deferred Tax Assets for Unrealized Losses recognizing and measuring financial assets, (Amendments to IAS 12). The amendments financial liabilities and some contracts to buy apply retrospectively for annual periods and sell non-financial items. IFRS 9 replaces beginning on or after January 1, 2017. Earlier IAS 39 Financial Instruments: Recognition and application is permitted. The amendments Measurement. The new standard establishes clarify that the existence of a deductible temporary difference depends solely on a a single classification and measurement approach for financial assets that reflects the comparison of the carrying amount of an asset business model in which they are managed and its tax base at the end of the reporting and their cash flow characteristics. It also period, and is not affected by possible provides guidance on an entity’s own credit future changes in the carrying amount or risk relating to financial liabilities and has expected manner of recovery of the asset. The modified the hedge accounting model to amendments also clarify the methodology better link the economics of risk management to determine the future taxable profits used with its accounting treatment. It further for assessing the utilization of deductible introduces a single, forward looking ‘expected temporary differences. There was no impact loss’ impairment model for financial assets. on DCM’s consolidated financial statements as Additional disclosures will also be required a result of the amendments. (ii) On January 7, 2016 the IASB issued Disclosure Initiative (Amendments to IAS 7 Statement of Cash Flows). The amendments apply prospectively for annual periods beginning on or after January 1, 2017. Earlier application under the new standard. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The new standard is not expected to have a significant impact on the consolidated financial statements of DCM. is permitted. The amendments require (ii) Amendments to IFRS 7 Financial Instruments: disclosures that enable users of financial Disclosure were issued in September 2014. This statements to evaluate changes in liabilities standard was amended to provide guidance on arising from financing activities, including additional disclosures on transition from IAS 39 both changes arising from cash flow and to IFRS 9. The amendments are effective on non-cash changes. The adoption of the adoption of IFRS 9. DCM does not expect this amendment resulted in additional disclosure amendment to have a significant impact on its in DCM’s consolidated financial statements. consolidated financial statements. 35 MANAGEMENT’S DISCUSSION AND ANALYSIS(iii) IFRS 15 Revenue from Contracts with Customers the five-step model in IFRS 15 to determine the was issued in May 2014. This new standard impact on the timing and measurement on its outlines a single comprehensive model revenue recognition. Based on management’s for companies to use when accounting preliminary assessment, the adoption of for revenue arising from contracts with IFRS 15 may have an impact on the timing of customers. It supersedes the IASB’s current recognition of revenues to an earlier stage for revenue recognition standards, including certain manufactured products, in addition to IAS 18 Revenues and related and related earlier recognition of related production and interpretations. The core principle of IFRS 15 commission costs. There will also be enhanced is that revenue is recognized at an amount disclosures in the consolidated financial that reflects the consideration to which the statements of DCM. Management is in the company expects to be entitled in exchange process of finalizing its analysis. for those goods or services, applying the following five steps: 1. Identify the contract with a customer 2. Identify the performance obligations in the contract (iv) An amendment to IFRS 2 Share-based Payment was issued in June 2016 to clarify the accounting for certain types of share-based payment transactions. The amendments provide requirements on accounting for the effects 3. Determine the transaction price of vesting and non-vesting conditions of 4. Allocate the transaction price to the performance obligations in the contract 5. Recognize revenue when (or as) the entity satisfies a performance obligation cash-settled share-based payments, withholding tax obligations for share-based payments with a net settlement feature, and when a modification to the terms of a share-based payment changes the classification This new standard also provides guidance of the transaction from cash-settled to relating to the accounting for contract costs as equity-settled. The amendments are effective well as for the measurement and recognition of for the year beginning on or after January 1, 2018. gains and losses arising from the sale of certain DCM does not expect this amendment to have non-financial assets. Additional disclosures a significant impact on its consolidated will also be required under the new standard, financial statements. which is effective for annual reporting periods beginning on or after January 1, 2018 with earlier adoption permitted. For comparative amounts, companies have the option of using either a full retrospective approach or a modified retrospective approach as set out in the new standard. DCM intends to use the modified retrospective approach. The IASB published final clarifications to IFRS 15 in April 2016, which do not change the underlying principles of the standard yet clarify how the principles should be applied. DCM has undertaken a comprehensive review of its significant contracts in accordance with (v) IFRS 16 Leases was issued in January 2016. It supersedes the IASB’s current lease standard, IAS 17 Leases, which required lessees and lessors to classify their leases as either finance leases or operating leases and to account for those two types of leases differently. It did not require lessees to recognize assets and liabilities arising from operating leases, but it did require lessees to recognize assets and liabilities arising from finance leases. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. It introduces a single lessee accounting model and requires a lessee 36 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017 to recognize assets and liabilities for all leases related asset or liability is recognized in the with a term of more than twelve months and financial statements. This interpretation is for which the underlying asset is not of low applicable for annual periods beginning on or value. A lessee is required to recognize a after January 1, 2018, and can be applied either right-of-use asset representing its right to use prospectively or retrospectively, at the option the underlying leased asset and a lease liability of the entity. IFRIC 22 is not expected to have representing its obligation to make lease a significant impact on the consolidated payments. The right-of-use asset is initially financial statements of DCM. measured at cost and subsequently depreciated. The lease liability is initially measured at the present value of the lease payments and subsequently adjusted for interest and lease payments. This accounting is subject to certain exceptions and other adjustments. (vii) In June 2017, the IASB issued IFRIC 23 Uncertainty over Income Tax Treatments. The interpretation clarifies the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The interpretation IFRS 16 contains disclosure requirements for requires an entity to consider whether it is lessees and lessors. This new standard will probable that a taxation authority will accept come into effect for annual periods beginning an uncertain tax treatment. If the entity on or after January 1, 2019. Earlier application considers it to be not probable that a taxation is permitted for companies that apply IFRS 15 authority will accept an uncertain tax provision Revenue from Contracts with Customers at or the interpretation requires the entity to use the before the date of initial application of IFRS 16. most likely amount or the expected value. The Based on management’s preliminary assessment, DCM has identified lease contracts, primarily for building and equipment rentals, for which recognition will change under IFRS 16. The recognition of the leased assets and their related liabilities will increase income from operations, with a corresponding combined amendments are to be applied retrospectively and are effective for annual periods beginning on or after January 1, 2019, with earlier application permitted. The adoption of this amendment is not expected to have a significant impact on the DCM’s consolidated financial statements. increase in depreciation and amortization and There are no other IFRS or International Financial financial charges as at the date of application Reporting Interpretations Committee (‘IFRIC’) of IFRS 16. Management intends to adopt interpretations that are not yet effective that would IFRS 16 for the annual period beginning be expected to have a material impact on DCM. on January 1, 2019. (vi) IFRIC 22 Foreign Currency Transactions and Advance Consideration, is an interpretation CRITICAL ACCOUNTING ESTIMATES paper issued by the IASB in December 2016. The preparation of the financial statements requires This interpretation paper clarifies that the foreign exchange rate applicable to management to make judgments, estimates and assumptions that are not readily apparent from transactions involving advance consideration other sources about the carrying amounts of paid or received is the rate at the date that assets and liabilities, and reporting of income the advance consideration is paid or received and expenses. The estimates and associated and a non-monetary asset or liability is assumptions are based on historical experience recorded, and not the later date at which the and other factors that are considered to be 37 MANAGEMENT’S DISCUSSION AND ANALYSIS relevant. Actual results may differ materially from determine the purchase price allocation. Estimates these estimates. The estimates and underlying are made as to the valuations of property, plant, assumptions are reviewed on an ongoing basis. and equipment, intangible assets, assumed Revisions to accounting estimates are recognized during the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision financial liabilities, among other items. These estimates have been discussed further below. Property, Plant and Equipment affects both current and future periods. The fair value of property, plant and equipment USE OF ESTIMATES AND MEASUREMENT UNCERTAINTY BUSINESS COMBINATIONS Business combinations are accounted for using the acquisition method. The consideration transferred is the total fair value of the assets acquired, equity instruments issued, liabilities incurred or assumed by DCM, and contingent considerations, on the acquisition date. If the agreement includes a contingent consideration, it is measured at fair value as of the acquisition date and added to the consideration transferred, and a liability for the same amount is recognized. Any subsequent change to the fair value of the contingent consideration will be recognized in the statement of operations. recognised as a result of a business combination is the estimated amount for which a property could be exchanged on the date of acquisition between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably. The fair value of equipment, computer hardware, furniture, fixtures and fittings is based on the market approach and cost approaches using quoted market prices for similar items when available and depreciated replacement cost when appropriate. Intangible Assets The fair value of trade names acquired in a business combination is based on the incremental discounted estimated cash flows enjoyed post acquisition, or expenditures avoided, as a result of owning the intangible assets. The fair value of customer lists If the initial recognition of the business combination acquired in a business combination is determined is incomplete when the financial statements are using the multi-period excess earnings method, issued for the period during which the acquisition whereby the subject asset is valued after deducting occurred, DCM records a provisional amount for a fair return on all other assets that are part of the items for which measurement is incomplete. creating the related cash flows. The fair value of Adjustments to the original recognition of the business combination will be recorded as an adjustment to the assets acquired and liabilities assumed during the measurement period, and the adjustments must be applied retroactively. other intangible assets were based on the depreciated replacement cost approach which reflects the cost to a market participant to construct assets of comparable utility and age, adjusted for obsolescence. The measurement period is the period from the Inventories acquisition date to the date on which DCM has received complete information on the facts and circumstances that existed as of the acquisition date. FAIR VALUE OF ASSETS AND LIABILITIES ACQUIRED IN BUSINESS COMBINATIONS The fair value of inventories acquired in a business combination is determined based on the estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort The value of acquired assets and liabilities on the required to complete and sell the inventories. acquisition date require the use of estimates to 38 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017Financial Liabilities UNCERTAIN TAX POSITIONS Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. IMPAIRMENT OF GOODWILL, INTANGIBLE AND NON-CURRENT ASSETS Goodwill, intangible and non-current assets are tested for impairment if there is an indicator of impairment, and in the case of goodwill, annually at the end of each fiscal year. The determination of the impairment of goodwill, intangible and non-current assets are impacted by estimates of the fair value of CGUs, assumptions of future cash flows, and achieving forecasted business results. DCM maintains provisions for uncertain tax positions using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. DCM reviews the adequacy of these provisions at the end of the reporting period. It is possible that at some future date, liabilities in excess of the DCM’s provisions could result from audits by, or litigation with, relevant 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. PENSION OBLIGATIONS These assumptions can be impacted by economic Management estimates the pension obligations conditions and also require considerable judgment annually using a number of assumptions and by management. Declines in business results with the assistance of independent actuaries; or declines in the fair value of DCM’s reporting however, the actual outcome may vary due to segments could result in impairments in future estimation uncertainties. The estimates of its periods. Changing the assumptions selected by pension obligations are based on rates of inflation management, in particular the discount rate and mortality that management considers to and growth assumptions used in the cash flow be reasonable. It also takes into account DCM’s projections, could significantly affect ithe result specific anticipation of future salary increases, of DCM’s impairment analysis. retirement ages of employees and other actuarial INCOME TAXES In assessing the probability of realizing deferred income tax assets, management has made estimates related to expectations of future taxable income, applicable tax planning opportunities, expected timing of reversals of existing temporary differences and the likelihood that tax positions taken will be sustained upon examination by applicable tax authorities. Deferred tax assets also reflect the factors. Discount factors are determined close to each fiscal year end by reference to high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability. Estimation uncertainties exist, which may vary significantly in future actuarial valuations and the carrying amount of DCM’s defined benefit obligations. PROVISIONS benefit of unused tax losses that can be carried Provisions are liabilities of uncertain timing or forward to reduce income taxes in future years. amount. Provisions are recognized when DCM In making its assessments, management gives has a present legal or constructive obligation additional weight to positive and negative arising from past events, when it is probable evidence that can be objectively verified. that an outflow of funds will be required to 39 MANAGEMENT’S DISCUSSION AND ANALYSISsettle the obligation, and a reliable estimate can onerous contracts. Provisions are reviewed at each be made of the amount of the obligation. The reporting date and any changes to estimates are amount recognized as a provision is DCM’s best reflected in the statement of operations. estimate of the present obligation at the end of the reporting period. When the effect of discounting is significant, the amount of the provision is determined by discounting the expected cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. DCM’s main provisions are related to restructuring costs and AGGREGATION OF OPERATING SEGMENTS Management applies judgment in aggregating operating segments in to a reportable segment. Aggregation occurs when the operating segments have similar economic characteristics and have similar products, production processes, types of customers, and distribution methods. MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING DISCLOSURE CONTROLS AND PROCEDURES With the supervision and participation of DCM’s senior management team, the Chief Executive have evaluated the effectiveness of the internal controls over financial reporting (as defined in Multilateral Instrument 52-109) of DCM as of December 31, 2017. Officer and the Chief Financial Officer of DCM In making this evaluation, the criteria set have evaluated the effectiveness of disclosure forth in 2013 by the Committee of Sponsoring controls and procedures (as defined in Organizations of the Treadway Commission in Multilateral Instrument 52-109) of DCM as of Internal Control – Integrated Framework was December 31, 2017. Based on that evaluation, used to design the internal controls over those officers have concluded that, as of financial reporting. Based on that evaluation, December 31, 2017, such disclosure controls and those officers have concluded that, as of procedures were sufficiently effective to provide December 31, 2017, such internal controls reasonable assurance that (i) material information over financial reporting were sufficiently relating to DCM was made known to management effective to provide reasonable assurance and (ii) information required to be disclosed by regarding the reliability of DCM’s financial DCM in its annual filings, interim filings or other reporting and the preparation of consolidated reports filed or submitted by it under securities financial statements for external purposes in legislation is recorded, processed, summarized accordance with IFRS. and reported within the time periods specified in the securities legislation. INTERNAL CONTROLS OVER FINANCIAL REPORTING DCM’s management has determined that there were no changes in the internal controls over financial reporting of DCM during the year ended December 31, 2017 reporting period that have materially affected, or are reasonably likely With the supervision and participation of DCM’s to materially affect, the internal controls over senior management team, the Chief Executive financial reporting of DCM. Officer and the Chief Financial Officer of DCM 40 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017OUTLOOK 2017 was a pivotal year in DCM’s pursuit to transform the business and create greater value for its shareholders. This was initiated with Lastly, DCM has been working hard to revitalize its internal operating systems with the development of a new ERP system which is expected to go-live in the latter part of 2018. It is expected that the ERP system will further improve DCM’s processes changes in the company’s senior leadership team and bring additional cost savings. with the introduction of Gregory J. Cochrane as President late in 2016. With his leadership, DCM established a new and refreshed growth strategy which included refining the company’s pricing model, realigning its sales force to specialize in vertical markets, highlighting the online and offline capabilities DCM has to offer to its DCM finished 2017 with a strong fourth quarter as it began to realize the benefits of the initiatives effected during 2017. Management is confident that DCM will continue to experience the benefits of these initiatives in the forth-coming year. The Company is confirming its previously announced customers, and the successful completion of three guidance for 2018: business acquisitions (Eclipse, Thistle and BOLDER Graphics) during the year, which have each REVENUES expanded the package of solutions DCM furnishes to its long-standing and newly acquired customers. In the fall of 2017, DCM achieved a milestone win with the addition of a leading North American financial institution to its roster of customers. DCM anticipates total revenues of between $295.0 million and $310.0 million, representing growth of approximately 2% to 7% compared to revenues of approximately $289.5 million in fiscal 2017. On the operational side of the business, DCM made further progress restructuring to achieve greater ADJUSTED EBITDA operational efficiencies and cost savings through Adjusted EBITDA for fiscal 2018 is estimated to improved processes, further plant consolidations be between $22.0 million and $25.0 million, and additional headcount reductions. compared to Adjusted EBITDA in fiscal 2017 From a financing perspective, DCM was able to further deleverage its balance sheet by raising additional equity (approximately $8.1 million) of approximately $16.1 million. CAPITAL EXPENDITURES to partially facilitate the payout of the 6.0% For fiscal 2018, DCM expects to spend convertible debentures ($11.5 million of principal approximately $2.5 million on capital expenditures, and interest) which matured in June of 2017. in line with approximately $2.4 million recorded In addition to this, a total of approximately in fiscal 2017. In addition to capital expenditures, $12.5 million in debt commitments were repaid DCM incurred approximately $3.4 million in during the year. DCM expects to pay down intangible asset purchases in 2017, substantially approximately $13.0 million of its fixed payment all of which related to the company’s ERP debt in 2018, including required principal project investment. DCM expects to incur payments on its senior debt, subordinated debt approximately $1.5 million in intangible asset and promissory note payments related to its purchases in 2018 and most of those capitalizable acquisitions. Management is committed to costs relating to the project will be incurred deleveraging its capital structure with through the first half of 2018. a long-term target net debt to Adjusted EBITDA range of between 1 and 2 times. 41 MANAGEMENT’S DISCUSSION AND ANALYSISAs part of establishing the above guidance, DCM DCM cautions that the assumptions used to made the following assumptions: prepare the guidance provided above, although • New customer wins and sales initiatives focused on capturing greater wallet share from DCM’s existing customer base, including increasingly capitalizing on its technology-enabled value-added services provided to customers, will offset continued expected declines in Company’s core business communications market; • DCM will benefit from the full-year results of the acquisitions of Eclipse, Thistle and BOLDER currently reasonable, may prove to be incorrect or inaccurate. Accordingly, actual results may differ materially from expectations as set forth above. The guidance provided above should be read in conjunction with, as is qualified by, the section Forward-looking Statements beginning on page 1 of the March 8, 2018 MD&A. RISKS AND UNCERTAINTIES Graphics and continue to experience growth An investment in DCM’s securities involves risks. rates in each of those businesses consistent In addition to the other information contained in with the past year; • The three acquisitions DCM completed in 2017 will continue to generate incremental cross-selling opportunities and cost synergies across the entire business of the Company; • DCM will be able to translate its sales pipeline into new customer acquisitions; • Improved year over year margins will be achieved through the strategic initiatives this report, investors should carefully consider the risks described in DCM’s most recent Annual Information Form and other continuous disclosure filings made by DCM with Canadian securities regulatory authorities before investing in securities of DCM. The risks described in this report, the Annual Information Form and those other filings are not the only ones facing DCM. Additional risks not currently known to DCM, or that DCM currently believes are immaterial, may also impair the business, results of operations, financial implemented in the fourth quarter of fiscal 2017, condition and liquidity of DCM. including from the consolidation of facilities, headcount reductions and continuing efforts by management to drive improved profitability and also from the relocation of BOLDER Graphics into DCM’s Calgary facility which was completed in February 2018; • The Company continues to explore additional strategic acquisition opportunities, and, while there can be no certainty that any such opportunities will be completed, such acquisitions could impact the outlook provided; • Economic conditions in North America will not deteriorate; and • The above guidance is based on the accounting policies applied in the consolidated financial statements of DCM for 2017 and IFRS in effect for the year ending December 31, 2017. 42 MANAGEMENT’S DISCUSSION AND ANALYSISDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017 FINANCIAL STATEMENTS 43 FINANCIAL REPORTING RESPONSIBILITY OF MANAGEMENT The accompanying consolidated financial statements of DATA Communications Management Corp. (“DCM”) have been prepared by management and approved by the Board of Directors of DCM. Management of DCM is responsible for the preparation and presentation of the consolidated financial statements and all the financial information contained within this Annual Report within reasonable limits of materiality. