2018 ANNUAL REPORT
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DATA Communications Management Corp.
Annual Report 2018
Letter to shareholders
Dear Fellow Shareholders,
2018 was an improved year for our Company. Revenues for our fiscal year ended December 31, 2018 were $322.8
million, up $33.2 million, or 11.5%, compared to a year ago. Excluding the effects of adopting IFRS 15, revenues increased
$23.1 million, or 8.0%, from last year. Adjusted EBITDA was $22.2 million, an improvement of $6.1 million or 38%
compared to fiscal 2017. Excluding the effects of adopting IFRS 9 and 15, adjusted EBITDA was $20.8 million for fiscal
2018.
We reported net income for fiscal 2018 of $2.2 million, compared to a net loss of $6.2 million in 2017, and our adjusted
net income grew to $5.7 million, compared to $2.5 million last year.
Revenues for the fourth quarter of 2018 were $81.2 million compared to $76.1 million in the fourth quarter of 2017, an
increase of $5.1 million or 6.6%. Excluding the effects of adopting IFRS 15, revenues for the fourth quarter of 2018
increased by $1.5 million or 2.0% relative to the same period last year. Adjusted EBITDA in the fourth quarter of 2018
was $6.5 million compared to $5.6 million in the fourth quarter of 2017, an increase of $0.9 million or 15.9%. Excluding
the effects of adopting IFRS 9 and 15, adjusted EBITDA was $6.1 million for the fourth quarter of 2018.
While we don’t expect to see these levels of year over year growth in 2019, we believe we can continue to provide
improved financial results in the coming year by adhering to five key strategic priorities:
Focus on our core customers
Continue to improve gross margins
Reduce our selling, general and administrative expenses
Pay down debt
•
•
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• Make strategic investments to support our future growth
2018 in Review
Clients, revenue and the way we go to market
As noted, our revenues grew by 11.5% over 2017. In large part, our acquisitions delivered the bulk of growth, but our
core DCM business grew by 7.5%. In 2018 we took a more focused approach to our top customers, presenting them
with a more enhanced product and service offering. Simply put, our focus on our core customers is helping us build
better customer relationships, providing them with deeper insights and, as a result, selling more.
In addition to our existing customer focus, new opportunities and markets emerged. In 2018 we experienced a full year
of revenue from the major financial services customer we won in the Fall of 2017 and our relationship and scope of
service offering continues to grow with this customer.
Another positive impact was from the cannabis market. Few opportunities occur with the stroke of a pen, but on October
17, 2018 the legalization of cannabis consumption in Canada provided a unique market opportunity for your Company.
DCM was already a major supplier of labels to retailers, courier companies and other specialty applications; cannabis
provided a new market for our capabilities and we capitalized on it. We expect to see the market for specialty labels
expand in 2019 and extend to the provision of specialty packaging solutions for these customers.
We also benefited from a one-time increase in volume in the first quarter of 2018 from a long-standing customer. While
the customer remains an important one, we don’t expect its volumes to recur at the same levels in 2019.
Despite this positive news, we face challenges specifically around three narratives:
1. Material price increases:
DCM and our competitors are facing price increases (particularly paper) which we haven’t seen in some years.
Paper mills have been shuttered or redirected to other products (think Amazon and cardboard packaging) and
inflationary increases are being experienced on other input costs.
We are mitigating these increases by in turn passing increases along to our customers, seeking alternate supply
sources where possible and by aggressively altering our internal processes in manufacturing to strengthen our
margins.
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Annual Report 2018
2. Technology replacement of paper:
This trend has been underway for some years, but the speed of change is increasing. Most of our customers
now provide their clients both online digital and offline physical alternatives for their communications.
DCM is taking a leadership role working with our customers to help them with both on and offline strategies
and tools. Our technologies, embedded within our top customers, are critical for our customers’ continued
transformation to a digital alternative. We too are making the transformation and are being seen as a leader in
digital as well as more traditional paper-based solutions for our customers.
3. Customers need ideas not suppliers:
Our Company has been a trusted supplier for many decades to our blue-chip customer base. Unfortunately,
over the past 15 years the products we provide have been commoditized where price and delivery have been
driving levers. We have signaled to our shareholders our shift from a commodity driven business to one where
we focus on fewer customers. Our strategy is to gain greater wallet share by better understanding our customers’
business challenges and providing solutions to their business processes, their brands and their product
positioning in the market. This shift commenced in 2017 and accelerated in 2018 with our acquisition of Perennial.
Our acquisitions of Thistle, Eclipse and Bolder in 2017 gave us core competencies to go after growing markets
in retail, large format and sheet feed lithography. However, these are just outcomes if you don’t have ideas.
Perennial gives our customers ideas to help them win in their markets.
Perennial is a thought leader for many of North America’s top brands. Leading brands in Canada and
internationally rely on your company to lead with narrative thought and innovative ideas to help their businesses
grow!
We need to accelerate this change from supplier to brand builder for our customers. This extends to our growing
markets in government and healthcare; they too have customers and will increasingly require an improved
customer first focus.
Our manufacturing and services footprint
At year end, we had 20 locations across North America serving our customers. Some are customer specific such as
providing on-demand services in New York and Chicago for a leading financial services customer. Others are highly
scaled including Canada’s largest on-demand print production facility in Mississauga, Ontario serving national customers.
In 2018 we added Canada’s first web-to-print hybrid label press for our growing label business. We expect to see strong
growth in this market in 2019, driven primarily from new customers.
In addition to the label press, we invested in a new Heidelberg sheet-fed press for our growing lithography business.
This has now been installed in our Thistle location to meet the demands of Thistle’s customers and our growing DCM
base of retail customers.
While our locations performed exceedingly well with on time deliveries in the 97.8% level, it would be imprudent for your
management team not to look at strategic imperatives and continued efficiencies.
We are actively assessing a number of product lines and services and whether our customers - and our shareholders
- would be better served if we outsourced or even sold certain non-core business lines.
We are also looking at ways to streamline our national footprint and continue to consolidate operations in the most cost-
effective manner.
Our people and culture
In 2019 our Company celebrates 60 years in business! As my dad said when I invested in my first business nearly 40
years ago “Son, there is no trick getting into business - the trick is staying in business.”
DCM is being re-built for the long haul. As we look to the future, we require strong & experienced people, a culture of
openness and inclusion, and a single-minded purpose.
2018 was a pivotal year for our Company on all three points, but it begins with people. In June 2018, I was given the
added role of CEO. The work and focus of Mike Sifton prior to me joining as President in late 2016 was a critical foundation
to where we are today; a more focused company on a much stronger financial footing.
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Mike’s determination to get our ship in financial order has allowed me to strategically pivot the business towards a
marketing and communications services bent. I’m pleased we have built a strong bench of experienced management
who’ve put their hands up to take on additional responsibility across all our functions, whether it be in sales & marketing,
operations, technology, finance or human resources.
Collectively, we are pushing our teams to have more engaged, idea-generated discussions with both our external and
internal clients, and ultimately deliver superior execution for our customers.
2019 Outlook
Helping our core customers win, focusing on our core capabilities while driving improved margins, reducing our cost to
serve, paying down debt and investing in technology and solutions that customers request and value. These are our
drivers.
We will operate our company as owners, because our leadership team, including your board of directors, are the largest
block of shareholders. I believe an ownership mindset gives us an advantage over our competitors. Shareholders care
and are willing to make changes, knowing as a shareholder a long-term vision beats a quarterly report any day. Being
nimble and agile will serve us well.
I thank all of you for your support. I believe we are just getting started on the next leg of a 60-year legacy.
Yours truly,
Gregory J. Cochrane
President and Chief Executive Officer
DATA Communications Management Corp.
March 2019
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MD&A
Management’s discussion and analysis of financial condition and results of operations
The following management’s discussion and analysis (“MD&A”) is intended to assist readers in understanding the
business environment, strategies, performance and risk factors of DATA Communications Management Corp. (TSX:
DCM) and its subsidiaries (referred to herein as “DCM” or the “Company”) for the years ended December 31, 2018 and
2017. This MD&A should be read in conjunction with audited consolidated financial statements and accompanying notes
of DCM for the years ended December 31, 2018 and December 31, 2017. 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.
The Company's Board of Directors, on the recommendation of its Audit Committee, approved the contents of this MD&A
on March 21, 2019. This MD&A reflects information as of March 22, 2019.
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
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 MD&A, words such as “may”, “would”, “could”, “will”,
“expect”, “anticipate”, “estimate”, “believe”, “intend”, “plan”, and other similar expressions are intended to identify 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 or results, and will not necessarily be accurate indications of whether or not such performance or results
will be achieved. Many factors could cause the actual results, performance, objectives or achievements of DCM to be
materially different from any future results, performance, objectives or achievements that may be expressed or implied
by such forward-looking statements. The principal factors, assumptions and risks that DCM made 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;
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MD&A
risks associated with acquisitions and/or investments in joint ventures by DCM; the failure to realize the expected benefits
from the acquisitions of Thistle Printing, Eclipse Colour & Imaging, BOLDER Graphics and Perennial Group of Companies
and DCM’s investment in the joint venture between Aphria Inc. and Perennial and risks associated with the integration
and growth of such businesses; increases in the costs of paper and other raw materials used by DCM; DCM’s ability to
maintain relationships with its customers; risks relating to future legislative and regulatory developments and other
business risks involving the wellness, medical and adult-use marijuana markets in Canada and internationally generally;
and risks relating to DCM’s ability to access sufficient capital on favourable terms to fund its business plans from internal
and external sources.
Additional factors are discussed elsewhere in this MD&A 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). Should one or more
of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove
incorrect, actual results may vary materially from those described in this MD&A as intended, planned, anticipated,
believed, estimated or expected. Unless required by applicable securities law, DCM does not intend and does not
assume any obligation to update these forward-looking statements.
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 EBITDA means EBITDA adjusted for restructuring expenses, one-time business reorganization costs, goodwill
impairment charges, and acquisition costs. Adjusted net income (loss) means net income (loss) adjusted for restructuring
expenses, one-time business reorganization costs, goodwill impairment charges, 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 of DCM (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, investors, rating agencies and other
interested parties frequently use non-IFRS measures in the evaluation of issuers. DCM’s management also uses non-
IFRS measures in order to facilitate operating 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
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MD&A
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 is a communication solutions partner that adds value for major companies across North America by creating more
meaningful connections with their customers. DCM pairs customer insights and thought leadership with cutting-edge
products, modular enabling technology and services to power its clients’ go-to market strategies. DCM helps its clients
manage how their brands come to life, determine which channels are right for them, manage multimedia campaigns,
deploy location-specific and 1:1 marketing, execute custom loyalty programs, and fulfill their commercial printing needs
all in one place.
DCM's extensive experience has positioned it as an expert at providing communication solutions across many verticals,
including the financial, retail, healthcare, consumer health, energy, and not-for-profit sectors. As a result of its locations
throughout Canada and in the United States (Chicago, Illinois and New York, New York), it is able to meet its clients’
varying needs with scale, speed, and efficiency - no matter how large or complex the ask. DCM is able to deliver
advanced data security, regulatory compliance, and bilingual communications, both in print or digital formats.
On February 22, 2017, 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. On February 22, 2017, DCM acquired
100% of the outstanding common shares of Thistle Printing Limited (“Thistle”), a full service commercial printing company.
On January 1, 2019, Thistle was amalgamated into DCM. On November 10, 2017, DCM acquired 100% of the outstanding
common shares of BGI Holdings Inc. and 1416395 Alberta Limited (collectively “BOLDER Graphics”), a company focused
on large-format digital printing, point of sale signage, corporate packaging, outdoor signage and vehicle graphics. On
January 1, 2018, BOLDER Graphics was amalgamated into DCM.
On May 8, 2018, DCM acquired 100% of the outstanding common shares of Perennial Group of Companies Inc., a
privately held holding company, Perennial Inc., one of Canada’s leading design firms focused on creating and delivering
design strategies for major retail brands in Canada and around the world, and The Finished Line Studios Inc., an
independent, multi-function creative, execution and production art studio (collectively, Perennial Group of Companies
Inc., Perennial Inc. and The Finished Line Studios Inc. being “Perennial Group”). On closing, Perennial Group was
amalgamated as Perennial Inc. (“Perennial”). Perennial’s suite of services includes business and brand strategy,
consumer insights, environmental and graphic design, and communications and retail operations design and strategy.
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
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MD&A
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 1,433 employees in Canada and the United States and had revenues of $322.8 million in 2018.
Website: www.datacm.com.
RECENT DEVELOPMENTS
FINALIZATION OF PURCHASE PRICE FOR PERENNIAL ACQUISTION
On October 17, 2018, the vendors of Perennial and DCM finalized the purchase price related to the Perennial acquisition
resulting in a $0.1 million post-close working capital adjustment which was paid in cash by DCM to the vendors of
Perennial in the fourth quarter of 2018.
RESTRUCTURING
Effective October 19, 2018, DCM closed its corporate engineering department in Drummondville, Québec, which was
comprised of a staff of approximately 14 people. The group was primarily responsible for the service and maintenance
of DCM’s traditional rotary offset and label presses, which have now been consolidated in two facilities in Drummondville
and Brampton, Ontario, and led the significant consolidation of DCM’s facilities over the past several years. Internal
maintenance departments in Drummondville and Brampton are expected to support DCM’s forms and label presses
going forward, while DCM’s other equipment is typically serviced by original equipment manufacturers. DCM included
restructuring costs related to the closing of this department of $0.6 million in the fourth quarter of 2018, primarily relating
to severances for terminated employees. Total annualized savings from reduced labour and related overhead costs
from the elimination of this group are estimated at $1.5 million.
Effective November 13, 2018, DCM reduced its direct sales force by approximately 13 people. DCM included restructuring
costs of $0.7 million in the fourth quarter of 2019, primarily relating to severances for terminated employees. Total
annualized savings from reduced labour and related overhead costs from the elimination of this group are estimated at
approximately $1.4 million.
PERENNIAL JOINT VENTURE WITH APHRIA
On November 7, 2018, DCM announced that Perennial, a wholly owned subsidiary of DCM, and Aphria Inc. (“Aphria”),
a leading global cannabis company, had entered into a joint venture agreement (the “JV”) for the purpose of the
development, production, marketing and sale of non-Aphria branded new products, brands and product categories on
the domestic and international adult-use cannabis markets. The JV will initially focus on cannabis-infused products for
the wellness, medical and adult-use markets. The JV is owned equally by Perennial and Aphria. It will select specific
projects to collaborate on and seek to leverage the respective capabilities of Perennial, DCM and Aphria. The JV
agreement includes typical terms related to corporate governance, capital contributions, intellectual property, and other
standard matters. As at December 31, 2018 and for the year then ended, the JV did not have any significant balances
or transactions.
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MD&A
INVESTMENT IN NEW EQUIPMENT
During the year ended December 31, 2018, DCM secured the new Gallus / Heidelberg hybrid digital label press. This
press will support DCM's current demand for cannabis label solutions and provide new opportunities in the wine and
spirits markets, offering a unique value proposition for these producers and distributors compared to their current offerings.
The Heidelberg six-colour press has been installed in the Thistle operations during the first quarter of 2019. This new
piece of equipment will provide enhanced capabilities, allowing DCM to migrate more sheet fed volumes from tier two
suppliers, and will also help in improving operating efficiencies and gross margins as it will replace an older five-colour
press.
EXTENSION OF BANK CREDIT FACILITY
On March 5, 2019, DCM entered into a second amendment to its Bank Credit Facility. Significant terms of the amendment
made to DCM’s Bank Credit Facility include an extension of the maturity date to January 31, 2023, from its original
maturity date of March 31, 2020; a reduction in the interest rate payable on advances by 15 basis points from 0.75%
per annum to 0.60% per annum; the elimination of an early termination fee in the event the Bank Credit Facility is
terminated or repaid prior to maturity; and amendments related to the calculation of certain financial covenants as a
result of the adoption of IFRS 16 effective for reporting periods on or after January 1, 2019. The amendments related
to IFRS 16 include clarification that the calculation of DCM's fixed charge coverage ratio under the Bank Credit Facility
will be completed on substantially the same basis as prior to the adoption of IFRS 16, after giving effect to changes in
the accounting treatment of leases related to right-of-use assets. As a result, definitions of certain terms related to IFRS
16 were added to the Bank Credit Facility. The Company’s financial covenant ratio with the Bank remains unchanged.
REVENUE RECOGNITION POLICY
DCM adopted IFRS 15 Revenue from Contracts with Customers (“IFRS 15”) effective January 1, 2018, which replaced
IAS Revenue (“IAS 18”), IAS 11 Construction Contracts, and related interpretations. DCM elected to adopt IFRS 15
using the modified retrospective method, with recognition of transitional adjustments in opening deficit on the date of
initial application (January 1, 2018), without restatement of comparative figures.
Under IFRS 15, DCM recognizes revenue when control of the products or services it provides to its customers has been
transferred. The following is a description of principal activities from which DCM generates its revenue, along with the
corresponding revenue recognition accounting policies under IFRS 15:
PRODUCT SALES
DCM manufactures customized products based on specifications pre-approved by its customers. At its customers’
request, DCM will also purchase stock product from third-party vendors and resell that to its customers. DCM recognizes
revenue upon the completion of production or when stock product is purchased from a third-party vendor and inducted
into DCM's warehouses. Given manufactured products are customized or purchased specifically at the customer’s
request, product returns are insignificant.
In some instances, DCM customers obtain the product directly from DCM following completion of production. In other
instances, DCM’s contracts involve the provision of warehousing and shipment services, in addition to manufacturing
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MD&A
or purchasing of third-party products. Based on DCM’s contractual arrangements with such customers, DCM has identified
three key distinct performance obligations related to the sale of product: product, warehousing services and shipment
services. DCM stores customized or purchased product at the request of the customer; the product is identifiable as the
customer’s product; the product is ready for transfer to the customer upon the customer’s request; and DCM cannot re-
direct the product nor use the product to fulfill another customer’s product order under the contract. Where control has
transferred over the product upon product manufacture by DCM or upon receipt of third-party product into DCM's
warehouses, DCM recognizes revenue for product and allocates an amount of the consideration received or receivable
from the customer for the remaining warehousing and shipping performance obligations based on their relative stand-
alone selling prices, where applicable.
WAREHOUSING SERVICES
DCM provides custodial services to store customer product in its warehouse over a specified agreed upon period of
time. Warehousing services represent a distinct performance obligation and accordingly, revenues are recognized over
the period that warehousing services are provided to the customer.
FREIGHT SERVICES
DCM provides services to ship customer product from its warehouse to a location specified by the customer. This
represents a distinct performance obligation and revenue is recognized when performance of the shipping service has
occurred.
MARKETING SERVICES
DCM generates revenue from providing marketing solutions to its customers which include business and brand strategy,
consumer insights, strategic marketing and design services. Typically, these services are contracted with fixed-fees and
are provided over a period of time equal to one year or less. Revenue is measured based on the consideration DCM
expects to be entitled to in exchange for providing services. Most of DCM’s marketing contracts include a single
performance obligation because the promise to transfer the individual services are not separately identifiable from other
promises in the contract and therefore are not distinct. DCM transfers control of the services it provides to its customers
over time and therefore recognizes revenue progressively as the services are performed based on the percentage of
completion method. Under this method, the stage of completion is measured using costs incurred to date as a percentage
of total estimated costs for each contract and the percentage of completion is applied to the total estimated revenue.
IMPACT ON TRANSITION TO IFRS 15
The primary impact on adoption of IFRS 15 relates to the timing of when revenue is recognized for product sales.
Previously, under IAS 18, DCM identified that the risks and rewards of ownership related to product that was manufactured
by DCM or purchased from a third-party vendor at the customer’s request and stored on the customer’s behalf in DCM’s
warehouse did not transfer until such time as the product was dispatched from the warehouse. Upon the adoption of
IFRS 15, DCM has identified that product revenue should be recognized upon the completion of production or purchase
and induction of product from third-party vendors into DCM's warehouses as that is when control of the product is
transferred to the customer and DCM has a right to payment. Management believes this represents a more accurate
reflection of the economics in how DCM conducts business with its customers, especially given all product orders are
customized based on specifications pre-approved by the customer, the product is segregated and maintained solely for
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the customer who placed the order (i.e. cannot be used interchangeably to fill another customer’s order), and DCM has
a right to payment for the performance obligations it has satisfied.
See “Accounting Policies” for further discussion regarding DCM's revenue recognition policies and the impact of adopting
IFRS 15 on DCM's consolidated financial statements as at January 1, 2018 and for the year ended December 31, 2018.
COST OF REVENUES AND EXPENSES
DCM’s cost of revenues primarily 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 primarily 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 the closure of certain facilities.
Selected Consolidated Financial Information
The following tables set out the summary consolidated financial information and supplemental information for the periods
indicated. The summary annual financial information for fiscal 2018, 2017 and 2016 have 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. Due to the adoption of new IFRS
standards at January 1, 2018, these periods do not reflect consistent accounting policies, particularly in relation to
revenue recognition and therefore are not directly comparable. In the opinion of management, such unaudited financial
data reflects all adjustments, consisting of normal and non-recurring adjustments, necessary for the fair presentation of
the results for those periods.
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TABLE 1
The following table sets out selected historical consolidated financial information for the periods noted.
For the years ended December 31, 2018, 2017 and
2016
(in thousands of Canadian dollars, except share and per
share amounts, unaudited)
Revenues (1)
Cost of revenues
Gross profit
Selling, general and administrative expenses
Restructuring expenses
Impairment of goodwill
Acquisition costs
Income (loss) before finance costs and income taxes
Finance costs (income)
Interest expense, net
Amortization of transaction costs
Income (loss) before income taxes
Income tax expense (recovery)
Current
Deferred
Net income (loss) for the year
Basic earnings (loss) per share
Diluted earnings (loss) per share
Weighted average number of common shares
outstanding, basic
Weighted average number of common shares
outstanding, diluted
As at December 31, 2018, 2017 and 2016
(in thousands of Canadian dollars, unaudited)
Current assets
Current liabilities
Total assets
Total non-current liabilities
Shareholders’ equity (deficit)
January 1 to
December 31,
2018
January 1 to
December 31,
2017
January 1 to
December 31,
2016
$
322,769 $
289,529 $
244,571
78,198
66,216
2,654
—
348
69,218
8,980
4,985
623
5,608
3,372
1,407
(284)
1,123
220,138
69,391
61,371
9,457
—
1,368
72,196
(2,805)
4,409
701
5,110
(7,915)
725
(2,435)
(1,710)
278,363
215,295
63,068
55,934
4,200
31,066
68
91,268
(28,200)
3,406
578
3,984
(32,184)
1,572
(1,649)
(77)
$
$
$
$
$
2,249 $
(6,205) $
(32,107)
0.11 $
0.11 $
(0.38) $
(0.38) $
(2.89)
(2.89)
20,998,703
16,330,837
11,125,518
21,055,460
16,330,837
11,125,518
As at
December 31,
2018
As at
December 31,
2017
As at As at
December 31,
2016
85,455 $
64,716
82,804 $
68,648
142,231
70,003
131,859
68,610
68,620
58,473
90,910
42,372
7,512 $
(5,399) $
(9,935)
(1)
2018 revenues include the impact of the adoption of new accounting standard IFRS 15. Refer to note 3 of the
consolidated financial statements for the year ended December 31, 2018 for further details on the impact of the
adoption of new accounting standards.
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TABLE 2
The following table sets out selected historical consolidated financial information for the periods noted.
See “Non-IFRS Measures” section above for more details.
For the years ended December 31, 2018, 2017 and
2016
(in thousands of Canadian dollars, except percentage
amounts, unaudited)
January 1 to
December 31,
2018
January 1 to
December 31,
2017
January 1 to
December 31,
2016
Revenues (1)
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 income (loss) for the year
Adjusted net income (see Table 4)
As a percentage of revenues
$
$
$
$
$
$
322,769
78,198
24.2%
$
$
289,529
69,391
24.0%
$
$
66,216
$
61,371
$
20.5%
21.2%
22,218
$
16,104
$
6.9%
5.6%
278,363
63,068
22.7%
55,934
20.1%
14,381
5.2%
$
$
2,249
5,584
1.7%
(6,205) $
(32,107)
2,472
$
0.9%
2,944
1.1%
(1) 2018 revenues include the impact of the adoption of new accounting standard IFRS 15. Refer to note 3 of the
consolidated financial statements for the year ended December 31, 2018 for further details on the impact of the
adoption of new accounting standards.
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TABLE 3
The following table provides reconciliations of net income (loss) to EBITDA and of net income (loss) to
Adjusted EBITDA for the periods noted. See “Non-IFRS Measures” section above for more details.
EBITDA and Adjusted EBITDA reconciliation
For the years ended December 31, 2018, 2017 and
2016
(in thousands of Canadian dollars, unaudited)
January 1 to
December 31,
2018
January 1 to
December 31,
2017
January 1 to
December 31,
2016
Net income (loss) for the year (1)
$
2,249 $
(6,205) $
(32,107)
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 (1)
Restructuring expenses
One-time business reorganization costs (2)
Impairment of goodwill
Acquisition costs
Adjusted EBITDA (1)
4,999
(14)
623
1,407
(284)
4,678
4,173
4,415
(6)
701
725
(2,435)
4,143
3,509
3,414
(8)
578
1,572
(1,649)
4,052
2,092
$
17,831 $
4,847 $
(22,056)
2,654
1,385
—
348
9,457
432
—
1,368
$
22,218 $
16,104 $
4,200
1,103
31,066
68
14,381
(1) 2018 revenues include the impact of the adoption of new accounting standard IFRS 15. Refer to note 3 of the
consolidated financial statements for the year ended December 31, 2018 for further details on the impact of the
adoption of new accounting standards.
(2) One-time business reorganization costs include primarily non-recurring headcount reduction expenses for
employees that did not qualify as restructuring costs and a one-time, non-recurring write-off of intangible assets.
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TABLE 4
The following table provides reconciliations of net income (loss) to Adjusted net income and a presentation
of Adjusted net income per share for the periods noted. See “Non-IFRS Measures” section above for more
details.
Adjusted net income (loss) reconciliation
For the years ended December 31, 2018, 2017 and
2016
(in thousands of Canadian dollars, except share and per
share amounts, unaudited)
Net income (loss) for the year (1)
January 1 to
December 31,
2018
January 1 to
December 31,
2017
January 1 to
December 31,
2016
$
2,249 $
(6,205) $
(32,107)
Restructuring expenses
One-time business reorganization costs (2)
Impairment of goodwill
Acquisition costs
Tax effect of the above adjustments
Adjusted net income (1)
Adjusted net income per share, basic
Adjusted net income per share, diluted
Weighted average number of common shares
outstanding, basic
Weighted average number of common shares
outstanding, diluted
2,654
1,385
—
348
(1,052)
5,584 $
0.27 $
0.27 $
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
20,998,703
16,330,837
11,125,518
21,055,460
16,445,831
11,125,518
$
$
$
Number of common shares outstanding, basic
Number of common shares outstanding, diluted
21,523,515
21,580,272
20,039,159
20,154,153
11,975,053
12,545,015
(1) 2018 revenues include the impact of the adoption of new accounting standard IFRS 15. Refer to note 3 of the
consolidated financial statements for the year ended December 31, 2018 for further details on the impact of the
adoption of new accounting standards.
(2) One-time business reorganization costs primarily include non-recurring headcount reduction expenses for
employees that did not qualify as restructuring costs and a one-time non-recurring write-off of intangible assets.
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Results of operations
REVENUES
For the year ended December 31, 2018, DCM recorded revenues of $322.8 million, an increase of $33.2 million or 11.5%
compared with the same period in 2017. Excluding the effects of adopting IFRS 15, for the year ended December 31,
2018, revenues were $23.1 million, or 8.0%, higher than the same period last year. The increase in revenues for the
year ended December 31, 2018 was primarily due to additional revenues from the full year results of the previous
acquisitions of Eclipse, Thistle, and BOLDER Graphics, the acquisition of Perennial in 2018, new revenues contributed
by a major Canadian Schedule I bank which DCM won late in the third quarter of 2017, increased volumes in labels
work for existing and new retailer customers, increased volume from existing customers in the lotto industry, increased
pricing for certain products and a one-time increase in volume from a long-standing customer which generated $8.9
million in higher revenues in the first quarter of 2018. The increase in revenues was partially offset by the reduction in
spend by certain customers, particularly in the financial institutions sector due to a technological shift in the way they
conduct business, non-recurring work and the timing of orders. Overall, DCM continues to benefit from the growth
initiatives it effected throughout the years 2017 and 2018 which helped to offset some of the secular declines experienced
by the industry.
COST OF REVENUES AND GROSS PROFIT
For the year ended December 31, 2018, cost of revenues increased to $244.6 million from $220.1 million for the same
period in 2017, resulting in a $24.5 million or 11.1% increase over the same period last year. Excluding the effects of
the adjustments upon adoption of IFRS 15, cost of revenues increased by $15.7 million or 7.1% relative to the same
period last year.
Gross profit for the year ended December 31, 2018 was $78.2 million, which represented an increase of $8.8 million or
12.7% from $69.4 million for the same period in 2017. Excluding the effects of adopting IFRS 15, gross profit increased
by $7.4 million or 10.6% relative to the same period last year. Gross profit as a percentage of revenues increased to
24.2% for the year ended December 31, 2018 compared to 24.0% for the same period in 2017, however, excluding the
effects of adopting IFRS 15, gross profit as a percentage of revenues was 24.6% for the year ended December 31,
2018. The increase in gross profit as a percentage of revenues for the year ended December 31, 2018 was positively
impacted by higher gross margins attributed to Eclipse, Thistle, BOLDER Graphics and Perennial, and due to the
refinement of DCM's pricing discipline and the implementation of cost reductions realized from prior cost savings
initiatives. The increase in gross profit as a percentage of revenues was, however, partially offset by changes in product
mix, the impact of paper and other raw materials price increases and compressed margins on contracts with certain
existing customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the year ended December 31, 2018 increased $4.8 million or 7.9% to $66.2 million compared to
$61.4 million for the same period of 2017. Excluding the effects of adopting IFRS 9 and 15, SG&A expenses were
$4.8 million higher for the year ended December 31, 2018 when compared to the same period last year. As a percentage
of revenues, these costs were 20.5% (or 21.2% before the effects of adopting IFRS 9 and 15) and 21.2% of revenues
for the year ended December 31, 2018 and 2017, respectively. The increase in SG&A expenses for the year ended
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December 31, 2018 was primarily attributable to the full year results of the prior acquisitions of Eclipse, Thistle, and
BOLDER Graphics, and the acquisition of Perennial in 2018, one time business reorganization costs of $1.4 million
relating to non-recurring headcount reduction expenses for employees that did not qualify as restructuring costs and a
one-time, non-recurring write-off of intangible assets, additional professional fees and higher sales commission costs
commensurate with the increase in revenues and gross margin and was partially offset by the benefits from the cost
savings initiatives implemented in early 2018 and in 2017.
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 in its
traditional business, a trend being faced by the traditional printing industry for several years now.
For the year ended December 31, 2018, DCM incurred net restructuring expenses of $2.7 million compared to $9.5
million in the same period in 2017. In 2018, DCM incurred $3.8 million of restructuring costs related to 1) headcount
reductions in indirect labour due to plant consolidations completed during the year, as well as reductions in the sales
and administrative functions, and 2) costs incurred to facilitate the closure and consolidation of Multiple Pakfold, BOLDER
Graphics and the Granby, Québec facilities into DCM's Brampton, Ontario, Calgary, Alberta and Drummondville, Quebec
facilities, respectively. Total restructuring costs were offset by a recovery of $1.1 million related to the termination of
DCM's lease agreement for its Granby, Québec facility.
For the year ended December 31, 2017, DCM incurred restructuring expenses of $9.5 million. A total of $6.8 million of
restructuring costs related to headcount reductions in DCM's indirect labour force due to the streamlining of DCM's
order-to-production process as well as headcount reductions in the sales, general and administrative functions; facility
closure costs; and costs to move equipment and inventory from the closed facilities. These restructuring costs were
offset by a recovery of $0.3 million related to a sub-lease of a closed facility in Richmond Hill, Ontario and DCM also
incurred a lease exit charge associated with the closure of its manufacturing and warehouse facility in Regina,
Saskatchewan, in Mississauga, Ontario, and in Granby, Québec of $0.3 million, $0.3 million and $2.4 million, respectively.
DCM will continue to evaluate its operating costs for further efficiencies as part of its commitment to improving its gross
margins and lowering its selling, general and administration expenses.
GOODWILL ANALYSIS
During the fourth quarter of 2018, 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,
Eclipse, Thistle, and Perennial.
The recoverable amounts of all the CGUs 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 is predicted on the value of the future
cash flows 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
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money. This approach requires assumptions about revenue growth rates, operating margins, tax rates and discount
rates.
