THE DESCARTES SYSTEMS GROUP INC.
ANNUAL REPORT
US GAAP FINANCIAL RESULTS FOR 2016 FISCAL YEAR
TABLE OF CONTENTS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................ 3
OVERVIEW ............................................................................................................................. 5
CONSOLIDATED OPERATIONS ....................................................................................................... 9
QUARTERLY OPERATING RESULTS ................................................................................................ 15
LIQUIDITY AND CAPITAL RESOURCES ............................................................................................ 18
COMMITMENTS, CONTINGENCIES AND GUARANTEES .......................................................................... 21
OUTSTANDING SHARE DATA ...................................................................................................... 23
APPLICATION OF CRITICAL ACCOUNTING POLICIES ............................................................................ 23
CHANGE IN / INITIAL ADOPTION OF ACCOUNTING POLICIES ................................................................. 26
CONTROLS AND PROCEDURES ..................................................................................................... 28
TRENDS / BUSINESS OUTLOOK ................................................................................................... 28
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS ...................................................................... 31
MANAGEMENT’S REPORT ON FINANCIAL STATEMENTS AND INTERNAL CONTROL OVER FINANCIAL REPORTING ........ 44
CONSOLIDATED BALANCE SHEETS ............................................................................................... 50
CONSOLIDATED STATEMENTS OF OPERATIONS ................................................................................. 51
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME .................................................................. 52
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY ................................................................... 53
CONSOLIDATED STATEMENTS OF CASH FLOWS................................................................................. 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................................................................... 55
CORPORATE INFORMATION ........................................................................................................ 86
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
contains references to Descartes using the words “we,” “us,” “our” and similar words and the reader is
referred to using the words “you,” “your,” and similar words.
This MD&A also refers to our fiscal years. Our fiscal year commences on February 1st of each year and
ends on January 31st of the following year. Our fiscal year, which ended on January 31, 2016, is referred
to as the “current fiscal year”, “fiscal 2016”, “2016” or using similar words. Our fiscal year, which ended
on January 31, 2015, is referred to as the “previous fiscal year”, “fiscal 2015”, “2015” or using similar
words. Other fiscal years are referenced by the applicable year during which the fiscal year ends. For
example, 2017 refers to the annual period ending January 31, 2017 and the “fourth quarter of 2017”
refers to the quarter ending January 31, 2017.
This MD&A, which is prepared as of March 3, 2016, covers our year ended January 31, 2016, as
compared to years ended January 31, 2015 and 2014. You should read the MD&A in conjunction with
our audited consolidated financial statements for 2016. We prepare and file our consolidated financial
statements and MD&A in United States (“US”) dollars and in accordance with US generally accepted
accounting principles (“GAAP”). All dollar amounts we use in the MD&A are in US currency, unless we
indicate otherwise.
We have prepared the MD&A with reference to the Form 51-102F1 MD&A disclosure requirements
established under National Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102”) of the
Canadian Securities Administrators.
Additional information about us, including copies of our continuous disclosure materials such as our
annual information form, is available on our website at http://www.descartes.com, through the EDGAR
website at http://www.sec.gov or through the SEDAR website at http://www.sedar.com.
Certain statements made in this Annual Report to Shareholders, including, but not limited to, statements
in the “Trends / Business Outlook” section and statements regarding our expectations concerning future
revenues and earnings, including potential variances from period to period; our expectations regarding
the cyclical nature of our business, including an expectation that our third quarter will be strongest for
shipping volumes and our first quarter will be the weakest; mix of revenues between services revenues
and license revenues and potential variances from period to period; our plans to focus on generating
services revenues yet to continue to allow customers to elect to license technology in lieu of subscribing
to services; our expected loss of revenues and customers; our baseline calibration; our ability to keep
our operating expenses at a level below our baseline revenues; our future business plans and business
planning process; allocation of purchase price for completed acquisitions; our expectations regarding
future restructuring charges and cost-reduction activities; expenses, including amortization of
intangibles and stock-based compensation; goodwill impairment tests and the possibility of future
impairment adjustments; capital expenditures; acquisition-related costs; our liability with respect to
various claims and suits arising in the ordinary course; any commitments referred to in the
“Commitments, Contingencies and Guarantees” section of this MD&A; our intention to actively explore
future business combinations and other strategic transactions; our liability under indemnification
obligations; our reinvestment of earnings of subsidiaries back into such subsidiaries; the sufficiency of
capital to meet working capital, capital expenditure, debt repayment requirements and our anticipated
growth strategy; our ability to raise capital; our adoption of certain accounting standards and other
matters related thereto constitute forward-looking information for the purposes of applicable securities
laws (“forward-looking statements”). When used in this document, the words “believe,” “plan,” “expect,”
“anticipate,” “intend,” “continue,” “may,” “will,” “should” or the negative of such terms and similar
expressions are intended to identify forward-looking statements. These forward-looking statements are
based on certain assumptions including the following: global shipment volumes continuing to increase at
levels consistent with the average growth rates of the global economy; countries continuing to
3
implement and enforce existing and additional customs and security regulations relating to the provision
of electronic information for imports and exports; countries continuing to implement and enforce
existing and additional trade restrictions and sanctioned party lists with respect to doing business with
certain countries, organizations, entities and individuals; Descartes’ continued operation of a secure and
reliable business network; the stability of general economic and market conditions, currency exchange
rates, and interest rates; equity and debt markets continuing to provide Descartes with access to
capital; Descartes’ continued ability to identify and source attractive and executable business
combination opportunities; Descartes’ ability to develop solutions that keep pace with the continuing
changes in technology, and our continued compliance with third party intellectual property rights. These
assumptions may prove to be inaccurate. Such forward-looking statements also involve known and
unknown risks, uncertainties and other factors that may cause the actual results, performance or
achievements of Descartes, or developments in Descartes’ business or industry, to differ materially from
the anticipated results, performance or achievements or developments expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, the factors discussed under
the heading “Certain Factors That May Affect Future Results” in this MD&A and in other documents filed
with the Securities and Exchange Commission, the Ontario Securities Commission and other securities
commissions across Canada from time to time. If any of such risks actually occur, they could materially
adversely affect our business, financial condition or results of operations. In that case, the trading price
of our common shares could decline, perhaps materially. Readers are cautioned not to place undue
reliance upon any such forward-looking statements, which speak only as of the date made. Forward-
looking statements are provided for the purpose of providing information about management’s current
expectations and plans relating to the future. Readers are cautioned that such information may not be
appropriate for other purposes. Except as required by applicable law, we do not undertake or accept any
obligation or undertaking to release publicly any updates or revisions to any forward-looking statements
to reflect any change in our expectations or any change in events, conditions, assumptions or
circumstances on which any such statements are based.
4
OVERVIEW
of
on
and
supply
logistics
logistics-intensive
We use technology and networks to simplify
complex business processes. We are primarily
focused
chain
management business processes. Our solutions
are predominantly cloud-based and are focused
on improving the productivity, performance and
security
businesses.
Customers use our modular, software-as-a-
service (“SaaS”) solutions to route, schedule,
track and measure delivery resources; plan,
allocate and execute shipments; rate, audit and
pay transportation invoices; access and leverage
global trade and restricted party data;
file
customs and security documents for imports and
exports; research and perform trade tariff and
duty calculations and complete numerous other
logistics processes by participating in a large,
logistics community.
collaborative multi-modal
Our pricing model provides our customers with
flexibility in purchasing our solutions either on a
subscription, transactional or perpetual license
basis. Our primary
serving
transportation providers (air, ocean and truck
modes),
logistics service providers (including
third-party logistics providers, freight forwarders
and customs brokers) and distribution-intensive
companies where delivery is either a key or a
defining part of their own product or service
offering, or where there is an opportunity to
reduce costs and improve service levels by
optimizing the use of their assets.
is on
focus
The Market
Logistics is the management of the flow of
resources between a point of origin and a point of
destination – processes that move items (such as
goods, people, information) from point A to point
B. Supply chain management is broader than
logistics and includes the sourcing, procurement,
for
storage of
conversion and
consumption by an enterprise. Logistics and
supply chain management have been evolving
over the past several years as companies are
increasingly seeking automation and real-time
control of their supply chain activities. We believe
companies are looking for integrated solutions for
managing inventory in transit, conveyance units,
people and business documents.
resources
We believe logistics-intensive organizations are
seeking new ways to reduce operating costs,
5
differentiate themselves, improve margins, and
better serve customers. Existing global trade and
transportation processes are often manual and
complex to manage. This is a consequence of the
growing number of business partners participating
in companies’ global supply chains and a lack of
standardized business processes.
Additionally, global sourcing, logistics outsourcing,
adoption of additional customs and regulatory
requirements and the increased rate of change in
day-to-day business requirements are adding to
the overall complexities that companies face in
planning and executing in their supply chains.
Whether a shipment is delayed at the border, a
customer changes an order or a breakdown occurs
on the road, there are increasingly more issues
that can significantly impact the execution of
fulfillment schedules and associated costs.
frequently
end-customers
These challenges are heightened for suppliers that
have
demanding
narrower order-to-fulfillment periods, lower prices
and greater
scheduling and
rescheduling deliveries. End customers also want
real-time updates on delivery status, adding
considerable burden to supply chain management
as process efficiency is balanced with affordable
service.
flexibility
in
In this market, the movement and sharing of data
between parties involved in the logistics process is
equally important to the physical movement of
goods. Manual,
fragmented and distributed
logistics solutions are often proving inadequate to
address the needs of operators. Connecting
manufacturers and suppliers to carriers on an
individual, one-off basis is too costly, complex and
risky for organizations dealing with many trading
partners. Further, many of these solutions do not
provide the
flexibility required to efficiently
accommodate varied processes for organizations
to remain competitive. We believe this presents
an opportunity for logistics technology providers
to unite this highly fragmented community and
help customers
in their
operations.
improve efficiencies
As the market continues to change, we have been
evolving to meet our customers’ needs. The rate
of adoption of newer logistics and supply chain
management technologies is evolving, but a large
number of organizations still have manual
business processes. We have been educating our
prospects and customers on
the value of
connecting to trading partners through our Global
Logistics Network (“GLN”) and automating, as well
as standardizing, multi-party business processes.
We believe that our customers are increasingly
looking for a single source, neutral, network-
based solution provider who can help them
manage the end-to-end shipment process, which
involves
booking
a
transportation, tracking the shipment as it moves,
managing regulatory compliance filings during the
finally, settling and auditing of
move and,
transportation invoices.
shipment,
planning
helps
require
regulatory
companies
technology
Additionally,
initiatives mandating
electronic filing of shipment information with
customs authorities
to
automate aspects of their shipping processes to
remain compliant and competitive. Our customs
compliance
shippers,
transportation providers, freight forwarders and
other logistics intermediaries to securely and
electronically
tariff/duty
information with customs authorities and self-
audit their own efforts. Our technology also helps
carriers
efficiently
coordinate with customs brokers and agencies to
expedite cross-border shipments. While many
the US,
compliance
compliance has now become a global issue with
significantly more
shipments
crossing several borders on the way to their final
destinations.
shipment and
international
forwarders
initiatives
started
freight
and
file
in
Solutions
Descartes’ Logistics Technology Platform unites a
growing global community of logistics-focused
parties, allowing them to transact business while
leveraging a broad array of applications designed
to help
thrive.
Descartes’ Logistics Technology Platform is the
synthesis of a network,
simple, elegant
applications and a community.
logistics-intensive businesses
The Logistics Technology Platform fuses our GLN,
an extensive logistics network covering multiple
transportation modes, with a broad array of
modular, interoperable web and wireless logistics
management
to help
accelerate time-to-value and increase productivity
and performance for businesses of all sizes, the
Logistics Technology Platform leverages the GLN’s
multimodal
to enable
companies to quickly and cost-effectively connect
and collaborate.
solutions. Designed
community
logistics
Descartes’ GLN, the underlying foundation of the
Logistics Technology Platform, manages the flow
6
of data and documents that track and control
inventory, assets and people in motion. Designed
expressly for logistics operations, it is native to
the particularities of different
transportation
modes and country borders. As a state-of-the-art
messaging network with wireless capabilities, the
GLN helps manage business processes in real-
time and in-motion. Its capabilities go beyond
logistics,
commercial
transactions, regulatory compliance documents,
and customer specific needs.
supporting
common
The GLN extends its reach using interconnect
agreements with other general and logistics-
specific networks, to offer companies access to a
wide array of trading partners. With the flexibility
to connect and collaborate in unique ways,
companies can effectively route or transform data
to and from partners and leverage new and
existing Descartes solutions on the network. The
GLN allows “low tech” partners to act and respond
with “high tech” capabilities and connect to the
transient partners that exist in many logistics
operations. This inherent adaptability creates
opportunities
logistics business
processes that can help customers differentiate
themselves from their competitors.
to develop
Descartes’ Logistics Application Suite offers a wide
array of modular, cloud-based, interoperable web
and wireless logistics management applications.
These solutions embody Descartes’ deep domain
expertise, not merely “check box” functionality.
These solutions deliver value for a broad range of
logistics intensive organizations, whether they
purchase transportation, run their own fleet,
operate globally or locally, or work across air,
ocean or ground
transportation. Descartes’
comprehensive suite of solutions includes:
Routing, Mobile and Telematics;
Transportation Management;
Customs & Regulatory Compliance
Trade Data;
Global Logistics Network Services; and
Broker & Forwarder Enterprise Systems.
applications
are modular
Powered by the Logistics Technology Platform,
Descartes’
and
interoperable to allow organizations the flexibility
to deploy them quickly within an existing portfolio
of solutions.
is streamlined
Implementation
because
these solutions use web-native or
wireless user interfaces and are pre-integrated
with the GLN. With interoperable and multi-party
solutions, Descartes’ solutions are designed to
deliver functionality that can enhance a logistics
motion. The program centers on Descartes’ Open
Standard Collaborative Interfaces, which provide a
wide variety of connectivity mechanisms to
integrate a broad spectrum of applications and
services.
Descartes has partnering
multiple parties across
categories:
relationships with
three
following
the
Technology Partners – Complementary
and
that
of
hardware,
embedded
extend
Descartes’ solution capabilities;
software,
network,
technology providers
functional
breadth
the
Consulting Partners
and
enterprise
- Large system
resource
integrators
planning system vendors
to
vertically specialized or niche consulting
domain
organizations
expertise and/or implementation services
for Descartes’ solutions; and
through
provide
that
Channel Partners (Value-Added Resellers)
sell,
that market,
– Organizations
implement
support Descartes'
and
solutions to extend access and expand
market share into territories and markets
where Descartes might not have a focused
direct sales presence.
Marketing
Our marketing efforts are focused on growing
for our solutions and establishing
demand
Descartes as a thought leader and innovator
across the markets we serve. Marketing programs
are delivered
initiatives
designed to reach our target customer and
prospect groups. These programs include digital
and online marketing, trade shows and user group
events, partner-focused campaigns, and direct
corporate marketing efforts.
integrated
through
Fiscal 2016 Highlights
At our annual meeting of shareholders on May 28,
2015, our shareholders elected one new director,
Deborah Close, a senior executive with many
years of experience in the software and oil and
gas industries.
operation’s performance and productivity both
within the organization and across a complex
network of partners.
joining
the GLN
Descartes’ GLN community members enjoy
extended command of operations and accelerated
time-to-value relative to many alternative logistics
solutions. Given the inter-enterprise nature of
logistics, quickly gaining access to partners is
this reason, Descartes has
paramount. For
focused on growing a community that strategically
attracts and retains relevant logistics parties.
Upon
community, many
companies find that a number of their trading
partners are already members with an existing
connection to the GLN. This helps to minimize the
time required to integrate Descartes’ logistics
management applications and to begin realizing
results. Descartes is committed to continuing to
expand community membership. Companies that
join
their
the GLN community or extend
participation find a single place where their entire
logistics network can exist regardless of the range
of transportation modes, the number of trading
partners or the variety of regulatory agencies.
Sales and Distribution
Our sales efforts are primarily directed towards
two specific customer markets: (a) transportation
companies and logistics service providers; and (b)
manufacturers, retailers, distributors and mobile
business service providers. Our sales staff is
regionally based and trained to sell across our
solutions to specific customer markets. In North
America and Europe, we promote our products
primarily through direct sales efforts aimed at
existing and potential users of our products. In
the Asia Pacific, Indian subcontinent, Ibero-
America and African regions, we focus on making
our channel partners successful. Channel partners
for our other international operations include
distributors, alliance partners and value-added
resellers.
United by Design
Descartes’ ‘United By Design’ strategic alliance
program is intended to ensure complementary
hardware, software and network offerings are
interoperable with Descartes’ solutions and work
together seamlessly to solve multi-party business
problems.
‘United By Design’ is intended to create a global
ecosystem of
logistics-intensive organizations
working together to standardize and automate
business processes and manage resources in
7
On July 20, 2015, we acquired all outstanding
shares of privately-held MK Data Services LLC
(“MK Data”), a leading US-based provider of
denied party screening trade data and solutions.
MK Data's technology screens shipments against a
comprehensive, frequently updated, international
database of restricted parties helping more than
900 businesses comply with denied party
screening requirements. The total purchase price
for the acquisition was $80.2 million, net of cash
acquired, which was funded with cash on hand.
of
to
solutions
designed
BearWare
privately-held
On July 22, 2015, we acquired all outstanding
shares
Inc.
(“BearWare”), a leading US-based provider of
mobile
improve
collaboration between retailers and their logistics
service providers. BearWare's system leverages
mobile technologies to scan cartons at each point
from the distribution centers through to the store
front, helping retailers and their logistics service
providers collaborate on store shipments. The
total purchase price for the acquisition was $11.2
million, net of cash acquired, which was funded
with cash on hand.
On November 25, 2015, we acquired Oz
Development Inc. (“Oz”), a leading US-based
provider of application integration solutions that
help small-to-medium sized businesses (“SMBs”)
automate a number of logistics and supply chain
processes. The solutions help a growing SMB
community connect to, and integrate with, leading
SMB ERP, CRM and e-commerce platforms. The
total purchase price for the acquisition was $29.5
million, net of cash acquired, which was funded
with cash on hand.
8
CONSOLIDATED OPERATIONS
The following table shows, for the fiscal years indicated, our results of operations in millions of dollars
(except per share and weighted average share amounts):
Year ended
Total revenues
Cost of revenues
Gross margin
Operating expenses
Other charges
Amortization of intangible assets
Income from operations
Interest income
Interest expense
Income before income taxes
Income tax expense
Current
Deferred
Net income
EARNINGS PER SHARE
BASIC
DILUTED
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)
BASIC
DILUTED
OTHER PERTINENT INFORMATION
Total assets
Non-current financial liabilities
January 31, January 31, January 31,
2014
151.3
2015
170.9
185.0
2016
53.9
131.1
54.8
116.1
49.0
102.3
75.3
1.5
26.2
28.1
0.2
(0.5)
27.8
1.4
5.8
20.6
68.8
2.9
21.7
22.7
0.3
(1.1)
21.9
2.8
4.0
15.1
63.1
6.5
18.0
14.7
0.1
(1.0)
13.8
1.8
2.4
9.6
0.27
0.27
0.21
0.21
0.15
0.15
75,595
76,409
70,559
71,584
62,841
64,370
452.8
444.2
-
-
344.5
31.8
Total revenues consist of services revenues and license revenues. Services revenues are
principally comprised of the following: (i) ongoing transactional fees for use of our services and products
by our customers, which are recognized as the transactions occur; (ii) professional services revenues
from consulting, implementation and training services related to our services and products, which are
recognized as the services are performed; (iii) maintenance, subscription and other related revenues,
including revenues associated with maintenance and support of our services and products, which are
recognized ratably over the subscription period; and (iv) hardware revenues, which are recognized when
hardware is shipped. License revenues are derived from perpetual licenses granted to our customers to
use our software products.
9
The following table provides additional analysis of our services and license revenues (in millions of
dollars and as a percentage of total revenues) generated over each of the periods indicated:
Year ended
Services revenues
Percentage of total revenues
License revenues
Percentage of total revenues
Total revenues
January 31, January 31, January 31,
2014
137.8
91%
2016
176.3
95%
2015
159.1
93%
8.7
5%
185.0
11.8
7%
170.9
13.5
9%
151.3
Our services revenues were $176.3 million, $159.1 million and $137.8 million in 2016, 2015 and
2014, respectively. The increase in 2016 compared to 2015 was primarily due to the inclusion of a full
period of services revenues from the acquisitions of Computer Management USA, Inc. and Computer
Management NA, Inc. (collectively, “Computer Management”), Customs Info LLC (“Customs Info”),
Airclic Inc. (“Airclic”), e-customs Inc. (“e-customs”) and Pentant Limited (“Pentant”), as well as services
revenues from the fiscal 2016 acquisitions of MK Data, BearWare and Oz. Services revenues in 2016
were negatively impacted by the weakening of the euro, Canadian dollar, Norwegian krone, British
pound sterling and Swedish krona compared to the US dollar.
The increase in 2015 compared to 2014 was primarily due to the inclusion of a full period of services
revenues from the 2014 acquisitions of KSD Software Norway AS (“KSD”), Compudata AG
(“Compudata”) and Impatex Freight Software Ltd. (“Impatex”) as well as services revenues from the
fiscal 2015 acquisitions of Computer Management, Customs Info, Airclic, e-customs and Pentant.
Services revenues in 2015 were negatively impacted by the weakening of the euro, Canadian dollar,
Norwegian krone and Swedish krona compared to the US dollar.
Our license revenues were $8.7 million, $11.8 million and $13.5 million in 2016, 2015 and 2014,
respectively. While our sales focus has been on generating services revenues in our SaaS business
model, we have continued to see a market for licensing the products in our omni-channel retailing and
home delivery logistics solutions. The amount of license revenues in a period is dependent on our
customers’ preference to license our solutions instead of purchasing our solutions as a service and we
anticipate variances from period to period.
As a percentage of total revenues, our services revenues were 95%, 93% and 91% in 2016, 2015
and 2014, respectively. Our high percentage of services revenues reflects our emphasis on selling to
new customers and expanding product offerings to existing customers under our SaaS business model.
We operate in one business segment providing logistics technology solutions. The following table
provides additional analysis of our revenues by geographic location of customer (in millions of
dollars and as a percentage of total revenues):
10
Year Ended
United States
Percentage of total revenues
Europe, Middle-East and Africa (“EMEA”)
Percentage of total revenues
Canada
Percentage of total revenues
Asia Pacific
Percentage of total revenues
January 31, January 31, January 31,
2014
69.9
46%
2016
96.3
52%
2015
73.8
43%
68.5
37%
12.6
7%
7.6
4%
72.9
44%
15.2
9%
9.0
5%
62.5
41%
14.4
10%
4.5
3%
Total revenues
185.0
170.9
151.3
Revenues from the United States were $96.3 million, $73.8 million and $69.9 million in 2016, 2015
and 2014, respectively. The increase in 2016 compared to 2015 was primarily a result of United States-
based revenue from the acquisitions of Computer Management, Customs Info, Airclic, MK Data,
BearWare and Oz. The increase in 2015 compared to 2014 was primarily attributable to the inclusion of
United States-based revenue from the 2015 acquisitions of Computer Management, Customs Info and
Airclic.
Revenues from the EMEA region were $68.5 million, $72.9 million and $62.5 million in 2016, 2015
and 2014, respectively. The decreases in 2016 compared to 2015 was primarily a result of the
weakening of the euro, Norwegian krone, British pound sterling and Swedish krona compared to the US
dollar. The decrease was partially offset by revenues from the acquisitions of Airclic, e-customs and
Pentant as well as a significant license sale made in the first quarter of 2016. The increase in 2015
compared to 2014 was primarily due to revenues from the acquisitions of Compudata, Impatex and e-
customs as well as increased professional services revenues. Partially offsetting this increase, revenues
from the EMEA region were negatively impacted by the weakening of the euro, Norwegian krone and
Swedish krona compared to the US dollar.
Revenues from Canada were $12.6 million, $15.2 million and $14.4 million in 2016, 2015 and 2014,
respectively. The decrease in 2016 compared to 2015 was primarily a result of the weakening of the
Canadian dollar compared to the US dollar. The increase in 2015 compared to 2014 is principally due to
increased license revenues in the region. Partially offsetting this increase, revenues from Canada were
negatively impacted by the weakening of the Canadian dollar compared to the US dollar.
Revenues from the Asia Pacific region were $7.6 million, $9.0 million and $4.5 million in 2016, 2015
and 2014, respectively. The decrease in 2016 compared to 2015 was primarily a result of decreased
license revenues in the region. The increase in 2015 compared to 2014 is primarily due to increased
license revenues in the region as well as increased services revenues associated with Descartes’ “Japan
Ocean Advanced Filing Rule” solution which helps customers comply with Japan’s new advanced cargo
security initiative.
11
The following table provides analysis of cost of revenues (in millions of dollars) and the related gross
margins for the periods indicated:
Year ended
Services
Services revenues
Cost of services revenues
Gross margin
Gross margin percentage
License
License revenues
Cost of license revenues
Gross margin
Gross margin percentage
Total
Revenues
Cost of revenues
Gross margin
Gross margin percentage
January 31, January 31, January 31,
2014
2016
2015
176.3
52.9
123.4
70%
8.7
1.0
7.7
89%
185.0
53.9
131.1
71%
159.1
53.0
106.1
67%
11.8
1.8
10.0
85%
170.9
54.8
116.1
68%
137.8
47.7
90.1
65%
13.5
1.3
12.2
90%
151.3
49.0
102.3
68%
Cost of services revenues consists of internal costs of running our systems and applications, hardware
costs, and other personnel-related expenses incurred in providing professional service and maintenance
work, including consulting and customer support.
Gross margin percentage for services revenues was 70%, 67% and 65% in 2016, 2015 and 2014,
respectively. The margin in 2016 was positively impacted by inclusion of the acquisitions of Airclic, e-
customs and MK Data which operate at margins higher than our other service revenue streams.
Gross margin in 2015 compared with 2014 was positively impacted by inclusion of the acquisitions of
Compudata, Impatex, Computer Management, Airclic and e-customs which was partially offset by the
inclusion of the acquisition of KSD, as well as a higher percentage of revenues from our telematics
products, both of which operate at margins lower than our other services revenue streams.
