Consolidated Financial Statements
(In Canadian dollars)
EQ INC.
Years ended December 31, 2015 and 2014
INDEPENDENT AUDITORS' REPORT
To the Shareholders of EQ Inc.
the accompanying consolidated
We have audited
Inc.
and its subsidiaries, which comprise the consolidated statements of financial position as at
December 31, 2015 and December 31, 2014 and the consolidated statements of comprehensive
loss, changes in shareholders' deficiency and cash flows for the years then ended and a summary
of significant accounting policies and other explanatory information.
financial statements of EQ
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditor’s judgement, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness
the reasonableness of accounting estimates made by
of accounting policies used and
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 EQ Inc. and its subsidiaries, as at December 31, 2015 and December 31, 2014
in accordance with International Financial Reporting Standards.
Emphasis of Matter
Without qualifying our opinion, we draw attention to Note 2 in the consolidated financial statements
which indicates that EQ Inc. incurred a net loss of $2,296,000 during the year ended December 31,
2015 and, as of that date, the Company's current liabilities exceeded its current assets by
$2,680,000. These conditions, along with others as set forth in Note 2, indicate the existence of
material uncertainties that may cast significant doubt about the Company's ability to continue as a
going concern.
Chartered Professional Accountants
Licensed Public Accountants
April 26, 2016
Toronto, Ontario
EQ INC.
Consolidated Statements of Financial Position
(In thousands of Canadian dollars)
December 31, 2015 and 2014
Assets
Current assets:
Cash
Accounts receivable (note 17 (a))
Other current assets (note 9 (a))
Non-current assets:
Investment (note 3)
Property and equipment (note 10)
Domain properties and other intangible assets (note 11)
Liabilities and Shareholders' Deficiency
Current liabilities:
Accounts payable and accrued liabilities (note 9 (b))
Deferred lease inducement
Loans and borrowings (note 12 (a) and (b))
Derivative liability - warrants (note 12 (c))
Current portion of finance lease
Deferred revenue
Non-current liabilities:
Deferred lease inducement
Shareholders' deficiency (note 13)
Going concern (note 2(b))
Commitments and contingencies (note 18)
On behalf of the Board:
2015
2014
$
$
115
677
202
994
251
16
242
509
311
722
196
1,229
50
124
324
498
$
1,503
$
1,727
$
$
2,050
20
1,323
259
–
22
3,674
1,480
22
–
–
64
90
1,656
63
73
$
3,737
$
1,729
(2,234)
(2)
$
1,503
$
1,727
“Vernon Lobo”
Director
“Geoffrey Rotstein”
Director
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
3
EQ INC.
Consolidated Statements of Loss and Comprehensive Loss
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
Revenue (note 4)
Expenses:
Publishing cost
Employee compensation and benefits
Other operating expenses
Depreciation of property and equipment
Amortization of domain properties and other intangible assets
Impairment of domain properties and other intangible assets
Loss from operations
Finance income (note 6)
Loss on derivative liability – warrants (note 12 (c))
Finance costs (note 6)
Loss before income taxes
Income tax recovery (note 7)
Net loss
Other comprehensive income (net of tax):
Items that maybe reclassified to net income (loss)
Net change in fair value of available-for-sale financial assets
Foreign currency translation adjustments to equity
Other comprehensive income, net of tax
2015
2014
$
3,684
$
4,877
1,977
1,978
1,733
119
112
-
2,322
2,990
2,217
186
1,093
265
5,919
9,073
(2,235)
92
(24)
(147)
(2,314)
18
(4,196)
13
-
(125)
(4,308)
22
(2,296)
(4,286)
201
(196)
5
-
156
156
Comprehensive loss
$
(2,291)
$
(4,130)
Loss per share (note 8)
Basic
Diluted
$
$
(0.14)
(0.14)
$
$
(0.27)
(0.27)
See accompanying notes to consolidated financial statements.
4
EQ INC.
Consolidated Statements of Changes in Shareholders' Deficiency
(In thousands of Canadian dollars)
Years ended December 31, 2015 and 2014
Common shares
Number of
shares
Amount
Contributed
surplus
Accumulated
other
comprehensive
income (loss)
Deficit
Total
deficiency
Balances, January 1, 2015
Net loss
Share-based payments (note 14)
Net change in fair value of available-for-sale financial assets
Foreign currency translation adjustments
15,857,225 $
66,278 $
-
-
-
-
-
-
-
-
2,450 $
-
59
-
-
(1,866) $
-
-
201
(196)
(66,864) $
(2,296)
-
-
-
(2)
(2,296)
59
201
(196)
Balance, December 31, 2015
15,857,225 $
66,278 $
2,509 $
(1,861) $
(69,160) $
(2,234)
Balances, January 1, 2014
Net loss
Share-based payments (note 14)
Foreign currency translation adjustments
Common shares
Number of
shares
Amount
Contributed
surplus
Accumulated
other
comprehensive
income (loss)
Deficit
Total
deficiency
15,857,225 $
66,278 $
-
-
-
-
-
-
2,359 $
-
55
-
(2,022) $
-
-
156
(6,2,578) $
(4,286)
-
-
4,073
(4,286)
55
156
Balance, December 31, 2014
15,857,225 $
66,278 $
2,450 $
(1,866) $
(66,864) $
(2)
See accompanying notes to consolidated financial statements.
5
EQ INC.
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash flows from operating activities:
$
(2,296)
$
4,286)
2015
2014
Depreciation of property and equipment
Amortization of domain properties and other intangible assets
Amortization of deferred lease inducement
Loss on derivative liability – warrants
Share-based payments (note 14)
Unrealized foreign exchange loss
Finance income, net
Current income tax recovery
Impairment of domain properties and other intangible assets
Loss (gain) on sale of domain properties and other intangible assets
Change in non-cash operating working capital (note 20)
Cash used in operating activities
Income taxes received
Net cash used in operating activities
Cash flows from financing activities:
Repayment of finance lease
Term loan
Repayment of term loan
Promissory notes
Interest paid
Net cash from (used) in financing activities
Cash flows from investing activities:
Interest income received
Net proceeds from disposal of domain properties
Additions to property and equipment
Net cash from investing activities
119
112
(12)
24
59
44
55
(18)
-
1
389
186
1,093
(28)
-
55
123
2
(22)
265
(79)
346
(1,523)
18
(2,345)
22
(1,505)
(2,323)
(64)
175
(73)
1,335
(25)
1,348
5
-
-
5
(123)
-
-
-
(15)
(138)
13
96
(11)
98
Decrease in cash
Foreign exchange loss on cash held in foreign currency
Cash, beginning of year
(152)
(44)
311
(2,363)
(123)
2,797
Cash, end of year
$
115
$
311
See accompanying notes to consolidated financial statements.