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards. In the preparation of the consolidated financial statements, estimates are sometimes necessary because a precise determination of certain assets and liabilities is dependent on future events. Management believes such estimates have been based on available information and careful judgements and have been properly reflected in the accompanying consolidated financial statements. The financial information throughout the text of this Annual Report is consistent with that in the consolidated financial statements. To assist management in discharging these responsibilities, DCM maintains a system of internal controls which are designed to provide reasonable assurance that DCM’s consolidated assets are safeguarded, that transactions are executed in accordance with management’s authorization and that the financial records form a reliable base for the preparation of accurate and timely financial information. Management recognizes its responsibilities for conducting DCM’s affairs in compliance with established financial standards and applicable laws, and for the maintenance of proper standards of conduct in its activities. PricewaterhouseCoopers LLP, Chartered Accountants, are appointed by the shareholders and have audited the consolidated financial statements of DCM in accordance with Canadian generally accepted auditing standards. Their report outlines the nature of their audit and expresses their opinion on the consolidated financial statements of DCM. The Board of Directors has appointed an Audit Committee composed of three directors who are not members of management of DCM. The Audit Committee meets periodically with management and the auditors to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues. It is responsible for reviewing DCM’s annual and interim consolidated financial statements and the report of the auditors. The Audit Committee reports the results of such reviews to the Board of Directors and makes recommendations with respect to the appointment of DCM’s auditors. In addition, the Board of Directors may refer to the Audit Committee other matters and questions relating to the financial position of DCM. The Board of Directors are responsible for ensuring that management fulfills its responsibilities for financial reporting, and are responsible for approving the consolidated financial statements of DCM. (Signed) “Michael G. Sifton” (Signed) “James E. Lorimer” Michael G. Sifton Chief Executive Officer James E. Lorimer Chief Financial Officer DATA Communications Management Corp. DATA Communications Management Corp. Brampton, Ontario. March 8, 2018 44 March 8, 2018 INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DATA COMMUNICATIONS MANAGEMENT CORP. We have audited the accompanying consolidated financial statements of DATA Communications Management Corp, and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2017 and December 31, 2016 and the consolidated statements of operations, comprehensive loss, changes in equity (deficit) 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 audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of DATA Communications Management Corp. and its subsidiaries as at December 31, 2017 and December 31, 2016 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. (Signed) “Pricewaterhourse Coopers LLP” Chartered Professional Accountants, Licensed Public Accountants 45 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands of Canadian dollars) December 31, 2017 December 31, 2016 $ — $ ASSETS CURRENT ASSETS Cash and cash equivalents Trade receivables (note 5) Inventories (note 6) Prepaid expenses and other current assets NON-CURRENT ASSETS Deferred income tax assets (note 13) Restricted cash (note 11) Property, plant and equipment (notes 4 and 7) Pension assets (note 15) Intangible assets (notes 4 and 8) Goodwill (notes 4 and 9) LIABILITIES CURRENT LIABILITIES Bank overdraft Trade payables and accrued liabilities Current portion of credit facilities (note 11) Convertible debentures (note 12) Current portion of promissory notes (note 4) Provisions (note 10) Income taxes payable Deferred revenue NON-CURRENT LIABILITIES Provisions (note 10) Credit facilities (note 11) Promissory notes (note 4) Deferred income tax liabilities (note 13) Other non-current liabilities (note 14) Pension obligations (note 15) Other post-employment benefit plans (note 16) EQUITY SHAREHOLDERS’ DEFICIT Shares (note 18) Warrants (note 18) Conversion options Contributed surplus (note 18) Accumulated other comprehensive income Deficit Approved by Board of Directors: (Signed) “J.R. Kingsley Ward” (Signed) “Michael G. Sifton” J.R. Kingsley Ward Director Michael G. Sifton Director 46 41,193 36,519 5,092 82,804 6,108 515 18,831 760 14,473 8,368 131,859 $ 2,868 $ 34,306 8,725 — 4,374 3,950 3,188 11,237 68,648 2,702 47,207 2,829 1,295 3,413 8,133 3,031 1,544 29,157 33,252 4,667 68,620 3,839 425 12,483 1,589 3,954 — 90,910 — 27,304 5,886 11,082 — 3,305 2,231 8,665 58,473 675 29,156 — — 1,691 8,340 2,510 137,258 $ 100,845 248,996 $ 237,432 287 — 1,368 183 — 128 1,164 258 (256,233) (248,917) (5,399) 131,859 $ $ (9,935) 90,910 The accompanying notes are an integral part of these consolidated financial statements. $ $ $ $ $ $ FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of Canadian dollars, except per share amounts) For the year ended December 31, 2017 For the year ended December 31, 2016 REVENUES COST OF REVENUES GROSS PROFIT EXPENSES Selling, commissions and expenses General and administration expenses Restructuring expenses (note 10) Impairment of goodwill (note 9) Acquisition costs (note 4) LOSS BEFORE FINANCE COSTS AND INCOME TAXES FINANCE COSTS (INCOME) Interest expense Interest income Amortization of transaction costs LOSS BEFORE INCOME TAXES INCOME TAX (RECOVERY) EXPENSE Current (note 13) Deferred (note 13) NET LOSS FOR THE YEAR BASIC LOSS PER SHARE (note 19) DILUTED LOSS PER SHARE (note 19) $ $ $ $ $ 289,529 220,138 69,391 33,992 27,379 9,457 — 1,368 72,196 (2,805) 4,415 (6) 701 5,110 (7,915) 725 (2,435) (1,710) (6,205) (0.38) (0.38) $ $ $ 278,363 215,295 63,068 31,376 24,558 4,200 31,066 68 91,268 (28,200) 3,414 (8) 578 3,984 (32,184) 1,572 (1,649) (77) (32,107) (2.89) (2.89) CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands of Canadian dollars) NET LOSS FOR THE YEAR OTHER COMPREHENSIVE LOSS: ITEMS THAT MAY BE RECLASSIFIED SUBSEQUENTLY TO NET LOSS Foreign currency translation ITEMS THAT WILL NOT BE RECLASSIFIED TO NET LOSS Re-measurements of post-employment benefit obligations Taxes related to post-employment adjustment above (note 13) OTHER COMPREHENSIVE LOSS FOR THE YEAR, NET OF TAX COMPREHENSIVE LOSS FOR THE YEAR $ $ For the year ended December 31, 2017 For the year ended December 31, 2016 $ (6,205) $ (32,107) (75) (75) (1,501) 390 (1,111) (1,186) (7,391) $ $ (48) (48) (309) 81 (228) (276) (32,383) The accompanying notes are an integral part of these consolidated financial statements 47 FINANCIAL STATEMENTSCONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT) (in thousands of Canadian dollars) Shares Warrants Conversion options Contributed surplus Accumulated other comprehensive income Deficit Total equity (deficit) $ 234,782 $ — $ 128 $ 385 $ 306 $ (216,582) $ 19,019 — — — 2,650 — — — — — — — — — — — — — — — 779 — (32,107) (32,107) (48) (228) (276) (48) (32,335) (32,383) — — — — 2,650 779 $ 237,432 $ — $ 128 $ 1,164 $ 258 $ (248,917) $ (9,935) $ 237,432 $ — $ 128 $ 1,164 $ 258 $ (248,917) $ (9,935) — — — — 11,564 — — — — — 287 — — — — — — — — (6,205) (6,205) (75) (1,111) (1,186) (75) (7,316) (7,391) (128) 128 — — (15) 91 — — — — — — — 11,836 91 $ 248,996 $ 287 $ — $ 1,368 $ 183 $ (256,233) $ (5,399) The accompanying notes are an integral part of these consolidated financial statements. BALANCE AS AT DECEMBER 31, 2015 Net loss for the year Other comprehensive loss for the year Total comprehensive loss for the year Issuance of common shares (note 18) Share-based compensation expense BALANCE AS AT DECEMBER 31, 2016 BALANCE AS AT DECEMBER 31, 2016 Net loss for the year Other comprehensive income (loss) for the year Total comprehensive loss for the year Cancellation of convertible debentures (note 12) Issuance of common shares and warrants, net (note 18) Share-based compensation expense BALANCE AS AT DECEMBER 31, 2017 48 FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of Canadian dollars) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net loss for the year Adjustments to net loss Depreciation of property, plant and equipment (note 7) Amortization of intangible assets (note 8) Share-based compensation expense Pension expense (note 15) Loss on disposal of property, plant and equipment Impairment of goodwill (note 9) Write-off of intangible assets Provisions (note 10) Amortization of transaction costs Accretion of convertible debentures and non-current liabilities Other non-current liabilities Other post-employment benefit plans, net Tax credits recognized Income taxes recovery Changes in working capital (note 20) Contributions made to pension plans (note 15) Provisions paid (note 10) Income taxes paid INVESTING ACTIVITIES Purchase of property, plant and equipment Purchase of intangible assets Proceeds on disposal of property, plant and equipment Cash consideration for acquisition of businesses (note 4) FINANCING ACTIVITIES Increase in restricted cash Issuance of common shares and warrants, net (note 18) Proceeds from credit facilities (note 11) Repayment of credit facilities (note 11) Repayment of convertible debentures (note 12) Repayment of loans payable Repayment of promissory notes (note 4) Finance and transaction costs (note 11) Finance lease payments (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS DURING THE YEAR CASH AND CASH EQUIVALENTS – BEGINNING OF YEAR EFFECTS OF FOREIGN EXCHANGE ON CASH BALANCES (BANK OVERDRAFT) CASH AND CASH EQUIVALENTS – END OF YEAR $ $ For the year ended December 31, 2017 For the year ended December 31, 2016 $ (6,205) $ (32,107) 4,143 3,509 91 526 312 — 57 9,457 701 692 1,043 531 (125) (1,710) 13,022 (537) (1,415) (6,995) (168) 3,907 (2,398) (3,375) 638 (6,796) (11,931) (90) 8,125 27,393 (14,709) (11,175) (1,091) (1,421) (925) (2,430) 3,677 (4,347) 1,544 $ (65) 4,052 2,092 779 589 358 31,066 — 4,200 578 85 469 94 (124) (77) 12,054 7,619 (1,878) (7,426) (223) 10,146 (2,653) (432) 167 — (2,918) (425) 2,650 49,532 (56,737) — (191) — (1,341) (18) (6,530) 698 871 (25) (2,868) $ 1,544 The accompanying notes are an integral part of these consolidated financial statements. 49 FINANCIAL STATEMENTSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION DATA Communications Management Corp. (“DCM”) is a leading provider of business communication solutions, bringing value and collaboration to marketing and operation teams in companies across North America. DCM helps marketers and agencies unify and execute communications campaigns across multiple channels, and it helps operations teams streamline and automate document and communications management processes. DCM derives its revenues from the following core capabilities: direct marketing, commercial print services, labels and automated identification solutions, event tickets and gift cards, logistics and fulfilment, content and workflow management, data management and analytics, and regulatory communications. DCM is strategically located across Canada to support clients on a national basis, and serves the U.S. market through its facilities in Chicago, Illinois. DCM’s revenue is subject to the seasonal advertising and mailing patterns of certain customers. Typically, higher revenues and profit are generated in the fourth quarter relative The common shares of DCM are listed on the Toronto Stock Exchange (“TSX”) under the symbol “DCM”. DCM’s outstanding 6.00% Convertible Unsecured Subordinated Debentures (the “6.00% Convertible Debentures”) were listed on the TSX under the symbol “DCM.DB”. The address of the registered office of DCM is 9195 Torbram Road, Brampton, Ontario. 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION DCM prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements were approved by the Board of Directors (“Board”) of DATA Communications Management Corp., on March 8, 2018. SIGNIFICANT ACCOUNTING POLICIES to the other three quarters, however this can BASIS OF MEASUREMENT vary from time to time by changes in customers’ purchasing decisions throughout the year. As a result, DCM’s revenue and financial performance for any single quarter may not be indicative of revenue and financial performance which may be expected for the full year. The 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. 50 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017 Fair value is the price that would be received to sell intercompany transactions, balances and an asset or paid to transfer a liability in an orderly unrealized gains and losses from intercompany transaction between market participants at the transactions are eliminated upon consolidation. measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or liability, DCM takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2 Share based-payments, (a) Subsidiaries Subsidiaries are all entities (including structured entities) over which DCM has control. Control exists when DCM is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date which control is obtained. They are deconsolidated from the date that control ceases. International Accounting Standards (“IAS”) 17 Leases, (b) Changes in ownership interests in subsidiaries and measurements that have some similarities to without change of control fair value but are not fair value, such as net realizable value in IAS 2 Inventories or value in use in IAS 36 Impairment of assets. Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions – that is, as transactions In addition, for financial reporting purposes, with the owners in their capacity as owners. fair value measurements are categorized into The difference between fair value of any Level 1, 2 or 3 based on the degree to which consideration paid and the relevant share the inputs to the fair value measurements are acquired of the carrying value of net assets of observable and the significance of the inputs to the subsidiary is recorded in equity. Gains or the fair value measurements in its entirety, which losses on disposals to non-controlling interests are described as follows: are also recorded in equity. Level 1 inputs are quoted prices (unadjusted) (c) Disposal of subsidiaries in active markets for identical assets or liabilities that the entity can access at the measurement date; When DCM ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the Level 2 inputs are inputs, other than quoted change in carrying amount recognized in profit or prices included within Level 1; that are loss. The fair value is the initial carrying amount observable for the asset or liability; either for the purposes of subsequently accounting for directly or indirectly; and the retained interest as an associate, joint venture • • • Level 3 inputs are unobservable inputs for the asset or liability. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of DCM and its subsidiaries. All or financial asset. In addition, any amounts previously recognized in other comprehensive loss in respect of that entity are accounted for as if DCM had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income (loss) are reclassified to the statement of operations. 51 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)BUSINESS COMBINATIONS In the case of a business combination of less than Business combinations are accounted for using the acquisition method, and their operating results are included in the consolidated financial statements as of the acquisition date. The consideration transferred is the total fair value of the assets acquired, equity instruments issued, liabilities incurred or assumed by DCM and contingent 100%, a non-controlling interest is measured, either at fair value or at the non-controlling interest’s share of the net identifiable assets of the acquiree. The basis of measurement is determined on a transaction-by-transaction basis. FOREIGN CURRENCY TRANSLATION considerations, on the acquisition date, in Items included in the financial statements of exchange for control of the acquired entity. The each entity within DCM are measured using the excess of the consideration transferred over the currency of the primary economic environment fair value of the identifiable assets acquired and in which the entity operates (the “functional liabilities assumed is recognized as goodwill. The currency”). These consolidated financial transaction costs attributable to the acquisition are statements are presented in Canadian dollars, recognized in the statement of operations when which is DCM’s functional currency. The functional they are incurred. If the agreement includes a contingent currency of DCM’s United States operations is U.S. dollars. All financial information presented in Canadian dollars has been rounded to the consideration, it is measured at fair value as of the nearest thousand. acquisition date and added to the consideration transferred, and a liability for the same amount Monetary assets and liabilities denominated in is recognized. Any subsequent change to the fair foreign currencies are translated into Canadian value of the contingent consideration will be dollars at rates of exchange in effect at the recognized in the statement of operations. statement of financial position date. Revenues and If the initial recognition of the business combination is incomplete when the financial statements are issued for the period during which the acquisition occurred, DCM records a provisional amount for the items for which expenses denominated in foreign currencies are translated into Canadian dollars at rates prevailing on the transaction dates. Gains and losses resulting from translation of monetary assets and liabilities denominated in currencies other than Canadian dollars are included in the determination of income measurement is incomplete. Adjustments to the for the year. original recognition of the business combination will be recorded as an adjustment to the assets The assets and liabilities of foreign operations, acquired and liabilities assumed during the including goodwill and fair value adjustments measurement period, and the adjustments must be arising on acquisitions, are translated to Canadian applied retroactively. The measurement period is dollars at exchange rates at the reporting date. the period from the acquisition date to the date on The income and expenses of foreign operations which DCM has received complete information on are translated to Canadian dollars at average the facts and circumstances that existed as of the exchange rate during the period. Foreign currency differences are recognized in other comprehensive loss in the foreign currency translation reserve account. acquisition date. If a business combination is achieved in stages, DCM reassesses the share it held previously in the acquiree at fair value at the acquisition date and includes the gain or loss resulting, if any, to the statement of operations. 52 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017 CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand, deposits held with banks, bank overdraft and highly liquid short-term interest bearing securities with maturities of three months or less value through profit or loss are classified as current except for the portion expected to be realized or paid beyond twelve months of the statement of financial position date, which is classified as non-current. at the date of purchase. (ii) Loans and receivables: Loans and receivables FINANCIAL INSTRUMENTS Financial assets and liabilities are recognized when DCM 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 DCM has transferred substantially all risks and rewards of ownership. Financial assets and liabilities are offset and the net amount reported in the statement 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. 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, if applicable, 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. (iii) Financial liabilities which are measured at amortized cost: Financial liabilities measured at amortized cost are initially recognized at the amount required to be paid less, if applicable, a discount to reduce the payables to fair value. Subsequently, these financial At initial recognition, DCM classifies its liabilities are measured at amortized financial instruments in the following categories cost using the effective interest method. depending on the purpose for which the Financial liabilities are classified as current instruments were acquired: (i) Financial assets and liabilities at fair value through profit or loss (“FVTPL”): A financial liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities. asset or liability is classified in this category if (iv) Derivative financial instruments: DCM may also acquired principally for the purpose of selling use derivatives in the form of interest rate or repurchasing in the short-term. Derivatives swaps to manage risks related to its variable are also included in this category unless they rate debt. All derivatives have been classified are designated as hedges. Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are expensed in the statement of operations and are included in finance costs. Gains and losses arising from changes in fair value are presented in the statement of operations within other gains and losses in the period in which they arise. Financial assets and liabilities at fair as held for trading, are included on the statement of financial position within other assets or other liabilities, and are classified as current or non-current based on the contractual terms specific to the instrument. Gains and losses on re-measurement of interest rate swaps that do not meet the hedge criteria and of the written put options are included in finance costs. At December 31, 2017 and 2016, DCM had not entered into any interest rate swap agreements. 53 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts) IMPAIRMENT OF FINANCIAL ASSETS INVENTORIES A financial asset is assessed at the end of each Raw materials inventories are stated at the reporting period to determine whether it is lower of cost and net realizable value. Printed impaired, based on objective evidence indicating finished goods and work-in-progress are that one or more events have had a negative effect recorded at the lower of cost and net realizable on the estimated future cash flows of that asset. value. Raw materials are recorded on a weighted Objective evidence used by the company to assess average cost basis. Cost of finished goods and impairment of financial assets includes quoted work-in-process are determined using the market prices for similar financial assets and first-in, first-out method. Inventory manufactured historical collection rates for loans and receivables. includes the cost of materials, labour and An impairment loss with respect to a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the net present value of the estimated future cash flows discounted at the original effective interest rate. The asset’s carrying amount is reduced and the amount of the loss is recognized in the statement of comprehensive loss. 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. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. The reversal of the previously recognized impairment is recognized in the statement of comprehensive loss. production overheads (based on normal operating capacity) including applicable depreciation on property, plant and equipment. Net realizable value is the estimated selling price less cost to complete and applicable selling expenses. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost less accumulated depreciation and accumulated impairments. Costs include expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset’s carrying value or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to DCM and the cost can be measured reliably. The carrying value of a replaced asset is derecognized when replaced. Maintenance and repairs are expensed as incurred. Depreciation is computed using the methods and rates based on the estimated useful lives of the property, plant and equipment as outlined below: Basis Rate Leasehold improvements straight-line Shorter of life or lease term Office furniture and equipment Presses and printing equipment Computer hardware and software Vehicles straight-line straight-line straight-line straight-line 5 years 3 to 10 years 1 to 5 years 3 years 54 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017DCM allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part. Residual values, the method of depreciation and useful lives of the assets are reviewed annually and adjusted if appropriate. Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included in general and administration expenses in the statement of operations. INTANGIBLE ASSETS Intangible assets that are acquired are • • • • • • it is technically feasible to complete the software so that it will be available for use management intends to complete the software and use or sell it there is an ability to use or sell the software it can be demonstrated how the software will generate probable future economic benefits adequate technical, financial and other resources to complete the development and to use or sell the software are available, and the expenditure attributable to the software during its development can be reliably measured. measured at cost and are carried at cost less Directly attributable costs that are capitalized as accumulated amortization. These assets include part of the software include employee costs and customer relationships, existing software an appropriate portion of relevant overheads. and technology, trademarks, trade names Capitalized development costs are recorded as and non-compete agreements. intangible assets and amortized from the point at Research costs and costs associated with which the asset is ready for use. maintaining software programs are recognized Management’s judgment is required to determine as an expense as incurred. Development costs that the useful lives of intangible assets including are directly attributable to the design and testing reviewing the length of customer relationships and of identifiable and unique software products other factors. These finite life assets are amortized controlled by DCM are recognized as intangible over their estimated useful lives as outlined below. assets when the following criteria are met: Customer relationships Software and technology Computer software development costs Trademarks, trade names and non-compete agreements Basis Rate straight-line straight-line straight-line straight-line 3 to 12 years 1 to 7 years 5 years 2 to 9 years Residual values, the method of amortization and useful lives of the assets are reviewed annually and adjusted if appropriate. 