Revenue growth rates and operating margins were based on the 2019 budget approved by the Board and projected
over a five-year period. For the Eclipse, Thistle and Perennial CGUs, a conservative growth rate of 1% (2017 – 1%),
and 0% (2017 - N/A) for DCM CGU was applied to revenue for 2020 to 2023, in consideration of the current economic
conditions and the specific trends of the printing industry, and a perpetual long-term growth rate of 0% (2017 – 0%) was
used thereafter to derive the recoverable amount of these CGUs.
As a result of this annual test, it was concluded that there was no impairment of goodwill for the DCM, Eclipse, Thistle
and Perennial CGUs. The estimated recoverable amount of the DCM, Eclipse, Thistle and Perennial CGUs exceeded
their carrying values by approximately $53.0 million, $14.3 million, $11.3 million and $6.4 million respectively. The
recoverable amount of the DCM, Eclipse, Thistle and Perennial CGUs would equal their carrying values if the discount
rate was increased to 31.8%, 38.6%, 30.7% and 22.5%, respectively.
ADJUSTED EBITDA
For the year ended December 31, 2018, Adjusted EBITDA was $22.2 million, or 6.9% of revenues, after adjusting EBITDA
for the $2.7 million in restructuring charges, $0.3 million of acquisition costs and $1.4 million of one-time business
reorganization costs. Excluding the effects of adopting IFRS 9 and 15, Adjusted EBITDA was $20.8 million or 6.6% of
revenues for the year ended December 31, 2018 compared with an Adjusted EBITDA of $16.1 million or 5.6% for the
same period last year. The $6.1 million increase or 38.0% in Adjusted EBITDA for the year ended December 31, 2018
over the same period last year was attributable to higher gross profit as a result of revenues contributed by DCM's core
business, in addition to the Eclipse, Thistle, BOLDER Graphics and Perennial acquisitions, improved pricing initiatives
implemented part-way through the prior year, favourable product mix, and cost savings from the restructuring efforts
carried out in the second half of 2017 and early 2018. This was partially offset by higher SG&A expenses.
INTEREST EXPENSE
Interest expense including interest on debt outstanding under DCM’s credit facilities, on certain unfavourable lease
obligations related to closed facilities and interest accretion expense related to certain debt obligations recorded at fair
value, was $5.0 million for the year ended December 31, 2018 compared to $4.4 million for the same period in 2017.
Interest expense for the year ended December 31, 2018 was higher than the same period in the prior year primarily due
to the increase in interest expense relating to the new Crown Facility and the issuance of an unsecured non-interest
bearing vendor take back note to fund the Perennial acquisition, full year interest expense for the vendor take back notes
for the previous year acquisitions, including Eclipse, Thistle and BOLDER Graphics and higher transaction costs for the
new Crown Facility which are being amortized to interest expense.
INCOME TAXES
DCM reported income before income taxes of $3.4 million and a net income tax expense of $1.1 million for the year
ended December 31, 2018 compared to a loss before income taxes of $7.9 million and a net income tax recovery of
$1.7 million for the year ended December 31, 2017. Excluding the impacts of adopting IFRS 9 and 15, the net income
tax expense was $0.8 million for the year ended December 31, 2018. The current income tax expense was due to the
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taxes payable on DCM's estimated taxable income for the year ended December 31, 2018. The deferred income tax
recovery for the year ended December 31, 2018 primarily relates to changes in estimates of future reversals of temporary
differences, primarily representing adjustments due to the adoption of IFRS 15 including the full utilization of loss
carryforwards and new temporary differences that arose for the year ended December 31, 2018.
NET INCOME
Net income for the year ended December 31, 2018 was $2.2 million compared to a net loss of $6.2 million for the same
period in 2017. Excluding the impacts of adopting IFRS 9 and 15, net income for the year ended December 31, 2018
was $1.2 million. The increase in comparable profitability for the year ended December 31, 2018 was primarily due to
the increase in revenues which included the post-acquisition financial results of Eclipse, Thistle, BOLDER Graphics and
Perennial, a refined discipline in DCM's pricing strategy, lower restructuring expenses and acquisition costs, and cost
reductions as a result of the restructuring efforts. This increase was partially offset by increases in the cost of raw
materials and compressed margins on contracted customers, and higher levels of SG&A including the post-acquisition
financial results of Eclipse, Thistle, BOLDER Graphics and Perennial.
ADJUSTED NET INCOME
Adjusted net income for the year ended December 31, 2018 was $5.6 million compared to Adjusted net income of $2.5
million for the same period in 2017. Excluding the impacts of adopting IFRS 9 and 15, Adjusted net income for the year
ended December 31, 2018 was $5.1 million. The increase in comparable profitability for the year ended December 31,
2018 was primarily due to the increase in revenues which included the post-acquisition financial results of Eclipse,
Thistle, BOLDER Graphics and Perennial, in addition to a refined discipline in DCM's pricing strategy and cost reductions
as a result of the restructuring efforts. This increase was partially offset by higher levels of SG&A including the post-
acquisition financial results of Eclipse, Thistle, BOLDER Graphics and Perennial.
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 Integrated Private Debt Fund IV LP (“IAM IV"), a
fund managed by Integrated Asset Management Corp. ("IAM"), pursuant to separate amended and restated credit
agreements, between DCM and the Bank (as amended, the “Bank Credit Agreement”) and IAM (as amended, the “IAM
IV Credit Agreement”), respectively. Upon closing of the Thistle acquisition in 2017, DCM became a co-borrower with
Thistle under an existing credit agreement (the “IAM III Credit Agreement”) between Thistle and Integrated Private Debt
Fund III LP (“IAM III”), another fund 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
covenants stipulated under the IAM IV Credit Agreement and are reported on a consolidated basis.
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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 were repayable on demand and bore 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 had a term of one year and could 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. As at December 31, 2018, DCM had no outstanding borrowings under the Bridging Credit Facility as the facility
was fully repaid on May 8, 2018, including accrued and unpaid interest and the security for this facility was released.
On May 8, 2018, DCM established a $12.0 million non-revolving term loan facility with Crown Capital Partner Funding,
LP (previously Crown Capital Fund IV, LP) (the "Crown Facility"), a fund managed by Crown Capital LP Funding Inc.
(previously Crown Capital Fund IV Management Inc.) ("Crown"), of which approximately $8.2 million was used to fund
the up-front cash component of the Perennial acquisition and $3.5 million was used to repay in full the outstanding
balance of the Bridging Credit Facility. The balance of the Crown Facility was used for general working capital purposes.
The Crown Facility was made available in one advance, with an effective date of May 7, 2018, and bears interest at a
rate equal to 10% per annum, calculated daily and payable in arrears on a quarterly basis. The loan facility has a five
(5) year term beginning on May 7, 2018 and can be repaid at any time after twenty-four (24) months, subject to a
prepayment fee, upon ten (10) days prior written notice to Crown. The Crown 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 a conventional security on all of the assets of DCM and its subsidiaries. In addition, a total of 960,000
warrants were issued to Crown in connection with the Crown Facility. Each warrant entitles the holder to acquire one
DCM common share at an exercise price of $1.75 for a period of five years, commencing on May 8, 2018. The Crown
Facility of $12.0 million was apportioned to the debt instrument and the warrant option based on their respective fair
values of $11.5 million and $0.5 million, respectively. The fair value of the warrant option was then bifurcated and
recorded separately within equity while the fair value of the debt host will be accreted from $11.5 million to $12.0 million
over the term of the loan. As at December 31, 2018 the accreted debt instrument was valued at $11.5 million including
total accretion expense of $0.1 million. The Crown Facility limits spending on capital expenditures by DCM to an aggregate
amount not to exceed $5.0 million during any fiscal year. DCM has capitalized transaction costs of $0.7 million related
to the Crown Facility and the related unamortized balance of these transaction cost was $0.6 million as at December 31,
2018. The unamortized balance of the transaction costs of the Crown Facility is being amortized over the remaining
term of the facility.
On July 31, 2018, DCM entered into a commitment with the Bank to lease equipment by way of a demand, non-revolving
lease facility for approximately $2.4 million (“Bank Lease Facility”). As part of this arrangement, DCM initially entered
into an agreement to purchase the equipment from a third-party supplier. All of DCM’s rights, title and interest in the
equipment were subsequently assigned to the Bank by way of an agreement dated July 31, 2018. The Bank advanced
funds pursuant to an interim funding agreement dated July 31, 2018 (the “Interim Funding Agreement”) to pay for the
upfront amounts required by the third-party supplier in exchange for a monthly fee payable by DCM which is calculated
by multiplying the annual prime rate plus 0.75% by the total value of funds advanced and pro-rated for the days the
funds remain outstanding. Total interest expense for the year ended December 31, 2018 of 2018 was $33 thousand.
The Bank Lease Facility is expected to begin in the second quarter of 2019 and will have monthly payments of
approximately $37 thousand per month over a five-year term.
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On July 31, 2018, the Bank Credit Agreement was amended to allow DCM to enter into the Bank Lease Facility for an
amount not to exceed $3.0 million. The Bank Credit Facility excludes the Bank Lease Facility from the maximum principal
amount of debt available of $35.0 million and has added a cross collateralization condition to include the equipment
leased as collateral under Bank Credit Facility and Bank Lease Facility.
As at December 31, 2018, DCM had outstanding borrowings of $20.8 million and letters of credit granted of $0.9 million
under the Bank Credit Facility, outstanding borrowings of $3.9 million under the IAM III Credit Facility, outstanding
borrowings of $18.6 million under the IAM IV Credit Facility, borrowings of $4.2 million under the IAM V Credit Facility,
and outstanding borrowings of $12.0 million under the Crown Facility. Under the Bank Credit Facility, DCM had access
to $9.3 million of available credit at December 31, 2018. The bank overdraft balance of $4.0 million on the statement
of consolidated position as at December 31, 2018, represents outstanding cheques which, when cashed, would be a
draw over the Bank Credit Facility.
Under the terms of the Bank Credit Agreement, the maximum principal amount available under the Bank Credit Facility
is $35.0 million and the Bank Credit Facility 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%.
Subsequent to year end on March 5, 2019, the Bank Credit Facility maturity date was extended from March 31, 2020
to January 31, 2023, and the prime rate margin was adjusted from 0.75% to 0.60%.
As at December 31, 2018, DCM has capitalized transaction costs of $0.9 million related to the amended Bank Credit
Facility. The unamortized transaction costs related to the credit facility as at December 31, 2018 was $0.4 million. The
unamortized balance of the transaction costs are being amortized over the remaining term of the amended Bank Credit
Facility. As at December 31, 2018, all of DCM’s indebtedness outstanding under the amended Bank Credit Facility was
subject to a floating interest rate of 4.7% per annum. As at December 31, 2018, DCM had access to $9.3 million of
available credit under the Bank Credit Facility.
Under the terms of the IAM Credit Agreements, the maximum aggregate principal amount which may be outstanding at
any time under the IAM III Credit Facility, IAM IV Credit Facility, the IAM V Credit Facility, the Bank Credit Facility and
Crown Facility, calculated on a consolidated basis in accordance with IFRS (“Total Funded Debt”), is $72.0 million (after
giving effect to the provisions of the inter-creditor agreement described below).
The principal amount of the amended IAM III Credit Facility amortizes in blended equal monthly repayments of principal
and interest over a nine year term ending October 15, 2022. The principal amount of the amended IAM IV Credit Facility
amortizes in blended equal monthly repayments of principal and interest over a seven year term ending in March 10,
2023. The principal amount of the IAM V Credit Facility amortizes in blended equal monthly repayments of principal
and interest over a sixty six month term ending in May 15, 2023. As at December 31, 2018, 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. 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
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Credit Facility. As at December 31, 2018, 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.
As at December 31, 2018, DCM has capitalized transaction costs of $nil, $0.9 million, and $0.2 million related to the
IAM III Credit Facility, IAM IV Credit Facility and IAM V Credit Facility, and the unamortized transaction costs were $26.0
thousand, $0.4 million, and $0.2 million, respectively, amortized over the remaining term of each facility.
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 Crown Facility 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 or payment of dividends on the common shares of DCM without the consent of the
Bank, IAM III, IAM IV, IAM V and Crown, as applicable.
Under the terms of the amended Bank Credit Agreement, DCM is required to maintain a fixed charge coverage ratio as
follows: i) for the period commencing July 1, 2017 and ending December 31, 2017, the ratio would not be less than 0.9
to 1.0; ii) for the period commencing January 1, 2018 and ending March 31, 2018, the ratio would not be less than 1.0
to 1.0, and for the periods ending after March 31, 2018, the ratio must not be less than 1.1 to 1.0 at all times, calculated
on a consolidated basis, in respect of any particular trailing 12 month period, as EBITDA for such period less cash taxes,
cash distributions (including dividends paid) and non-financed capital expenditures paid in such period, divided by the
total amount required by DCM to service its outstanding debt for such period. The pro forma financial results for DCM's
acquisitions 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. As at December 31, 2018, the fixed charge coverage ratio was 1.42. As at
December 31, 2018, DCM was in compliance with this covenant and it expects to be compliant with this covenant going
forward.
Under the terms of the IAM Credit Agreements, DCM is required to maintain (i) a ratio of Total Funded Debt to EBITDA
of not greater than the following levels: from October 1 2017 to December 31, 2017 - 3.50 to 1; from January 1, 2018
up to March 31, 2018 - 3.25 to 1; and on and after 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 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. In addition, the IAM Credit Agreements permit cash payments in respect of
the vendor take-back promissory notes issued in connection with DCM's acquisitions, as well as consulting fees or
distributions in cash to shareholders and/or related parties, in an amount equal to the Excess Cash Flow (as defined
below) provided the debt service coverage ratio for the four most recently completed fiscal quarter is greater than 2.00
to 1 and there is no default or event of default. The excess cash flow is calculated by taking EBITDA less payments for
(i) cash taxes; (ii) capital expenditures; (iii) principal and interest on the Bank Credit Facility, IAM Credit Agreements and
the Crown Facility and (iv) interest on capital leases for the two most recently completed fiscal quarters (“Excess Cash
Flow”). The Excess Cash Flow is required to be calculated as at March 31 and September 30 of each calendar year
(the “Excess Cash Flow Determination Date”) which determines the quantum of payments that can be made for the
following six-month period until the next Excess Cash Flow Determination Date. As at September 30, 2018, the conditions
required to permit excess cash flow payments were met and the Excess Cash Flow was sufficient to cover the payments
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required to the VTB Noteholders (as defined below) for the next six months. As at December 31, 2018, the ratio of Total
Funded Debt to EBITDA was 2.58, the debt service coverage ratio was 2.07 and the working capital current ratio was
1.32. On October 26, 2018, DCM received a waiver with regards to the IAM Credit Agreements for the purpose of
determining DCM's Excess Cash Flow, whereby the requirement to maintain a debt service coverage ratio of 2.0 times
was waived as long as DCM maintains a debit service coverage ratio of at least 1.85 times for next four fiscal quarters
beginning October 1, 2018 and ending on September 30, 2019. DCM is required to maintain the requirement in order
to make payments in respect to the vendor take-back promissory notes issued in connection with the Eclipse, Thistle,
BOLDER Graphics and Perennial acquisitions in addition to any other distributions to shareholders and/or related parties.
As at December 31, 2018, DCM was in compliance with these covenants and it expects to be compliant with these
covenants going forward.
Under the terms of the Crown Facility agreement, DCM must maintain (i) a fixed charge ratio, at the end of each quarter,
of no less than (a)1.1 to 1.0 for the fiscal quarter ending June 30, 2018, (b) 1.25 to 1.0 for the fiscal quarter ending
September 30, 2018 and (c) 1.4 to 1.0 for each fiscal quarter thereafter; and (ii) a net debt to EBITDA ratio, of not greater
than 4.0 to 1.0 for each quarter up until December 31, 2019 and 3.0 to 1.0 for each quarter thereafter. On September
30, 2018, DCM received a waiver on the Crown Facility regarding the requirement to meet a fixed charge coverage ratio
of 1.4 to 1.0 for the quarters ending December 31, 2018 and March 31, 2019. Subsequent to year-end on February 8,
2019, DCM received a waiver on the Crown Facility regarding the requirement to meet the fixed charge coverage ratio
of 1.4 to 1.0 for the quarter ending June 30, 2019. As at December 31, 2018, the fixed charge coverage ratio was 1.40
and the net debt to EBITDA ratio was 2.99. As at December 31, 2018, DCM was in compliance with this covenant and
it expects to be compliant with this covenant going forward.
A failure by DCM to comply with its obligations under any of the amended Bank Credit Agreement, the IAM Credit
Agreements or the Crown Facility 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 III, IAM IV and IAM V, 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 DCM will be successful in achieving the
results targeted in its operating plans or in complying with its covenants over the next twelve months.
DCM's obligations under the amended Bank Credit Facility, the IAM III Credit Facility, the amended IAM IV Credit Facility,
the IAM V Credit Facility, and the Crown Facility are secured by conventional security charging all of the property and
assets of DCM and its affiliates. On February 22, 2017, DCM entered into an amended inter-creditor agreement between
the Bank, IAM III, IAM IV, and the parties to the vendor take-back promissory notes (the “VTB Noteholders”) issued in
connection with the acquisitions of Eclipse and Thistle, respectively, which, among other things, establishes the rights
and priorities of the respective liens of the Bank, IAM III, IAM IV and the VTB Noteholders on the present and after-
acquired property of DCM, Eclipse and Thistle (the "Original Inter-Creditor Agreement"). On June 28, 2017, a second
inter-creditor agreement was entered into in order to include Bridging and to separately address the priority of its liens
on certain specified equipment as a result of the Bridging Credit Facility. On November 10, 2017, the Original Inter-
Creditor Agreement was amended in connection with the BOLDER Graphics acquisition to include IAM V as a party to
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Annual Report 2018
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the agreement and to establish the rights and priorities of the respective liens of the Bank, IAM III, IAM IV, IAM V and
the VTB Noteholders on the present and after-acquired property of BOLDER Graphics. Effective May 7, 2018, DCM
entered into a second amended and restated inter-creditor agreement (the “Second A&R ICA”) between the Bank, IAM
III, IAM IV, IAM V, Crown and the VTB Noteholders, respectively, which, among other things, establishes the rights and
priorities of the respective liens of the Bank, IAM III, IAM IV, IAM V, Crown and the VTB Noteholders on the present and
after-acquired property of DCM and Perennial.
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 Crown Facility,
as amended, or other indebtedness of DCM.
In assessing DCM’s liquidity requirements, DCM takes into account its level of cash, together with currently projected
cash to be provided by operating activities, cash available from its unused credit facilities, cash from investing activities
such as sales of redundant assets, access to the capital markets and anticipated reductions in operating costs projected
to result from existing restructuring activities, as well as its ongoing cash needs for its existing operations. DCM expects
there to be sufficient liquidity to fund its currently projected operating requirements including expenditures related to its
growth strategy, payments associated with various restructuring and productivity improvement initiatives, contributions
to its pension plans, payment of income tax liabilities, cash required to finance currently planned capital expenditures
and funds required to meets its debt repayment obligations. Cash flows from operations have been, and could continue
to be, negatively impacted by decreased demand for DCM’s products and services and pricing pressures 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. 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.
During the year ended December 31, 2018, DCM engaged actuaries to complete an updated actuarial valuation of the
DATA Communications Management Pension Plan, which confirmed that, as at January 1, 2018, the solvency position
of the DATA Communications Management Pension Plan had improved since the previous valuation. Based upon the
January 1, 2018 actuarial report, DCM's annual minimum funding obligation for the defined benefit provision of the DATA
Communications Management Pension Plan for 2018 remained unchanged at $0.6 million when compared to the actuarial
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report as at January 1, 2017. The annual minimum funding obligation will decrease from $1.4 million based on the
actuarial report as at January 1, 2017 to $0.5 million for 2019 and 2020.
As of December 31, 2017, DCM had exceeded its minimum required funding requirements for the defined benefit provision
of the DATA Communications Management Pension Plan for 2017 by $0.2 million. During the year ended December
31, 2018, DCM made all the required payments related to its 2018 funding requirements for the defined benefit provision
of the DATA Communications Management Pension Plan after applying $0.2 million of the excess funding from 2017.
The remaining excess funding from 2017 of $11 thousand will be applied to DCM's 2019 minimum funding requirements
for the defined benefit provision of the DATA Communications Management Pension Plan.
DCM makes contributions to the Québec Graphics Communications SRDF based on a percentage of the wages of its
unionized employees covered by the respective collective bargaining agreements, all of whom are employed at DCM
facilities located in the Province of Québec. The SRDF is a negotiated contribution defined benefit multi-employer pension
plan which provides retirement benefits to unionized employees in the printing industry. The SRDF is jointly-trusteed by
representatives of the employers of SRDF members and the unions which represent SRDF Quebec members in collective
bargaining. Based upon the terms of those applicable collective agreements, DCM’s estimated 2019 funding obligation
for the SRDF is $0.6 million. DCM has accounted for the SRDF on a defined contribution basis.
Under Québec pension legislation for negotiated contribution defined benefit multi-employer pension plans:
•
•
•
Employers’ contributions are limited to those amounts specified in the applicable collective agreements;
Reduction of accrued benefits while the plan is ongoing or upon plan termination is allowed, if the plan is
insufficiently funded; and
The responsibility of participating employers to fund their prorated share of the solvency deficit upon withdrawal
from the plan or termination of the plan, except if withdrawal from the plan or termination of the plan occurs
prior to April 2, 2020, is removed.
The most recent funding actuarial report for the SRDF (as at December 31, 2017), which takes into account the 2016
restructuring of the plan, disclosed that:
•
•
Total employers’ contributions determined pursuant to collective agreements cover the minimum total
contributions required under applicable Québec pension legislation;
The plan has a going concern funding surplus with a ratio of 105%; and
• While the plan has a solvency deficiency with a solvency funded ratio of 80%, Quebec pension legislation does
not require the solvency deficit be funded.
CASH FLOW FROM OPERATIONS
During the year ended December 31, 2018, cash flows generated by operating activities were $17.3 million compared
to cash flows generated by operating activities of $3.9 million during the same period in 2017. A total of $16.5 million
of the current period cash flows resulted from operations, after adjusting for non-cash items, compared with $13.0 million
for the same period last year. Current period cash flows from operations were positively impacted by the increase in
revenues, better gross margins from improved pricing discipline and higher margins earned through the acquisitions of
BOLDER Graphics and Perennial, however this was slightly offset by an increase in the cost of paper combined with
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compressed gross margin for customers with contract pricing, and an increase in SG&A expenses from the acquisitions
made, one-time, non-recurring business reorganization costs, professional fees and higher sales commissions
corresponding with the increase in revenues over the prior year comparative period. Changes in working capital during
the year ended December 31, 2018 generated $7.8 million in cash compared with $0.5 million of cash used in the prior
year. There was an increase in accounts payable for higher volumes in inventory purchases and related manufacturing
costs as a result of higher revenues during the year ended December 31, 2018 as well as extending the payment terms
to DCM's suppliers to better align the timing of payments with collections on outstanding receivables from DCM's
customers. In addition, during the year ended December 31, 2018, $4.9 million of cash was used to make payments
primarily related to severances and lease termination costs, compared with $7.0 million of payments in 2017.
Contributions made to the Company's pension plans were $1.0 million, which decreased from $1.4 million in the prior
year while income tax payments increased to $1.2 million for the year ended December 31, 2018 from $0.2 million during
the prior year.
INVESTING ACTIVITIES
For the year ended December 31, 2018, $14.9 million in cash flows were used for investing activities compared with
$11.9 million during the same period in 2017. In 2018, $2.7 million of cash was used to invest in IT equipment to support
the new Enterprise Resource Planning ("ERP") system and printing equipment, in addition to incurring certain costs for
leasehold improvements to facilitate the consolidation of the Multiple Pakfold, Granby, Québec and BOLDER Graphics
facilities into DCM's Brampton, Ontario, Drummondville, Québec and Calgary, Alberta locations, respectively.
Furthermore, $5.1 million of cash was used to further invest in the development of DCM's new ERP system. In 2018,
$7.3 million of net cash was used to acquire the business of Perennial.
FINANCING ACTIVITIES
For the year ended December 31, 2018, cash flow used for financing activities was $3.5 million compared to cash flow
generated by financing activities of $3.7 million during the same period in 2017. DCM received $0.7 million in cash from
the issuance of common shares and warrants and $13 million in cash from advances under its credit facilities including
the establishment of the new Crown Facility. A total of $11.2 million in outstanding principal amounts under its various
credit facilities were repaid during the year and a total of $4.6 million was repaid related to the vendor take-back promissory
notes issued in connection with the acquisitions of Eclipse, Thistle and BOLDER Graphics. DCM also incurred $0.9
million of transaction costs related to the amendments to its senior credit facilities and the establishment of the new
Crown Facility.
Outstanding share data
At March 22, 2019 and December 31, 2018, there were 21,523,515 common shares of DCM (“Common Shares”)
outstanding, respectively. At December 31, 2017, there were 20,039,159 Common Shares outstanding.
On June 11, 2018, a total of 89,500 Common Shares were issued pursuant to the exercise of 89,500 warrants.
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Annual Report 2018
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On May 8, 2018, a total of 1,394,856 Common Shares were issued to one of the vendors as partial consideration for
the purchase of the shares of Perennial. That vendor 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 the Perennial transaction until May 8, 2019.
At March 22, 2019 and December 31, 2018, there were options outstanding to purchase up to 1,991,957 Common
Shares and at December 31, 2017, there were options outstanding to purchase up to 804,961 Common Shares. During
the year ended December 31, 2018, the Board approved awards of options to purchase up to 1,200,000 Common
Shares. Once vested, the options are exercisable for a period of seven years from the grant date at an exercise price
of $1.41 per share, representing the fair value of the Common Shares on March 13, 2018. A total of 40,000 options
were awarded to DCM's CEO and a total of 1,160,000 options were awarded to the other members of DCM's executive
management team and the Board. All options vest at a rate of 1/36th per month beginning on March 14, 2018. The fair
value of the options issued was estimated to be $0.8 million using the Black-Scholes option-pricing model, assuming a
risk-free interest of 1.88%, a weighted average life of seven years, a dividend yield of nil, an expected volatility of 40%
and a forfeiture rate of 10%. During the year ended December 31, 2018, options to purchase 13,004 Common Shares
were forfeited.
At March 22, 2019 and December 31, 2018, there were warrants outstanding to purchase up to 2,251,550 Common
Shares. At December 31, 2017, there were warrants outstanding to purchase up to 1,381,050 Common Shares,
respectively. On June 11, 2018, 89,500 warrants were exercised, and DCM received cash proceeds of $0.2 million. On
April 30, 2018, Crown was granted a total of 960,000 warrants in connection with the Crown Facility used to finance the
acquisition of Perennial. Each warrant entitles the holder to acquire one Common Share of DCM at an exercise price
of $1.75 for a period of five years, commencing on May 8, 2018. The fair value of the warrants issued was estimated
to be $0.6 million using the Black-Scholes option-pricing model, assuming a risk-free interest of 2.16%, a weighted
average life of five years, a dividend yield of nil and an expected volatility of 40%. This was adjusted using a discount
rate of 5% for the statutory hold period and net of transaction costs. The total credit facility amount of $12.0 million was
then apportioned between the host debt and the warrant option based on relative fair values. The 960,000 warrants
were recorded at a carrying value of $0.5 million.
Financial instruments and Risk management
DCM’s financial instruments consist of cash, restricted cash, trade receivables, bank overdraft, trade payables and
accrued liabilities, bonuses payable, credit facilities, promissory notes, and restricted share units, as indicated in DCM’s
statements of consolidated financial position as at December 31, 2018 and December 31, 2017, respectively. All of
DCM's financial instruments are non-derivative in nature. DCM does not enter into financial instruments for trading or
speculative purposes.
FAIR VALUE
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.
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The fair value for other non-derivative financial instruments such as cash, trade receivables, bank overdraft, trade
payables and accrued liabilities approximates their carrying value because of the short-term maturity of these instruments.
The fair value of restricted cash approximates its carrying value because it is a deposit held with a Canadian chartered
bank. Credit facilities, bonuses payable and promissory notes are initially recognized as the amount required to be paid
less a discount to derive its fair value and are then measured at amortized costs using the effective interest method,
less any impairment losses.
CREDIT RISK
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its
contractual obligations. Financial instruments that potentially subjected DCM to credit risk consisted of cash and trade
receivables. The carrying amount of assets included in the consolidated statements of financial position represents the
maximum credit exposure.
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
60 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 agencies that are not concentrated in
any specific geographic area. DCM does not believe that any single industry or geographic region represents significant
credit risk. Credit risk concentration with respect to trade receivables is mitigated by DCM’s large client base.
To measure the ECLs, trade receivables, including unbilled receivables, have been grouped based on similar credit risk
characteristics, past due status and other relevant factors. The expected default rates are calculated based on
management’s estimate as well as historical credit losses. The historical loss rates are adjusted to reflect current and
forward-looking information on economic factors affecting the ability of the customers to settle the trade receivable.
On that basis, the loss allowance as at December 31, 2018 was determined using default rates under the provision
matrix for an amount of $0.8 million, of which $0.5 million relates to unbilled receivables. The following table represents
the provision matrix as at December 31, 2018:
The following default rates are used to calculate the ECLs on billed receivables as at December 31, 2018:
December 31, 2018 (in
thousands)
Total
Current
period
Over 30 days Over 60 days Over 90 days
Over 120
days
Default rates
Billed receivables balance
Billed receivables ECL
44,352
$342
0.01%
23,243
$3
0.03%
14,246
$4
0.06%
5,370
$3
0.10%
55.40%
896
$1
597
$331
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Annual Report 2018
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The following default rates are used to calculate the ECLs on unbilled receivables as at December 31, 2018:
December 31, 2018 (in
thousands)
Total
Current
period
Over 30 days Over 60 days Over 90 days
Default rates
Unbilled receivables balance
Unbilled receivables ECL
29,567
$453
0.20%
5,427
$11
0.39%
5,928
$23
0.97%
3,912
$38
1.50%
2,672
$40
Over 120
days
2.93%
11,628
$341
At the end of each reporting period, management re-assesses the default rates. Default rates are applied to the billed
and unbilled receivable balances to calculate the credit default reserve. 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. When collection efforts have been reasonably
exhausted, specific balances are written off.
LIQUIDITY RISK
Liquidity risk is the risk that DCM may encounter difficulties in meeting obligations associated with financial liabilities as
they become due. DCM believes that the currently projected cash flow 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 or investment in new 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 contains additional information on the contractual undiscounted cash flows of DCM’s significant financial liabilities
and the future commitments of the Company.
As at December 31, 2018, DCM had access to $10.2 million of additional available credit less letters of credit granted
of $0.9 million under the Bank Credit Facility.
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. DCM’s interest rate risk arises from credit facilities issuances at floating interest rates. As at
December 31, 2018, $20.8 million of DCM’s indebtedness outstanding was subject to floating interest rates of 4.7% per
annum, $38.2 million of DCM’s indebtedness outstanding was subject to a fixed interest rate of 6.1% per annum and of
6.95% per annum, and $12.0 million on indebtedness outstanding was subject to a fixed rate of 10.0% per annum.
CURRENCY RISK
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 course of business, DCM does not have significant foreign
exchange transactions and, accordingly, the amounts and currency risk are not expected to have adverse material impact
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Annual Report 2018
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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.
Note 21 to the audited consolidated financial statements of DCM for the year ended December 31, 2018 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, 2018. Short-term commitments
such as month-to-month office leases, which are easily cancelled, are excluded from this definition.
DCM believes that its existing cash resources and projected cash flows from operations will be sufficient to fund its
currently projected operating requirements and that it will continue to remain compliant with its covenants and other
obligations under its credit facilities.
TABLE 5
The following table sets out DCM's significant contractual obligations and commitments as of December 31, 2018.
Total
(in thousands of Canadian dollars,
unaudited)
Pension funding contributions (1) $ 10,537
Bonuses payable (2)
733
Long-term debt (3)
Promissory notes (4)
Operating leases (5)
$ 69,958
$ 59,925
5,578
$
$
2019
2020
2021
2022
2023
2024 and
thereafter
$ 1,056
$ 1,895
$ 1,905
$ 1,899
$ 1,891
$
1,891
400
9,495
4,078
333
29,478
1,000
11,998
11,361
—
8,517
500
9,536
—
—
8,323
14,145
—
—
—
—
—
6,892
6,463
13,675
Total
$ 146,731
$ 27,027
$ 44,067
$ 20,458
$ 17,114
$ 22,499
$
15,566
(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 thousand ending October 31, 2020.