6
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
1.
Corporate information:
EQ Inc. (“EQ Works”) (the "Company") uses real-time technology and advanced analytics to
improve performance for all web, mobile, social and video advertising initiatives. The
Company balances the many components that comprise the complex advertising ecosystem and
establishes equilibrium for reaching the right audience at the right time through any web or
mobile device. The Company is governed by the Ontario Business Corporations Act and is
domiciled in Canada. The address of the Company's registered office is 1255 Bay Street, Suite
400, Toronto, ON, M5R 2A9. The Company is a publicly listed on the TSX Venture Exchange
("TSX-V").
2.
Significant accounting policies:
The accounting policies set out below have been applied consistently to all years presented in
these consolidated financial statements:
(a) Statement of compliance:
These consolidated
in accordance with
financial statements have been prepared
International Financial Reporting Standards ("IFRS") and interpretations of the IFRS
Interpretation Committee (“IFRIC”), as issued by the International Accounting Standards
Board ("IASB"). The accounting policies applied in these consolidated financial statements
are based on IFRS issued and outstanding as of December 31, 2015. The Board of
Directors authorized the consolidated financial statements for issue on April 26, 2016.
(b) Basis of presentation and going concern:
The consolidated financial statements have been prepared under the historical cost basis.
Other measurement bases used are described in the applicable notes.
The consolidated financial statements were prepared on a going concern basis, which
assumes that the Company will continue in operation for the foreseeable future and will be
able to realize its assets and discharge its liabilities and commitments in the normal course
of business.
The Company has incurred significant operating losses $2,296 (2014 - $4,286) and negative
cash flows from operations $1,505 (2014 - $2,323) in recent years, and has a working
capital deficiency $2,680 (2014 – deficiency of $427). Whether and when the Company can
attain profitability and positive cash flows is uncertain. These uncertainties cast significant
doubt upon the Company’s ability to continue as a going concern.
The Company will need to raise capital in order to fund its operations. This need may be
adversely impacted by: a lack of normally available financing and an accelerating loss of
customers. To address its financing requirements, the Company will seek financing through
debt and equity financings, asset sales, and rights offerings to existing shareholders. The
outcome of these matters cannot be predicted at this time.
7
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(c) Functional and presentation currencies:
These consolidated financial statements are presented in Canadian dollars. The Company's
functional currency is the U.S. dollar. The Company has elected its presentation currency to
be the Canadian dollar as it is listed on the TSX-V and its shareholders are primarily
Canadian.
(d) Use of estimates and judgments:
The preparation of consolidated financial statements and application of IFRS often involve
management's judgment and the use of estimates and assumptions deemed to be
reasonable at the time they are made. The Company reviews estimates and underlying
assumptions on an ongoing basis. Revisions are recognized in the period in which the
estimates are revised and may impact future periods as well. Other results may be derived
with different judgments or using different assumptions or estimates and events may occur
that could require a material adjustment.
The following are critical accounting policies subject to such judgments and the key sources
of estimation uncertainty that the Company believes could have the most significant impact
on the reported consolidated results of operations and consolidated financial position.
(e) Key sources of estimation uncertainty:
(i) Useful lives of intangible assets - Useful lives over which intangible assets are
amortized are based on management's estimate of future use and performance.
Expected useful lives are reviewed annually for any change to estimates and
assumptions.
(ii) Revenue recognition - In their determination of the amount and timing of revenue to be
recognized, management relies on assumptions and estimates supporting its revenue
recognition policy. Revenue from fixed fee arrangements is recognized using the
percentage-of-completion method. Estimates of the percentage-of-completion for
customer projects are based upon current actual and forecasted information and
contractual terms.
(iii) Trade receivables - The Company monitors the financial stability of its customers and
the environment in which they operate to make estimates regarding the likelihood that
the individual trade receivable balances will be paid. Credit risks for outstanding trade
receivables are regularly assessed and allowances are recorded for estimated losses.
(iv) Share-based payments - The estimated fair value of stock options is determined using
the Black-Scholes option pricing model. Inputs to the model are subject to various
estimates related to volatility, interest rates, dividend yields and expected life of the
stock options issued. Fair value inputs are subject to market factors, as well as internal
estimates. In addition to the fair value calculation, the Company estimates the
expected forfeiture rate with respect to equity-settled share-based payments based on
historical experience.
8
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(f) Critical judgments in applying accounting policies:
(i)
Impairment tests for non-financial assets - Judgment is applied in determining whether
events or changes in circumstances during the years are indicators that a review for
impairment should be conducted.
(ii) Functional currency - Judgment is applied in situations where primary and secondary
indicators are mixed. Primary indicators such as the currency that mainly influences
sales prices are given priority before considering secondary indicators.
(g) Basis of consolidation:
(i) Subsidiaries:
Subsidiaries are entities controlled by the Company. The financial statements of
subsidiaries are included in the consolidated financial statements from the date that
control commences until the date that control ceases.
The Company has the following wholly owned subsidiaries:
. Ownership interest
Subsidiary
Jurisdiction
of incorporation
December 31, December 31,
2015 2014
CX Digital Media U.S.A Inc.
CX Digital Media Inc.
EQ Advertising Group Ltd.
Cyberplex Services Inc.
Cyberplex Ontario Holdings Inc.
1887811 Ontario Inc.
CX U.S.A Southwest Inc.
CX U.S.A. Pacific, Inc.
Bootcamp Media Inc.
Delaware
Ontario
Ontario
Ontario
Ontario
Ontario
Texas
California
Ontario
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
(ii) Transactions eliminated on consolidation:
Intercompany balances and transactions, and any unrealized income and expenses
arising from such transactions, are eliminated upon consolidation.
9
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(h) Foreign currency transactions:
Transactions in foreign currencies are translated to the respective functional currencies of
the Company and its subsidiaries at exchange rates at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies at the reporting date are
translated to the functional currency at the exchange rate at that date. Non-monetary
assets and liabilities denominated in foreign currencies that are measured at fair value are
translated to the functional currency at the month-end exchange rate at the date that the fair
value was determined. Foreign currency differences arising on translation are recognized
in finance income or cost. Non-monetary assets and liabilities and related depreciation and
amortization are translated at historical exchange rates. Revenue and expenses, other
than depreciation and amortization, are translated at the monthly average rates of exchange
for the year.