Cost of license revenues consists of costs related to our sale of third-party technology, such as third-
party map license fees and royalties.
Gross margin percentage for license revenues was 89%, 85% and 90% in 2016, 2015 and 2014,
respectively. Our gross margin on license revenues is dependent on the proportion of our license
revenues that involve third-party technology. Consequently, our gross margin percentage for license
revenues is higher when a lower proportion of our license revenues attracts third-party technology costs,
and vice versa.
Operating expenses consisting of sales and marketing, research and development and general and
administrative expenses, were $75.3 million, $68.8 million and $63.1 million for 2016, 2015 and 2014,
respectively. The increase in 2016 as compared to 2015 was primarily due to operating expenses from
the acquisitions of Customs Info, Airclic, e-customs, BearWare and, to a lesser extent, Computer
Management, Pentant, MK Data, and Oz. Operating expenses in 2016 were positively impacted on a
comparative basis to 2015 by the weakening of the Canadian dollar, euro, Swedish krona, Norwegian
krone, and British pound sterling compared to the US dollar.
12
The increase in 2015 compared to 2014 was primarily due to operating expenses from the acquisition of
KSD, Impatex, Compudata, Customs Info, Airclic and, to a lesser extent, Computer Management, e-
customs and Pentant. Operating expenses in 2015 were also impacted by fees to value-added resellers
and strategic marketing alliances associated with selling and marketing our solutions, particularly in the
Asia Pacific region. These increases were partially offset by a reduction in professional fees during 2015.
Operating expenses in 2015 were positively impacted on a comparative basis to 2014 by the weakening
of the Canadian dollar, euro Swedish krona and Norwegian krone compared to the US dollar.
The following table provides analysis of operating expenses (in millions of dollars and as a percentage of
total revenues) for the periods indicated:
Year ended
Total revenues
Sales and marketing expenses
Percentage of total revenues
Research and development expenses
Percentage of total revenues
General and administrative expenses
Percentage of total revenues
Total operating expenses
Percentage of total revenues
January 31, January 31, January 31,
2014
151.3
2016
185.0
2015
170.9
22.4
12%
31.3
17%
21.6
12%
75.3
41%
20.4
12%
28.1
16%
20.3
12%
68.8
40%
16.7
11%
25.9
17%
20.5
14%
63.1
42%
Sales and marketing expenses include salaries, commissions, stock-based compensation and other
personnel-related costs, bad debt expenses, travel expenses, advertising programs and services, and
other promotional activities associated with selling and marketing our services and products. Sales and
marketing expenses were $22.4 million, $20.4 million and $16.7 million in 2016, 2015 and 2014,
respectively. Sales and marketing expenses as a percentage of total revenues were 12% in 2016, 12%
in 2015 and 11% in 2014. The increases in sales and marketing expenses in 2016 compared to 2015
was primarily due to the inclusion of sales and marketing expenses from the acquisitions of Customs
Info and Airclic and additional expenses related to our annual User Group conference. Sales and
marketing expenses in 2016 on a comparative basis to 2015 were positively impacted by the weakening
of the Canadian dollar, euro, Swedish krona, Norwegian krone and British pound sterling compared to
the US dollar.
The increase in sales and marketing expenses in 2015 compared to 2014 was primarily due to the
inclusion of sales and marketing expenses from the acquisitions of KSD, Compudata, Impatex, Customs
Info and Airclic. Sales and marketing expenses in 2015 were also impacted by increased fees to value-
added resellers and strategic marketing alliances associated with selling and marketing our solutions,
particularly in the Asia Pacific region. Sales and marketing expenses in 2015 on a comparative basis to
2014 were positively impacted by the weakening of the Canadian dollar, euro, Swedish krona and
Norwegian krone compared to the US dollar.
Research and development expenses consist primarily of salaries, stock-based compensation and
other personnel-related costs of technical and engineering personnel associated with our research and
product development activities, as well as costs for third-party outsourced development providers. We
expensed all costs related to research and development in 2016, 2015 and 2014. Research and
development expenses were $31.3 million, $28.1 million and $25.9 million in 2016, 2015 and 2014,
respectively. Research and development expenses as a percentage of total revenues were 17% in 2016,
16% in 2015 and 17% in 2014. The increase in research and development expenses in 2016 compared
13
to 2015 was primarily attributable to increased payroll and related costs from the acquisitions of
Customs Info, Airclic, e-customs, BearWare and MK Data. Research and development expenses in 2016
on a comparative basis to 2015 were positively impacted by the weakening of the Canadian dollar and
euro compared to the US dollar.
The increase in research and development expenses in 2015 as compared to 2014 was primarily due to
increased payroll and related costs from the acquisitions of KSD, Impatex, Computer Management,
Customs Info and Airclic. Research and development expenses in 2015 on a comparative basis to 2014
were positively impacted by the weakening of the Canadian dollar and euro compared to the US dollar.
General and administrative expenses consist primarily of salaries, stock-based compensation and
other personnel-related costs of administrative personnel, as well as professional fees and other
administrative expenses. General and administrative costs were $21.6 million, $20.3 million and $20.5
million in 2016, 2015 and 2014, respectively. General and administrative expenses as a percentage of
total revenues were 12%, 12% and 14% in 2016, 2015 and 2014, respectively. The increase in general
and administrative expenses in 2016 compared to 2015 was primarily attributable to the inclusion of
general and administrative expenses from the acquisitions of Customs Info. General and administrative
expenses in 2016 were also impacted by an increase in the Descartes share price resulting in additional
expense for deferred share unit compensation costs. General and administrative expenses in 2016 on a
comparative basis to 2015 were positively impacted by the weakening of the Canadian dollar and euro
compared to the US dollar.
The decrease in general and administrative expenses in 2015 compared to 2014 is primarily attributable
to the weakening of the Canadian dollar compared to the US dollar over the comparative period and a
reduction in professional fees in 2015. This decrease was partially offset by increased general and
administrative expenses from the acquisitions of KSD, Compudata, Impatex, Customs Info and Airclic.
Other charges consist primarily of acquisition-related costs with respect to completed and prospective
acquisitions, restructuring charges and executive departure charges. Acquisition-related costs primarily
include retention bonuses, advisory services, brokerage services and administrative costs, and relate to
completed and prospective acquisitions. Restructuring costs relate to the integration of previously
completed acquisitions and other cost-reduction activities. Other charges were $1.5 million, $2.9 million
and $6.5 million in 2016, 2015 and 2014, respectively. Other charges were comprised of restructuring
costs of $0.1 million, $0.8 million and $1.9 million in 2016, 2015 and 2014, respectively, acquisition-
related costs of $1.4 million, $1.7 million and $1.3 million in 2016, 2015 and 2014, respectively, and
executive departure charges of nil, $0.4 million and $3.3 million in 2016, 2015 and 2014, respectively.
The decrease in other charges in 2016 compared to 2015 was primarily a result of a reduction in
restructuring and executive departure charges as a result of no new restructuring plans being
implemented during the year.
The decrease in other charges in 2015 compared to 2014 was primarily a result of a reduction in
executive departure charges. Partially offsetting this decrease was an increase in acquisition-related
costs due to the timing of acquisition activities.
Amortization of intangible assets is amortization of the value attributable to intangible assets,
including customer agreements and relationships, non-compete covenants, existing technologies and
trade names, in each case associated with acquisitions completed by us as of the end of each reporting
period. Intangible assets with a finite life are amortized to income over their useful life. The amount of
amortization expense in a fiscal period is dependent on our acquisition activities as well as our asset
impairment tests. Amortization of intangible assets was $26.2 million, $21.7 million and $18.0 million in
2016, 2015 and 2014, respectively. The increase in amortization expense over those three years
primarily arose due to amortization expense from the acquisitions of Customs Info, Airclic and MK Data
and, to a lesser extent, Computer Management, e-customs, Pentant, BearWare and Oz. As at January
31, 2016, the unamortized portion of all intangible assets amounted to $133.6 million.
14
We test the carrying value of our finite life intangible assets for recoverability when events or changes in
circumstances indicate that there may be evidence of impairment. We write down intangible asset or
asset groups with a finite life to fair value when the related undiscounted cash flows are not expected to
allow for recovery of the carrying value. Fair value of intangible asset or asset groups is determined by
discounting the expected related cash flows. No finite life intangible asset or asset group impairment
has been identified or recorded for any of the fiscal periods reported.
Interest income was $0.2 million, $0.3 million and $0.1 million in 2016, 2015 and 2014, respectively.
The increase in interest income was primarily attributable to changes in the average cash balance during
the periods. Interest income is reflective of current market rates.
Interest expense was $0.5 million, $1.1 million and $1.0 million in 2016, 2015 and 2014, respectively.
Interest expense is primarily comprised of interest expense on the amount borrowed and outstanding on
our revolving debt facility as well as amortization of deferred financing charges. Interest expense
decreased in 2016 compared to 2015 as a result of repayment of the revolving debt facility. As of
January 31, 2016, all amounts previously borrowed under the revolving debt facility have been repaid
and no amounts remain owing.
Income tax expense is comprised of current and deferred income tax expense (recovery). Income tax
expense for 2016, 2015 and 2014 was 26%, 31% and 30% of income before income taxes, respectively,
with current income tax expense being 5%, 13% and 13% of income before income taxes, respectively.
Income tax expense – current was $1.4 million, $2.8 million and $1.8 million in 2016, 2015 and
2014, respectively. Current income taxes arise primarily from income that is not fully sheltered by loss
carry-forwards primarily in the US and EMEA. Current tax expense decreased in 2016 compared to 2015
primarily due to a decrease in taxable income in the US as a result of tax benefits related to stock option
exercises.
The increase in current income tax expense in 2015 as compared to 2014 was primarily as a result of
income in the US, Netherlands and EMEA region which is not sheltered by loss carry-forwards.
Income tax expense – deferred was $5.8 million, $4.0 million and $2.4 million in 2016, 2015 and
2014, respectively. Deferred income tax expense increased in 2016 compared to 2015 primarily due to
additional valuation allowance in EMEA and a tax rate reduction in certain jurisdictions.
Deferred income tax expense increased in 2015 compared to 2014 primarily due to a release of
valuation allowance which decreased tax expense by $2.7 million in 2014, while only $1.2 million of
valuation allowance was released in 2015.
Net income was $20.6 million, $15.1 million and $9.6 million in 2016, 2015 and 2014, respectively.
QUARTERLY OPERATING RESULTS
The following table provides an analysis of our unaudited operating results (in thousands of dollars,
except per share and weighted average number of share amounts) for each of the quarters ended on
the date indicated.
15
April 30, July 31, October 31, January 31,
2016
2015
2015
2015
Total
2016
Revenues
Gross margin
Operating expenses
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding
(thousands):
Basic
Diluted
44,424
31,041
17,887
4,901
0.06
0.06
45,172
31,683
18,294
5,072
0.07
0.07
47,360
33,944
19,528
5,229
0.07
0.07
48,037 184,993
34,466 131,134
75,324
19,615
20,562
5,360
0.27
0.07
0.27
0.07
75,484
76,344
75,498
76,396
75,633
76,421
75,760
76,423
75,595
76,409
April 30, July 31, October 31, January 31,
2015
2014
2014
2014
Total
2015
Revenues
Gross margin
Operating expenses
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding
(thousands):
Basic
Diluted
40,836
27,587
16,418
3,694
0.06
0.06
42,680
28,860
17,284
3,613
0.05
0.05
43,057
29,181
17,236
4,157
0.06
0.05
44,287 170,860
30,353 115,981
68,814
17,876
15,059
3,595
0.21
0.05
0.21
0.05
63,667
64,817
67,559
68,567
75,324
76,190
75,460
76,303
70,559
71,584
April 30, July 31, October 31, January 31,
2014
2013
2013
2013
Total
2014
Revenues
Gross margin
Operating expenses
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding
(thousands):
Basic
Diluted
34,031
23,475
14,314
2,807
0.04
0.04
38,195
25,244
15,805
1,740
0.03
0.03
38,763
26,015
16,020
2,183
0.03
0.03
40,305 151,294
27,517 102,251
63,071
16,932
9,612
2,882
0.15
0.05
0.15
0.04
62,669
64,024
62,711
64,183
62,737
64,301
63,242
64,658
62,841
64,370
Revenues over the comparative period have been positively impacted by the eleven acquisitions that we
have completed since the beginning of 2014. In addition, over the past three fiscal years we have seen
increased revenues as a result of an increase in transactions processed over our GLN business document
exchange as we help our customers comply with electronic filing requirements of US, Canadian, EU and
Asia security and customs regulations.
Our services revenues continue to have seasonal trends. In the first fiscal quarter of each year, we
historically have seen lower shipment volumes by air and truck which impact the aggregate number of
transactions flowing through our GLN business document exchange. In the second fiscal quarter of each
16
year, we historically have seen an increase in ocean services revenues as ocean carriers are in the midst
of their customer contract negotiation period. In the third fiscal quarter of each year, we have
historically seen shipment and transactional volumes at their highest. In the fourth fiscal quarter of each
year, the various international holidays impact the aggregate number of shipping days in the quarter,
and historically we have seen this adversely impact the number of transactions our network processes
and, consequently, the amount of services revenues we receive during that period.
In the fourth quarter of 2016, revenues and net income were positively impacted by the inclusion of a
partial quarter of operations from our acquisition of Oz. Revenues in the fourth quarter were negatively
impacted by the weakening of the euro, Canadian dollar, Norwegian krone, Swedish krona and British
pound sterling compared to the US dollar. Gross margins and net income continue to be positively
impacted by inclusion of the acquisitions of Airclic, e-customs and MK Data. Net income was partially
offset by $0.4 million of additional amortization as a result of the acquisition of Oz.
In the third quarter of 2016, revenues, gross margins and net income were positively impacted by the
inclusion of a full quarter of operations from our acquisitions of MK Data and BearWare. Revenues in the
third quarter were negatively impacted by the weakening of the euro, Canadian dollar, Norwegian krone,
Swedish krona and British pound sterling compared to the US dollar. Net income in the third quarter was
partially offset by $0.9 million of additional amortization as a result of the acquisitions of MK Data and
BearWare.
In the second quarter of 2016, revenues and net income were positively impacted by the growth of
services revenues and an increase in gross margin. Gross margins and net income in the second quarter
were positively impacted by inclusion of the acquisitions of Airclic and e-customs. Revenues in the
second quarter were negatively impacted by the weakening of the euro, Canadian dollar, Norwegian
krone, Swedish krona and British pound sterling compared to the US dollar. Net income was also
positively impacted by a $0.2 million reduction in tax expense primarily related to permanent
differences.
In the first quarter of 2016, revenues and net income were positively impacted by the inclusion of a full
quarter of operations from our acquisitions of Airclic, e-customs and Pentant. Revenues in the first
quarter were negatively impacted by the weakening of the euro, Canadian dollar, Norwegian krone,
Swedish krona and British pound sterling compared to the US dollar. Net income for the first quarter was
also negatively impacted by $0.1 million of other charges, primarily attributable to acquisition-related
costs with respect to completed and prospective acquisitions.
In 2015, revenues and net income were positively impacted on a comparative basis to 2014 by the
inclusion of a full period of operations from our fiscal 2014 acquisitions of KSD, Compudata and Impatex
as well as the inclusion of a partial period of operations from our fiscal 2015 acquisitions of Computer
Management, Customs Info, Airclic and to a lesser extent e-customs and Pentant. Net income was
negatively impacted by a $0.4 million charge related to executive departure charges during the second
quarter of 2015, as well as $0.1 million and $0.7 million of restructuring costs during the first and fourth
quarters of 2015, respectively. Acquisition-related costs with respect to completed and prospective
acquisitions of $0.5 million, $0.3 million, $0.2 million and $0.7 million in the first, second, third and
fourth quarters of 2015, respectively, and interest expense on our revolving debt facility of $0.4 million
in each of the first and second quarters of 2015 reduced net income. A deferred income tax recovery of
$1.3 million in the UK also favourably contributed to net income in the fourth quarter of 2015.
In 2014, revenues and net income were positively impacted on a comparative basis to 2013 by the
inclusion of a full period of operations from our fiscal 2013 acquisitions of Infodis B.V., Integrated Export
Systems, Ltd. and Exentra Transport Solutions Limited as well as the inclusion of a partial period of
operations from our fiscal 2014 acquisitions of Compudata and to a lesser extent Impatex. While the
acquisition of KSD contributed positively to fiscal 2014 revenues, it contributed a net loss of $1.7 million,
including $1.7 million of restructuring charges and $1.8 million of amortization of intangible assets.
License revenues and gross margin from license revenues were positively impacted by the inclusion of
significant license sales to three specific customers during 2014. Net income was negatively impacted by
17
a $3.3 million charge related to the departure of the former Chairman and CEO during the fourth quarter
of 2014, as well as $1.1 million, $0.6 million and $0.1 million of restructuring costs during the second,
third and fourth quarters of 2014, respectively. Acquisition-related costs with respect to completed and
prospective acquisitions of $0.3 million, $0.2 million, $0.2 million and $0.7 million in the first, second,
third and fourth quarters of 2014, respectively, and interest expense on our revolving debt facility of
$0.3 million in each of the second, third and fourth quarters of 2014 reduced net income. Net income
was also negatively impacted by $0.6 million in deferred share unit (“DSU”) and $0.4 million in cash-
settled restricted share unit (“CRSU”) compensation costs, primarily attributable to mark-to-market
related liabilities to reflect the 25% appreciation in the value of our common shares in the fourth quarter
of 2014. A deferred tax recovery of $2.8 million in the UK and Canada favourably contributed to net
income in the fourth quarter of 2014.
Our weighted average shares outstanding has increased over the three year comparative period as a
result of the public offering of common shares completed on July 2, 2014, common shares issued in
relation to the acquisition of Customs Info and common shares issued pursuant to periodic employee
stock option exercises.
LIQUIDITY AND CAPITAL RESOURCES
Cash We had $37.2 million and $118.1 million in cash as at January 31, 2016 and January 31, 2015,
respectively. All cash was held in interest-bearing bank accounts, primarily with major Canadian, US and
European banks.
Debt facility. As of January 31, 2016, all amounts previously borrowed under the revolving debt facility
have been repaid and the balance of the $77.0 million facility remains available for use. We are in
compliance with the covenants of the revolving debt facility as of January 31, 2016. On May 28 2014,
we amended our revolving debt facility, increasing the borrowing limit from $50.0 million to $77.0
million. The amended facility is comprised of a $75.0 million revolving facility, with drawn amounts to be
repaid in equal quarterly installments over a period of five years from the advance date, and a $2.0
million revolving facility, with no fixed repayment date on drawn amounts prior to the end of the term.
Borrowings under the credit agreement are secured by a first charge over substantially all of our assets.
Depending on the type of advance under the available facilities, interest will be charged on advances at
a rate of either i) Canada prime rate or US base rate plus 0% to 1.5%; or ii) LIBOR plus 1.5% to 3%.
Undrawn amounts are charged a standby fee of between 0.3% and 0.5%. Interest is payable monthly in
arrears under both facilities. Standby fees are payable quarterly in arrears. The revolving debt facility
contains certain customary representations, warranties and guarantees, and covenants.
On March 2, 2016, Descartes amended its $77.0 million revolving debt facility with a new senior secured
credit facility (“Credit Facility”). The Credit Facility consists of a $150.0 million revolving operating credit
facility to be available for general corporate purposes including the financing of ongoing working capital
needs and acquisitions. The Credit Facility also provides for an additional $7.5 million available to
support foreign exchange and interest rate hedging. The Credit Facility has a five year maturity with no
fixed repayment dates prior to the end of the five year term. Borrowings under the facility are secured
by a first charge over substantially all of Descartes’ assets. Depending on the type of advance, interest
rates under the revolving operating credit facility are based on the Canada or US prime rate, Bankers’
Acceptance (BA) or London Interbank Offered Rate (LIBOR) plus an additional 0 to 200 basis points
based on the ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization,
as defined in the credit agreement. A standby fee of between 20 to 28 basis points will be charged on all
undrawn amounts. The Credit Facility contains certain customary representations, warranties and
guarantees, and covenants.
Short-form base shelf prospectus. On April 16, 2014, we filed a final short-form base shelf
prospectus, allowing us to offer and issue the following securities: (i) common shares; (ii) preferred
18
shares; (iii) senior or subordinated unsecured debt securities; (iv) subscription receipts; (v) warrants;
and (vi) securities comprised of more than one of the common shares, preferred shares, debt securities,
subscription receipts and/ or warrants offered together as a unit. These securities may be offered
separately or together, in separate series, in amounts, at prices and on terms to be set forth in one or
more shelf prospectus supplements. The aggregate initial offering price of securities that may be sold by
us (or certain of our current or future shareholders) pursuant to our base shelf prospectus during the
25-month period that our base shelf prospectus, including any amendments thereto, remains valid is
limited to $250 million. As noted below, securities in the amount of $147.5 million were subsequently
issued under our base shelf prospectus, leaving a remaining limit of $102.5 million available to be issued
under our base shelf prospectus. This base shelf prospectus expires on May 15, 2016.
On July 2, 2014, we completed a public offering of common shares in the United States and Canada at a
price of $13.50 per common share pursuant to the short-form base shelf prospectus and related
prospectus supplement filed in connection with the offering. The total offering of 10,925,000 common
shares included the exercise in full by the underwriters of the 15% overallotment option for aggregate
gross proceeds to Descartes of $147.5 million. Net proceeds to Descartes were approximately $142.1
million once expenses associated with the offering were deducted inclusive of the related deferred tax
benefit related to share issuance costs. Excluding share issuance costs payable and the deferred tax
benefit on issuance costs, the net cash proceeds to Descartes were approximately $140.7 million.
Working capital. As at January 31, 2016, our working capital (current assets less current liabilities)
was $35.4 million. Current assets primarily include $37.2 million of cash, $25.6 million of current trade
receivables and $4.7 million of prepaid assets. Current liabilities primarily include $16.8 million of
accrued liabilities, $16.6 million of deferred revenue and $4.5 million of accounts payable. Our working
capital has decreased since January 31, 2015 by $81.8 million, primarily due to cash used in the
acquisitions of BearWare, MK Data and Oz, partially offset by cash generated from operations during the
period.
Historically, we have financed our operations and met our capital expenditure requirements primarily
through cash flows provided from operations, issuances of common shares and proceeds from debt. We
anticipate that, considering the above, we have sufficient liquidity to fund our current cash requirements
for working capital, contractual commitments, capital expenditures and other operating needs. We also
believe that we have the ability to generate sufficient amounts of cash in the long term to meet planned
growth targets and to fund strategic transactions. Should additional future financing be undertaken, the
proceeds from any such transaction could be utilized to fund strategic transactions or for general
corporate purposes. We expect, from time to time, to continue to consider select strategic transactions
to create value and improve performance, which may include acquisitions, dispositions, restructurings,
joint ventures and partnerships, and we may undertake further financing transactions, including draws
on our revolving debt facility or equity offerings, in connection with any such potential strategic
transaction.
With respect to earnings of our non-Canadian subsidiaries, our intention is that these earnings will be
reinvested in each subsidiary indefinitely. Of the $37.2 million of cash as at January 31, 2016, $34.6
million was held by our foreign subsidiaries, most significantly in the United States with lesser amounts
held in other countries in the EMEA and Asia Pacific regions. To date, we have not encountered
significant legal or practical restrictions on the abilities of our subsidiaries to repatriate money to
Canada, even if such restrictions may exist in respect of certain foreign jurisdictions where we have
subsidiaries. In the future, if we elect to repatriate the unremitted earnings of our foreign subsidiaries in
the form of dividends, or if the shares of the foreign subsidiaries are sold or transferred, then we could
be subject to additional Canadian or foreign income taxes, net of the impact of any available foreign tax
credits, which would result in a higher effective tax rate. However, since we currently anticipate
investing outside of Canada, it is our current intent to permanently reinvest unremitted earnings in our
foreign subsidiaries.
19
The table set forth below provides a summary of cash flows for the periods indicated in millions of
dollars:
Year ended
Cash provided by operating activities
Purchase of marketable securities
Additions to property and equipment
Acquisition of subsidiaries, net of cash acquired
Proceeds from borrowing on debt facility
Payment of debt issuance costs
Repayments of debt
Issuance of common shares, net of issuance costs
Settlement of stock options
Effect of foreign exchange rate on cash
Net change in cash
Cash, beginning of period
Cash, end of period
January 31, January 31, January 31,
2014
42.6
-
(2.4)
(58.7)
46.3
(0.7)
(3.7)
3.6
(1.4)
2016
54.2
(4.7)
(4.3)
(120.9)
-
-
-
0.2
(2.6)
2015
49.5
-
(2.7)
(82.2)
20.0
(0.4)
(63.3)
140.7
(0.4)
(2.8)
(80.9)
118.1
37.2
(5.8)
55.4
62.7
118.1
(0.5)
25.1
37.6
62.7
Cash provided by operating activities was $54.2 million, $49.5 million and $42.6 million for 2016,
2015 and 2014, respectively. For 2016, the $54.2 million of cash provided by operating activities
resulted from $20.6 million of net income, plus adjustments for $36.5 million of non-cash items included
in net income and less $2.9 million of cash used from changes in our operating assets and liabilities. For
2015, the $49.5 million of cash provided by operating activities resulted from $15.1 million of net
income, plus adjustments for $30.5 million of non-cash items included in net income and plus $3.9
million of cash generated from changes in our operating assets and liabilities. For 2014, the $42.6
million of cash provided by operating activities resulted from $9.6 million of net income, plus
adjustments for $26.3 million of non-cash items included in net income and plus $6.7 million of cash
generated from changes in our operating assets and liabilities. Cash provided by operating activities
increased in 2016 compared to 2015, primarily due to net income adjusted for non-cash expenses which
increased $11.5 million.
Cash provided by operating activities increased in 2015 compared to 2014, primarily due to net income
adjusted for non-cash expenses which increased $9.7 million.
Purchase of marketable securities was $4.7 million, nil and nil for 2016, 2015 and 2014,
respectively.