(3) Long-term debt at December 31, 2018 subject to floating interest rates consists of the Bank Credit Facility, expiring
on March 31, 2020. As at December 31, 2018, the outstanding balances totaled $20.8 million and bore interest at
an average floating rate of 4.7% per annum. The amounts at December 31, 2018 include estimated interest totaling
$1.0 million for 2019 and $0.2 million 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, 2017. Long-
term debt at December 31, 2018 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, IAM V Credit Facility expiring on May 15,
2023 and the Crown Facility expiring May 7, 2023. As at December 31, 2018, the outstanding balances totaled
$38.7 million and bore interest at a fixed rate of 6.1% per annum, of 6.95% per annum, 6.95% per annum and
10.00% , respectively. Monthly blended principal and interest payments of $96.0 thousand, of $0.4 million and of
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Annual Report 2018
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$0.1 million, are made for the IAM III Credit Facility, the IAM IV Credit Facility and the IAM V Credit Facility, respectively.
Annual interest payment on the Crown Facility totals $1.2 million.
(4) Promissory notes related to the acquisitions completed during the year. Non interest bearing promissory notes
related to the acquisition of Eclipse totaling $4.6 million and payable in two installments of $2.3 million due on
February 28, 2018 and February 28, 2019, respectively. Additional non interest bearing promissory notes related
to the Thistle acquisition totaling $1.9 million which payable in monthly installments of $0.1 million ending
February 28, 2019, and the Perennial acquisition totaling $2.5 million payable in three installments of $1.0 million,
$1.0 million and $0.5 million due on May 8, 2019, May 8, 2020 and May 8, 2021, respectively. Interest bearing
promissory notes related to the acquisition of BOLDER totaling $1.2 million and bore interest at a fixed rate of 6.0%
per annum. Monthly blended principal and interest payments of $0.1 million, beginning February 28, 2018 and
ending September 30, 2019.
(5) Operating leases include payments to landlords for the rental of facilities and payments to vendors for the rental of
equipment.
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, 2018, there were regular intercompany activities between DCM and its subsidiaries
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.
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 $0.5 million (2017 – $0.3 million) related to these policies. As at December 31, 2018, prepaid expenses and other
current assets included prepaid insurance to the insurance company of $0.3 million (2017 – $0.3 million). The insurance
company was a related party whereby the Chair of the Board and the President of DCM each were Directors and indirectly
held a minority interest in the insurance company, through companies controlled by them. Subsequent to year-end on
January 9, 2019, the Chair of the Board and the CEO and President of DCM disposed of their minority interest in the
insurance company, and resigned their positions as Directors.
For 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, 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. During the year
ended December 31, 2018, 89,500 common shares were issued pursuant to the exercise of warrants. The additional
share issue caused an increase in common shares by $0.2 million. The increase consisted of cash proceeds of $0.2
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million thousand as well as the transfer of share options from the warrant reserves to common shares at the recognized
fair value of $18 thousand.
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 CEO and 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 $9 thousand (2017 - $7 thousand) per month.
Effective July 1, 2018, Perennial entered into a new agreement with Perennial Designs International Private Limited, a
company 100% owned by a key management personnel for creative design and development of technology. During the
year ended, total consulting fees totaled $0.3 million (2017 - nil).
On March 15, 2018, DCM entered into a 5-year loan agreement with a key member of management for a total of $0.1
million to finance the purchase of Common Shares. Interest will accrue at a rate of 3% per annum on the unpaid balance.
As at December 31, 2018, the balance owing $0.1 million (2017 - nil) and was included in trade payables and accrued
liabilities on the statement of financial position.
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.
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Operating results for the fourth quarter of 2018 and 2017
TABLE 6
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,
2018
October 1 to
December 31,
2017
Revenues (1)
Cost of revenues
Gross profit
Selling, general and administrative expenses
Restructuring expenses
Acquisition costs
Amortization of intangible assets
Income (loss) before finance costs and income taxes
Finance costs
Interest expense, net
Amortization of transaction costs
Income (loss) before income taxes
Income tax (recovery) expense
Current
Deferred
Net income (loss) for the period
Net income (loss) attributable to common shareholders
Adjusted EBITDA (see Table 7)
Adjusted net income (see Table 8)
Adjusted net income per share, basic and diluted
Weighted average number of common shares outstanding, basic
and diluted
Number of common shares outstanding, basic and diluted
$
81,152 $
61,279
19,873
15,247
1,845
29
—
17,121
2,752
1,321
154
1,475
1,277
422
13
435
76,125
57,771
18,354
15,263
4,453
381
—
20,097
(1,743)
1,143
324
1,467
(3,210)
221
(972)
(751)
$
$
$
$
$
842 $
(2,459 )
842 $
6,538 $
2,280 $
0.11 $
(2,459)
5,643
1,533
0.08
21,523,515
21,523,515
19,732,888
20,039,159
(1)
2018 revenues include the impact of the adoption of new accounting standard IFRS 15. Refer to note 3 of the
consolidated financial statements for the year ended December 31, 2018 for further details on the impact of the
adoption of new accounting standards.
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TABLE 7
The following table provides a reconciliation of net income (loss) to Adjusted EBITDA for the periods
noted. See “Non-IFRS Measures”.
(in thousands of Canadian dollars, unaudited)
Net income (loss) for the period
Interest expense
Interest income
Amortization of transaction costs
Current income tax expense
Deferred income tax expense
Depreciation of property, plant and equipment
Amortization of intangible assets
EBITDA
Restructuring expenses
One-time business reorganization costs
Acquisition costs
Adjusted EBITDA (1)
October 1 to
December 31, 2018
842 $
1,330
(9)
154
422
13
1,192
659
4,603 $
1,845
61
29
6,538 $
$
$
$
October 1 to
December 31, 2017
(2,459 )
1,149
(6)
324
221
(972)
1,116
1,004
377
4,453
432
381
5,643
(1)
2018 revenues include the impact of the adoption of new accounting standard IFRS 15. Refer to note 3 of the
consolidated financial statements for the year ended December 31, 2018 for further details on the impact of the
adoption of new accounting standards.
TABLE 8
The following table provides a reconciliation of net income (loss) to Adjusted net income for the periods
noted. See “Non-IFRS Measures”.
(in thousands of Canadian dollars, unaudited)
Net income (loss) for the period
Restructuring expenses
One-time business reorganization costs
Acquisition costs
Tax effect of above adjustments
Adjusted net income (1)
October 1 to
December 31,
2018
842 $
1,845
61
29
(497)
2,280 $
$
$
October 1 to
December 31,
2017
(2,459 )
4,453
432
381
(1,274)
1,533
(1)
2018 revenues include the impact of the adoption of new accounting standard IFRS 15. Refer to note 3 of the
consolidated financial statements for the year ended December 31, 2018 for further details on the impact of the
adoption of new accounting standards.
REVENUES
For the quarter ended December 31, 2018, DCM recorded IFRS 15 adjusted revenues of $81.2 million, an increase of
$5.0 million or 6.6% compared with the same period in 2017. Excluding the effects of the adjustments upon adoption
of IFRS 15, revenues increased by $1.5 million or 2.0% relative to the same period last year. The increase in revenues
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for the quarter ended December 31, 2018 was primarily due to the inclusion of the full year financial results of BOLDER
Graphics, the acquisition of Perennial in 2018, new customer wins within the financial services and Cannabis industries,
improved pricing of existing contracts, and increased volume from existing customers in the lotto industry. 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 and labels for certain government agencies and major retailers.
COST OF REVENUES AND GROSS PROFIT
For the quarter ended December 31, 2018, cost of revenues increased to $61.3 million from $57.8 million for the same
period in 2017. Gross profit for the quarter ended December 31, 2018 was $19.9 million, which represented an increase
of $1.5 million or 8.3% from $18.4 million for the same period in 2017. Gross profit as a percentage of revenues increased
to 24.5% for the quarter ended December 31, 2018 compared to 24.1% for the same period in 2017. Excluding the
effects of the adjustments upon adoption of IFRS 15, cost of revenues increased by $0.2 million or 0.4%, and gross
profit as a percentage of revenue remained consistent at 24.1% relative to the same period last year. The increase in
gross profit as a percentage of revenues for the quarter ended December 31, 2018 was primarily due to higher revenues,
increased pricing for certain products and favourable product mix, with lower levels of lower margin thermal products
production than the comparable period replaced with higher margin products, higher gross margins attributed to Perennial,
as well as cost reductions realized from prior cost savings initiatives implemented early on in the year. Gross profit was
also negatively impacted by increases in the cost of paper and the timing of passing through increases to customers,
particularly certain large contracted customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the quarter ended December 31, 2018 decreased $0.1 million or 0.1% to $15.2 million compared
to $15.3 million in the same period in 2017. Excluding the effects of adopting IFRS 9 and 15, SG&A expenses were
consistent when compared to the same period last year. As a percentage of revenues, these costs were 18.8% of
revenues for the quarter ended December 31, 2018 compared to 20.0% of revenues for the same period in 2017. SG&A
expenses increased for the quarter ended December 31, 2018, which is primarily attributable to the acquisition of
Perennial and increase in one-time business reorganization costs includes non-recurring headcount reduction expenses
for employees that did not qualify as restructuring costs and a one-time non-recurring write-off of intangible assets,
however this was offset by the benefits from cost saving initiatives including headcount reductions resulting in a consistent
balance with the prior period.
RESTRUCTURING EXPENSES
For the quarter ended December 31, 2018, DCM incurred restructuring expenses of $1.8 million compared to $4.5 million
in the same period in 2017. For the quarter ended December 31, 2018, DCM incurred restructuring expense of $1.8
million primarily related to headcount reductions across DCM's operations. For the quarter ended December 31, 2017,
DCM incurred restructuring expenses of $1.7 million primarily to related headcount reductions associated facility closure
costs, costs to move equipment and inventory from the closed facilities, and headcount reduction 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 and $2.4 million,
respectively, in the quarter ended December 31, 2017.
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GOODWILL ANALYSIS
During the fourth quarter of 2018, 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.
Similarly, during the fourth quarter of 2017, DCM performed its annual review for impairment of goodwill, which resulted
in no impairment charge.
ADJUSTED EBITDA
For the quarter ended December 31, 2018, Adjusted EBITDA was $6.5 million, or 8.1% of revenues, after adjusting
EBITDA for the $1.8 million in restructuring charges, adding back $29 thousand related to business acquisition costs
and $0.1 million of one-time business reorganization costs. Adjusted EBITDA for the quarter ended December 31, 2018
increased $0.9 million or 15.9% from the same period in the prior year and Adjusted EBITDA margin for the quarter, as
a percentage of revenues, increased from 7.4% of revenues in 2017 to 8.1% of revenues in 2018. Excluding the effects
of adopting IFRS 9 and 15, Adjusted EBITDA was $6.1 million or 7.8% of revenues for the year ended December 31,
2018. The increase in Adjusted EBITDA for the quarter ended December 31, 2018 was primarily attributable to higher
gross profit as a result of higher revenues contributed by DCM's core business, higher margins related to the Perennial
acquisition, favourable product mix and improved pricing discipline and costs savings from the restructuring and plant
consolidations carried out in the second half of 2017 and early 2018.
INTEREST EXPENSE
Interest expense including interest on debt outstanding under DCM’s credit facilities, on certain unfavourable lease
obligations related to closed facilities and interest accretion expense related to certain debt obligations recorded at fair
value, was $1.3 million for the quarter ended December 31, 2018 compared to $1.1 million for the same period in 2017.
Interest expense for the quarter ended December 31, 2018 was higher when compared to the same period in the prior
year primarily due to the increase in debt outstanding under DCM's new Crown Facility.
INCOME TAXES
DCM reported income before income taxes of $1.3 million, a current income tax expense of $0.4 million and a deferred
income tax expense of $13 thousand for the quarter ended December 31, 2018 compared to 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. Excluding the impacts of adopting IFRS 9 and 15, the net income tax expense was
$0.3 million for the year ended December 31, 2018. The current tax expense was primarily related to the income tax
payable on DCM’s estimated taxable income for the quarters ended December 31, 2018 and 2017. The deferred income
tax recovery primarily related to changes in estimates of the timing of future reversals of temporary differences and new
temporary differences that arose during the quarters ended December 31, 2018 and 2017, respectively.
NET INCOME (LOSS)
Net income for the quarter ended December 31, 2018 was $0.8 million compared to net loss of $2.5 million for the quarter
ended December 31, 2017. Excluding the impacts of adopting IFRS 9 and 15, net income for the year ended December
31, 2018 was $0.6 million. The increase in comparable profitability for the quarter ended December 31, 2018 was primarily
due to higher gross profit as a percentage of revenue, higher revenues which included the post-acquisition financial
results of Perennial, increased pricing for certain products, favourable product mix, cost savings and lower restructuring
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and acquisition expenses. The net loss for the quarter ended December 31, 2017 included a non-cash impairment of
goodwill totaling $31.1 million which did not recur in 2018.
ADJUSTED NET INCOME
Adjusted net income for the quarter ended December 31, 2018 was $2.3 million compared to Adjusted net income of
$1.5 million for the same period in 2017. Excluding the impacts of adopting IFRS 9 and 15, Adjusted net income for the
year ended December 31, 2018 was $2.5 million. The increase in comparable profitability for the quarter ended December
31, 2018 was primarily due to higher gross profit as a percentage of revenue, lower volumes of lower margin product,
higher revenues and the refined discipline in DCM's pricing strategy and cost savings.
Summary of eight quarter results
TABLE 9
The following table summarizes quarterly financial information for the past eight quarters.
(in thousands of Canadian dollars, except per share amounts, unaudited)
2018
2017
Revenues
Net income (loss) attributable
to shareholders
Basic earnings (loss) per share
Diluted earnings (loss) per
share
Q4
Q1
$ 81,152 $ 74,925 $ 78,176 $ 88,516 $ 76,125 $ 70,212 $ 73,066 $ 70,126
Q3
Q4
Q2
Q3
Q1
Q2
842
0.04
0.04
838
(1,194)
1,763
(2,459)
(1,068)
(581)
(2,097)
0.04
(0.06)
0.09
(0.12)
(0.06)
(0.04)
(0.17)
0.04
(0.06)
0.09
(0.12)
(0.06)
(0.04)
(0.17)
The variations in DCM’s quarterly revenues and net income (loss) over the eight quarters ended December 31, 2018
can be attributed to several principal factors: the adoption of IFRS 9 and 15 on January 1, 2018, the acquisitions of
Eclipse, Thistle, BOLDER Graphics and Perennial, 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, refinement of DCM's pricing discipline, the impact of paper and other raw materials price increases
and compressed margins on contracts with certain existing customers, and restructuring expenses and business
reorganization costs related to DCM’s ongoing productivity improvement and cost reduction initiatives.
DCM's net income for the fourth quarter of 2018 included the impact on adoption of IFRS 9 and 15, and the operating
results of Perennial and BOLDER Graphics for the full quarter of 2018, restructuring expenses of $1.8 million related to
its cost reduction initiatives. 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 income for the third quarter of 2018 included the impact on adoption of IFRS 9 and 15, and the operating
results of Perennial for the full quarter of 2018. DCM’s net loss for the third quarter of 2017 included operating results
of Eclipse and Thistle as well as restructuring cost initiatives of $1.4 million related to its cost reduction initiatives.
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DCM’s net income for the second quarter of 2018 included the impact on adoption of IFRS 9 and 15, operating results
of BOLDER Graphics for the full quarter of 2018, partial operating results of Perennial, restructuring expenses of $0.7
million related to its cost reduction initiatives, $0.8 million of one-time business reorganization costs related to its cost
reduction initiatives and business acquisition costs of $0.3 million. 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 first quarter of 2018 included the impact on adoption of IFRS 9 and 15, operating results of
Eclipse, Thistle and BOLDER Graphics for the full quarter of 2018 and net restructuring expenses of $0.1 million related
to its cost reduction initiatives. DCM's net loss in the first quarter of 2017 included the operating results of Eclipse and
Thistle post-acquisition (after February 22, 2017), restructuring expenses of $1.9 million and business acquisition costs
of $1.0 million.
Accounting policies
CHANGES IN ACCOUNTING POLICIES
The accounting policies and critical accounting estimates and judgments as disclosed in DCM's audited annual
consolidated financial statements have been applied consistently in the preparation of its unaudited condensed interim
consolidated financial statements, with the exception of the accounting standards implemented in 2018 which are outlined
in notes 2 and 3 of the Notes to the consolidated financial statements of DCM for the year ended December 31, 2018.
On January 1, 2018, DCM implemented the following new and revised standards, along with any consequential
amendments, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The impact
of the implementation of these standards on DCM’s consolidated financial statements are described below.
IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS
In 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”), replacing IAS 18 Revenue (“IAS
18”), IAS 11 Construction Contracts, and related interpretations. IFRS 15 establishes a single comprehensive framework
for revenue recognition based on a five-step model where entities are required to 1) identify the contract with a customer;
2) identify the performance obligations related to the contract; 3) determine the transaction price of the contract; 4)
allocate such transaction price between the performance obligations in the contract; and 5) recognize revenue when (or
as) performance obligations are satisfied. In addition to recognition and measurement, IFRS 15 also includes new
requirements on presentation and disclosures. IFRS 15 is effective for annual periods beginning on or after January 1,
2018.
DCM elected to adopt IFRS 15 using the modified retrospective method, with recognition of transitional adjustments in
opening deficit on the date of initial application (January 1, 2018), without restatement of comparative figures.
IFRS 15 provides for certain optional practical expedients, including those related to the initial adoption of the standard.
DCM applied the following practical expedients upon adoption of IFRS 15:
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PRACTICAL EXPEDIENT
(ON TRANSITION)
Completed contracts
PRACTICAL EXPEDIENTS
(ONGOING)
Assessment against a
portfolio of contracts versus
individual contracts
Consideration of potential
existence of a significant
financing component in a
contract
DESCRIPTION
DCM did not restate contracts that began and were completed in the same annual
reporting period or were completed by delivering all product and services prior to or
on January 1, 2018.
DESCRIPTION
DCM grouped customer contracts that were individually less significant in nature where
they had similar characteristics and applied IFRS 15 to the portfolio of contracts (or
performance obligations) on the basis that DCM reasonably expects that the effects
on the financial statements of applying this standard to the portfolio would not differ
materially from applying this standard to the individual contracts (or performance
obligations) within that portfolio.
DCM applied the practical expedient in IFRS 15 to not assess whether there is a
significant financing component in its contracts on the basis that:
1) The period between when DCM transfers a promised good or service to a customer
and when the customer pays for that good or service is generally one year or less;
and
2) Where invoicing takes place when the product is dispatched from the warehouse,
DCM charges its customers a financing charge for the duration of the time that
customer product is stored in its warehouses at a rate that is reasonably comparable
with market interest rates.
Transaction price allocated to
the remaining performance
obligations unsatisfied at the
end of a reporting period
DCM elected not to disclose the aggregate amount of the transaction price allocated
to the unsatisfied portion of the performance obligations at the end of the reporting
period, in addition to when it expects to recognize this as revenue based on the following
reasons:
1) Product and freight revenue - DCM has a right to consideration from a customer in
an amount that corresponds directly with the value to the customer for the
performance obligation completed to date.
2) Warehouse and marketing revenue - generally this performance obligation is part
of a contract that has an original expected duration of one year or less.
The details of the new significant accounting policies are set out below and the impact of the changes from previous
significant accounting policies in relation to DCM’s sale of products and services are set out on pages 39 - 42.
REVENUE RECOGNITION
Under IFRS 15, DCM recognizes revenue when control of the goods or services has been transferred. Revenue is
measured at the amount of consideration to which DCM expects to be entitled to, net of incentives given to its customers
including volume-based incentives and cash discounts.
The following is a description of the principal activities from which DCM generates its revenue, along with the
corresponding revenue recognition accounting policies applied:
a. Product sales - DCM manufactures customized products based on specifications pre-approved by its customers.
At its customers' request, DCM will also purchase stock product from third-party vendors and resell that to its
customers. For products that DCM purchases and resells to its customers, DCM is typically a principal in these
arrangements as it is responsible for making key decisions over the purchasing of product and has the economic
risks and rewards that are customary with control. Accordingly, third party stock product revenue is typically presented
on a gross basis in revenue with the corresponding product purchase cost and associated costs recognized in costs
of revenue. DCM recognizes revenue when control over the product transfers to the customer, which is effectively
transferred upon the completion of production or when resale product is purchased and inducted into DCM's
warehouses. Given manufactured products are customized or purchased specifically at the customer’s request,
product returns are insignificant.
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In some instances, DCM's customers obtain the product directly from DCM following the completion of production.
In other instances, DCM’s contracts involve the provision of warehousing and shipment services, in addition to
manufacturing or purchasing of third-party products. Based on DCM's contractual arrangements with its customers
related to product, DCM has identified three key distinct performance obligations: product sales, warehousing
services and shipment services. DCM stores customized or purchased product at the request of the customer; the
product is identifiable as the customer’s product; the product is ready for transfer to the customer upon the customer’s
request; and DCM cannot re-direct the product nor use the product to fulfill another customer’s product order under
the contract. Where control has transferred over the product upon product manufacture by DCM or upon receipt
of third-party product into DCM's warehouses, DCM recognizes revenue for product and allocates an amount of
the consideration received or receivable from the customer for the remaining warehousing and shipping performance
obligations based on their relative stand-alone selling prices, where applicable. Based on the contractual terms
with its customers, DCM either issues an invoice when product that is manufactured by DCM or purchased from
third-party vendors is inducted into DCM's warehouse, or alternatively the invoice is issued for some customers
when product is dispatched from, its warehouses. In instances where DCM issues an invoice on dispatch of product
from its warehouses, rather than at the date of transfer of control, DCM is still entitled to payment for the purchased
or manufactured product. Accordingly, revenue is recognized for the product manufactured by DCM or third-party
stock product and a corresponding balance for “unbilled receivables” are recognized within trade receivables in the
consolidated statement of financial position. Unbilled receivables are transferred to accounts receivables when the
invoices are issued to the customers. Deferred revenue represents amounts that have been invoiced to the customer
but not yet recognized as revenue, including advance payments and billings in excess of revenue. Deferred revenue
is recognized as revenue when DCM completes production of product or upon receipt of third-party product into its
warehouses.
b. Warehousing services - DCM provides custodial services to store customer product in its warehouse over a specified
agreed upon period. For non-bundled pricing arrangements, warehousing revenues are recognized over the period
that warehousing services are provided to the customer based on the balance of customer product remaining in
the warehouse at the time an invoice is issued. For bundled pricing arrangements, DCM allocates a portion of the
initial transaction price for warehousing services and recognizes revenue on a straight-line basis over the period of
the warehousing as it best represents the pattern of performance. Amounts are typically invoiced as warehousing
services are performed in accordance with agreed upon contractual terms at periodic intervals. When DCM receives
advance payments or issues billings in excess of revenue, these are recognized as deferred revenue in the statement
of financial position. Deferred revenue is recognized as revenue when or as DCM provides custodial services over
the agreed upon warehouse term.
c.
Freight services - DCM has identified it has a distinct performance obligation for shipment of product for certain
contracts where it has an obligation to arrange shipment services where control of the product has been transferred
to the customer prior to shipment. DCM frequently contracts with third parties to deliver product. DCM is typically
a principal for such shipment services as it is responsible for making key decisions over the shipment arrangements
and has the economic risks and rewards associated with such control. As a principal DCM recognizes shipment
revenues when performance of the shipping service has occurred as products are shipped.
d. Marketing services - DCM generates revenue from providing marketing solutions to its customers which include
business and brand strategy, consumer insights, strategic marketing and design services. Typically, these services
are contracted with fixed-fees and are provided over a period of time equal to one year or less. Revenue is measured
based on the consideration DCM expects to be entitled to in exchange for providing services. DCM’s marketing
contracts include a single performance obligation because the promise to transfer the individual services are not
separately identifiable from other promises in the contract and therefore are not distinct. DCM transfers control of
the services it provides to its customers over time and therefore recognizes revenue progressively as the services
are performed. Revenue from customer contracts are recognized based on the percentage of completion method.
Under this method, the stage of completion is measured using costs incurred to date as a percentage of total
estimated costs for each contract and the percentage of completion is applied to the total estimated revenue.
While providing services, DCM incurs certain direct costs for subcontractors and other expenses that are recoverable
directly from its customers. The recoverable amounts of these direct costs are included in DCM’s gross revenue as
it obtains control of these services before they are provided to the customer and therefore, acts as a principal in
these arrangements.
The timing of revenue recognition, billings, and cash collections results in trade receivables, unbilled receivables,
and deferred revenue in the consolidated statements of financial position. Amounts are typically invoiced as work
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progresses in accordance with agreed-upon contractual terms, either at periodic intervals or when contractual
milestones are achieved. Receivables represent amounts currently due from customers and unbilled receivables
represents work that has not yet been invoiced to the customer however DCM has a right to payment for the services
provided ahead of agreed upon contractual milestones. Unbilled receivables are transferred to receivables when
billings are issued to the customer. Accordingly, unbilled receivables are recognized and included within trade
receivables in the consolidated statement of financial position. Deferred revenue represents amounts that have
been invoiced to the customer but not yet recognized as revenue, including advance payments and billings in excess
of revenue. Deferred revenue is recognized as revenue when or as DCM performs under the contract.
e. Other services - This includes other ancillary services such as fees related to administrative functions that DCM
provides to its customers and financing charges associated with customers where DCM stores customer product
in the warehouse over a period of time and invoices the customer when the product is dispatched from DCM's
warehouse. Revenue for other ancillary services are recognized upon completion of the performance obligations
to its customers. Financing income is recognized as DCM provides custodial services to its customers over the
agreed upon warehouse term.
VARIABLE CONSIDERATION
Some contracts with customers provide volume-based incentives specific to product sales. Such incentive offerings
give rise to variable consideration and are required to be estimated at contract inception by using either the expected
value or the most likely amount, depending on which method better predicts the amount of consideration to which
the customer will be entitled. The estimates are based on various assumptions including past experience with
customers and other relevant factors. DCM uses the most likely amount when determining the expected amount
of volume-based incentives it will give to its customers and records these as a reduction to revenue in the consolidated
statement of operations.
CONTRACT COSTS
Contract costs represent incremental costs incurred, such as sales commissions for sales made to certain customers.
Contract costs are amortized over their estimated useful lives. Contract costs are carried at cost less accumulated
amortization. For the year ended December 31, 2018, DCM did not have any significant balances or transactions.
FINANCIAL INSTRUMENTS
In 2014, the IASB issued IFRS 9 Financial Instruments (“IFRS 9”) replacing IAS 39 Financial Instruments: Recognition
and Measurement and related interpretations. IFRS 9 includes revised guidance on the classification and measurement
of financial assets, including impairment and a new general hedge accounting model. IFRS 9 is effective for annual
periods beginning on or after January 1, 2018. DCM implemented IFRS 9 as at January 1, 2018 by applying the
requirements for classification and measurement, including impairment, retrospectively, with the cumulative effects of
initial application recorded in the opening deficit balance as at January 1, 2018 with no restatement of comparative
periods. IFRS 9 was not applied to financial assets and financial liabilities that were derecognized at the date of initial
application (i.e. January 1, 2018). DCM also applied related amendments to IFRS 7 Financial Instruments: Disclosures.
CLASSIFICATION AND MEASUREMENT
Financial assets are classified and measured based on these categories: amortized cost, fair value through other
comprehensive income ("FVTOCI"), and fair value through profit and loss (“FVTPL”).
Financial liabilities are classified and measured based on two categories: amortized cost or FVTPL. Derivatives embedded
in contracts where the host is a financial asset in the scope of the standard are not separated, but the hybrid financial
instrument as a whole is assessed for classification.
The following table summarizes the classification impact of DCM's financial assets and financial liabilities upon the
adoption of IFRS 9. The adoption of the new classification requirements under IFRS 9 did not result in any significant
changes in measurement or the carrying amount of DCM's financial assets and liabilities.
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Classification under IAS 39
Classification under IFRS 9
Asset/Liability
Financial assets
Cash and cash equivalents
Trade receivables
Restricted cash
Financial liabilities
Loans and receivables
Loans and receivables
Loans and receivables
Bank overdraft
Trade payables and accrued liabilities (1)
Other liabilities
Other liabilities
Other non-current liabilities (2)
Credit facilities
Promissory notes
Other liabilities
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
(1)
Includes 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. RSUs and DSUs payables are also excluded as they are measured
at fair value through profit and loss.)
(2)
Includes bonuses payable
Financial assets and liabilities at FVTPL: A financial asset or liability is classified in this category if acquired principally
for the purpose of selling or repurchasing in the short-term. Derivatives are also included in this category unless they
are designated as hedges. Financial instruments in this category are recognized initially and subsequently at fair value.
Transaction costs are expensed in the 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 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.
Financial assets and liabilities at amortized cost: Financial assets and liabilities at amortized cost are initially recognized
at fair value, except for trade receivables that do not contain a significant financing component which are measured at
the transaction price, plus or minus transaction costs, respectively, and subsequently carried at amortized cost less any
impairment.
Financial assets through other comprehensive income: Financial assets carried at FVOCI are measured at fair value.
Interest, dividends and impairment gains and losses are recognized in the consolidated statement of operations on the
same basis as for amortized cost assets. Changes in fair value are recognized initially in other comprehensive income.
When the assets are derecognized or reclassified the cumulative changes in fair value are reclassified to the consolidated
statement of operations (except where they relate to investments in equity instruments). The Company has no financial
instruments measured at fair value through other comprehensive loss.
IMPAIRMENT OF FINANCIAL ASSETS
DCM applies the 'expected credit loss' ("ECL") model to assess the impairment of its financial assets at each balance
sheet date. The ECL model requires considerable judgment, including consideration of how changes in economic factors
affect ECLs, which are determined on a probability-weighted basis. IFRS 9 outlines a three-stage approach to recognizing
ECLs which is intended to reflect the increase in credit risks of a financial instrument based on 1) 12-month expected
credit losses or 2) lifetime expected credit losses. DCM measures loss allowance at an amount equal to lifetime ECLs.
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DCM applies the simplified approach to determine ECLs on trade receivables by using a provision matrix based on
historical credit loss experiences. The historical results were used to calculate the run rates of default which were then
applied over the expected life of the trade receivables, adjusted for forward looking estimates. Trade receivables are
written off when there is no reasonable expectation of recovering the asset or a portion, thereof.
Impairment losses are recorded in general and administration expenses in the consolidated statements of operations.
Where there is a change that will cause a significant reduction in the loss, the impairment loss previously recognized is
reversed through the consolidated statements of operations.
DERECOGNITION
Financial Assets: The Company derecognizes financial assets only when the contractual rights to cash flows from the
financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards
of ownership to another entity. Gains and losses on derecognition are generally recognized in the consolidated statements
of operations.
Financial liabilities: The Company derecognizes financial liabilities only when its obligations under the financial liabilities
are discharged, cancelled or expired. Generally, the difference between the carrying amount of the financial liability
derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed,
is recognized in the consolidated statements of operations
IMPACT OF ADOPTION OF IFRS 9 AND IFRS 15
The following table summarizes the impact of adopting IFRS 9 and IFRS 15 on DCM’s consolidated statement of financial
position as at January 1, 2018:
(in thousands of Canadian dollars)
Trade receivables
Inventories
Deferred income tax assets
Trade payables and accrued
liabilities
Deferred revenue
Deferred income tax liabilities
Deficit
January 1, 2018
prior to the adoption
of IFRS 9 and IFRS
15
Impact of
adopting
IFRS 9
Impact of
adopting
IFRS 15
January 1, 2018 after
the adoption of IFRS 9
and IFRS 15
$
41,193 $
(505) $
28,671 $
36,519
6,108
34,306
11,237
1,295
—
132
—
—
—
(256,233)
(373)
(25,639)
(3,006)
600
(9,395)
83
8,738
69,359
10,880
3,234
34,906
1,842
1,378
(247,868)
a) Under IAS 18, DCM previously identified that the risks and rewards of ownership related to product that was
manufactured by DCM or purchased from a third-party vendor at the customer’s request and stored on the customer’s
behalf in DCM's warehouse did not transfer until such time as the product was dispatched from the warehouse at
which time revenue was recorded. DCM has identified that on adoption of IFRS 15 product revenue should be
recognized upon the completion of production of manufactured product or purchase and induction of third-party
product into DCM's warehouses as that is when control of the product is transferred to the customer and DCM has
a right to payment.
An adjustment of $8.3 million, net of tax, was made to recognize product revenue, net of costs, upon the completion
of production or upon the purchase and induction of third-party product into DCM's warehouses resulting in a
decrease to the deficit balance in the consolidated statement of financial position as at January 1, 2018. There was
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a corresponding increase to the unbilled portion of trade receivables of $24.4 million, increase to billed portion of
trades receivable of $3.4 million, a decrease in finished goods inventory of $25.4 million and a decrease to deferred
revenue of $9.1 million.
b) Under IFRS 15, revenue is recognized over the period that warehousing services are provided to the customer.