The Company has elected to use the Canadian dollar as its presentation currency as it is
listed on the TSX-V and its shareholders are primarily Canadian. Monetary assets and
liabilities at the reporting date are translated at the month-end exchange rate and revenue
and expenses are translated at the monthly average rates of the exchange for the year.
Capital assets and domain properties and other intangible assets are also translated at
month-end exchange rate but maintained at the USD historical cost. Shareholders’ capital
and retained earnings are maintained at historical cost. Foreign exchange gains and losses
resulting from the translation of functional to presentation currency are recorded to other
comprehensive income (loss) ("OCI") in the year in which they occur.
(i) Financial instruments:
(i) Non-derivative financial assets:
The Company initially recognizes loans and receivables and deposits on the date they
originate. All other financial assets (including assets designated at fair value through
profit or loss) are recognized initially on the trade date at which the Company becomes
a party to the contractual provisions of the instrument.
The Company derecognizes a financial asset when the contractual rights to the cash
flows from the asset expire, or it transfers the rights to receive the contractual cash
flows on the financial asset in a transaction in which substantially all the risks and
rewards of ownership of the financial asset are transferred.
Financial assets and liabilities are offset and the net amount presented in the
consolidated statements of financial position when, and only when, the Company has a
legal right to offset the amounts and intends either to settle on a net basis or to realize
the asset and settle the liability simultaneously.
Financial instruments are, for measurement purposes, grouped into categories. The
classification depends on the purpose and is determined upon initial recognition. The
Company has the following categories of non-derivative financial assets: financial
assets at fair value through profit or loss, loans and receivables and available-for-sale
financial assets.
10
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(i) Financial instruments: (continued)
(i) Non-derivative financial assets: (continued)
(a) Financial assets at fair value through profit or loss:
A financial asset is classified at fair value through profit or loss if it is classified as
held-for-trading or is designated as such upon initial recognition. Financial assets
are designated at fair value through profit or loss if the Company manages such
investments and makes purchase and sale decisions based on their fair value in
accordance with the Company's documented risk management or investment
strategy. Upon initial recognition, attributable transaction costs are recognized in
profit or loss as incurred. Financial assets at fair value through profit or loss are
measured at fair value, and changes therein are recognized in profit or loss.
(b) Loans and receivables:
Loans and receivables, which include cash and accounts receivable and other
current assets, are recognized initially at fair value plus any directly attributable
transaction costs. Subsequent to initial recognition, loans and receivables are
measured at amortized cost using the effective interest method, less any
impairment losses. Accounts receivable comprise trade receivables, net of
allowance for doubtful accounts.
Cash comprise cash balances and cash deposits. Bank overdrafts that are
repayable on demand and form an integral part of the Company's cash
management are included as a component of cash for the purpose of the
consolidated statements of cash flows.
(c) Available-for-sale financial assets:
Available-for-sale financial assets are non-derivative financial assets that are
designated as available-for-sale and that are not classified in any of the previous
categories, and include investments. Subsequent to initial recognition, they are
measured at fair value and changes therein, other than impairment losses and
foreign currency differences on available-for-sale equity
instruments, are
recognized in OCI and presented within equity in the accumulated other
comprehensive income (“OCI”). When an investment is derecognized, the
cumulative gain or loss in OCI is transferred to profit or loss.
11
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(i) Financial instruments: (continued)
(ii) Non-derivative financial liabilities:
The Company initially recognizes debt securities issued and subordinated liabilities on
the date that they are originated. All other financial liabilities (including liabilities
designated at fair value through profit or loss) are recognized initially on the trade date
at which the Company becomes a party to the contractual provisions of the instrument.
The Company derecognizes a financial liability when its contractual obligations are
discharged, cancelled or expired.
The Company's non-derivative financial liabilities consist of accounts payable and
accrued liabilities and loans and borrowings. Such financial liabilities are recognized
initially at fair value plus any directly attributable transaction costs. Subsequent to initial
recognition and measurement, these financial liabilities are measured at amortized cost
using the effective interest method.
(iii) Derivative financial assets and liabilities:
The Company’s derivative financial assets and liabilities consist of warrant liabilities.
Derivatives are recognized initially at fair value and attributable transaction costs are
recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives
are re-measured each period with the movement being recorded as a gain or loss in the
statement of profit or loss.
(iv) Fair value measurement:
The Company provides disclosure of the three-level hierarchy that reflects the
significance of the inputs used in making the fair value measurement. The three levels
of fair value hierarchy based on the reliability of inputs are as follows:
Level 1 - inputs are quoted prices in active markets for identical assets and
liabilities;
Level 2 - inputs are based on observable market data, either directly or indirectly
other than quoted prices; and
Level 3 - inputs are not based on observable market data.
12
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(j) Property and equipment:
(i) Recognition and measurement:
Property and equipment are measured at cost less accumulated depreciation and
accumulated impairment losses. Cost includes expenditures that are directly attributable
to the acquisition of the asset. Gains and losses on disposal of an item of property and
equipment are determined by comparing the proceeds from disposal with the
carrying amount of property and equipment and are recognized net within loss from
operations.
The costs of the day-to-day servicing of property and equipment are recognized in
operating income as incurred.
(ii) Depreciation:
Depreciation is calculated over the depreciable amount, which is the cost of an asset, or
other amount substituted for cost, less its estimated residual value. Depreciation is
recognized on a straight-line basis over the estimated useful lives of the property and
equipment, since this most closely reflects the expected pattern of consumption of the
future economic benefits embodied in the asset.
The estimated useful lives for the current and comparative years are as follows:
Furniture and fixtures
Computer equipment
Leasehold improvements
4 years
3 years
Lesser of useful life and term of lease
Depreciation methods, useful lives and residual values are reviewed at each financial
year end and adjusted, if appropriate.
(k) Intangible assets:
(i) Domain properties and other intangible assets:
Domain properties and other intangible assets that are acquired by the Company and
have finite useful lives are measured at cost less accumulated amortization and
accumulated impairment losses.
13
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(k) Intangible assets: (continued)
(ii) Amortization:
Amortization is calculated over the cost of the asset less its estimated residual value,
which typically is expected to be nil. Amortization is recognized in profit or loss on a
straight-line basis over the estimated useful lives of intangible assets, other than
goodwill, from the date that they are available for use, since this most closely reflects
the expected pattern of consumption of the future economic benefits embodied in the
asset. Useful lives, residual values and amortization methods for intangible assets with
finite lives are reviewed at least annually.
The estimated useful lives for the current and comparative years are as follows:
Computer Software
Technology
Domain properties and content
Customer relationships
(iii) Research and development:
2 years
4 years
7 years
1- 5 years
Research and development activities can be either contracted or self-initiated:
Costs for contracted research and development activities, carried out within the scope
of externally financed research and development contracts, are expensed when the
related revenues are recorded.