55 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)GOODWILL Goodwill represents the excess of the aggregate of consideration transferred in a business combination and the non-controlling interest in the acquired business over the net fair value of net identifiable assets and liabilities acquired. Adjustments to fair value assessments are future cash flows take into account the relevant operating plans and management’s best estimate of the most probable set of conditions anticipated to prevail including a number of estimates and assumptions such as projected future revenues, cost of revenues, operating margins, market conditions well into the future, and discount rates. recorded to goodwill over the measurement An impairment loss is recognized for the amount period, not exceeding one year from the date by which the asset’s carrying amount exceeds of acquisition. Goodwill is allocated to the cash its recoverable amount. Impairment losses generating unit (“CGU”) or a group of CGUs to are recorded as impairment provisions within which it relates. A CGU is an identifiable group of accumulated depreciation for depreciable assets. assets that are largely independent of the cash DCM evaluates impairment losses, other than flows from other assets or group of assets, which goodwill impairment, for potential reversals is not higher than an operating segment. when events or circumstances warrant such Goodwill is evaluated for impairment annually or more frequently if events or circumstances indicate there may be impairment. Impairment is determined for goodwill by assessing if the carrying value of a cash generating unit, including the allocated goodwill, exceeds its recoverable amount determined as the greater of the estimated fair value less costs to sell or the value in use. Impairment losses recognized in respect of a CGU consideration. Where an impairment loss subsequently reverses the carrying amount of the asset or CGU is increased to the lesser of the revised estimate of recoverable amount and the carrying amount that would have been recorded had no impairment loss been recognized previously. SHARE-BASED COMPENSATION are first allocated to the carrying value of goodwill DCM has share-based compensation plans and any excess is allocated to the carrying amount as part of DCM’s long-term incentive plan, of assets in the CGU. Any goodwill impairment as described in note 18. All transactions is charged to income in the period in which the involving share-based payments are recognized impairment is identified. Impairment losses on as an expense in the statement of operations goodwill are not subsequently reversed. over the vesting period. IMPAIRMENT OF NON-FINANCIAL ASSETS Equity-settled share-based payment transactions, such as stock option awards, are measured at the Property, plant and equipment and intangible grant date at the fair value of employee services assets are tested for impairment when events received in exchange for the grant of options or or changes in circumstances indicate that the share awards and, for non-employee transactions, carrying amount may not be recoverable. For the at the fair value of the goods or services received purpose of measuring recoverable amounts, assets at the date on which the entity recognizes the are grouped at the lowest levels for which there goods or services. The total amount of the are separately identifiable cash flows (CGUs). The expense recognized in the statement of recoverable amount is the higher of an asset’s fair operations is determined by reference to the fair value less costs to sell and value in use (being the value of the share awards or options granted, present value of the expected future cash flows which factors in the number of options expected of the relevant asset or CGU). The projections of to vest. Equity-settled share-based payment 56 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017transactions are not remeasured once the grant DCM’s obligation to the SRDF and Unifor Pension date fair value has been determined. & Benefit Plans are limited to the amounts Cash-settled share-based payment transactions are measured at the fair value of the liability. The agreed to in the respective collective bargaining agreements of each plan. liability is remeasured at each reporting date and Certain former senior executives of a predecessor at the date of settlement, with changes in fair value corporation participated in a Supplementary recognized in the statement of operations. Executive Retirement Plan (“SERP”), which EMPLOYEE BENEFITS provides for pension benefits payable as a single life annuity with a five year guarantee. DCM maintains a defined benefit and defined (a) Defined contribution plan contribution pension plan (the “DATA Communications Management Pension Plan”) for some of its employees. Pension benefits are primarily based on years of service, compensation and accrued contributions with investment earnings. DCM’s funding policy is to fund the annual amount required to meet or exceed the minimum statutory requirements. Annual actuarial valuations are required on the DATA Communications Management Pension Plan until the solvency deficiency is reduced to a level under which the applicable pension regulations allow A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and has no legal or constructive obligation to pay further amounts. Pension benefits for defined contribution formula are based on the accrued contributions with investment earnings. DCM’s annual pension expense is based on the amounts contributed in respect of eligible employees when they are due. (b) Defined benefit plans the valuations to be completed every three years. A defined benefit plan is a post-employment At January 1, 2014, the solvency deficiency had benefit plan other than a defined contribution plan. reduced to a level such that actuarial valuations Pension benefits for the defined benefit formula are to be completed every three years. are generally calculated based on the number of DCM also contributes to the Graphics Communications Supplemental Retirement and Disability Fund of Canada (“SRDF”) for certain employees at its Drummondville and Granby plants. During the fourth quarter of 2017, the Granby employees were relocated to the Drummondville plant in Québec. In addition, DCM sponsors a number of multi-employer, defined benefit employee pension and non-pension benefit plans which are administered by Unifor Local 591G for the hourly employees of Thistle Printing Limited (“Unifor Pension & Benefit Plans”). The SRDF and Unifor Pension & Benefit Plans provide post-employment benefits to unionized employees in the printing industry jointly-trusteed by representatives of the employers and the unions. years of service and the maximum average eligible earnings of each employee during any period of five consecutive years. DCM accrues its obligations for the defined benefit provision and related costs, net of plan assets, where applicable. The cost of pensions earned by employees covered by these plans are actuarially determined using the projected unit credit method taking into account management’s best estimate of salary escalation, retirement ages and longevity of employees, where applicable. When the calculation results in a benefit to DCM, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in 57 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)DCM. An economic benefit is available to DCM if benefit plans. When the payment in the future it is realizable during the life of the plan, or on of minimum funding requirements related to settlement of the plan liabilities. past service would result in a net defined benefit Improvements to the pension plans are recognized as past service costs in the period of the plan amendment. Current service costs are expensed in the period that the benefits are accrued. Current service costs, administration costs and surplus or an increase in a surplus, the minimum funding requirements are recognized as a liability to the extent that the surplus would not be fully available as a refund or a reduction in future contributions to the plans. past services costs are recognized as period costs A liability for a termination benefits is recognized in general and administration expenses in the at the earlier of when the entity can no longer statement of operations. Net interest is calculated withdraw the offer of the termination benefit by applying the discount rate at the beginning of and when the entity recognizes any related the period to the net benefit liability or asset and restructuring costs. Termination benefits is recognized in finance expense (income) in the that require future services are required to statement of operations. be recognized over the periods the future The discount rate used to determine the accrued benefit obligation is determined by reference to The SERP is unfunded. services are provided. yields on high quality corporate bonds and that have terms to maturity approximating the terms of the related pension liability. The SRDF and the Unifor Pension & Benefit Plans are negotiated contribution, defined benefit multi-employer plans, however, the trustees of these Actuarial gains and losses arise from the difference plans are not able to provide sufficient information between actual rate of return on plan assets and for DCM to account for these plans as a defined the discount rate for that period, from changes benefit plan. DCM has accounted for these plans in actuarial assumptions used to determine the on a defined contribution basis as DCM does not accrued benefit obligation and from changes to believe there is sufficient information to recognize accrued benefit obligation resulting from actual participation on a defined benefit basis. See note 21 experience differing from long-term assumptions for additional information related to the SRDF. used to determine the accrued benefit obligation. Re-measurements, comprising actuarial gains and losses, the effect of the changes to the asset ceiling (if applicable) and the actual return on plan assets (excluding interest), is reflected immediately in the statement of financial position with a charge or credit recognized in other comprehensive loss in the period in which they occur. Re-measurements recognized in other comprehensive loss are reflected immediately in retained earnings (deficit) and will not be reclassified to statement of operations. The retirement benefit obligation recognized in the statement of financial position represents the actual deficit or surplus in the DCM’s defined (c) Other post-employment and long-term employee benefit plans DCM provides non-pension post-employment benefits, including health care and life insurance benefits on retirement to certain former employees, their beneficiaries and covered dependents (“DCM OPEB Plans”). DCM’s net obligation in respect of its DCM OPEB Plans is the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The calculation is performed using the projected unit credit method. Any actuarial gains and losses related to non-pension post-employment benefit plans 58 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017are recognized in other comprehensive loss in (iii) Off-market leases: DCM performs evaluations the period in which they arise and will not be to identify off-market lease arrangements reclassified to statement of operations. and, where applicable, records provisions DCM also provides other long-term employee benefit plans including pension, health care and dental care benefits for certain employees on long-term disability (“DCM OPEB LTD Plan”). DCM’s net obligation in respect of its DCM OPEB LTD Plan is the actuarial present value of all future projected benefits determined as at the valuation against such lease agreements. INCOME TAXES Income tax expense comprises current and deferred tax. Current income tax and deferred income tax are recognized in profit or loss except to the extent that it relates to a business date. Any actuarial gains and losses related to other combination, or items recognized directly in equity long-term employee benefit plans are recognized or in other comprehensive loss, in which case the in the statement of operations in the period in which they arise. current and/or deferred tax is also recognized directly in equity or other comprehensive loss. The discount rate is the yield at the reporting date Current income taxes is the expected tax payable on yields on high quality corporate bonds that have or receivable on the taxable income or loss for maturity dates approximating the terms of DCM’s obligations. The non-pension post-employment the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment benefit plan and other long-term employee benefit to tax payable in respect of previous years that plan are funded on a pay-as-you-go basis. are expected to be paid. Management periodically PROVISIONS A provision is recognized if, as a result of a past event, DCM has a present legal or constructive obligation for which the amount can be estimated reliably, and it is more likely than not that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at management’s best estimate of the expenditure required to settle the obligation and discounted to its present value if material. The unwinding of the discount is recognized as a finance cost. (i) Restructuring: A provision for restructuring is recognized when DCM has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses are not provided for. evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. DCM establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred income tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and temporary differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred income tax is not recognized for taxable temporary differences (ii) Onerous contracts: DCM performs evaluations arising on the initial recognition of goodwill. to identify onerous contracts and, where Deferred income tax is measured on a applicable, records provisions against non-discounted basis at the tax rates that are such contracts. expected to be applied to temporary differences 59 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)when they reverse, based on the laws that have Lease incentives received are recognized as an been enacted or substantively enacted by the integral part of the total lease expense, over the reporting date. A deferred income tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred income tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized in the foreseeable future. term of the lease. The unamortized portion of lease incentives and the difference between the straight-line rent expense and the payments, as stipulated under the lease agreement, are included in other non-current liabilities. SHARE CAPITAL AND WARRANTS Common shares and warrants are classified as equity instruments. Incremental costs directly attributable to the issue of common shares and warrants are recognized as a deduction from Deferred income tax assets and liabilities are equity, net of any tax effects. offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to REVENUE RECOGNITION income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. Revenue from the sale of product is recognized upon shipment to the customer when costs and revenues can be reliably measured, collection is probable, the transfer of title occurs, and risk of loss passes to the buyer. When the customer Deferred income tax assets and liabilities are requests a bill and hold arrangement, revenue is presented as non-current. recognized when the goods are ultimately shipped to the customer. When customer payments exceed the revenue recognized, the excess is recorded as deferred revenue. Pre-production services have no standalone value and no reliable evidence of their fair value and are therefore included with the final printed products as one unit of accounting. The majority of products are customized and product returns are not significant. Warehousing, administration and marketing service fees are recognized as the services are provided, when the amount of revenue can be measured reliably, it is probable that economic benefits associated with these services will flow to DCM and the costs associated with these services can be reliably measured. If warehousing, administration and marketing service fees are included in one overall selling price of a custom print product, the consideration is allocated to each component based on relative selling prices. LEASES Leases are classified as financing or operating depending on the terms and conditions of the contracts. Lease agreements where DCM assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset class. Obligations recorded under finance leases are reduced by lease payments net of imputed interest. Other lease agreements are operating leases and the leased assets are not recognized in DCM’s statement of financial position. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. 60 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share is calculated by adjusting net income (loss) and weighted average number of shares outstanding during the period for the effects of dilutive potential shares, which includes any options granted. USE OF ESTIMATES AND MEASUREMENT UNCERTAINTY The preparation of consolidated financial statements requires management to make critical judgments, estimates and assumptions that affect the reported amount of certain assets and liabilities and the disclosure of the contingent assets and liabilities at the date of the consolidated segments could result in impairments in future periods. Changing the assumptions selected by management, in particular the discount rate and growth assumptions used in the cash flow projections, could significantly affect ithe result of DCM’s impairment analysis. FAIR VALUE OF ASSETS AND LIABILITIES ACQUIRED IN BUSINESS COMBINATIONS The value of acquired assets and liabilities on the acquisition date require the use of estimates to determine the purchase price allocation. Estimates are made as to the valuations of property, plant, and equipment, intangible assets, assumed financial liabilities, among other items. These estimates have been discussed further below. Property, Plant and Equipment financial statements and revenues and expenses The fair value of property, plant and equipment for the period reported. Management must also recognised as a result of a business combination is make estimates and judgments about future results the estimated amount for which a property could of operations, related specific elements of the be exchanged on the date of acquisition between a business and operations in assessing recoverability willing buyer and a willing seller in an arm’s length of assets and recorded value of liabilities. transaction after proper marketing wherein the Significant areas of measurement uncertainty parties had each acted knowledgeably. The fair value are summarized below. For each item, actual of equipment, computer hardware, furniture, fixtures results could differ from estimates and judgments and fittings is based on the market approach and cost made by management. IMPAIRMENT OF GOODWILL, INTANGIBLE AND NON-CURRENT ASSETS Goodwill, intangible and non-current assets are tested for impairment if there is an indicator of approaches using quoted market prices for similar items when available and depreciated replacement cost when appropriate. Intangible Assets The fair value of trade names acquired in a impairment, and in the case of goodwill, annually business combination is based on the incremental at the end of each fiscal year. The determination discounted estimated cash flows enjoyed post of the impairment of goodwill, intangible and non-current assets are impacted by estimates of acquisition, or expenditures avoided, as a result of owning the intangible assets. The fair value of the fair value of CGUs, assumptions of future cash customer lists acquired in a business combination flows, and achieving forecasted business results. These assumptions can be impacted by economic is determined using the multi-period excess earnings method, whereby the subject asset is conditions and also require considerable judgment valued after deducting a fair return on all other by management. Declines in business results or declines in the fair value of DCM’s reporting assets that are part of creating the related cash flows. The fair value of other intangible assets were based on the depreciated replacement cost 61 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)approach which reflects the cost to a market with, relevant taxing authorities. Where the final participant to construct assets of comparable outcome of these tax-related matters is different utility and age, adjusted for obsolescence. from the amounts that were initially recorded, Inventories such differences will affect the tax provisions in the period in which such determination is made. The fair value of inventories acquired in a business combination is determined based on the estimated PENSION OBLIGATIONS selling price in the ordinary course of business Management estimates the pension obligations less the estimated costs of completion and sale, annually using a number of assumptions and and a reasonable profit margin based on the effort with the assistance of independent actuaries; required to complete and sell the inventories. however, the actual outcome may vary due to Financial Liabilities Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. INCOME TAXES estimation uncertainties. The estimates of its pension obligations are based on rates of inflation and mortality that management considers to be reasonable. It also takes into account DCM’s specific anticipation of future salary increases, retirement ages of employees and other actuarial factors. Discount factors are determined close to each fiscal year end by reference to high quality corporate bonds that are denominated in the In assessing the probability of realizing deferred currency in which the benefits will be paid and income tax assets, management has made that have terms to maturity approximating to the estimates related to expectations of future taxable terms of the related pension liability. Estimation income, applicable tax planning opportunities, uncertainties exist, which may vary significantly expected timing of reversals of existing temporary in future actuarial valuations and the carrying differences and the likelihood that tax positions amount of DCM’s defined benefit obligations. taken will be sustained upon examination by applicable tax authorities. Deferred tax assets also PROVISIONS reflect the benefit of unused tax losses that can be carried forward to reduce income taxes in future years. In making its assessments, management gives additional weight to positive and negative evidence that can be objectively verified. UNCERTAIN TAX POSITIONS DCM maintains provisions for uncertain tax Provisions are liabilities of uncertain timing or amount. Provisions are recognized when DCM has a present legal or constructive obligation arising from past events, when it is probable that an outflow of funds will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is DCM’s best positions using the best estimate of the amount estimate of the present obligation at the end of the expected to be paid based on a qualitative assessment of all relevant factors. DCM reviews the adequacy of these provisions at the end of the reporting period. It is possible that at some future date, liabilities in excess of the DCM’s reporting period. When the effect of discounting is significant, the amount of the provision is determined by discounting the expected cash flows at a pre-tax rate that reflects current market assessments of the time value of money provisions could result from audits by, or litigation and the risks specific to the liability. DCM’s main 62 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017provisions are related to restructuring costs and statements to evaluate changes in liabilities onerous contracts. Provisions are reviewed at each arising from financing activities, including reporting date and any changes to estimates are both changes arising from cash flow and reflected in the statement of operations. non-cash changes. The adoption of the AGGREGATION OF OPERATING SEGMENTS Management applies judgment in aggregating operating segments in to a reportable segment. Aggregation occurs when the operating segments have similar economic characteristics and have similar products, production processes, types of customers, and distribution methods. 3. CHANGE IN ACCOUNTING POLICIES (a) New and amended standards adopted (i) On January 19, 2016 the IASB issued Recognition of Deferred Tax Assets for Unrealized Losses (Amendments to IAS 12). The amendments apply retrospectively for annual periods beginning on or after January 1, 2017. Earlier application is permitted. The amendments clarify that the existence of a deductible temporary difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or expected manner of recovery of the asset. The amendments also clarify the methodology to determine the future taxable profits used for assessing the utilization of deductible temporary differences. There was no impact amendment resulted in additional disclosure in DCM’s consolidated financial statements. See (note 11). (b) Future accounting standards not yet adopted (i) IFRS 9 Financial Instruments was issued in July 2014. IFRS 9 sets out the requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy and sell non-financial items. IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement. The new standard establishes a single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics. It also provides guidance on an entity’s own credit risk relating to financial liabilities and has modified the hedge accounting model to better link the economics of risk management with its accounting treatment. It further introduces a single, forward looking ‘expected loss’ impairment model for financial assets. Additional disclosures will also be required under the new standard. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The new standard is not expected to have a significant impact on the consolidated financial statements of DCM. on DCM’s consolidated financial statements (ii) Amendments to IFRS 7 Financial Instruments: as a result of the amendments. (ii) On January 7, 2016 the IASB issued Disclosure Initiative (Amendments to IAS 7 Statement of Cash Flows). The amendments apply prospectively for annual periods beginning on or after January 1, 2017. Earlier application is permitted. The amendments require disclosures that enable users of financial Disclosure were issued in September 2014. This standard was amended to provide guidance on additional disclosures on transition from IAS 39 to IFRS 9. The amendments are effective on adoption of IFRS 9. DCM does not expect this amendment to have a significant impact on its consolidated financial statements. 