Previously, under IAS 18, revenue related to warehousing services bundled with the overall selling price of the
product, were recognized upon shipment of the product to the customer and non-bundled warehousing services
were recognized over the service period.
An adjustment of $0.9 million, to the opening deficit, net of tax, was made to recognize revenue, net of costs, related
to warehousing services completed bundled with the overall transaction price of the product, and therefore had not
been recognized previously under IAS 18 until the product was invoiced upon shipment of the product from the
warehouse. The adjustment decreased the deficit balance in the consolidated statement of financial position as of
January 1, 2018. There was a corresponding increase to the unbilled portion of trade receivables of $0.9 million
and a decrease to deferred revenue of $0.2 million.
c) DCM has recognized revenue as noted in (a) and (b) above for unbilled receivables representing receivables where
DCM has a right to payment for product manufactured or purchased from a third-party vendor and inducted into its
warehouses, and warehousing services, yet DCM has agreed not to issue an invoice until the product is shipped
from the warehouse. Such amounts related to product sales under IFRS 15 were previously recorded as inventories
under IAS 2 Inventories, until such time as the product was dispatched from the warehouse.
Upon transition to IFRS 9, DCM assessed trade receivables, which includes unbilled receivables for impairment by
applying the provision matrix as at January 1, 2018. An impairment loss of $0.4 million, net of tax, was recorded
as an increase to the deficit balance in the consolidated statement of financial position. There was a corresponding
decrease to the unbilled portion of trade receivables of $0.5 million in the consolidated statement of financial position
as at January 1, 2018.
(in thousands of Canadian dollars)
TRADE
RECEIVABLES
Lifetime
expected credit
losses
UNBILLED
RECEIVABLES
Lifetime
expected credit
losses
Allowances as at December 31, 2017
$
Additional loss allowance recognized on January 1, 2018
Impairment allowance under IFRS 9 as at January 1, 2018 $
(206)
—
(206) $
N/A (1) $
(505)
(505) $
(1)
Unbilled receivables, classified in Trade receivables were recognized upon the adoption of IFRS 15 as at January 1, 2018
Total
(206)
(505)
(711)
d) Under IAS 18, DCM recognized revenue from the sale of products measured at the fair value of the consideration
received or receivable, net of provisions for customer incentives. As a result of the change in the timing of revenue
recognition upon the adoption of IFRS 15, the timing to recognize volume-based incentives was also changed to
correspond with the related recognition of revenue.
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An adjustment of $0.3 million, net of tax, was made to increase the opening deficit balance in the consolidated
statement of financial position as at January 1, 2018. There was a corresponding increase to trade payables and
accrued liabilities of $0.4 million in the consolidated statement of financial position as at January 1, 2018.
e) Under IAS 18, DCM would recognize an expense for commission costs payable to its employees within selling,
commissions and expenses in the consolidated statement of operations based on when the customer was invoiced.
Given the timing of revenue recognition has changed for product sales and warehousing services with a bundled
pricing arrangement upon the adoption of IFRS 15, the timing to recognize commission costs also changed to
correspond with the related recognition of revenue.
An adjustment of $0.2 million, net of tax, was made to increase the opening deficit balance in the consolidated
statement of financial position as at January 1, 2018. There was a corresponding increase to trade payables and
accrued liabilities of $0.3 million in the consolidated statement of financial position as at January 1, 2018.
f)
The combined tax impact of the above adjustments in (a) to (e) was a decrease to deferred income tax assets of
$2.9 million and increase to deferred income tax liabilities of $0.1 million in the consolidated statement of financial
position as at January 1, 2018.
There were adjustments made for the year ended December 31, 2018 similar in nature to those noted in (a) to (f) above.
In addition, the following adjustments were also made for the year ended December 31, 2018:
g) As noted in the accounting policies, DCM serves as a principal when contracting freight services it provides to its
customers as it represents the primary obligor in these arrangements. Previously, under IAS 18, DCM had recorded
freight revenue, net of related costs, in cost of revenues. Under IFRS 15, an adjustment was made to present
freight revenue on a gross basis. For the year ended December 31, 2018, DCM recognized $12.6 million of freight
revenue in the consolidated statement of operations
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The following table summarizes the impact of adopting IFRS 9 and IFRS 15 on DCM’s consolidated financial statements
for the year ended December 31, 2018:
(in thousands of Canadian dollars,
unaudited)
Revenues
Cost of Revenues
Gross profit
Selling, commissions and expenses
General and administration expenses
Current income tax expense
Deferred income tax expense
(recovery)
Net income
For the twelve
months ended
December 31, 2018
prior to the adoption
of IFRS 9 and IFRS 15
Impact of
adopting
IFRS 9
Impact of
adopting
IFRS 15
For the twelve
months ended
December 31, 2018
as reported
$
312,627 $
— $
10,142 $
235,866
76,761
36,155
29,992
939
(172)
1,237
—
—
—
(52)
(118)
132
38
8,705
1,437
121
—
586
(244)
974
322,769
244,571
78,198
36,276
29,940
1,407
(284)
2,249
The adjustments on adoption of IFRS 15 and 9 had the following effect on the basic and diluted earnings (loss) per
share:
Basic earnings (loss) per share
Diluted earnings (loss) per share
0.06
0.06
—
—
0.05
0.05
0.11
0.11
(in thousands of Canadian dollars)
Trade receivables
Inventories
Deferred income tax assets
Trade payables and accrued liabilities
Income taxes payable
Deferred revenue
Deficit
December 31, 2018
prior to the adoption
of IFRS 9 and IFRS
Impact of
adopting
IFRS 9
Impact of
adopting
IFRS 15
December 31, 2018
as reported
$
39,865 $
(453) $
33,712 $
34,751
6,272
42,718
2,684
7,641
(255,987)
—
—
—
(118)
—
(335)
(25,939)
(2,844)
779
586
(6,164)
9,728
73,124
8,812
3,428
43,497
3,152
1,477
(246,594)
The adoption of IFRS 9 and IFRS 15 did not have a material impact on DCM's consolidated statement of cash flows for
the year ended December 31, 2018.
h) As at December 31, 2018, DCM has disclosed revenue on a disaggregated basis based on the nature of the major
products and services it provides to its customers as follows:
(in thousands of Canadian dollars)
Product sales
Warehousing revenue
Freight services
Marketing and other services
$
$
For the year ended
December 31, 2018
289,719
9,424
12,565
11,061
322,769
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IFRS 2 - SHARE-BASED PAYMENT
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 of vesting and
non-vesting conditions of 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
of the transaction from cash-settled to equity-settled. The amendments are effective for the year beginning on or after
January 1, 2018. This amendment did not have an impact on the consolidated financial statements of DCM.
IFRIC 22 - FOREIGN CURRENCY TRANSACTIONS AND ADVANCE CONSIDERATION
IFRIC 22 Foreign Currency Transactions and Advance Consideration is an interpretation paper issued by the IASB in
December 2016. The interpretation clarifies how to determine the date of transaction for the exchange rate to be used
on initial recognition of a related asset, expense or income where an entity pays or receives consideration in advance
for foreign currency-denominated contracts. For a single payment or receipt, the date of the transaction should be the
date on which the entity initially recognizes the non-monetary asset or liability arising from the advance consideration
(the prepayment or deferred income/contract liability). If there are multiple payments or receipts for one item, a date of
transaction should be determined as above for each payment or receipt. Entities can choose to apply any of the following
interpretations: (a) retrospectively for each period presented, (b) prospectively to items in scope that are initially
recognized on or after the beginning of the reporting period in which the interpretation is first applied, or (c) prospectively
from the beginning of a prior reporting period presented as comparative information. IFRIC 22 did not have an impact
on the consolidated financial statements of DCM.
FUTURE ACCOUNTING STANDARDS NOT YET ADOPTED
DCM has not yet determined the impact of adopting the changes in accounting standards listed below. The assessment
of the impact on our consolidated financial statements of these new standards or the amendments to these standards
is ongoing.
IFRS 16 - LEASES
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 to recognize assets and liabilities for all leases with a term of
more than twelve months and for which the underlying asset is not of low value. A lessee is required to recognize a right-
of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to
make lease payments. The right-of-use asset is initially 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.
IFRS 16 contains disclosure requirements for lessees and lessors. This new standard will come into effect for annual
periods beginning on or after January 1, 2019.
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Based on management’s preliminary assessment, DCM anticipates the adoption of this standard will have a material
impact on the consolidated statement of financial position. DCM has identified lease contracts that are currently accounted
for as operating leases, primarily for building and equipment rentals, for which recognition will change under IFRS 16.
This will result in the recognition of the present value of unavoidable future lease payments as leased assets and lease
liabilities on the statement of financial position, with a corresponding increase to income from operations. Depreciation
expense and finance costs will be charged to the consolidated statement of operations related to the leased assets and
lease liabilities recognized post adoption of IFRS 16.
DCM has (a) completed an inventory of all leases to be considered under this new standard and (b) reviewed contract
details to capture all necessary information. In addition, DCM has substantially completed the configuration of a SaaS
based solution to manage the accounting of its leases more effectively, including uploading lease data compiled to date
and testing the integrity of the output generated from the system. DCM is currently in the process of quantifying the
impacts on adoption, with finalization of documentation and evaluation of financial reporting implications to be completed
for its first quarter financial statements. In addition, management is in the process of reviewing the impact that IFRS 16
will have on all of its financial covenants with its lenders and amending its credit agreements, as appropriate, for any
changes required to its respective covenant calculations that will be applicable for 2019 and forward. DCM will adopt
IFRS 16 for the annual period beginning January 1, 2019. Management expects to adopt IFRS 16 using the modified
retrospective transition method. Further, DCM currently expects to apply the following practical expedients: (i) grandfather
the assessment of which transactions are leases; (ii) recognition exemption of short-term leases; and (iii) recognition
exemption leases of low-value items
IFRIC 23 - UNCERTAINTY OVER INCOME TAX TREATMENTS
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 requires an entity to consider whether it is probable that a taxation authority will accept
an uncertain tax treatment. If the entity considers it to be not probable that a taxation authority will accept an uncertain
tax provision the interpretation requires 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.
IAS 19 EMPLOYEE BENEFITS (AMENDMENT)
In February 2018, the IASB issued amendments to IAS 19 Employee Benefits with a mandatory effective date of January
1, 2019. The amendment clarifies the effect of a plan amendment, curtailment and settlement on the requirements
regarding the asset ceiling. In addition, if a plan amendment, curtailment or settlement occurs, it is mandatory under the
amended standard that the current service cost and the net interest for the period after the remeasurement are determined
using the assumptions used for the remeasurement. This amendment is to be applied prospectively. DCM intends to
adopt the amendments to IAS 19 in its consolidated financial statements for the annual period beginning January 1,
2019. The adoption of this amendment is not expected to have a significant impact on the DCM’s consolidated financial
statements.
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There are no other IFRS or International Financial Reporting Interpretations Committee (‘IFRIC’) interpretations that are
not yet effective that would be expected to have a material impact on DCM.
Critical accounting estimates
The preparation of the financial statements requires management to make judgments, estimates and assumptions that
are not readily apparent from other sources about the carrying amounts of assets and liabilities, and reporting of income
and expenses. The estimates and associated assumptions are based on historical experience and other factors that
are considered to be relevant. Actual results may differ materially from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis.
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 affects both current and future periods.
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 recoverable value of CGUs, assumptions of future cash flows,
and achieving forecasted business results. These assumptions can be impacted by economic conditions and also
require considerable judgment by management. Declines in business results or declines in the fair value of CGUs 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 the result of DCM's impairment
analysis.
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 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 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.
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PENSION OBLIGATIONS
Management estimates the pension obligations annually using a number of assumptions and with the assistance of
independent actuaries; however, the actual outcome may vary due to 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 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. See notes 15 and 16 for the sensitivity of key
assumptions.
PROVISIONS
Provisions are liabilities of uncertain timing or amount. The amount recognized as a provision is DCM's best estimate
of the present obligation at the end of the reporting period. The determination of DCM's provisions, which includes
restructuring costs and onerous contracts, involves judgment about the outcome of future events, and estimates on the
timing and amount of expected future cash flows. 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. Provisions are reviewed at each reporting date and any
changes to estimates are reflected in the statement of operations.
AGGREGATION OF OPERATING SEGMENTS
Management applies judgment in aggregating operating segments into 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.
REVENUE RECOGNITION
a)
Product sales
DCM uses significant judgment, which is inherent in its revenue generating activities, as to when control is transferred
to its customers on the completion of the manufacture or purchase and induction of third-party product into DCM's
warehouses. As an integral part of the judgment on the transfer of control of product, DCM typically has a right of
payment for all customized product produced or purchased from third-party vendors notwithstanding that invoicing of
the product for some contracts does not occur until the product is dispatched from the warehouse at the customers'
request. Due to the custom nature of the product, it does not have an alternative use to DCM, such that DCM is entitled
to payment once the quantity of product pursuant to an individual purchase order is produced or purchased from a third-
party vendor and inducted into its warehouses. Where a customer has an arrangement to be invoiced on dispatch from
one of DCM's warehouses, DCM closely monitors the customer’s product and the agreed upon term of warehousing to
manage any related business risks.
b) Marketing services
DCM accounts for its revenue from fixed-fee contracts using the percentage of completion method, which requires
estimates to be made for contract costs and revenues. Contract costs include direct labor, direct costs for subcontractors
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and other expenditures that are recoverable directly from its customers. Progress on jobs is regularly reviewed by
management and estimated costs to complete are revised based on the information available at the end of each reporting
period. Contract costs estimates are based on various assumptions that can result in a change to contract profitability
from one financial reporting period to another, including labor productivity and availability, the complexity of the work to
be performed and the performance of subcontractors. Estimating total costs is subjective and requires management’s
best judgments based on the information available at that time.
Changes in estimates are reflected in the period in which the circumstances that gave rise to the change became known.
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 Officer and the Chief
Financial Officer of DCM have evaluated the effectiveness of disclosure controls and procedures (as defined in Multilateral
Instrument 52-109) of DCM as of December 31, 2018. Based on that evaluation, those officers have concluded that,
as of December 31, 2018, such disclosure controls and procedures were sufficiently effective to provide reasonable
assurance that (i) material information relating to DCM was made known to management and (ii) information required
to be disclosed by DCM in its annual filings, interim filings or other reports filed or submitted by it under securities
legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
With the supervision and participation of DCM’s senior management team, the Chief Executive Officer and the Chief
Financial Officer of DCM have evaluated the effectiveness of the internal controls over financial reporting (as defined in
Multilateral Instrument 52-109) of DCM as of December 31, 2018.
In making this evaluation, the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control – Integrated Framework was used to design the internal controls over financial reporting.
Based on that evaluation, those officers have concluded that, as of December 31, 2018, such internal controls over
financial reporting were sufficiently effective to provide reasonable assurance regarding the reliability of DCM’s financial
reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.
During the period covered by this report, other than as listed below, there were no changes in our internal control over
financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
DCM adopted the new revenue guidance under IFRS 15 on January 1, 2018. The adoption of this guidance required
the implementation of new accounting processes and procedures, which required DCM to update the internal controls
over accounting for revenue recognition, including the adjustments to accumulated deficit required under the modified
retrospective method of adoption, and the related disclosures required under the new guidance. As a result, DCM
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Annual Report 2018
MD&A
implemented new internal controls designed to mitigate the risks associated with these new processes and to provide
assurance at a reasonable level of the fair presentation of the consolidated financial statements and related disclosures.
Outlook
2018 was an improved year for DCM. DCM reported the second consecutive year in a row of revenue growth, after
many years of continued declines. Importantly, it also showed improvements in gross profit and gross profit margin,
SG&A as percent of revenue, adjusted EBITDA, adjusted EBITDA margin, net income and adjusted net income. Revenue
growth, along with these other improved financial metrics, was largely supported by the acquisitions DCM made in 2017
and 2018 together with some stability in its core DCM business.
DCM's core business was supported by the onboarding of a major financial services customer. It also benefited from
a one-time increase in volume in the first quarter of 2018 from a long-standing customer. While the customer remains
an important one, it does not expect its volumes to recur at the same levels in 2019. However, in the last half of 2018,
DCM began to serve an emerging new market, providing specialty label solutions to the cannabis market.
While its core traditional business continues to face secular challenges, DCM remains optimistic that opportunities to
continue to gain increased wallet share from its top customers will offset secular declines in certain parts of its business
and continue to experience growth in other markets, including those served by its recent acquisitions.
In February 2019, DCM completed payments of the final promissory note balances owing to the Eclipse and Thistle
vendors. The final payments to the BOLDER vendors will be completed later this year. In aggregate, DCM will pay
down approximately $4.1 million of promissory notes related to the Eclipse, Thistle, BOLDER and Perennial acquisitions
in fiscal 2019. In addition, DCM will repay approximately $5.7 million of fixed term debt, related to its three IAM credit
facilities in 2019. The scheduled IAM term debt payments continue to amortize and be repaid monthly, and will be fully
repaid through their respective terms in early 2023. DCM recently extended the term of the Bank Credit Facility by three
years to March 31, 2023. This balance drawn on this facility at the end of 2018 was approximately $20.8 million, and,
with up to $35 million of total availability, subject to eligible provisions, provides DCM with working capital flexibility for
its business.
While DCM does not expect to experience the year over year growth in 2019 that it did last year, it remains focused on
driving improved financial results in the coming year by adhering to five key strategic priorities:
•
•
•
•
•
Focus on its core customers
Continue to improve gross margins
Reduce its selling, general and administrative expenses
Pay down debt
Make strategic investments to support its future growth
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DATA Communications Management Corp.
Annual Report 2018
MD&A
Risks and uncertainties
An investment in DCM’s securities involves risks. In addition to the other information contained in 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 condition and liquidity of DCM.
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DATA Communications Management Corp.
Annual Report 2018
MD&A
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 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.
Gregory J. Cochrane
President and Chief Executive Officer
DATA Communications Management Corp.
James E. Lorimer
Chief Financial Officer
DATA Communications Management Corp.
March 22, 2019
Brampton, Ontario
50
DATA Communications Management Corp.
DATA Communications Management Corp.
Annual Report 2018
Annual Report 2018
Independent auditor’s report
To the Shareholders of DATA Communications Management Corp.
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of DATA Communications Management Corp. and its subsidiaries (together, the
Company) as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years
then ended in accordance with International Financial Reporting Standards (IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
the consolidated statements of financial position as at December 31, 2018 and 2017;
the consolidated statements of operations for the years then ended;
the consolidated statements of comprehensive income (loss) for the years then ended;
the consolidated statements of changes in shareholders’ equity (deficit) for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to the consolidated financial statements, which include a summary of significant
accounting policies.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit
of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Independence
We are independent of the Company in accordance with the ethical requirements that are relevant to our
audit of the consolidated financial statements in Canada. We have fulfilled our other ethical
responsibilities in accordance with these requirements.
PricewaterhouseCoopers LLP
PwC Centre, 354 Davis Road, Suite 600, Oakville, Ontario, Canada L6J 0C5
T: +1 905 815 6300, F: +1 905 815 6499
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
51
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DATA Communications Management Corp.
DATA Communications Management Corp.
Annual Report 2018
Annual Report 2018
Other information
Management is responsible for the other information. The other information comprises the Management’s
Discussion and Analysis and the CEO’s Letter to Shareholders and the information, other than the
consolidated financial statements and our auditor’s report thereon, included in the Annual Report.
Our opinion on the consolidated financial statements does not cover the other information and we do not
and will not express an opinion or any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
If, based on the work we have performed on the other information, we conclude that there is a material
misstatement of this other information, we are required to report that fact. We have nothing to report in
this regard.
Responsibilities of management and those charged with governance for the
consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with IFRS, 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.
In preparing the consolidated financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to liquidate
the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.
52
52
DATA Communications Management Corp.
DATA Communications Management Corp.
Annual Report 2018
Annual Report 2018
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company’s ability to continue as a going concern.
If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor’s report. However, future events or conditions may cause the Company to
cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Company to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and performance of the group audit.
We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
53
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DATA Communications Management Corp.
DATA Communications Management Corp.
Annual Report 2018
Annual Report 2018
The engagement partner on the audit resulting in this independent auditor’s report is Simon Kent.
Chartered Professional Accountants, Licensed Public Accountants
Oakville, Ontario
March 22, 2019
54
54
DATA Communications Management Corp.
Annual Report 2018
FINANCIAL STATEMENTS
Consolidated statements of financial position
(in thousands of Canadian dollars)
December 31, 2018
December 31, 2017
ASSETS
CURRENT ASSETS
Trade receivables (note 5)
Inventories (note 6)
Prepaid expenses and other current assets
NON-CURRENT ASSETS
Other non-current assets
Deferred income tax assets (note 13)
Restricted cash (note 11)
Property, plant and equipment (note 7)
Pension assets (note 15)
Intangible assets (note 8)
Goodwill (note 9)
LIABILITIES
CURRENT LIABILITIES
Bank overdraft
Trade payables and accrued liabilities
Current portion of credit facilities (note 11)
Current portion of promissory notes (note 12)
Provisions (note 10)
Income taxes payable
Deferred revenue
NON-CURRENT LIABILITIES
Provisions (note 10)
Credit facilities (note 11)
Promissory notes (note 12)
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’ EQUITY / (DEFICIT)
Shares (note 17)
Warrants (note 17)
Contributed surplus (note 17)
Translation reserve
Deficit
$
$
$
$
$
$
$
Commitments and Contingencies (note 20); Subsequent Event (note 26)
Approved by Board of Directors
$
73,124
8,812
3,519
85,455
827
3,428
515
16,804
—
18,164
17,038
41,193
36,519
5,092
82,804
—
6,108
515
18,831
760
14,473
8,368
142,231
$
131,859
3,999
43,497
5,670
4,013
2,908
3,152
1,477
64,716
540
51,751
1,363
1,753
3,272
8,346
2,978
134,719
251,217
806
1,841
242
(246,594)
7,512
142,231
$
$
$
$
$
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
137,258
248,996
287
1,368
183
(256,233)
(5,399)
131,859
Director
Director
55
DATA Communications Management Corp.
Annual Report 2018
FINANCIAL STATEMENTS
Consolidated statements of operations
(in thousands of Canadian dollars, except per share amounts)
For the year
ended December
31, 2018
For the year
ended December
31, 2017
$
322,769
$
REVENUES (note 3)
COST OF REVENUES
GROSS PROFIT
EXPENSES
Selling, commissions and expenses
General and administration expenses
Restructuring expenses (note 10)
Acquisition costs (note 4)
INCOME (LOSS) BEFORE FINANCE COSTS AND INCOME
TAXES
FINANCE COSTS (INCOME)
Interest expense, net
Amortization of transaction costs
INCOME (LOSS) BEFORE INCOME TAXES
INCOME TAX EXPENSE (RECOVERY)
Current (note 13)
Deferred (note 13)
NET INCOME (LOSS) FOR THE YEAR
BASIC EARNINGS (LOSS) PER SHARE (note 18)
DILUTED EARNINGS (LOSS) PER SHARE (note 18)
$
$
$
244,571
78,198
36,276
29,940
2,654
348
69,218
8,980
4,985
623
5,608
3,372
1,407
(284)
1,123
2,249
$
0.11
0.11
$
$
289,529
220,138
69,391
33,992
27,379
9,457
1,368
72,196
(2,805)
4,409
701
5,110
(7,915)
725
(2,435)
(1,710)
(6,205)
(0.38)
(0.38)
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DATA Communications Management Corp.
Annual Report 2018
FINANCIAL STATEMENTS
Consolidated statements of comprehensive income (loss)
(in thousands of Canadian dollars)
For the year
ended December
31, 2018
For the year
ended December
31, 2017
NET INCOME (LOSS) FOR THE YEAR
$
2,249
$
(6,205)
OTHER COMPREHENSIVE INCOME (LOSS):
ITEMS THAT MAY BE RECLASSIFIED SUBSEQUENTLY TO
NET INCOME (LOSS)
Foreign currency translation
ITEMS THAT WILL NOT BE RECLASSIFIED TO
NET INCOME (LOSS)
Re-measurements of pension and other post-employment benefit
obligations (notes 15 and 16)
Taxes related to pension and other post-employment benefit
adjustment above (note 13)
59
59
(1,318)
343
(975)
(75)
(75)
(1,501)
390
(1,111)
OTHER COMPREHENSIVE LOSS FOR THE YEAR, NET OF
TAX
COMPREHENSIVE INCOME (LOSS) FOR THE YEAR
$
$
(916) $
(1,186)
1,333
$
(7,391)
57
DATA Communications Management Corp.
Annual Report 2018
FINANCIAL STATEMENTS
Consolidated statements of changes in shareholders' equity (deficit)
(in thousands of Canadian
dollars)
Balance as at December 31,
2016
Net loss for the period
Other comprehensive loss for
the period
Total comprehensive loss for
the period
Shares issued on the
redemption of convertible
debentures (note 17)
Issuance of common shares
(note 17)
Share-based compensation
expense (note 17)
Balance as at December 31,
2017
BALANCE AS AT
DECEMBER 31, 2017
Impact of change in
accounting policy, net of tax
(note 3)
Net income for the period
Other comprehensive income
(loss) for the period
Total comprehensive income
for the period
Issuance of common shares
and warrants, net (note 17)
Share-based compensation
expense (note 17)
BALANCE AS AT
DECEMBER 31, 2018
Shares
Warrants
Conversion
options
Contributed
surplus
Translation
reserve
Deficit
Total
equity
(deficit)
$ 237,432 $
— $
128 $
1,164 $
258 $ (248,917) $
(9,935)
—
—
—
—
11,564
—
—
—
—
—
287
—
—
—
—
(128)
—
—
—
—
—
128
(15)
91
—
(6,205)
(6,205)
(75)
(1,111)
(1,186)
(75)
(7,316)
(7,391)
—
—
—
—
—
—
—
11,836
91
$ 248,996 $
287 $
— $
1,368 $
183 $ (256,233) $
(5,399)
$ 248,996 $
287 $
— $
1,368 $
183 $ (256,233) $
(5,399)
—
—
—
—
—
8,365
$ 248,996 $
287 $
— $
1,368 $
183 $ (247,868) $
8,365
2,966
—
—
—
2,221
—
—
—
—
519
—
—
—
—
—
—
—
—
—
—
473
—
59
59
—
—
2,249
2,249
(975)
(916)
1,274
1,333
—
—
2,740
473
$ 251,217 $
806 $
— $
1,841 $
242 $ (246,594) $
7,512
58
DATA Communications Management Corp.
Annual Report 2018
FINANCIAL STATEMENTS
Consolidated statements of cash flows
(in thousands of Canadian dollars)
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net income (loss) for the year
Adjustments to net income (loss)
Depreciation of property, plant and equipment
Amortization of intangible assets
Share-based compensation expense
Pension expense (note 15)
(Gain) loss on disposal of property, plant and equipment
Write-off of intangible assets
Provisions (note 10)
Amortization of transaction costs (note 11)
Accretion of non-current liabilities and related interest expense
Other non-current liabilities
Other post-employment benefit plans, net
Tax credits recognized
Income tax expense (recovery)
Changes in working capital (note 19)
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
Net cash consideration for acquisition of businesses (note 4)
FINANCING ACTIVITIES
Increase in restricted cash
Issuance of common shares and warrants, net (note 17)
Proceeds from credit facilities (note 11)
Repayment of credit facilities (note 11)
Repayment of convertible debentures
Repayment of other liabilities
Repayment of promissory notes (note 12)
Transaction costs (note 11)
Finance lease payments
INCREASE IN (BANK OVERDRAFT) / (DECREASE) IN CASH
AND CASH EQUIVALENTS DURING THE YEAR
(BANK OVERDRAFT) CASH AND CASH EQUIVALENTS –
BEGINNING OF YEAR
EFFECTS OF FOREIGN EXCHANGE ON CASH BALANCES
BANK OVERDRAFT – END OF YEAR
$
$
59
For the year
ended December
31, 2018
For the year
ended December
31, 2017
$
2,249 $
(6,205)
4,678
4,173
473
560
(10)
242
1,665
623
617
192
1
(111)
1,123
16,475
7,827
(959)
(4,869)
(1,211)
17,263
(2,694)
(5,111)
180
(7,320)
(14,945)
—
685
12,951
(11,238)
—
(400)
(4,561)
(900)
(20)
(3,483)
(1,165)
(2,868) $
34
(3,999) $
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)
(2,868)
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
1 General Information
DATA Communications Management Corp. ("DCM") is a communication solutions partner that adds value for major
companies across North America by creating more meaningful connections with their customers. DCM pairs customer
insights and thought leadership with cutting-edge products, modular enabling technology and services to power its
clients’ go-to market strategies. DCM helps its clients manage how their brands come to life, determine which channels
are right for them, manage multimedia campaigns, deploy location-specific and 1:1 marketing, execute custom loyalty
programs, and fulfill their commercial printing needs all in one place.
DCM's extensive experience has positioned it as an expert at providing communication solutions across many verticals,
including the financial, retail, healthcare, consumer health, energy, and not-for-profit sectors. As a result of its locations
throughout Canada and in the United States (Chicago, Illinois and New York, New York), it is able to meet its clients’
varying needs with scale, speed, and efficiency - no matter how large or complex the ask. DCM is able to deliver
advanced data security, regulatory compliance, and bilingual communications, both in print or digital formats.
On February 22, 2017, 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. On February 22, 2017, DCM acquired
100% of the outstanding common shares of Thistle Printing Limited (“Thistle”), a full service commercial printing company.
On January 1, 2019, Thistle was amalgamated into DCM. On November 10, 2017, DCM acquired 100% of the outstanding
common shares of BGI Holdings Inc. and 1416395 Alberta Limited (collectively “BOLDER Graphics”), a company focused
on large-format digital printing, point of sale signage, corporate packaging, outdoor signage and vehicle graphics. On
January 1, 2018, BOLDER Graphics was amalgamated into DCM.
On May 8, 2018, DCM acquired 100% of the outstanding common shares of Perennial Group of Companies Inc., a
privately held holding company, Perennial Inc., one of Canada’s leading design firms focused on creating and delivering
design strategies for major retail brands in Canada and around the world, and The Finished Line Studios Inc., an
independent, multi-function creative, execution and production art studio (collectively, Perennial Group of Companies
Inc., Perennial Inc. and The Finished Line Studios Inc. being “Perennial Group”). On closing, Perennial Group was
amalgamated as Perennial Inc. (“Perennial”). Perennial’s suite of services includes business and brand strategy,
consumer insights, environmental and graphic design, and communications and retail operations design and strategy.
On November 7, 2018, DCM announced that Perennial, a wholly owned subsidiary of DCM, and Aphria Inc. (“Aphria”),
a leading global cannabis company, had entered into a joint venture agreement (the “JV”) for the purpose of the
development, production, marketing and sale of non-Aphria branded new products, brands and product categories on
the domestic and international adult-use cannabis markets. The JV will initially focus on cannabis-infused products for
the wellness, medical and adult-use markets. The JV is owned equally by Perennial and Aphria. It will select specific
projects to collaborate on and seek to leverage the respective capabilities of Perennial, DCM and Aphria. The JV
agreement includes typical terms related to corporate governance, capital contributions, intellectual property, and other
standard matters. As at December 31, 2018 and for the year then ended, the JV did not have any significant balances
or transactions.
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.
The common shares of DCM are listed on the Toronto Stock Exchange (“TSX”) under the symbol “DCM”. The address
of the registered office of DCM is 9195 Torbram Road, Brampton, Ontario.
60
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
2 Basis of presentation and significant accounting policies
BASIS OF PRESENTATION
DCM prepares its consolidated financial statements in accordance with International Financial Reporting Standards
issued by the International Accounting Standards Board (“IFRS”).
These consolidated financial statements were approved by the Board of Directors ("Board") of DATA Communications
Management Corp., on March 21, 2019.
SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies set out below have been applied consistently to all periods presented in these
consolidated financial statements except for the accounting policy changes as described in note 3.
BASIS OF MEASUREMENT
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.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, 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, International Accounting Standards (“IAS”) 17 Leases, and measurements that have
some similarities to 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.
In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the
degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair
value measurements in its entirety, which are described as follows:
•
•
•
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can
access at the measurement date;
Level 2 inputs are inputs, other than quoted prices included within Level 1; that are observable for the asset or
liability; either directly or indirectly; and
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 intercompany transactions,
balances and unrealized gains and losses from intercompany transactions are eliminated upon consolidation.
(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.
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DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
(b) Changes in ownership interests in subsidiaries without change of control
Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions
– that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration
paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains
or losses on disposals to non-controlling interests are also recorded in equity.
(c) Disposal of subsidiaries
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 change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount
for the purposes of subsequently accounting for the retained interest as an associate, joint venture 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.