Costs for self-initiated research and development activities are assessed to determine if
they qualify for recognition as internally generated intangible assets. Apart from
complying with the general requirements for initial measurement of an intangible asset,
qualification criteria are met only when technical as well as commercial feasibility can be
demonstrated and cost can be reliably measured. It must also be probable that the
intangible asset will generate future economic benefits, be clearly identifiable and
allocable to a specific product. Further to meeting these criteria, only such costs that
relate solely to the development phase of a self-initiated project are capitalized. Any
costs that are classified as part of the research phase of a self-initiated project are
expensed as incurred. If the research phase cannot be clearly distinguished from the
development phase, the respective project-related costs are treated as if they were
incurred in the research phase only. Capitalized development costs are amortized over
the estimated useful life of the internally generated intangible asset. Internally
generated intangible assets are reviewed for impairment annually when the asset is not
yet in use or when events or changes in circumstances indicate that the carrying
amount may not be recoverable and the asset is in use
For the year ended December 31, 2015 $115 (2014 - $133) of research and
development costs have been expensed primarily as part of employee compensation
and benefits in profit or loss.
14
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(l)
Impairment:
(i) Financial assets, including accounts receivable:
A financial asset is considered impaired if objective evidence indicates that one or more
events have had a negative effect on the estimated future cash flow of that asset that
can be estimated reliably. Individually significant financial assets are tested for
impairment on an individual basis. The remaining financial assets are assessed
collectively based on the nature of the asset.
An impairment loss on loans and receivables is measured as the difference between
the asset's carrying amount and the present value of the future cash flows expected to
be derived from the asset. The carrying value is reduced through the use of an
allowance for doubtful accounts, with the loss recognized in net income (loss).
An impairment loss on available-for-sale financial assets is recognized by reclassifying
the losses accumulated in the accumulated other comprehensive income in equity to
the consolidated statements of comprehensive income (loss). The cumulative loss that
is reclassified from equity to net income (loss) is the difference between the acquisition
cost less any impairment loss previously recognized and the current fair value. An
impairment loss in respect of an equity-accounted investment is measured by
comparing the recoverable amount of the investment with its carrying amount.
(ii) Non-financial assets:
The carrying amounts of the Company's non-financial assets, other than deferred tax
assets, are reviewed at each reporting date to determine whether there is any
indication of impairment. If any such indication exists, then the asset's recoverable
amount is estimated. For intangible assets that are not yet available for use, the
recoverable amount is estimated each year during the fourth quarter in alignment with
the Company's annual planning cycle.
(m) Share-based payments:
Share-based payment arrangements in which the Company receives goods or services as
consideration for its own equity instruments are accounted for as equity-settled share-
based payment transactions.
The grant date fair value of share-based payment awards granted to employees is
recognized as a compensation cost, with a corresponding increase in contributed surplus,
over the vesting period of the award. The amount recognized is adjusted to reflect the
number of awards for which the related service and non-market vesting conditions are
expected to be met, such that the amount ultimately recognized is based on the number of
awards that vest. Upon exercising the awards, such as options, the fair value of the stock
options exercised that has been expensed to contributed surplus along with the cash
received is reclassified to common shares and reflected in the statements of changes in
shareholders' equity.
15
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(n) Provisions:
A provision is recognized if, as a result of a past event, the Company has a present legal or
constructive obligation that can be estimated reliably, and it is probable that an outflow of
economic benefits will be required to settle the obligation. The timing or amount of the
outflow may still be uncertain. Provisions are determined by discounting the expected
future cash flows at a pre-tax rate that reflects current market assessments of the time value
of money and the risks specific to the liability. The unwinding of the discount is recognized
as finance cost.
(o) Revenue:
Advertising revenue is generated from the targeted delivery of digital advertisements to
internet users through various channels, including online display, mobile, social and video
using its “Programmatic Marketing Platform”. The Company offers its services on a fully-
managed and a self-service technology basis. Revenue is recognized when all four of the
following criteria are met: (i) evidence of an arrangement exists, (ii) delivery has occurred or
a service has been provided, (iii) customer fees are fixed or determinable, and, (iv)
collection is reasonably assured.
Revenue arrangements are evidenced by a fully executed insertion order (“IO”). Generally,
IOs specify the number and type of advertising impressions to be delivered over a specified
time at an agreed upon price, and performance objectives for an ad campaign.
Performance objectives are generally a measure of targeting as defined by the parties in
advance, such as number of ads displayed, consumer clicks on ads, or consumer actions
(which may include qualified leads, registrations, downloads, inquiries or purchase). These
payment models are commonly referred to as "CPM" (cost per impression), "CPC" (cost per
click) and "CPA" (cost per action).
Marketing services revenue is based on either time and material arrangements or fixed fee
arrangements. Revenue related to time and materials arrangements is recognized as
services are performed. Revenue from fixed fee arrangements is recognized using the
percentage-of-completion method, based on the ratio of total labour hours incurred to date
to total estimated labour hours. Changes in job performance, job conditions, estimated
profitability and final settlement may result in revisions to costs and income and are
recognized in the year in which the revisions are determined. Costs include direct material
and labour costs which are expensed as incurred. Provisions for estimated losses on
incomplete arrangements are made in the year in which such losses are determined.
Revenue from hosting services is recognized on a straight-line basis over the term of the
hosting arrangement.
16
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(o) Revenue: (continued)
The Company determines collectability by performing ongoing credit evaluations and
monitoring its customers’ accounts receivable balances. For new customers and their
agents, which may be advertising agencies or other third parties, the Company may perform
a credit check with an independent credit agency and may check credit references to
determine creditworthiness. The Company only recognizes revenue when collection is
reasonably assured. If collection is not considered reasonably assured, revenue is
recognized only once fees are collected. Revenue is recorded net of trade discounts and
volume rebates. If it is probable that discounts will be granted and amounts can be
measured reliably, then the discount is recognized as a reduction of revenue as the related
sales are recognized.
In instances where the Company contracts with third party advertising agencies on behalf of
their advertiser clients, a determination is made to recognize revenue on a gross or net
basis based on an assessment of whether the Company is acting as the principal or an
agent in the transaction. Generally the Company is the primary obligor and is responsible
for (i) fulfilling the advertisement delivery, (ii) establishing the selling prices for delivery of
the advertisements, and (iii) performing all billing and collection activities including retaining
credit risk, resulting in a determination that the Company is acting as the principal in these
arrangements and therefore revenue earned and costs incurred are recognized on a gross
basis.