Additions to property and equipment were $4.3 million, $2.7 million and $2.4 million in 2016, 2015
and 2014, respectively. Additions to property and equipment were greater in 2016 as compared to 2015
and 2014 as a result of additional investments in computing equipment and software to support our
network and build out our infrastructure.
Acquisition of subsidiaries, net of cash acquired was $120.9 million, $82.2 million and $58.7
million in 2016, 2015 and 2014, respectively. In 2016, the $120.9 million was related to the acquisitions
of MK Data, BearWare and Oz. In 2015, the $82.2 million was related to the acquisitions of Computer
Management, Customs Info, Airclic, e-customs and Pentant. In 2014, the $58.7 million was related to
the acquisitions of KSD, Compudata and Impatex.
Proceeds from borrowing on debt facility of nil, $20.0 million and $46.3 million in 2016, 2015 and
2014, respectively, were a result of borrowings on our revolving debt facility to finance our 2015
acquisition of Customs Info and 2014 acquisitions of KSD, Compudata and Impatex.
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Payment of debt issuance costs of nil, $0.4 million and $0.7 million in 2016, 2015 and 2014,
respectively, relate to costs paid in establishing and amending the terms of the revolving debt facility.
Repayments of debt of nil, $63.3 million and $3.7 million in 2016, 2015 and 2014, respectively, relate
to principal repayments on our revolving debt facility and repayment of debt acquired from the
acquisitions of KSD and Customs Info.
Issuance of common shares, net of issuance costs of $0.2 million, $140.7 million and $3.6 million
in 2016, 2015 and 2014, respectively. The $0.2 million in 2016 was a result of the exercise of employee
stock options. The increase in 2015 was primarily a result of the public share offering. The $3.7 million
in 2014 was a result of the exercise of employee stock options.
Settlement of stock options of $2.6 million, $0.4 million and $1.4 million in 2016, 2015 and 2014,
respectively, was a result of the settlement of tandem stock appreciation rights exercised upon the
surrender of stock options.
COMMITMENTS, CONTINGENCIES AND GUARANTEES
Commitments
To facilitate a better understanding of our commitments, the following information is provided (in
millions of dollars) in respect of our operating obligations as of January 31, 2016:
Less than
1 year
1-3 years 4-5 years More than
5 years
Operating lease obligations
Capital lease obligations
Total
4.2
0.1
4.3
4.7
0.1
4.8
0.9
-
0.9
-
-
-
Total
9.8
0.2
10.0
Lease Obligations
We are committed under non-cancelable operating leases for business premises, computer equipment
and vehicles with terms expiring at various dates through 2021. We are also committed under non-
cancelable capital leases for computer equipment expiring at various dates through 2018. The future
minimum amounts payable under these lease agreements are presented in the table above.
Other Obligations
Deferred Share Unit and Restricted Share Unit Plans
As discussed in the “Trends / Business Outlook” section later in this MD&A and in Note 2 to our
consolidated financial statements, we maintain DSU and CRSU plans for our directors and employees.
Any payments made pursuant to these plans are settled in cash. For DSUs and CRSUs, the units vest
over time and the liability recognized at any given consolidated balance sheet date reflects only those
units vested at that date that have not yet been settled in cash. As such, we had an unrecognized
aggregate amount for the unvested CRSUs of $1.0 million at January 31, 2016. As at January 31, 2016
there were no unvested DSUs. The ultimate liability for any payment of DSUs and CRSUs is dependent
on the trading price of our common shares.
Contingencies
We are subject to a variety of other claims and suits that arise from time to time in the ordinary course
of our business. The consequences of these matters are not presently determinable but, in the opinion
of management after consulting with legal counsel, the ultimate aggregate liability is not currently
expected to have a material effect on our results of operations or financial position.
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Product Warranties
In the normal course of operations, we provide our customers with product warranties relating to the
performance of our hardware, software and network services. To date, we have not encountered
material costs as a result of such obligations and have not accrued any liabilities related to such
obligations in our consolidated financial statements.
Business combination agreements
In respect of our acquisition of e-customs in the fourth quarter of 2015, up to approximately $1.2 million
(GBP 0.8 million) in cash may have become payable had certain revenue performance targets been met
by e-customs during 2016. No amounts are accrued related to this contingent consideration as at
January 31, 2016.
In respect of our acquisition of Pentant in the fourth quarter of 2015, up to approximately $0.4 million
(GBP 0.3 million) in cash may have become payable had certain revenue performance targets been met
by Pentant during 2016. No amounts are accrued related to this contingent consideration as at January
31, 2016.
Guarantees
In the normal course of business we enter into a variety of agreements that may contain features that
meet the definition of a guarantee under ASC Topic 460, “Guarantees”. The following lists our significant
guarantees:
Intellectual property indemnification obligations
We provide indemnifications of varying scope to our customers against claims of intellectual property
infringement made by third parties arising from the use of our products. In the event of such a claim,
we are generally obligated to defend our customers against the claim and we are liable to pay damages
and costs assessed against our customers that are payable as part of a final judgment or settlement.
These intellectual property infringement indemnification clauses are not generally subject to any dollar
limits and remain in force for the term of our license and services agreements with our customers,
where license terms are typically perpetual. To date, we have not encountered material costs as a result
of such indemnifications.
Other indemnification agreements
In the normal course of operations, we enter into various agreements that provide general indemnities.
These indemnities typically arise in connection with purchases and sales of assets, securities offerings or
buy-backs, service contracts, administration of employee benefit plans, retention of officers and
directors, membership agreements, customer financing transactions, and leasing transactions. In
addition, our corporate by-laws provide for the indemnification of our directors and officers. Each of
these indemnities requires us, in certain circumstances, to compensate the counterparties for various
costs resulting from breaches of representations or obligations under such arrangements, or as a result
of third party claims that may be suffered by the counterparty as a consequence of the transaction. We
believe that the likelihood that we could incur significant liability under these obligations is remote.
Historically, we have not made any significant payments under such indemnities.
In evaluating estimated losses for the guarantees or indemnities described above, we consider such
factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. We are unable to make a reasonable estimate of the maximum potential
amount payable under such guarantees or indemnities as many of these arrangements do not specify a
maximum potential dollar exposure or time limitation. The amount also depends on the outcome of
future events and conditions, which cannot be predicted. Given the foregoing, to date, we have not
accrued any liability in our financial statements for the guarantees or indemnities described above.
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OUTSTANDING SHARE DATA
We have an unlimited number of common shares authorized for issuance. As of March 3, 2016, we had
75,761,184 common shares issued and outstanding.
On July 2, 2014, we completed a public offering of common shares in the United States and Canada at a
price of $13.50 per common share pursuant to the short-form base shelf prospectus and related
prospectus supplement filed in connection with the offering. The total offering of 10,925,000 common
shares included the exercise in full by the underwriters of the 15% over-allotment option, for aggregate
gross proceeds to Descartes of $147.5 million. Net proceeds to Descartes were approximately $142.1
million once expenses associated with the offering were deducted inclusive of the related deferred tax
benefit related to share issuance costs. Excluding share issuance costs payable and the deferred tax
benefit on issuance costs, the net cash proceeds to Descartes were approximately $140.7 million.
As of March 3, 2016, there were 468,889 options issued and outstanding, and 217,264 remaining
available for grant under all stock option plans. As of March 3, 2016, there were 253,537 performance
share units (“PSUs”) and 224,779 restricted share units (“RSUs”) issued and outstanding, and 354,066
remaining available for grant under all performance and restricted share unit plans.
On November 30, 2004, we announced that our board of directors had adopted a shareholder rights plan
(the “Rights Plan”) to ensure the fair treatment of shareholders in connection with any take-over offer,
and to provide our board of directors and shareholders with additional time to fully consider any
unsolicited take-over bid. We did not adopt the Rights Plan in response to any specific proposal to
acquire control of the Company. The Rights Plan was approved by the TSX and was originally approved
by our shareholders on May 18, 2005. The Rights Plan took effect as of November 29, 2004. On May 29,
2008, our shareholders approved certain amendments to the Rights Plan and approved the Rights Plan
continuing in effect. At our annual shareholders meeting held on May 29, 2014, our shareholders
approved certain amendments to the Rights Plan and approved the Rights Plan continuing in effect. The
Rights Plan will expire at the termination of our annual shareholders’ meeting in calendar year 2017
unless its continued existence is ratified by the shareholders before such expiration. We understand that
the Rights Plan is similar to plans adopted by other Canadian companies and approved by their
shareholders.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP.
Preparing financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are
affected by management’s application of accounting policies. Estimates are deemed critical when a
different estimate could have reasonably been used or where changes in the estimates are reasonably
likely to occur from period to period and would materially impact our financial condition or results of
operations. Our significant accounting policies are discussed in Note 2 to the audited consolidated
financial statements for 2016 included in our 2016 Annual Report.
Our management has discussed the development, selection and application of our critical accounting
policies with the audit committee of the board of directors.
The following discusses the critical accounting estimates and assumptions that management has made
under these policies and how they affect the amounts reported in the fiscal 2016 consolidated financial
statements:
23
Revenue recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or
realizable and earned when there exists persuasive evidence of an arrangement, the product has been
delivered or the services have been provided to the customer, the sales price is fixed or determinable
and collectability is reasonably assured.
In recognizing revenue, we make estimates and assumptions on factors such as the probability of collection
of the receivable from the customer, the amount of revenue to allocate to individual elements in a multiple
element arrangement, the selling price and other matters. We make these estimates and assumptions
using our past experience, taking into account any other current information that may be relevant. These
estimates and assumptions may differ from the actual outcome for a given customer which could impact
operating results in a future period.
Impairment of long-lived assets
We test long-lived asset or asset groups, such as property and equipment and finite life intangible
assets, for recoverability when events or changes in circumstances indicate that there may be
impairment. An impairment loss is recognized when the estimate of undiscounted future cash flows
generated by such asset or asset groups is less than the carrying amount. Measurement of the
impairment loss is based on the present value of the expected future cash flows. Our impairment
analysis contains estimates due to the inherent uncertainty relating to forecasting long-term estimated
cash flows and determining the ultimate useful lives of asset or asset groups. Actual results will differ,
which could materially impact our impairment assessment.
Goodwill
We test for impairment of goodwill at least annually on October 31st of each year and at any other time
if any event occurs or circumstances change that would more likely than not reduce our fair value below
our carrying amount. Our operations are analyzed by management and our chief operating decision
maker as being part of a single industry segment providing logistics technology solutions. Accordingly,
our goodwill impairment assessment is based on the allocation of goodwill to a single reporting unit.
We will perform further quarterly analysis of whether any event has occurred that would more likely
than not reduce our fair value below our carrying amounts and, if so, we will perform a goodwill
impairment test between the annual date. Any future impairment adjustment will be recognized as an
expense in the period that the adjustment is identified.
Application of the goodwill impairment test requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, assessing
qualitative factors and determining the fair value of each reporting unit. Significant judgments are
required to estimate the fair value of reporting units and include estimating future cash flows,
determining appropriate discount rates and other assumptions. Changes in these estimates and
assumptions could materially affect the determination of fair value and/or goodwill impairment for each
reporting unit.
Stock-based compensation plans
Stock Options
We maintain stock option plans for directors, officers, employees and other service providers. Options to
purchase our common shares are granted at an exercise price equal to the fair market value of our
common shares as of the date of grant. This fair market value is determined using the closing price of
our common shares on the TSX on the day immediately preceding the date of the grant.
Employee stock options generally vest over a five-year period starting from the grant date and expire
seven years from the grant date. Directors’ and officers’ stock options generally have quarterly vesting
over a three- to five-year period. We issue new shares from treasury upon the exercise of a stock
option.
24
The fair value of employee stock option grants that are ultimately expected to vest are amortized to
expense in our consolidated statement of operations based on the straight-line attribution method. The
fair value of stock option grants is calculated using the Black-Scholes Merton option-pricing model.
Expected volatility is based on historical volatility of our common stock and other factors. The risk-free
interest rates are based on Government of Canada average bond yields for a period consistent with the
expected life of the option in effect at the time of the grant. The expected option life is based on the
historical life of our granted options and other factors.
Performance & Restricted Share Units
We maintain a performance and restricted share unit plan pursuant to which certain of our officers are
eligible to receive grants of performance share units and restricted share units.
PSUs vest at the end of a three-year performance period. The ultimate number of PSUs that vest is
based on the total shareholder return (“TSR”) of our Company relative to the TSR of companies
comprising a peer index group. TSR is calculated based on the weighted-average closing price of shares
for the five trading days preceding the beginning and end of the performance period. The fair value of
PSUs is expensed to stock-based compensation expense over the vesting period. PSUs expire ten years
from the grant date. New shares are issued from treasury upon the redemption of a PSU.
PSUs are measured at fair value estimated using a Monte Carlo Simulation approach. Expected volatility
is based on historical volatility of our common stock and other factors. The risk-free interest rates are
based on the Government of Canada average bond yields for a period consistent with the expected life
of the PSUs at the time of the grant. The expected PSU life is based on the historical life of our stock
options and other factors.
RSUs vest annually over a three-year period starting from the grant date and expire ten years from the
grant date. We issue new shares from treasury upon the redemption of an RSU.
RSUs are measured at fair value based on the closing price of our common shares for the day preceding
the date of the grant and will be expensed to stock-based compensation expense over the vesting
period.
Deferred Share Unit Plan
Our board of directors adopted a deferred share unit plan effective as of June 28, 2004, pursuant to
which non-employee directors are eligible to receive grants of deferred share units, each of which has an
initial value equal to the weighted-average closing price of our common shares for the five trading days
preceding the grant date. The plan allows each director to choose to receive, in the form of DSUs, all,
none or a percentage of the eligible director’s fees which would otherwise be payable in cash. If a
director has invested less than the minimum amount of equity in Descartes, as prescribed from time to
time by the board of directors, then the director must take at least 50% of the base annual fee for
serving as a director in the form of DSUs. Each DSU fully vests upon award but is distributed only when
the director ceases to be a member of the board of directors. Vested units are settled in cash based on
our common share price when conversion takes place. Fair value of the liability is based on the closing
price of our common shares at the balance sheet date.
Cash-Settled Restricted Share Unit Plan
Our board of directors adopted a cash-settled restricted share unit plan effective as of May 23, 2007,
pursuant to which certain of our employees and outside directors are eligible to receive grants of CRSUs,
each of which has an initial value equal to the weighted-average closing price of our common shares for
the five trading days preceding the date of the grant. The CRSUs generally vest based on continued
employment and have annual vesting over three- to five-year periods. Vested units are settled in cash
based on our common share price when conversion takes place, which is within 30 days following a
vesting date and in any event prior to December 31st of the calendar year in which a vesting date
occurs. Fair value of the liability is based on the closing price of our common shares at the balance sheet
date.
25
Income Taxes
We have provided for income taxes based on information that is currently available to us. Tax filings are
subject to audits, which could materially change the amount of deferred income tax assets and
liabilities. We record deferred tax assets on our consolidated balance sheet for tax benefits that we
currently expect to realize in future periods. Over recent years, we have determined that there was
sufficient positive evidence such that it was more likely than not that we would utilize all or a portion of
deferred tax assets in certain jurisdictions, to offset taxable income in future periods. This positive
evidence included that we have earned cumulative income, after permanent differences, in each of these
jurisdictions in at least the current and two preceding tax years. As such, over recent years, we have
reduced our valuation allowances by amounts which represent the amount of tax loss carry forwards
that we project will be used to offset taxable income in these jurisdictions over the foreseeable future. In
making the projection for the period, we made certain assumptions, including the following: (i) that
there will be continued customer migration from technology platforms owned by foreign jurisdictions to
a technology platform owned by another entity in our corporate group; and (ii) that tax rates in these
jurisdictions will be consistent over the period of projection. Any further change to increase or decrease
the valuation allowance for the deferred tax assets would result in an income tax expense or income tax
recovery, respectively, on the consolidated statements of operations.
Business Combinations
In connection with business acquisitions that we have completed, we identify and estimate the fair value
of net assets acquired, including certain identifiable intangible assets (other than goodwill) and liabilities
assumed in the acquisitions. Any excess of the purchase price over the estimated fair value of the net
assets acquired is assigned to goodwill. Intangible assets include customer agreements and
relationships, non-compete covenants, existing technologies and trade names. Our initial allocation of
purchase price is generally preliminary in nature and may not be final for up to one year from the date
of acquisition. Changes to the estimates and assumptions used in determining our purchase price
allocation may result in material differences depending on the size of the acquisition completed.
CHANGE IN / INITIAL ADOPTION OF ACCOUNTING POLICIES
Recently adopted accounting pronouncements
In September 2015, the FASB issued Accounting Standards Update 2015-16, “Business Combinations
(Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU
2015-16 provides guidance to more clearly articulate the accounting requirements for measurement-
period adjustments related to a business combination. ASU 2015-16 is effective for annual periods, and
interim periods within those annual periods, beginning after December 15, 2015, which will be our fiscal
year beginning February 1, 2016. Early adoption is permitted and the Company adopted ASU 2015-16 in
the third quarter of fiscal 2016. The adoption of this standard did not have a material impact on our
results of operations or disclosures.
In November 2015, the FASB issued Accounting Standards Update 2015-17, “Income Taxes (Topic 740):
Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). ASU 2015-17 requires entities with a
classified balance sheet to present all deferred tax assets and liabilities as noncurrent. ASU 2015-17 is
effective for annual periods, and interim periods within those annual periods, beginning after December
15, 2016, which will be our fiscal year beginning February 1, 2017. Early adoption at the beginning of an
interim or annual period is permitted. Entities can adopt this standard either prospectively or
retrospectively. The Company adopted ASU 2015-17 in the fourth quarter of fiscal 2016 on a prospective
basis. As a result, we have presented all deferred tax assets and liabilities as noncurrent in our
consolidated balance sheet as of January 31, 2016, but have not reclassified current deferred tax assets
and liabilities in our consolidated balance sheet as of January 31, 2015. There was no impact on our
results of operations as a result of the adoption of ASU 2015-17.
26
Recently issued accounting pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with
Customers” (“ASU 2014-09”). This update supersedes the revenue recognition requirements in ASC
Topic 605, "Revenue Recognition" and nearly all other existing revenue recognition guidance under US
GAAP. The core principal of ASU 2014-09 is to recognize revenues when promised goods or services are
transferred to customers in an amount that reflects the consideration that is expected to be received for
those goods or services. In August 2015, the FASB issued Accounting Standards Update 2015-14 which
defers the effective date of ASU 2014-09 for one year. ASU 2014-09 is now effective for annual periods,
and interim periods within those annual periods, beginning after December 15, 2017, which will be our
fiscal year beginning February 1, 2018. Early adoption as of the original effective date of ASU 2014-09 is
permitted. When applying ASU 2014-09 we can either apply the amendments: (i) retrospectively to each
prior reporting period presented with the option to elect certain practical expedients as defined within
ASU 2014-09 or (ii) retrospectively with the cumulative effect of initially applying ASU 2014-09
recognized at the date of initial application and providing certain additional disclosures as defined within
ASU 2014-09. We are currently evaluating the effect that the pending adoption of ASU 2014-09 will
have on our results of operations, financial position and disclosures. Although it is expected to have a
impact on our revenue recognition policies and disclosures, we have not yet selected a transition method
nor have we determined when we will adopt the standard and the effect of the standard on our ongoing
financial reporting.
In August 2014, the FASB issued Accounting Standards Update 2014-15, “Presentation of Financial
Statements – Going Concern (Subtopic 2015-40)” (“ASU 2014-15”). ASU 2014-15 requires an entity’s
management to evaluate whether there are conditions or events that raise substantial doubt about the
entity’s ability to continue as a going concern within one year after the date that the financial
statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016,
and for annual periods and interim periods thereafter, which will be our fiscal year beginning February 1,
2016. Early adoption is permitted. The Company will adopt this guidance in the fourth quarter of fiscal
2017. The adoption of this amendment is not expected to have a material impact on our results of
operations or disclosures.
In April 2015, the FASB issued Accounting Standards Update 2015-03, “Interest – Imputation of Interest
(Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03
simplifies the presentation of debt issuance costs. ASU 2015-03 is effective for annual periods, and
interim periods within those annual periods, beginning after December 15, 2015, which will be our fiscal
year beginning February 1, 2016. Early adoption is permitted. The Company will adopt this guidance in
the first quarter of fiscal 2017. The adoption of this amendment is not expected to have a material
impact on our results of operations or disclosures.
In April 2015, the FASB issued Accounting Standards Update 2015-05, “Intangibles – Goodwill and Other
– Internal Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement” (“ASU 2015-05”). ASU 2015-05 provides guidance about whether a cloud computing
arrangement includes a software license. ASU 2015-05 is effective for annual periods, and interim
periods within those annual periods, beginning after December 15, 2015, which will be our fiscal year
beginning February 1, 2016. Early adoption is permitted. The Company will adopt this guidance in the
first quarter of fiscal 2017. The adoption of this amendment is not expected to have a material impact
on our results of operations or disclosures.
In July 2015, the FASB issued Accounting Standards Update 2015-11, “Inventory (Topic 330):
Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 provides guidance to more
clearly articulate the requirements for the measurement and disclosure of inventory. ASU 2015-11 is
effective for annual periods, and interim periods within those annual periods, beginning after December
15, 2016, which will be our fiscal year beginning February 1, 2017. The Company will adopt this
guidance in the first quarter of fiscal 2018. The adoption of this amendment is not expected to have a
material impact on our results of operations or disclosures.
27
In January 2016, the FASB issued Accounting Standards Update 2016-01, “Financial Instruments—
Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”
(“ASU 2016-01”). ASU 2016-01 supersedes the guidance to classify equity securities with readily
determinable fair values into different categories reducing the number of items that are recognized in
other comprehensive income as well as simplifying the impairment assessment of equity investments
without readily determinable fair values. ASU 2016-01 is effective for annual periods, and interim
periods within those annual periods, beginning after December 15, 2017, which will be our fiscal year
beginning February 1, 2018. The Company will adopt this guidance in the first quarter of fiscal 2019 and
is currently evaluating the impact that the adoption will have on its results of operations, financial
position and disclosures.
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases (Topic 842)” (“ASU
2016-02”). ASU 2016-02 supersedes the lease guidance in ASC Topic 840, “Leases” and requires the
recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases.
ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning
after December 15, 2018, which will be our fiscal year beginning February 1, 2019. The Company will
adopt this guidance in the first quarter of fiscal 2020 and is currently evaluating the impact that the
adoption will have on its results of operations, financial position and disclosures.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, management evaluated our disclosure controls and procedures (as
defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings)
as of January 31, 2016. Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that the design and operation of our disclosure controls and procedures were effective.
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, management assessed the effectiveness of our internal control over
financial reporting (as defined in National Instrument 52-109 Certification of Disclosure in Issuers’
Annual and Interim Filings) as of January 31, 2016, based on criteria established in “Internal Control –
Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway
Commission”. Based on the assessment, our Chief Executive Officer and Chief Financial Officer
concluded that, as of January 31, 2016, the design and operation of our internal control over financial
reporting was effective.
During the period beginning on November 1, 2015 and ended on January 31, 2016, no changes were
made to the Company’s internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
TRENDS / BUSINESS OUTLOOK
This section discusses our outlook for fiscal 2017 and in general as of the date of this MD&A, and
contains forward-looking statements.
Our business may be impacted from time to time by the general cyclical and seasonal nature of
particular modes of transportation and the freight market in general, as well as the industries that such
markets serve. Factors which may create cyclical fluctuations in such modes of transportation, or the
freight market in general, include: legal and regulatory requirements; timing of contract renewals
between our customers and their own customers; seasonal-based tariffs; vacation periods applicable to
28
particular shipping or receiving nations; weather-related events or natural disasters that impact shipping
in particular geographies; availability of credit to support shipping operations; economic downturns; and
amendments to international trade agreements. As many of our services are sold on a “per shipment”
basis, we anticipate that our business will continue to reflect the general cyclical and seasonal nature of
shipment volumes with our third quarter being the strongest quarter for shipment volumes, compared to
our first quarter being the weakest quarter for shipment volumes. Historically, in our second fiscal
quarter, we have seen an increase in ocean services revenues as ocean carriers are in the midst of their
customer contract negotiation period.
In 2016, our services revenues comprised 95% of our total revenues, with the balance being license
revenues. We expect that our focus in 2017 will remain on generating services revenues, primarily by
promoting the use of our GLN (including customs compliance services) and the migration of customers
using our legacy license-based products to our services-based architecture. We anticipate maintaining
the flexibility to license our products to those customers who prefer to buy the products in that fashion
and the composition of our revenues in any one quarter between services revenues and license revenues
will be impacted by the buying preferences of our customers.
We have significant contracts with our license customers for ongoing support and maintenance, as well
as significant service contracts which provide us with recurring services revenues. After their initial term,
our service contracts are generally renewable at a customer’s option, and there are generally no
mandatory payment obligations or obligations to license additional software or subscribe for additional
services. For 2017, based on our historic experience, we anticipate that over a one-year period we may
lose approximately 5% to 7% of our aggregate annualized recurring revenues in the ordinary course.
This includes the potential further loss of recurring revenue from our contract to operate the U.S.
Census Bureau’s Automated Export System, AESDirect, which we currently expect will continue to
decline as Census transitions users of the AESDirect system to a new system operated by U.S. Customs
& Border Protection. While the revenue from the Census contract currently represents less than 2% of
our aggregate revenues, there can be no assurance that we will be able to replace it or any other lost
revenue with new sources of recurring revenue from new customer relationships or from existing
customers.