63 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts) (iii) IFRS 15 Revenue from Contracts with Customers DCM has undertaken a comprehensive review was issued in May 2014. This new standard of its significant contracts in accordance with outlines a single comprehensive model the five-step model in IFRS 15 to determine for companies to use when accounting the impact on the timing and measurement for revenue arising from contracts with on its revenue recognition. Based on customers. It supersedes the IASB’s current management’s preliminary assessment, revenue recognition standards, including the adoption of IFRS 15 may have an impact IAS 18 Revenues and related and related on the timing of recognition of revenues to interpretations. The core principle of IFRS 15 an earlier stage for certain manufactured is that revenue is recognized at an amount products, in addition to earlier recognition that reflects the consideration to which the of related production and commission costs. company expects to be entitled in exchange There will also be enhanced disclosures in the for those goods or services, applying the consolidated financial statements of DCM. following five steps: Management is in the process of finalizing 1. Identify the contract with a customer 2. Identify the performance obligations in the contract 3. Determine the transaction price its analysis. (iv) An amendment to IFRS 2 Share-based Payment was issued in June 2016 to clarify the accounting for certain types of share-based payment transactions. The amendments 4. Allocate the transaction price to the provide requirements on accounting for the performance obligations in the contract effects of vesting and non-vesting conditions 5. Recognize revenue when (or as) the entity satisfies a performance obligation of cash-settled share-based payments, withholding tax obligations for share-based payments with a net settlement feature, This new standard also provides guidance and when a modification to the terms relating to the accounting for contract of a share-based payment changes the costs as well as for the measurement and classification of the transaction from recognition of gains and losses arising from cash-settled to equity-settled. The the sale of certain non-financial assets. amendments are effective for the year Additional disclosures will also be required beginning on or after January 1, 2018. under the new standard, which is effective DCM does not expect this amendment to for annual reporting periods beginning on have a significant impact on its consolidated or after January 1, 2018 with earlier adoption financial statements. permitted. For comparative amounts, companies have the option of using either a full retrospective approach or a modified retrospective approach as set out in the new standard. DCM intends to use the modified retrospective approach. The IASB published final clarifications to IFRS 15 in April 2016, which do not change the underlying principles of the standard yet clarify how the principles should be applied. (v) IFRS 16 Leases was issued in January 2016. It supersedes the IASB’s current lease standard, IAS 17 Leases, which required lessees and lessors to classify their leases as either finance leases or operating leases and to account for those two types of leases differently. It did not require lessees to recognize assets and liabilities arising from operating leases, but it did require lessees to recognize assets and liabilities arising from finance leases. 64 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017 IFRS 16 sets out the principles for the the foreign exchange rate applicable to recognition, measurement, presentation and transactions involving advance consideration disclosure of leases. It introduces a single paid or received is the rate at the date that lessee accounting model and requires a lessee the advance consideration is paid or received to recognize assets and liabilities for all and a non-monetary asset or liability is leases with a term of more than twelve recorded, and not the later date at which the months and for which the underlying asset related asset or liability is recognized in the is not of low value. A lessee is required to financial statements. This interpretation is recognize a right-of-use asset representing applicable for annual periods beginning on or its right to use the underlying leased asset after January 1, 2018, and can be applied either and a lease liability representing its obligation prospectively or retrospectively, at the option to make lease payments. The right-of-use asset of the entity. IFRIC 22 is not expected to have is initially measured at cost and subsequently a significant impact on the consolidated depreciated. The lease liability is initially financial statements of DCM. measured at the present value of the lease payments and subsequently adjusted for interest and lease payments. This accounting is subject to certain exceptions and other adjustments. (vii) In June 2017, the IASB issued IFRIC 23 Uncertainty over Income Tax Treatments. The interpretation clarifies the accounting for current and deferred tax liabilities and assets in circumstances in which there is IFRS 16 contains disclosure requirements for uncertainty over income tax treatments. The lessees and lessors. This new standard will interpretation requires an entity to consider come into effect for annual periods beginning whether it is probable that a taxation authority on or after January 1, 2019. Earlier application will accept an uncertain tax treatment. If the is permitted for companies that apply IFRS 15 entity considers it to be not probable that a Revenue from Contracts with Customers at or taxation authority will accept an uncertain before the date of initial application of IFRS 16. tax provision the interpretation requires Based on management’s preliminary assessment, DCM has identified lease contracts, primarily for building and equipment rentals, for which recognition will change under IFRS 16. The recognition of the leased assets and their related liabilities will increase income from operations, with a corresponding combined increase in depreciation and amortization and financial the entity to use the most likely amount or the expected value. The amendments are to be applied retrospectively and are effective for annual periods beginning on or after January 1, 2019, with earlier application permitted. The adoption of this amendment is not expected to have a significant impact on the DCM’s consolidated financial statements. charges as at the date of application of IFRS 16. There are no other IFRS or International Management intends to adopt IFRS 16 for the Financial Reporting Interpretations Committee annual period beginning on January 1, 2019. (‘IFRIC’) interpretations that are not yet (vi) IFRIC 22 Foreign Currency Transactions and Advance Consideration, is an interpretation paper issued by the IASB in December 2016. This interpretation paper clarifies that effective that would be expected to have a material impact on DCM. 65 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts) 4. BUSINESS ACQUISITIONS ECLIPSE COLOUR AND IMAGING CORP. On February 22, 2017 (the “Closing Date”), DCM acquired substantially all of the assets of Eclipse Colour and Imaging Corp. (“Eclipse”), a Canadian large-format and point-of-purchase printing and packaging company, with approximately 100 employees operating in an 80,000 square foot facility located in Burlington, Ontario. The acquisition of Eclipse has added significantly expanded wide format, large format, and grand format printing capabilities to DCM’s portfolio of products and services, with Eclipse having a product mix focused on in-store print, outdoor, transit, display, packaging, kitting and The fair value of the Common Shares attributed to the acquisition consideration was estimated based on the market price of the Common Shares on the Closing Date of $2.63 per Common Share, discounted by 15% for the effect of the contractual restrictions on selling those Common Shares for a twelve month period from the Closing Date. The fair value of the vendor take-back promissory note was determined by present valuing the future cash flows using a discount rate of 10% which represents management’s best estimate based on financial instruments with a similar term and risk profile in the market. On the Closing Date, DCM also advanced $3,220 to settle Eclipse’s bank indebtedness, equipment leases and amounts payable to the former owners pre-acquisition, in addition to paying $311 for fulfilment capabilities. related transaction costs. DCM acquired the assets of Eclipse for a purchase price of $8,914 before giving effect to post-closing adjustments for changes in working capital and bank indebtedness, net of cash, based on the final statement of financial position as of the Closing Date. The purchase price was satisfied as follows Total cash advanced on the Closing Date was $7,065, which was used to finance the up-front cash component of the acquisition, settle the above noted debt and pay for related transaction costs, and was funded with the increased availability under DCM’s existing bank credit facilities (see on the Closing Date: $3,534 in cash, $1,418 through note 11 for further details related to DCM’s the issuance of 634,263 common shares of DCM bank credit facilities). (“Common Shares”), and $3,962 through the issuance of a secured, non-interest bearing vendor take-back promissory note, which is payable in two equal instalments on each of the first and second anniversaries of the Closing Date. During the three months ended June 30, 2017, the total post-closing adjustments to the purchase price were finalized and paid in cash to the vendor in the amount of $550. 66 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017The consideration paid and the allocation of the consideration to the fair values of the assets acquired and liabilities assumed in the acquisition as of the Closing Date were as follows: Recognized amounts of identifiable assets acquired and liabilities assumed Amount Cash and cash equivalents Trade receivables Inventories Prepaid expenses and other assets Property, plant and equipment Intangible assets Trade payables and accrued liabilities Deferred revenue Unfavorable lease obligation Credit facilities Capital lease obligations Other non-current liabilities Total identifiable net assets Goodwill Total Purchase price consideration Cash Common shares Promissory notes Total $ $ $ $ 632 4,641 972 145 5,245 3,700 (3,352) (45) (210) (668) (2,421) (11) 8,628 836 9,464 Amount 4,084 1,418 3,962 9,464 The fair value of trade receivables was $4,641. The cross selling opportunities, in addition to the gross contractual amount of trade receivables due company’s skilled workforce. The goodwill is was $4,656 of which $15 was deemed uncollectible. tax deductible. The identifiable intangible assets acquired for Total acquisition-related costs incurred $3,700 primarily relate to customer relationships were $562 of which $537 and $25 was charged which will be amortized over an expected useful to the consolidated statement of operations life of seven years. for the year ended December 31, 2017 and Goodwill of $836 arising from the acquisition is December 31, 2016, respectively. mainly attributable to expected future growth in The revenues and net income contributed by sales from existing and new customers through Eclipse and included in the consolidated statement 67 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)of operations for the period between the Closing Closing Date: $1,104 in cash, $1,440 through the Date and December 31, 2017 were $21,843 and issuance of 644,445 Common Shares, and $2,783 $2,100, respectively. If the acquisition had occurred through the issuance of a secured, non-interest on January 1, 2017, the estimated revenues and net bearing vendor take-back promissory note, income contributed by Eclipse to DCM’s operating which is payable in 24 equal monthly payments results for the year ended December 31, 2017 would from the Closing Date. During the three months have been approximately $25,401 and $2,381, ended September 30, 2017, the total post-closing respectively, adjusting net income for additional adjustments were finalized and the purchase price depreciation and amortization that would have was decreased by $181 and has been reflected as been charged assuming the fair value adjustments a reduction in the principal amount of the vendor to property, plant and equipment and intangible take-back promissory note. assets had applied from January 1, 2017. THISTLE PRINTING LIMITED On February 22, 2017, DCM acquired 100% of the outstanding common shares of Thistle Printing Limited (“Thistle”), a full service commercial printing company with approximately 65 employees operating in a 42,000 square foot facility located in Toronto, Ontario, from Capri Media Group Inc. (“Capri”). Capri is a related party of DCM by virtue of the fact that companies controlled by the President of DCM and the Chair of the Board of DCM, respectively, control Capri. The acquisition of Thistle provides DCM with a The fair value of the Common Shares attributed to the acquisition consideration was estimated based on the market price of the Common Shares on the Closing Date of $2.63 per Common Share, discounted by 15% for the effect of the contractual restrictions on selling those Common Shares for a twelve month period from the Closing Date. The fair value of the vendor take-back promissory note was determined by present valuing the future cash flows using a discount rate of 10% which represents management’s best estimate based on financial instruments with a similar term and risk profile in the market. full service commercial print facility in Eastern On the Closing Date, DCM also advanced $1,942 Canada and enables DCM to expand its margins to settle Thistle’s bank indebtedness and amounts by insourcing commercial printing capabilities payable to the former owners of Thistle. Total cash advanced on the Closing Date was $3,046, which was used to finance the up-front cash component of the acquisition and settle the above noted debt, and was funded with the increased availability under DCM’s existing bank credit facilities. which it has historically outsourced to local tier two suppliers. This acquisition adds expertise in commercial printing, design, prepress and bindery services to DCM’s portfolio, and complements DCM’s current capabilities in direct mail, fulfilment and data management. DCM acquired the shares of Thistle for a purchase price of $5,327 which included the estimated post-closing adjustments for changes in working capital of $412, based on the final statement of financial position as of the Closing Date. The purchase price was satisfied as follows on the 68 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017The consideration paid and the allocation of the consideration to the fair values of the assets acquired and liabilities assumed in the acquisition as of the Closing Date were as follows: Recognized amounts of identifiable assets acquired and liabilities assumed Preliminary Adjusted Change Cash and cash equivalents $ 37 $ 42 $ Trade receivables Inventories Prepaid expenses and other assets Property, plant and equipment Intangible assets Trade payables and accrued liabilities Income taxes payable Deferred revenue Deferred income tax liabilities Credit facilities Capital lease obligations Other non-current liabilities Total identifiable net liabilities Goodwill Total Purchase price consideration Cash Common shares Promissory note Total $ $ $ 2,569 885 890 1,743 5,871 (2,460) (647) (459) (1,464) (7,130) (60) (933) (1,158) 6,485 2,506 1,791 868 1,743 5,899 (2,311) (686) (1,261) (1,572) (7,097) (34) (933) (1,045) 6,603 5,327 $ 5,558 $ 5 (63) 906 (22) — 28 149 (39) (802) (108) 33 26 — 113 118 231 Preliminary Adjusted Change $ 1,104 1,440 2,783 $ 1,104 1,440 3,014 5,327 $ 5,558 $ — — 231 231 The fair value of trade receivables was $2,506. cross selling opportunities, in addition to the The gross contractual amount of trade receivables company’s skilled workforce. The goodwill is due was $2,531 of which $25 was deemed to not tax deductible. be uncollectible. The identifiable intangible assets acquired of $496 of which $453 and $43 was charged to $5,899 primarily relate to customer relationships the consolidated statement of operations which will be amortized over an expected useful for the year ended December 31, 2017 and life of seven years. December 31, 2016, respectively. Total acquisition-related costs incurred were Goodwill of $6,603 arising from the acquisition is The revenues and net income contributed by mainly attributable to expected future growth in Thistle and included in the consolidated statement sales from existing and new customers through of operations for the period between the Closing 69 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)Date and December 31, 2017 were $15,112 and $761, September 30, 2019. The post-closing adjustment respectively. If the acquisition had occurred on to the purchase purchase of $88 was finalized January 1, 2017, the estimated revenues and net subsequent to year-end and will be settled in income contributed by Thistle to DCM’s operating cash. Accordingly, this amount has been included results for the year ended December 31, 2017 would in trade payables and accrued liabilities in the have been approximately $17,423 and $1,074, consolidated statement of financial position respectively, adjusting net income for additional as at December 31, 2017. depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from January 1, 2017. BOLDER GRAPHICS On November 10, 2017, (the “BOLDER Closing Date”) DCM acquired 100% of the outstanding common shares of BGI Holdings Inc. and 1416395 Alberta Limited (collectively “BOLDER Graphics”), a privately-held company that specializes in large-format digital printing, point of sale The fair value of the Common Shares attributed to the acquisition consideration was estimated based on the market price of the Common Shares on the BOLDER Closing Date of $1.26 per Common Share, discounted by 15% for the effect of the contractual restrictions on selling those Common Shares for a twelve month period from the BOLDER Closing Date. A fair value adjustment to the value of the vendor take-back promissory note was not necessary as the interest rate of 6.0% represents management’s best estimate based on financial instruments with a similar term and risk profile signage, corporate packaging, outdoor signage and vehicle graphics. It also specializes in loose- in the market. leaf bindery, stationery and other commercial On the BOLDER Closing Date, DCM also advanced print capabilities. The company has approximately $1,339 to settle BOLDER Graphics’ bank 40 employees operating in a 59,000 square foot indebtedness and amounts payable to the former facility located in Calgary, Alberta. This acquisition owners of the company. strengthens DCM’s large and wide format printing capabilities in western Canada and complements its significantly expanded large format capabilities obtained through the acquisition of Eclipse in eastern Canada earlier this year. Total cash advanced on the BOLDER Graphics Closing Date was $2,947, which was used to finance the up-front cash component of the acquisition and settle the above noted debt. $2,000 of this was financed with the proceeds received from BOLDER Graphics was acquired for a total purchase the IAM V Credit Facility (as defined in note 11) price of approximately $3,448 before giving and $947 was financed using DCM’s Bank Credit effect to post-closing adjustments for changes Facility (as defined in note 11). in working capital and bank indebtedness, based on the final statement of financial position as of the BOLDER Closing Date. The purchase price was satisfied as follows on the BOLDER Closing Date: $1,608 in cash, $754 through the issuance of 704,424 Common Shares, and $1,086 in the form of subordinated, unsecured, 6.0% interest bearing vendor take-back promissory notes, which are payable in twenty equal monthly blended payments of principal and interest commencing on February 28, 2018 and ending on 70 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017The consideration paid and the allocation of the consideration to the fair values of the assets acquired and liabilities assumed in the acquisition as of the BOLDER Closing Date were as follows: Recognized amounts of identifiable assets acquired and liabilities assumed Amount Cash and cash equivalents Trade receivables Inventories Prepaid expenses and other assets Property, plant and equipment Intangible assets Trade payables and accrued liabilities Income taxes payable Deferred revenue Deferred income tax liabilities Credit facilities Other non-current liabilities Total identifiable net assets Goodwill Total Purchase price consideration Cash Common shares Promissory notes Total $ $ $ $ 198 927 830 206 2,065 1,111 (748) (8) (185) (488) (909) (392) 2,607 929 3,536 Amount 1,696 754 1,086 3,536 The fair value and gross contractual amount of Goodwill of $929 arising from the acquisition is trade receivables was $927 of which $Nil was mainly attributable to expected future growth in deemed to be uncollectible. sales from existing and new customers through The identifiable intangible assets acquired of $1,111 primarily relate to customer relationships which will be amortized over an expected useful cross selling opportunities, in addition to the company’s skilled workforce. The goodwill is not tax deductible. life of six years, a non-compete agreement which Total acquisition-related costs incurred were $378 will be amortized over an expected useful life of was charged to the consolidated statement of two years, and computer software which will be operations for the year ended December 31, 2017. amortized over an expected useful life of one year. 71 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)The revenues and net loss contributed by BOLDER The valuation report for BOLDER Graphics Graphics and included in the consolidated acquisition is still in progress and therefore statement of operations for the period between the the purchase price allocation is preliminary. BOLDER Closing Date and December 31, 2017 were As such, there may be adjustments to the $998 and $112, respectively. If the acquisition had purchase accounting and those adjustments occurred on January 1, 2017, the estimated revenues could be material. and net loss contributed by BOLDER Graphics to DCM’s operating results for the year ended December 31, 2017 would have been approximately $6,868 and $814, respectively, adjusting net loss for additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from January 1, 2017. The changes in promissory notes from the respective Closing dates of each acquisition to December 31, 2017 and their presentation in the consolidated statement of financial position as at December 31, 2017 are as follows: Balance - February 22, 2017 (Preliminary) Post-closing adjustment Balance - February 22, 2017 (Final) Addition on November 10, 2017 Unwinding of discount and interest expense Payment Balance - End of year Less: Current portion of promissory notes As at December 31, 2017 $ $ $ $ Eclipse acquisition Thistle acquisition BOLDER Graphics acquisition 3,962 $ 2,783 $ — 231 3,962 $ 3,014 $ — — — $ $ — 347 — — 1,086 206 (1,421) 9 — Total 6,745 231 6,976 1,086 562 (1,421) 4,309 $ 1,799 $ 1,095 $ 7,203 (2,253) (1,529) (592) (4,374) 2,056 $ 270 $ 503 $ 2,829 Subsequent to the year end, DCM made a payment of $2,283 related to the Eclipse acquisition promissory note that was due on February 22, 2018. 72 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017 5. TRADE RECEIVABLES Trade receivables Provision for doubtful accounts 6. INVENTORIES Raw materials Work-in-progress Finished goods December 31 2017 December 31 2016 41,399 (206) 41,193 $ $ 29,597 (440) 29,157 December 31 2017 December 31 2016 6,235 $ 4,164 26,120 36,519 $ 3,774 2,940 26,538 33,252 $ $ $ $ Raw materials and finished goods inventory amounts are net of obsolescence reserves of $586 (2016 – $360). The cost of inventories recognized as an expense within cost of revenues for the year ended December 31, 2017 was $211,867 (2016 – $202,539). 