In situations where amounts billed in excess of revenue recognized to date on an
arrangement by arrangement basis are classified as deferred revenue, whereas revenue
recognized in excess of amounts billed is classified as accrued receivables and included as
part of accounts receivable.
(p) Lease payments:
Payments made under operating leases are recognized in profit or loss on a straight-line
basis over the term of the lease. Lease incentives received are recognized as an integral
part of the total lease expense, over the term of the lease.
Minimum lease payments made under finance leases are apportioned between the finance
cost and the reduction of the outstanding liability. The finance cost is allocated to each
period during the lease term so as to produce a constant periodic rate of interest on the
remaining balance of the liability.
Contingent lease payments are accounted for in the period in which they are incurred.
17
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(q) Finance income and finance cost:
Finance income comprises interest income on funds invested (including available-for-sale
financial instruments), gains on the disposal of available-for-sale financial assets and
changes in the fair value of financial assets at fair value through profit or loss. Interest
income is recognized as it accrues in profit or loss, using the effective interest method.
Finance cost comprises interest expense on loans and borrowings, changes in the fair value
of financial instruments at fair value through profit or loss and impairment losses
recognized on financial assets.
Foreign currency gain and losses arriving from the translation and settlement of assets and
liabilities as well as revenue and expenses are reported on a net basis within finance cost
(income).
(r) Income taxes:
Income tax expense for the year comprises current and deferred income taxes. Current
taxes and deferred taxes are recognized in the consolidated statements of comprehensive
income (loss), except to the extent that they relate to items recognized in OCI or directly in
equity. In these cases, the taxes are also recognized in OCI or directly in equity,
respectively.
The Company uses the asset and liability method of accounting for deferred income taxes.
Under this method, the Company recognizes deferred income tax assets and liabilities for
future income tax consequences attributable to temporary differences between the
consolidated statement of financial position carrying amounts of assets and liabilities and
their respective income tax bases, and on unused tax losses and tax credit carryforwards.
The Company measures deferred income taxes using tax rates and laws that have
been enacted or substantively enacted at the reporting date and are expected to apply
when the related deferred income tax asset is realized or the deferred income tax liability is
settled. The Company recognizes deferred income tax assets only to the extent that it is
probable that future taxable profit will be available against which the deductible
temporary differences, as well as unused tax losses and tax credit carryforwards can be
utilized. Deferred income tax assets are reviewed at each reporting date and are reduced to
the extent that it is no longer probable that the related tax benefit will be realized. The
Company recognizes the effect of a change in income tax rates in the year of enactment or
substantive enactment.
Deferred income taxes are not recognized if they arise from the initial recognition of
goodwill, nor are they recognized on temporary differences arising from the initial
recognition of an asset or liability in a transaction that is not a business combination and
that affects neither accounting nor taxable profit or loss. Deferred income taxes are also not
recognized on temporary differences relating to investments in subsidiaries to the extent
that it is probable that the temporary differences will not reverse in the foreseeable future.
18
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(r) Income taxes: (continued)
The Company records current income tax expense or recovery based on taxable income
earned or loss incurred for the year in each tax jurisdiction where it operates, and for any
adjustment to taxes payable in respect of previous years, using tax laws that are enacted or
substantively enacted at the consolidated statements of financial position dates.
In the ordinary course of business, there are many transactions for which the ultimate tax
outcome is uncertain. The final tax outcome of these matters may be different from the
estimates originally made by management in determining the Company's income tax
provisions. Management periodically evaluates the positions taken in the Company's tax
returns with respect to situations in which applicable tax rules are subject to interpretation.
The Company establishes provisions related to tax uncertainties where appropriate, based
on its best estimate of the amount that will ultimately be paid to or received from tax
authorities.
Basic loss per share amounts are calculated by dividing net loss for the year attributable to
common shareholders by the weighted average number of common shares outstanding
during the year. Diluted loss per share amounts are calculated by dividing the net loss
attributable to common shareholders by the weighted average number of shares outstanding
during the period plus the weighted average number of shares that would be issued on the
conversion of all the dilutive potential ordinary shares into common shares.
(s) Recently issued accounting pronouncements:
Effective for annual periods beginning on or after January 1, 2016
(i)
IAS 1 Presentation of Financial Statements was amended by the IASB in December
2014. The amendments are designed to further encourage companies to apply
professional judgement in determining what information to disclose in their financial
statements. For example, the amendments make clear that materiality applies to the
whole of financial statements and that the inclusion of immaterial information can inhibit
the usefulness of financial disclosures. Furthermore, the amendments clarify that
companies should use professional judgement in determining where and in what order
information is presented in the financial disclosures. Earlier application is permitted.
(ii) IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets were amended by
the IASB in May 2014. Amendments clarify that the use of revenue-based methods to
calculate the depreciation of an asset is not appropriate because revenue generated by
an activity that includes the use of an asset generally reflects factors other than the
consumption of the economic benefits embodied in the asset. The IASB also clarified
that revenue is generally presumed to be an inappropriate basis for measuring the
consumption of the economic benefits embodied in an intangible asset. This
presumption, however, can be rebutted in certain limited circumstances. Earlier
application is permitted.
Effective for annual periods beginning on or after January 1, 2018
19
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies: (continued)
(s) Recently issued accounting pronouncements: (continued)
(iii) IFRS 15 Revenue from Contracts with Customers was issued by the IASB in May 2014.
The core principle of the new standard is for companies to recognize revenue to depict
the transfer of goods or services to customers in amounts that reflect the consideration
(that is, payment) to which the company expects to be entitled in exchange for those
goods or services. The new standard will also result in enhanced disclosures about
revenue, provide guidance for transactions that were not previously addressed
comprehensively (for example, service revenue and contract modifications) and
improve guidance for multiple-element arrangements. Earlier application is permitted.
IFRS 15 supersedes the following standards: IAS 11 Construction Contracts, IAS 18
Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the
Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, and SIC-31
Revenue—Barter Transactions Involving Advertising Services.
(iv) IFRS 9 Financial Instruments was issued by the IASB in July 2014 and will replace IAS
39 Financial Instruments: Recognition and Measurement. IFRS 9 uses a single
approach to determine whether a financial asset is measured at amortized cost or fair
value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how
an entity manages its financial instruments in the context of its business model and the
contractual cash flow characteristics of the financial assets. Most of the requirements in
IAS 39 for classification and measurement of financial liabilities were carried forward
unchanged to IFRS 9. The new standard also requires a single impairment method to
be used, replacing the multiple impairment methods in IAS 39. Earlier application is
permitted.
The Company is assessing the impact of these new standards on its consolidated financial
statements.