We internally measure and manage our “baseline calibration,” a non-GAAP financial measure, which we
define as the difference between our “baseline revenues” and “baseline operating expenses”. We define
our “baseline revenues,” a non-GAAP financial measure, as our visible, recurring and contracted
revenues. Baseline revenues are not a projection of anticipated total revenues for a period as they
exclude any anticipated or expected new sales for a period beyond the date that the baseline revenues
are measured. We define our “baseline operating expenses,” a non-GAAP financial measure, as our total
expenses less interest, taxes, depreciation and amortization, stock-based compensation (for which we
include related costs and taxes), acquisition-related costs and restructuring charges. Baseline operating
expenses are not a projection of anticipated total expenses for a period as they exclude any expenses
associated with anticipated or expected new sales for a period beyond the date that the baseline
expenses are measured. Our baseline calibration is not a projection of net income for a period as
determined in accordance with GAAP, or adjusted earnings before interest, taxes, depreciation and
amortization for a period as it excludes anticipated or expected new sales for a period beyond the date
that the baseline calibration is measured, excludes any costs of goods sold or other expenses associated
with such new sales, and excludes the expenses identified as excluded in the definition of “baseline
operating expenses,” above. We calculate and disclose “baseline revenues,” “baseline operating
expenses” and “baseline calibration” because management uses these metrics in determining its planned
levels of expenditures for a period. These metrics are estimates and not projections, nor actual financial
results, and are not indicative of current or future performance. These metrics do not have a
standardized meaning prescribed by GAAP and are unlikely to be comparable to similarly-titled metrics
used by other companies and are not a replacement or proxy for any GAAP measure. At February 1,
2016, using foreign exchange rates of $0.72 to CAD $1.00, $1.12 to EUR 1.00 and $1.45 to £1.00, we
estimated that our baseline revenues for the first quarter of 2017 will be approximately $46.1 million
and our baseline operating expenses will be approximately $32.9 million. We consider this to be baseline
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calibration of approximately $13.2 million for the first quarter of 2017, or approximately 29% of our
baseline revenues as at February 1, 2016.
We estimate that aggregate amortization expense for existing intangible assets will be $26.1 million for
2017, $21.3 million for 2018, $19.3 million for 2019, $18.6 million for 2020, $15.2 million for 2021 and
$33.1 million thereafter, assuming that no impairment of existing intangible assets occurs in the interim
and subject to fluctuations in foreign exchange rates.
We anticipate that acquisition costs related to retention bonuses in 2017 will be approximately $1.5
million, conditional on future services rendered by employees.
We anticipate that stock-based compensation expense in 2017 will be approximately $1.3 million to $1.7
million, subject to any necessary adjustments resulting from reconciling estimated stock-based
compensation forfeitures to actual stock-based compensation forfeitures.
We performed our annual goodwill impairment tests in accordance with ASC Topic 350, “Intangibles –
Goodwill and Other” (“ASC Topic 350”) on October 31, 2015 and determined that there was no evidence
of impairment. We are currently scheduled to perform our next annual impairment test during the third
quarter of fiscal 2017. We will continue to perform quarterly analyses of whether any event has occurred
that would more likely than not reduce our enterprise value below our carrying amounts and, if so, we
will perform a goodwill impairment test between the annual dates. The likelihood of any future
impairment increases if our public market capitalization is adversely impacted by global economic,
capital market or other conditions for a sustained period of time. Any future impairment adjustment will
be recognized as an expense in the period that such adjustment is identified.
In 2016, capital expenditures were $4.3 million or 2% of revenues, as we continue to invest in computer
equipment and software to support our network and build out our infrastructure. We anticipate that we
will incur approximately $6.0 million to $7.0 million in capital expenditures in 2017 primarily related to
investments in our network and security infrastructure.
We conduct business in a variety of foreign currencies and, as a result, our foreign operations are
subject to foreign exchange fluctuations. Our businesses operate in their local currency environment and
use their local currency as their functional currency. Assets and liabilities of foreign operations are
translated into US dollars at the exchange rate in effect at the balance sheet date. Revenues and
expenses of foreign operations are translated using daily exchange rates. Translation adjustments
resulting from this process are accumulated in other comprehensive income (loss) as a separate
component of shareholders’ equity. Transactions incurred in currencies other than the functional
currency are converted to the functional currency at the transaction date. All foreign currency
transaction gains and losses are included in net income. Some of our cash is held in foreign currencies.
We currently have no specific hedging program in place to address fluctuations in international currency
exchange rates. We can make no accurate prediction of what will happen with international currency
exchange rates going forward. However, if the US dollar was to weaken in comparison to foreign
currencies, then we anticipate this will increase the expenses of our business and have a negative
impact on our results of operations. By way of illustration, 60% of our revenues in 2016 were in US
dollars, 16% in euro, 8% in British pound sterling, 7% in Canadian dollars, and the balance in mixed
currencies, while 43% of our operating expenses were in US dollars, 18% in euro, 7% in British pound
sterling, 22% in Canadian dollars, and the balance in mixed currencies.
As at March 3, 2016, we had 188,766 outstanding DSUs and 85,515 outstanding CRSUs. CRSUs are
notional share units granted to directors, officers and employees that, when vested, are settled in cash
by Descartes using the fair market value of Descartes’ common shares at the vesting date. DSUs, which
have only been granted to non-executive directors, vest upon award but are only paid after the
completion of the applicable director’s service to Descartes. CRSUs generally vest and are paid over a
period of three- to five-years. Our liability to pay amounts for DSUs and CRSUs is determined using the
fair market value of Descartes’ common shares at the applicable balance sheet date. Increases in the
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fair market value of Descartes’ common shares between reporting periods will require us to record
additional expense in a reporting period; while decreases in the fair market value of Descartes’ common
shares between reporting periods will require us to record an expense recovery. For CRSUs and DSUs,
the amount of any expense or recovery is based on the number of vested units outstanding and our
stock price. Because the expense is subject to fluctuations in our stock price, we are not able to predict
these expenses or expense recoveries and, accordingly, they are outside our baseline calibration.
In 2016, we recorded a net deferred income tax expense of $5.8 million primarily as a result of income
that is sheltered by loss carry-forwards and other tax attributes. The amount of any tax expense or
recovery in a period will depend on the amount of taxable income, if any, we generate in a jurisdiction,
our then current effective tax rate in that jurisdiction, and estimations of our ability to utilize deferred
tax asset balances in the future. We can provide no assurance as to the timing or amounts of any
income tax expense or recovery, nor can we provide any assurance that our current valuation allowance
for deferred tax assets will not need to be adjusted further.
Our tax expense for a period is difficult to predict as it depends on many factors, including the actual
jurisdictions in which income is earned, the tax rates in those jurisdictions, the amount of deferred tax
assets relating to the jurisdictions and the valuation allowances relating to those tax assets.
We intend to continue to actively explore business combinations to add complementary services,
products and customers to our existing businesses. We also intend to continue to focus our acquisition
activities on companies that are targeting the same customers as us and processing similar data and, to
that end, we listen to our customers’ suggestions as they relate to acquisition opportunities. Depending
on the size and scope of any business combination, or series of business combinations, we may choose
or need to use our existing debt facility or need to raise additional debt or equity capital. However, there
can be no assurance that we will be able to undertake such a financing transaction. If we use debt in
connection with acquisition activity, we will incur additional interest expense from the date of the draw
under such facility.
Certain future commitments are set out above in the section of this MD&A called “Commitments,
Contingencies and Guarantees”. We believe that we have sufficient liquidity to fund our current
operating and working capital requirements, including the payment of these commitments.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Any investment in us will be subject to risks inherent to our business. Before making an investment
decision, you should carefully consider the risks described below together with all other information
included in this report. The risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties that we are not aware of or have not focused on, or that we currently
deem immaterial, may also impair our business operations. This report is qualified in its entirety by
these risk factors.
If any of the risks actually occur, they could materially adversely affect our business, financial condition,
liquidity or results of operations. In that case, the trading price of our securities could decline and you
may lose all or part of your investment.
We may have difficulties identifying, successfully integrating or maintaining or growing our
acquired businesses.
Businesses that we acquire may sell products or operate services that we have limited experience
operating or managing. We may experience unanticipated challenges or difficulties identifying suitable
acquisition candidates, integrating their businesses into our company, maintaining these businesses at
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their current levels or growing these businesses. Factors that may impair our ability to identify,
successfully integrate, maintain or grow acquired businesses may include, but are not limited to:
Challenges identifying suitable businesses to buy and negotiating the acquisition of those
businesses on acceptable terms;
Challenges completing the acquisitions within our expected time frames and budgets;
Challenges in integrating acquired businesses with our business;
Loss of customers of the acquired business;
Loss of key personnel from the acquired business, such as former executive officers or key
technical personnel;
Non-compatible business cultures;
For regulatory compliance businesses, changes in government regulations impacting
electronic regulatory filings or import/export compliance, including changes in which
government agencies are responsible for gathering import and export information;
Difficulties in gaining necessary approvals in international markets to expand acquired
businesses as contemplated;
Our inability to obtain or maintain necessary security clearances to provide international
shipment management services;
Our failure to make appropriate capital investments in infrastructure to facilitate growth; and
Other risk factors identified in this report.
We may fail to properly respond to any of these risks, which may have a material adverse effect on our
business results.
Investments in acquisitions and other business initiatives involve a number of risks that
could harm our business.
We have in the past acquired, and in the future expect to seek to acquire, additional products, services,
customers, technologies and businesses that we believe are complementary to ours. For example, in
2016, we have acquired BearWare, MK Data and Oz. In 2015 we acquired Computer Management,
Customs Info, Airclic, e-customs and Pentant. In 2014 we acquired KSD, Compudata and Impatex. We
are unable to predict whether or when we will be able to identify any appropriate products, technologies
or businesses for acquisition, or the likelihood that any potential acquisition will be available on terms
acceptable to us or will be completed. We also, from time to time, take on investments in other business
initiatives, such as the implementation of new systems or purchase of marketable securities.
Acquisitions and other business initiatives involve a number of risks, including: substantial investment of
funds, diversion of management’s attention from current operations; additional demands on resources,
systems, procedures and controls; and disruption of our ongoing business. Acquisitions specifically
involve risks, including: difficulties in integrating and retaining all or part of the acquired business, its
customers and its personnel; assumption of disclosed and undisclosed liabilities; dealing with unfamiliar
laws, customs and practices in foreign jurisdictions; and the effectiveness of the acquired company’s
internal controls and procedures. In addition, we may not identify all risks or fully assess risks identified
in connection with an investment. As well, by investing in such initiatives, we may deplete our cash
resources or dilute our shareholder base by issuing additional shares. Furthermore, for acquisitions,
there is a risk that our valuation assumptions, customer retention expectations and our models for an
acquired product or business may be erroneous or inappropriate due to foreseen or unforeseen
circumstances and thereby cause us to overvalue an acquisition target. There is also a risk that the
contemplated benefits of an acquisition or other investment may not materialize as planned or may not
materialize within the time period or to the extent anticipated. The individual or combined effect of these
risks could have a material adverse effect on our business.
Our existing customers might cancel contracts with us, fail to renew contracts on their
renewal dates, and/or fail to purchase additional services and products, and we may be
unable to attract new customers.
We depend on our installed customer base for a significant portion of our revenues. We have significant
contracts with our license customers for ongoing support and maintenance, as well as significant service
contracts that provide recurring services revenues to us, such as our contract to operate the U.S.
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Census Bureau’s Automated Export System, AESDirect. In addition, our installed customer base has
historically generated additional new license and services revenues for us. Service contracts are
generally renewable at a customer’s option, and there are generally no mandatory payment obligations
or obligations to license additional software or subscribe for additional services.
If our customers fail to renew their service contracts, fail to purchase additional services or products, or
we are unable to attract new customers, then our revenues could decrease and our operating results
could be adversely affected. Factors influencing such contract terminations could include changes in the
financial circumstances of our customers, dissatisfaction with our products or services, our retirement or
lack of support for our legacy products and services, our customers selecting or building alternate
technologies to replace us, the cost of our products and services as compared to the cost of products
and services offered by our competitors, our ability to attract, hire and maintain qualified personnel to
meet customer needs, consolidating activities in the market, and changes in our customers’ business or
in regulation impacting our customers’ business that may no longer necessitate the use of our products
or services, general economic or market conditions, or other reasons. Further, our customers could
delay or terminate implementations or use of our services and products or be reluctant to migrate to
new products. Such customers will not generate the revenues we may have anticipated within the
timelines anticipated, if at all, and may be less likely to invest in additional services or products from us
in the future. We may not be able to adjust our expense levels quickly enough to account for any such
revenue losses. In addition, loss of one or more of our key customers could adversely impact our
competitive position in the marketplace and hurt our credibility and ability to attract new customers.
System or network failures or information security breaches in connection with our services
and products could reduce our sales, impair our reputation, increase costs or result in liability
claims, and seriously harm our business.
Any disruption to our services and products, our own information systems or communications networks
or those of third-party providers on which we rely as part of our own product offerings could result in
the inability of our customers to receive our products for an indeterminate period of time. Our ability to
deliver our products and services depends on the development and maintenance of internet
infrastructure by third parties. This includes maintenance of reliable networks with the necessary
security, speed, data capacity and bandwidth. While our services are designed to operate without
interruption, we have experienced, and may in the future experience, interruptions and delays in
services and availability from time to time. In the event of a catastrophic event with respect to one or
more of our systems, we may experience an extended period of system unavailability, which could
negatively impact our relationship with customers. Our services and products may not function properly
for reasons which may include, but are not limited to, the following:
Interruption in the supply of power;
System or network failure;
Software errors, failures and crashes;
Virus proliferation;
Communications failures;
Earthquakes, fires, floods, natural disasters, or other force majeure events outside our
Information or infrastructure security breaches;
Insufficient investment in infrastructure;
control; and
Acts of war, cyber-attacks, denial-of-service attacks and/or terrorism.
In addition, any disruption to the availability of customer information, or any compromise to the
integrity or confidentiality of customer information in our systems or networks, or the systems or
networks of third parties on which we rely, could result in our customers being unable to effectively use
our products or services or forced to take mitigating actions to protect their information. Back-up and
redundant systems may be insufficient or may fail and result in a disruption of availability of our
products or services to our customers or the integrity or availability of our customers’ information.
Any disruption to our services or compromise of customer information could impair our reputation and
cause us to lose customers or revenue, or face litigation, necessitate customer service or repair work
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that would involve substantial costs and distract management from operating our business. Such issues
could have a material adverse effect on our business, results of operations and financial condition.
Changes in the value of the U.S. dollar, as compared to the currencies of other countries
where we transact business, could harm our operating results and financial condition.
Historically, the largest percentage of our revenues has been denominated in U.S. dollars. However, the
majority of our international expenses, including the wages of our non-U.S. employees and certain key
supply agreements, have been denominated in Canadian dollars, euros and other foreign currencies.
Therefore, changes in the value of the U.S. dollar as compared to the Canadian dollar, the euro and
other foreign currencies may materially affect our operating results. We generally have not implemented
hedging programs to mitigate our exposure to currency fluctuations affecting international accounts
receivable, cash balances and inter-company accounts. We also have not hedged our exposure to
currency fluctuations affecting future international revenues and expenses and other commitments.
Accordingly, currency exchange rate fluctuations have caused, and may continue to cause, variability in
our foreign currency denominated revenue streams, expenses, and our cost to settle foreign currency
denominated liabilities.
General economic conditions may affect our results of operations and financial condition.
Demand for our products depends in large part upon the level of capital and operating expenditures by
many of our customers. Decreased capital and operational spending could have a material adverse effect
on the demand for our products and our business, results of operations, cash flow and overall financial
condition. Disruptions in the financial markets may adversely impact the availability of credit already
arranged and the availability and cost of credit in the future, which could result in the delay or
cancellation of projects or capital programs on which our business depends. In addition, disruptions in
the financial markets may also have an adverse impact on regional economies or the world economy,
which could negatively impact the capital and operating expenditures of our customers. These conditions
may reduce the willingness or ability of our customers and prospective customers to commit funds to
purchase our products and services, or their ability to pay for our products and services after purchase.
Disruptions in the movement of freight could negatively affect our revenues.
Our business is highly dependent on the movement of freight from one point to another since we
generate transaction revenues as freight is moved by, to or from our customers. If there are disruptions
in the movement of freight or proper reporting, whether as a result of labor disputes, weather or natural
disaster, or caused by terrorists, political instability, or security activities, contagious illness outbreaks,
or otherwise, then the traffic volume on our Global Logistics Network will be impacted and our revenues
will be adversely affected. As these types of freight disruptions are generally unpredictable, there can be
no assurance that our business, results of operations and financial condition will not be adversely
affected by such events.
If we fail to attract and retain key personnel, it would adversely affect our ability to develop
and effectively manage our business.
Our performance is substantially dependent on the performance of our highly qualified management,
technical expertise, and sales and marketing personnel, which we regard as key individuals to our
business. We do not maintain life insurance policies on any of our employees that list Descartes as a loss
payee. Our success is highly dependent on our ability to identify, hire, train, motivate, promote, and
retain key individuals. Significant competition exists for management and skilled personnel. If we fail to
cross train key employees, particularly those with specialized knowledge it could impair our ability to
provide consistent and uninterrupted service to our customers. If we are not able to attract, retain or
establish an effective succession planning program for key individuals it could have a material adverse
effect on our business, results of operations, financial condition and the price of our common shares.
We have in the past, and may in the future, make changes to our executive management team or board
of directors. There can be no assurance that any such changes and the resulting transition will not have
a material adverse effect on our business, results of operations, financial condition and the price of our
common shares.
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Changes in government filing or screening requirements for global trade may adversely
impact our business.
Our regulatory compliance services help our customers comply with government filing and screening
requirements relating to global trade. The services that we offer may be impacted, from time to time, by
changes in these requirements. Changes in requirements that impact electronic regulatory filings or
import/export compliance, including changes adding or reducing filing requirements, changes in
enforcement practices or changes in the government agency responsible for such requirements could
adversely impact our business, results of operations and financial condition.
Emergence or increased adoption of alternative sources for trade data may adversely impact
our business.
With recent acquisitions in the area of supplying trade data and content, an increasing portion of our
business relates to the supply of trade data and content that is often used by our customers in other
systems, such as enterprise resource planning systems. Emergence or increased adoption of alternative
sources of this data and content could have an adverse impact on our customers’ needs to obtain this
data and content from us and/or the need for certain of the third party system vendors in this field to
refer customers to us for this data and content, each of which could adversely impact upon the revenues
and income we generate from these areas of our business.
We may have exposure to greater than anticipated tax liabilities or expenses.
We are subject to income and non-income taxes in various jurisdictions and our tax structure is subject
to review by both domestic and foreign taxation authorities and currently has tax audits open in a
number of jurisdictions in which we operate. On a quarterly basis we assess the status of these audits
and the potential for adverse outcomes to determine whether a provision for income and other taxes is
appropriate. The timing of the resolution of income tax audits is highly uncertain, and the amounts
ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from any
amounts that we accrue from time to time. The actual amount of any change could vary significantly
depending on the ultimate timing and nature of any settlements. We cannot currently provide an
estimate of the range of possible outcomes.
The determination of our worldwide provision for income taxes and other tax liabilities requires
significant judgment. In the ordinary course of a global business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Any audit of our tax filings could materially
change the amount of current and deferred income tax assets and liabilities. We have recorded a
valuation allowance against a portion of our net deferred tax assets. If we achieve a consistent level of
profitability, the likelihood of further reducing our deferred tax valuation allowance for some portion of
the losses incurred in prior periods in one of our jurisdictions will increase. We calculate our current and
deferred tax provision based on estimates and assumptions that could differ from the actual results
reflected in income tax returns filed during subsequent years. Adjustments based on filed returns are
generally recorded in the period when the tax returns are filed and the global tax implications are
known. Our estimate of the potential outcome for any uncertain tax issue is based on a number of
assumptions. Any further changes to the valuation allowance for our deferred tax assets would also
result in an income tax recovery or income tax expense, as applicable, on the consolidated statements
of operations in the period in which the valuation allowance is changed.
Changes to earnings resulting from past acquisitions may adversely affect our operating
results.
Under ASC Topic 805, “Business Combinations”, we allocate the total purchase price to an acquired
company’s net tangible assets, intangible assets and in-process research and development based on
their values as of the date of the acquisition (including certain assets and liabilities that are recorded at
fair value) and record the excess of the purchase price over those values as goodwill. Management’s
estimates of fair value are based upon assumptions believed to be reasonable but which are inherently
uncertain. After we complete an acquisition, the following factors, among others, could result in material
charges that would adversely affect our operating results and may adversely affect our cash flows:
Impairment of goodwill or intangible assets;
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A reduction in the useful lives of intangible assets acquired;
Identification of assumed contingent liabilities after we finalize the purchase price allocation
period;
Charges to our operating results to eliminate certain pre-merger activities that duplicate
those of the acquired company or to reduce our cost structure; and
Charges to our operating results resulting from revised estimates to restructure an acquired
company’s operations after we finalize the purchase price allocation period.
Routine charges to our operating results associated with acquisitions include amortization of intangible
assets, acquisition-related costs and restructuring charges. Acquisition-related costs primarily include
advisory services, brokerage services and administrative costs with respect to completed and
prospective acquisitions.
We expect to continue to incur additional costs associated with combining the operations of our acquired
companies, which may be substantial. Additional costs may include costs of employee redeployment,
relocation and retention, including salary increases or bonuses, accelerated stock-based compensation
expenses and severance payments, reorganization or closure of facilities, taxes, and termination of
contracts that provide redundant or conflicting services. These costs would be accounted for as expenses
and would decrease our net income and earnings per share for the periods in which those adjustments
are made.
Our success depends on our ability to continue to innovate and to create new solutions and
enhancements to our existing products
We may not be able to develop and introduce new solutions and enhancements to our existing products
that respond to new technologies or shipment regulations on a timely basis. If we are unable to develop
and sell new products and new features for our existing products that keep pace with rapid technological
and regulatory change as well as developments in the transportation logistics industry, our business,
results of operations and financial condition could be adversely affected. We intend to continue to invest
significant resources in research and development to enhance our existing products and services and
introduce new high-quality products that customers will want. If we are unable to predict or quickly
react to user preferences or changes in the transportation logistics industry, or its regulatory
requirements, or if we are unable to modify our products and services on a timely basis or to effectively
bring new products to market, our sales may suffer.
In addition, we may experience difficulties with software or hardware development, design, integration
with third-party software or hardware, or marketing that could delay or prevent our introduction,
deployment or implementation of new solutions and enhancements. The introduction of new solutions by
competitors, the emergence of new industry standards or the development of entirely new technologies
to replace existing offerings could render our existing or future solutions obsolete.
We may not have sufficient resources to make the necessary investments in software development and
our technical infrastructure, and we may experience difficulties that could delay or prevent the
successful development, introduction or marketing of new products or enhancements. In addition, our
products or enhancements may not meet increasingly complex customer requirements or achieve
market acceptance at the rate we expect, or at all. Any failure by us to anticipate or respond adequately
to technological advancements, customer requirements and changing industry standards, or any
significant delays in the development, introduction or availability of new products or enhancements,
could undermine our current market position and negatively impact our business, results of operations
or financial condition.
As we continue to increase our international operations we increase our exposure to
international business risks that could cause our operating results to suffer.
While our headquarters are in Canada, we currently have direct operations in the U.S., EMEA and the
Asia Pacific region. We anticipate that these international operations will continue to require significant
management attention and financial resources to localize our services and products for delivery in these
markets, to develop compliance expertise relating to international regulatory agencies, and to develop
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direct and indirect sales and support channels in those markets. We face a number of risks associated
with conducting our business internationally that could negatively impact our operating results. These
risks include, but are not limited to:
Longer collection time from foreign clients, particularly in the EMEA region and the Asia
Pacific region;
Difficulty in repatriating cash from certain foreign jurisdictions;
Language barriers, conflicting international business practices, and other difficulties related to
the management and administration of a global business;
Increased management, travel, infrastructure and legal compliance costs associated with
having international operations;
Difficulties and costs of staffing and managing geographically disparate direct and indirect
operations;
Volatility or fluctuations in foreign currency and tariff rates;
Multiple, and possibly overlapping, tax structures;
Complying with complicated and widely differing global laws and regulations in areas such as
employment, tax, privacy and data protection;
Trade restrictions;
Enhanced security procedures and requirements relating to certain jurisdictions;
The need to consider characteristics unique to technology systems used internationally;
Economic or political instability in some markets; and
Other risk factors set out herein.
If we need additional capital in the future and are unable to obtain it or can only obtain it on
unfavorable terms, our operations may be adversely affected, and the market price for our
securities could decline.
Historically, we have financed our operations primarily through cash flows from our operations, the sale
of our equity securities and borrowing under our revolving debt facility. In addition to our current cash
and available debt facilities, we may need to raise additional debt or equity capital to fund expansion of
our operations, to enhance our services and products, or to acquire or invest in complementary
products, services, businesses or technologies. However, there can be no assurance that we will be able
to undertake incremental financing transactions. If we raise additional funds through further issuances
of convertible debt or equity securities, our existing shareholders could suffer significant dilution and any
new equity securities we issue could have rights, preferences and privileges superior to those attaching
to our common shares. Our current revolving debt facility contains, and any debt financing secured by
us in the future could contain restrictive covenants relating to our capital-raising activities and other
financial and operational matters, which may make it more difficult for us to obtain additional capital and
to pursue business opportunities, including potential acquisitions. In addition, we may not be able to
obtain additional financing on terms favorable to us, if at all. If adequate funds are not available on
terms favorable or at all, our operations and growth strategy may be adversely affected and the market
price for our common shares could decline.
Increases in fuel prices and other transportation costs may have an adverse effect on the
businesses of our customers resulting in them spending less money with us.
Our customers are all involved, directly or indirectly, in the delivery of goods from one point to another,
particularly transportation providers and freight forwarders. As the costs of these deliveries become
more expensive, whether as a result of increases in fuel costs or otherwise, our customers may have
fewer funds available to spend on our products and services. There can be no assurance that these
companies will be able to allocate sufficient funds to use our products and services. In addition, rising
fuel costs may cause global or geographic-specific reductions in the number of shipments being made,
thereby impacting the number of transactions being processed by our Global Logistics Network and our
corresponding network revenues.
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We may not be able to compensate for downward pricing pressure on certain products and
services by increased volumes of transactions or increased prices elsewhere in our business,
ultimately resulting in lower revenues.
Some of our products and services are sold to industries where there is downward pricing pressure on
the particular product or service due to competition, general industry conditions or other causes. If we
cannot offset any such downward pricing pressure, then the particular customer may generate less
revenue for our business or we may have less aggregate revenue. This could have an adverse impact on
our operating results.