73 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)7. PROPERTY, PLANT AND EQUIPMENT The following tables present changes in property, plant and equipment for the years ended December 31, 2017 and 2016: Office Presses and Computer Leasehold furniture and printing hardware and Construction improvements equipment equipment software Vehicles in progress Total Year ended December 31, 2017 Opening net book value $ 5,228 $ 293 $ 6,176 $ 299 $ — $ 487 $ 12,483 Additions Acquisitions during the year (note 4) Effect of movement in exchange rates Disposals Depreciation for the year 224 229 1 (66) 239 222 — (22) 1,367 8,212 (9) (856) 284 311 (2) (6) — 79 — — (1,095) (159) (2,528) (353) (8) 284 2,398 — — — — 9,053 (10) (950) (4,143) Closing net book value $ 4,521 $ 573 $ 12,362 $ 533 $ 71 $ 771 $ 18,831 At December 31, 2017 Cost Accumulated depreciation $ 11,076 $ 1,687 $ 44,949 $ 3,938 $ 79 $ 771 $ 62,500 (6,555) (1,114) (32,587) (3,405) (8) — (43,669) Net book value $ 4,521 $ 573 $ 12,362 $ 533 $ 71 $ 771 $ 18,831 Year ended December 31, 2016 Opening net book value $ 6,249 $ 368 $ 7,294 $ 511 $ — $ — $ 14,422 Additions 621 107 1,366 Effect of movement in exchange rates Disposals Depreciation for the year (2) (126) — (41) (6) (301) (1,514) (141) (2,177) (220) 72 (7) (57) — — — — 487 2,653 — — — (15) (525) (4,052) Closing net book value $ 5,228 $ 293 $ 6,176 $ 299 $ — $ 487 $ 12,483 At December 31, 2016 Cost Accumulated depreciation $ 12,869 $ 1,951 $ 44,810 $ 5,233 $ — $ 487 $ 65,350 (7,641) (1,658) (38,634) (4,934) — — (52,867) Net book value $ 5,228 $ 293 $ 6,176 $ 299 $ — $ 487 $ 12,483 74 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 20178. INTANGIBLE ASSETS The following tables present changes in intangible assets for the years ended December 31, 2017 and 2016: Customer Software and non-compete Construction in relationships technology agreements progress Total Trademarks, trade names and Year ended December 31, 2017 Opening net book value $ 3,391 $ 439 $ Additions Acquisitions during the year (note 4) Write off during the year Amortization for the year Closing net book value At December 31, 2017 Cost Accumulated amortization Net book value Year ended December 31, 2016 Opening net book value Additions Amortization for the year Closing net book value At December 31, 2016 Cost Accumulated amortization Net book value $ $ $ $ $ $ $ — 9,730 — (3,122) 160 533 (57) (316) — $ — 124 $ 3,215 447 — (71) — — — 3,954 3,375 10,710 (57) (3,509) 9,999 $ 759 $ 376 $ 3,339 $ 14,473 85,353 $ 11,668 $ 8,147 $ 3,339 $ 108,507 (75,354) (10,909) (7,771) — (94,034) 9,999 $ 759 $ 376 $ 3,339 $ 14,473 5,260 $ 354 $ — $ — $ — (1,869) 308 (223) — — 124 — 5,614 432 (2,092) 3,391 $ 439 $ — $ 124 $ 3,954 75,623 $ 11,032 $ 7,700 $ 124 $ 94,479 (72,232) (10,593) (7,700) — (90,525) 3,391 $ 439 $ — $ 124 $ 3,954 The remaining useful lives of the customer relationships are between 1 and 6 years. During the year ended December 31, 2017, DCM incurred costs mainly related to the development and implementation of new Enterprise Resource Planning (“ERP”) software. These costs of $3,215 were included in construction in progress and were not amortized during the year. 75 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)9. GOODWILL Opening balance Acquisition of Eclipse Acquisition of Thistle Acquisition of BOLDER Graphics Impairment of goodwill Ending balance Cost Accumulated impairment losses Net carrying value $ $ $ $ December 31 2017 December 31 2016 $ 31,066 — 836 6,603 929 — 8,368 $ — — — (31,066) — December 31 2017 December 31 2016 169,093 (160,725) 8,368 $ $ 160,725 (160,725) — DCM performed its annual impairment analysis of less cost to sell. DCM uses the income approach to goodwill at the CGU level. The CGUs were defined estimate the recoverable value of each CGU. The as follows: DCM North America, Eclipse, Thistle income approach is predicated on the value of the and BOLDER Graphics. The classification of CGUs is future cash flows that a business will generate consistent with the operating segments identified going forward. The discounted cash flow method in note 24. During the fourth quarter of 2016, DCM recorded a non-cash impairment of goodwill for $31,066 related to the DCM North America CGU. There was no further goodwill remaining for this CGU in 2017. In addition, given the purchase price accounting for BOLDER Graphics is still being finalized, the goodwill recognized on acquisition was not tested was used which involves projecting cash flows and converting them into a present value through discounting. The discounting uses a rate of return that is commensurate with the risk associated with the business and the time value of money. This approach requires assumptions about revenue growth rates, operating margins, tax rates and discount rates. for impairment as of December 31, 2017. Revenue growth rates and operating margins were During the fourth quarter of 2017, DCM performed its annual review for impairment of goodwill by comparing the fair value of each of its CGUs to its respective carrying values. DCM did not make any significant changes to the valuation methodology used to assess for impairment since its last annual impairment test. The recoverable amounts of all CGUs have been determined based on the fair value based on the 2018 budget approved by the Board and projected over a five-year period. For the Eclipse and Thistle CGUs, a conservative growth rate of 1% (2016 – N/A) was applied to revenue for 2019 to 2021, in consideration of the current economic conditions and the specific trends of the printing industry, and a perpetual long-term growth rate of 0% (2016 – N/A) was used thereafter to derive the recoverable amount of these CGUs. 76 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017Furthermore, DCM derived a pre-tax discount forecast periods. DCM used a tax rate of 26.25% rate to calculate the present value of the projected (2016 – 26.25%). Tax assumptions are sensitive to cash flows using a weighted average cost of capital changes in tax laws as well as assumptions about (“WACC”) for both the Eclipse and Thistle CGUs, the jurisdictions in which profits are earned. It adjusted for tax. This represents an estimate of is possible that actual tax rates could differ from the total overall required rate of return on an those assumed. investment for both debt and equity owners. Determination of the WACC requires separate analysis of cost of equity and debt, and considers a risk premium based on the assessment of risks related to the projected cash flows of these CGUs. A discount rate of 15.0% (2016 – N/A) was used for the Eclipse and Thistle CGUs reflecting management’s judgment that sales channels and the size of its CGU’s would affect the volatility of each CGU’s cash flows. DCM projects cash flows net of income taxes using substantively enacted tax rates effective during the As a result of this annual test, it was concluded that there was no impairment of goodwill for the Eclipse and Thistle CGUs. The estimated recoverable amount of the Eclipse and Thistle CGUs exceeded their carrying values by approximately $19,300 and $5,570, respectively. The recoverable amount of the Eclipse and Thistle CGUs would equal their carrying values if the discount rate was increased by 30.5% to 45.5% and 8% to 23%, respectively. 10. PROVISIONS 2017 Restructuring Onerous contracts Balance – Beginning of year Additional charge during the year Charge related to an acquisition Utilized during the year Balance – End of period Less: Current portion of provisions As at December 31, 2017 2016 Balance – Beginning of year Additional charge during the year Utilized during the year Balance – End of year Less: Current portion of provisions As at December 31, 2016 $ $ $ $ $ $ 2,773 $ 1,207 $ 6,778 — (6,083) 3,468 (2,856) 612 $ $ 2,679 — (898) 2,988 (1,078) 1,910 $ $ Restructuring Onerous contracts 4,614 $ 2,592 $ 3,771 (5,612) 2,773 (2,571) 202 $ $ 429 (1,814) 1,207 (734) 473 $ $ Other — — 210 (14) 196 (16) 180 Other — — — — — — $ $ $ $ $ $ Total 3,980 9,457 210 (6,995) 6,652 (3,950) 2,702 Total 7,206 4,200 (7,426) 3,980 (3,305) 675 77 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)RESTRUCTURING During the year ended December 31, 2017, DCM continued its restructuring and ongoing productivity improvement initiatives to reduce its cost of operations. During the year ended December 31, 2017, these initiatives resulted in $6,778 of additional restructuring expenses in the consolidated statement of operations due to headcount reductions across DCM’s operations and the closure of certain manufacturing and During the year ended December 31, 2017, DCM closed a Regina, Saskatchewan facility. A lease exit charge of $269, representing the liability, at present value, for remaining lease costs under the lease agreement and building maintenance costs, was recorded and would have been paid over the remaining term of the lease, expiring in 2018. In November 2017, DCM entered into an agreement with the landlord of this property to terminate this lease. DCM made a payment of $110 to the landlord and recorded a recovery of $184 related to this warehouse locations in the consolidated statement of operations and comprehensive loss. During the lease exit charge. year ended December 31, 2016, these initiatives During the year ended December 31, 2016, DCM resulted in $3,771 of restructuring expenses in closed a Richmond Hill, Ontario facility. A lease the consolidated statement of operations due to exit charge of $429, representing the liability, headcount reductions across DCM’s operations at present value, for remaining lease costs under and the closure of certain manufacturing and the lease agreement and building maintenance warehouse locations in the consolidated statement costs, was recorded and will be paid over the of operations and comprehensive income (loss). remaining term of the lease, expiring in 2019. For the year ended December 31, 2017, cash payments of $6,083 (2016 – $5,612) were made to former employees for severance and other restructuring costs. The remaining severance and restructuring During the year ended December 31, 2017, DCM entered into a sub-lease for this facility for the remainder of the term of the lease agreement and recorded a recovery of $300. accruals of $3,468 at December 31, 2017 are expected OTHER to be substantially paid throughout 2018 and 2019. In connection with the acquisition of Eclipse, on February 22, 2017, DCM assumed the lease for its Burlington, Ontario facility with rent payments that exceeded the fair market value and as a result an unfavourable lease obligation for $210 was recorded based on discounting the rent payments in excess of the fair market value lease rates using a discount rate of 7%. The unfavourable lease obligation is being amortized as a reduction of rent expense in the consolidated statement of operations over the lease term, expiring in 2026. ONEROUS CONTRACTS During the year ended December 31, 2017, DCM closed a Mississauga, Ontario facility. A lease exit charge of $317, representing the liability for remaining lease costs under the lease agreement and building maintenance costs was recorded and is expected to be paid in March of 2018. During the year ended December 31, 2017, DCM closed a Granby, Québec facility. A lease exit charge of $2,393 representing the liability, at present value, for remaining lease costs under the lease agreement and building maintenance costs, was recorded and will be paid over the remaining term of the lease, expiring in 2021. 78 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 201711. CREDIT FACILITIES December 31 2017 December 31 2016 Term loans } floating rate debt, maturing May 31, 2018 $ — $ } floating rate debt, maturing June 28, 2018 } 6.10% term debt, maturing October 15, 2022 } 6.95% term debt, maturing March 10, 2023 } 6.95% term debt, maturing May 15, 2023 Revolving facilities } floating rate debt, maturing March 31, 2020 Credit facilities Unamortized transaction costs Less: Current portion of Credit facilities Credit facilities 3,500 4,834 22,220 4,938 21,747 57,239 (1,307) 55,932 (8,725) 47,207 $ $ $ $ 2,920 — — 25,611 — 7,514 36,045 (1,003) 35,042 (5,886) 29,156 In March 2016, DCM established a revolving to adjust the calculation of the working capital credit facility (the “Bank Credit Facility”) with ratio (“First Amended IAM IV Credit Agreement”). a Canadian chartered bank (the “Bank”) and In connection with the acquisitions of Eclipse an amortizing term loan facility (the “IAM IV and Thistle, on January 31, 2017 DCM amended its Credit Facility”) with Integrated Private Debt Fund IAM IV Credit Agreement (the “Second Amended IV LP (“IAM IV”) a loan managed by Integrated Asset IAM IV Credit Agreement”). On August 4, 2017, the Management Corp. (“IAM”) pursuant to separate IAM IV Credit Agreement was amended to adjust credit agreements, each dated March 10, 2016, the working capital current ratio (the “Third between DCM and the Bank (the “Bank Credit Amended IAM IV Credit Agreement”) and on Agreement”) and IAM (as amended, the “IAM IV September 29, 2017, the IAM IV Credit Agreement Credit Agreement”), respectively. Approximately was further amended to adjust the calculation $43,250 of the total principal amount available to and ratio applicable to the Senior Funded Debt to DCM under the IAM IV Credit Agreement and the EBITDA covenant (as defined below) and amend the Bank Credit Agreement was used to fully repay calculation of the debt service coverage ratio (the indebtedness owing by it under the senior credit “Fourth Amended IAM IV Credit Agreement”). facilities previously maintained by DCM with a syndicate of Canadian chartered banks. In connection with the acquisitions of Eclipse and Thistle, on January 31, 2017 DCM amended its Bank During the quarter ended June 30, 2016, DCM Credit Agreement (the “First Amended Bank Credit amended the terms of the IAM IV Credit Agreement Agreement”). On May 30, 2017, the Bank Credit 79 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)Agreement was amended to adjust the fixed charge increased to $7,000, an increase from $5,000 coverage ratio (the “Second Amended Bank Credit under the original sub facility. The maturity Agreement”) and on June 28, 2017, the Bank Credit on the Bank Term Facility originally was the Agreement was amended in connection with the earlier of March 10, 2018 and the date on which establishment of a new credit facility (the “Bridging the Bank Credit Facility is terminated pursuant Credit Agreement”) with Bridging Finance Inc. to the Bank Credit Agreement, with monthly (“Bridging”), as described in further detail below principal repayments of $208. Pursuant to the (the “Third Amended Bank Credit Agreement”). On First Amended Bank Credit Agreement, beginning September 29, 2017 and October 20, 2017, the Bank March 31, 2017 through until March 31, 2020, the Credit Agreement was further amended to adjust Bank Term Facility would be amortized in equal the fixed charge coverage ratio (the “Fourth monthly payments of $194, however pursuant to Amended Bank Credit Agreement” and “Fifth the Third Amended Bank Credit Agreement, the Amended Bank Credit Agreement”, respectively). On amortization period was subsequently adjusted November 10, 2017, the Bank Credit Agreement was to equal monthly instalments of $400 being paid further amended for matters related to the acquisition beginning July 31, 2017 until May 31, 2018. On of BOLDER Graphics including the additional June 28, 2017, DCM repaid $2,000 of the financing arrangements related to that acquisition outstanding borrowings under the Bank Term (the “Sixth Amended Bank Credit Agreement”). Facility. On November 10, 2017, DCM repaid Pursuant to the First Amended Bank Credit Agreement, the maximum principal amount available under the Bank Credit Facility increased from up to $25,000 to up to $35,000. The increased the total remaining outstanding borrowings of $2,622 under the Bank Term Facility and expensed unamortized transaction costs of $179 related to the Bank Term Facility. availability was used in part, together with the Principal payments made on the Bank Term additional availability under the amended Bank Facility did not reduce the total available principal Term Facility (as described below), to finance amount under the Bank Credit Facility. Advances the up-front cash components and settle certain under the amended Bank Credit Facility may not, debt assumed related to the Eclipse and Thistle at any time, exceed the lesser of $35,000 and a acquisitions, pay for related acquisition costs and fixed percentage of DCM’s aggregate accounts also provide DCM with additional flexibility to receivable and inventory (less certain amounts). continue to pursue its strategic growth objectives. The Bank Term Facility was a sub facility of the The term on the Bank Credit Facility originally amended Bank Credit Facility and was available by had a maturity on the earlier of March 10, 2019 way of a single advance and its availability was not and the date on which the facility is terminated based on DCM’s accounts receivable or inventories. pursuant to the Bank Credit Agreement. This was Advances under the amended Bank Credit Facility extended by one year, to March 31, 2020 per the are subject to floating interest rates based upon the First Amended Bank Credit Agreement. A portion of Canadian prime rate plus an applicable margin of the Bank Credit Facility consists of a non-revolving 0.75%. Pursuant to the Third Amended Bank Credit term credit facility (the “Bank Term Facility”) as Agreement, the interest on the Bank Term Facility well as a committed treasury facility pursuant to was amended to a rate based upon the Canadian which the Bank may, in its sole discretion, agree to prime rate plus an applicable margin of 2.25%. enter into non-speculative hedging arrangements, DCM has capitalized transaction costs of $1,068 subject to certain restrictions. As per the First related to the Bank Credit Facility, including $443 Amendment Agreement, the principal amount of new costs incurred as a result of the Second, available under the Bank Term Facility was Third, Fourth and Sixth Amended Bank Credit 80 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017Agreements, respectively, during the year ended Credit Agreement, the “IAM Credit Agreements”). December 31, 2017. The unamortized balance of The IAM V Credit Facility may be drawn by way the transaction costs are being amortized over of a single advance, bears interest at a fixed the remaining term of the amended Bank Credit rate of 6.95% per annum, calculated and Facility. As at December 31, 2017, the unamortized payable monthly, and shall be repaid in sixty six transaction costs related to the amended Bank equal monthly payments of $91 beginning on Credit Facility was $490. As at December 31, 2017 December 15, 2017 and through to May 15, 2023, there were outstanding borrowings of $21,747 consistent with the maturity of the IAM IV Credit under the revolving facilities portion of the Facility. The IAM V Credit Facility can be repaid amended Bank Credit Facility and letters of credit in full at any time prior to maturity upon thirty granted of $1,426. As at December 31, 2017, all days prior written notice to IAM and is subject of DCM’s indebtedness outstanding under the to an early repayment fee equal to the difference amended Bank Credit Facility was subject to a between i) the present value of the remaining floating interest rate of 3.95% per annum. DCM payments from the prepayment date discounted had access to $6,555 of available credit under the at a rate based on yields earned on Government of amended Bank Credit Facility at December 31, 2017. Canada Bonds with a comparable term; and Integrated Private Debt Fund III LP (“IAM III”), another loan managed by IAM, was a senior secured lender to Thistle. An existing term loan in an original principal amount of $8,000 was being amortized in equal monthly payments of $96 over a nine year term ending on October 15, 2022, with a fixed interest rate of 6.1% per annum (“IAM III Credit Facility”). In connection with the Thistle acquisition, on February 22, 2017, an amendment was made to the IAM III Credit Facility whereby DCM became a co-borrower with Thistle, pursuant to which the covenants were amended to match those of DCM under its IAM IV Credit Facility and reported on a consolidated basis. There were no other changes to the terms of the IAM III Credit Facility. As at February 22, 2017 and December 31, 2017, Thistle had outstanding borrowings of $5,533 and $4,834 under the IAM III Credit Facility, respectively. As at December 31, 2017, the unamortized transaction costs related to the IAM III Credit Facility were $30. On November 10, 2017, DCM established a $5,000 secured, non-revolving senior credit facility (the “IAM V Credit Facility”) with Integrated Private Debt Fund V LP (“IAM V”), a loan managed by IAM (the “IAM V Credit Agreement” and, together with the IAM III Credit Agreement and the IAM IV ii) the face value of the remaining payments on the prepayment date. Under the terms of the IAM V Credit Agreement, DCM is required to deposit and hold cash of $90 in a blocked account to be used for repayments of principal and interest of indebtedness outstanding under the IAM V Credit Facility. In addition, the IAM V Credit Facility is subject to the same covenant conditions stipulated under the amended IAM IV Credit Agreement and will be reported on a consolidated basis. The consolidated covenant conditions also include the pro forma financial results of BOLDER Graphics on a trailing twelve month basis effective as of the BOLDER Closing Date. The IAM V Credit Facility was used to fund a portion of the up-front cash component of the BOLDER Graphics acquisition of $2,000 on the closing of the BOLDER Graphics acquisition, repay the remaining outstanding balance of the Bank Term Facility of $2,622 and the balance was used for general working capital purposes. DCM has capitalized transaction costs of $162 related to the IAM V Credit Facility and these transaction costs are being amortized over the term the IAM V Credit Facility. As at December 31, 2017, the unamortized transaction costs and outstanding borrowings related to this facility were $155 and $4,938, respectively. 81 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)Pursuant to the Second Amended IAM IV Credit unamortized transaction costs and outstanding Agreement, the maximum aggregate principal borrowings related to this facility were $560 and amount which may be outstanding under the IAM $22,220, respectively. IV Credit Facility, the IAM III Credit Facility and the amended Bank Credit Facility, calculated on a consolidated basis in accordance with generally accepted accounting principles (“Senior Funded Debt”), can not exceed $72,000 (after giving effect to the provisions of the inter-creditor agreement described below). This was an increase from $50,000 under the original term loan facility dated March 10, 2016. The aggregate principal amount outstanding under the IAM V Credit Facility is included as part of Senior Funded Debt for the purposes of the covenant calculation. The IAM IV Credit Facility matures on March 10, 2023 and has a maximum available principal amount of $28,000. Indebtedness outstanding under the IAM IV Credit Facility bears interest at a fixed rate equal to 6.95% per annum. Under the terms of the Second Amended IAM IV Credit Agreement, which remain unchanged per the original term loan facility dated March 10, 2016, DCM is required to make mandatory blended equal monthly repayments of principal and interest for $422 such that, on maturity, advances under the IAM IV Credit Facility and applicable interest on those advances will have been fully repaid. In addition, under the terms of the IAM IV Credit Agreement, DCM is required to deposit and hold cash in a blocked account of $425 to be used for repayments of principal and interest of indebtedness outstanding under the IAM IV Credit Facility. This requirement did not change as a result of the Second Amended IAM IV Credit Agreement. As at December 31, 2017, there was a balance of $515 in the blocked account related to the IAM IV Credit Facility and IAM V Credit Facility which is recognized as restricted cash on the consolidated statement of financial position. Furthermore, DCM has capitalized transaction costs of $838, including $173 of additional costs incurred during the year ended December 31, 2017 as a result of the Third and Fourth Amended IAM IV Credit Agreements which is being amortized over the term of the IAM IV Credit Facility. As at December 31, 2017, the 82 Each of the amended Bank Credit Agreement and the amended IAM Credit Agreements contain customary representations and warranties, as well as restrictive covenants which limit the discretion of the Board and management with respect to certain business matters including the declaration or payment of dividends on the common shares of DCM without the consent of the Bank, IAM III, IAM IV and IAM V, as applicable. Under the terms of the IAM Credit Agreements, DCM has agreed that it will not, without the prior written consent of IAM III, IAM IV and IAM V, change (or permit any change) in its Chief Executive Officer, President or Chief Financial Officer, provided that, if he or she voluntarily resigns as an officer of DCM, or if any such person has either died or is disabled and can therefore no longer carry on his or her duties of such office, DCM will have 60 days to replace such officer, such replacement officer to be satisfactory to IAM III, IAM IV and IAM V, acting reasonably. The amended Bank Credit Facility limits spending on capital expenditures by DCM to an aggregate amount not to exceed $5,500 during any fiscal year, and the IAM Credit Agreements limits the incurrence of capital expenditures to no more than $5,000 in any fiscal year. Under the terms of the original IAM IV Credit Agreement, and before giving effect to the amendments described below, DCM was required to maintain (i) a ratio of Senior Funded Debt to EBITDA (as defined below) of not greater than the following levels: from the date of the advance up to March 31, 2017 – 3.25 to 1; from April 1, 2017 up to March 31, 2018 – 3.00 to 1; and on and after April 1, 2018 – 2.75 to 1; (ii) a debt service coverage ratio of not less than 1.50 to 1; and (iii) a working capital current ratio of not less than 1.25:1. Pursuant to the First Amended IAM IV Credit Agreement, during the quarter ended June 30, 2016, the terms of the IAM IV Credit Agreement were NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017amended to exclude the aggregate principal amount the four most recently completed fiscal quarters of the 6.00% Convertible Debentures from current effective the quarter ended September 30, 2017; liabilities for the purposes of calculating the ii) include the Bridging Credit Facility as defined working capital ratio for the period from below, as part of Senior Funded Debt effective June 29, 2016 to June 30, 2017. Furthermore, as the quarter ended September 30, 2017; iii) include a result of the Second Amended IAM IV Credit projected interest payments on the Bridging Agreement on January 31, 2017, the pro forma Credit Facility over the next four quarters for the financial results for Eclipse and Thistle were purposes of calculating the debt service coverage included on a trailing twelve and eighteen month ratio; and iv) revise the Senior Funded Debt to basis, as applicable, effective as of the Closing Date EBITDA ratio such that DCM must maintain for the purposes of DCM’s covenant calculations. the following levels: from July 1, 2017 up to Pursuant to the Third Amended IAM IV Agreement, September 30, 2017 – 4.00 to 1; October 1, 2017 up to the working capital current ratio was changed December 31, 2017 – 3.50 to 1; from January 1, 2018 to 1.1 to 1 effective June 30, 2017. up to March 31, 2018 – 3.25 to 1; and on and after On March 9, 2017, IAM consented, effective the quarter ending March 31, 2017, to modify the April 1, 2018 – 3.00 to 1. As at December 31, 2017, DCM was in compliance with these covenants. calculation of the debt service coverage ratio For purposes of the Bank Credit Agreement under the provisions of the amended IAM IV Credit and the IAM Credit Agreements, “EBITDA” Agreement to include EBITDA for the six most means net income or net loss for the relevant recently completed fiscal quarters (previously four period, calculated on a consolidated basis in most recently completed quarters) less income accordance with generally accepted accounting taxes actually paid in cash and the amount of principles, plus amounts deducted, or minus capital expenditures actually incurred or paid amounts added, in calculating net income or during such period up to the amount permitted net loss in respect of: the aggregate expense under this agreement, divided by the aggregate incurred for interest on debt and other costs of of i) scheduled principal plus interest payments obtaining credit; income taxes, whether or not on the IAM IV Credit Facility and IAM III Credit deferred; depreciation and amortization; non-cash Facility (as described above) and ii) projected expenses resulting from employee or management interest payments on the amended Bank Credit compensation, including the grant of stock options Facility for the next six quarters (previously the or restricted options to employees; any gain or four most recently completed quarters). In addition, loss attributable to the sale, conversion or other on May 11, 2017, DCM received consent from disposition of property out of the ordinary course IAM, effective the quarter ending June 30, 2017, of business; interest or dividend income; foreign to modify the calculation of the Senior Funded exchange gain or loss; gains resulting from the Debt to EBITDA ratio under the provisions of the write up of property and losses resulting from amended IAM IV Credit Agreement and the IAM the write down of property (except allowances III Credit Agreement to include EBITDA for the six for doubtful accounts receivable and non-cash most recently completed fiscal quarters multiplied reserves for obsolete inventory); any gain or loss by 2/3 (previously the four most recently completed on the repurchase or redemption of any securities quarters). Pursuant to the Fourth Amended IAM (including in connection with the early retirement IV Credit Agreement on September 29, 2017, the or defeasance of any debt); goodwill and other calculation of the debt service coverage ratio and intangible asset write-downs; and any other the Senior Funded Debt to EBITDA ratio were extraordinary, non recurring or unusual items amended to i) restore the inclusion of EBITDA to as agreed to by the lender. 