3.
Investment:
In July 2012, the Company acquired 116,267 shares of an available-for-sale equity investment in
a private company for $50. As at December 31, 2015, the fair value of the shares increased to
$251. The gain from the appreciation of $201 was booked through the other comprehensive
income. The fair value was assessed based on the subsequent agreed upon sale price for the
investment (note 21).
20
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
4.
Revenue:
The Company sub-classifies revenue into the following components: advertising and marketing
services revenue.
Advertising revenue is derived from the on-line network connecting advertisers and publishers to
execute advertising. Marketing services revenue is derived from consulting services and
developing advertising strategies for the Company's customers.
Advertising
Marketing services
5.
Segment information:
2015
2,796
888
$
2014
3,794
1,083
3,684
$
4,877
$
$
The Company has one operating segment and report as such. EQ Works’ business focuses on
targeted advertising and incorporates the most sophisticated advertising technologies, data
analytics and programmatic media buying capabilities into a single system. The chief operating
decision maker evaluates the Company’s performance, makes operating decision, and allocates
resources based on financial data consistent with the presentation in these financial statements.
The Company's assets and operations are substantially all located in Canada; however, the
Company services many customers in the United States and internationally.
The Company generates revenue across three geographical regions; customer revenue by
region is as follows:
Canada
Outside North America
United States
2015
2014
$
$
$
3,394
12
278
3,684
$
3,533
80
1,264
4,877
In 2015, there were two customers that comprised 13% and 11% of the Company's total
revenue from operations, respectively. No other customers exceeded 10% of revenue. In 2014,
there was one customer that comprised 12% of the Company's total revenue from operations.
21
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
6.
Finance income and finance cost:
Finance income:
Interest income on cash
Foreign exchange gain, net
Total finance income
Finance costs:
Other interest expense
Foreign exchange loss, net
Total finance costs
7.
Income Taxes:
(a) Income tax expense:
2015
2014
$
$
$
$
$
5
87
92
$
13
–
13
2015
2014
(147)
–
$
(147)
$
(15)
(110)
(125)
The following table reconciles income taxes calculated at combined Canadian federal/
provincial tax rates with the income tax expense in these financial statements:
Loss before income taxes
Statutory rate
Expected income tax recovery
Amounts not deductible for tax
Other
Change in valuation allowance
Income tax recovery
December 31,
2015
December 31,
2014
$
$
$
(2,314) $
26.5%
(613) $
(10)
(3,360) $
3,965
(4,308)
26.5%
(1,142)
96
1,454
(430)
(18) $
(22)
22
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
7.
Income Taxes: (continued)
(b) Deferred income taxes:
The temporary differences that give rise to deferred income tax assets and deferred income
tax liabilities are presented below:
December 31,
2015
December 31,
2014
Amounts related to tax loss and credit carry
forwards
$
18,523 $
14,481
Other
Capital and intangible assets
Net deferred tax assets
Deferred tax assets not recognized
19
235
18,777
(18,777)
135
196
14,812
(14,812)
$
- $
-
Deferred tax assets have not been recognized in respect of the above items because it is not
probable that future taxable profit will be available against which the Company can utilize the
benefits therefrom.
The Company has ITCs of approximately $388 related to scientific research and
experimental development costs.
losses of
approximately $36,652 available to apply against future taxable income and capital losses of
$59,430. If not utilized, the non-capital losses will expire as follows:
The Company also has non-capital
$ 1,127
8,821
3,857
2,905
3,076
14,304
2,562
$ 36,652
2029
2030
2031
2032
2033
2034
2035
23
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
8.
Loss per share:
The computations for basic and diluted loss per share for the years ended December 31, 2015
and 2014 are as follows:
Net loss
$
(2,296)
$
(4,286)
Weighted average number of shares outstanding:
2015
2014
Basic
Diluted
Loss per share:
Basic
Diluted
15,857,225
15,857,225
15,857,225
15,857,225
$
$
(0.14)
(0.14)
$
$
(0.27)
(0.27)
Warrants to purchase 9,945,845 common shares were outstanding during 2015 but were not
included in the computation of diluted loss per share because the warrants' exercise price was
greater than the average market price of the common shares. The total number of warrants that
were excluded from the calculation of diluted loss per share, because their inclusion would have
been anti-dilutive for the year ended December 31, 2015, was 9,945,845 (2014 - nil).
The total number of options that were excluded from the calculation of diluted loss per share,
because their inclusion would have been anti-dilutive for the year ended December 31, 2015,
was nil (2014 - 1,037,498).
9.
Other current assets and accounts payable and accrued liabilities:
(a) Other current assets:
The major components of other current assets are as follows:
Prepaid expenses
SR&ED credits receivable
Accrued income
2015
2014
$
$
$
94
69
39
202
$
141
-
55
196
24
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
9.