Concerns about the environmental impacts of greenhouse gas emissions and global climate
change may result in environmental taxes, charges, regulatory schemes, assessments or
penalties, which could restrict or negatively impact our operations or reduce our profitability.
The impacts of human activity on global climate change have attracted considerable public and scientific
attention, as well as the attention of the U.S. and other governments. Efforts are being made to reduce
greenhouse gas emissions and energy consumption, including those from automobiles and other modes
of transportation. The added cost of any environmental regulation, taxes, charges, assessments or
penalties levied or imposed on our customers in light of these efforts could result in additional costs for
our customers, which could lead them to reduce use of our services. There are also a number of
legislative and environmental regulatory initiatives internationally that could restrict or negatively impact
our operations or increase our costs. Additionally, environmental regulation, taxes, charges,
assessments or penalties could be levied or imposed directly on us. Any enactment of laws or passage of
regulations regarding greenhouse gas emissions by Canada, the U.S., or any other jurisdiction we
conduct our business in, could adversely affect our operations and financial results.
The general cyclical and seasonal nature of the freight market may have a material adverse
effect on our business, results of operations and financial condition.
Our business may be impacted from time to time by the general cyclical and seasonal nature of
particular modes of transportation and the freight market in general, as well as the cyclical and seasonal
nature of the industries that such markets serve. Factors which may create cyclical fluctuations in such
modes of transportation or the freight market in general include legal and regulatory requirements,
timing of contract renewals between our customers and their own customers, seasonal-based tariffs,
vacation periods applicable to particular shipping or receiving nations, weather-related events that
impact shipping in particular geographies and amendments to international trade agreements. Since
some of our revenues from particular products and services are tied to the volume of shipments being
processed, adverse fluctuations in the volume of global shipments or shipments in any particular mode
of transportation may adversely affect our revenues. Declines in shipment volumes in the U.S. or
internationally likely would have a material adverse effect on our business.
From time to time, we may be subject to litigation or dispute resolution that could result in
significant costs to us and damage to our reputation.
From time to time, we may be subject to litigation or dispute resolution relating to any number or type
of claims, including claims for damages related to undetected errors or malfunctions of our services and
products or their deployment, claims related to previously-completed acquisition transactions or claims
relating to applicable securities laws. Litigation may seriously harm our business because of the costs of
defending the lawsuit, diversion of employees’ time and attention and potential damage to our
reputation.
Further, our services and products are complex and often implemented by our customers to interact
with third-party technology or networks. Claims may be made against us for damages properly
attributable to those third-party technologies or networks, regardless of our lack of responsibility for any
failure resulting in a loss, even if our services and products perform in accordance with their functional
specifications. We may also have disputes with key suppliers for damages incurred which, depending on
resolution of the disputes, could impact the ongoing quality, price or availability of the services or
products we procure from the supplier. Limitation of liability provisions in certain third-party contracts
may not be enforceable under the laws of some jurisdictions. As a result, we could be required to pay
38
substantial amounts of damages in settlement or upon the determination of any of these types of
claims, and incur damage to our reputation and products. The likelihood of such claims and the amount
of damages we may be required to pay may increase as our customers increasingly use our services and
products for critical business functions, or rely on our services and products as the systems of record to
store data for use by other customer applications. Our insurance may not cover potential claims, or may
not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all
liability that may be imposed. A claim brought against us that is uninsured or underinsured could result
in unanticipated costs, thereby harming our operating results and leading analysts or potential investors
to lower their expectations of our performance, which could reduce the trading price of our common
shares.
We are dependent on certain key vendors for our inventory of telematics units, which could
impede our development and expansion.
We currently have relationships with a small number of mobile asset unit vendors over which we have
no operational or financial control and no influence in how these vendors conduct their businesses.
Suppliers of mobile asset units could among other things, extend delivery times, raise prices and limit
supply due to their own shortages and business requirements. Interruption in the supply of equipment
from these vendors could delay our ability to maintain, grow and expand our telematics solutions
business. If our relationships with any of these unit vendors were to terminate, there is no guarantee
that our remaining unit vendors would be able to handle the increased equipment supply required to
maintain and grow our expansive networks at our desired rates. There is also no guarantee that
business relationships with other key unit vendors could be entered into on terms desirable or favorable
to us, if at all. Fewer key vendors might mean that existing or potential customers are unable to
meaningfully communicate using our Global Logistics Network, which may cause existing and potential
customers to move to competitors’ products. Such equipment supply issues could adversely affect our
business, results of operations and financial condition.
We may not remain competitive. Increased competition could seriously harm our business.
The market for supply chain technology is highly competitive and subject to rapid technological change.
We expect that competition will increase in the future. To maintain and improve our competitive
position, we must continue to develop and introduce in a timely and cost effective manner new products,
product features and network services to keep pace with our competitors. We currently face competition
from a large number of specific market entrants, some of which are focused on specific industries,
geographic regions or other components of markets we operate in.
Current and potential competitors include supply chain application software vendors, customers that
undertake internal software development efforts, value-added networks and business document
exchanges, enterprise resource planning software vendors, regulatory filing companies, trade data
vendors and general business application software vendors. Many of our current and potential
competitors may have one or more of the following relative advantages:
Larger installed base of customers;
Established relationships with existing customers or prospects that we are targeting;
Superior product functionality and industry-specific expertise;
Broader range of products to offer and better product life cycle management;
Greater financial, technical, marketing, sales, distribution and other resources;
Better performance;
Greater investment in infrastructure;
Greater worldwide presence;
Early adoption of, or adaptation to changes in, technology; or
Longer operating history; and/or greater name recognition.
Lower cost structure and more profitable operations;
Further, current and potential competitors have established, or may establish, cooperative relationships
and business combinations among themselves or with third parties to enhance their products, which
may result in increased competition. In addition, we expect to experience increasing price competition
and competition surrounding other commercial terms as we compete for market share. In particular,
39
larger competitors or competitors with a broader range of services and products may bundle their
products, rendering our products more expensive and/or less functional. As a result of these and other
factors, we may be unable to compete successfully with our existing or new competitors.
If we are unable to generate broad market acceptance of our services, products and pricing,
serious harm could result to our business.
We currently derive substantially all of our revenues from our federated network and global logistics
technology solutions and expect to do so in the future. Broad market acceptance of these types of
services and products, and their related pricing, is therefore critical to our future success. The demand
for, and market acceptance of, our services and products is subject to a high level of uncertainty. Some
of our services and products are often considered complex and may involve a new approach to the
conduct of business by our customers. The market for our services and products may weaken,
competitors may develop superior services and products that perform logistics services on a global scale
or within a particular geographic region, or we may fail to develop or maintain acceptable services and
products to address new market conditions, governmental regulations or technological changes. Any one
of these events could have a material adverse effect on our business, results of operations and financial
condition.
Our success and ability to compete depend upon our ability to secure and protect patents,
trademarks and other proprietary rights.
We consider certain aspects of our internal operations, products, services and related documentation to
be proprietary, and we primarily rely on a combination of patent, copyright, trademark and trade secret
laws and other measures to protect our proprietary rights. Patent applications or issued patents, as well
as trademark, copyright, and trade secret rights may not provide adequate protection or competitive
advantage and may require significant resources to obtain and defend. We will also not be able to
protect our intellectual property if we are unable to enforce our rights or if we do not detect
unauthorized use of our intellectual property. Despite our precautions, it may be possible for
unauthorized third parties to copy our products and use information that we regard as proprietary to
create products and services that compete with ours. We also rely on contractual restrictions in our
agreements with customers, employees, outsourced developers and others to protect our intellectual
property rights. There can be no assurance that these agreements will not be breached, that we will
have adequate remedies for any breach, or that our patents, copyrights, trademarks or trade secrets will
not otherwise become known. Through an escrow arrangement, we have granted some of our customers
a contingent future right to use our source code for software products solely for their internal
maintenance services. If our source code is accessed through an escrow, the likelihood of
misappropriation or other misuse of our intellectual property may increase.
Moreover, the laws of some countries do not protect proprietary intellectual property rights as effectively
as do the laws of the U.S. and Canada. Protecting and defending our intellectual property rights could be
costly regardless of venue. In order to protect our intellectual property rights, we may be required to
spend significant resources to monitor and protect these rights. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity
and scope of the intellectual property rights of others or to defend against claims of infringement or
invalidity. Litigation brought to protect and enforce our intellectual property rights could be costly, time
consuming and distracting to management and could result in the impairment or loss of portions of our
intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met
with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual
property rights. Our inability to protect our proprietary technology against unauthorized copying or use,
as well as any costly litigation or diversion of our management’s attention and resources, could delay
further sales or the implementation of our solutions, impair the functionality of our solutions, delay
introductions of new solutions, result in our substituting inferior or more costly technologies into our
solutions, or injure our reputation.
40
infringe third-party proprietary rights could trigger
Claims that we
indemnification
obligations and result in significant expenses or restrictions on our ability to provide our
products or services.
Competitors and other third parties have claimed, and in the future may claim, that our current or future
services or products infringe their proprietary rights or assert other claims against us. Many of our
competitors have obtained patents covering products and services generally related to our products and
services, and they may assert these patents against us. Such claims, whether with or without merit,
could be time consuming and expensive to litigate or settle and could divert management attention from
focusing on our core business.
As a result of such a dispute, we may have to pay damages, incur substantial legal fees, suspend the
sale or deployment of our services and products, develop costly non-infringing technology, if possible, or
enter into license agreements, which may not be available on terms acceptable to us, if at all. Any of
these results would increase our expenses and could decrease the functionality of our services and
products, which would make our services and products less attractive to our current and/or potential
customers. We have agreed in some of our agreements, and may agree in the future, to indemnify other
parties for any expenses or liabilities resulting from claimed infringements of the proprietary rights of
third parties. If we are required to make payments pursuant to these indemnification agreements, such
payments could have a material adverse effect on our business, results of operations and financial
condition.
Our results of operations may vary significantly from quarter to quarter and therefore may be
difficult to predict or may fail to meet investment community expectations.
Our results of operations may vary from quarter to quarter in the future due to a variety of factors,
many of which are outside of our control. Such factors include, but are not limited to:
Volatility or fluctuations in foreign currency exchange rates;
Timing of acquisitions and related costs;
Timing of restructuring activities;
The introduction of enhanced products and services from competitors;
Our ability to introduce new products and updates to our existing products on a timely basis;
The termination of any key customer contracts, whether by the customer or by us;
Recognition and expensing of deferred tax assets;
Legal costs incurred in bringing or defending any litigation with customers or third-party
providers, and any corresponding judgments or awards;
Legal and compliance costs incurred to comply with regulatory requirements;
Fluctuations in the demand for our services and products;
The impact of stock-based compensation expense;
Price and functionality competition in our industry;
Changes in legislation and accounting standards;
Our ability to satisfy contractual obligations in customer contracts and deliver services and
products to the satisfaction of our customers; and
Other risk factors discussed in this report.
Although our revenues may fluctuate from quarter to quarter, significant portions of our expenses are
not variable in the short term, and we may not be able to reduce them quickly to respond to decreases
in revenues. If revenues are below expectations, this shortfall is likely to adversely and/or
disproportionately affect our operating results. If this occurs, the trading price of our common shares
may fall substantially.
Privacy laws and regulations are extensive, open to various interpretations, complex to
implement and may reduce demand for our products, and failure to comply may impose
significant liabilities.
Our customers can use our products to collect, use, process and store information regarding their
shipments. Federal, state and foreign government bodies and agencies may adopt laws and regulations
regarding the collection, use, processing, storage and disclosure of such information obtained from
41
consumers and individuals. In addition to government regulatory activity, privacy advocacy groups and
the technology industry and other industries may consider various new, additional or different self-
regulatory standards that may place additional burdens directly on our customers and target customers,
and indirectly on us. Our products are expected to be capable of use by our customers in compliance
with such laws and regulations. The functional and operational requirements and costs of compliance
with such laws and regulations may adversely impact our business, and failure to enable our products to
comply with such laws and regulations could lead to significant fines and penalties imposed by
regulators, as well as claims by our customers or third parties. Additionally, all of these domestic and
international legislative and regulatory initiatives could adversely affect our customers’ ability or desire
to collect, use, process and store shipment logistics information, which could reduce demand for our
products.
The price of our common shares has in the past been volatile and may also be volatile in the
future.
The trading price of our common shares may be subject to fluctuation in the future. This may make it
more difficult for you to resell your common shares when you want at prices that you find attractive.
Increases in our common share price may also increase our compensation expense pursuant to our
existing director, officer and employee compensation arrangements. Fluctuations in our common share
price may be caused by events unrelated to our operating performance and beyond our control. Factors
that may contribute to fluctuations include, but are not limited to:
Revenue or results of operations in any quarter failing to meet the expectations, published or
otherwise, of the investment community;
Changes in recommendations or financial estimates by industry or investment analysts;
Changes in management or the composition of our board of directors;
Outcomes of litigation or arbitration proceedings;
Announcements of technological innovations or acquisitions by us or by our competitors;
Introduction of new products or significant customer wins or losses by us or by our
competitors;
Developments with respect to our intellectual property rights or those of our competitors;
Fluctuations in the share prices of other companies in the technology and emerging growth
sectors;
General market conditions; and
Other risk factors set out in this report.
If the market price of our common shares drops significantly, shareholders could institute securities
class action lawsuits against us, regardless of the merits of such claims. Such a lawsuit could cause us to
incur substantial costs and could divert the time and attention of our management and other resources
from our business.
Fair value assessments of our intangible assets required by GAAP may require us to record
significant non-cash charges associated with intangible asset impairment.
Significant portions of our assets, which include customer agreements and relationships, non-compete
covenants, existing technologies and trade names, are intangible. We amortize intangible assets on a
straight-line basis over their estimated useful lives. We review the carrying value of these assets at least
annually for evidence of impairment. In accordance with ASC Topic 360-10-35, “Property, Plant, and
Equipment: Overview: Subsequent Measurement” an impairment loss is recognized when the estimate
of undiscounted future cash flows generated by such assets is less than the carrying amount.
Measurement of the impairment loss is based on the present value of the expected future cash flows.
Future fair value assessments of intangible assets may require impairment charges to be recorded in the
results of operations for future periods. This could impair our ability to achieve or maintain profitability
in the future.
42
If our common share price decreases to a level such that the fair value of our net assets is
less than the carrying value of our net assets, we may be required to record additional
significant non-cash charges associated with goodwill impairment.
We account for goodwill in accordance with ASC Topic 350, “Intangibles – Goodwill and Other”, which
among other things, requires that goodwill be tested for impairment at least annually. We have
designated October 31st for our annual impairment test. Should the fair value of our net assets,
determined by our market capitalization, be less than the carrying value of our net assets at future
annual impairment test dates, we may have to recognize goodwill impairment losses in our results of
operations in future periods. This could impair our ability to achieve or maintain profitability in the
future.
We have a substantial accumulated deficit and may incur losses in the future.
As at January 31, 2016, our accumulated deficit was $262.3 million, which has been accumulated from
2005 and prior fiscal periods. Although the Company has been profitable since 2005, there can be no
assurance that we will not incur losses again in the future. If we fail to maintain profitability, the market
price of our common shares may decline.
43
MANAGEMENT’S REPORT ON FINANCIAL STATEMENTS
AND INTERNAL CONTROL OVER FINANCIAL
REPORTING
Financial Statements
Management is responsible for the accompanying consolidated financial statements and all other
information in this Annual Report. These consolidated financial statements have been prepared in
accordance with US generally accepted accounting principles (“GAAP”) and necessarily include amounts
that reflect management’s judgment and best estimates. Financial information contained elsewhere in
this Annual Report is prepared on a basis consistent with the consolidated financial statements.
The Board of Directors carries out its responsibilities for the consolidated financial statements through its
Audit Committee, consisting solely of independent directors. The Audit Committee meets with
management and the independent auditors to review the consolidated financial statements and internal
controls as they relate to financial reporting. The Audit Committee reports its findings to the Board of
Directors for its consideration in approving the consolidated financial statements for issuance to
shareholders.
Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed by, or under the supervision of,
the Chief Executive Officer and Chief Financial Officer and effected by the Board of Directors,
management and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements on a timely basis.
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, management assessed the effectiveness of our internal control over
financial reporting as of January 31, 2016, based on criteria established in “Internal Control – Integrated
Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission”.
Based on the assessment, management concluded that, as of January 31, 2016, the design and
operation of our internal control over financial reporting was effective.
Management’s internal control over financial reporting as of January 31, 2016, has been audited by
KPMG LLP, Independent Registered Public Accounting Firm, who also audited our Consolidated Financial
Statements for the year ended January 31, 2016, as stated in the Report of Independent Registered
Public Accounting Firm, which expressed an unqualified opinion on the effectiveness of our internal
control over financial reporting as of January 31, 2016.
Changes in Internal Control Over Financial Reporting
During the fiscal year ended January 31, 2016, no changes were made to the Company’s internal control
over financial reporting that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
‘Edward J. Ryan’
Edward J. Ryan
Chief Executive Officer
Waterloo, Ontario
‘Allan Brett’
Allan Brett
Chief Financial Officer
Waterloo, Ontario
44
Deloitte LLP
Bay Adelaide East
22 Adelaide Street West, Suite 200
Toronto ON M5H 0A9
Canada
Tel: 416-601-6150
Fax: 416-601-6610
www.deloitte.ca
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
We have audited the accompanying consolidated financial statements of The Descartes Systems Group Inc. and
subsidiaries (the “Company”), which comprise the consolidated balance sheets as at January 31, 2015, and the
consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for
each of the years in the two-year period ended January 31, 2015, and a summary of significant accounting
policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis
for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
The Descartes Systems Group Inc. and subsidiaries as at January 31, 2015, and the results of their operations
and cash flows for each of the years in the two-year period ended January 31, 2015 in accordance with
accounting principles generally accepted in the United States of America.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Ontario
March 5, 2015
45
KPMG LLP
Yonge Corporate Centre
4100 Yonge St.
Suite 200
North York, ON M2P 2H3
Telephone (416) 228-7000
Fax (416) 228-7123
Internet www.kpmg.ca
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
We have audited the accompanying consolidated financial statements of The Descartes Systems
Group Inc., which comprise the consolidated balance sheet as at January 31, 2016, the consolidated
statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the
year then ended, and notes, comprising a summary of significant accounting policies and other
explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with US generally accepted accounting principles, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audit. We conducted our audit in accordance with Canadian generally accepted auditing standards and
the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on our judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide
a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of The Descartes Systems Group Inc. as at January 31, 2016, and its
consolidated results of operations and its consolidated cash flows for the year then ended, in
accordance with U.S. generally accepted accounting principles.
46
Emphasis of Matter
As discussed in Note 2 to the consolidated financial statements, the Company adopted a new
accounting pronouncement related to prospective presentation of deferred income tax assets and
liabilities as non-current in the year ended January 31, 2016.
Other Matter
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), The Descartes Systems Group Inc.’s internal control over financial reporting as
of January 31, 2016, based on the criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 2, 2016 expressed an unqualified (unmodified) opinion on the effectiveness
of The Descartes Systems Group Inc.’s internal control over financial reporting.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
March 2, 2016
47
KPMG LLP
Yonge Corporate Centre
4100 Yonge St.
Suite 200
North York, ON M2P 2H3
Telephone (416) 228-7000
Fax (416) 228-7123
Internet www.kpmg.ca
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of The Descartes Systems Group Inc.
We have audited The Descartes Systems Group Inc.’s internal control over financial reporting as of
January 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Descartes Systems Group Inc.’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included under the heading Management’s Report on Financial Statements and Internal
Control over Financial Reporting in Management’s Discussion and Analysis of Financial Condition and
Results of Operations for the year ended January 31, 2016. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, The Descartes Systems Group Inc. maintained, in all material respects, effective internal
control over financial reporting as of January 31, 2016, based on criteria established in Internal Control
– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
48
We also have audited, in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheet of The Descartes Systems Group Inc. as of January 31, 2016, and the related
consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash
flows for the year then ended, and our report dated March 2, 2016 expressed an unmodified
(unqualified) opinion on those consolidated financial statements.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
March 2, 2016
49
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED BALANCE SHEETS
(US DOLLARS IN THOUSANDS; US GAAP)
ASSETS
CURRENT ASSETS
Cash
Short-Term marketable securities (Note 4)
Accounts receivable (net)
Trade (Note 5)
Other (Note 6)
Prepaid expenses and other
Inventory (Note 7)
Deferred income taxes
PROPERTY AND EQUIPMENT, NET (Note 8)
DEFERRED INCOME TAXES
DEFERRED TAX CHARGE (Note 18)
INTANGIBLE ASSETS, NET (Note 9)
GOODWILL (Note 10)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
Accrued liabilities (Note 11)
Income taxes payable
Deferred revenue
LONG-TERM DEFERRED REVENUE
LONG-TERM INCOME TAXES PAYABLE (Note 18)
DEFERRED INCOME TAXES
COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 13)
SUBSEQUENT EVENT (Note 12)
SHAREHOLDERS’ EQUITY
Common shares – unlimited shares authorized; Shares issued and outstanding totaled
75,761,184 at January 31, 2016 (January 31, 2015 – 75,480,492) (Note 14)
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board:
January 31,
January 31,
2016
2015
37,213
4,639
118,053
-
25,614
3,131
4,673
155
-
75,425
8,604
16,804
906
133,562
217,486
452,787
4,473
16,844
2,086
16,639
40,042
941
3,672
6,097
50,752
22,613
3,257
4,327
474
8,572
157,296
7,829
16,510
-
115,126
147,440
444,201
4,620
16,695
4,112
14,720
40,147
589
3,450
9,630
53,816
252,471
446,747
(34,880)
(262,303)
247,839
450,623
(25,212)
(282,865)
402,035
390,385
452,787
444,201
‘Eric A. Demirian’
Eric A. Demirian
Director
‘Edward J. Ryan’
Edward J. Ryan
Chief Executive Officer
50
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(US DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND WEIGHTED AVERAGE SHARE AMOUNTS; US GAAP)
Year Ended
REVENUES
COST OF REVENUES
GROSS MARGIN
EXPENSES
Sales and marketing
Research and development
General and administrative
Other charges (Note 19)
Amortization of intangible assets
INCOME FROM OPERATIONS
INTEREST EXPENSE
INTEREST INCOME
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE (Note 17)
Current
Deferred
NET INCOME
EARNINGS PER SHARE (Note 15)
Basic
Diluted
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)
Basic
Diluted
January 31,
January 31,
January 31,
2016
2015
2014
184,993
170,860
151,294
53,859
54,879
49,043
131,134
115,981
102,251
22,424
31,293
21,607
1,491
26,222
103,037
28,097
20,404
28,077
20,333
2,876
21,715
93,405
22,576
(522)
(1,088)
195
333
16,681
25,881
20,509
6,512
17,999
87,582
14,669
(993)
57
27,770
21,821
13,733
1,443
5,765
7,208
2,784
3,978
6,762
20,562
15,059
1,768
2,353
4,121
9,612
0.27
0.27
0.21
0.21
0.15
0.15
75,595
76,409
70,559
71,584
62,841
64,370
The accompanying notes are an integral part of these consolidated financial statements.
51
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(US DOLLARS IN THOUSANDS; US GAAP)
January 31, January 31, January 31,
2014
2016
2015
NET INCOME
Other comprehensive loss:
Foreign currency translation adjustment, net of income tax
(recovery) expense of ($797) for the year ended January 31, 2016 (January
20,562
15,059
9,612
(9,640)
(24,123)
(2,958)
31, 2015 – $445; January 31, 2014 – $562)
Unrealized loss on marketable securities (Note 4)
Total other comprehensive loss
COMPREHENSIVE INCOME (LOSS)
(28)
-
-
(9,668)
(24,123)
(2,958)
10,894
(9,064)
6,654
The accompanying notes are an integral part of these consolidated financial statements.
52
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(US DOLLARS IN THOUSANDS; US GAAP)
Common shares
Balance, beginning of year
Shares issued:
Stock options and share units exercised
Issuance of common shares, net of issuance costs (Note 14)
Acquisitions (Note 3)
Balance, end of year
Additional paid-in capital
Balance, beginning of year
Stock-based compensation expense (Note 16)
Stock options and share units exercised
Settlement of stock options (Note 16)
Stock option income tax benefits
Balance, end of year
Accumulated other comprehensive (loss) income
Balance, beginning of year
Foreign currency translation adjustments, net of income taxes
Unrealized loss on marketable securities (Note 4)
Balance, end of year
Accumulated deficit
Balance, beginning of year
Net income
Balance, end of year
January 31, January 31, January 31,
2014
2016
2015
247,839
97,779
92,472
4,632
-
-
252,471
2,626
142,052
5,382
247,839
5,307
-
-
97,779
450,623
1,577
(68)
(7,000)
1,615
451,394
1,543
(1,670)
(733)
89
451,434
2,523
(1,525)
(1,510)
472
446,747
450,623
451,394
(25,212)
(9,640)
(28)
(1,089)
(24,123)
-
1,869
(2,958)
-
(34,880)
(25,212)
(1,089)
(282,865)
20,562
(297,924)
15,059
(307,536)
9,612
(262,303)
(282,865)
(297,924)
Total Shareholders’ Equity
402,035
390,385
250,160
The accompanying notes are an integral part of these consolidated financial statements.