83 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)Under the terms of the Bank Credit Agreement, Credit Facility are repayable on demand and bear and before giving effect to the amendments interest at a rate equal to the prime rate of interest described below, DCM was required to maintain charged by DCM’s Bank lender from time to time a fixed charge coverage ratio of not less than plus 10.3% per annum, calculated and payable 1.1 to 1.0 at all times, calculated on a consolidated monthly. The Bridging Credit Facility has a term of basis, in respect of any particular trailing twelve one year and can be repaid at any time without any month period, as EBITDA for such period less cash repayment fee upon sixty days prior written notice taxes, cash distributions (including dividends paid) to Bridging, subject to the prior written consent and non-financed capital expenditures paid in of DCM’s other senior lenders. The Bridging Credit such period, divided by the total amount required Facility is subordinated in right of payment to by DCM to service its outstanding debt for such the prior payment in full of DCM’s indebtedness period. As a result of the First Amended Bank under the amended Bank Credit Agreement and the Credit Agreement on January 31, 2017, the amended IAM Credit Agreements and is secured by pro forma financial results for Eclipse and Thistle certain specified equipment together with certain were included on a trailing twelve month basis other conventional security. The Bridging Credit effective as of the Closing Date for the purposes Facility limits spending on capital expenditures by of DCM’s covenant calculations. Pursuant to the DCM to an aggregate amount not to exceed $5,500 Second, Fourth and Fifth Amended Bank Credit during any fiscal year. Transaction costs of $146 Agreements on May 30, 2017, September 29, 2017, were capitalized and the unamortized transaction and October 20, 2017, respectively, the fixed charge costs as at December 31, 2017 were $72. These coverage ratio was amended such that i) for the costs are being amortized over the term of the period commencing April 30, 2017 and ending Bridging Credit Facility. June 30, 2017, the ratio would not be less than 1.0 to 1.0; ii) for the period commencing July 1, 2017 and ending December 31, 2017, the ratio would not be less than 0.9 to 1.0; and iii) for the period commencing January 1, 2018 and ending March 31, 2018, the ratio would not be less than 1.0 to 1.0, on a consolidated basis, in respect of any particular trailing twelve month period. Pursuant to the Sixth Amended Bank Credit Agreement, the pro forma financial results for BOLDER Graphics on a trailing twelve month basis and the monthly blended payments of principal and interest for the IPD V Credit Facility were included effective as of the BOLDER Closing Date for the purposes of DCM’s covenant calculations. As at December 31, 2017, DCM was in compliance with this covenant. A failure by DCM to comply with its obligations under the amended Bank Credit Agreement, the amended IAM Credit Agreements or the Bridging Credit Agreement, together with certain other events, including a change of control of DCM and a change in DCM’s chief executive officer, president or chief financial officer (unless a replacement officer acceptable to IAM, acting reasonably, is appointed within 60 days of the effective date of such officer’s resignation), could result in an event of default which, if not cured or waived, could permit acceleration of the indebtedness outstanding under each of those agreements. DCM anticipates it will be in compliance with the covenants in its credit facilities for the next twelve months; however there can be no assurance that On June 28, 2017, DCM established a non-revolving DCM will be successful in achieving the results credit facility with Bridging for $3,500 (the targeted in its 2018 operating plan or in complying “Bridging Credit Facility”) in conjunction with with its covenants over the next twelve months. the net proceeds of certain equity issuances to enable the Company to repay the convertible debentures (note 12). Advances under the Bridging DCM’s obligations under the amended Bank Credit Facility, the IAM V Credit facility, the amended 84 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017IAM IV Credit Facility and the IAM III Credit Inter-creditor Agreement was further amended Facility are secured by conventional security to include Bridging and to separately address the charging all of the property and assets of DCM priority of its liens on certain specified equipment and its affiliates (the “Inter-creditor Agreement”). as a result of the Bridging Credit Facility. On On February 22, 2017, DCM entered into an November 10, 2017, the inter-creditor agreement amended Inter-creditor Agreement between the was further amended in connection with the Bank, IAM III, IAM IV, and the parties to the BOLDER Graphics acquisition to include IAM V vendor take-back promissory notes (the “VTB as a party to the agreement and to establish the Noteholders”) issued in connection with the rights and priorities of the respective liens of acquisitions of Eclipse and Thistle, respectively, the Bank, IAM III, IAM IV, IAM V and the VTB which, among other things, establishes the Noteholders on the present and after-acquired rights and priorities of the respective liens of the property of BOLDER Graphics. Bank, IAM III, IAM IV and the VTB Noteholders on the present and after-acquired property of DCM, Eclipse and Thistle. On June 28, 2017, the The movement in credit facilities during the year are as follows: Balance - Beginning of year, net of transaction costs Changes from financing cash flows Proceeds from credit facilities Repayment of credit facilities Finance costs Total change from financing cash flows Non-cash movements Acquisitions (note 4) Amortization of transaction costs Balance - End of year December 31 2017 35,042 27,393 (14,709) (925) 46,801 8,476 655 55,932 $ $ $ $ $ 85 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)The scheduled principal repayments on the long-term debt are as follows: 2018 2019 2020 2021 2022 2023 and thereafter $ December 31 2017 8,797 5,671 27,815 6,494 6,757 1,705 $ 57,239 12. CONVERTIBLE DEBENTURES December 31 2017 December 31 2016 6.00% Convertible Debentures, maturing June 30, 2017, interest payable in June and December, convertible at 0.841 common shares per $1,000 of debenture Unamortized transaction costs Less: Current portion of Convertible debentures Convertible debentures $ $ $ — — — — — $ $ $ 11,129 (47) 11,082 11,082 — Upon maturity on June 30, 2017, DCM settled on June 30 and December 31. The 6.00% Convertible the 6.00% Convertible Debentures with a cash Debentures were convertible into common shares payment of $11,175 plus interest of $335 which of DCM (“Common Shares”) at the option of was financed with the net proceeds received from the holder prior to maturity or redemption at a the Rights Offering (as described in further detail conversion price of $1,220 per common share in Note 18 – Shares and warrants), the Private (prior to the Rights Offering, as defined in Note Placement (as described in further detail in 18 – Shares and warrants). As described in greater Note 18 – Shares and warrants) and the Bridging detail in DCM’s Annual Information Form for the Credit Facility (as described in further detail in year ended December 31, 2016 the conversion price Note 11 – Credit facilities). was subject to adjustment with the occurrence of The 6.00% Convertible Debentures with an aggregate principal amount of $11,175 (2016 – $11,175) bore interest at a rate of 6.00% per annum payable semi-annually, in arrears, certain events, of which the issuance of Rights (as defined in Note 18 – Shares and warrants) to shareholders to acquire Common Shares at less than 95% of the then current market price, defined 86 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017as the volume-weighted average trading price of Common Shares obtained by dividing the per Common Share for the 20 consecutive trading aggregate redemption price of the debentures days ending five days prior to the event (the to be redeemed, or the principal amount of “Current Market Price”), was included. Upon outstanding debentures which have matured, by closing of the Rights Offering, the conversion 95% of the Current Market Price of the Common price was adjusted to $1,189 per common share. Shares on the date fixed for redemption or the The holders forwent the conversion option into maturity date. DCM forewent the redemption Common Shares of DCM. option into Common Shares. On redemption or at maturity, DCM had, at its DCM capitalized transaction costs of $2,266 related option, and subject to regulatory approval and to this issuance and the amortization of these costs certain other conditions, the ability to satisfy its which was recognized over the term of the 6.00% obligation to pay the applicable redemption price Convertible Debentures. As at December 31, 2017, for the principal amount of the 6.00% Convertible $nil (2016 – $47) of these transaction costs Debentures by issuing and delivering that number remain unamortized. 87 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)13. INCOME TAXES Significant components of DCM’s deferred income tax assets and liabilities as of December 31, 2017 and 2016 are as follows: December 31, 2017 Assets Liabilities Net Pension obligations and other post-employment benefit plans $ 2,712 $ Unfavourable lease obligation Lease escalation Benefit of income tax loss and other carry-forwards Deferred finance fees Deductible reserves Tax credit carry-forwards Property, plant and equipment Intangible assets Promissory notes Other Total deferred income tax assets (liabilities) December 31, 2016 Pension obligations and other post-employment benefit plans Unfavourable lease obligation Lease escalation Benefit of income tax loss and other carry-forwards $ $ Deferred finance fees Deductible reserves Tax credit carry-forwards Convertible debentures Property, plant and equipment Intangible assets Other 282 492 2,108 299 1,581 348 — — — — $ — — — — — — — (1,349) (1,552) (97) (11) 2,712 282 492 2,108 299 1,581 348 (1,349) (1,552) (97) (11) 7,822 $ (3,009) $ 4,813 Assets Liabilities Net 2,414 $ 207 344 1,619 149 607 238 — — — — $ — — — — — — — (12) (840) (867) (20) 2,414 207 344 1,619 149 607 238 (12) (840) (867) (20) Total deferred income tax assets (liabilities) $ 5,578 $ (1,739) $ 3,839 As at December 31, 2017, DCM recorded net deferred tax liabilities as DCM does not have a legally income tax assets of $6,108 (2016 – $3,839) and enforceable right to offset these amounts and the net deferred income tax liabilities of $1,295 deferred income tax assets and deferred income (2016 – $Nil) in its consolidated statements of tax liabilities are not related to income taxes levied financial position. The deferred income tax assets by the same taxation authority. have not been offset against the deferred income 88 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017Changes in deferred income tax assets and liabilities during the years ended December 31, 2017 and 2016 are as follows: Balance at in business in statement comprehensive Balance at January 1, 2017 Other combinations operations loss December 31, 2017 Acquired Recognized Recognized in $ 2,414 $ — $ — $ (92) $ 390 $ 2,712 207 344 1,619 149 607 238 — — — 99 — 110 — — 8 — 397 — 75 148 481 51 577 — — — — — — — 282 492 2,108 299 1,581 348 5,578 $ 209 $ 405 $ 1,240 $ 390 $ 7,822 (12) $ — $ — $ 12 $ — $ — (840) (867) — (20) — — — — (587) (1,794) (84) — 78 1,109 (13) 9 — — — — (1,349) (1,552) (97) (11) (1,739) $ — $ (2,465) $ 1,195 $ — $ (3,009) 3,839 $ 209 $ (2,060) $ 2,435 $ 390 $ 4,813 $ $ $ $ Pension obligations and other post-employment benefit plans Unfavourable lease obligation Lease escalation Benefit of income tax loss and other carry-forwards Deferred finance fees Deductible reserves Tax credit carry-forwards Convertible debentures Property, plant and equipment Intangible assets Promissory notes Other Deferred income tax assets (liabilities), net 89 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)Balance at January 1, 2016 Recognized Recognized in in statement comprehensive Balance at Other operations loss December 31, 2016 Pension obligations and other post-employment benefit plans $ 2,649 $ — $ (316) $ 81 $ 2,414 Unfavourable lease obligation Lease escalation Benefit of income tax loss and other carry-forwards Deferred finance fees Deductible reserves Tax credit carry-forwards Convertible debentures Property, plant and equipment Intangible assets Benefit of other carry-forwards Other Deferred income tax assets (liabilities), net $ $ $ $ 216 200 — 130 1,166 125 4,486 $ (34) $ (1,083) (1,321) (33) (21) (2,492) $ — — — — — 113 113 — — — — 2 2 (9) 144 1,619 19 (559) — 898 22 243 454 33 (1) $ $ $ $ $ 751 $ — — — — — — 81 — — — — — — 207 344 1,619 149 607 238 5,578 (12) (840) (867) — (20) $ $ $ (1,739) 1,994 $ 115 $ 1,649 $ 81 $ 3,839 The realization of the deferred income In the ordinary course of business, DCM and its tax assets is dependent on the generation of subsidiary and predecessors have entered into future taxable income during the years in which transactions where the ultimate tax determination those temporary differences become deductible. may be uncertain. These uncertainties require Based on management’s projections of future management to make estimates of the ultimate taxable income and tax planning strategies, tax liabilities and, accordingly, the provision management expects to realize these net deferred for income taxes. Since there are inherent income tax assets in advance of expiry. As at uncertainties, additional tax liabilities may result December 31, 2017, DCM has non-capital tax loss if tax matters are ultimately resolved or settled at carry-forwards of $8,404 (2016 – $6,434). The amounts different from those estimates. non-capital tax loss carry-forwards expire in varying amounts from 2033 to 2037. 90 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017The major components of income tax (recovery) expense for the years ended December 31, 2017 and 2016 are set out below: Current income tax expense: Current tax on profits for the year Recovery of taxes for prior periods Adjustment to current income tax on filing Total current income tax expense Deferred income tax recovery: Origination and reversal of temporary differences described above Adjustment to deferred income tax on filing Total deferred income tax recovery Total income tax recovery for the year For the year ended December 31 2017 For the year ended December 31 2016 $ $ $ $ $ 725 $ — — 725 (2,435) — (2,435) (1,710) $ $ $ $ 397 (195) 1,370 1,572 (279) (1,370) (1,649) (77) For the year ended December 31, 2017, deferred The following are reconciliations of income tax income tax recovery on the recognition of actuarial (recovery) expense calculated at the statutory rate gains (losses) related to DCM’s defined benefit of Canadian corporate income taxes below for the plans of $390 (2016 – $81) were recognized in the years ended December 31, 2017 and 2016. statements of comprehensive loss. For the year ended December 31 2017 For the year ended December 31 2016 Loss before income taxes $ (7,915) $ (32,184) Expected income tax recovery calculated at statutory income tax rate (1) (2,065) (8,413) Adjustment to income taxes resulting from: Difference between Canadian rates and rates applicable to subsidiary in another country or rates applicable to wholly owned Canadian subsidiaries Impairment of goodwill Non-deductible expenses and other items 116 — 239 Total income tax recovery for the year $ (1,710) $ 124 8,122 90 (77) (1) The calculation of the current income tax is based on a combined federal and provincial statutory income tax rate of 26.09% (2016 – 26.14%). The current tax rate for the current year is 0.05% is realized or the liability is settled. Deferred income lower than 2016 due to the effect of changes in tax assets and liabilities have been measured using statutory tax rates and the allocation of taxable an expected average combined statutory income income between provinces. Deferred income tax tax rate of 26.21% (2016 – 25.28%) based on the tax assets and liabilities are measured at tax rates that rates in years when the temporary differences are are expected to apply to the period when the asset expected to reverse. 91 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)14. OTHER NON-CURRENT LIABILITIES Deferred lease inducement Lease escalation liabilities Bonuses payable Loan payable Less: Current portion of other non-current liabilities December 31 2017 December 31 2016 $ $ $ 1,082 $ 1,888 983 — 3,953 (540) 3,413 $ $ 793 1,321 — 151 2,265 (574) 1,691 The current portion of other non-current liabilities and generally require it to pay a portion of the is included in trade payables and accrued liabilities. real estate taxes and other property operating In connection with the acquisition on February 22, 2017 of Thistle, DCM assumed certain liabilities related to bonuses payable to former employees of the company which will be expense. Payments made under operating leases are recognized in the consolidated statements of operations on a straight-line basis over the term of the lease, expiring in 2018 to 2028. paid in equal monthly payments until the end of During the year ended December 31, 2015, October 2020. The liability was recorded at fair DCM entered into a loan payable agreement for value based on discounting using a discount rate licensed software in the amount of $368. The loan of 10%. The fair value of the future payments of had an interest rate of 2.90% and repayments of $33 per month as of the closing date was $1,226 $19 per month were made over 20 months ending of which $293 was classified as current liabilities in August 2017. As at December 31, 2017, there was in trade payables and accrued liabilities. no remaining amount outstanding. DCM’s operations are conducted in leased properties. DCM’s leases generally provide for minimum rent and may also include escalation clauses, guarantees and certain other restrictions, 92 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 201715. PENSION OBLIGATIONS, ASSETS AND EXPENSES Effective January 1, 2008, no further service credits funding will be applied to DCM’s future will accrue under the defined benefit provision of minimum funding requirements for the defined the DATA Communications Management Pension benefit provision of the DATA Communications Plan. Annual actuarial valuations are required Management Pension Plan. on the defined benefit provision of the DATA Communications Management Pension Plan until the solvency deficiency is reduced to a level under which the applicable pension regulations allow the valuations to be completed every three years. At January 1, 2014, the solvency deficiency had reduced to a level such that actuarial valuations are to be completed every three years. Based on those valuations, the annual cash contributions in respect of the defined benefit provision of the DATA Communications Management Pension Plan are dependent on the plan’s investment performance and changes in long-term interest rates, estimates of the price of annuities, and other elements of pension plan experience such as demographic changes and administration expenses, among others. Under applicable pension regulations, the plan’s solvency deficiency can be funded over a maximum period of five years. During the year ended December 31, 2017, DCM engaged actuaries to complete an updated actuarial valuation of the defined benefit provision of the DATA Communications Management Pension Plan, which confirmed that, as at January 1, 2017, the defined benefit provision of the DATA Communications Management Pension Plan had a solvency deficit. Based upon the January 1, 2017 actuarial report, DCM’s annual minimum funding obligation for the defined benefit provision of the DATA Communications Management Pension Plan for 2017 decreased from $1,311 to $647. As of December 31, 2017, DCM has exceeded its minimum required funding requirements for the defined benefit provision of the DATA Communications Management Pension Plan for 2017 by $227. This excess In May 2017 the Ontario Ministry of Finance announced major reforms to the funding framework for defined benefit pension plans. The proposed new framework is based on an enhanced going-concern approach, whereby solvency funding requirements would be eliminated except for plans that are less than 85% funded. The regulations supporting the transitional measures which assist plan sponsors prior to the full reforms being implemented were enacted into legislation in June 2017. The new regulation allows plan administrators whose next filed valuation report is dated on or after December 31, 2016 and before December 31, 2017 to elect to defer the start of new solvency special payments by up to 24 months instead of the usual 12 months. DCM has elected to defer the start of new solvency special payments by 24 months and intends on completing an updated actuarial valuation of the defined benefit provision of the DATA Communications Management Pension Plan as at January 1, 2018. DCM expects that its future minimum funding requirements for the defined benefit provision of the DATA Communications Management Pension Plan for 2018 will be approximately $420, after adjusting for the excess funding from 2017, and for 2019 will be approximately $1,353. The January 1, 2018 actuarial valuation report for the defined benefit provision of the DATA Communications Management Pension Plan will not be completed until partway through 2018 and the funding reforms have not been finalized, therefore, the effect on DCM’s minimum funding requirements for 2018 and forward is not determinable at this time. 93 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)The following is a summary of DCM’s net pension obligations for the defined benefit provision of the DATA Communications Management Pension Plan and SERP: Present value of funded obligations Less: Fair value of plan assets Surplus of funded plans Present value of unfunded obligations Pension obligations, net December 31 2017 December 31 2016 $ $ 62,638 $ (63,398) (760) 8,133 7,373 $ 60,559 (62,148) (1,589) 8,340 6,751 CHANGE IN THE PRESENT VALUE OF DEFINED BENEFIT PLAN OBLIGATIONS The following is a summary of the change in DCM’s net pension obligations for the defined benefit provision of the DATA Communications Management Pension Plan and SERP: Funded Unfunded December 31 2017 Balance – Beginning of year $ 60,559 $ 8,340 $ Interest expense Benefits paid Re-measurements: – Loss from change in demographic assumptions – Loss from change in financial assumptions – Experience (gains) losses Balance – End of year Balance – Beginning of year Interest expense Benefits paid Re-measurements: – Gain from change in financial assumptions – Experience (gains) losses 2,293 (3,661) 265 3,376 (194) 297 (541) — 237 (200) 68,899 2,590 (4,202) 265 3,613 (394) $ $ 62,638 $ 8,133 $ 70,771 Funded Unfunded December 31 2016 59,929 $ 8,354 $ 2,412 (3,531) 1,776 (27) 315 (567) 162 76 68,283 2,727 (4,098) 1,938 49 Balance – End of year $ 60,559 $ 8,340 $ 68,899 94 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017CHANGE IN THE FAIR VALUE OF PLAN ASSETS The following is a summary of the change in the fair value of the plan assets for the defined benefit provision of the DATA Communications Management Pension Plan and SERP: Funded Unfunded December 31 2017 Balance – Beginning of year $ 62,148 $ Interest income Employer contributions Benefits paid Administrative expenses paid from plan assets Re-measurements: – Return on plan assets, excluding amounts included in interest income Balance – End of year Balance – Beginning of year Interest income Employer contributions Refund of over contribution Benefits paid Administrative expenses paid from plan assets Re-measurements: – Return on plan assets, excluding amounts included in interest income $ $ 2,364 874 (3,661) (300) 1,973 63,398 $ 60,699 $ 2,463 1,311 — (3,531) (325) 1,531 Balance – End of year $ 62,148 $ Funded Unfunded $ 62,148 2,364 1,415 (4,202) (300) 1,973 $ 63,398 December 31 2016 $ 60,699 — — 541 (541) — — — — — 567 — (567) — — — $ 2,463 1,878 — (4,098) (325) 1,531 62,148 95 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)DATA COMMUNICATIONS MANAGEMENT PENSION PLAN ASSET COMPOSITION The following is a summary of the composition in plan assets of the defined benefit provision of the DATA Communications Management Pension Plan: For the year ended December 31, 2017 For the year ended December 31, 2016 Quoted Percentage of plan assets Domestic equities Foreign equities Equity instruments Short and mid-term bonds Long-term bonds Commercial mortgages Debt instruments Cash and cash equivalents Total $ $ $ $ $ $ 4,413 5,185 9,598 7,438 42,937 3,196 53,571 229 63,398 Percentage of plan assets $ Quoted 4,660 5,591 15% $ 10,251 16% $ 9,652 38,208 3,443 84% $ 51,303 1% $ 594 100% $ 62,148 83% 1% 100% ELEMENTS OF DEFINED BENEFIT EXPENSE RECOGNIZED IN THE STATEMENTS OF OPERATIONS The following is a summary of the expense recognized for the defined benefit provision of the DATA Communications Management Pension Plan and SERP: Funded Unfunded December 31 2017 300 $ — $ 300 2,293 (2,364) (71) 297 — 297 229 $ 297 $ 2,590 (2,364) 226 526 Funded Unfunded December 31 2016 325 $ — $ 2,412 (2,463) (51) 315 — 315 274 $ 315 $ 325 2,727 (2,463) 264 589 $ $ $ $ Administration expenses Interest expense Interest income Total net interest expense Defined benefit expense recognized Administration expenses Interest expense Interest income Total net interest expense Defined benefit expense recognized 96 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017AMOUNTS RECOGNIZED IN THE STATEMENTS OF COMPREHENSIVE LOSS The following is a summary of the amounts recognized in the statement of comprehensive loss for the defined benefit provision of the DATA Communications Management Pension Plan and SERP: Funded Unfunded December 31 2017 Re-measurements: – Loss from change in demographic assumptions $ 265 $ — $ – Loss from change in financial assumptions – Experience (gains) losses – Return on plan assets, excluding amounts included in interest income Deferred income tax effect Defined benefit expense recognized Re-measurements: – Gain from change in financial assumptions – Experience (gains) losses – Return on plan assets, excluding amounts included in interest income Deferred income tax effect Defined benefit recovery recognized $ $ $ 3,376 (194) (1,973) 1,474 (385) 237 (200) — 37 (10) 1,089 $ 27 $ 265 3,613 (394) (1,973) 1,511 (395) 1,116 Funded Unfunded December 31 2016 1,776 $ (27) (1,531) 218 (57) $ 162 76 — 238 (62) 161 $ 176 $ 1,938 49 (1,531) 456 (119) 337 DCM manages its pension plans by meeting with pension assets relative to the market. Assumptions an actuarial consultant and the fund managers on a are reviewed on an ongoing basis and adjustments regular basis and reviews periodic reports outlining are made whenever management believes that changes in the plan liabilities and the return on conditions have materially changed. 