Other current assets and accounts payable and accrued liabilities:
(b) Accounts payable and accrued liabilities:
The major components of accounts payable and accrued liabilities are as follows:
Trade accounts payable
Accrued liabilities
10. Property and equipment:
Cost
Balance, January 1, 2014
Additions
Effect of movements in exchange rates
Balance, December 31, 2014
Cost
Balance, January 1, 2015
Effect of movements in exchange rates
Balance, December 31, 2015
Depreciation
Balance, January 1, 2014
Depreciation
Effect of movements in exchange rates
Balance, December 31, 2014
Depreciation
Balance, January 1, 2015
Depreciation
Effect of movements in exchange rates
Balance, December 31, 2015
Carrying amounts
December 31, 2014
December 31, 2015
2015
2014
$
$
1,460
590
$
926
554
2,050
$
1,480
Furniture
and fixtures
Computer
equipment
Leasehold
improvements
Total
$
$
$
$
$
$
$
662
1
159
822
822
370
1,192
655
2
158
815
815
2
370
1,187
$
3,001
10
482
3,493
$
$
3,493
1,118
4,611
2,727
184
465
3,376
3,376
117
1,107
4,600
$
$
$
$
$
$
303
–
58
361
361
135
496
303
–
58
361
361
–
135
496
$
$
3,966
11
699
4,676
$
$
$
$
$
4,676
1,623
6,299
3,685
186
681
4,552
4,552
119
1,612
$
6,283
7
5
$
117
$
–
$
124
11
–
16
$
$
$
$
$
$
$
$
$
25
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
11. Domain properties and other intangible assets:
(a) Intangible assets by category are as follows:
Customer
properties
Computer
relationships
Technology
and content
software
Total
Domain
Cost
Balance, January 1, 2014
$
18,032
$
9,998
$
7,800
$
1,119
$ 36,949
Disposals
Effect of movements in
exchange rates
-
53
-
328
(32)
113
-
87
(32)
581
Balance, December 31,
2014
$
18,085
$ 10,326
$
7,881
$
1,206
$ 37,498
Cost
Balance, January 1, 2015
$
18,085
$ 10,326
$
7,881
$
1,206
$ 37,498
Disposals
Effect of movements in
exchange rates
-
122
-
(241)
-
(241)
772
236
202
1,332
Balance, December 31,
2015
$
18,207
$ 11,098
$
7,876
$
1,408
$ 38,589
26
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
11. Domain properties and other intangible assets: (continued)
(a) Intangible assets by category are as follows: (continued)
Customer
properties
Computer
relationships
Technology
and content
software
Total
Domain
Amortization and
impairment loss
Balance, January 1, 2014
$
18,032
$
9,068
$
7,121
$
1,118
$ 35,339
Amortization
Impairment
Disposals
Effect of movements in
exchange rates
Balance, December 31,
-
-
-
53
926
-
-
296
166
265
(14)
55
1
-
-
87
1,093
265
(14)
491
2014
$
18,085
$ 10,290
$
7,593
$
1,206
$ 37,174
Amortization and
impairment loss
Balance, January 1, 2015
$
18,085
$ 10,290
$
7,593
$
1,206
$ 37,174
Amortization
Disposals
Effect of movements in
exchange rates
Balance, December 31,
-
-
122
16
-
766
96
(220)
-
-
112
(220)
191
202
1,281
2015
$
18,207
$ 11,072
$
7,660
$
1,408
$ 38,347
Carrying amounts
December 31, 2014
December 31, 2015
$
$
-
-
$
$
36
26
$
$
288
216
$
$
-
-
$
$
324
242
(b) Impairment:
In 2014, the Company booked an impairment for the domain properties and other intangible
assets of $265 using the fair value less cost of sales, the Company determined the
recoverable amount of this asset to be lower than its carrying value.
27
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
12. Loans and borrowings:
(a) Bank credit facilities:
The Company has a non-revolving term loan and credit card facility with a Canadian
chartered bank. As at December 31, 2015, there was $102 (2014 - nil) outstanding under the
non-revolving term facility and $58 outstanding under the credit card facility (2014 - $61)
included in accounts payable.
The non-revolving demand facility is up to $175 by way of Canadian dollar currency loans
and repayable by twelve monthly equal installments. The facility bears interest at the bank's
prime rate plus 2.35%. The Company renegotiated the revolving demand facility with the
lender during the year ended December 31, 2015 and under the amended credit agreement,
the Company is not required to maintain any covenant as security of the banking facility.
(b) Promissory note payable:
During March 2015, the Company entered into promissory notes (“Notes”) in the amount of
$700, due on September 10, 2015. The Notes, which are non-convertible, bear interest at an
annual rate of 15% with principal and interest payment due on maturity date. $300 of such
Notes have been subscribed for by certain insiders of the Company. On November 25, 2015
the Notes, along with accrued interest were refinanced.
During September 2015, the Company entered into Demand Loans (“Loans”) in the amount
of $1,388. The Loans included promissory notes of approximately $753 from the March
2015 financing which matured on September 10, 2015 and $635 of new contribution
including accrued interest of $53. The Loans were converted into new promissory notes
upon closing of the November 2015 financing.
On November 25, 2015, the Company entered into new promissory notes (“New Notes”) in
the amount of $1,421 due on November 25, 2016. The New Notes, which are non-
convertible, bear interest at an annual rate of 8% with principal and interest payment due on
maturity date. The lenders received seven non-transferable warrants (the “Bonus Warrants”)
for each dollar of principal amount of New Notes, with each Bonus Warrant being exercisable
for a period of twelve months from the date of issuance for one common share of the
Company (a “Bonus Share”) at an exercise price of $0.10 per Bonus Share. All Bonus
Warrants will be subject to a four months hold period from the date of issuance in
accordance with the applicable securities law.
28
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
12. Loans and borrowings (continued):
(b) Promissory note payable: (continued)
As the New Notes are denominated in Canadian dollars, a currency different from the
functional currency of the Company, the embedded derivative is recognized as a liability.
The embedded derivative is recorded at fair value and re-measured each period with the
movement being recorded as a gain or loss in consolidated statement of operations. The
New Notes are classified as liability, less the portion relating to the embedded derivate
feature. As a result, the recorded liability to repay the New Notes is lower than its face value.
Using effective interest rate method of 29.5% rate implicit in the calculation, the difference of
$349 characterized as the notes discount, is being charged to interest expenses accreted to
the liability over the term of the New Notes. $588 of such New Notes have been subscribed
for by insiders of the Company.
The following table outlines the activity for loans and borrowings as at December 31, 2015:
Balance, January 1, 2015
Notes issued on March 9, 2015
Accrued interest on Notes as of November 25, 2015
Notes and accrued interest refinanced with New Notes
New Notes issued on November 25, 2015
Derivative liability – Warrants
Accretion of interest – Warrants
Accrued interest on New Notes
Total promissory notes payable
Term loan
Repayment of term loan
Net term loan
Total loans and borrowings
$
$
$
$
–
700
75
(775)
1,421
(235)
24
11
1,221
175
(73)
102
1,323
29
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
12. Loans and borrowings (continued):
(c) Derivative liability - warrants:
The Company’s functional currency is US dollars and the Bonus Warrants have an exercise
price denominated in Canadian dollars. The Company has determined that the Bonus
Warrants with an exercise price that is different from the entity’s functional currency are
classified as derivative liability based on the evaluation of the Bonus Warrant’s settlement
provisions, and carried at their fair value.
Any changes in the fair value from the period are recorded as a gain or loss in the statement
of comprehensive income.
The fair value of the derivative for the Bonus Warrants has been estimated using Black-
Scholes pricing model as it is considered as a Level 3 financial instrument in the fair value
hierarchy with significant unobservable inputs. Assumptions used in the pricing model for
December 31, 2015 is provided below.
Expected volatility
Average risk free interest rate
Forfeiture rate
Expected life (year)
Expected dividends
November 25, December 31,
2015
2015
155%
0.62%
0%
1
–
151%
0.48%
0%
0.90
–
The fair value of the derivative liability for the bonus warrants is as follows:
Balance, January 1, 2015
Derivative liability November 25, 2015
Loss on revaluation of derivative liability for the period
Derivative balance – December 31, 2015
$
$
–
235
24
259
30
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
13.