53
THE DESCARTES SYSTEMS GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US DOLLARS IN THOUSANDS; US GAAP)
Year Ended
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation
Amortization of intangible assets
Stock-based compensation expense (Note 16)
Other non-cash operating activities
Deferred tax expense
Deferred tax charge
Changes in operating assets and liabilities:
Accounts receivable
Trade
Other
Prepaid expenses and other
Inventory
Accounts payable
Accrued liabilities
Income taxes payable
Deferred revenue
Cash provided by operating activities
INVESTING ACTIVITIES
Purchase of marketable securities
Additions to property and equipment
Acquisition of subsidiaries, net of cash acquired and bank indebtedness
assumed (Note 3)
Cash used in investing activities
FINANCING ACTIVITIES
Proceeds from borrowing on the debt facility
Payment of debt issuance costs
Repayments of debt and other financial liabilities
Issuance of common shares for cash, net of issuance costs
Settlement of stock options (Note 16)
Cash (used in) provided by financing activities
Effect of foreign exchange rate changes on cash
(Decrease) increase in cash
Cash, beginning of year
Cash, end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for interest
Cash paid during the year for income taxes
January 31, January 31, January 31,
2016
2015
2014
20,562
15,059
9,612
3,377
26,222
1,577
(392)
5,765
22
3,295
21,715
1,543
-
3,396
17,999
2,523
-
3,978
2,353
-
-
764
203
(86)
314
3,999
4,869
141
859
(412)
(3,121)
25
(1,690)
(294)
(73)
3,650
2,164
91
(535)
146
2,051
596
(2,008)
(2,492)
(1,432)
54,243
49,478
42,614
(4,667)
-
-
(4,309)
(2,679)
(2,385)
(120,853)
(82,152)
(58,737)
(129,829)
(84,831)
(61,122)
-
-
-
20,000
46,262
(386)
(692)
(63,305)
(3,722)
158
140,724
3,633
(2,590)
(405)
(1,361)
(2,432)
96,628
44,120
(2,822)
(5,927)
(545)
(80,840)
118,053
55,348
62,705
37,213
118,053
25,067
37,638
62,705
31
3,533
692
2,983
406
1,762
The accompanying notes are an integral part of these consolidated financial statements.
54
THE DESCARTES SYSTEMS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE INDICATED;
US GAAP)
Note 1 - Description of the Business
The Descartes Systems Group Inc. (“Descartes”, “Company”, “our” or “we”) is a global provider of
federated network and global logistics technology solutions that help our customers make and receive
shipments and manage related resources. Our network-based solutions, which primarily consist of
services and software, connect people to their trading partners and enable business document exchange
(bookings, bills of lading, status messages); regulatory compliance and customs filing; route and
resource planning, execution and monitoring; access and leverage global trade and restricted party
data; inventory and asset visibility; rate and transportation management; and warehouse operations.
Our pricing model provides our customers with flexibility in purchasing our solutions either on a
perpetual license, subscription or transactional basis. Our primary focus is on serving transportation
providers (air, ocean and truck modes), logistics service providers (including third-party logistics
providers, freight forwarders and customs brokers) and distribution-intensive companies where delivery
is either a key or a defining part of their own product or service offering, or where there is an
opportunity to reduce costs and improve service levels by optimizing the use of their assets.
Note 2 –Basis of Presentation
The accompanying consolidated financial statements are presented in United States (“US”) dollars and
are prepared in accordance with generally accepted accounting principles in the US (“GAAP”) and the
rules and regulations of the Canadian Securities Administrators and US Securities and Exchange
Commission (“SEC”) for the preparation of consolidated financial statements.
Our fiscal year commences on February 1st of each year and ends on January 31st of the following year.
Our fiscal year, which ends on January 31, 2016, is referred to as the “current fiscal year”, “fiscal 2016”,
“2016” or using similar words. Our previous fiscal year, which ended on January 31, 2015, is referred to
as the “previous fiscal year”, “fiscal 2015”, “2015” or using similar words. Other fiscal years are
referenced by the applicable year during which the fiscal year ends. For example, “2017” refers to the
annual period ending January 31, 2017 and the “fourth quarter of 2017” refers to the quarter ending
January 31, 2017.
We have reclassified certain immaterial items in the consolidated financial statements to conform to the
current presentation.
Basis of consolidation
The consolidated financial statements include the financial statements of Descartes and our wholly-
owned subsidiaries. We do not have any variable interests in variable interest entities. All intercompany
accounts and transactions have been eliminated during consolidation.
Financial instruments
Fair value of financial instruments
In accordance with Financial Accounting Standards Board (“FASB”), Accounting Standards Codification
(“ASC”) Topic 320 "Investments - Debt and Equity Securities" (Topic 320) related to accounting for certain
investments in equity securities, and based on our intentions regarding these instruments, we classify our
marketable securities as available for sale and account for these investments at fair value.
The carrying amounts of the Company’s cash, accounts receivable (net), accounts payable, accrued
liabilities and income taxes payable approximate their fair value due to the relatively short period of time
between origination of the instruments and their expected realization.
55
Foreign exchange risk
We are exposed to foreign exchange risk because the Company transacts business in currencies other than
the US dollar. Accordingly, our results are affected, and may be affected in the future, by exchange rate
fluctuations of the US dollar relative to the Canadian dollar, euro and various other foreign currencies.
Interest rate risk
We are exposed to interest rate fluctuations to the extent that we borrow on our revolving debt facility,
which depending on the type of advance under the available facilities, interest will be charged based on
either i) Canada prime rate; or ii) US base rate; or iii) LIBOR. As of January 31, 2016, all amounts
previously borrowed under the revolving debt facility have been repaid and no amounts remain owing.
We are also exposed to reductions in interest rates, which could adversely impact expected returns from
our investment of corporate funds in interest bearing bank accounts.
Credit risk
We are exposed to credit risk through our invested cash and accounts receivable. We hold our cash with
reputable financial institutions. The lack of concentration of accounts receivable from a single customer and
the dispersion of customers among industries and geographical locations mitigate our credit risk.
We do not use any type of speculative financial instruments, including but not limited to foreign exchange
contracts, futures, swaps and option agreements, to manage our foreign exchange or interest rate risks. In
addition, we do not hold or issue financial instruments for trading purposes.
Foreign currency translation
The US dollar is the presentation currency of the Company. Assets and liabilities of our subsidiaries are
translated into US dollars at the exchange rate in effect at the balance sheet date. Revenues and
expenses are translated into US dollars using daily exchange rates. Translation adjustments resulting
from this process are accumulated in other comprehensive income (loss) as a separate component of
shareholders’ equity. On substantial liquidation of a foreign operation, the component of other
accumulated comprehensive income relating to that particular foreign operation is recognized in the
consolidated statements of operations.
The functional currency of each of our entities is the local currency in which they operate. Transactions
incurred in currencies other than the local currency of an entity are converted to the local currency at
the transaction date. Monetary assets and liabilities denominated in foreign currencies are re-measured
into the local currency at the exchange rate in effect at the balance sheet date. All foreign currency re-
measurement gains and losses are included in net income. For the year ended January 31, 2016, foreign
currency re-measurement loss of $0.2 million was included in net income (January 31, 2015 – gain of
$1.4 million; January 31, 2014 – loss of $0.2 million).
Use of estimates
Preparing financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts that are reported in the consolidated financial statements and
accompanying note disclosures. Although these estimates and assumptions are based on management’s
best knowledge of current events, actual results may be different from the estimates. These estimates,
judgments and assumptions are evaluated on an ongoing basis. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable at that time, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources.
Estimates and assumptions are used when accounting for items such as allocations of the purchase price
and the fair value of net assets acquired in business combination transactions, useful lives of intangible
assets and property and equipment, allowance for doubtful accounts, collectability of other receivables,
provisions for excess or obsolete inventory, restructuring accruals, revenue related estimates including
vendor-specific objective evidence (“VSOE”) of selling price and best estimate of selling price (“BESP”),
56
fair value of stock-based compensation, assumptions embodied in the valuation of assets for impairment
assessment, valuation allowances for deferred income tax assets, realization of investment tax credits,
uncertain tax positions and recognition of contingencies.
Cash
Cash included highly liquid short-term deposits with original maturities of three months or less.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of
customers to make their required payments. Specifically, we consider the age of the receivables,
customers’ payment history, historical write-offs, the creditworthiness of the customer, and current
economic trends among other factors. Accounts receivable are written off, and the associated allowance
is eliminated, if it is determined that the specific balance is no longer collectible. The allowance is
maintained for 100% of all accounts deemed to be uncollectible and, for those receivables not
specifically identified as uncollectible, an allowance is maintained for a specific percentage of those
receivables based upon the aging of accounts, our historical collection experience and current economic
expectations. To date, the actual losses have been within our expectations. No single customer
accounted for more than 10% of the accounts receivable balance as of January 31, 2016 and 2015.
Inventory
Finished goods inventories are stated at the lower of cost and market. The cost of finished goods is
determined on the basis of average cost of units.
The valuation of inventory, including the determination of obsolete or excess inventory, requires
management to estimate the future demand for our products within specified time horizons. We perform
an assessment of inventory which includes a review of, among other factors, demand requirements,
product life cycle and development plans, product pricing and quality issues. If the demand for our
products indicates we are no longer able to sell inventories above cost or at all, we write down inventory
to market or excess inventory is written off.
Impairment of long-lived assets
We test long-lived assets or asset groups, such as property and equipment and finite life intangible
assets, for recoverability when events or changes in circumstances indicate that there may be
impairment. Circumstances which could trigger a review include, but are not limited to: significant
adverse changes in the business climate or legal factors; current period cash flow or operating losses
combined with a history of losses or a forecast of continuing losses associated with the use of the asset
or asset group; and a current expectation that the asset or asset group will more likely than not be sold
or disposed of before the end of its estimated useful life. An impairment loss is recognized when the
estimate of undiscounted future cash flows generated by such asset or asset group is less than the
carrying amount. Measurement of the impairment loss is based on the present value of the expected
future cash flows. No impairment of long-lived assets has been identified or recorded in our consolidated
statements of operations for any of the fiscal years presented.
Goodwill and intangible assets
Goodwill represents the excess of the purchase price in a business combination over the fair value of net
tangible and intangible assets acquired. Goodwill is not subject to amortization.
We test for impairment of goodwill at least annually on October 31st of each year and at any other time
if any event occurs or circumstances change that would more likely than not reduce our fair value below
our reporting unit’s carrying amount. Our operations are analyzed by management and our chief
operating decision makers as being part of a single industry segment providing logistics technology
solutions. Accordingly, our goodwill impairment assessment is based on the allocation of goodwill to a
single reporting unit. We completed the qualitative assessment during our third quarter of 2016 and
concluded that it was more likely than not that the fair value of the goodwill was greater than the
57
carrying value. As a result, no impairment of goodwill was recorded in fiscal 2016 (no impairments were
recorded for fiscal 2015 or fiscal 2014).
We perform further quarterly analysis of whether any event has occurred that would more likely than
not reduce our fair value below our reporting unit’s carrying amount and, if so, we perform a goodwill
impairment test between the annual date. Any impairment adjustment is recognized as an expense in
the period that the adjustment is identified.
Intangible assets related to our acquisitions are recorded at their fair value at the acquisition date.
Intangible assets include customer agreements and relationships, non-compete covenants, existing
technologies and trade names. Intangible assets are amortized on a straight-line basis over their
estimated useful lives. We write down intangible asset or asset groups with a finite life to fair value
when the related undiscounted cash flows are not expected to allow for recovery of the carrying value.
Fair value of intangible asset or asset groups is determined by discounting the expected related future
cash flows.
Amortization of our intangible assets is generally recorded at the following rates:
Customer agreements and relationships
Existing technologies
Trade names
Non-compete covenants
Straight-line over three to twenty years
Straight-line over three to twelve years
Straight-line over one to fifteen years
Straight-line over two to twelve years
Property and equipment
Property and equipment is recorded at cost. Depreciation of our property and equipment is generally
recorded at the following rates:
Computer equipment and software 30% declining balance
20% declining balance
Furniture and fixtures
Straight-line over lesser of useful life or term of lease
Leasehold improvements
Fully depreciated property and equipment are removed from the balance sheet when they are no longer
in use.
Revenue recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or
realizable and earned when there exists persuasive evidence of an arrangement, the product has been
delivered or the services have been provided to the customer, the sales price is fixed or determinable
and collectability is reasonably assured. All revenue is recognized net of any related sales taxes. In
addition to this general policy, the specific revenue recognition policies for each major category of
revenue are included below.
Services Revenues - Services revenues are principally comprised of the following: (i) ongoing
transactional fees for use of our services and products by our customers, which are recognized as the
transactions occur; (ii) professional services revenues from consulting, implementation and training
services related to our services and products, which are recognized as the services are performed; (iii)
maintenance, subscription and other related revenues, including revenues associated with maintenance
and support of our services and products, which are recognized ratably over the subscription period; and
(iv) hardware revenues, which are recognized when hardware is shipped.
License Revenues - License revenues are derived from perpetual licenses granted to our customers to
use our software products.
We enter into arrangements from time to time that may consist of multiple deliverables which may
include any combination of services and software licenses. Our typical multiple-element arrangements
58
involve: (i) software with maintenance support services, (ii) professional services with one time set-up
fees and (iii) hardware with services. For any arrangements involving multiple deliverables involving
non-software elements (hardware, one time set-up fees, professional services, subscription, etc.) the
consideration from the arrangement is allocated to each respective element based on its relative selling
price, using VSOE of selling price. In instances when we are unable to establish the selling price using
VSOE, we attempt to establish selling price of each element based on acceptable third party evidence of
selling price (“TPE”); however we are generally unable to reliably determine the selling price of similar
competitor products or services on a stand-alone basis. In these instances, we use our BESP in our
allocation of the arrangement consideration. The objective of BESP is to determine the price at which we
would transact a sale if the product or service was sold on a stand-alone basis. We determine BESP for
each specific element in a multiple element arrangement considering multiple factors including, but not
limited to, market conditions, competitive landscape, internal costs, gross margin objectives and pricing
practices.
For arrangements involving multiple deliverables of software with maintenance support services, the
revenue is recognized based ASC Subtopic 985-605 “Software: Revenue Recognition”. If we are unable
to determine VSOE of fair value for all of the deliverables of the arrangement, but are able to obtain
VSOE of fair value for all the undelivered elements, revenue is allocated using the residual method.
Under the residual method, the amount of revenue allocated to the delivered elements equals the total
arrangement consideration less the aggregate fair value of any undelivered elements. If VSOE of fair
value of any undelivered software items does not exist, revenue from the entire arrangement is initially
deferred and recognized at the earlier of: (i) delivery of those elements for which VSOE of fair value did
not exist; or (ii) when VSOE of fair value can be established.
Research and development costs
To date, we have not capitalized any costs related to research and development of our computer
software products. Costs incurred between the dates that the product is considered to be technologically
feasible and is considered to be ready for general release to customers have historically been expensed
as they have not been significant.
Stock-based compensation plans
Stock Options
We maintain stock option plans for directors, officers, employees and other service providers. Options to
purchase our common shares are granted at an exercise price equal to the fair market value of our
common shares as of the date of grant. This fair market value is determined using the closing price of
our common shares on the TSX on the day immediately preceding the date of the grant.
Employee stock options generally vest over a five-year period starting from the grant date and expire
seven years from the grant date. Directors’ and officers’ stock options generally have quarterly vesting
over a three- to five-year period. We issue new shares from treasury upon the exercise of a stock
option.
The fair value of employee stock option grants that are ultimately expected to vest are amortized to
expense in our consolidated statement of operations based on the straight-line attribution method. The
fair value of stock option grants is calculated using the Black-Scholes Merton option-pricing model.
Expected volatility is based on historical volatility of our common stock and other factors. The risk-free
interest rates are based on Government of Canada average bond yields for a period consistent with the
expected life of the option in effect at the time of the grant. The expected option life is based on the
historical life of our granted options and other factors.
Performance & Restricted Share Units
We maintain a performance and restricted share unit plan pursuant to which certain of our officers are
eligible to receive grants of performance share units (“PSUs”) and restricted share units (“RSUs”).
PSUs vest at the end of a three-year performance period. The ultimate number of PSUs that vest is
based on the total shareholder return (“TSR”) of our Company relative to the TSR of companies
59
comprising a peer index group. TSR is calculated based on the weighted-average closing price of shares
for the five trading days preceding the beginning and end of the performance period. The fair value of
PSUs is expensed to stock-based compensation expense over the vesting period. PSUs expire ten years
from the grant date. New shares are issued from treasury upon the redemption of a PSU.
PSUs are measured at fair value estimated using a Monte Carlo Simulation approach. Expected volatility
is based on historical volatility of our common stock and other factors. The risk-free interest rates are
based on the Government of Canada average bond yields for a period consistent with the expected life
of the PSUs at the time of the grant. The expected PSU life is based on the historical life of our stock
options and other factors.
RSUs vest annually over a three-year period starting from the grant date and expire ten years from the
grant date. We issue new shares from treasury upon the redemption of an RSU.
RSUs are measured at fair value based on the closing price of our common shares for the day preceding
the date of the grant and will be expensed to stock-based compensation expense over the vesting
period.
Deferred Share Unit Plan
Our board of directors adopted a deferred share unit plan effective as of June 28, 2004, pursuant to
which non-employee directors are eligible to receive grants of deferred share units (“DSUs”), each of
which has an initial value equal to the weighted-average closing price of our common shares for the five
trading days preceding the grant date. The plan allows each director to choose to receive, in the form of
DSUs, all, none or a percentage of the eligible director’s fees which would otherwise be payable in cash.
If a director has invested less than the minimum amount of equity in Descartes, as prescribed from time
to time by the board of directors then the director must take at least 50% of the base annual fee for
serving as a director in the form of DSUs. Each DSU fully vests upon award but is distributed only when
the director ceases to be a member of the board of directors. Vested units are settled in cash based on
our common share price when conversion takes place. Fair value of the liability is based on the closing
price of our common shares at the balance sheet date.
Cash-Settled Restricted Share Unit Plan
Our board of directors adopted a cash-settled restricted share unit plan effective as of May 23, 2007,
pursuant to which certain of our employees and outside directors are eligible to receive grants of cash-
settled restricted share units (“CRSUs”), each of which has an initial value equal to the weighted-
average closing price of our common shares for the five trading days preceding the date of the grant.
The CRSUs generally vest based on continued employment and have annual vesting over three- to five-
year periods. Vested units are settled in cash based on our common share price when conversion takes
place, which is within 30 days following a vesting date and in any event prior to December 31st of the
calendar year in which a vesting date occurs. Fair value of the liability is based on the closing price of
our common shares at the balance sheet date.
Business combinations
We apply the provisions of ASC Topic 805, “Business Combinations” (Topic 805), in the accounting for
our acquisitions. It requires us to recognize separately from goodwill, the assets acquired and the
liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as
the excess of consideration transferred over the net of the acquisition date fair values of the assets
acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately
value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration,
where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during
the measurement period, which may be up to one year from the acquisition date, we may record
adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.
Upon the conclusion of the measurement period or final determination of the values of assets acquired
or liabilities assumed, whichever comes first, any subsequent adjustments would be recorded to our
consolidated statement of operations.
60
Costs to exit or restructure certain activities of an acquired company or our internal operations are
accounted for as termination and exit costs pursuant to ASC Topic 420, “Exit or Disposal Cost
Obligations” (Topic 420) and are accounted for separately from the business combination.
For a given acquisition, we generally identify certain pre-acquisition contingencies as of the acquisition
date and may extend our review and evaluation of these pre-acquisition contingencies throughout the
measurement period in order to obtain sufficient information to assess whether we include these
contingencies as a part of the purchase price allocation and, if so, to determine the estimated amounts.
If we determine that a pre-acquisition contingency (non-income tax related) is probable in nature and
estimable as of the acquisition date, we record our best estimate for such a contingency as a part of the
preliminary purchase price allocation. We often continue to gather information and evaluate our pre-
acquisition contingencies throughout the measurement period and if we make changes to the amounts
recorded or if we identify additional pre-acquisition contingencies during the measurement period, such
amounts will be included in the purchase price allocation during the measurement period and,
subsequently, in our results of operations.
Uncertain tax positions and tax related valuation allowances assumed in connection with a business
combination are initially estimated as of the acquisition date. We review these items during the
measurement period as we continue to actively seek and collect information relating to facts and
circumstances that existed at the acquisition date. Changes to these uncertain tax positions and tax
related valuation allowances made subsequent to the measurement period, or if they relate to facts and
circumstances that did not exist at the acquisition date, are recorded in our provision for income taxes in
our consolidated statement of operations.
Income taxes
We use the liability method of income tax allocation to account for income taxes. Deferred tax assets
and liabilities arise from temporary differences between the tax bases of assets and liabilities and their
reported amounts in the consolidated financial statements that will result in taxable or deductible
amounts in future years. These temporary differences are measured using enacted tax rates. A valuation
allowance is recorded to reduce deferred tax assets to the extent that we consider it is more likely than
not that a deferred tax asset will not be realized. In determining the valuation allowance, we consider
factors such as the reversal of deferred income tax liabilities, projected taxable income, our history of
losses for tax purposes, and the character of income tax assets and tax planning strategies. A change to
these factors could impact the estimated valuation allowance and income tax expense.
We evaluate our uncertain tax positions by using a two-step approach to recognizing and measuring
uncertain tax positions and provisions for income taxes. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates it is more likely than not, based
solely on the technical merits, that the position will be sustained on audit, including resolution of related
appeals or litigation processes, if any. The second step is to measure the appropriate amount of the
benefit to recognize. The amount of benefit to recognize is measured as the maximum amount which is
more likely than not to be realized. The tax position is derecognized when it is no longer more likely
than not that the position will be sustained on audit. We continually assess the likelihood and amount of
potential adjustments and adjust the income tax provisions, income taxes payable and deferred income
taxes in the period in which the facts that give rise to a revision become known.
Earnings per share
Basic earnings per share is calculated by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted earnings per common share is calculated by
dividing net income by the sum of the weighted average number of common shares outstanding and all
additional common shares that would have been outstanding if potentially dilutive common shares had
been issued during the period. The treasury stock method is used to compute the dilutive effect of
stock-based compensation.
61
Recently adopted accounting pronouncements
In September 2015, the FASB issued Accounting Standards Update 2015-16, “Business Combinations
(Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU
2015-16 provides guidance to more clearly articulate the accounting requirements for measurement-
period adjustments related to a business combination. ASU 2015-16 is effective for annual periods, and
interim periods within those annual periods, beginning after December 15, 2015, which will be our fiscal
year beginning February 1, 2016. Early adoption is permitted and the Company adopted ASU 2015-16 in
the third quarter of fiscal 2016. The adoption of this standard did not have a material impact on our
results of operations or disclosures.
In November 2015, the FASB issued Accounting Standards Update 2015-17, “Income Taxes (Topic 740):
Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). ASU 2015-17 requires entities with a
classified balance sheet to present all deferred tax assets and liabilities as noncurrent. ASU 2015-17 is
effective for annual periods, and interim periods within those annual periods, beginning after December
15, 2016, which will be our fiscal year beginning February 1, 2017. Early adoption at the beginning of an
interim or annual period is permitted. Entities can adopt this standard either prospectively or
retrospectively. The Company adopted ASU 2015-17 in the fourth quarter of fiscal 2016 on a prospective
basis. As a result, we have presented all deferred tax assets and liabilities as noncurrent in our
consolidated balance sheet as of January 31, 2016, but have not reclassified current deferred tax assets
and liabilities in our consolidated balance sheet as of January 31, 2015. There was no impact on our
results of operations as a result of the adoption of ASU 2015-17.
Recently issued accounting pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with
Customers” (“ASU 2014-09”). This update supersedes the revenue recognition requirements in ASC
Topic 605, "Revenue Recognition" and nearly all other existing revenue recognition guidance under US
GAAP. The core principal of ASU 2014-09 is to recognize revenues when promised goods or services are
transferred to customers in an amount that reflects the consideration that is expected to be received for
those goods or services. In August 2015, the FASB issued Accounting Standards Update 2015-14 which
defers the effective date of ASU 2014-09 for one year. ASU 2014-09 is now effective for annual periods,
and interim periods within those annual periods, beginning after December 15, 2017, which will be our
fiscal year beginning February 1, 2018. Early adoption as of the original effective date of ASU 2014-09 is
permitted. When applying ASU 2014-09 we can either apply the amendments: (i) retrospectively to each
prior reporting period presented with the option to elect certain practical expedients as defined within
ASU 2014-09 or (ii) retrospectively with the cumulative effect of initially applying ASU 2014-09
recognized at the date of initial application and providing certain additional disclosures as defined within
ASU 2014-09. We are currently evaluating the effect that the pending adoption of ASU 2014-09 will
have on our results of operations, financial position and disclosures. Although it is expected to have a
impact on our revenue recognition policies and disclosures, we have not yet selected a transition method
nor have we determined when we will adopt the standard and the effect of the standard on our ongoing
financial reporting.
In August 2014, the FASB issued Accounting Standards Update 2014-15, “Presentation of Financial
Statements – Going Concern (Subtopic 2015-40)” (“ASU 2014-15”). ASU 2014-15 requires an entity’s
management to evaluate whether there are conditions or events that raise substantial doubt about the
entity’s ability to continue as a going concern within one year after the date that the financial
statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016,
and for annual periods and interim periods thereafter, which will be our fiscal year beginning February 1,
2016. Early adoption is permitted. The Company will adopt this guidance in the fourth quarter of fiscal
2017. The adoption of this amendment is not expected to have a material impact on our results of
operations or disclosures.
In April 2015, the FASB issued Accounting Standards Update 2015-03, “Interest – Imputation of Interest
(Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03
simplifies the presentation of debt issuance costs. ASU 2015-03 is effective for annual periods, and
62
interim periods within those annual periods, beginning after December 15, 2015, which will be our fiscal
year beginning February 1, 2016. Early adoption is permitted. The Company will adopt this guidance in
the first quarter of fiscal 2017. The adoption of this amendment is not expected to have a material
impact on our results of operations or disclosures.
In April 2015, the FASB issued Accounting Standards Update 2015-05, “Intangibles – Goodwill and Other
– Internal Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement” (“ASU 2015-05”). ASU 2015-05 provides guidance about whether a cloud computing
arrangement includes a software license. ASU 2015-05 is effective for annual periods, and interim
periods within those annual periods, beginning after December 15, 2015, which will be our fiscal year
beginning February 1, 2016. Early adoption is permitted. The Company will adopt this guidance in the
first quarter of fiscal 2017. The adoption of this amendment is not expected to have a material impact
on our results of operations or disclosures.
In July 2015, the FASB issued Accounting Standards Update 2015-11, “Inventory (Topic 330):
Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 provides guidance to more
clearly articulate the requirements for the measurement and disclosure of inventory. ASU 2015-11 is
effective for annual periods, and interim periods within those annual periods, beginning after December
15, 2016, which will be our fiscal year beginning February 1, 2017. The Company will adopt this
guidance in the first quarter of fiscal 2018. The adoption of this amendment is not expected to have a
material impact on our results of operations or disclosures.