97 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)SIGNIFICANT ACTUARIAL ASSUMPTIONS ADOPTED IN MEASURING DCM’S DEFINED BENEFIT OBLIGATIONS DATA Communications Management Pension Plan Discount rate Rate of compensation increase SERP Discount rate December 31 2017 December 31 2016 3.50% 3.00% 3.90% 3.00% 3.40% 3.70% DCM decreased the discount rate that was used Assumptions regarding future mortality are set to calculate its defined benefit obligations as at based on actuarial advice in accordance with December 31, 2017 to better reflect current Canadian published statistics and experience in Canada. These economic conditions and long-term interest assumptions translate into an average life expectancy rates. The salary increase assumption remained in years for a pensioner retiring at age 65: unchanged at December 31, 2017. Retiring at the end of the reporting period: Male Female Retiring in 25 years after the end of the reporting period: Male Female December 31 2017 December 31 2016 21.7 24.1 23.0 25.3 21.6 24.1 22.3 25.3 Through its defined benefit plans, DCM is exposed to provision of the DATA Communications Management a number of risks, the most significant of which are Pension Plan currently holds a small proportion of detailed below: ASSET VOLATILITY For a defined benefit pension plan, fluctuations in the value of plan assets are assessed in the context of fluctuations in the plan liabilities. The plan liabilities are calculated using a discount rate set with reference to high quality corporate bond yields. As discount rates change, the value of the plan liabilities will fluctuate, if the growth of plan liabilities exceeds that of plan assets a deficit will result. The defined benefit equities, 15% of total assets, which are expected to outperform corporate bonds in the long-term while providing volatility and risk in the short-term. The defined benefit provision of the DATA Communications Management Pension Plan’s investment time horizon and financial position are key inputs in deciding on the proportion of equities held. The defined benefit provision of the DATA Communications Management Pension Plan is closed to new membership, which means the investment time horizon is shrinking as the plan matures. In 98 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 20172014, the derisking strategy was reviewed against salaries of plan participants, so salary increases the investment time horizon and the financial of the plan participants greater than assumed will position of the defined benefit provision of the increase plan liabilities. DATA Communications Management Pension Plan. With a significant improvement in the financial LIFE EXPECTANCY position, the defined benefit provision of the DATA Communications Management Pension Plan asset mix was moved to 15% equities and 85% bonds, with the bond portfolio being adopted with liability cash flow matching characteristics. There were no significant The majority of the plans’ obligations provide benefits for the life of the member, so increases in life expectancy will result in an increase in the plans’ liabilities. changes in the investment strategy during 2017. The sensitivity of the defined benefit pension CHANGES IN BOND YIELDS A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plan’s bond holdings. SALARY RISK The present value of the pension benefit obligations is calculated by reference to the future obligations for the DATA Communications Management Pension Plan and SERP to changes in assumptions at December 31, 2017 and at December 31, 2016 are set out below. The effects on each plan of a change in an assumption are weighted proportionately to the total plan obligations to determine the total impact for each assumption presented. Impact on defined benefit obligations December 31, 2017 Change in assumption Increase in assumption Decrease in assumption Discount rate Salary growth rate 0.25% $ 0.25% (2,343) $ 486 2,470 (572) Life expectancy $ 1,834 $ (1,869) Increase by 1 year in assumption Decrease by 1 year in assumption Impact on defined benefit obligations December 31, 2016 Change in assumption Increase in assumption Decrease in assumption 0.25% 0.25% $ $ (2,410) $ 754 2,545 (775) Increase by 1 year Decrease by 1 year in assumption in assumption 1,816 $ (1,857) Discount rate Salary growth rate Life expectancy 99 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)Each sensitivity analysis disclosed in this note is obligations calculated with the projected unit based on changing one assumption while holding credit method at the end of the reporting period) all other assumptions constant. In practice, this has been applied as for calculating the liability is unlikely to occur and changes in some of the recognized in the statements of financial position. assumptions may be correlated. When calculating the sensitivity of the defined benefit obligations to variations in significant actuarial assumptions, the same method (present value of the defined benefit The weighted average duration of the defined benefit obligations is 13.6 years (2016 – 14.4 years). Expected maturity analysis of undiscounted pension benefits: Less than Between Between Between a year 1 to 2 years 2 to 5 years 5 to 10 years At December 31, 2017 At December 31, 2016 $ $ 3,118 2,893 $ $ 6,566 6,106 $ $ 6,847 6,762 $ $ 18,650 18,684 The annual pension expense for the plan, is based on amounts contributed based defined contribution provision of the DATA on a percentage of wages of unionized employees Communications Management Pension Plan is who are covered by the respective collective based on the amounts contributed in respect of bargaining agreements, all of whom are employed eligible employees. The annual pension expense at DCM facilities located in the Province for the SRDF and Unifor Pension & Benefit Plans, of Québec and Ontario. which are accounted for as a defined contribution DCM’s pension expense related to DCM’s defined contribution plans are as follows: Defined contribution plan Defined benefit multi-employer plans $ $ 1,349 670 $ $ 1,493 570 For the year ended December 31 2017 For the year ended December 31 2016 DCM expects that, in 2018, contributions to be approximately $1,306, contributions to the SERP the defined benefit provision of the DATA will be approximately $529, contributions to the Communications Management Pension Plan SRDF will be approximately $535 and contributions will be approximately $647, contributions to to the Unifor Pension & Benefit Plans will be the defined contribution provision of the DATA approximately $121. Communications Management Pension Plan will 100 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017 16. OTHER POST-EMPLOYMENT BENEFIT PLANS Costs related to the DCM OPEB Plans and the The following summarizes the change in the DCM OPEB LTD Plan, are actuarially determined obligations related to the DCM OPEB Plans and using the projected unit credit method, the DCM OPEB LTD Plan: actuarial present value of all future projected benefits determined as at the valuation date and management’s best assumptions. December 31 2017 December 31 2016 Balance – Beginning of year Current service cost Interest expense Benefits paid Re-measurements: – Loss (gain) from change in demographic assumptions – Loss from change in financial assumptions – Experience gains Balance – End of year $ $ 2,510 $ 250 103 (220) 299 89 — 3,031 $ 2,563 289 99 (203) (250) 58 (46) 2,510 ELEMENTS OF OTHER POST EMPLOYMENT BENEFIT EXPENSE RECOGNIZED IN THE STATEMENTS OF OPERATIONS The following summarizes the elements of the benefit expense related to the DCM OPEB Plans and DCM OPEB LTD Plan: Current service cost Interest expense Re-measurements: – Experience gains Benefit expense recognized December 31 2017 December 31 2016 $ $ $ 250 103 398 751 $ 289 99 (91) 297 101 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)AMOUNTS RECOGNIZED IN THE STATEMENTS OF COMPREHENSIVE LOSS The following summarizes the amounts recognized in the statement of comprehensive loss related to the DCM OPEB Plans and DCM OPEB LTD Plan: Re-measurements: – Gain from change in demographic assumptions – Loss from change in financial assumptions – Experience (gains) losses Deferred income tax effect Benefit recovery recognized December 31 2017 December 31 2016 $ $ $ — 36 (46) (10) 5 (5) $ (207) 40 20 (147) 38 (109) SIGNIFICANT ACTUARIAL ASSUMPTIONS ADOPTED IN MEASURING DCM’S OTHER POST-EMPLOYMENT BENEFIT OBLIGATIONS DCM OPEB Plans Discount rate Health care cost trend rate – Initial Health care cost trend rate declines by 2028 (2016 – 2028) DCM OPEB LTD Plan Discount rate Health care cost trend rate – Initial Health care cost trend rate declines by 2028 (2016 – 2028) December 31 2017 December 31 2016 3.50% 6.48% 4.50% 3.90% 6.61% 4.50% December 31 2017 December 31 2016 3.50% 5.86% 4.50% 3.90% 6.00% 4.50% 102 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017SENSITIVITY ANALYSIS ON OTHER POST-EMPLOYMENT BENEFIT OBLIGATIONS The effects on the DCM OPEB Plans and DCM OPEB LTD Plan of a change in an assumption are weighted proportionately to the total plan obligations to determine the total impact for each assumption presented. At December 31, 2017 Discount rate Health care cost trend rates Impact on other post-employment benefit obligations Change in assumption Increase in assumption Decrease in assumption 0.25% $ 1.00% (56) $ 208 58 (184) Increase by 1 year in assumption Decrease by 1 year in assumption Life expectancy $ 70 $ (67) At December 31, 2016 Discount rate Health care cost trend rates Life expectancy Impact on other post-employment benefit obligations Change in assumption Increase in assumption Decrease in assumption 0.25% 1.00% $ $ $ (46) 165 49 (145) Increase by 1 year Decrease by 1 year in assumption in assumption 62 $ (61) Expected maturity analysis of undiscounted other post-employment benefits: Less than Between Between Between a year 1 to 2 years 2 to 5 years 5 to 10 years At December 31, 2017 At December 31, 2016 $ $ 307 267 $ $ 555 450 $ $ 517 427 $ $ 994 887 DCM expects that, in 2018, contributions to its DCM OPEB Plans and DCM OPEB LTD Plan will be approximately $307. 103 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)17. FINANCIAL INSTRUMENTS DCM’s financial instruments consist of cash and The fair value for other non-derivative financial cash equivalents, restricted cash, trade receivables, instruments such as cash and cash equivalents, bank overdraft, trade payables and accrued trade receivables, bank overdraft, trade payables liabilities, loan payable, bonuses payable, credit and accrued liabilities, and loan payable facilities, promissory notes, restricted share units approximates their carrying value because of the and convertible debentures, as indicated in DCM’s short-term maturity of these instruments. The fair statements of consolidated financial position value of restricted cash approximates its carrying as at December 31, 2017 and 2016. DCM does not value because it is a deposit held with a Canadian enter into financial instruments for trading or chartered bank. Credit facilities, bonuses payable speculative purposes. and promissory notes are initially recognized as FAIR VALUE OF FINANCIAL INSTRUMENTS to derive its fair value and are then measured the amount required to be paid less a discount DCM’s non-derivative financial instruments are comprised of cash and cash equivalents, trade receivables, restricted cash, bank overdraft, trade payables and accrued liabilities, loan payable, bonuses payable, credit facilities, promissory notes restricted share units and convertible debentures. Non-derivative financial instruments are recognized initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition non- derivative financial instruments are measured as described below. at amortized costs using the effective interest method, less any impairment losses. DCM’s convertible debentures contained a host contract and an embedded derivative. The host contract (the debt portion of the convertible debenture) was measured as the residual of the proceeds after deducting the fair value of the embedded derivative, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method. CATEGORIES OF FINANCIAL ASSETS AND LIABILITIES The carrying values and the fair values of DCM’s Non-derivative financial instruments at fair value financial instruments are classified into the through the profit and loss include restricted share categories listed below as at December 31, 2017 units which are recorded as a liability at fair value and as at December 31, 2016. on the grant date and are subsequently adjusted for changes in the price of DCM’s common shares through the consolidated statements of operations. 104 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017December 31, 2017 Loans and receivables (1) Financial liabilities at amortized cost (2) Financial liabilities FVTPL (3) December 31, 2016 Loans and receivables (1) Financial liabilities at amortized cost (2) Financial liabilities FVTPL (3) $ $ Carrying Value Fair Value 41,708 $ 99,504 90 41,708 99,504 90 Carrying Value Fair Value 31,126 $ 71,427 17 31,126 70,914 17 (1) Includes cash and cash equivalents, restricted cash and trade receivables. (2) Includes bank overdraft, trade payables and accrued liabilities (excluding financial liabilities related to commodity taxes that are not contractual and that arise as a result of statutory requirements imposed by governments and therefore do not meet the definition of financial assets or financial liabilities), loan payable, bonuses payable, credit facilities, promissory notes and convertible debentures. (3) Includes restricted share units. Bonuses payable, credit facilities, promissory The cash equivalents consisted mainly of notes, convertible debentures and restricted share short-term investments, such as money units are categorized as level 2 inputs in the fair market deposits. DCM has deposited the cash value hierarchy given their valuations include equivalents with Canadian Schedule 1 banks, inputs other than quoted prices for which all from which management believes the risk of significant inputs are observable, either directly or loss to be remote. indirectly. There were no transfers between levels 1, 2 or 3 during the year. RISKS ARISING FROM FINANCIAL INSTRUMENTS DCM grants credit to customers in the normal course of business. DCM typically does not require collateral or other security from customers; however, credit evaluations are performed prior to the initial granting of credit terms when DCM is exposed to various risks as it relates warranted and periodically thereafter. Normal to financial instruments. These risks and the credit terms for amounts due from customers processes for managing the risk are set out below. call for payment within 0 to 90 days. CREDIT RISK DCM has trade receivables from clients engaged in various industries including Credit risk is the risk of an unexpected loss if financial institutions, insurance, healthcare, a customer or counterparty to a financial lottery and gaming, retailing, not-for-profit, instrument fails to meet its contractual obligations. energy and governmental agencies that are not Financial instruments that potentially subjected concentrated in any specific geographic area. DCM to credit risk consisted of cash and cash DCM does not believe that any single industry equivalents and trade receivables. The carrying or geographic region represents significant amount of assets included in the consolidated credit risk. Credit risk concentration with statements of financial position represents the respect to trade receivables is mitigated by maximum credit exposure. DCM’s large client base. 105 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)Based on historical experience, DCM records required, to recognize that risk. When collection a reserve for estimated uncollectible amounts. efforts have been reasonably exhausted, specific Management assesses the adequacy of this balances are written off. As at December 31, 2017, reserve quarterly, taking into account historical 7.0% (or $2,911), of trade receivables were more experience, current collection trends, the age of than 90 days old, an increase from 3.7% (or $1,102), receivables and, when warranted and available, of trade receivables that were more than 90 days the financial condition of specific counterparties. old at December 31, 2016. The movement in DCM’s Management focuses on trade receivables allowance for doubtful accounts for 2017 and 2016 outstanding for more than 90 days in assessing are as follows: DCM’s credit risk and records a reserve, when For the year ended December 31 2017 For the year ended December 31 2016 $ $ 440 (234) 206 $ $ 526 (86) 440 Balance – Beginning of period Provisions and revisions Balance – End of period LIQUIDITY RISK Liquidity risk is the risk that DCM may encounter of additional available credit less letters of credit difficulties in meeting obligations associated granted of $1,426 under the Bank Credit Facility. with financial liabilities as they become due. As at December 31, 2017, DCM had access to $7,981 The contractual undiscounted cash flows of DCM’s significant financial liabilities are as follows: December 31, 2017 Bank overdraft Trade payables and accrued liabilities Bonuses payable (1) Credit facilities (2) Promissory notes (3) Less than a year 1 to 3 years 4 years and greater Total $ 2,868 $ — $ — $ 2,868 34,306 400 11,911 4,561 — 733 44,699 3,078 — — 8,852 — 34,306 1,133 65,462 7,639 Total $ 54,046 $ 48,510 $ 8,852 $ 111,408 Less than a year 1 to 3 years 4 years and greater 27,304 $ 151 7,866 11,510 $ — — 23,407 — $ — — 11,952 — Total 27,304 151 43,225 11,510 46,831 $ 23,407 $ 11,952 $ 82,190 $ $ December 31, 2016 Trade payables and accrued liabilities Loan payable Credit facilities (2) Convertible debentures (4) Total 106 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017 (1) Bonuses payable to former employees of Thistle assumed in connection with DCM’s acquisition of Thistle on February 22, 2017. Monthly principal payments of $33 ending October 31 2020. (2) Credit facilities at December 31, 2017 subject to floating interest rates consisting of the Bank Credit Facility, expiring on March 31, 2020 and the Bridging Credit Facility expiring on June 28, 2018. As at December 31, 2017, the outstanding balances totaled $25,247 and bore interest at an average floating rate of 3.95% per annum and of 13.50% per annum. The amounts at December 31, 2017 include estimated interest totaling $1,095 for 2018, $859 for 2019 and $143 for 2020. The estimated interest was calculated based on the total borrowings outstanding during the period and the average annual floating interest rate in effect as at December 31, 2016. Credit facilities at December 31, 2017 subject to fixed interest rates consisting of the IAM III Credit Facility, expiring on October 15, 2022, the IAM IV Credit Facility, expiring on March 10, 2023 and the IAM V Credit Facility expiring on May 15, 2023. As at December 31, 2017, the outstanding balances totaled $31,992 and bore interest at a fixed rate of 6.1% per annum, of 6.95% per annum and of 6.95% per annum, respectively. Monthly blended principal and interest payments of $96, of $422 and of $91, respectively. Credit facilities at December 31, 2016 subject to floating interest rates consisting of the Bank Credit Facility, expiring on March 10, 2019. As at December 31, 2016, the outstanding balance totaled $10,434 and bore interest at an average floating rate of 3.45% per annum. The outstanding balance will be reduced by monthly principal repayments of $208 ending February 1, 2018, a principal payment of $8 on May 31, 2018 and principal repayment of $7,514 on March 10, 2019. The amounts at December 31, 2016 include estimated interest totaling $320 for 2017, $261 for 2018 and $44 for 2019. The estimated interest was calculated based on the total borrowings outstanding during the period and the average annual floating interest rate in effect as at December 31, 2016. Credit facilities at December 31, 2016 subject to fixed interest rates consisting of the IAM IV Credit Facility, expiring on March 10, 2023. As at December 31, 2016, the outstanding balance totaled $25,611 and bore interest at a fixed rate of 6.95% per annum. Monthly blended principal and interest payments of $422. (3) Promissory notes related to the acquisitions completed during the year. Non interest bearing promissory notes related to the acquisition of Eclipse totaling $4,566 and payable in two installments of $2,283 due on February 28, 2018 and February 28, 2019, respectively, and related to the acquisition of Thistle totaling $1,913 and payable in monthly installments of $137 ending February 28, 2019. Interest bearing promissory notes related to the acquisition of BOLDER Graphics totaling $1,160 and bore interest at a fixed rate of 6.0% per annum. Monthly blended principal and interest payments of $58, beginning February 28, 2018 and ending September 30, 2019. (4) 6.00% Convertible Debentures, matured on June 30, 2017, convertible at 0.8196 common shares per $1,000 of debenture. The aggregate principal amount totaled $11,175 as at December 31, 2016. The amounts at December 31, 2016 include interest totaling $335 for 2017. DCM also has significant contractual obligations provisions as a result of on-going productivity in the form of operating leases (note 21), as well improvement initiatives, payment of income tax as contingent obligations in the form of letters of liabilities, contributions to its pension plans, credit. DCM believes that the currently projected maintenance capital expenditures, and interest cash flow from operations, cash on hand and and scheduled repayments of borrowings under anticipated lower operating costs resulting its credit facilities and scheduled repayments of from existing restructuring initiatives will be promissory notes. sufficient to fund its currently projected operating requirements, including expenditures related to its growth strategy, payments associated with 107 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)MARKET RISK INTEREST RATE RISK Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the financial instrument will fluctuate due to changes in market interest rates. Interest rate risk arises from interest bearing financial assets and liabilities. Non-derivative interest bearing assets are primarily short term liquid assets. DCM’s interest rate risk arises from credit facilities issuances at floating interest rates. At December 31, 2017, $25,247 of DCM’s indebtedness outstanding was subject to floating interest rates of 3.95% per annum and 13.50% per annum; a 1% increase/decrease in interest rates would have resulted in an increase/decrease in profit or loss and comprehensive loss by $217 for the year ended December 31, 2017 (2016 – $171), respectively. At December 31, 2017, $31,992 of DCM’s indebtedness outstanding was subject to a fixed interest rate of 6.1% per annum and of 6.95% per annum. Interest bearing promissory notes related to the acquisition of BOLDER Graphics totaling $1.2 million was subject to a fixed rate of 6.0% per annum. CURRENCY RISK 18. SHARES AND WARRANTS DCM is authorized to issue an unlimited number of common shares. The common shares have a stated capital of one dollar. Each common share is entitled to one vote at any meeting of shareholders. Each holder of the common shares will be entitled to receive dividends if, as and when declared by the Board. In the event of the liquidation, dissolution, winding up of DCM or other distribution of assets of DCM among its shareholders for the purpose of winding up its affairs, the holders of the common shares will, subject to the rights of the holders of any other class of shares of DCM entitled to receive assets of DCM upon such a distribution in priority to or concurrently with the holders of the common shares, be entitled to participate in the distribution. Such distribution will be made in equal amounts per share on all the common shares at the time outstanding without preference or distinction. On July 4, 2016, DCM consolidated its issued and outstanding common shares on the basis of one post-consolidation common share for each 100 pre-consolidation common shares (the “Share Consolidation”). As a result, the total number of DCM’s issued and outstanding common shares were consolidated to 11,975,053 on that date. No fractional common shares were issued, and Currency risk is the risk that the fair value any fractional share entitlements resulting of future cash flows arising from a financial from the Share Consolidation were rounded instrument will fluctuate because of changes in up to the nearest whole number of common foreign currency exchange rates. In the normal shares. All references to common shares, course of business, DCM does not have significant restricted share units and stock options in these foreign exchange transactions and, accordingly, consolidated financial statements reflect the Share the amounts and currency risk are not expected Consolidation, unless specified otherwise. to have adverse material impact on the operations of DCM. Management considers the currency risk to be low and does not hedge its currency risk and therefore sensitivity analysis is not presented. 