BUSINESS COMBINATIONS
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 considerations, on
the acquisition date, in exchange for control of the acquired entity. The excess of the consideration transferred over the
fair value of the identifiable assets acquired and liabilities assumed is recognized as goodwill. The transaction costs
attributable to the acquisition are recognized in the statement of operations when they are incurred.
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.
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 measurement is
incomplete. 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. The measurement period is the period from the acquisition date to the date on which DCM has received
complete information on the facts and circumstances that existed as of the 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.
In the case of a business combination of less than 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
Items included in the financial statements of each entity within DCM are measured using the currency of the primary
economic environment in which the entity operates (the “functional currency”). These consolidated financial statements
are presented in Canadian dollars, which is DCM’s functional currency. The functional currency of DCM’s United States
operations is U.S. dollars. All financial information presented in Canadian dollars has been rounded to the nearest
thousand.
Monetary assets and liabilities denominated in foreign currencies are translated into each entity's functional currency at
rates of exchange in effect at the statement of financial position date. Revenues and expenses denominated in foreign
currencies are translated into each entity's functional currency at rates prevailing on the transaction dates. Gains and
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DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
losses resulting from translation of monetary assets and liabilities denominated in currencies other than each entity's
functional currency are included in the determination of income for the year.
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisitions, are
translated to Canadian dollars at exchange rates at the reporting date. The income and expenses of foreign operations
are translated to Canadian dollars at average exchange rate during the period. Foreign currency differences are
recognized in other comprehensive income (loss) in the foreign currency translation reserve account.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, deposits held with banks and bank overdraft and highly liquid short-
term interest bearing securities with maturities of three months or less at the date of purchase.
INVENTORIES
Raw materials inventories, base stock finished goods and work-in-progress are recorded at the lower of cost and net
realizable value. Raw materials are recorded on a weighted average cost basis. Cost of finished goods and work-in-
process are determined using the first-in, first-out method. Inventory manufactured includes the cost of materials, labour
and 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 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. Property, plant and equipment
are depreciated from the point at which the asset is ready for use. Depreciation is computed using the methods and
rates based on the estimated useful lives of the property, plant and equipment as outlined below:
Leasehold improvements
Office furniture and equipment
Presses and printing equipment
Computer hardware and software
Vehicles
Basis
straight-line
straight-line
straight-line
straight-line
straight-line
Rate
Shorter of life or
lease term
5 years
3 to 10 years
2 to 5 years
3 years
DCM 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
Separately acquired intangible assets are initially measured at cost. Customer relationships, tradenames, trademarks
and non-compete agreements acquired in a business combination are recognised at fair value at the acquisition date
which is their deemed cost. Where these assets have a finite life they are subsequently carried at cost less accumulated
amortization and impairment losses
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DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
Research costs are recognized as an expense as incurred. Development costs that are directly attributable to the design
and testing of identifiable and unique software products controlled by DCM are recognized as intangible assets when
the following criteria are met:
•
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.
Directly attributable costs that are capitalized as part of the software include employee costs and an appropriate portion
of relevant overheads. Capitalized development costs are recorded as intangible assets and amortized from the point
at which the asset is ready for use.
Management’s judgment is required to determine the useful lives of intangible assets including reviewing the length of
customer relationships and other factors. These finite life assets are amortized over their estimated useful lives as
outlined below.
Customer relationships and customer backlog
Software and technology
Computer software development costs
Basis
straight-line
straight-line
straight-line
Trademarks, trade names and non-compete agreements
straight-line
Rate
1.5 to 12 years
1 to 7 years
1 to 5 years
2 to 10 years
Residual values, the method of amortization and useful lives of the assets are reviewed annually and adjusted if
appropriate.
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 fair value of net identifiable assets and liabilities acquired.
Adjustments to fair value assessments are recorded to goodwill over the measurement period, not exceeding one year
from the date of acquisition. Goodwill is allocated to the cash generating unit (“CGU”) or a group of CGUs to which it
relates. A CGU is an identifiable group of assets that are largely independent of the cash flows from other assets or
group of assets, which is not higher than an operating segment.
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 are first allocated to the carrying value of
goodwill and any excess is allocated to the carrying amount of assets in the CGU. Any goodwill impairment is charged
to income in the period in which the impairment is identified. Impairment losses on goodwill are not subsequently
reversed.
IMPAIRMENT OF NON-FINANCIAL ASSETS
Property, plant and equipment and intangible assets are tested for impairment when events or changes in circumstances
indicate that the carrying amount may not be recoverable. For the purpose of measuring recoverable amounts, assets
are grouped at the lowest levels for which there are separately identifiable cash flows (CGUs). The recoverable amount
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DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
is the higher of an asset’s fair value less costs to sell and value in use (being the present value of the expected future
cash flows of the relevant asset or CGU). The projections of 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.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount.
Impairment losses are recorded as impairment provisions within accumulated depreciation for depreciable assets. DCM
evaluates impairment losses, other than goodwill impairment, for potential reversals when events or circumstances
warrant such 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
DCM has share-based compensation plans as part of DCM’s long-term incentive plan, as described in note 17. All
transactions involving share-based payments are recognized as an expense in the statement of operations over the
vesting period.
Equity-settled share-based payment transactions, such as stock option awards, are measured at the grant date at the
fair value of employee services received in exchange for the grant of options or share awards and, for non-employee
transactions, at the fair value of the goods or services received at the date on which the entity recognizes the goods or
services. The total amount of the expense recognized in the statement of operations is determined by reference to the
fair value of the share awards or options granted, which factors in the number of options expected to vest. Equity-settled
share-based payment transactions are not remeasured once the grant date fair value has been determined.
Cash-settled share-based payment transactions are measured at the fair value of the liability. The liability is remeasured
at each reporting date and at the date of settlement, with changes in fair value recognized in the statement of operations.
EMPLOYEE BENEFITS
DCM maintains a defined benefit and defined 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. Actuarial valuations are required to be completed every three years.
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. DCM's obligation to the SRDF and Unifor Pension & Benefit Plans are limited to the
amounts agreed to in the respective collective bargaining agreements of each plan.
Certain former senior executives of a predecessor corporation participated in a Supplementary Executive Retirement
Plan (“SERP”), which provides for pension benefits payable as a single life annuity with a five year guarantee.
(a) Defined contribution plan
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.
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DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
(b) Defined benefit plans
A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. Pension benefits for
the defined benefit formula are generally calculated based on the number of 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 DCM. An economic benefit is available to DCM if it is realizable during the life of the plan, or on settlement
of the plan liabilities.
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
past services costs are recognized as period costs in general and administration expenses in the statement of operations.
Net interest is calculated by applying the discount rate at the beginning of the period to the net benefit liability or asset
and is recognized in finance costs (income) in the statement of operations.
The discount rate used to determine the accrued benefit obligation is determined by reference to yields on high quality
corporate bonds and that have terms to maturity approximating the terms of the related pension liability.
Actuarial gains and losses arise from the difference between actual rate of return on plan assets and the discount rate
for that period, from changes in actuarial assumptions used to determine the accrued benefit obligation and from changes
to accrued benefit obligation resulting from actual experience differing from long-term assumptions 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 income (loss) in the period in
which they occur. Re-measurements recognized in other comprehensive income (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 benefit plans. When the payment in the future of minimum funding requirements related to past
service would result in a net defined benefit 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.
A liability for termination benefits is recognized at the earlier of when the entity can no longer withdraw the offer of the
termination benefit and when the entity recognizes any related restructuring costs. Termination benefits that require
future services are required to be recognized over the periods the future services are provided.
The SERP is unfunded.
The SRDF and the Unifor Pension & Benefit Plans are negotiated contribution, defined benefit multi-employer plans,
however, the trustees of these plans are not able to provide sufficient information for DCM to account for these plans
as a defined benefit plan. DCM has accounted for these plans on a defined contribution basis as DCM does not believe
there is sufficient information to recognize participation on a defined benefit basis. See note 20 for additional information
related to the SRDF.
(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
66
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
plans are recognized in other comprehensive loss in the period in which they arise and will not be reclassified to statement
of operations.
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 date. Any actuarial
gains and losses related to other long-term employee benefit plans are recognized in the statement of operations in the
period in which they arise.
The discount rate is the yield at the reporting date on yields on high quality corporate bonds that have maturity dates
approximating the terms of DCM’s obligations. The DCM OPEB Plans and DCM OPEB LTD Plan are funded on a pay-
as-you-go basis.
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.
(ii) Onerous contracts: DCM performs evaluations to identify onerous contracts and, where applicable, records
provisions against such contracts.
(iii) Off-market leases: DCM performs evaluations to identify off-market lease arrangements and, where applicable,
records provisions 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 combination, or items recognized directly in equity or in
other comprehensive income (loss), in which case the current and/or deferred tax is also recognized directly in equity
or other comprehensive income (loss).
Current income taxes is the expected tax payable or receivable on the taxable income or loss for the year, using tax
rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous
years that are expected to be paid. Management periodically 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 arising on the initial recognition of goodwill. Deferred
income tax is measured on a non-discounted basis at the tax rates that are expected to be applied to temporary differences
when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
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.
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DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
Deferred income tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities
and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different
tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will
be realized simultaneously.
Deferred income tax assets and liabilities are presented as non-current.
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. Lease incentives received are recognized as an integral part of the total lease
expense, over the 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 equity, net of any tax effects.
EARNINGS (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.
REVENUE RECOGNITION
DCM recognizes revenue when control of the goods or services has been transferred. Revenue is measured at the
amount of consideration to which DCM expects to be entitled to, net of incentives given to its customers including volume-
based incentives and cash discounts.
The following is a description of the principal activities from which DCM generates its revenue, along with the
corresponding revenue recognition accounting policies applied:
(a) Product sales - DCM manufactures customized products based on specifications pre-approved by its customers.
At its customers' request, DCM will also purchase stock product from third-party vendors and resell that to its
customers. For products that DCM purchases and resells to its customers, DCM is typically a principal in these
arrangements as it is responsible for making key decisions over the purchasing of product and has the economic
risks and rewards that are customary with control. Accordingly, third party stock product revenue is typically presented
on a gross basis in revenue with the corresponding product purchase cost and associated costs recognized in costs
of revenue. DCM recognizes revenue when control over the product transfers to the customer, which is effectively
transferred upon the completion of production or when resale product is purchased and inducted into DCM's
warehouses. Given manufactured products are customized or purchased specifically at the customer’s request,
product returns are insignificant.
In some instances, DCM's customers obtain the product directly from DCM following the completion of production.
In other instances, DCM’s contracts involve the provision of warehousing and shipment services, in addition to
manufacturing or purchasing of third-party products. Based on DCM's contractual arrangements with its customers
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DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
related to product, DCM has identified three key distinct performance obligations: product sales, warehousing
services and shipment services. DCM stores customized or purchased product at the request of the customer; the
product is identifiable as the customer’s product; the product is ready for transfer to the customer upon the customer’s
request; and DCM cannot re-direct the product nor use the product to fulfill another customer’s product order under
the contract. Where control has transferred over the product upon product manufacture by DCM or upon receipt
of third-party product into DCM's warehouses, DCM recognizes revenue for product and allocates an amount of
the consideration received or receivable from the customer for the remaining warehousing and shipping performance
obligations based on their relative stand-alone selling prices, where applicable. Based on the contractual terms
with its customers, DCM either issues an invoice when product that is manufactured by DCM or purchased from
third-party vendors is inducted into DCM's warehouse, or alternatively the invoice is issued for some customers
when product is dispatched from, its warehouses. In instances where DCM issues an invoice on dispatch of product
from its warehouses, rather than at the date of transfer of control, DCM is still entitled to payment for the purchased
or manufactured product. Accordingly, revenue is recognized for the product manufactured by DCM or third-party
stock product and a corresponding balance for “unbilled receivables” are recognized within trade receivables in the
consolidated statement of financial position. Unbilled receivables are transferred to accounts receivables when the
invoices are issued to the customers. Deferred revenue represents amounts that have been invoiced to the customer
but not yet recognized as revenue, including advance payments and billings in excess of revenue. Deferred revenue
is recognized as revenue when DCM completes production of product or upon receipt of third-party product into its
warehouses.
(b) Warehousing services - DCM provides custodial services to store customer product in its warehouse over a specified
agreed upon period. For non-bundled pricing arrangements, warehousing revenues are recognized over the period
that warehousing services are provided to the customer based on the balance of customer product remaining in
the warehouse at the time an invoice is issued. For bundled pricing arrangements, DCM allocates a portion of the
initial transaction price for warehousing services and recognizes revenue on a straight-line basis over the period of
the warehousing as it best represents the pattern of performance. Amounts are typically invoiced as warehousing
services are performed in accordance with agreed upon contractual terms at periodic intervals. When DCM receives
advance payments or issues billings in excess of revenue, these are recognized as deferred revenue in the statement
of financial position. Deferred revenue is recognized as revenue when or as DCM provides custodial services over
the agreed upon warehouse term.
(c) Freight services - DCM has identified it has a distinct performance obligation for shipment of product for certain
contracts where it has an obligation to arrange shipment services where control of the product has been transferred
to the customer prior to shipment. DCM frequently contracts with third parties to deliver product. DCM is typically
a principal for such shipment services as it is responsible for making key decisions over the shipment arrangements
and has the economic risks and rewards associated with such control. As a principal DCM recognizes shipment
revenues when performance of the shipping service has occurred as products are shipped.
(d) Marketing services - DCM generates revenue from providing marketing solutions to its customers which include
business and brand strategy, consumer insights, strategic marketing and design services. Typically, these services
are contracted with fixed-fees and are provided over a period of time equal to one year or less. Revenue is measured
based on the consideration DCM expects to be entitled to in exchange for providing services. DCM’s marketing
contracts include a single performance obligation because the promise to transfer the individual services are not
separately identifiable from other promises in the contract and therefore are not distinct. DCM transfers control of
the services it provides to its customers over time and therefore recognizes revenue progressively as the services
are performed. Revenue from customer contracts are recognized based on the percentage of completion method.
Under this method, the stage of completion is measured using costs incurred to date as a percentage of total
estimated costs for each contract and the percentage of completion is applied to the total estimated revenue.
While providing services, DCM incurs certain direct costs for subcontractors and other expenses that are recoverable
directly from its customers. The recoverable amounts of these direct costs are included in DCM’s gross revenue as
it obtains control of these services before they are provided to the customer and therefore, acts as a principal in
these arrangements.
69
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
The timing of revenue recognition, billings, and cash collections results in trade receivables, unbilled receivables,
and deferred revenue in the consolidated statements of financial position. Amounts are typically invoiced as work
progresses in accordance with agreed-upon contractual terms, either at periodic intervals or when contractual
milestones are achieved. Receivables represent amounts currently due from customers and unbilled receivables
represents work that has not yet been invoiced to the customer however DCM has a right to payment for the services
provided ahead of agreed upon contractual milestones. Unbilled receivables are transferred to receivables when
billings are issued to the customer. Accordingly, unbilled receivables are recognized and included within trade
receivables in the consolidated statement of financial position. Deferred revenue represents amounts that have
been invoiced to the customer but not yet recognized as revenue, including advance payments and billings in excess
of revenue. Deferred revenue is recognized as revenue when or as DCM performs under the contract.
(e) Other services - This includes other ancillary services such as fees related to administrative functions that DCM
provides to its customers and financing charges associated with customers where DCM stores customer product
in the warehouse over a period of time and invoices the customer when the product is dispatched from DCM's
warehouse. Revenue for other ancillary services are recognized upon completion of the performance obligations
to its customers. Financing income is recognized as DCM provides custodial services to its customers over the
agreed upon warehouse term.
VARIABLE CONSIDERATION
Some contracts with customers provide volume-based incentives specific to product sales. Such incentive offerings give
rise to variable consideration and are required to be estimated at contract inception by using either the expected value
or the most likely amount, depending on which method better predicts the amount of consideration to which the customer
will be entitled. The estimates are based on various assumptions including past experience with customers and other
relevant factors. DCM uses the most likely amount when determining the expected amount of volume-based incentives
it will give to its customers and records these as a reduction to revenue in the consolidated statement of operations.
CONTRACT COSTS
Contract costs represent incremental costs incurred, such as sales commissions for sales made to certain customers.
Contract costs are deferred and included within prepaid expenses and other assets for contracts expected to be delivered
after more than one year and then amortized over their estimated useful lives. Contract costs are carried at cost less
accumulated amortization. For the year ended December 31, 2018, DCM did not have any significant balances or
transactions.
FINANCIAL INSTRUMENTS
CLASSIFICATION AND MEASUREMENT
Financial assets are classified and measured based on these categories: amortized cost, fair value through other
comprehensive income ("FVTOCI"), and fair value through profit and loss (“FVTPL”).
Financial liabilities are classified and measured based on two categories: amortized cost or FVTPL. Derivatives embedded
in contracts where the host is a financial asset in the scope of the standard are not separated, but the hybrid financial
instrument as a whole is assessed for classification.
Financial assets and liabilities at FVTPL: A financial asset or liability is classified in this category if acquired principally
for the purpose of selling or repurchasing in the short-term. Derivatives are also included in this category unless they
are designated as hedges. Financial instruments in this category are recognized initially and subsequently at fair value.
Transaction costs are expensed in the 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 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.
70
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
Financial assets and liabilities at amortized cost: Financial assets and liabilities at amortized cost are initially recognized
at fair value, except for trade receivables that do not contain a significant financing component which are measured at
the transaction price, plus or minus transaction costs, respectively, and subsequently carried at amortized cost less any
impairment.
Financial assets through other comprehensive income: Financial assets carried at FVOCI are measured at fair value.
Interest, dividends and impairment gains and losses are recognized in the consolidated statement of operations on the
same basis as for amortized cost assets. Changes in fair value are recognized initially in other comprehensive income.
When the assets are derecognized or reclassified the cumulative changes in fair value are reclassified to the consolidated
statement of operations (except where they relate to investments in equity instruments). The Company has no financial
instruments measured at fair value through other comprehensive loss.
DCM determines the classification of financial assets and liabilities at initial recognition. The classification of DCM's
financial assets and liabilities is disclosed in note 21.
IMPAIRMENT OF FINANCIAL ASSETS
DCM applies the 'expected credit loss' ("ECL") model to assess the impairment of its financial assets at each balance
sheet date. The ECL model requires considerable judgment, including consideration of how changes in economic factors
affect ECLs, which are determined on a probability-weighted basis. IFRS 9 outlines a three-stage approach to recognizing
ECLs which is intended to reflect the increase in credit risks of a financial instrument based on 1) 12-month expected
credit losses or 2) lifetime expected credit losses. DCM measures loss allowance at an amount equal to lifetime ECLs.
DCM applies the simplified approach to determine ECLs on trade receivables by using a provision matrix based on
historical credit loss experiences. The historical results were used to calculate the run rates of default which were then
applied over the expected life of the trade receivables, adjusted for forward looking estimates. Trade receivables are
written off when there is no reasonable expectation of recovering the asset or a portion, thereof.
Impairment losses are recorded in general and administration expenses in the consolidated statements of operations.
Where there is a change that will cause a significant reduction in the loss, the impairment loss previously recognized is
reversed through the consolidated statements of operations.
DERECOGNITION
Financial Assets: The Company derecognizes financial assets only when the contractual rights to cash flows from the
financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards
of ownership to another entity. Gains and losses on derecognition are generally recognized in the consolidated statements
of operations.
Financial liabilities: The Company derecognizes financial liabilities only when its obligations under the financial liabilities
are discharged, cancelled or expired. Generally, the difference between the carrying amount of the financial liability
derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed,
is recognized in the consolidated statements of operations.
USE OF ESTIMATES, MEASUREMENT UNCERTAINTY AND JUDGMENTS
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 financial statements and revenues and expenses for the period reported.
Management must also make estimates and judgments about future results of operations, related specific elements of
the business and operations in assessing recoverability of assets and recorded value of liabilities. Significant areas of
measurement uncertainty are summarized below. For each item, actual results could differ from estimates and judgments
made by management.
71
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
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 recoverable value of CGUs, assumptions of future cash flows,
and achieving forecasted business results. These assumptions can be impacted by economic conditions and also
require considerable judgment by management. Declines in business results or declines in the fair value of CGUs 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 the 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
The fair value of property, plant and equipment 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 acquired in a business combination is determined using the multi-period excess earnings method,
whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related
cash flows. The fair value of 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.
Inventories
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 required to complete and sell the inventories.
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
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 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 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
72
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
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
Management estimates the pension obligations annually using a number of assumptions and with the assistance of
independent actuaries; however, the actual outcome may vary due to 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 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. See notes 15 and 16 for the sensitivity of key
assumptions.
PROVISIONS
Provisions are liabilities of uncertain timing or amount. The amount recognized as a provision is DCM's best estimate
of the present obligation at the end of the reporting period. The determination of DCM's provisions, which includes
restructuring costs and onerous contracts, involves judgment about the outcome of future events, and estimates on the
timing and amount of expected future cash flows. 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. Provisions are reviewed at each reporting date and any
changes to estimates are reflected in the statement of operations.
AGGREGATION OF OPERATING SEGMENTS
Management applies judgment in aggregating operating segments into 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.
REVENUE RECOGNITION
a) Product sales
DCM uses significant judgment, which is inherent in its revenue generating activities, as to when control is transferred
to its customers on the completion of the manufacture or purchase and induction of third-party product into DCM's
warehouses. As an integral part of the judgment on the transfer of control of product, DCM typically has a right of
payment for all customized product produced or purchased from third-party vendors notwithstanding that invoicing
of the product for some contracts does not occur until the product is dispatched from the warehouse at the customers'
request. Due to the custom nature of the product, it does not have an alternative use to DCM, such that DCM is
entitled to payment once the quantity of product pursuant to an individual purchase order is produced or purchased
from a third-party vendor and inducted into its warehouses. Where a customer has an arrangement to be invoiced
on dispatch from one of DCM's warehouses, DCM closely monitors the customer’s product and the agreed upon
term of warehousing to manage any related business risks.
b) Marketing services
DCM accounts for its revenue from fixed-fee contracts using the percentage of completion method, which requires
estimates to be made for contract costs and revenues. Contract costs include direct labor, direct costs for
subcontractors and other expenditures that are recoverable directly from its customers. Progress on jobs is regularly
reviewed by management and estimated costs to complete are revised based on the information available at the
end of each reporting period. Contract costs estimates are based on various assumptions that can result in a change
to contract profitability from one financial reporting period to another, including labor productivity and availability,
the complexity of the work to be performed and the performance of subcontractors. Estimating total costs is subjective
and requires management’s best judgments based on the information available at that time.
73
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
Changes in estimates are reflected in the period in which the circumstances that gave rise to the change became known.
3 Change in accounting policies
(a) New and amended standards adopted
On January 1, 2018, DCM implemented the following new and revised standards, along with any consequential
amendments, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The impact
of the implementation of these standards on DCM’s consolidated financial statements are described below.
IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS
In 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”), replacing IAS 18 Revenue (“IAS
18”), IAS 11 Construction Contracts, and related interpretations. IFRS 15 establishes a single comprehensive framework
for revenue recognition based on a five-step model where entities are required to 1) identify the contract with a customer;
2) identify the performance obligations related to the contract; 3) determine the transaction price of the contract; 4)
allocate such transaction price between the performance obligations in the contract; and 5) recognize revenue when (or
as) performance obligations are satisfied. In addition to recognition and measurement, IFRS 15 also includes new
requirements on presentation and disclosures. IFRS 15 is effective for annual periods beginning on or after January 1,
2018.
DCM elected to adopt IFRS 15 using the modified retrospective method, with recognition of transitional adjustments in
opening deficit on the date of initial application (January 1, 2018), without restatement of comparative figures.
IFRS 15 provides for certain optional practical expedients, including those related to the initial adoption of the standard.
DCM applied the following practical expedients upon adoption of IFRS 15:
PRACTICAL EXPEDIENT
(ON TRANSITION)
Completed contracts
DESCRIPTION
DCM did not restate contracts that began and were completed in the same annual
reporting period or were completed by delivering all product and services prior to or
on January 1, 2018.
74
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
PRACTICAL EXPEDIENTS
(ONGOING)
Assessment against a
portfolio of contracts versus
individual contracts
Consideration of potential
existence of a significant
financing component in a
contract
Transaction price allocated to
the remaining performance
obligations unsatisfied at the
end of a reporting period
DESCRIPTION
DCM grouped customer contracts that were individually less significant in nature where
they had similar characteristics and applied IFRS 15 to the portfolio of contracts (or
performance obligations) on the basis that DCM reasonably expects that the effects
on the financial statements of applying this standard to the portfolio would not differ
materially from applying this standard to the individual contracts (or performance
obligations) within that portfolio.
DCM applied the practical expedient in IFRS 15 to not assess whether there is a
significant financing component in its contracts on the basis that:
1) The period between when DCM transfers a promised good or service to a customer
and when the customer pays for that good or service is generally one year or less;
and
2) Where invoicing takes place when the product is dispatched from the warehouse,
DCM charges its customers a financing charge for the duration of the time that
customer product is stored in its warehouses at a rate that is reasonably comparable
with market interest rates.
DCM elected not to disclose the aggregate amount of the transaction price allocated
to the unsatisfied portion of the performance obligations at the end of the reporting
period, in addition to when it expects to recognize this as revenue based on the following
reasons:
1) Product and freight revenue - DCM has a right to consideration from a customer in
an amount that corresponds directly with the value to the customer for the
performance obligation completed to date.
2) Warehouse and marketing revenue - generally this performance obligation is part
of a contract that has an original expected duration of one year or less.
IFRS 9 - FINANCIAL INSTRUMENTS
In 2014, the IASB issued IFRS 9 Financial Instruments (“IFRS 9”) replacing IAS 39 Financial Instruments: Recognition
and Measurement and related interpretations. IFRS 9 includes revised guidance on the classification and measurement
of financial assets, including impairment and a new general hedge accounting model. IFRS 9 is effective for annual
periods beginning on or after January 1, 2018. DCM implemented IFRS 9 as at January 1, 2018 by applying the
requirements for classification and measurement, including impairment, retrospectively, with the cumulative effects of
initial application recorded in the opening deficit balance as at January 1, 2018 with no restatement of comparative
periods. IFRS 9 was not applied to financial assets and financial liabilities that were derecognized at the date of initial
application (i.e. January 1, 2018). DCM also applied related amendments to IFRS 7 Financial Instruments: Disclosures.
IFRS 9 contains a new classification and measurement approach for financial assets reflecting the business model in
which assets are managed and their cash flow characteristics. The following table summarizes the classification impact
of DCM's financial assets and financial liabilities upon the adoption of IFRS 9. The adoption of the new classification
requirements under IFRS 9 did not result in any significant changes in measurement or the carrying amount of DCM's
financial assets and liabilities.
75
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
Classification under IAS 39
Classification under IFRS 9
Asset/Liability
Financial assets
Cash and cash equivalents
Trade receivables
Restricted cash
Financial liabilities
Loans and receivables
Loans and receivables
Loans and receivables
Bank overdraft
Trade payables and accrued liabilities (1)
Other liabilities
Other liabilities
Other non-current liabilities (2)
Credit facilities
Promissory notes
Other liabilities
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
(1)
Includes 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. RSUs and DSUs payables are also excluded as they are measured
at fair value through profit and loss.)
(2)
Includes bonuses payable
The details of the new significant accounting policies are set out in note 2 and the impact of the changes from previous
significant accounting policies in relation to DCM’s sale of products and services are set out in note 3.
IMPACT OF ADOPTION OF IFRS 9 AND IFRS 15
The following table summarizes the impact of adopting IFRS 9 and IFRS 15 on DCM’s consolidated statement of financial
position as at January 1, 2018:
(in thousands of Canadian dollars)
Trade receivables
Inventories
Deferred income tax assets
Trade payables and accrued
liabilities
Deferred revenue
Deferred income tax liabilities
Deficit
January 1, 2018
prior to the adoption
of IFRS 9 and IFRS 15
Impact of
adopting
IFRS 9
Impact of
adopting
IFRS 15
January 1, 2018 after
the adoption of IFRS 9
and IFRS 15
$
41,193 $
(505) $
28,671 $
36,519
6,108
34,306
11,237
1,295
—
132
—
—
—
(256,233)
(373)
(25,639)
(3,006)
600
(9,395)
83
8,738
69,359
10,880
3,234
34,906
1,842
1,378
(247,868)
a) Under IAS 18, DCM previously identified that the risks and rewards of ownership related to product that was
manufactured by DCM or purchased from a third-party vendor at the customer’s request and stored on the customer’s
behalf in DCM's warehouse did not transfer until such time as the product was dispatched from the warehouse at
which time revenue was recorded. DCM has identified that on adoption of IFRS 15 product revenue should be
recognized upon the completion of production of manufactured product or purchase and induction of third-party
product into DCM's warehouses as that is when control of the product is transferred to the customer and DCM has
a right to payment.
An adjustment of $8,320, net of tax, was made to recognize product revenue, net of costs, upon the completion of
production or upon the purchase and induction of third-party product into DCM's warehouses resulting in a decrease
to the deficit balance in the consolidated statement of financial position as at January 1, 2018. There was a
76
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
corresponding increase to the unbilled portion of trade receivables of $24,366, increase to billed portion of trades
receivable of $3,388, a decrease in finished goods inventory of $25,639 and a decrease to deferred revenue of
$9,147.
b) Under IFRS 15, revenue is recognized over the period that warehousing services are provided to the customer.
Previously, under IAS 18, revenue related to warehousing services bundled with the overall selling price of the
product, were recognized upon shipment of the product to the customer and non-bundled warehousing services
were recognized over the service period.
An adjustment of $861, to the opening deficit, net of tax, was made to recognize revenue, net of costs, related to
warehousing services completed bundled with the overall transaction price of the product, and therefore had not
been recognized previously under IAS 18 until the product was invoiced upon shipment of the product from the
warehouse. The adjustment decreased the deficit balance in the consolidated statement of financial position as of
January 1, 2018. There was a corresponding increase to the unbilled portion of trade receivables of $917 and a
decrease to deferred revenue of $248.
c) DCM has recognized revenue as noted in (a) and (b) above for unbilled receivables representing receivables where
DCM has a right to payment for product manufactured or purchased from a third-party vendor and inducted into its
warehouses, and warehousing services, yet DCM has agreed not to issue an invoice until the product is shipped
from the warehouse. Such amounts related to product sales under IFRS 15 were previously recorded as inventories
under IAS 2 Inventories, until such time as the product was dispatched from the warehouse.
Upon transition to IFRS 9, DCM assessed trade receivables, which includes unbilled receivables for impairment by
applying the provision matrix as at January 1, 2018. An impairment loss of $373, net of tax, was recorded as an
increase to the deficit balance in the consolidated statement of financial position. There was a corresponding
decrease to the unbilled portion of trade receivables of $505 in the consolidated statement of financial position as
at January 1, 2018.
The following default rates are used to calculate the ECLs on billed receivables as at January 1, 2018.
(in thousands of Canadian
dollars)
Default rates
Billed receivables balance
Billed receivables ECL
Total
44,787
$206
Current
period
0.05%
26,037
$14
Over 30 days Over 60 days Over 90 days
0.13%
12,762
$17
0.40%
4,088
$16
9.22%
1,900
$159
Over 120
days
1.06%
—
$—
The following default rates are used to calculate the ECLs on unbilled receivables as at January 1, 2018.
(in thousands of Canadian
dollars)
Total
Default rates
Unbilled receivables balance
Unbilled receivables ECL
25,283
$505
Current
period
0.23%
4,316
$10
Over 30 days Over 60 days Over 90 days
0.49%
4,552
$22
1.63%
3,547
$58
2.28%
2,166
$49
Over 120
days
3.42%
10,702
$366
77
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
The following table presents the reconciliation of the ending allowances as at December 31, 2017 to the opening
loss allowances determined in accordance with IFRS 9 at the date of initial application:
(in thousands of Canadian dollars)
TRADE
RECEIVABLES
UNBILLED
RECEIVABLES
Lifetime
expected credit
losses
Lifetime
expected credit
losses
Allowances as at December 31, 2017
$
Additional loss allowance recognized on January 1, 2018
Impairment allowance under IFRS 9 as at January 1, 2018 $
(206)
—
(206) $
N/A (1) $
(505)
(505) $
(1)
Unbilled receivables, classified in Trade receivables were recognized upon the adoption of IFRS 15 as at January 1, 2018
Total
(206)
(505)
(711)
d) Under IAS 18, DCM recognized revenue from the sale of products measured at the fair value of the consideration
received or receivable, net of provisions for customer incentives. As a result of the change in the timing of revenue
recognition upon the adoption of IFRS 15, the timing to recognize volume-based incentives was also changed to
correspond with the related recognition of revenue.