In January 2016, the FASB issued Accounting Standards Update 2016-01, “Financial Instruments—
Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”
(“ASU 2016-01”). ASU 2016-01 supersedes the guidance to classify equity securities with readily
determinable fair values into different categories reducing the number of items that are recognized in
other comprehensive income as well as simplifying the impairment assessment of equity investments
without readily determinable fair values. ASU 2016-01 is effective for annual periods, and interim
periods within those annual periods, beginning after December 15, 2017, which will be our fiscal year
beginning February 1, 2018. The Company will adopt this guidance in the first quarter of fiscal 2019 and
is currently evaluating the impact that the adoption will have on its results of operations, financial
position and disclosures.
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases (Topic 842)” (“ASU
2016-02”). ASU 2016-02 supersedes the lease guidance in ASC Topic 840, “Leases” and requires the
recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases.
ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning
after December 15, 2018, which will be our fiscal year beginning February 1, 2019. The Company will
adopt this guidance in the first quarter of fiscal 2020 and is currently evaluating the impact that the
adoption will have on its results of operations, financial position and disclosures.
Note 3 – Acquisitions
On November 25, 2015, we acquired Oz Development Inc. (“Oz”), a leading US-based provider of
application integration solutions that help small-to-medium sized businesses (“SMBs”) automate a
number of logistics and supply chain processes. The solutions help a growing SMB community connect
to, and integrate with, leading SMB ERP, CRM and e-commerce platforms. The total purchase price for
the acquisition was $29.5 million, net of cash acquired, which was funded with cash on hand. The gross
contractual amount of trade receivables acquired was $0.3 million with a fair value of $0.3 million at the
date of acquisition. Our acquisition date estimate of contractual cash flows not expected to be collected
was nil. The finalization of the initial purchase price allocation is pending the determination of the
finalization of the fair value for certain taxation-related and accrued liability balances, as well as
potential unrecorded liabilities. We expect to finalize this determination on or before November 25,
2016.
On July 22, 2015, we acquired all outstanding shares of privately-held BearWare Inc. (“BearWare”), a
63
leading US-based provider of mobile solutions designed to improve collaboration between retailers and
their logistics service providers. BearWare's system leverages mobile technologies to scan cartons at
each point from the distribution centers through to the store front, helping retailers and their logistics
service providers collaborate on store shipments. The total purchase price for the acquisition was $11.2
million, net of cash acquired, which was funded with cash on hand. The gross contractual amount of
trade receivables acquired was $0.8 million with a fair value of $0.7 million at the date of acquisition.
Our acquisition date estimate of contractual cash flows not expected to be collected was $0.1 million.
The finalization of the initial purchase price allocation is pending the determination of the finalization of
the fair value for certain taxation-related and accrued liability balances, as well as potential unrecorded
liabilities. We expect to finalize this determination on or before July 22, 2016.
On July 20, 2015, we acquired all outstanding shares of privately-held MK Data Services LLC (“MK
Data”), a leading US-based provider of denied party screening trade data and solutions. MK Data's
technology screens shipments against a comprehensive, frequently updated, international database of
restricted parties helping businesses comply with denied party screening requirements. The total
purchase price for the acquisition was $80.2 million, net of cash acquired, which was funded with cash
on hand. The acquisition included an employee retention agreement to provide up to $3.1 million in
retention bonuses to employees conditional on future services rendered over a specified time period.
These amounts are being expensed over the service periods. The gross contractual amount of trade
receivables acquired was $1.3 million with a fair value of $1.2 million at the date of acquisition. Our
acquisition date estimate of contractual cash flows not expected to be collected was $0.1 million. The
finalization of the initial purchase price allocation is pending the determination of the finalization of the
fair value for certain taxation-related and accrued liability balances, as well as potential unrecorded
liabilities. We expect to finalize this determination on or before July 20, 2016.
For businesses acquired during 2016, we incurred acquisition-related costs of $1.2 million, primarily for
advisory services and retention bonuses. These costs are included in other charges in our consolidated
statements of operations. During 2016, we have recognized aggregate revenues of $7.7 million and
aggregate net income of $2.4 million from MK Data, BearWare and Oz since the date of acquisition in
our consolidated statements of operations.
The preliminary purchase price allocations for businesses acquired during 2016, which have not been
finalized, is as follows:
Purchase price consideration:
Cash, net of cash acquired related to MK Data
($345), BearWare ($243) and Oz ($870)
Net working capital adjustments (receivable)
Allocated to:
Current assets, excluding cash acquired
Property and equipment
Current liabilities
Deferred revenue
Net tangible assets (liabilities) assumed
Finite life intangible assets acquired:
Customer agreements and relationships
Existing technology
Tradenames
Non-compete covenants
Goodwill
MK Data
BearWare
Oz
Total
80,151
(133)
80,018
11,243
(19)
11,224
29,459
(61)
29,398
120,853
(213)
120,640
2,034
-
(204)
(2,610)
(780)
7,500
22,000
190
-
51,108
80,018
759
-
(112)
(451)
196
440
29
(304)
(1,634)
(1,469)
2,600
3,400
70
-
4,958
11,224
5,400
7,500
90
240
17,637
29,398
3,233
29
(620)
(4,695)
(2,053)
15,500
32,900
350
240
73,703
120,640
64
The above transactions were accounted for using the acquisition method in accordance with ASC Topic
805, “Business Combinations”. The purchase price allocation in the table above represents our estimates
of the allocations of the purchase price and the fair value of net assets acquired. The preliminary
purchase price may differ from the final purchase price allocation, and these differences may be
material. Revisions to the valuation will occur as additional information about the fair value of assets and
liabilities becomes available. The final purchase price allocation will be completed within one year from
the acquisition date.
No in-process research and development was acquired in these transactions.
The acquired intangible assets are being amortized over their estimated useful lives as follows:
Customer agreements and relationships
Existing technology
Tradenames
Non-compete covenants
MK Data
13 years
7 years
5 years
N/A
BearWare
11 years
5 years
5 years
N/A
Oz
9 years
5 years
3 years
5 years
The goodwill on the MK Data, BearWare and Oz acquisitions arose as a result of the combined strategic
value to our growth plan. The goodwill arising from the MK Data, BearWare and Oz acquisitions is
deductible for tax purposes.
On December 5, 2014, we acquired all outstanding shares of privately-held Pentant Limited (“Pentant”),
a leading UK-based Community System Provider offering customs connectivity and import/export
inventory control solutions for ocean, truck and air cargo. Pentant provides its shipper and logistics
customers with a reliable and secure connection to both CHIEF (the central UK Revenue & Customs
system) and ICS (the European Union Import Control System) to streamline declaration, cargo security
and clearance processes. The total purchase price for the acquisition was $2.1 million, net of cash
acquired, which was funded with cash on hand. Additional contingent consideration of up to $0.4 million
in cash may have become payable had certain revenue performance targets been met by Pentant during
2016. The fair value of the contingent consideration was valued at nil at the acquisition date and
January 31, 2016. The gross contractual amount of trade receivables acquired was $0.1 million with a
fair value of $0.1 million at the date of acquisition.
On December 5, 2014, we acquired all outstanding shares of privately-held e-customs Inc. (“e-
customs”), a leading provider of electronic security and fiscal customs filing solutions in the UK. e-
customs' cloud-based solution, Webdecs, provides both shippers and logistics service providers with a
wide range of customs capabilities to cost effectively comply with UK fiscal filing and security filing
requirements. The total purchase price for the acquisition was $9.6 million, net of cash acquired, which
was funded with cash on hand. Additional contingent consideration of up to $1.2 million in cash may
have become payable had certain revenue performance targets been met by e-customs during 2016.
The fair value of the contingent consideration was valued at nil at the acquisition date and January 31,
2016. The gross contractual amount of trade receivables acquired was $0.2 million with a fair value of
$0.2 million at the date of acquisition.
On November 19, 2014, we acquired all outstanding shares of privately-held Airclic Inc. (“Airclic”), a
leading US-based provider of mobile solutions that help companies reduce the cost of delivering goods
by automating traditional paper-based processes. Airclic's cloud-based mobile solutions help streamline
and automate complex 'last mile' logistics processes. The total purchase price for the acquisition was
$29.6 million, net of cash acquired, which was funded with cash on hand. The gross contractual amount
of trade receivables acquired was $4.5 million with a fair value of $4.5 million at the date of acquisition.
Our acquisition date estimate of contractual cash flows not expected to be collected was nil.
In the third quarter of 2016, the preliminary purchase price allocation for Airclic was finalized resulting in
65
a $0.8 million increase to goodwill and income taxes payable.
On May 30, 2014 we acquired all outstanding membership interests of privately-held Customs Info, LLC
(“Customs Info”), a leading US-based provider of trade data content to power Global Trade Management
(GTM) systems and streamline global trade automation. The total purchase price for the acquisition was
$39.5 million, net of cash acquired, which was funded by $34.1 million in cash and approximately 0.4
million Descartes common shares valued at $5.4 million. As part of completing the acquisition $20.0
million of the $39.5 million purchase price was funded by drawing on our revolving debt facility, which
was subsequently repaid. Additional contingent consideration of up to $3.9 million in cash may have
become payable had certain revenue performance targets been met by Customs Info during the
calendar year 2014. The fair value of the contingent consideration was valued at nil at the acquisition
date and the performance targets were not met. The gross contractual amount of trade receivables
acquired was $1.8 million with a fair value of $1.7 million at the date of acquisition. Our acquisition date
estimate of contractual cash flows not expected to be collected was $0.1 million.
On April 1, 2014, we acquired all outstanding shares of privately-held Computer Management USA, Inc.
and Computer Management NA, Inc. (collectively, “Computer Management”), a US-based provider of
security filing solutions and air cargo management solutions for airlines and their partners. The total
purchase price for the acquisition was $6.7 million, net of cash acquired, which was funded with cash on
hand. The gross contractual amount of trade receivables acquired was $0.2 million with a fair value of
$0.2 million at the date of acquisition. Our acquisition date estimate of contractual cash flows not
expected to be collected was nil.
For businesses acquired during 2015, we incurred acquisition-related costs of $1.5 million, primarily for
advisory services and retention bonuses. These costs are included in other charges in our consolidated
statements of operations.
The final purchase price allocations for businesses we acquired during 2015 are as follows:
Computer
Management
Customs
Info
Airclic e-customs Pentant
Total
Purchase price consideration:
Cash, excluding cash acquired
related to Computer Management
($112), Customs Info (nil), Airclic
($117), e-customs ($1,983) and
Pentant ($21)
Common shares issued
Net working capital adjustments
(receivable) / payable
Allocated to:
Current assets, excluding cash
acquired
Property and equipment
Current liabilities
Deferred revenue
Deferred income tax liability
Debt
Net tangible assets (liabilities)
assumed
Finite life intangible assets acquired:
Customer agreements and
relationships
6,689
-
3
6,692
211
65
(10)
(8)
-
-
258
34,121
5,382
29,597
-
9,611
-
2,134
-
82,152
5,382
(813)
38,690
(318)
29,279
(41)
9,570
(13)
2,121
(1,182)
86,352
1,754
-
(556)
(3,147)
-
(927)
(2,876)
4,990
440
(3,466)
(6,930)
-
-
(4,966)
1,190
7
(399)
(19)
(1,053)
-
(274)
142
-
(658)
8,287
512
(5,089)
(38) (10,142)
(1,368)
(927)
(8,727)
(315)
-
(869)
3,256
8,650
7,802
2,318
1,336
23,362
66
Existing technology
Trade names
Non-compete covenants
Goodwill
1,840
-
-
1,338
6,692
5,708
682
391
26,135
38,690
13,786
-
177
12,480
29,279
2,807
-
138
4,581
9,570
595
-
-
1,059
2,121
24,736
682
706
45,593
86,352
No in-process research and development was acquired in these transactions.
The acquired intangible assets are being amortized over their estimated useful lives as follows:
Computer
Management
Customs
Info
Airclic
e-customs
Pentant
Customer agreements
and relationships
Existing technology
Trade names
Non-compete covenants
9 years
6 years
N/A
N/A
9 years
3 years
15 years
12 years
9 years
8 years
N/A
12 years
10 years
6 years
N/A
12 years
9 years
6 years
N/A
N/A
The goodwill on the Pentant, e-customs, Airclic, Customs Info and Computer Management acquisitions
arose as a result of the combined strategic value to our growth plan. The goodwill arising from the
Pentant and e-customs acquisitions is not deductible for tax purposes. The goodwill arising from the
Airclic, Customs Info and Computer Management acquisitions is deductible for tax purposes
On December 23, 2013, we acquired all outstanding shares of privately-held Impatex Freight Software
Limited (“Impatex”), a leading UK-based provider of electronic customs filing and freight forwarding
solutions. The total purchase price for the acquisition was $8.2 million, net of cash acquired, which was
funded by drawing on our revolving debt facility. We incurred acquisition-related costs, primarily for
advisory services, of $0.3 million included in other charges in our consolidated statements of operations
in 2014. The gross contractual amount of trade receivables acquired was $0.3 million with a fair value of
$0.3 million at the date of acquisition. Our acquisition date estimate of contractual cash flows not
expected to be collected was nil.
On December 20, 2013, we acquired all outstanding shares of privately-held Compudata, a leading
provider of business-to-business supply chain integration and e-invoicing solutions in Switzerland. The
total purchase price for the acquisition was $18.1 million, net of cash acquired, which was funded by
drawing on our revolving debt facility. We incurred acquisition-related costs, primarily for advisory
services, of $0.3 million included in other charges in our consolidated statements of operations in 2014.
The gross contractual amount of trade receivables acquired was $0.6 million with a fair value of $0.5
million at the date of acquisition. Our acquisition date estimate of contractual cash flows not expected to
be collected was $0.1 million.
On May 2, 2013 we acquired all outstanding shares of privately-held KSD Software Norway AS (“KSD”),
a leading Scandinavian-based provider of electronic customs filing solutions for the European Union
(“EU”). KSD’s software helps customers manage the complexities of EU customs compliance. The total
purchase price for the acquisition was $32.4 million, net of cash acquired. As part of completing the
acquisition $19.8 million of the $32.4 million purchase price was funded by drawing on our revolving
debt facility, with the remainder funded with cash on hand. We incurred acquisition-related costs,
primarily for advisory services, of $0.7 million included in other charges in our consolidated statements
of operations in 2014. The gross contractual amount of trade receivables acquired was $3.1 million with
a fair value of $2.6 million at the date of acquisition. Our acquisition date estimate of contractual cash
flows not expected to be collected was $0.5 million.
In 2015, the preliminary purchase price allocation for KSD was adjusted due to changes made to net
working capital adjustments and receivable estimates made upon close of the acquisition. The purchase
67
price allocation adjustments were to increase goodwill $0.7 million from $13.1 million to $13.8 million
and decrease net working capital adjustments receivable $0.7 million from $2.9 million to $2.2 million.
For businesses acquired during 2014, we incurred acquisition-related costs of $1.4 million, primarily for
advisory services and retention bonuses. These costs are included in other charges in our consolidated
statements of operations.
The final purchase price allocations for businesses we acquired during 2014 are as follows:
Purchase price consideration:
Cash, less cash acquired related to
Impatex ($200), Compudata ($166) and KSD ($199)
Net working capital adjustments receivable
KSD Compudata Impatex
Total
32,419
(2,213)
30,206
18,143
(71)
18,072
8,175
(209)
7,966
58,737
(2,493)
56,244
Allocated to:
Current assets, excluding cash acquired
Property and equipment
Deferred income tax assets
Current liabilities
Deferred revenue
Deferred income tax liability
Debt
Net tangible liabilities assumed
Finite life intangible assets acquired:
Customer agreements and relationships
Existing technology
Non-compete covenants
Goodwill
4,174
67
863
(3,904)
(3,004)
(6,720)
(894)
(9,418)
17,500
8,300
-
13,824
30,206
1,793
24
-
(934)
(21)
(2,924)
-
(2,062)
524
109
11
(300)
(441)
6,491
200
874
(5,138)
(3,466)
(1,140) (10,784)
(894)
(1,237) (12,717)
-
11,910
-
23
8,201
18,072
2,495
3,207
-
3,501
7,966
31,905
11,507
23
25,526
56,244
No in-process research and development was acquired in the Impatex, Compudata or KSD acquisitions.
The acquired intangible assets are being amortized over their estimated useful lives as follows:
Customer agreements and relationships
Existing technology
Non-compete covenants
Impatex Compudata
9 years
10 years
N/A
8 years
3 years
N/A
KSD
12 years
8 years
N/A
The goodwill on the Impatex, Compudata and KSD acquisitions arose as a result of the value of their
assembled workforces and the combined strategic value to our growth plan. The goodwill arising from
these acquisitions is not deductible for tax purposes.
The financial information in the table below summarizes selected results of operations on a pro forma
basis as if we had acquired Oz, BearWare, MK Data, Airclic, Customs Info, Impatex, Compudata and
KSD as of the beginning of each of the periods presented. The pro forma results of operations for the
Pentant, e-customs and Computer Management transactions have not been included in the table below
as they are not material to our consolidated financial statements.
68
This pro forma information is for information purposes only and does not purport to represent what our
results of operations for the periods presented would have been had the acquisitions of Oz, BearWare,
MK Data Airclic, Customs Info, Impatex, Compudata and KSD occurred at the beginning of the period
indicated, or to project our results of operations for any future period.
Pro forma results of operations (unaudited)
Year Ended
Revenues
Net income
Earnings per share
Basic
Diluted
January 31,
2016
197,088
January 31, January 31,
2014
199,860
205,723
2015
22,391
16,830
8,223
0.30
0.29
0.24
0.24
0.13
0.13
Note 4 – Fair Value Measurements
ASC Topic 820 “Fair Value Measurements and Disclosures” (Topic 820) defines fair value as the price
that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction
between market participants at the measurement date and in the principal or most advantageous
market for that asset or liability. The fair value, in this context, should be calculated based on
assumptions that market participants would use in pricing the asset or liability, not on assumptions
specific to the entity. In addition, the fair value of liabilities should include consideration of non-
performance risk, including our own credit risk.
Topic 820 establishes a fair value hierarchy which prioritizes the inputs used in the valuation
methodologies in measuring fair value into three levels:
• Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in
active markets.
• Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are observable in the market or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
• Level 3—inputs are generally unobservable and typically reflect management’s estimates of
assumptions that market participants would use in pricing the asset or liability. The fair values
are therefore determined using model-based techniques that include option pricing models,
discounted cash flow models, and similar techniques.
The following table shows the Company’s marketable securities investment portfolio measured at fair
value on a recurring basis as of January 31, 2016:
Level 1
Short-Term Marketable Securities
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated Fair
Value
-
(28)
4,639
Cost
4,667
The Company’s marketable securities have been classified and accounted for as available-for-sale.
Management determines the appropriate classification of its investments at the time of purchase and
reevaluates the designations at each balance sheet date. The Company classifies its marketable
securities as either short-term or long-term based on the nature of each security and its availability for
use in current operations. The Company’s marketable securities are carried at fair value, with the
69
unrealized gains and losses, net of taxes, reported as a separate component of accumulated other
comprehensive loss. The cost of securities sold is based upon the specific identification method.
As of January 31, 2016, the Company considers the declines in market value of its marketable securities
investment portfolio to be temporary in nature and does not consider any of its investments other-than-
temporarily impaired. The Company did not hold any available-for-sale securities as of January 31,
2015.
The carrying amounts of the Company’s cash, accounts receivable (net), accounts payable, accrued
liabilities and income taxes payable approximate their fair value (a Level 2 measurement) due to their
short maturities.
Note 5 – Trade Receivables
Trade receivables
Less: Allowance for doubtful accounts
January 31, January 31,
2015
2016
27,080
(1,466)
25,614
23,714
(1,101)
22,613
Included in accounts receivable are unbilled receivables in the amount of $1.0 million as at January 31,
2016 ($1.0 million as at January 31, 2015). Bad debt expense was $0.8 million, $0.4 million and $0.3
million for the years ended January 31, 2016, January 31, 2015 and January 31, 2014, respectively.
Note 6 – Other Receivables
Net working capital adjustments receivable from acquisitions
Other receivables
January 31, January 31,
2015
2016
193
2,938
3,131
372
2,885
3,257
As at January 31, 2016, $0.2 million ($0.4 million as at January 31, 2015) of the net working capital
adjustments receivable from acquisitions is recoverable from amounts held in escrow related to the
respective acquisitions.
Note 7 – Inventory
At January 31, 2016 and January 31, 2015, inventory is entirely comprised of finished goods inventory.
Finished goods inventory consists of hardware and related parts for mobile asset units held for sale. A
provision for excess or obsolete inventories has been recorded in cost of revenues of $0.1 million, $0.3
million and nil for the years ended January 31, 2016, January 31, 2015 and January 31, 2014,
respectively.
70
Note 8 – Property and Equipment
Cost
Computer equipment and software
Furniture and fixtures
Leasehold improvements
Accumulated amortization
Computer equipment and software
Furniture and fixtures
Leasehold improvements
Net
Note 9 - Intangible Assets
Cost
Customer agreements and relationships
Existing technology
Trade names
Non-compete covenants
Accumulated amortization
Customer agreements and relationships
Existing technology
Trade names
Non-compete covenants
Net
January 31, January 31,
2015
2016
26,335
1,062
431
27,828
18,134
853
237
19,224
8,604
27,218
1,117
466
28,801
19,881
919
172
20,972
7,829
January 31,
2016
January 31,
2015
107,743
117,586
4,515
2,559
232,403
45,853
48,295
3,128
1,565
98,841
133,562
97,344
93,911
4,349
2,407
198,011
37,956
40,326
3,130
1,473
82,885
115,126
Intangible assets related to our acquisitions are recorded at their fair value at the acquisition date. The
change in intangible assets during 2016 is primarily due to the acquisition of BearWare, MK Data, and
Oz described in Note 3 to these consolidated financial statements. The balance of the change in
intangible assets is due to foreign currency translation and amortization.
Intangible assets with a finite life are amortized into income over their useful lives. Amortization
expense for existing intangible assets is expected to be $133.6 million over the following periods: $26.1
million for 2017, $21.3 million for 2018, $19.3 million for 2019, $18.6 million for 2020, $15.2 million for
2021 and $33.1 million thereafter. Expected future amortization expense is subject to fluctuations in
foreign exchange rates and assumes no future adjustments to acquired intangible assets.
Note 10 – Goodwill
Goodwill is recorded when the consideration paid for an acquisition of a business exceeds the fair value
of identifiable net tangible and intangible assets acquired. The following table summarizes the changes
in goodwill since January 31, 2014:
71
Balance at beginning of period
Adjustment to purchase price allocation of KSD
Acquisition of Computer Management
Acquisition of Customs Info
Acquisition of Airclic
Acquisition of e-customs
Acquisition of Pentant
Acquisition of MK Data
Acquisition of BearWare
Acquisition of Oz
Adjustments on account of foreign exchange
Balance at end of period
Note 11 - Accrued Liabilities
Accrued compensation and benefits
Accrued professional fees
Other accrued liabilities
January 31, January 31,
2015
111,179
714
1,338
26,135
11,670
4,581
1,059
-
-
-
(9,236)
147,440
2016
147,440
-
-
-
810
-
-
51,108
4,958
17,637
(4,467)
217,486
January 31,
2016
10,700
1,211
4,933
16,844
January 31,
2015
9,017
1,137
6,541
16,695
Other accrued liabilities include accrued expenses related to third party resellers and royalties, vendors
and accrued restructuring charges.
Note 12 - Debt
As of January 31, 2016, all amounts previously borrowed under the revolving debt facility have been
repaid and the balance of the $77.0 million facility remains available for use. We are in compliance with
the covenants of the revolving debt facility as of January 31, 2016. On May 28 2014, we amended our
revolving debt facility, increasing the borrowing limit from $50.0 million to $77.0 million and renewing
the agreement for a five year term. The amended facility is comprised of a $75.0 million revolving
facility, with drawn amounts to be repaid in equal quarterly installments over a period of five years from
the advance date, and a $2.0 million revolving facility, with no fixed repayment date on drawn amounts
prior to the end of the term. Borrowings under the credit agreement are secured by a first charge over
substantially all of our assets. Depending on the type of advance under the available facilities, interest
will be charged on advances at a rate of either i) Canada prime rate or US base rate plus 0% to 1.5%;
or ii) LIBOR plus 1.5% to 3%. Undrawn amounts are charged a standby fee of between 0.3% and 0.5%.
Interest is payable monthly in arrears under both facilities. Standby fees are payable quarterly in
arrears. The revolving debt facility contains certain customary representations, warranties and
guarantees, and covenants.
72
On March 2, 2016, Descartes amended its $77.0 million revolving debt facility with a new senior secured
credit facility (“Credit Facility”). The Credit Facility consists of a $150.0 million revolving operating credit
facility to be available for general corporate purposes including the financing of ongoing working capital
needs and acquisitions. The Credit Facility also provides for an additional $7.5 million available to
support foreign exchange and interest rate hedging. The Credit Facility has a five year maturity with no
fixed repayment dates prior to the end of the five year term. Borrowings under the facility are secured
by a first charge over substantially all of Descartes’ assets. Depending on the type of advance, interest
rates under the revolving operating credit facility are based on the Canada or US prime rate, Bankers’
Acceptance (BA) or London Interbank Offered Rate (LIBOR) plus an additional 0 to 200 basis points
based on the ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization,
as defined in the credit agreement. A standby fee of between 20 to 28 basis points will be charged on all
undrawn amounts. The Credit Facility contains certain customary representations, warranties and
guarantees, and covenants.
As at January 31, 2016, we have outstanding letters of credit of approximately $0.3 million primarily
related to our leased premises ($0.4 million as at January 31, 2015) which are not related to the debt
facility or Credit facility.