108 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017The following summarizes the change in number of issued and outstanding common shares during the periods below: Balance – January 1, 2017 Shares issued - February 22, 2017 (note 4) Shares issued - May 5, 2017 Shares issued - June 23, 2017 Shares issued - June 28, 2017 Shares issued - July 13, 2017 Shares issued - November 10, 2017 (note 4) Number of Common shares 11,975,053 $ 1,278,708 6,502 3,312,368 2,690,604 71,500 704,424 Amount 237,432 2,850 15 4,452 3,421 78 748 Balance – December 31, 2017 20,039,159 $ 248,996 Balance – January 1, 2016 Shares issued - May 31, 2016 Shares issued - July 4, 2016 Balance – December 31, 2016 Number of Common shares 9,987,528 $ 1,678,567 308,958 11,975,053 $ Amount 234,782 2,280 370 237,432 In connection with the acquisition of Thistle and gross proceeds were used to finance, in part, the Eclipse on February 22, 2017, DCM issued a total settlement of the 6.00% Convertible Debentures of 1,278,708 Common Shares to the vendors of the which matured on June 30, 2017. Under the terms companies as partial consideration for the fair of the Rights Offering, each eligible shareholder value of the net assets acquired on the Closing (“Eligible Holder”) on record as of May 31, 2017 Date for $2,858, net of $11 in issuance costs and (the “Record Date”) received one right (“Right”) increased by a deferred income tax asset of $3. for each Common Share held as of the Record Date. On May 5, 2017, 6,502 Common Shares were issued in connection with the net settlement of 19,505 stock options at an exercise price of $1.50 per Common Share. The net amount of $15 was recorded in contributed surplus in the consolidated statement of changes in equity (deficit). On June 23, 2017, DCM completed a rights offering (“Rights Offering”) which was conducted by way of a rights offering circular (“Circular”). Under the offering, DCM issued 3,312,368 Common Shares at a price of $1.40 per share for gross proceeds of $4,637. Among this, 1,090,727 Common Shares were issued to directors, officers and related parties of DCM for total gross proceeds of $1,527. The Every two Rights entitled the Eligible Holder to subscribe for one Common Share upon payment of the subscription price of $1.40 per share. The Rights were transferable and were represented by rights certificates. Total transaction costs were $250 which were classified net of the Common Shares issued under the Rights Offering. The value of the Common Shares were increased by a deferred income tax asset of $65. On June 28, 2017, DCM completed a non-brokered private placement offering (“First Private Placement”). Pursuant to the First Private Placement, DCM issued 2,690,604 units (“Units”), with each Unit consisting of one Common Share 109 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)and one-half of a Common Share purchase warrant the statutory hold period. The fair value of the (each whole Common Share purchase warrant, Common Shares issued was $3,655, based on the a “Warrant”) at a price per Unit of $1.40 for gross closing market price of the shares on closing of the proceeds of $3,766. Among this, 550,650 Units First Private Placement. This was adjusted using a were issued to directors and officers of DCM discount rate of 5% for the statutory hold period. for total proceeds of $771. Each full Warrant The proceeds allocated to the Common Shares was entitles the holder to acquire one Common Share $3,398 and the proceeds allocated to the Warrants (a “Warrant Share”) at an exercise price of $1.75 was $280, net of transaction costs totaling $88. for a period of two years from the closing of the All of these transaction costs were allocated to the First Private Placement. The exercise price is Common Shares. The gross proceeds of $3,766 were subject to adjustment for certain capital events, also used to finance, in part, the settlement of the as described in the warrant certificate, to preserve 6.00% Convertible Debentures which matured on the relative rights of the existing shareholders June 30, 2017. The value of the Common Shares were of Common Shares and the Warrant holders. In increased by a deferred income tax asset of $23. addition, if the volume-weighted average price of the Common Shares on the TSX equals or exceeds $2.75 for 20 consecutive trading days, DCM has the right (the “Acceleration Right”) to accelerate the expiry date of the Warrants to a date that is 30 days from the date on which DCM notifies the Warrant holders of its intent to exercise the Acceleration Right. DCM did not exercise any of its Acceleration Rights during 2017. The Common Shares, Warrants and Warrant Shares are subject to a statutory hold period expiring four months and one day after the closing of the First Private Placement. DCM issued a total of 2,690,604 additional Common Shares (before giving effect to the exercise of any Warrants) and 1,345,300 Warrants pursuant to the First Private Placement all of which were also outstanding as of December 31, 2017. The value of the Warrants and Common Shares issued were determined based on an allocation of the gross proceeds of $3,766 by the relative fair values of each component on closing of the First Private Placement. The fair value of the Warrants issued was estimated to be $294 using the Black-Scholes option-pricing model, assuming a risk-free interest of 1.04%, a weighted average life of two years, a dividend yield of nil and an expected volatility of 40%. This was adjusted using a discount rate of 5% for On July 13, 2017, DCM completed a second closing of the private placement (“Second Private Placement”), consistent with the terms and conditions of the First Private Placement, to a director of DCM for 71,500 Units, raising additional gross proceeds of $100. 71,500 Common Shares and 35,750 Warrants were issued as a result of the Second Private Placement. As of December 31, 2017, 35,750 Warrants pursuant to the Second Private Placement were outstanding. The value of the Warrants and Common Shares issued were determined based on an allocation of the gross proceeds of $100 by the relative fair values of each component on closing of the Second Private Placement. The fair value of the Warrants issued was estimated to be $6 using the Black-Scholes option-pricing model, assuming a risk-free interest of 1.22%, a weighted average life of two years, a dividend yield of nil and an expected volatility of 40%. The fair value of the Common Shares issued was $91 based on the closing market price of the shares on closing of the Second Private Placement. The fair value of the Common Shares and Warrants were each adjusted using a discount rate of 5% for the statutory hold period. The proceeds allocated to the Common Shares was $72 and the proceeds allocated to the Warrants was $7, net of transaction costs totaling $21. All of these 110 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017transaction costs were allocated to the Common DCM’s share-based compensation plan consists of Shares. The gross proceeds of $100 were used to five types of awards: restricted share unit (“RSUs”), finance the general working capital requirements options, deferred share unit (“DSUs”), restricted of DCM. The value of the Common Shares were shares or stock appreciation right (“SARs”) awards. increased by a deferred income tax asset of $6. No DSUs, restricted shares or SARs have been In connection with the acquisition of BOLDER granted to date. Graphics on November 10, 2017, DCM issued a (a) Restricted share unit (“RSU”) total of 704,424 Common Shares to the vendors as partial consideration for the fair value of the net assets acquired on the BOLDER Closing Date for $754, net of $8 in issuance costs and increased by deferred income tax asset of $2. Under the RSU portion of the LTIP, selected employees are granted RSUs where each RSU represents the right to receive a distribution from the company in an amount equal to the fair value of one DCM common share. RSUs generally vest SHARE-BASED COMPENSATION within three years and primarily settle in cash DCM has adopted a Long-Term Incentive Plan upon vesting. (“LTIP”) to: recruit and retain highly qualified A liability for RSUs is measured at fair value on directors, officers, employees and consultants the grant date and is subsequently adjusted for (the “Participants”); provide Participants with an changes in fair value. The liability is recognized incentive for productivity and an opportunity to on a graded vesting basis over the vesting period, share in the growth and the value of DCM; and, with a corresponding charge to compensation align the interests of Participants with those of expense, as a component of costs of revenues, the shareholders of DCM. Awards to Participants selling, commissions and expenses, and general are primarily based on the financial results and administration expenses. Compensation of DCM and services provided. The aggregate expenses for RSUs incorporate an estimate for maximum number of common shares available for expected forfeiture rates based on which the fair issuance from DCM’s treasury under the LTIP is value is adjusted. 2,003,916 common shares or 10% of the issued and outstanding common shares of DCM. The shares to be awarded will be authorized and unissued shares. Balance - beginning of period/year Units granted Units forfeited Units paid Balance - end of period/year December 31 2017 Number of RSUs December 31 2016 Number of RSUs 29,538 150,192 (1,514) (347) 177,869 2,366 452,371 (425,199) — 29,538 111 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)During the year ended December 31, 2017, the chief During the year ended December 31, 2017, executive officer (“CEO”) of DCM and President of compensation expense of $73 (2016 – $17) was DCM were granted 104,548 RSUs (2016 – 145,566 recognized in the consolidated statement of RSUs were issued to the CEO) and a total of 45,644 operations related to RSUs granted. RSUs (2016 – 304,722 RSUs) were awarded to other key members of DCM’s management. During the year ended December 31, 2017, 1,514 RSUs were forfeited by the CEO. Of the total outstanding RSUs at December 31, 2017, $nil (2016 – $234) have vested and are payable. The carrying amount of the liability relating to the RSUs at December 31, 2017 was $90 (2016 – $17). (b) Option (“Option”) A summary of Option activities for the year ended December 31, 2017 and the year ended December 31, 2016 is as follows: 2017 2016 Number of Options Weighted average Exercise Price Number of Options Weighted average Exercise Price Options outstanding - beginning of period/year 959,745 $ Granted Forfeited Exercised Options outstanding - end of period/year Exercisable — (135,279) (19,505) 804,961 744,006 $ $ The outstanding options had an exercise price range as follows: 2.41 — 7.88 1.50 1.50 11,745 $ 75.00 987,011 (39,011) — 959,745 1.50 1.50 — 2.41 1.50 $ $ 1.50 641,603 $75.00 $1.50 Options outstanding December 31, 2017 Number of Options December 31, 2016 Number of Options — 804,961 804,961 11,745 948,000 959,745 During the year ended December 31, 2017, a total of During the year ended December 31, 2017, 135,279 options awarded were forfeited, including compensation expense of $91 (2016 – $779) was 11,745 options awarded to the CEO and 19,505 recognized in the consolidated statement of options awarded were exercised. operations related to options granted. 112 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 201719. LOSS PER SHARE BASIC LOSS PER SHARE Net loss for the year attributable to common shareholders Weighted average number of shares Basic loss per share DILUTED LOSS PER SHARE Net loss for the year attributable to common shareholders Weighted average number of shares Diluted loss per share $ $ $ $ For the year ended December 31, 2017 For the year ended December 31, 2016 (6,205) 16,330,837 (0.38) (6,205) 16,330,837 (0.38) $ $ $ $ (32,107) 11,125,518 (2.89) (32,107) 11,125,518 (2.89) DCM’s 6.00% Convertible Debentures were settled diluted earnings per share as they were on June 30, 2017 and therefore were excluded from out-of-the-money as of December 31, 2017. the computation of diluted earnings per share. Options to purchase up to 804,961 common shares and warrants to purchase up to 1,381,050 common shares were excluded from the computation of The prior year loss per share calculations have been retroactively adjusted to reflect the Share Consolidation. See note 18. 20. CHANGES IN WORKING CAPITAL Trade receivables Inventories Prepaid expenses and other current assets Trade and accrued liabilities Deferred revenue For the year ended December 31, 2017 For the year ended December 31, 2016 $ $ (3,983) $ 290 508 1,560 1,088 (537) $ 8,879 3,782 (520) (2,378) (2,144) 7,619 113 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)21. COMMITMENTS AND CONTINGENCIES DCM leases real estate, printing equipment, trucks and office equipment in connection with its sales and manufacturing activities under non-cancellable lease agreements, which expire at various dates. Future commitments under non-cancellable operating leases are as follows: 2018 2019 2020 2021 2022 2023 and thereafter December 31 2017 12,078 10,747 9,544 8,124 6,596 24,249 71,338 $ $ DCM and its subsidiaries are subject to minimum total contributions required under various claims, potential claims and lawsuits. While applicable Québec pension legislation and total the outcome of these matters is not determinable, employer contributions determined pursuant DCM’s management does not believe that the to collective agreements. ultimate resolution of such matters will have a material adverse impact on DCM’s financial position. Under Québec pension legislation applicable prior to December 31, 2014, DCM would have DCM makes contributions to the Québec Graphics been required to fund any outstanding solvency Communications Supplemental Retirement and deficiency in respect of its employees, pensioners Disability Fund of Canada (the “SRDF”) based on and vested deferred members if DCM had a percentage of the wages of its unionized withdrawn from the plan or if the plan had been employees covered by the respective collective terminated. On February 18, 2015, Bill 34 (An Act to bargaining agreements, all of whom are employed amend the Supplemental Pension Plans Act with at DCM facilities located in the Province of respect to the funding and restructuring of certain Québec. The SRDF is a negotiated contribution multi-employer pension plans) was tabled in the defined benefit, multi-employer pension plan Québec legislature. Bill 34, which was adopted which provides retirement benefits to unionized on April 2, 2015 with effect from December 31, employees in the printing industry. The SRDF 2014, amends and clarifies the Québec pension is jointly-trusteed by representatives of the legislation for the SRDF to, among other things: employers of SRDF members and the unions which represent SRDF members in collective bargaining. Based upon the terms of those applicable collective agreements, DCM’s estimated annual funding obligation for the SRDF for 2018 is $579. The most recent funding actuarial report (as at December 31, 2013) in respect of the Québec members of the plan disclosed • limit required employer contributions only to those amounts specified in the applicable collective agreements negotiated with the relevant unions; • eliminate the employer’s obligation to fund solvency deficiencies; a solvency deficiency and a gap between the • allow for the reduction of accrued benefits; and 114 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017• remove the responsibility of participating • To maintain a strong capital base so as to employers to fund their share of the solvency maintain shareholders’, creditors’, customers’, deficit upon withdrawal from the plan or suppliers’ and market confidence; and termination of the plan, except in certain circumstances when withdrawal from the plan or termination of the plan occurs within five • To deploy capital to provide an appropriate investment return to its shareholders years of Bill 34 being adopted. DCM’s capital structure consists of In addition, another consequence of Bill 34 will be to require the administrator of the SRDF to propose and seek consensus on a “Recovery Plan”. On October 31, 2016, DCM received a letter from the Board of Trustees administering the SRDF and was advised that a form of Recovery Plan was filed long-term debt (including the current portion) and shareholders’ equity. DCM’s primary uses of capital are to finance increases in working capital, make payments towards its long-term obligations, and fund investments in capital expenditures and business acquisitions. with the Quebec pension regulatory authorities in DCM manages its capital structure and makes August 2016 and that plan members will be sent a adjustments to it in light of changes in economic personalised statement indicating the effect that conditions and the risk characteristics of the the proposed plan will have on their respective underlying assets. In order to maintain or pension entitlements. DCM understands that the adjust the capital structure, in line with its present Recovery Plan was approved in December 2016 and strategic plan, the company may issue new shares. has been advised that employers’ obligations to Management anticipates that any major acquisition fund any solvency deficiency have been eliminated or significant growth initiatives would be financed in accordance with Bill 34. All participating in part with additional equity and debt. employers will be receiving a copy of the decisions in the near future. During the year ended December 31, 2017, DCM did not receive any updated information on the SRDF. 22. CAPITAL STRUCTURE DCM is not subject to any externally imposed capital requirements other than the covenants and restrictions under the terms of its Credit Facilities including the requirement to meet certain financial ratios and financial conditions pertaining to permitted investments, acquisitions, lease agreements, dividends and subordinated DCM’s objectives when managing its capital debt (see note 11). structure are: DCM’s capital structure is as follows: • To seek to ensure sufficient liquidity to safeguard DCM’s ability to continue as a going concern; Credit facilities Convertible debentures Total long-term debt Total equity (deficit) December 31 2017 December 31 2016 55,932 — 55,932 (5,399) $ $ $ 35,042 11,082 46,124 (9,935) $ $ $ 115 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)23. EXPENSES BY NATURE Raw materials and other purchases $ 141,327 $ 140,691 For the year ended December 31, 2017 For the year ended December 31, 2016 Wages and benefits Pension and other post-employment expenses Occupancy costs Restructuring expenses Depreciation, amortization and impairments Other expenses 101,108 3,011 17,008 9,457 7,709 12,714 94,297 2,587 16,273 4,200 37,210 11,305 Total cost of revenues and operating expenses $ 292,334 $ 306,563 24. SEGMENTED INFORMATION DCM considers itself to have one reportable delivery of various marketing and business segment for purposes of segment reporting which communications solutions. This includes: consists of four operating segments that are printing of labels, forms, stationary, lottery aggregated based on the aggregation criteria In and point-of-sale rolls, event tickets, direct mail, IFRS 8. Given many of DCM’s customers operate marketing collateral, loyalty cards, and run marketing campaigns on a national scale, large-format signage and banners, bindery DCM utilizes its print capabilities, logistics and and kitting services, in addition to digital fulfilment services, and digital communications communications and data analytics services. solutions from its combined operating segments DCM North America also provides logistics and to service its customers. These operating segments fulfillment solutions including warehousing, have been aggregated as one reportable segment distribution and inventory management services. as they have similar economic characteristics, they offer a portfolio of similar products and services, they have alike customers, and their production processes and distribution methods are similar. Eclipse represents a separate operating segment that provides significantly expanded wide format, large format and grand format printing capabilities to DCM’s portfolio of products and services in The chief executive officer of DCM is the chief eastern Canada. This includes: in-store print, operating decision maker (“CODM”). The CODM outdoor signage, transit graphics, packaging, reviews and assesses the company’s performance kitting and fulfilment capabilities. and makes decisions about resources to be allocated for each operating segment which have been described below: BOLDER Graphics strengthens DCM’s large and wide format printing capabilities in western Canada and complements its significantly expanded large The core DCM business has a number of operating format capabilities obtained through the acquisition facilities across Canada and one in the U.S. of Eclipse in eastern Canada. BOLDER Graphics (collectively the “DCM North America” operating specializes in large-format digital printing, segment) which focus on the production and point-of-sale signage, corporate packaging, 116 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017outdoor signage and vehicle graphics, in addition the insurance expense paid by DCM. During the to loose-leaf bindery, stationery and other fiscal year, DCM recorded an insurance expense commercial print capabilities. of $306 (2016 – $480) related to these policies. As at December 31, 2017, prepaid expenses and other current assets included prepaid insurance to the insurance company of $260 (2016 – $259). The insurance company is a related party whereby the Chair of the Board and the President of DCM each are Directors and indirectly have a minority interest in the insurance company, through companies controlled by them. During the year ended December 31, 2017, directors, officers and related parties of DCM participated in a rights offering and a private placement of common shares (see note 18), purchasing 1,712,877 common shares (or 28.2% of the 6,074,472 common shares issued as a result of the rights offering and private placement) for consideration of $2,298. On December 21, 2016, DCM entered into a new agreement to lease approximately 2,000 square feet of office space in Toronto, Ontario from a company that the Chair of the Board and the President are Directors of. Under the lease agreement, the lease commences March 1, 2017, runs month-to-month and can be terminated by either party with reasonable notice. The monthly expense is $7 per month. These transactions are provided in the normal course of operations and are measured at the exchange amount, which represents the amount of consideration established and agreed to by the related parties. Thistle is a full service commercial printing company in eastern Canada which adds expertise in commercial printing, design, pre-press and bindery services to DCM’s portfolio, and complements DCM’s current capabilities in direct mail, fulfilment and data management. Management evaluates the performance of the reporting segment based on income before interest, finance costs and income taxes. Corporate expenses, certain non-recurring expenses, interest expense, finance costs and income taxes are not taken into account in the evaluation of the performance of the reporting segment. All significant external sales are to customers located in Canada. DCM established operations in Niles, Illinois during the fourth quarter of 2012 in order to service the U.S. operations of a large customer and is seeking to grow its U.S. sales, however at December 31, 2017, U.S. sales were not significant to disclose separately. Warehousing revenues were approximately 6% of total consolidated revenues for the year ended December 31, 2017 and were approximately 6% of total consolidated revenues for the year ended December 31, 2016. 25. RELATED PARTY TRANSACTIONS Effective June 23, 2015, DCM appointed an insurance company as its broker of record for its corporate insurance policies and subsequently entered into new general corporate insurance policies, including the renewal of its directors and officers liability insurance later in the year. The insurance company continues as DCM’s broker of record and earns fees based on a percentage of 117 NOTES TO FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016(in thousands of Canadian dollars, except percentages, shares and per share amounts)COMPENSATION OF KEY MANAGEMENT Key management personnel are deemed to be the CEO, president, chief financial officer and other members of the senior executive team. Compensation awarded to key management personnel included: For the year ended December 31, 2017 For the year ended December 31, 2016 Salaries and other short-term employee benefits Post-employment benefits Share-based compensation expense Total $ $ 2,743 $ 16 157 2,916 $ 2,599 20 779 3,398 During the year ended December 31, 2017, key During the year ended December 31, 2017, DCM’s management personnel were granted 132,744 RSUs general and administration expenses include a (2016 – 277,379 RSUs), and 1,514 RSUs charge of $157 (2016 – $779) for these share-based (2016 – 250,207 RSUs) were forfeited. Key compensation awards. management personnel were also granted options to purchase up to Nil Common Shares (2016 – 791,957 Common Shares) and options to purchase up to 11,745 Common Shares (2016 – Nil Common Shares) were forfeited during the year ended December 31, 2017 (see note 18). During the year ended December 31, 2017, DCM’s general and administration expenses include a charge of $287 (2016 – $372) for the duties performed by DCM’s Board. 118 NOTES TO FINANCIAL STATEMENTSDATA COMMUNICATIONS MANAGEMENT CORP. | ANNUAL REPORT 2017CORPORATE INFORMATION DIRECTORS AND OFFICERS J.R. Kingsley Ward 3 Chairman, Director EXECUTIVE TEAM CORPORATE INFORMATION Michael G. Sifton Auditors Chief Executive Officer PricewaterhouseCoopers LLP William Albino 1,2,3 Gregory J. Cochrane Transfer Agent Director President Computershare Investor Services Inc. James J. Murray O.Ont., SIOR 1,2 James E. Lorimer Director Chief Financial Officer Corporate Counsel Derek J. Watchorn 1,2,3 Alan Roberts Director Michael G. Sifton Director & Officer Senior Vice-President, Operations Michael Coté Chief Executive Offier Senior Vice-President, Chief Commercial Officer James E. Lorimer Officer Judy Holcomb-Williams Chief Financial Officer & Corporate Senior Vice-President, Secretary Chief Culture Officer 1 Member, Audit Comittee (Chairperson is William Albino) 2 Member, Corporate Governance Committee (Chairperson is Derek J. Watchorn) 3 Member, Human Resources & Compensation Committee (Chairperson is J.R. Kingsley Ward) McCarthy Tétrault LLP Corporate Office 9195 Torbram Road Brampton, Ontario L6S 6H2 Telephone: 905-791-3151 Facsimile: 905-791-1713 Website datacm.com Toronto Stock Exchange Symbol DCM 119 DATA COMMUNICATIONS MANAGEMENT CORP. 9195 TORBRAM ROAD, BRAMPTON, ON L6S 6H2 DATACM.COM

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