An adjustment of $259, net of tax, was made to increase the opening deficit balance in the consolidated statement
of financial position as at January 1, 2018. There was a corresponding increase to trade payables and accrued
liabilities of $350 in the consolidated statement of financial position as at January 1, 2018.
e) Under IAS 18, DCM would recognize an expense for commission costs payable to its employees within selling,
commissions and expenses in the consolidated statement of operations based on when the customer was invoiced.
Given the timing of revenue recognition has changed for product sales and warehousing services with a bundled
pricing arrangement upon the adoption of IFRS 15, the timing to recognize commission costs also changed to
correspond with the related recognition of revenue.
An adjustment of $184, net of tax, was made to increase the opening deficit balance in the consolidated statement
of financial position as at January 1, 2018. There was a corresponding increase to trade payables and accrued
liabilities of $250 in the consolidated statement of financial position as at January 1, 2018.
f)
The combined tax impact of the above adjustments in (a) to (e) was a decrease to deferred income tax assets of
$2,874 and increase to deferred income tax liabilities of $83 in the consolidated statement of financial position as
at January 1, 2018.
There were adjustments made for the for the year ended December 31, 2018 similar in nature to those noted in (a) to
(f) above. In addition, the following adjustments were also made for the year ended December 31, 2018:
g) As noted in the accounting policies, DCM serves as a principal when contracting freight services it provides to its
customers as it represents the primary obligor in these arrangements. Previously, under IAS 18, DCM had recorded
freight revenue, net of related costs, in cost of revenues. Under IFRS 15, an adjustment was made to present
freight revenue on a gross basis. For the year ended December 31, 2018, DCM recognized $12,565 of freight
revenue in the consolidated statement of operations.
78
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
The following table summarizes the impact of adopting IFRS 9 and IFRS 15 on DCM’s consolidated financial statements
for the year ended December 31, 2018:
(in thousands of Canadian dollars)
Revenues
Cost of Revenues
Gross profit
Selling, commissions and expenses
General and administration
expenses
Current income tax expense
Deferred income tax expense
(recovery)
Net income
For the year ended
December 31, 2018
prior to the adoption
of IFRS 9 and IFRS
15
Impact of
adopting
IFRS 9
Impact of
adopting
IFRS 15
For the year
ended December 31,
2018 as reported
$
312,627 $
— $
10,142 $
235,866
76,761
36,155
29,992
939
(172)
1,237
—
—
—
(52)
(118)
132
38
8,705
1,437
121
—
586
(244)
974
322,769
244,571
78,198
36,276
29,940
1,407
(284)
2,249
The adjustments on adoption of IFRS 15 and 9 had the following effect on the basic and diluted earnings (loss) per
share:
Basic earnings (loss) per share
Diluted earnings (loss) per share
0.06
0.06
—
—
0.05
0.05
0.11
0.11
(in thousands of Canadian dollars)
Trade receivables
Inventories
Deferred income tax assets
Trade payables and accrued
liabilities
Income taxes payable
Deferred revenue
Deficit
December 31, 2018
prior to the adoption
of IFRS 9 and IFRS 15
Impact of
adopting
IFRS 9
Impact of
adopting
IFRS 15
December 31, 2018 as
reported
$
39,865
34,751
6,272
42,718
2,684
7,641
(255,987)
(453) $
33,712 $
—
—
—
(118)
—
(335)
(25,939)
(2,844)
779
586
(6,164)
9,728
73,124
8,812
3,428
43,497
3,152
1,477
(246,594)
The adoption of IFRS 9 and IFRS 15 did not have a material impact on DCM's consolidated statement of cash flows for
the year ended December 31, 2018.
79
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
h) As at December 31, 2018, DCM has disclosed revenue on a disaggregated basis based on the nature of the major
products and services it provides to its customers as follows:
(in thousands of Canadian dollars)
Product sales
Warehousing revenue
Freight services
Marketing and other services
For the year ended
December 31, 2018
289,719
9,424
12,565
11,061
322,769
$
$
IFRS 2 - SHARE-BASED PAYMENT
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 of vesting and
non-vesting conditions of 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
of the transaction from cash-settled to equity-settled. The amendments are effective for the year beginning on or after
January 1, 2018. This amendment did not have an impact on the consolidated financial statements of DCM.
IFRIC 22 - FOREIGN CURRENCY TRANSACTIONS AND ADVANCE CONSIDERATION
IFRIC 22 Foreign Currency Transactions and Advance Consideration is an interpretation paper issued by the IASB in
December 2016. The interpretation clarifies how to determine the date of transaction for the exchange rate to be used
on initial recognition of a related asset, expense or income where an entity pays or receives consideration in advance
for foreign currency-denominated contracts. For a single payment or receipt, the date of the transaction should be the
date on which the entity initially recognizes the non-monetary asset or liability arising from the advance consideration
(the prepayment or deferred income/contract liability). If there are multiple payments or receipts for one item, a date of
transaction should be determined as above for each payment or receipt. Entities can choose to apply any of the following
interpretations: (a) retrospectively for each period presented, (b) prospectively to items in scope that are initially
recognized on or after the beginning of the reporting period in which the interpretation is first applied, or (c) prospectively
from the beginning of a prior reporting period presented as comparative information. IFRIC 22 did not have an impact
on the consolidated financial statements of DCM.
(b) Future accounting standards not yet adopted.
IFRS 16 - LEASES
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 to recognize assets and liabilities for all leases with a term of
more than twelve months and for which the underlying asset is not of low value. A lessee is required to recognize a right-
of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to
make lease payments. The right-of-use asset is initially 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.
IFRS 16 contains disclosure requirements for lessees and lessors. This new standard will come into effect for annual
periods beginning on or after January 1, 2019.
80
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
Based on management’s preliminary assessment, DCM anticipates the adoption of this standard will have a material
impact on the consolidated statement of financial position. DCM has identified lease contracts that are currently accounted
for as operating leases, primarily for building and equipment rentals, for which recognition will change under IFRS 16.
This will result in the recognition of the present value of unavoidable future lease payments as leased assets and lease
liabilities on the statement of financial position, with a corresponding increase to income from operations. Depreciation
expense and finance costs will be charged to the consolidated statement of operations related to the leased assets and
lease liabilities recognized post adoption of IFRS 16.
DCM has (a) completed an inventory of all leases to be considered under this new standard and (b) reviewed contract
details to capture all necessary information. In addition, DCM has substantially completed the configuration of a SaaS
based solution to manage the accounting of its leases more effectively, including uploading lease data compiled to date
and testing the integrity of the output generated from the system. DCM is currently in the process of quantifying the
impacts on adoption, with finalization of documentation and evaluation of financial reporting implications to be completed
for its first quarter financial statements. In addition, management is in the process of reviewing the impact that IFRS 16
will have on all of its financial covenants with its lenders and amending its credit agreements, as appropriate, for any
changes required to its respective covenant calculations that will be applicable for 2019 and forward. DCM will adopt
IFRS 16 for the annual period beginning January 1, 2019. Management expects to adopt IFRS 16 using the modified
retrospective transition method. Further, DCM currently expects to apply the following practical expedients: (i) grandfather
the assessment of which transactions are leases; (ii) recognition exemption of short-term leases; and (iii) recognition
exemption leases of low-value items.
IFRIC 23 - UNCERTAINTY OVER INCOME TAX TREATMENTS
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 requires an entity to consider whether it is probable that a taxation authority will accept
an uncertain tax treatment. If the entity considers it to be not probable that a taxation authority will accept an uncertain
tax provision the interpretation requires 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.
IAS 19 EMPLOYEE BENEFITS (AMENDMENT)
In February 2018, the IASB issued amendments to IAS 19 Employee Benefits with a mandatory effective date of January
1, 2019. The amendment clarifies the effect of a plan amendment, curtailment and settlement on the requirements
regarding the asset ceiling. In addition, if a plan amendment, curtailment or settlement occurs, it is mandatory under the
amended standard that the current service cost and the net interest for the period after the remeasurement are determined
using the assumptions used for the remeasurement. This amendment is to be applied prospectively. DCM intends to
adopt the amendments to IAS 19 in its consolidated financial statements for the annual period beginning January 1,
2019. The adoption of this amendment is not expected to have a significant impact on the DCM’s consolidated financial
statements.
There are no other IFRS or International Financial Reporting Interpretations Committee (‘IFRIC’) interpretations that are
not yet effective that would be expected to have a material impact on DCM.
4 Business acquisitions
ACQUISITION OF PERENNIAL GROUP OF COMPANIES
On May 8, 2018 (the "Perennial Closing Date"), DCM acquired 100% of the outstanding common shares of Perennial,
a leading design firm. The acquisition of Perennial has added a new suite of services which include business and brand
81
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
strategy, consumer insights, environmental and graphic design, and communications and retail operations design and
strategy.
DCM acquired Perennial for a total purchase price of approximately $12,530, comprised of $8,226 in cash paid on closing
(after giving effect to the preliminary working capital adjustment of $1,166 and the post-closing working capital adjustments
of $60), $2,051 through the issuance of common shares of DCM, and $2,253 in the form of a subordinated, unsecured
non-interest bearing vendor take back note (the "Perennial VTB"). The Perennial VTB is repayable as follows: $1,000
payable on the first anniversary of closing, $1,000 on the second anniversary of closing and $500 on the third anniversary
of closing. A total of 1,394,856 common shares ("Common Shares") of DCM have been issued to one of the vendors of
Perennial. During the last quarter of fiscal 2018, the total post-closing adjustments to the purchase price were finalized
and paid in cash to the vendor in the amount of $60.
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 Perennial Closing Date of $1.73 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 Perennial
Closing Date. The fair value of the Perennial VTB was determined by present valuing the future cash flows using a
discount rate of 6% which represents management’s best estimate based on financial instruments with a similar term
and risk profile in the market.
The 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 Perennial Closing Date were as follows:
Recognized amounts of identifiable assets acquired and
liabilities assumed
Preliminary
Adjusted
Change
Cash and cash equivalents
Trade receivables
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
Total identifiable net assets
Goodwill
Total
$
661 $
906 $
1,085
252
123
3,105
(224)
(28)
(115)
(936)
3,923
8,547
1,012
287
115
2,995
(388)
(28)
(115)
(924)
3,860
8,670
$
12,470 $
12,530 $
245
(73)
35
(8)
(110)
(164)
—
—
12
(63)
123
60
Purchase price consideration
Preliminary
Adjusted
Change
Cash
Common shares
Promissory note (note 12)
Total
$
$
8,166 $
8,226 $
2,051
2,253
2,051
2,253
12,470 $
12,530 $
60
—
—
60
The fair value of trade receivables was $1,012. The gross contractual amount of trade receivables due was $721 of
which $4 was deemed to be uncollectible. The remaining balance of $295 relates to unbilled receivables.
82
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
The identifiable intangible assets acquired of $2,995 relate to customer relationships of $1,615, trade names of $550
and customer backlog intangible of $830. The customer relationship is being amortized over an expected useful life of
5 years. The trade name and the customer backlog are being amortized over estimated useful lives of 10 years and 19
months, respectively.
Goodwill of $8,670 arising from the acquisition is mainly attributable to expected future growth in sales from existing and
new customers through cross selling opportunities, in addition to the company's skilled workforce. The goodwill is not
tax deductible.
Total acquisition costs incurred and charged to the consolidated statement of operations for the year ended December
31, 2018 were $294 related to the Perennial acquisition.
The revenues and net loss contributed by Perennial and included in the consolidated statement of operations for the
period between the Perennial Closing Date and December 31, 2018 were $4,087 and $464, respectively. Net profit (loss)
has been adjusted for additional amortization and depreciation expense related to the fair value adjustments made to
tangible and intangible assets on acquisition. If the acquisition had occurred on January 1, 2018, the estimated revenues
and net loss contributed by Perennial to DCM’s operating results for the year ended December 31, 2018 would have
been approximately $6,487 and $875, respectively, after adjusting net loss for additional amortization and depreciation
expense that would have been charged assuming the fair value adjustments to tangible and intangible assets had applied
from January 1, 2018.
During the year ended December 31, 2018, the valuation report and the post-closing adjustments were finalized, and
therefore, no changes are expected to the purchase price allocations.
ECLIPSE COLOUR AND IMAGING CORP.
On February 22, 2017 (the “Eclipse Closing Date”), DCM acquired substantially all of the assets of Eclipse, 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 fulfilment capabilities.
DCM acquired the assets of Eclipse for a purchase price of $9,464. The purchase price was satisfied as follows on the
Eclipse Closing Date: $4,084 in cash, $1,418 through the issuance of 634,263 common shares of DCM, and $3,962
through the issuance of a secured, non-interest bearing vendor take-back promissory note ("Eclipse VTB"), which is
payable in two equal instalments on each of the first and second anniversaries of the Eclipse Closing Date.
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 Eclipse 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 Eclipse Closing Date.
The fair value of the Eclipse VTB 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 Eclipse 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 related transaction costs.
Total cash advanced on the Eclipse 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 note 11 for further details related to DCM’s bank credit facilities).
83
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
The 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 Eclipse 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 gross contractual amount of trade receivables due was $4,656 of
which $15 was deemed uncollectible.
The identifiable intangible assets acquired for $3,700 primarily relate to customer relationships which will be amortized
over an expected useful life of seven years.
Goodwill of $836 arising from the acquisition is mainly attributable to expected future growth in sales from existing and
new customers through cross selling opportunities, in addition to the company's skilled workforce. The goodwill is tax
deductible.
Total acquisition-related costs incurred were $562 of which $537 and $25 was charged to the consolidated statement
of operations for the year ended December 31, 2017 and December 31, 2016, respectively.
The revenues and net income contributed by Eclipse and included in the consolidated statement of operations for the
period between the Eclipse Closing Date and December 31, 2017 were $21,843 and $2,100, respectively. If the acquisition
had occurred on January 1, 2017, the estimated revenues and net income contributed by Eclipse to DCM's operating
results for the year ended December 31, 2017 would have been approximately $25,401 and $2,381, respectively,
84
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
adjusting net income 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.
THISTLE PRINTING LIMITED
On February 22, 2017 ("Thistle Closing Date"), DCM acquired 100% of the outstanding common shares of Thistle Printing
Limited (“Thistle”), a 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 CEO and President of DCM and the Chair of the Board of DCM, respectively,
control Capri. The acquisition of Thistle provides DCM with a full service commercial print facility in Eastern Canada
and enables DCM to expand its margins by insourcing commercial printing capabilities 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 $5,558. The purchase price was satisfied as follows on the
Thistle Closing Date: $1,104 in cash, $1,440 through the issuance of 644,445 Common Shares, and $3,014 through
the issuance of a secured, non-interest bearing vendor take-back promissory note, which is payable in 24 equal monthly
payments from the Closing Date ("Thistle VTB").
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 Thistle 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 Thistle Closing Date.
The fair value of the Thistle VTB 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 Thistle Closing Date, DCM also advanced $1,942 to settle Thistle’s bank indebtedness and amounts payable to
the former owners of Thistle.
Total cash advanced on the Thistle 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.
85
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
The 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 Thistle 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
Capital lease obligations
Other non-current liabilities
Total identifiable net liabilities
Goodwill
Total
Purchase price consideration
Cash
Common shares
Promissory note
Total
$
$
$
$
42
2,506
1,791
868
1,743
5,899
(2,311)
(686)
(1,261)
(1,572)
(7,097)
(34)
(933)
(1,045)
6,603
5,558
Amount
1,104
1,440
3,014
5,558
The fair value of trade receivables was $2,506. The gross contractual amount of trade receivables due was $2,531 of
which $25 was deemed to be uncollectible.
The identifiable intangible assets acquired of $5,899 primarily relate to customer relationships which will be amortized
over an expected useful life of seven years.
Goodwill of $6,603 arising from the acquisition is mainly attributable to expected future growth in sales from existing and
new customers through cross selling opportunities, in addition to the company's skilled workforce. The goodwill is not
tax deductible.
Total acquisition-related costs incurred were $496 of which $453 and $43 was charged to the consolidated statement
of operations for the year ended December 31, 2017 and December 31, 2016, respectively.
The revenues and net income contributed by Thistle and included in the consolidated statement of operations for the
period between the Thistle Closing Date and December 31, 2017 were $15,112 and $761, respectively. If the acquisition
had occurred on January 1, 2017, the estimated revenues and net income contributed by Thistle to DCM’s operating
86
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
results for the year ended December 31, 2017 would have been approximately $17,423 and $1,074, respectively,
adjusting net income 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.
BOLDER Graphics
On November 10, 2017, (the “BOLDER Closing Date”) DCM acquired 100% of the outstanding common shares of
BOLDER Graphics, a privately-held company that specializes in large-format digital printing, point of sale signage,
corporate packaging, outdoor signage and vehicle graphics. The company has approximately 40 employees operating
in a 59,000 square foot facility located in Calgary, Alberta. This acquisition 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.
BOLDER Graphics was acquired for a total purchase price of approximately $3,536. The purchase price was satisfied
as follows on the BOLDER Closing Date: $1,696 in cash (of which $88 was unpaid as of December 31, 2017), $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 September 30, 2019 ("Bolder VTB"). Accordingly, this
amount was included in trade payables and accrued liabilities in the consolidated statement of financial position as at
December 31, 2017.
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 Bolder VTB 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 in the market.
On the BOLDER Closing Date, DCM also advanced $1,339 to settle BOLDER Graphics' bank indebtedness and amounts
payable to the former owners of the company.
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 the IAM V Credit Facility (as defined in note 11) and $947 was financed using DCM's Bank Credit Facility (as defined
in note 11).
The 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:
87
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
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 trade receivables was $927 of which $Nil was deemed to be uncollectible.
The identifiable intangible assets acquired of $1,111 primarily relate to customer relationships which will be amortized
over an expected useful life of six years, a non-compete agreement which will be amortized over an expected useful
life of two years, and computer software which will be amortized over an expected useful life of one year.
Goodwill of $929 arising from the acquisition is mainly attributable to expected future growth in sales from existing and
new customers through cross selling opportunities, in addition to the company's skilled workforce. The goodwill is not
tax deductible.
Total acquisition-related costs incurred were $54 for the year ended December 31, 2018 ($378 for the for the year ended
December 31, 2017) which was charged to the consolidated statement of operations.
The revenues and net loss contributed by BOLDER Graphics and included in the consolidated statement of operations
for the period between the BOLDER Closing Date and December 31, 2017 were $998 and $112, respectively. If the
acquisition had occurred on January 1, 2017, the estimated revenues 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.
88
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
5 Trade receivables
Trade receivables
Provision for doubtful accounts (1)
December 31,
2018
December 31,
2017
$
$
73,919 $
(795)
73,124 $
41,399
(206)
41,193
(1) Under IAS 39 DCM had a provision for doubtful accounts for the year ended December 31, 2017. Under IFRS 9 DCM has an expected credit loss allowance for lifetime credit
losses, which is a simplified approach that is permissible for trade receivables which do not have a significant financing component.
As at December 31, 2018, trade receivables include unbilled receivables of $29,114, net of an expected credit loss
allowance of $453. Unbilled receivables and the related expected credit loss allowance were recognized upon the
adoption of IFRS 9 and IFRS 15 (see note 3 for further discussion related to the impact on adoption of these standards).
6 Inventories
Raw materials
Work-in-progress
Finished goods
December 31,
2018
December 31,
2017
4,779 $
2,810
1,223
8,812 $
6,235
4,164
26,120
36,519
$
$
Raw materials inventory amount is net of obsolescence reserves of $250 (2017 – Raw materials and finished goods
inventory amounts are net of obsolescence reserves of $586). Finished goods at December 31, 2018 consist of base
stock items. The cost of inventories recognized as an expense within cost of revenues for the year ended December 31,
2018 was $221,221 (2017 – $211,867).
See note 3 for impact of change on adoption of IFRS 15.
89
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(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, 2018 and
2017:
Leasehold
improvements
Office
furniture
and
equipment
Presses
and
printing
equipment
Computer
hardware
and
software Vehicles
Construction
in progress
Total
Year ended December 31, 2018
Opening net book value
$
4,521 $
573 $
12,362 $
533 $
71 $
771 $ 18,831
Additions, net of
transfers
Acquisition during the
year (note 4)
Effect of movement in
exchange rates
Disposals
905
19
(5)
(22)
6
38
—
—
886
1,010
—
9
(145)
58
8
—
Depreciation for the year
(1,080)
(180)
(3,007)
(385)
—
—
—
(3)
(26)
(113)
2,694
—
—
—
—
115
12
(170)
(4,678)
Closing net book value $
4,338 $
437 $
10,105 $
1,224 $
42 $
658 $ 16,804
At December 31, 2018
Cost
Accumulated
depreciation
Net book value
$
$
11,986 $
1,724 $
44,621 $
4,996 $
74 $
658 $ 64,059
(7,648)
(1,287)
(34,516)
(3,772)
(32)
— (47,255)
4,338 $
437 $
10,105 $
1,224 $
42 $
658 $ 16,804
Leasehold
improvements
Office
furniture
and
equipment
Presses
and
printing
equipment
Computer
hardware
and
software
Vehicles
Construction
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
224
229
1
(66)
239
222
—
(22)
1,367
8,212
(9)
(856)
284
311
(2)
(6)
Depreciation for the year
(1,095)
(159)
(2,528)
(353)
—
79
—
—
(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
Net book value
$
$
11,076 $
1,687 $
44,949 $
3,938 $
79 $
771 $ 62,500
(6,555)
(1,114)
(32,587)
(3,405)
(8)
— (43,669)
4,521 $
573 $
12,362 $
533 $
71 $
771 $ 18,831
90
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
8 Intangible assets
The following tables present changes in intangible assets for the years ended December 31, 2018 and 2017:
Customer
relationships
Software and
technology
Year ended December 31, 2018
Opening net book value
$
9,999 $
759 $
Trademarks,
trade names
and non-
compete
agreements
Construction
in progress
Total
376 $
—
3,339 $
5,105
14,473
5,111
550
—
(266)
—
(242)
—
2,995
(242)
(4,173)
660 $
8,202 $
18,164
—
2,445
—
(3,263)
9,181 $
6
—
—
(644)
121 $
Additions
Acquisition during the year
(note 4)
Write off during the year
Amortization for the year
Closing net book value
At December 31, 2018
Cost
Accumulated amortization
Net book value
$
$
$
87,798 $
11,674 $
8,697 $
8,202 $
116,371
(78,617)
(11,553)
(8,037)
—
(98,207 )
9,181 $
121 $
660 $
8,202 $
18,164
Customer
relationships
Software and
technology
Trademarks,
trade names
and non-
compete
agreements
Construction
in progress
—
9,730
—
(3,122)
439 $
160
533
(57)
(316)
— $
—
124 $
3,215
447
—
(71)
—
—
—
9,999 $
759 $
376 $
3,339 $
Total
3,954
3,375
10,710
(57 )
(3,509 )
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
Year ended December 31, 2017
Opening net book value
$
3,391 $
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
$
$
$
The remaining useful lives of the customer relationships are between 1 and 5 years as at December 31, 2018.
DCM incurred costs mainly related to development and implementation of new Enterprise Resource Planning ("ERP")
system. During the year ended December 31, 2018, these costs of $5,105 (December 31, 2017 - $3,215) were included
in construction in progress and were not amortized during the year.
91
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
9 Goodwill
Opening balance
Acquisition of Eclipse (note 4)
Acquisition of Thistle (note 4)
Acquisition of BOLDER (note 4)
Acquisition of Perennial (note 4)
Ending balance
Cost
Accumulated impairment losses
Net carrying value
December 31,
2018
December 31,
2017
8,368 $
—
—
—
8,670
17,038 $
—
836
6,603
929
—
8,368
December 31,
2018
December 31,
2017
177,763 $
(160,725)
17,038 $
169,093
(160,725)
8,368
$
$
$
$
DCM performed its annual impairment analysis of goodwill at the CGU level. The CGUs were defined as follows: DCM,
Eclipse, Thistle, and Perennial. The classification of CGUs is consistent with the operating segments identified in note
24.
As at January 1, 2017, there was no goodwill in the DCM CGU. However, given the finalization of the purchase price
accounting for the acquisitions of Thistle Printing, Eclipse Imaging and BOLDER Graphics in the year 2017, DCM
recognized goodwill of $6,303, $836 and $929, respectively.
During the year ended December 31, 2018, DCM recognized an additional $8,670 of goodwill which was derived from
the acquisition of Perennial.
During the fourth quarter of 2018, DCM performed its annual review for impairment of goodwill by comparing the fair
value of each of its CGUs to its respective carrying values. BOLDER Graphics amalgamated with DCM effective January
1, 2018. BOLDER Graphics compliments DCM's existing operations and operates from the same location, therefore
management concluded that BOLDER Graphics forms a part of the DCM CGU. DCM did not make any other 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 less cost to sell. DCM uses the income
approach to estimate the recoverable value of each CGU. The income approach is predicated on the value of the future
cash flows that a business will generate going forward. The discounted cash flow method 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.
Revenue growth rates and operating margins were based on the 2019 budget approved by the Board and projected
over a five-year period. A conservative growth rate of 1% (2017 – 1%) was applied to revenue for Eclipse, Thistle and
Perennial CGUs, and 0% (2017 - N/A) for DCM CGU for 2020 to 2023, taking into consideration the current economic
conditions and the specific trends of the printing industry. A perpetual long-term growth rate of 0% (2017 – 0%) was used
thereafter to derive the recoverable amount of these CGUs.
Furthermore, DCM derived a post-tax discount rate to calculate the present value of the projected cash flows using a
weighted average cost of capital (“WACC”) for the DCM, Eclipse, Thistle and Perennial CGUs. This represents an
estimate of the total overall required rate of return on an investment for both debt and equity owners. Determination of
92
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
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 14.0% (2017 – 15.0%) was used for the
DCM, Eclipse, Thistle and Perennial 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 forecast periods.
DCM used a tax rate of 26.50% (2017 – 26.25%). Tax assumptions are sensitive to changes in tax laws as well as
assumptions about the jurisdictions in which profits are earned. It is possible that actual tax rates could differ from those
assumed.
As a result of this annual test, it was concluded that there was no impairment of goodwill for the DCM, Eclipse, Thistle
and Perennial CGUs. The estimated recoverable amount of the DCM, Eclipse, Thistle and Perennial CGUs exceeded
their carrying values by approximately $53,024, $14,279, $11,260 and $6,374 respectively. The recoverable amount of
the DCM, Eclipse, Thistle and Perennial CGUs would equal their carrying values if the discount rate was increased to
31.8%, 38.6%, 30.7% and 22.5%, respectively.
10 Provisions
Balance – Beginning of year
Additional charge during the year
Recovery during the year
Utilized during the year
Balance – End of year
Less: Current portion of provisions
As at December 31, 2018
Balance – Beginning of year
Additional charge during the year
Charge related to an acquisition
Utilized during the year
Balance – End of year
Less: Current portion of provisions
As at December 31, 2017
TERMINATION PROVISIONS
Termination
provisions
Onerous
contracts
3,468 $
2,988 $
2,654
—
(3,541)
2,581 $
(2,286)
295 $
—
(1,123)
(1,212)
653 $
(571)
82 $
Termination
provisions
Onerous
contracts
2,773 $
1,207 $
6,778
—
(6,083)
2,679
—
(898)
3,468 $
2,988 $
(2,856)
(1,078)
Other
196 $
134
—
(116)
214 $
(51)
163 $
Other
— $
—
210
(14)
196
(16)
612 $
1,910 $
180 $
$
$
$
$
$
$
Total
6,652
2,788
(1,123)
(4,869)
3,448
(2,908)
540
Total
3,980
9,457
210
(6,995)
6,652
(3,950)
2,702
For the year ended December 31, 2018, DCM continued its restructuring and ongoing productivity improvement initiatives
to reduce its cost of operations. During the year ended December 31, 2018, these initiatives resulted in $2,654 of
additional restructuring expenses due to headcount reductions across DCM's operations and the closure of certain
manufacturing and warehouse locations in the consolidated statement of operations. For the year ended December 31,
2017, total restructuring initiatives resulted in costs incurred of $6,778.
For the year ended December 31, 2018, cash payments of $3,541 (2017 - $6,083) were made to former employees for
severances and for other restructuring costs. The remaining severance and restructuring accruals of $2,581 at
December 31, 2018 are expected to be paid in the year 2019 and 2020.
93
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
ONEROUS CONTRACTS
During the year ended December 31, 2017, DCM recorded additional costs of $2,679. This was mainly due to the closing
of the 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. During the year ended December 31, 2018, DCM entered into an agreement with
the landlord of the property to terminate the existing lease. DCM agreed to make payments of approximately $1,116 to
the landlord. The termination resulted in DCM recording a recovery of $1,123 during the year ended December 31, 2018
related to this lease exist charge recorded as at December 31, 2017.
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. As at December 31, 2018, the remaining lease exit accrual is nil.
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 lease exit charge.
During the year ended December 31, 2018, DCM made payments of $1,212 to the landlords of the facilities DCM exited
from (2017 - $898). The remaining lease exit accruals of $653 for the year ended December 31, 2018 are expected to
be paid by 2021.
OTHER
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.
During the year ended December 31, 2018, DCM determined that an additional charge of $134 (2017 - $nil) was required
in connection with a contract with a former employee.
94
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
11 Credit facilities
Term loans
- floating rate debt, maturing June 28, 2018, (Bridging Facility)
- 6.10% term debt, maturing October 15, 2022, (IAM III Credit
Facility)
- 6.95% term debt, maturing March 10, 2023, (IAM IV Credit
Facility)
- 6.95% term debt, maturing May 15, 2023, (IAM V Credit
Facility)
- 10.00% term debt, maturing May 7, 2023, (Crown Facility)
Revolving facilities
- floating rate debt, maturing March 31, 2020, (Bank Credit
Facility)
Credit facilities
Unamortized transaction costs
Less: Current portion of Credit facilities
Credit facilities
CREDIT AGREEMENTS
$
$
December 31,
2018
December 31,
2017
—
3,947
18,589
4,160
11,511
20,799
59,006
(1,585)
57,421 $
(5,670)
51,751 $
3,500
4,834
22,220
4,938
—
21,747
57,239
(1,307)
55,932
(8,725)
47,207
BANK AND IAM FACILITIES
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 Integrated Private Debt Fund IV LP ("IAM IV") a
fund managed by Integrated Asset Management Corp. ("IAM") pursuant to separate amended and restated credit
agreements between DCM and the Bank (as amended, the “Bank Credit Agreement”) and IAM (as amended, the “IAM
IV Credit Agreement”), respectively. Upon closing of the Thistle acquisition in 2017, DCM became a co-borrower with
Thistle under an existing credit agreement (the “IAM III Credit Agreement”) between Thistle and Integrated Private Debt
Fund III LP (“IAM III”), another fund 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 $5,000 secured, non-revolving senior
credit facility (the "IAM V Credit Facility") with Integrated Private Debt Fund V LP ("IAM V"), a fund 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
covenants stipulated under the IAM IV Credit Agreement and are reported on a consolidated basis.
Under the terms of the Bank Credit Agreement, the maximum principal amount available under the Bank Credit Facility
is $35,000 and the Bank Credit Facility matures on March 31, 2020. Advances under the Bank Credit Facility may not,
at any time, exceed the lesser of $35,000 and a fixed percentage of DCM’s aggregate accounts receivable and inventory
(less certain amounts). 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%. Subsequent to year end, the Bank Credit Facility
was amended (note 26). DCM has capitalized transaction costs of $937 related to the Bank Credit Facility. For the
year-ended December 31, 2018, DCM capitalized additional transaction costs of $167. The unamortized balance of the
transaction costs are being amortized over the remaining term of the Bank Credit Facility. As at December 31, 2018,
the unamortized transaction costs related to the Bank Credit Facility was $384. As at December 31, 2018 there were
outstanding borrowings of $20,799 under the revolving facilities portion of the Bank Credit Facility and letters of credit
granted of $861. As at December 31, 2018, all of DCM’s indebtedness outstanding under the Bank Credit Facility was
95
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
subject to a floating interest rate of 4.7% per annum. As at December 31, 2018, DCM had access to $9,341 of available
credit under the Bank Credit Facility. The bank overdraft of $3,999 on the statement of consolidated financial position
as at December 31, 2018 includes outstanding cheques which when cashed, would be a draw on the Bank Credit Facility.
Under the terms of the IAM Credit Agreements, the maximum aggregate principal amount which may be outstanding
under the IAM III Credit Facility, IAM IV Credit Facility, the IAM V Credit Facility, the Bank Credit Facility and Crown
Facility (as defined below), calculated on a consolidated basis in accordance with generally accepted accounting
principles (“Total Funded Debt”), cannot exceed $72,000 (after giving effect to the provisions of the inter-creditor
agreement described below).