Note 13 - Commitments, Contingencies and Guarantees
Commitments
The following information is provided in respect of our operating and capital lease obligations:
Years Ended January 31,
2017
2018
2019
2020
2021
Operating
Leases
4,152
2,845
1,872
685
254
9,808
Capital
Leases
134
66
-
-
-
200
Total
4,286
2,911
1,872
685
254
10,008
Lease Obligations
We are committed under non-cancelable operating leases for business premises, computer equipment
and vehicles with terms expiring at various dates through 2021. We are also committed under non-
cancelable capital leases for computer equipment expiring at various dates through 2018. The future
minimum amounts payable under these lease agreements are outlined in the chart above. The $0.2
million balance of the capital lease obligation outstanding at January 31, 2016 is included in accrued
liabilities in the consolidated balance sheet. Rental expense from operating leases was $4.4 million, $5.2
million and $4.8 million for the years ended January 31, 2016, January 31, 2015 and January 31, 2014,
respectively.
Other Obligations
Deferred Share Unit and Cash-Settled Restricted Share Unit Plans
As described in Note 2 to these consolidated financial statements, we maintain DSU and CRSU plans for
our directors and employees. Any payments made pursuant to these plans are settled in cash. For DSUs
and CRSUs, the units vest over time and the liability recognized at any given consolidated balance sheet
date reflects only those units vested at that date that have not yet been settled in cash. As such, we had
an unrecognized aggregate amount for the unvested CRSUs of $1.0 million at January 31, 2016. As at
January 31, 2016 there were no unvested DSUs. The ultimate liability for any payment of DSUs and
CRSUs is dependent on the trading price of our common shares.
73
Contingencies
We are subject to a variety of other claims and suits that arise from time to time in the ordinary course
of our business. The consequences of these matters are not presently determinable but, in the opinion
of management after consulting with legal counsel, the ultimate aggregate potential liability is not
currently expected to have a material effect on our results of operations or financial position.
Product Warranties
In the normal course of operations, we provide our customers with product warranties relating to the
performance of our hardware, software and network services. To date, we have not encountered
material costs as a result of such obligations and have not accrued any liabilities related to such
obligations in our consolidated financial statements.
Business combination agreements
In respect of our acquisition of e-customs in the fourth quarter of 2015, up to approximately $1.2 million
(GBP 0.8 million) in cash may have become payable had certain revenue performance targets been met
by e-customs during 2016. No amounts are accrued related to this contingent consideration as at
January 31, 2016.
In respect of our acquisition of Pentant in the fourth quarter of 2015, up to approximately $0.4 million
(GBP 0.3 million) in cash may have become payable had certain revenue performance targets been met
by Pentant during 2016. No amounts are accrued related to this contingent consideration as at January
31, 2016.
Guarantees
In the normal course of business we enter into a variety of agreements that may contain features that
meet the definition of a guarantee under ASC Topic 460, “Guarantees”. The following lists our significant
guarantees:
Intellectual property indemnification obligations
We provide indemnifications of varying scope to our customers against claims of intellectual property
infringement made by third parties arising from the use of our products. In the event of such a claim,
we are generally obligated to defend our customers against the claim and we are liable to pay damages
and costs assessed against our customers that are payable as part of a final judgment or settlement.
These intellectual property infringement indemnification clauses are not generally subject to any dollar
limits and remain in force for the term of our license agreement with our customer, which license terms
are typically perpetual. Historically, we have not encountered material costs as a result of such
indemnifications.
Other indemnification agreements
In the normal course of operations, we enter into various agreements that provide general indemnities.
These indemnities typically arise in connection with purchases and sales of assets, securities offerings or
buy-backs, service contracts, administration of employee benefit plans, retention of officers and
directors, membership agreements, customer financing transactions, and leasing transactions. In
addition, our corporate by-laws provide for the indemnification of our directors and officers. Each of
these indemnities requires us, in certain circumstances, to compensate the counterparties for various
costs resulting from breaches of representations or obligations under such arrangements, or as a result
of third party claims that may be suffered by the counterparty as a consequence of the transaction. We
believe that the likelihood that we could incur significant liability under these obligations is remote.
Historically, we have not made any significant payments under such indemnities.
In evaluating estimated losses for the guarantees or indemnities described above, we consider such
factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. We are unable to make a reasonable estimate of the maximum potential
amount payable under such guarantees or indemnities as many of these arrangements do not specify a
maximum potential dollar exposure or time limitation. The amount also depends on the outcome of
74
future events and conditions, which cannot be predicted. Given the foregoing, to date, we have not
accrued any liability in our financial statements for the guarantees or indemnities described above.
Note 14 – Share Capital
On July 2, 2014, we completed a public offering of common shares in the United States and Canada at a
price of $13.50 per common share pursuant to the short-form base shelf prospectus and related
prospectus supplement filed in connection with the offering. The total offering of 10,925,000 common
shares included the exercise in full by the underwriters of the 15% overallotment option for aggregate
gross proceeds to Descartes of $147.5 million. Net proceeds to Descartes were approximately $142.1
million once expenses associated with the offering were deducted inclusive of the related deferred tax
benefit related to share issuance costs. Excluding share issuance costs payable and the deferred tax
benefit on issuance costs, the net cash proceeds to Descartes were approximately $140.7 million.
We are authorized to issue an unlimited number of our common shares, without par value, for unlimited
consideration. Our common shares are not redeemable or convertible.
(thousands of shares)
Balance, beginning of year
Shares issued:
Stock options and share units exercised
Issuance of common shares
Acquisitions (Note 3)
Balance, end of year
January 31, January 31, January 31,
2014
62,654
2016
75,480
2015
63,661
281
-
-
75,761
478
10,925
416
75,480
1,007
-
-
63,661
Cash flows provided from stock options and share units exercised during 2016, 2015 and 2014 was
approximately $0.2 million, $0.9 million and $3.6 million, respectively.
Note 15 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”) (number
of shares in thousands):
Year Ended
January 31,
2016
January 31,
2015
January 31,
2014
Net income for purposes of calculating basic and diluted
earnings per share
Weighted average shares outstanding
Dilutive effect of employee stock options
Dilutive effect of restricted and performance share units
Weighted average common and common equivalent shares
outstanding
Earnings per share
Basic
Diluted
20,562
15,059
9,612
75,595
452
362
70,559
665
360
62,841
1,258
271
76,409
71,584
64,370
0.27
0.27
0.21
0.21
0.15
0.15
For the years ended January 31, 2016, 2015 and 2014, nil options were excluded from the calculation of
diluted EPS as those options had an exercise price greater than or equal to the average market value of
our common shares during the applicable periods and their inclusion would have been anti-dilutive.
Additionally, for 2016, 2015 and 2014, respectively, the application of the treasury stock method
75
excluded nil, 215,000 and nil options, restricted and performance share units from the calculation of
diluted EPS as the assumed proceeds from the unrecognized stock-based compensation expense that
are attributed to future service periods made such stock-based compensation anti-dilutive.
Note 16 - Stock-Based Compensation Plans
Total estimated stock-based compensation expense recognized in our consolidated statement of
operations was as follows:
Year Ended
Cost of revenues
Sales and marketing
Research and development
General and administrative
Other charges
Effect on net income
January 31,
2016
24
41
-
1,512
-
1,577
January 31,
2015
45
70
2
1,426
-
1,543
January 31,
2014
54
538
12
1,138
781
2,523
For the year ended January 31, 2014 other charges includes stock-based compensation expense of $0.3
million related to a modification of certain PSU grants.
Differences between how GAAP and applicable income tax laws treat the amount and timing of
recognition of stock-based compensation expense may result in a deferred tax asset. We have recorded
a valuation allowance against any such deferred tax asset except for $0.1 million ($0.1 million at
January 31, 2015) recognized in the United States. The tax benefit realized in connection with stock
options exercised and settled during 2016, 2015 and 2014 was $1.6 million, $0.1 million and $0.4
million, respectively.
Stock Options
As of January 31, 2016, we had 293,889 stock options granted and outstanding under our shareholder-
approved stock option plan and 217,264 remained available for grant. In addition, we had 175,000 stock
options outstanding pursuant to option grants made outside of our shareholder-approved stock option
plan as permitted under the rules of the Toronto Stock Exchange in certain circumstances.
For the year ended January 31, 2016, the Company settled 446,875 options for $4.4 million of common
shares issued from treasury and $2.6 million in cash related to payment of applicable employee
withholding taxes. For the year ended January 31, 2015, the Company settled 175,000 options for $0.4
million in cash related to payment of applicable employee withholding taxes and $0.3 million of common
shares issued from treasury. For the year ended January 31, 2014, 300,000 options were settled for
$1.4 million in cash including payment of applicable employee withholding taxes and $0.1 million of
common shares were issued from treasury.
As of January 31, 2016, $0.4 million of total unrecognized compensation costs, net of forfeitures, related
to non-vested stock option awards is expected to be recognized over a weighted average period of 1.6
years. The total fair value of stock options vested during 2016 was $0.3 million.
The total number of options granted during 2016, 2015 and 2014 was nil, 215,000 and nil, respectively.
The weighted average grant-date fair value of options granted during 2016, 2015 and 2014 was nil,
$3.47 and nil per option, respectively.
76
The weighted-average assumptions were as follows:
Year Ended
Expected dividend yield (%)
Expected volatility (%)
Risk-free rate (%)
Expected option life (years)
A summary of option activity under all of our plans is presented as follows:
Balance at January 31, 2014
Granted
Exercised
Surrendered for Shares
Forfeited
Balance at January 31, 2015
Exercised
Surrendered for Shares
Balance at January 31, 2016
Number of
Stock Options
Outstanding
1,139,853
215,000
(220,138)
(175,000)
(6,451)
953,264
(37,500)
(446,875)
468,889
Weighted-
Average
Exercise
Price
$4.39
$13.77
$3.49
$4.53
$5.72
$6.33
$4.18
$2.59
$8.25
Vested or expected to vest at January 31,
2016
450,589
$8.18
Exercisable at January 31, 2016
292,811
$6.54
January
31, 2015
-
25.4
1.5
5
Weighted-
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in millions)
2.5
10.6
3.5
5.2
3.5
2.6
5.0
3.7
The total intrinsic value of options exercised during 2016, 2015 and 2014 was approximately $0.5
million, $2.4 million and $9.4 million, respectively. The total intrinsic value of options surrendered for
shares during 2016, 2015 and 2014 was approximately $6.7 million, $1.6 million and $1.5 million,
respectively.
Options outstanding and options exercisable as at January 31, 2016 by range of exercise price are as
follows:
Range of Exercise Prices
$4.88 – $5.54
$6.91 – $6.91
$11.69 – $11.85
Options Outstanding
Weighted
Average
Exercise
Price
Number of
Stock
Options
$4.91
$6.91
$11.84
$8.25
215,889
38,000
215,000
468,889
Weighted
Average
Remaining
Contractual
Life (years)
1.8
3.5
5.4
3.5
Options Exercisable
Number of
Stock
Options
Weighted
Average
Exercise
Price
$4.91
$6.91
$11.84
$6.54
208,311
22,000
62,500
292,811
77
A summary of the status of our unvested stock options under our shareholder-approved stock option
plan as of January 31, 2016 is presented as follows:
Balance at January 31, 2014
Granted
Vested
Forfeited
Balance at January 31, 2015
Vested
Balance at January 31, 2016
Performance Share Units
A summary of PSU activity is as follows:
Number of
Stock Options
Outstanding
164,145
40,000
(73,840)
(6,451)
123,854
(70,276)
53,578
Weighted-
Average Grant-
Date Fair Value
per Share
$2.21
$3.43
$1.97
$1.96
$2.56
$1.92
$2.52
Balance at January 31, 2014
Granted
Exercised
Forfeited
Balance at January 31, 2015
Granted
Performance units issued
Balance at January 31, 2016
Number of
PSUs
Outstanding
211,428
51,752
(83,984)
(4,938)
174,258
49,187
30,092
253,537
Weighted-
Average
Granted Date
Fair Value
$11.69
$16.67
$10.88
$10.93
$12.61
$19.70
$9.34
$12.39
Vested or expected to vest at January 31,
2016
253,537
$12.39
Exercisable at January 31, 2016
152,598
$9.36
Weighted-
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in millions)
7.9
3.0
7.2
4.9
7.2
6.3
4.9
2.9
The aggregate intrinsic values represents the total pre-tax intrinsic value (the aggregate closing share
price of our common shares on January 31, 2016) that would have been received by PSU holders if all
PSUs had been vested on January 31, 2016.
As of January 31, 2016, $0.9 million of total unrecognized compensation costs related to non-vested
awards is expected to be recognized over a weighted average period of 1.5 years. The total fair value of
PSUs vested during 2016 was $0.8 million.
78
Restricted Share Units
A summary of RSU activity is as follows:
Balance at January 31, 2014
Granted
Exercised
Forfeited
Balance at January 31, 2015
Granted
Balance at January 31, 2016
Number of
RSUs
Outstanding
214,076
51,752
(85,298)
(4,938)
175,592
49,187
224,779
Weighted-
Average
Granted Date
Fair Value
$8.96
$13.79
$8.36
$8.59
$9.94
$15.33
$10.03
Vested or expected to vest at January 31,
2016
224,779
$10.03
Exercisable at January 31, 2016
174,737
$8.86
Weighted-
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in millions)
7.9
7.4
7.4
7.0
3.1
4.3
4.3
3.4
The aggregate intrinsic values represents the total pre-tax intrinsic value (the aggregate closing share
price of our common shares on January 31, 2016) that would have been received by RSU holders if all
RSUs had been vested on January 31, 2016.
As of January 31, 2016, $0.7 million of total unrecognized compensation costs related to non-vested
awards is expected to be recognized over a weighted average period of 1.7 years. The total fair value of
RSUs vested during 2016 was $0.6 million.
Deferred Share Unit Plan
As at January 31, 2016, the total number of DSUs held by participating directors was 188,766 (209,727
at January 31, 2015), representing an aggregate accrued liability of $3.3 million ($3.2 million at January
31, 2015). During 2016, 61,020 DSUs were granted and 81,981 were settled for cash. As at January 31,
2016, the unrecognized aggregate liability for the unvested DSUs was nil (nil at January 31, 2015). The
fair value of the DSU liability is based on the closing price of our common shares at the balance sheet
date. The total compensation cost related to DSUs recognized in our consolidated statements of
operations was approximately $1.9 million, $1.5 million and $1.1 million for 2016, 2015 and 2014,
respectively.
79
Cash-Settled Restricted Share Unit Plan
A summary of activity under our CRSU plan is as follows:
Balance at January 31, 2014
Granted
Vested and settled in cash
Forfeited
Balance at January 31, 2015
Granted
Vested and settled in cash
Balance at January 31, 2016
Non-vested at January 31, 2016
Number of
CRSUs
Outstanding
152,794
68,439
(106,910)
(467)
113,856
72,817
(85,924)
100,749
100,749
Weighted-
Average
Remaining
Contractual
Life (years)
1.5
1.6
1.6
We have recognized the compensation cost of the CRSUs ratably over the service/vesting period relating
to the grant and have recorded an aggregate accrued liability of $0.8 million at January 31, 2016 ($1.0
million at January 31, 2015). As at January 31, 2016, the unrecognized aggregate liability for the
unvested CRSUs was $1.0 million ($0.7 million at January 31, 2015). The fair value of the CRSU liability
is based on the closing price of our common shares at the balance sheet date. The total compensation
cost related to CRSUs recognized in our consolidated statements of operations was approximately $0.7
million, $0.6 million and $1.2 million for 2016, 2015 and 2014, respectively.
Note 17 - Income Taxes
Income (loss) before income taxes is earned in the following tax jurisdictions:
Year Ended
Canada
United States
Other countries
Income tax expense is incurred in the following jurisdictions:
Year Ended
Current income tax expense
Canada
United States
Other countries
Deferred income tax expense (recovery)
80
January 31, January 31, January 31,
2014
2016
2015
13,933
4,773
9,064
27,770
14,489
6,300
1,032
21,821
6,922
7,841
(1,030)
13,733
January 31, January 31, January 31,
2014
2016
2015
94
70
1,279
1,443
568
1,060
1,156
2,784
61
605
1,102
1,768
Canada
United States
Other countries
3,493
800
1,472
5,765
7,208
3,741
2,144
(1,907)
3,978
6,762
3,827
2,804
(4,278)
2,353
4,121
Income tax expense for 2016, 2015 and 2014 was 26%, 31% and 30% of income before income taxes,
respectively, with current income tax expense being 5%, 13% and 13% of income before income taxes,
respectively.
The components of the deferred income tax assets and liabilities are as follows:
Assets
Accruals not currently deductible
Accumulated net operating losses
Corporate minimum taxes
Difference between tax and accounting basis of property and equipment
Research and development and other tax credits and expenses
Other timing differences
Total deferred income tax assets
Liabilities
Difference between tax and accounting basis of intangible assets
Uncertain tax positions incurred in loss years
Total deferred income tax liabilities
Net deferred income taxes
Valuation allowance
Net deferred income taxes, net of valuation allowance
January 31, January 31,
2015
2016
8,653
19,859
1,589
700
2,885
924
34,610
(9,584)
(356)
(9,940)
24,670
(13,963)
10,707
4,238
22,617
1,710
7,031
2,792
1,508
39,896
(9,232)
(530)
(9,762)
30,134
(14,681)
15,453
As at January 31, 2016, we have not accrued for foreign withholding taxes and Canadian income taxes
applicable to approximately $118.1 million of unremitted earnings of subsidiaries operating outside of
Canada. These earnings, which we consider to be invested indefinitely, will become subject to these
taxes if and when they are remitted as dividends or if we sell our stock in the subsidiaries. If we decide
to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we
determined that the earnings will no longer be indefinitely invested outside Canada.
81
The provision (recovery) for income taxes varies from the expected provision at the statutory rates for
the reasons detailed in the table below:
Year Ended
Net income before taxes
January 31, January 31, January 31,
2014
13,733
2015
21,821
27,770
2016
Combined basic Canadian statutory rates
26.5%
26.5%
26.5%
7,359
5,783
3,639
Income tax expense based on the above rates
Increase (decrease) in income taxes resulting from:
Permanent differences including amortization of intangibles
Effect of differences between Canadian and foreign tax rates
Effect of rate changes on current year timing differences
Adjustments relating to previous periods
(Decrease) increase in tax reserves
Valuation allowance
Stock compensation
Deferred tax charges
Other, including foreign exchange
Income tax expense
We have income tax loss carryforwards which expire as follows:
(2,593)
169
1,150
36
(172)
(41)
345
270
685
7,208
800
1,007
-
9
(41)
(1,195)
86
-
313
6,762
Expiry year
2017
2018
2019
2020
2021
Thereafter
Canada
-
-
-
-
-
115
115
United
States
-
-
2,649
-
805
9,653
13,107
EMEA Asia Pacific
122
-
57
48
20
6,808
7,055
-
316
388
194
-
64,744
65,642
1,078
663
321
355
239
(2,707)
481
-
52
4,121
Total
122
316
3,094
242
825
81,320
85,919
The following is a tabular reconciliation of the total estimated liability associated with uncertain tax
positions taken:
Liability, beginning of year
Gross increases – current period
Lapsing due to statutes of limitations
Liability, end of year
2016
January 31, January 31, January 31,
2014
5,639
981
(409)
6,211
2015
6,211
825
(1,315)
5,721
5,721
1,967
(1,920)
5,768
We have identified accruals of $5.8 million with respect to uncertain tax positions as at January 31,
2016. It is possible that these uncertain tax positions will not be realized in which case up to $4.7
million of the recorded liability will decrease the effective tax rate in future years if this liability is
reversed. We believe that it is reasonably possible that $1.0 million of the uncertain tax positions could
decrease tax expense in the next 12 months relating primarily to tax years becoming statute barred for
purposes of future tax examinations by local taxing jurisdictions.
82
We recognize accrued interest and penalties related to uncertain tax positions as a current tax expense.
As at January 31, 2016 and January 31, 2015, the unrecognized tax positions have resulted in no
material liability for estimated interest and penalties.
Descartes and our subsidiaries file their tax returns as prescribed by the tax laws of the jurisdictions
within which they operate. We are no longer subject to income tax examinations by tax authorities in
our major tax jurisdictions as follows:
Tax Jurisdiction
United States Federal
Canada
United Kingdom
Sweden
Norway
Netherlands
Belgium
Note 18 – Deferred Tax Charge
Years No Longer Subject to
Audit
2012 and prior
2013 and prior
2012 and prior
2010 and prior
2013 and prior
2014 and prior
2012 and prior
During 2016, we had internal re-organizations related to intellectual property in some of our
subsidiaries. The tax impact related to the reorganizations has been recorded as a deferred charge and
is being amortized to income tax expense over the remaining estimated useful life of the intellectual
property. Deferred tax charges are amortized to income tax expense over a period of 3 to 8 years.
Note 19 - Other Charges
Other charges are comprised of executive departure charges, restructuring initiatives which have been
undertaken from time to time under various restructuring plans, and acquisition-related costs.
Acquisition-related costs primarily include retention bonuses, advisory services, brokerage services and
administrative costs, and relate to completed and prospective acquisitions.
Other charges included in our consolidated statements of operations are as follows:
Executive departure charges
Acquisition-related costs
Fiscal 2015 restructuring plan
Fiscal 2014 restructuring plan
Other restructuring plans
January 31,
2016
-
1,416
50
33
(7)
1,492
January 31,
2015
396
1,666
715
100
(1)
2,876
January 31,
2014
3,313
1,308
-
1,904
(13)
6,512
Executive Departure Charges
In the fourth quarter of 2014, the Company incurred charges related to the departure of the former
Chairman and CEO. In the second quarter of 2015, the Company incurred charges related to the
departure of the former CFO. To date $3.7 million has been recorded within other charges in conjunction
with executive departure charges. At January 31, 2016, $0.5 million remains payable relating to this
charge ($0.9 million at January 31, 2015).
83
Fiscal 2015 Restructuring Plan
In the fourth quarter of 2015, management approved and began to implement the fiscal 2015
restructuring plan to reduce operating expenses and increase operating margins. To date, $0.8 million
has been recorded within other charges in conjunction with this restructuring plan. These charges are
comprised of workforce reduction charges, office closure costs and other costs. This plan is complete
with no further expected costs.
The following table shows the changes in the restructuring provision for the fiscal 2015 restructuring
plan.
Balance at January 31, 2014
Accruals and adjustments
Cash draw downs
Balance at January 31, 2015
Accruals and adjustments
Cash payments
Balance at January 31, 2016
Workforce
Reduction
-
464
(238)
226
24
(250)
-
Office Closure
Costs
-
224
(4)
220
14
(93)
141
Other Costs
-
27
(27)
-
12
(12)
-
Total
-
715
(269)
446
50
(355)
141
Fiscal 2014 Restructuring Plan
In the second quarter of 2014, management approved and began to implement the fiscal 2014
restructuring plan to reduce operating expenses and increase operating margins. To date, $2.0 million
has been recorded within other charges in conjunction with this restructuring plan. These charges are
comprised of workforce reduction charges, office closure costs and network consolidation costs. This
plan is complete with no further expected costs.
The following table shows the changes in the restructuring provision for the fiscal 2014 restructuring
plan.
Balance at January 31, 2014
Accruals and adjustments
Cash draw downs
Foreign exchange
Balance at January 31, 2015
Accruals and adjustments
Cash payments
Foreign exchange
Balance at January 31, 2016
Note 20 - Segmented Information
Workforce
Reduction
52
64
(116)
-
-
-
-
-
-
Office Closure
Costs
96
36
(99)
(8)
25
33
(57)
(1)
-
Total
148
100
(215)
(8)
25
33
(57)
(1)
-
We review our operating results, assess our performance, make decisions about resources, and generate
discrete financial information at the single enterprise level. Accordingly, we have determined that we
operate in one reportable business segment providing logistics technology solutions. The following tables
provide our revenue information by geographic location of customer and revenue type:
84
Year Ended
Revenues
United States
Europe, Middle-East and Africa
Canada
Asia Pacific
Year Ended
Revenues
Services
Licenses
January 31, January 31, January 31,
2014
2016
2015
96,300
68,451
12,572
7,670
184,993
73,810
72,900
15,187
8,963
170,860
69,905
62,531
14,388
4,470
151,294
January 31, January 31, January 31,
2014
2016
2015
176,288
8,705
184,993
159,050
11,810
170,860
137,795
13,499
151,294
Services revenues are composed of the following: (i) ongoing transactional and/or subscription fees for
use of our services and products by our customers; (ii) professional services revenues from consulting,
implementation and training services related to our services and products; (iii) maintenance and other
related revenues, which include revenues associated with maintenance and support of our services and
products; and (iv) hardware revenues. License revenues derive from licenses granted to our customers
to use our software products.
The following table provides information by geographic area of operation for our long-lived assets. Long-
lived assets represent property and equipment and intangibles that are attributed to geographic areas.
Total long-lived assets
United States
Europe, Middle-East and Africa
Canada
January 31,
2016
January 31,
2015
49,192
44,963
48,011
142,166
59,041
57,711
6,203
122,955
85
CORPORATE INFORMATION
Stock Exchange Information
Our common stock trades on the Toronto Stock Exchange
under the symbol DSG and on The Nasdaq Stock Market
under the symbol DSGX.
Transfer Agents
Computershare Investor Services Inc.
100 University Avenue
Toronto, Ontario M5J 2Y1
North America: (800) 663-9097
Phone: (416) 263-9200
Computershare Trust Company
12039 West Alameda Parkway
Suite Z-2 Lakewood, Colorado
80228 USA
Phone: (303) 262-0600
Independent Registered Public Accounting Firm
KPMG LLP
Yonge Corporate Centre
4100 Yonge Street
Suite 200
Toronto, Ontario M2P 2H3
Phone: (416) 228-7000
Investor Inquiries
Investor Relations
The Descartes Systems Group Inc.
120 Randall Drive
Waterloo, Ontario N2V 1C6
Phone: (519) 746-8110 ext. 202358
Toll Free: (800) 419-8495
E-mail: investor@descartes.com
www.descartes.com
The Descartes Systems Group Inc.
Corporate Headquarters
120 Randall Drive
Waterloo, Ontario N2V 1C6
Canada
Phone: (519) 746-8110
(800) 419-8495
Fax: (519) 747-0082
info@descartes.com
www.descartes.com