The principal amount of the amended IAM III Credit Facility amortizes in blended equal monthly repayments of principal
and interest of $96 over a nine year term ending October 15, 2022. The principal amount of the IAM IV Credit Facility
amortizes in blended equal monthly repayments of principal and interest of $422 over a seven year term ending in
March 10, 2023. The principal amount of the IAM V Credit Facility amortizes in blended equal monthly repayments of
principal and interest of $91 over a sixty six month term ending in May 15, 2023. As at December 31, 2018, 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.
As at December 31, 2018, the unamortized transaction costs and outstanding borrowings related to the IAM III Credit
Facility were $26 and $3,947, respectively. DCM incurred no additional capitalized transaction costs for the year ended
December 31, 2018 for IAM III Credit Facility. As at December 31, 2018, the unamortized transaction costs and
outstanding borrowings related to the IAM IV Credit Facility were $434 and $18,589, respectively. For the year ended
December 31, 2018, DCM capitalized transaction costs of $29 related to the IAM IV Credit Facility. As at December 31,
2018, the unamortized transaction costs and outstanding borrowings related to the IAM V Credit Facility were $154 and
$4,160, respectively. For the year ended December 31, 2018 , DCM capitalized additional transaction costs of $52,
related to the IAM V Credit Facility. The unamortized balance of the transaction costs for IAM III Credit Facility, IAM IV
Credit Facility and the IAM V Credit Facility are being amortized over the remaining term of each respective facility.
BRIDGING CREDIT FACILITY
On June 28, 2017, DCM established a subordinated debt facility with Bridging Finance Inc. for $3,500 ("Bridging Credit
Facility"). Advances under the Bridging Credit Facility were repayable on demand with 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 had a term of one year and could 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 was 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 was secured by certain specified equipment
together with certain other conventional security. DCM has no outstanding borrowings under the Bridging Credit Facility
as the facility was fully repaid on May 8, 2018, including accrued and unpaid interest and the security for this facility was
released. Additionally, transaction costs of $146 were previously capitalized. A total of $125 of these transaction cost
were amortized as May 8, 2018 and the remaining balance of $21 was written off due to the early repayment.
CROWN FACILITY
On May 8, 2018, DCM established a $12,000 non-revolving term loan facility with Crown Capital Partner Funding, LP
(previously Crown Capital Fund IV, LP) (the "Crown Facility"), a fund managed by Crown Capital LP Partner Funding
Inc. (previously Crown Capital Fund IV Management Inc.) ("Crown"), of which $8,226 was used to fund the up-front cash
component of the Perennial acquisition and $3,500 was used to repay in full the outstanding balance of Bridging Facility.
The balance of the Crown Facility was used for general working capital purposes.
The Crown Facility was made available in one advance on the funding date of May 8, 2018 and bears interest at a fixed
rate of 10% per annum, payable quarterly, and the principal amount of the loan is due at maturity, which is 60 months
from closing. DCM’s obligations under the Crown Facility are subordinated to its other senior credit facilities and is
secured by a conventional security on all of the assets of DCM and its subsidiaries. In addition, a total of 960,000
96
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
warrants have been issued to Crown in connection with the Crown Facility. Each warrant entitles the holder to acquire
one DCM common share at an exercise price of $1.75 for a period of five years, commencing on May 8, 2018. The
Crown Facility of $12,000 was apportioned to $11,458 to the debt instrument and $542 to the warrant option based on
their relative fair values (note 17). The fair value of the warrant option was then bifurcated and recorded separately
within equity while the fair value of the debt host will be accreted from $11,458 to $12,000 over the term of the loan. As
at December 31, 2018 the accreted debt instrument was valued at $11,511 including total accretion expense of $53.
The Crown Facility can be prepaid in full at any time after twenty-four (24) months from the date of the funding anniversary.
The penalties attached to each option are: (a) 3% prepayment penalty fee on the principal loan outstanding if the
prepayment option is exercised during or after the 24th month but before the 36th month following the date of the funding
anniversary, (b) 2% prepayment penalty fee on the principal loan outstanding if the prepayment option is exercised
during or after the 36th month but before the 48th month following the date of the funding anniversary, or (c) 1%
prepayment penalty fee on the principal loan outstanding if the prepayment option is exercised during or after the 48th
month but before the 60th month following the date of the funding anniversary.
For the year ended December 31, 2018, DCM capitalized transaction costs of $653 related to the Crown Facility. The
unamortized transaction costs and outstanding borrowings related to the Crown Facility were $587 and $11,511,
respectively and the unamortized balance of the transaction costs is being amortized over the remaining term of this
facility.
BANK LEASE FACILITY
On July 31, 2018, DCM entered into a commitment with the Bank to lease equipment by way of a demand, non-revolving
lease facility for approximately $2,400 (“Bank Lease Facility”). As part of this arrangement, DCM initially entered into
an agreement to purchase the equipment from a third-party supplier. All of DCM's rights, title and interest in the equipment
were subsequently assigned to the Bank by way of an agreement dated July 31, 2018. The Bank advanced funds
pursuant to an interim funding agreement dated July 31, 2018 (the "Interim Funding Agreement") to pay for the upfront
amounts required by the third-party supplier in exchange for a monthly fee payable by DCM which is calculated by
multiplying the annual prime rate plus 0.75% by the total value of funds advanced and pro-rated for the days the funds
remain outstanding. Total interest expense for the year ended December 31, 2018 of 2018 was $33. Subsequent to
year-end on January 16, 2019, DCM entered into an amendment to extend the interim funding period to March 31, 2019.
DCM expects to enter into a five year lease agreement with the Bank in the second quarter of 2019 at which time the
leased asset and obligation will be recorded and monthly repayments will be approximately $37 per month over the
lease term.
AMENDMENTS TO CREDIT FACILITIES
Effective May 7, 2018, DCM entered into an amended and restated bank credit agreement (the "A&R Bank Credit
Facility") with regards to its Bank Credit Facility, as amended, which incorporated conforming updates to the original
Bank Credit Facility dated March 16, 2016 to consolidate the subsequent series of amendments previously made to that
facility, including to provide for the addition of the Crown Facility together with the repayment of the Bridging Credit
Agreement into the A&R Bank Credit Facility and the acquisition of Perennial. No material changes were otherwise
incorporated into the A&R Bank Credit Facility.
Effective May 7, 2018, DCM also entered into amended and restated credit agreements with regards to its IAM III Credit
Facility (the "IAM III A&R Credit Facility"), its IAM IV Credit Facility (the "IAM IV A&R Credit Facility") and its IAM V Credit
Facility (the "IAM V A&R Credit Facility"), each managed by IAM, which, among other things incorporated conforming
updates to each of those respective original credit agreements, to consolidate the subsequent series of amendments
previously made to those agreements, including to provide for the addition of the Crown Facility together with the
repayment of the Bridging Credit Agreement and the acquisition of Perennial. No material changes were otherwise
incorporated into the various credit facilities managed by IAM.
On July 31, 2018, the A&R Bank Credit Facility was amended to allow DCM to enter into the Bank Lease Facility for an
amount not to exceed $3,000. The A&R Bank Credit Facility excludes the Bank Lease Facility from the maximum principal
97
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
amount of debt available of $35,000 and has added a cross collateralization and cross default condition to include the
equipment leased as collateral under A&R Bank Credit Facility and Bank Lease Facility.
On September 30, 2018, DCM received a waiver on the Crown Facility regarding the requirement to meet the fixed
charge coverage ratio of 1.4 to 1.0 for the quarters ending December 31, 2018 and March 31, 2019. Subsequent to
year-end on February 8, 2019, DCM received an extension of the previous waiver in relation to meeting the fixed charge
coverage ratio requirement for the quarter ending June 30, 2019.
On October 26, 2018, DCM received a waiver with regards to the IAM Credit Agreements, and for the purposes of
determining DCM's Excess Cash Flow (as defined under "Covenant Requirements" below), the IAM Credit Agreements
were waived to reduce the requirement to maintain a debt service coverage ratio of 2.0 times so long as DCM maintains
a debt service coverage ratio of at least 1.85 times for the next four fiscal quarters beginning October 1, 2018 and ending
on September 30, 2019. DCM is required to maintain the requirement in order to make payments in respect to the vendor
take-back promissory notes issued in connection with the Eclipse, Thistle, BOLDER Graphics and Perennial acquisitions.
COVENANT REQUIREMENTS
Each of the Bank Credit Agreement, the IAM Credit Agreements and the Crown Facility 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, IAM V and Crown, 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 Bank Credit Facility, IAM Credit Agreements and the Crown Facility limit
spending on capital expenditures by DCM to an aggregate amount not to exceed $5,500, $5,000 and $5,000, respectively
during any fiscal year.
Under the terms of the Bank Credit Agreement, DCM is required to maintain a fixed charge coverage ratio of no less
than the following levels: 0.90 to 1 from July 1, 2017 to December 31, 2017; 1.00 to 1 from January 1, 2018 to March
31, 2018 and 1.10 to 1 on and after March 31, 2018, calculated on a consolidated basis, in respect of any particular
trailing 12 month period, as EBITDA for such period less cash taxes, cash distributions (including dividends paid) and
non-financed capital expenditures paid in such period, divided by the total amount required by DCM to service its
outstanding debt for such period. Each covenant is calculated and reported on a quarterly basis. As at December 31,
2018, DCM was in compliance with this covenant.
Under the terms of the IAM Credit Agreements, DCM is required to maintain (i) a ratio of Total Funded Debt to EBITDA
no greater than the following levels: 3.50 to 1 from October 1, 2017 up to December 31, 2017; 3.25 to 1 from January
1, 2018 up to March 31, 2018 and 3.00 to 1 on and after April 1, 2018; (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 1.10 to 1. Each covenant is calculated and reported on
a quarterly basis. As at December 31, 2018, DCM was in compliance with these covenants.
In addition, the IAM Credit Agreements permit cash payments in respect to the vendor take-back promissory notes
issued in connection with DCM's acquisitions, as well as consulting fees or distributions in cash to shareholders and/or
related parties, in an amount equal to the Excess Cash Flow (as defined below), provided that the debt service coverage
ratio for the four most recently completed quarters is greater than 2.00 to 1, which was subsequently amended to 1.85
to 1.00 from October 1, 2018 to September 30, 2019, and provided that there is no default or event of default. The excess
cash flow is calculated by taking the EBITDA less payments for (i) cash taxes, (ii) capital expenditures, (iii) principal and
interest payments on the Bank Credit Facility, the IAM Credit Agreements and the Crown Facility and (iv) interest on
capital leases for the two most recently completed quarters ("Excess Cash Flow"). The Excess Cash Flow is required
to be calculated as at March 31 and September 30 of each calendar year ("The Excess Cash Flow Determination Date")
which determines the quantum of payments that can be made for the following six-month period until the next Excess
Cash Flow Determination Date. As at December 31, 2018, the conditions required to permit excess cash flow payments
98
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
were met and the Excess Cash Flow was sufficient to cover the payments required in respect of the vendor take-back
promissory notes for six months.
Under the terms of the Crown Facility agreement, DCM is required to maintain (i) Net Debt to EBITDA of no greater than
4.0 to 1.0 from June 30, 2018 to December 31, 2018 and 3.00 to 1 thereafter; (ii) a fixed charge coverage ratio no less
than the following levels: 1.10 to 1 as at June 30, 2018, 1.25 to 1 from July 1, 2018 to September 30, 2018 and 1.40 to
1 for each quarter thereafter, for which a waiver for the quarter ended December 31, 2018 and ending March 31, 2019
and June 30, 2019 has been obtained as noted above. Each covenant is calculated and reported on a quarterly basis.
As at December 31, 2018, DCM was in compliance with these covenants.
For purposes of the Bank Credit Agreement, the IAM Credit Agreements and Crown Facility agreement, “EBITDA” means
net income or net loss for the relevant period, calculated on a consolidated basis in accordance with generally accepted
accounting principles, plus amounts deducted, or minus amounts added, in calculating net income or net loss in respect
of: the aggregate expense incurred for interest on debt and other costs of obtaining credit; income taxes, whether or not
deferred; depreciation and amortization; non-cash expenses resulting from employee or management compensation,
including the grant of stock options or restricted options to employees; any gain or loss attributable to the sale, conversion
or other disposition of property out of the ordinary course of business; interest or dividend income; foreign exchange
gain or loss; gains resulting from the write‑up of property and losses resulting from the write‑down of property (except
allowances for doubtful accounts receivable and non-cash reserves for obsolete inventory); any gain or loss on the
repurchase or redemption of any securities (including in connection with the early retirement or defeasance of any debt);
goodwill and other intangible asset write-downs; and any other extraordinary, non‑recurring or unusual items as agreed
to by the lender. 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 calculations.
A failure by DCM to comply with its obligations under the Bank Credit Agreement, the IAM Credit Agreements or the
Crown Facility, 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 DCM will be successful in achieving the results targeted in its operating plans or in complying
with its covenants over the next twelve months.
In addition, under the terms of the IAM IV Credit Agreement and the IAM V Credit Agreement, DCM is required to deposit
and hold cash in a blocked account of $425 and of $90 to be used for repayments of principal and interest of indebtedness
outstanding under the IAM IV Credit Facility and indebtedness outstanding under the IAM V Credit Facility, respectively.
As at December 31, 2018, 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.
INTER-CREDITOR AGREEMENT
DCM's obligations under the Bank Credit Facility, the IAM V Credit facility, the IAM IV Credit Facility and the IAM III Credit
Facility are secured by conventional security charging all of the property and assets of DCM and its affiliates (the "Inter-
creditor Agreement"). On February 22, 2017, DCM entered into an amended Inter-creditor Agreement between the
Bank, IAM III, IAM IV, and the parties to the vendor take-back promissory notes (the “VTB Noteholders”) issued in
connection with the acquisitions of Eclipse and Thistle, respectively, which, among other things, establishes the rights
and priorities of the respective liens of the Bank, IAM III, IAM IV and the VTB Noteholders on the present and after-
acquired property of DCM, Eclipse and Thistle (the "Original Inter-Creditor Agreement").
On November 10, 2017, the Original Inter-Creditor Agreement was amended in connection with the BOLDER Graphics
acquisition to include IAM V as a party to the agreement and to establish the rights and priorities of the respective liens
of the Bank, IAM III, IAM IV, IAM V and the VTB Noteholders on the present and after-acquired property of BOLDER
Graphics.
99
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
Effective May 7, 2018, DCM entered into a second amended and restated inter-creditor agreement between the Bank,
IAM III, IAM IV, IAM V, Crown and the VTB Noteholders, respectively, which, among other things, establishes the rights
and priorities of the respective liens of the Bank, IAM III, IAM IV, IAM V, Crown and the VTB Noteholders on the present
and after-acquired property of DCM and Perennial.
The movement in credit facilities during the year ended December 31, 2018 and 2017 is as follows:
Balance - Beginning of year, net of transaction costs
$
55,932 $
35,042
December 31,
2018
December 31,
2017
Changes from financing cash flows
Proceeds from credit facilities
Repayment of credit facilities
Transactions cost
Total change from financing cash flows
Non-cash movements
Acquisitions
Amortization of transaction costs
Accretion of discount
Balance - End of year
12,951
(11,238)
(900)
56,745
—
623
53
$
57,421 $
The scheduled principal repayments on the long-term debt are as follows:
2019
2020
2021
2022
2023
27,393
(14,709)
(925)
46,801
8,476
655
—
55,932
December 31,
2018
5,670
26,869
6,494
6,757
13,705
$ 59,495
100
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
12 Promissory notes
The movement in the promissory note balances during the year ended December 31, 2018 and 2017 is as follows:
2018
Balance – Beginning of year
Addition - May 8, 2018 (note 4)
Unwinding of discount
Interest expense
Payments during the year
Balance – End of year
Less: Current portion of promissory
notes
As at December 31, 2018
2017
Balance - February 22, 2017
(Preliminary)
Post-closing adjustment
Balance - February 22, 2017 (Final)
Addition on November 10, 2017
Unwinding of discount
Interest expense
Payments during the year
Balance – End of year
Less: Current portion of promissory
notes
As at December 31, 2017
$
$
$
$
$
$
Eclipse
acquisition
Thistle
acquisition
BOLDER
Graphics
acquisition
Perennial
acquisition
4,309 $
—
1,799 $
—
1,095 $
—
— $
2,253
228
—
111
—
(2,283)
(1,640)
—
52
(638)
90
—
—
2,254 $
270 $
509 $
2,343 $
(2,254)
— $
(270) $
— $
(509)
(980)
— $
1,363 $
Eclipse
acquisition
Thistle
acquisition
BOLDER
Graphics
acquisition
Perennial
acquisition
3,962 $
—
3,962
—
347
—
—
2,783 $
231
3,014
—
206
—
(1,421)
— $
—
—
1,086
—
9
—
4,309 $
1,799 $
1,095 $
(2,253)
(1,529)
2,056 $
270 $
(592)
503 $
— $
—
—
—
—
—
—
— $
—
— $
Total
7,203
2,253
429
52
(4,561)
5,376
(4,013)
1,363
Total
6,745
231
6,976
1,086
553
9
(1,421)
7,203
(4,374)
2,829
Subsequent to the year end, the Eclipse VTB for $2,283 was paid in full on February 22, 2019, and the Thistle VTB
for $137 was paid in full on February 28, 2019.
101
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(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, 2018 and 2017 are as
follows:
December 31, 2018
Assets
Liabilities
Pension obligations and other post-employment benefit plans
$
2,944 $
— $
Unfavourable lease obligation
Lease escalation
Deferred finance fees
Deductible reserves
Property, plant and equipment
Intangible assets
Promissory notes
Tax related to tax credit carry-forwards
Other
236
586
217
734
—
—
—
—
—
—
—
—
—
(1,491)
(1,348)
(50)
(121)
(32)
Net
2,944
236
586
217
734
(1,491)
(1,348)
(50)
(121)
(32)
Total deferred income tax assets (liabilities)
$
4,717 $
(3,042) $
1,675
December 31, 2017
Assets
Liabilities
Net
Pension obligations and other post-employment benefit plans
$
2,712 $
— $
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
282
492
2,108
299
1,581
348
—
—
—
—
—
—
—
—
—
—
(1,349)
(1,552)
(97)
(11)
282
492
2,108
299
1,581
348
(1,349)
(1,552)
(97)
(11)
Total deferred income tax assets (liabilities)
$
7,822 $
(3,009) $
4,813
As at December 31, 2018, DCM recorded net deferred income tax assets of $3,428 (2017 – $6,108) and net deferred
income tax liabilities of $1,753 (2017 – $1,295) in its consolidated statements of financial position. The deferred income
tax assets have not been offset against the deferred income tax liabilities as DCM does not have a legally enforceable
right to offset these amounts and the deferred income tax assets and deferred income tax liabilities are not related to
income taxes levied by the same taxation authority.
102
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
Changes in deferred income tax assets and liabilities during the years ended December 31, 2018 and 2017 are as
follows:
Balance at
January 1,
2018
Acquired in
business
combinations
Recognized
in statement
operations
Recognized in
comprehensive
income
Balance at
December 31,
2018
Other
$
2,712 $
— $
— $
(111) $
343 $
2,944
282
492
2,108
299
1,581
348
—
—
—
5
—
111
—
—
—
—
(42)
—
(46)
94
(2,108)
(87)
(805)
(459)
—
—
—
—
—
—
236
586
—
217
734
—
7,822 $
116 $
(42) $
(3,522) $
343 $
4,717
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
Property, plant and
equipment
Intangible assets
Promissory notes
Tax related to tax credit
carry-forwards
$
$
(1,349) $
— $
(7) $
(135) $
— $
(1,552)
(97)
—
—
—
—
(793)
(65)
—
(17)
997
112
(121)
2,953
—
—
—
—
(1,491)
(1,348)
(50)
(121)
(32)
Other
(11)
(2,957)
$
(3,009) $ (2,957) $
(882) $
3,806 $
— $
(3,042)
Deferred income tax
assets (liabilities), net $
4,813 $ (2,841) $
(924) $
284 $
343 $
1,675
The impact of adopting IFRS 9 and IFRS 15 on DCM’s deferred income tax assets and liabilities as at January 1, 2018
totaled $2,957 (see note 3).
103
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
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
Balance at
January 1,
2017
Acquired in
business
combinations
Recognized
in statement
operations
Recognized in
comprehensive
loss
Balance at
December 31,
2017
Other
$
2,414 $
— $
— $
(92) $
390 $
2,712
207
344
1,619
149
607
238
—
—
—
99
—
110
—
—
8
—
397
—
75
148
481
51
577
—
—
—
—
—
—
—
5,578 $
209 $
405 $
1,240 $
390 $
282
492
2,108
299
1,581
348
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
$
$
$
$
The realization of the deferred income tax assets is dependent on the generation of future taxable income during the
years in which those temporary differences become deductible. Based on management's projections of future taxable
income and tax planning strategies, management expects to realize these net deferred income tax assets in advance
of expiry. As at December 31, 2018, DCM has non-capital tax loss carry-forwards of $nil (2017 – $8,404).
In the ordinary course of business, DCM and its subsidiary and predecessors have entered into transactions where the
ultimate tax determination may be uncertain. These uncertainties require management to make estimates of the ultimate
tax liabilities and, accordingly, the provision for income taxes. Since there are inherent uncertainties, additional tax
liabilities may result if tax matters are ultimately resolved or settled at amounts different from those estimates.
104
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
The major components of income tax expense (recovery) for the years ended December 31, 2018 and 2017 are set
out below:
Current income tax expense:
Current tax on profits for the year
Total current income tax expense
Deferred income tax recovery:
Origination and reversal of temporary differences
described above
Total deferred income tax recovery
Total income tax expense (recovery) for the year
For the year ended
December 31, 2018
For the year ended
December 31, 2017
$
$
1,407
$
1,407
(284)
(284)
1,123
$
725
725
(2,435)
(2,435)
(1,710)
For the year ended December 31, 2018, deferred income tax recovery on the recognition of actuarial gains (losses)
related to DCM's defined benefit plans of $343 (2017 – $390) were recognized in the statements of comprehensive
income (loss).
The following are reconciliations of income tax expense (recovery) calculated at the statutory rate of Canadian corporate
income taxes below for the years ended December 31, 2018 and 2017.
For the year ended
December 31, 2018
For the year ended
December 31, 2017
Income (loss) before income taxes
Expected income tax expense (recovery) calculated at statutory
income tax rate (1)
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
Non-deductible expenses and other items
Total income tax expense (recovery) for the year
$
$
3,372
$
879
(18)
262
1,123
$
(7,915)
(2,065)
116
239
(1,710)
(1) The calculation of the current income tax is based on a combined federal and provincial statutory income tax rate
of 26.06% (2017 – 26.09%).
The current tax rate for the current year is 0.03% lower than 2017 due to the effect of changes in statutory tax rates and
the allocation of taxable income between provinces. Deferred income tax assets and liabilities are measured at tax
rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred income tax
assets and liabilities have been measured using an expected average combined statutory income tax rate of 26.07%
(2017 – 26.21%) based on the tax rates in years when the temporary differences are expected to reverse.
105
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(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
Less: Current portion of other non-current liabilities
December 31,
2018
December 31,
2017
$
$
$
908 $
2,254
668
3,830 $
(558)
3,272 $
1,082
1,888
983
3,953
(540)
3,413
The current portion of other non-current liabilities is included in trade payables and accrued liabilities.
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 paid in equal monthly payments until the end of October
2020. The liability was recorded at fair value based on discounting using a discount rate of 10%. The carrying amount
of the liability at December 31, 2018 was $668, of which $348 (2017 - $293) was classified as current liabilities in trade
payables and accrued liabilities.
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, and generally require it to pay a portion of the real
estate taxes and other property operating 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 2019 to 2028.
15 Pension obligations, assets and expenses
Effective January 1, 2018, no further services credits will accrue under the defined the benefit provision of the DATA
Communications Management Pension Plan. Actuarial valuations are performed 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.
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.
During the year ended December 31, 2018, 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,
2018, the solvency position of the defined benefit provision of the DATA Communications Management Pension Plan
had improved since the previous valuation. Based upon the January 1, 2018 actuarial report, DCM's annual minimum
funding obligation for the defined benefit provision of the DATA Communications Management Pension Plan for 2018
remained unchanged at $647 when compared to the actuarial report as at January 1, 2017. The annual minimum funding
obligation decreased from $1,353 based on the actuarial report as at January 1, 2017 to $527 for 2019 and 2020 per
the latest actuarial valuation report.
106
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
As of December 31, 2017, DCM had exceeded its minimum required funding requirements for the defined benefit provision
of the DATA Communications Management Pension Plan for 2017 by $227. During the year ended December 31, 2018,
DCM made all the required payments related to its 2018 funding requirements for the defined benefit provision of the
DATA Communications Management Pension Plan after applying $216 of the excess funding from 2017. The remaining
excess funding from 2017 of $11 will be applied to DCM's 2019 minimum funding requirements for the defined benefit
provision of the DATA Communications Management Pension Plan.
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
Deficit (Surplus) of funded plans
Present value of unfunded obligations
Pension obligations, net
December 31,
2018
December 31,
2017
$
$
60,073 $
(59,448)
625
7,721
8,346 $
62,638
(63,398)
(760)
8,133
7,373
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:
Balance – Beginning of year
Interest expense
Benefits paid
Re-measurements:
‑ Gain from change in financial assumptions
‑ Experience (gains) losses
Balance – End of year
Balance – Beginning of year
Interest expense
Benefits paid
Re-measurements:
‑ Loss from change in demographic assumptions
‑ Gain from change in financial assumptions
‑ Experience (gains) losses
Balance – End of year
Funded
Unfunded
$
62,638 $
8,133 $
2,161
(2,890)
(2,438)
602
268
(528)
(224)
72
60,073 $
7,721 $
Funded
Unfunded
60,559 $
8,340 $
$
$
2,293
(3,661)
265
3,376
(194)
297
(541)
—
237
(200)
$
62,638 $
8,133 $
December 31,
2018
70,771
2,429
(3,418)
(2,662)
674
67,794
December 31,
2017
68,899
2,590
(4,202)
265
3,613
(394)
70,771
107
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
CHANGE 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:
Balance – Beginning of year
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
Balance – End of year
Funded
Unfunded
$
63,398 $
— $
2,169
431
(2,890)
(300)
—
528
(528)
—
(3,360)
59,448 $
—
— $
December 31,
2018
63,398
2,169
959
(3,418)
(300)
(3,360)
59,448
Funded
Unfunded
62,148 $
— $
2,364
874
—
(3,661)
(300)
—
541
—
(541)
—
December 31,
2017
62,148
2,364
1,415
—
(4,202)
(300)
$
$
1,973
$
63,398 $
—
— $
1,973
63,398
108
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(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, 2018
For the year ended
December 31, 2017
Quoted
Percentage of
plan assets
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
$
$
$
$
$
$
3,673
4,610
8,283
11,102
39,555
—
50,657
508
59,448
$
14% $
$
85% $
1% $
4,413
5,185
9,598
7,438
42,937
3,196
53,571
229
100% $
63,398
15%
84%
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:
Administration expenses
$
300 $
— $
300
Funded
Unfunded
December 31,
2018
Interest expense
Interest income
Total net interest expense
Defined benefit expense recognized
Administration expenses
Interest expense
Interest income
Total net interest expense
$
$
2,161
(2,169)
(8)
268
—
268
2,429
(2,169)
260
292 $
268 $
560
Funded
Unfunded
December 31,
2017
300 $
— $
300
2,293
(2,364)
(71)
297
—
297
2,590
(2,364)
226
Defined benefit expense recognized
$
229 $
297 $
526
109
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
AMOUNTS RECOGNIZED IN THE STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
The following is a summary of the amounts recognized in the statement of comprehensive income (loss) for the defined
benefit provision of the DATA Communications Management Pension Plan and SERP:
Funded
Unfunded
December 31,
2018
Re-measurements:
‑ Gain from change in financial assumptions
$
(2,438) $
(224) $
‑ Experience (gains) losses
‑ Loss on plan assets, excluding amounts included in interest
income
Deferred income tax effect
602
3,360
1,524
(397)
72
—
(152)
40
Defined benefit expense recognized
$
1,127 $
(112) $
(2,662)
674
3,360
1,372
(357)
1,015
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
3,376
(194 )
(1,973 )
1,474
(385)
237
(200 )
—
37
(10)
Defined benefit recovery recognized
$
1,089 $
27 $
265
3,613
(394 )
(1,973 )
1,511
(395)
1,116
DCM manages its pension plans by meeting with an actuarial consultant and the fund managers on a regular basis and
reviews periodic reports outlining changes in the plan liabilities and the return on pension assets relative to the market.
Assumptions are reviewed on an ongoing basis and adjustments are made whenever management believes that
conditions have materially changed.
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,
2018
December 31,
2017
3.80 %
3.00 %
3.50 %
3.00 %
3.70 %
3.40 %
DCM increased the discount rate that was used to calculate its defined benefit obligations as at December 31, 2018 to
reflect current Canadian economic conditions and long-term interest rates. The salary increase assumption remained
unchanged at December 31, 2018.
110
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
Assumptions regarding future mortality are set based on actuarial advice in accordance with published statistics and
experience in Canada. These assumptions translate into an average life expectancy in years for a pensioner retiring at
age 65:
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,
2018
December 31,
2017
21.8
24.2
23.1
25.4
21.7
24.1
23.0
25.3
Through its defined benefit plans, DCM is exposed to a number of risks, the most significant of which are 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 provision of the DATA Communications Management Pension
Plan currently holds a small proportion of 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 2014, the derisking strategy was reviewed
against the investment time horizon and the financial position of the defined benefit provision of the DATA Communications
Management Pension Plan. With a significant improvement in the financial position, the defined benefit provision of the
DATA Communications Management Pension Plan asset mix was 14% equities and 85% bonds. Given the new funding
rules for Ontario registered pension plans, the investment strategy shifted from a solvency focus to an ongoing focus.
This lead to a bond portfolio structure change in 2018 that moved from cash flow matching to duration matching using
pooled funds. The equity and bond target allocations and the equity portfolio structure did not change relative to the
previous year.
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 salaries of plan participants,
so salary increases of the plan participants greater than assumed will increase plan liabilities.
LIFE EXPECTANCY
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.
111
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
The sensitivity of the defined benefit pension obligations for the DATA Communications Management Pension Plan and
SERP to changes in assumptions at December 31, 2018 and at December 31, 2017 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.
December 31, 2018
Impact on defined benefit obligations
Change in assumption
Increase in assumption Decrease in assumption
Discount rate
Salary growth rate
0.25%
0.25%
Life expectancy
$
$
(2,096) $
464
2,207
(419)
Increase by 1 year in
assumption
Decrease by 1 year in
assumption
1,849 $
(1,883)
December 31, 2017
Impact on defined benefit obligations
Change in assumption
Increase in assumption
Decrease in assumption
Discount rate
Salary growth rate
0.25%
0.25%
Life expectancy
$
$
(2,343) $
486
2,470
(572)
Increase by 1 year in
assumption
Decrease by 1 year in
assumption
1,834 $
(1,869)
Each sensitivity analysis disclosed in this note is based on changing one assumption while holding all other assumptions
constant. In practice, this is unlikely to occur and changes in some of the 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 obligations calculated with the projected unit credit method at the end of
the reporting period) has been applied as for calculating the liability recognized in the statements of financial position.
The weighted average duration of the defined benefit obligations is12.7 years (2017 – 13.6 years).
Expected maturity analysis of undiscounted pension benefits:
At December 31, 2018
At December 31, 2017
$
$
3,202 $
3,118 $
6,655 $
6,566 $
6,940 $
6,847 $
19,048
18,650
Less than
a year
Between 1
to 2 years
Between 2
to 5 years
Between 5
to 10 years
The annual pension expense for the defined contribution provision of the DATA Communications Management Pension
Plan is based on the amounts contributed in respect of eligible employees. The annual pension expense for the SRDF
and Unifor Pension & Benefit Plans, which are accounted for as a defined contribution plan, is based on amounts
contributed based on a percentage of wages of unionized employees who are covered by the respective collective
bargaining agreements, all of whom are employed at DCM facilities located in the Province of Québec and Ontario.
112
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
DCM’s pension expense related to DCM’s defined contribution plans are as follows:
Defined contribution plan
Defined benefit multi-employer plans
For the year ended
December 31, 2018
$
$
1,346 $
596 $
For the year ended
December 31, 2017
1,349
670
DCM expects that, in 2019, contributions to the defined benefit provision of the DATA Communications Management
Pension Plan will be approximately $516, contributions to the defined contribution provision of the DATA Communications
Management Pension Plan will be approximately $1,370, contributions to the SERP will be approximately $529,
contributions to the SRDF will be approximately $610 and contributions to the Unifor Pension & Benefit Plans will be
approximately $80.
16 Other post-employment benefit plans
Costs related to the DCM OPEB Plans and the DCM OPEB LTD Plan, are actuarially determined using the projected
unit credit method, the actuarial present value of all future projected benefits determined as at the valuation date and
management’s best assumptions.
The following summarizes the change in the obligations related to the DCM OPEB Plans and DCM OPEB LTD Plan:
December 31,
2018
December 31,
2017
Balance – Beginning of year
Current service cost
Interest expense
Benefits paid
Re-measurements:
‑ Loss from change in demographic assumptions
‑ (Gain) Loss from change in financial assumptions
‑ Experience gains
Balance – End of year
$
$
3,031
$
293
111
(272)
—
(52)
(133)
2,978
$
2,510
250
103
(220)
299
89
—
3,031
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:
December 31,
2018
December 31,
2017
Current service cost
Interest expense
Re-measurements:
‑ Loss from change in demographic assumptions
‑ (Gain) Loss from change in financial assumptions
‑ Experience (gains) losses
Benefit expense recognized
$
$
$
293
111
—
(33)
(98)
273
$
250
103
299
53
46
751
113
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
AMOUNTS RECOGNIZED IN THE STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
The following summarizes the amounts recognized in the statement of comprehensive income (loss) related to the DCM
OPEB Plans:
Re-measurements:
‑ (Gain) loss from change in financial assumptions
‑ Experience (gains) losses
Deferred income tax effect
Benefit recovery recognized
December 31,
2018
December 31,
2017
$
$
(19) $
(35)
(54)
14
(40) $
36
(46)
(10)
5
(5)
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 2040 (2017 – 2028)
DCM OPEB LTD Plan
Discount rate
Health care cost trend rate – Initial
Health care cost trend rate declines by 2040 (2017 – 2028)
December 31,
2018
December 31,
2017
3.80%
6.16%
4.00%
3.50 %
6.48 %
4.50 %
December 31,
2018
December 31,
2017
3.80%
5.62%
4.00%
3.50 %
5.86 %
4.50 %
SENSITIVITY 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, 2018
Discount rate
Health care cost trend rates
Life expectancy
Impact on other post-employment benefit obligations
Change in
assumption
0.25%
1.00%
$
Increase in
assumption
Decrease in
assumption
(52) $
207
54
(186)
Increase by 1 year in
assumption
Decrease by 1 year in
assumption
$
70 $
(68)
114
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
At December 31, 2017
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%
$
$
(56) $
208
58
(184)
Increase by 1 year in
assumption
Decrease by 1 year in
assumption
70 $
(67 )
Expected maturity analysis of undiscounted other post-employment benefits:
At December 31, 2018
At December 31, 2017
$
$
326 $
307 $
605 $
555 $
556 $
517 $
1,013
994
Less than
a year
Between 1
to 2 years
Between 2
to 5 years
Between 5
to 10 years
DCM expects that, in 2019, contributions to its DCM OPEB Plans and DCM OPEB LTD Plan will be approximately
$326.
17 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 be 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.
115
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
The following summarizes the change in number of issued and outstanding common shares during the periods below:
Balance – January 1, 2018
Shares issued - May 8, 2018 (note 4)
Shares issued - June 11, 2018 (note 25)
Balance – December 31, 2018
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)
Balance – December 31, 2017
Number of
Common shares
20,039,159 $
1,394,856
89,500
Amount
248,996
2,046
175
21,523,515 $
251,217
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
20,039,159 $
248,996
In connection with the acquisition of Perennial on May 8, 2018, DCM issued a total of 1,394,856 Common Shares to
the vendors of the companies as partial consideration for the fair value of the net assets acquired on the Closing Date
for $2,051, net of $8 in issuance costs and increased by a deferred income tax asset of $3.
On June 11, 2018, a total of 89,500 Common Shares were issued pursuant to the exercise of warrants. The additional
share issue caused an increase in common shares by $175. The increase consisted of cash proceeds of $157 as well
as the transfer of share options from the warrant reserves to common shares at the recognized fair value of $18.
In connection with the acquisition of Thistle and Eclipse on February 22, 2017, DCM issued a total of 1,278,708 Common
Shares to the vendors of the companies as partial consideration for the fair value of the net assets acquired on the
Closing Date for $2,858, net of $11 in issuance costs and increased by a deferred income tax asset of $3.
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 gross proceeds were used to finance, in part, the settlement of the 6.00%
Convertible Debentures which matured on June 30, 2017. 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 (“Right”) for each
Common Share held as of the Record Date. 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 and
one-half of a Common Share purchase warrant (each whole Common Share purchase warrant, a “Warrant”) at a price
116
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
per Unit of $1.40 for gross proceeds of $3,766. Among this, 550,650 Units were issued to directors and officers of DCM
for total proceeds of $771. Each full Warrant entitles the holder to acquire one Common Share (a “Warrant Share”) at
an exercise price of $1.75 for a period of two years from the closing of the First Private Placement. The exercise price
is subject to adjustment for certain capital events, as described in the warrant certificate, to preserve the relative rights
of the existing shareholders of Common Shares and the Warrant holders. In 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% based on comparable companies. This was
adjusted using a discount rate of 5% for the statutory hold period. The fair value of the Common Shares issued was
$3,655, based on the closing market price of the shares on closing of the First Private Placement. This was adjusted
using a discount rate of 5% for the statutory hold period. The proceeds allocated to the Common Shares was $3,398
and the proceeds allocated to the Warrants was $280, net of transaction costs totaling $88. All of these transaction costs
were allocated to the Common Shares. The gross proceeds of $3,766 were also used to finance, in part, the settlement
of the 6.00% Convertible Debentures which matured on June 30, 2017. The value of the Common Shares were increased
by a deferred income tax asset of $23.
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% based on comparable
companies. 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 transaction costs were
allocated to the Common Shares. The gross proceeds of $100 were used to finance the general working capital
requirements of DCM. The value of the Common Shares were increased by a deferred income tax asset of $6.
In connection with the acquisition of BOLDER Graphics on November 10, 2017, DCM issued a 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.
117
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
WARRANTS
A summary of warrant activities for the year ended December 31, 2018 and the year ended December 31, 2017 is as
follows:
2018
2017
Number of
Warrants
Weighted
average
Exercise Price
Number of
Warrants
Weighted
average
Exercise Price
Warrants outstanding - beginning of
year
Granted
Exercised
1,381,050 $
960,000
(89,500)
Warrants outstanding - end of year
2,251,550 $
1.75
1.75
1.75
1.75
— $
1,381,050
—
1,381,050 $
—
1.75
—
1.75
On May 8, 2018, DCM established the $12,000 Crown Facility and issued 960,000 warrants as part of this financing.
Each warrant entitles the holder to acquire one Common Share at an exercise price of $1.75 for a period of five years,
commencing on May 8, 2018. The fair value of the warrants issued was estimated to be $565 using the Black-Scholes
option-pricing model, assuming a risk-free interest of 2.16%, a weighted average life of five years, a dividend yield of
nil and an expected volatility of 40% based on comparable companies. This was adjusted using a discount rate of 5%
for the statutory hold period and net of transaction costs totaling $5 (increased by a deferred income tax asset of $2).
The total credit facility amount of $12,000 was then apportioned between the host debt and the warrant option based
on relative fair values. As at December 31, 2018, the value allocated to the warrant option was $537, net of transaction
costs.
SHARE-BASED COMPENSATION
DCM has adopted a Long-Term Incentive Plan ("LTIP") to: recruit and retain highly qualified directors, officers, employees
and consultants (the "Participants"); provide Participants with an incentive for productivity and an opportunity to share
in the growth and the value of DCM; and, align the interests of Participants with those of the shareholders of DCM.
Awards to Participants are primarily based on the financial results of DCM and services provided. The aggregate
maximum number of common shares available for issuance from DCM's treasury under the LTIP is 2,152,352 common
shares or 10% of the issued and outstanding common shares of DCM. The shares to be awarded will be authorized
and unissued shares.
DCM's share-based compensation plan consists of five types of awards: restricted share unit ("RSUs"), options, deferred
share unit ("DSUs"), restricted shares or stock appreciation right ("SARs") awards. No restricted shares or SARs have
been granted to date.
(a) Restricted share unit ("RSU")
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 granted
are performance and non-performance based. The performance component is based on Company specific financial
targets approved by the Board and the non-performance component is based on continued employment. RSUs generally
vest within three years, requires continued employment with the Company for the duration of the vesting period and
settles in cash upon final vesting.
A liability for RSUs is measured at fair value on the grant date and is subsequently adjusted for changes in fair value.
The liability is recognized on a graded vesting basis over the vesting period, with a corresponding charge to compensation
expense, as a component of costs of revenues, selling, commissions and expenses, and general and administration
118
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
expenses. The RSUs payable is included in trade payables and accrued liabilities. Compensation expenses for RSUs
incorporate an estimate for expected forfeiture rates based on which the fair value is adjusted.
Balance - beginning of period/year
Units granted
Units forfeited
Units paid out
Balance - end of period/year
December 31,
2018
December 31,
2017
Number of RSUs
Number of RSUs
177,869
740,432
(387,344)
(505)
530,452
29,538
150,192
(1,514)
(347)
177,869
During the year ended December 31, 2018, the former CEO and current CEO and President of DCM were granted
299,021 RSUs (2017 – 104,548 RSUs) and a total of 441,411 RSUs (2017 – 45,644 RSUs) were awarded to other key
members of DCM's management.
Of the total outstanding RSUs at December 31, 2018, 26,634 (2017 – Nil) have vested and are payable. The carrying
amount of the liability relating to the RSUs at December 31, 2018 was $400 (2017 – $90).
During the year ended December 31, 2018, compensation expense of $312 (2017 – $73) was recognized in the
consolidated statement of operations related to RSUs granted.
(b) Options ("Options")
A summary of Options activities for the year ended December 31, 2018 and the year ended December 31, 2017 is as
follows:
Options outstanding - beginning of
period / year
Granted
Forfeited
Exercised
Options outstanding - end of period /
year
Exercisable
2018
2017
Number of
Options
Weighted
average
Exercise Price
Number of
Options
Weighted
average
Exercise Price
804,961 $
1,200,000
(13,004)
—
1,991,957 $
1,125,281 $
1.50
1.41
1.50
—
1.45
1.50
959,745 $
—
(135,279)
(19,505)
804,961 $
744,006 $
2.41
—
7.88
1.50
1.50
1.50
The outstanding Options had an exercise price range as follows:
$1.41
$1.50
Options outstanding
119
December 31, 2018
December 31, 2017
Number of Options
Number of Options
1,200,000
791,957
1,991,957
—
804,961
804,961
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
The Black-Scholes option-pricing model inputs used to compute compensation expense under the fair value-based
method are as follows:
Expected life (years)
Expected volatility
Dividend yield
Risk free rate of return
Weighted average fair value of options granted
$
Forfeiture rate
December 31, 2018
7
40%
0%
1.88%
0.68
10%
During the year ended December 31, 2018, options to purchase up to 1,200,000 common shares were awarded to
DCM's Board of Directors and executive management team, including a total of 240,000 options awarded to the CEO
and President. Once vested, the options are exercisable for a period of seven years from the grant date at an exercise
price of $1.41 per share, representing the fair value of the common shares on the date of grant. These options vest at
a rate of 1/36th per month beginning on March 14, 2018. During the year ended December 31, 2018, a total of 13,004
options awarded were forfeited.
During the year ended December 31, 2018, compensation expense of $473 (2017 – $91) was recognized in the
consolidated statement of operations related to options granted.
(c) Deferred share unit ("DSU")
On March 14, 2018, each director was given the option to elect to receive all or part of his or her compensation (the
"Director Fees") in DSUs.
Each DSU represents the right to receive a distribution from the company in an amount equal to the fair value of one
DCM common share on the date of the termination of service of the respective director. The number of DSUs payable
to each director is determined by multiplying the total Director Fees payable by percent elected to be paid in DSUs and
dividing the product by the Fair Value of one DCM common share on the grant date. A liability for DSUs is measured
at fair value on the grant date and is subsequently adjusted for changes in fair value. The DSUs payable is included in
trade payables and accrued liabilities.
During the year ended December 31, 2018, 86,924 DSUs (2017 – Nil DSUs) were granted. The carrying amount of the
liability relating to the DSUs at December 31, 2018 was $116 (2017 – $Nil).
During the year ended December 31, 2018, an expense of $116 (2017 – $Nil) was recognized in the consolidated
statement of operations related to DSUs granted.
120
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
18 Earnings (loss) per share
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) for the year attributable to common
shareholders
Weighted average number of shares
Basic earnings (loss) per share
DILUTED EARNINGS (LOSS) PER SHARE
Net income (loss) for the year attributable to common
shareholders
Weighted average number of shares
Diluted earnings (loss) per share
For the year ended
December 31, 2018
For the year ended
December 31, 2017
$
$
$
$
2,249 $
20,998,703
0.11 $
(6,205)
16,330,837
(0.38)
2,249 $
21,055,460
0.11 $
(6,205)
16,330,837
(0.38)
For the year ended December 31, 2018, options to purchase up to 1,200,000 common shares where the average market
price of the common shares was greater than the exercise price were included in the computation of diluted earnings
per share as their effect would have been dilutive. Options to purchase up to 791,957 where the average market price
of the common shares was less than the exercise price were excluded from the computation of diluted earnings per
share as their effect would have been anti-dilutive. Warrants to purchase up to 2,251,550 common shares were excluded
from the computation of diluted earnings per share as they were out-of-the-money as of December 31, 2018.
During the year ended December 31, 2017, DCM's 6.00% Convertible Unsecured Subordinated Debentures were settled
by a cash payment. The cash payment was made on June 30, 2017 and as such, the debentures were excluded from
the computation of diluted earnings per share. Options to purchase up to 811,463 common shares and warrants to
purchase up to 1,381,050 common shares where the average market price of the common shares was higher than the
exercise price were excluded from the computation of diluted earnings per share as their effect would have been anti-
dilutive.
19 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, 2018
For the year ended
December 31, 2017
$
$
(2,668) $
2,070
788
8,118
(481)
7,827 $
(3,983)
290
508
1,560
1,088
(537)
121
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
20 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:
2019
2020
2021
2022
2023
2024 and thereafter
December 31,
2018
11,998
11,361
9,536
6,892
6,463
13,675
59,925
$
$
Total lease expense for the year ended December 31, 2018 was $9,136 (2017 - $9,551).
DCM and its subsidiaries are subject to various claims, potential claims and lawsuits. While the outcome of these matters
is not determinable, DCM’s management does not believe that the ultimate resolution of such matters will have a material
adverse impact on DCM’s financial position.
DCM makes contributions to the Québec Graphics Communications SRDF based on a percentage of the wages of its
unionized employees covered by the respective collective bargaining agreements, all of whom are employed at DCM
facilities located in the Province of Québec. The SRDF is a negotiated contribution defined benefit multi-employer pension
plan which provides retirement benefits to unionized employees in the printing industry. The SRDF is jointly-trusteed by
representatives of the employers of SRDF members and the unions which represent SRDF Quebec members in collective
bargaining. Based upon the terms of those applicable collective agreements, DCM’s estimated 2019 funding obligation
for the SRDF is $610. DCM has accounted for the SRDF on a defined contribution basis.
Under Québec pension legislation for negotiated contribution defined benefit multi-employer pension plans:
•
•
•
Employers’ contributions are limited to those amounts specified in the applicable collective agreements;
Reduction of accrued benefits while the plan is ongoing or upon plan termination is allowed, if the plan is
insufficiently funded; and
The responsibility of participating employers to fund their prorated share of the solvency deficit upon
withdrawal from the plan or termination of the plan, except if withdrawal from the plan or termination of the
plan occurs prior to April 2, 2020, is removed.
The most recent funding actuarial report for the SRDF (as at December 31, 2017), which takes into account the 2016
restructuring of the plan, disclosed that:
•
Total employers’ contributions determined pursuant to collective agreements cover the minimum total
contributions required under applicable Québec pension legislation;
The plan has a going concern funding surplus with a ratio of 105%; and
•
• While the plan has a solvency deficiency with a solvency funded ratio of 80%, Quebec pension legislation
does not require the solvency deficit be funded.
122
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
21 Financial instruments
DCM’s financial instruments consist of cash, restricted cash, trade receivables, bank overdraft, trade payables and
accrued liabilities, bonuses payable, credit facilities, promissory notes, and restricted share units, as indicated in DCM’s
statements of consolidated financial position as at December 31, 2018 and 2017. DCM does not enter into financial
instruments for trading or speculative purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
DCM's non-derivative financial instruments are comprised of cash, trade receivables, restricted cash, bank overdraft,
trade payables and accrued liabilities, bonuses payable, credit facilities, promissory notes, and restricted share units.
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.
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 through the consolidated statements of operations.
The fair value for other non-derivative financial instruments such as cash, trade receivables, bank overdraft, trade
payables and accrued liabilities approximates their carrying value because of the short-term maturity of these instruments.
The fair value of restricted cash approximates its carrying value because it is a deposit held with a Canadian chartered
bank. Credit facilities, bonuses payable and promissory notes are initially recognized as the amount required to be paid
less a discount to derive its fair value and are then measured at amortized costs using the effective interest method,
less any impairment losses.
CATEGORIES OF FINANCIAL ASSETS AND LIABILITIES
The carrying values and the fair values of DCM’s financial instruments are classified into the categories listed below in
accordance with IFRS 9 and IAS 39 as at December 31, 2018 and as at December 31, 2017 respectively. The carrying
amounts did not change as a result of the adoption of IFRS 9.
December 31, 2018
Financial assets at amortized cost (1)
Financial liabilities at amortized cost (2)
Financial liabilities FVTPL (3)
Carrying Value
Fair Value
$ 73,639
108,856
516
$ 73,639
110,441
516
December 31, 2017
Carrying Value
Fair Value
Financial assets at amortized cost (IAS 39 - Loans and
receivables) (1)
Financial liabilities at amortized cost (2)
Financial liabilities FVTPL(3)
$ 41,708
$ 41,708
99,504
90
100,811
90
(1)
(2)
(3)
Includes restricted cash and trade receivables.
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), bonuses payable, credit facilities, and
promissory notes.
Includes RSUs and DSUs.
123
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
Bonuses payable, credit facilities, promissory notes, RSUs and DSUs are categorized as level 2 inputs in the fair value
hierarchy given their valuations include inputs other than quoted prices for which all significant inputs are observable,
either directly or indirectly. There were no transfers between levels 1, 2 or 3 during the year.
RISKS ARISING FROM FINANCIAL INSTRUMENTS
DCM is exposed to various risks as it relates to financial instruments. These risks and the processes for managing the
risk are set out below.
CREDIT RISK
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its
contractual obligations. Financial instruments that potentially subjected DCM to credit risk consisted of cash and trade
receivables. The carrying amount of assets included in the consolidated statements of financial position represents the
maximum credit exposure.
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
60 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 agencies that are not concentrated in
any specific geographic area. DCM does not believe that any single industry or geographic region represents significant
credit risk. Credit risk concentration with respect to trade receivables is mitigated by DCM’s large client base.
To measure the ECLs, trade receivables, including unbilled receivables, have been grouped based on similar credit
risk characteristics, past due status and other relevant factors. The expected default rates are calculated based on
management’s estimate as well as historical credit losses. The historical loss rates are adjusted to reflect current and
forward-looking information on economic factors affecting the ability of the customers to settle the trade receivable.
On that basis, the loss allowance as at December 31, 2018 was determined using default rates under the provision
matrix for an amount of $795, of which $453 relates to unbilled receivables.
The following default rates are used to calculate the ECLs on billed receivables as at December 31, 2018:
December 31, 2018
Total
Default rates
Billed receivables balance
Billed receivables ECL
44,352
$342
Current
period
0.01%
23,243
$3
Over 30 days Over 60 days Over 90 days
Over 120
days
0.03%
14,246
$4
0.06%
5,370
$3
0.10%
55.40%
896
$1
597
$331
The following default rates are used to calculate the ECLs on unbilled receivables as at December 31, 2018:
December 31, 2018
Total
Default rates
Unbilled receivables balance
Unbilled receivables ECL
29,567
$453
Current
period
0.20%
5,427
$11
Over 30 days Over 60 days Over 90 days
0.39%
5,928
$23
0.97%
3,912
$38
1.50%
2,672
$40
Over 120
days
2.93%
11,628
$341
At the end of each reporting period, management re-assesses the default rates. Default rates are applied to the billed
and unbilled receivable balances to calculate the credit default reserve. Management assesses the adequacy of this
reserve quarterly, taking into account historical experience, current collection trends, the age of receivables and, when
124
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
warranted and available, the financial condition of specific counterparties. When collection efforts have been reasonably
exhausted, specific balances are written off.
The movement in DCM’s allowance for doubtful accounts for 2018 and 2017 are as follows:
Balance – Beginning of period
Additional loss allowance for unbilled receivables (note 3)
Provisions and revisions
Balance – End of period
LIQUIDITY RISK
For the year ended
December 31, 2018
For the year ended
December 31, 2017
$
$
206 $
505
84
795 $
440
—
(234)
206
Liquidity risk is the risk that DCM may encounter difficulties in meeting obligations associated with financial liabilities as
they become due. As at December 31, 2018, DCM had access to $10,205 of additional available credit less letters of
credit granted of $861 under the Bank Credit Facility.
The contractual undiscounted cash flows of DCM’s significant financial liabilities are as follows:
December 31, 2018
Bank overdraft
Trade payables and accrued liabilities
Bonuses payable (1)
Credit facilities (2)
Promissory notes (3)
Total
December 31, 2017
Bank overdraft
Trade payables and accrued liabilities
Bonuses payable (1)
Credit facilities (2)
Promissory notes (3)
Total
$
$
$
$
Less than
a year
1 to 3 years
4 years and
greater
3,999 $
— $
43,497
400
9,495
4,078
—
333
46,318
1,500
— $
—
—
14,145
—
Total
3,999
43,497
733
69,958
5,578
61,469 $
48,151 $
14,145 $
123,765
Less than
a year
$ 2,868
34,306 $
400
11,911
4,561
1 to 3 years
4 years and
greater
—
— $
733
44,699
3,078
—
— $
—
8,852
—
Total
$ 2,868
34,306
1,133
65,462
7,639
54,046 $
48,510 $
8,852 $
111,408
(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, 2018 subject to floating interest rates consisting of the Bank Credit Facility, expiring
on March 31, 2020. The Bank Credit Facility was subsequently amended (note 26). As at December 31, 2018, the
outstanding balances totaled $20,799 and bore interest at an average floating rate of 4.7% per annum . The amounts
at December 31, 2018 include estimated interest totaling $978 for 2019, and $163 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, 2018. Credit facilities at December 31, 2018 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,
the IAM V Credit Facility expiring on May 15, 2023 and Crown Facility expiring on May 7, 2023. As at December 31,
2018, the outstanding balances totaled $38,207 and bore interest at a fixed rate of 6.1% per annum, of 6.95% per
125
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
annum, of 6.95% per annum, and of 10.00% per annum, respectively. Monthly blended principal and interest
payments of $96, of $422 and of $91, respectively. Annual interest payment on the Crown Capital Credit Facility
totals $1,200. 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 balance 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, 2017. Credit facilities
at December 31, 2017 subject to fixed interest rates consisting of the IAM III Credit Facility expiring on October 15,
2022, 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 balance 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.
(3) Promissory notes related to the acquisition completed during the year ended December 31, 2018 include a non-
interest bearing promissory note related to the acquisition of Perennial totaling $2,253 and payable in three
installments of $1,000 due on May 8, 2019, $1,000 due on May 8, 2020 and $500 due on May 8, 2021. Promissory
notes related to the acquisitions completed during the year ended December 31, 2017 included a 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.
DCM also has significant contractual obligations in the form of operating leases (note 20), as well as contingent obligations
in the form of letters of credit. DCM believes that the currently projected cash flow 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 or investment in new capital expenditures, and interest and scheduled repayments of
borrowings under its credit facilities and scheduled repayments of promissory notes. Cash flows from operations have
been, and could continue to be, negatively impacted by decreased demand for DCM’s products and services and pricing
pressures 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.
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. DCM’s interest rate risk arises from credit facilities issuances at floating interest rates.
At December 31, 2018, $20,799 of DCM’s indebtedness outstanding was subject to floating interest rates of 4.7% per
annum; a 1% increase/decrease in interest rates would have resulted in an increase/decrease in profit or loss and
comprehensive loss by $203 for the year ended December 31, 2018 (2017 – $217), respectively. At December 31,
2018, $38,207 of DCM’s indebtedness outstanding was subject to a fixed interest rate of 6.1% per annum, of 6.95% per
annum and of 10.00% 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.
126
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
CURRENCY RISK
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 course of business, DCM does not have significant foreign
exchange transactions and, accordingly, the amounts and currency risk are not expected 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.
22 Capital structure
DCM’s objectives when managing its capital structure are:
▪ To seek to ensure sufficient liquidity to safeguard DCM’s ability to continue as a going concern;
▪ To maintain a strong capital base so as to maintain shareholders’, creditors’, customers', suppliers' and market
confidence; and
▪ To deploy capital to provide an appropriate investment return to its shareholders
DCM’s capital structure consists of 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.
DCM manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain or adjust the capital structure, in line with its present strategic
plan, the company may issue new shares. Management anticipates that any major acquisition or significant growth
initiatives would be financed in part with additional equity and debt.
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 debt (see note 11).
DCM’s capital structure is as follows:
Credit facilities
Total long-term debt
Total equity (deficit)
December 31,
2018
December 31,
2017
$
$
$
57,421 $
57,421 $
7,512 $
55,932
55,932
(5,399)
127
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
23 Expenses by nature
Raw materials and other purchases
Wages and benefits
Pension and other post-employment expenses
Occupancy costs
Restructuring expenses
Depreciation, amortization and impairments
Other expenses
Total cost of revenues and operating expenses
24 Segmented information
For the year ended
December 31, 2018
For the year ended
December 31, 2017
$
$
160,824 $
109,029
2,275
16,316
2,654
9,093
13,598
313,789 $
141,327
101,108
3,011
17,008
9,457
7,709
12,714
292,334
The CEO and President of DCM is the chief operating decision maker ("CODM"). The CODM reviews and assesses
the company’s performance and makes decisions about resources to be allocated for each operating segment.
Given many of DCM’s customers operate and run marketing campaigns on a national scale, DCM utilizes its print
capabilities, logistics and fulfilment services, and digital communications solutions from its operating segments to service
its customers. These operating segments have been aggregated as one reportable segment 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 based on the aggregation criteria in IFRS 8. This includes
BOLDER graphics which was amalgamated with DCM effective January 1, 2018, and formed one operating segment
with DCM.
Perennial is considered a separate operating segment. Perennial is a design firm focused on creating and delivering
design strategies for major retail brands. Perennial's business is separate from the core DCM business and cannot be
aggregated based on the criteria in IFRS 8. For the purposes of segment disclosure, Perennial does not meet the
quantitative thresholds stipulated under IFRS 8, and because it is not significant, this segment is not disclosed separately.
Management evaluates the performance of the reportable segments 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 and Chicago,
Illinois and New York, New York 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, 2018, U.S. sales were not significant to disclose separately.
Warehousing revenues were approximately 3% (2017 - 6%) of total consolidated revenues for the year ended December
31, 2018. Freight revenues were approximately 4% (2017 - 0%) of total consolidated revenues for the year ended
December 31, 2018. Marketing and other services were approximately 3% (2017 - 0%) of total consolidated revenues
for the year ended December 31, 2018.
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 the insurance expense paid by DCM. During the fiscal year, DCM recorded an insurance expense
128
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
of $542 (2017 – $306) related to these policies. As at December 31, 2018, prepaid expenses and other current assets
included prepaid insurance to the insurance company of $277 (2017 – $260). The insurance company is a related party
whereby the Chair of the Board and the CEO and President of DCM each are Directors and indirectly have a minority
interest in the insurance company, through companies controlled by them. Subsequent to year-end on January 9, 2019,
the Chair of the Board and the CEO and President of DCM resigned their positions as Directors and disposed of their
minority interest in the insurance company.
For the year end December 31, 2017 , directors, officers and related parties of DCM participated in a rights offering and
a private placement of Common Shares (see note 17), 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.
During the year ended December 31, 2018, 89,500 Common Shares were issued to the CEO and President of DCM
pursuant to the exercise of warrants. The additional share issue caused an increase in Common Shares by $175. The
increase consisted of cash proceeds of $157 as well as the transfer of share options from the warrant reserves to common
shares at the recognized fair value of $18.
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 CEO and 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 $9 per month.
Effective July 1, 2018, Perennial entered into a new agreement with Perennial Designs International Private Limited, a
company 100% owned by a key member of management for creative design and development of technology. During
the year ended, total consulting fees totaled $289 (2017 - nil).
On March 15, 2018, DCM entered into a 5 year loan agreement with a key member of management for a total of $107
to finance the purchase of Common Shares. Interest will accrue at a rate of 3% per annum on the unpaid balance. As
at December 31, 2018, the balance owing was $109 (2017 - nil) was included within other non-current assets and accrued
liabilities on the statement of financial position.
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.
COMPENSATION OF KEY MANAGEMENT
Key management personnel are deemed to be the former CEO, current CEO and President, Chief Financial Officer and
other members of the senior executive team. Compensation awarded to key management personnel included:
Salaries and other short-term employee benefits
Post-employment benefits
Share-based compensation expense
Total
For the year ended
December 31, 2018
For the year ended
December 31, 2017
$
$
3,141 $
31
651
3,823 $
2,743
16
157
2,916
During the year ended December 31, 2018, key management personnel were granted 536,626 RSUs (2017 – 132,749
RSUs), and 261,312 RSUs (2017 – 1,514 RSUs) were forfeited. Key management personnel were also granted options
to purchase up to 1,000,000 Common Shares (2017 – nil Common Shares) and nil Common Shares (2017 – 11,745
Common Shares) were forfeited during the year ended December 31, 2018 (see note 17). During the year ended
December 31, 2018, DCM’s general and administration expenses include a charge of $651 (2017 – $157) for these
share-based compensation awards.
129
DATA Communications Management Corp.
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in thousands of Canadian dollars, except percentages, shares and per share amounts)
During the year ended December 31, 2018, DCM’s general and administration expenses include a charge of $234 (2017
– $287) for the duties performed by DCM’s Board, of which $116 relates to DSU expense (note 17). The Board was also
granted options to purchase up to 200,000 Common shares (2017 - nil Common Shares) during the year ended December
31, 2018 (see note 17). During the year ended December 31, 2018, DCM’s general and administration expenses include
a charge of $78 (2017 – nil) for these share-based compensation awards.
26 Subsequent event
On March 5, 2019, DCM entered into a second amendment to its Bank Credit Facility. Significant terms of the amendment
made to DCM’s Bank Credit Facility include an extension of the maturity date to January 31, 2023, from its original
maturity date of March 31, 2020; a reduction in the interest rate payable on advances by 15 basis points from 0.75%
per annum to 0.60% per annum; the elimination of an early termination fee in the event the Bank Credit Facility is
terminated or repaid prior to maturity; and amendments related to the calculation of certain financial covenants as a
result of the adoption of IFRS 16 effective for reporting periods on or after January 1, 2019. The amendments related
to IFRS 16 include clarification that the calculation of DCM's fixed charge coverage ratio under the Bank Credit Facility
will be completed on substantially the same basis as prior to the adoption of IFRS 16, after giving effect to changes in
the accounting treatment of leases related to right-of-use assets. As a result, definitions of certain terms related to IFRS
16 were added to the Bank Credit Facility. The Company’s financial covenant ratio with the Bank remains unchanged.
130
CORPORATE INFORMATION
DIRECTORS
AND OFFICERS
J.R. Kingsley Ward 3
Charirman, Director
William Albino 1,2,3
Director
James J. Murray O.Ont., SIOR 1,2
Director
Derek J. Watchorn 1,2
Director
Michael G. Sifton
Director
Merri L. Jones 3
Director
Gregory J. Cochrane
Director & Officer
James E. Lorimer
Officer
Chief Financial Officer &
Corporate Secretary
EXECUTIVE
TEAM
CORPORATE
INFORMATION
Gregory J. Cochrane
President & Chief Executive Officer
Auditors
PricewaterhouseCoopers LLP
James E. Lorimer
Chief Financial Officer
Alan Roberts
Senior Vice-President,
Operations
Michael Coté
Senior Vice-President,
Chief Commercial Officer
Judy Holcomb-Williams
Senior Vice President,
Chief Culture Officer
Transfer Agent
Computershare Investor
Services Inc.
Corporate Counsel
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
1
Member, Audit Comittee
(chairperson is William Albino)
2
3
Member, Corporate Governance Committee
(Chairperson is Derek J.Watchorn)
Member, Human Resources & Compensation Committee
(Chairperson is J.R. Kingsley Ward)
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