Shareholders' deficiency:
Common shares:
The authorized share capital of the Company comprises an unlimited number of common shares
without par value. The holders of common shares are entitled to receive dividends when
declared and are entitled to one vote per share at annual meetings of the Company.
14. Share-based payments:
The following table summarizes the continuity of options issued under the Company’s stock
option plan for the year ended:
2015
2014
Number of
options
Weighted
average
exercise
price
Number of
options
Weighted
average
exercise
price
Outstanding, beginning of year
Granted
Forfeited or cancelled
Outstanding, end of year
1,037,498
–
(1,037,498)
–
$
0.99
–
0.99
–
$
1,106,871
200,000
(269,373)
1,037,498
1.75
0.54
3.76
0.99
Options exercisable, end of year
–
–
302,080
$
1.63
A summary of the status of the Company's options under the Plan is as follows:
Range of
exercise
prices
Number of
options
$0.54 - 0.55
$0.80
$4.08 - $4.72
–
–
–
–
2015
Weighted
average
remaining
contractual
life (years)
–
–
–
Number of
options
exercisable
Number of
options
2014
Weighted
average
remaining
contractual
life (years)
–
–
–
–
200,000
768,750
68,748
1,037,498
4.01
2.50
0.54
Number of
options
exercisable
–
233,332
68,748
302,080
During the year ended December 31, 2015, the Company recorded share-based payments of
$59 compared to $55 during the same period in 2014. In the year ended December 31, 2015, the
Company’s common shares were trading significantly below the issued exercise price of the
stock options and the Company forfeited and cancelled the issued and outstanding stock options.
During the year ended December 31, 2015, no stock options were granted and no stock options
were exercised. During the year ended December 31, 2014, 200,000 stock options were granted
and no stock options were exercised.
31
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
14. Share-based payments (continued):
The weighted average grant date fair value of options granted during 2014 was $0.33.
The fair value of each option granted has been estimated on the date of grant using the Black-
Scholes fair value option pricing model with the following weighted average assumptions
used for grants for the year ended December 31, 2014: dividend yield of nil, expected
volatility of 108% calculated based on the contract term-life using historical prices, weighted
average risk-free interest rate of 1%, and expected lives of 2.5 years and forfeiture rate of 55%
calculated using the historical information for forfeitures.
15. Fair values of financial instruments:
(a) Classification of financial instruments:
The following table provides the allocation of financial instruments, their associated
financial instrument classifications, their carrying values, and fair values including their most
appropriate level within the fair value hierarch, based on the inputs used to determine the
fair value at the measurement date:
Loans and
receivables /
other
financial
liabilities
Amortized
cost
Available –
for – sale
securities
Fair value
Carrying
value
total
Fair
value total
December 31, 2015
Measurement basis
Financial assets:
Cash
Accounts receivable
SR&ED credits receivable
Investment (level 3)(i)
$
$
115
677
69
-
$
-
-
-
251
$
115
677
69
251
115
677
69
251
$
861
$
251
$
1,112
$
1,112
Financial liabilities:
Accounts payable and
accrued liabilities
Derivative liability-
warrants (level 3)(i)
Loans and borrowings
$
2,050
$
259
1,323
$
3,632
$
-
-
-
-
$
2,050
$
2,050
259
1,323
259
1,323
$
3,632
$
3,632
32
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
15. Fair values of financial instruments: (continued)
(a) Classification of financial instruments: (continued)
Loans and
receivables /
other
financial
liabilities
Amortized
cost
Available –
for – sale
securities
Fair value
Carrying
value
total
Fair
value total
December 31, 2014
Measurement basis
Financial assets:
Cash
Accounts receivable
SR&ED credits receivable
Investment (level 3)(i)
$
$
311
722
196
-
$
-
-
-
50
$
311
722
196
50
311
722
196
50
$
1,229
$
50
$
1,279
$
1,279
Financial liabilities:
Accounts payable and
accrued liabilities
Finance leases
$
$
1,480
64
$
1,544
$
-
-
-
$
$
1,480
64
$
1,480
64
1,544
$
1,544
(i)
The Company initially measured the available-for-sale equity investment purchased in 2012 based on the cash
exchanged between the parties in 2014. In 2015 the investment appreciated in value due to the valuation and
the Company recognize $201 of gain.
There have been no transfers of assets between levels during the years ended December 31,
2015 and 2014.
33
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
16.
Capital risk management:
The Company's objectives in managing capital are to ensure sufficient liquidity to pursue its
strategy of organic growth combined with strategic acquisitions and to provide returns to its
shareholders. The Company defines capital that it manages as the aggregate of its shareholders'
equity, which comprises issued capital, contributed surplus, accumulated other comprehensive
income and retained earnings (deficit). The Company manages its capital structure and makes
adjustments to it in light of general economic conditions, the risk characteristics of the underlying
assets and the Company's working capital requirements. In order to maintain or adjust its capital
structure, the Company, upon approval from its Board of Directors, may issue shares,
repurchase shares, pay dividends or raising capital and borrowings, as deemed appropriate
under the specific circumstances. The Company is not subject to externally imposed capital
requirements. There has been no changes to the Company’s capital management approach in
2015 from 2014.
17.
Financial risk management:
The Company's Board of Directors has overall responsibility for the establishment and
oversight of the Company's risk management framework. The Audit Committee reviews the
Company's risk management policies on an annual basis. The finance department identifies and
evaluates financial risks and is charged with the responsibility of establishing controls and
procedures to ensure that financial risks are mitigated in accordance with the approved policies.
(a) Credit risk:
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a
financial instrument fails to meet its contractual obligations and arises from the Company's
accounts receivable and cash. The majority of the Company's customers are located in
the United States and Canada. At December 31, 2015, three customers represented
16%, 13% and 12% of the gross accounts receivable balance of $724, respectively. At
December 31, 2014, three customers represented 20%, 12% and 10% of the gross
accounts receivable balance of $779, respectively. The accounts receivable balances due
from these significant customers were aged less than 30 days and classified as current at
December 31, 2015. No other individual customers represented more than 10% of
accounts receivable. As at December 31, 2015, the allowance for doubtful accounts was
$47 (2014 - $57). In establishing the appropriate allowance for doubtful accounts,
management makes assumptions with respect to the future collectability of the receivables.
Assumptions are based on an individual assessment of a customer's credit quality, as
well as subjective factors and trends. As at December 31, 2015, approximately 31% of
accounts receivable balances over 90 days were not provided for. Management believes
that the allowance is adequate. The Company, from time to time, invests its excess cash
with the objective of maintaining safety of the principal and providing adequate liquidity to
meet current payment obligations and future planned capital expenditures and with
the secondary objective of maximizing the overall yield of the portfolio. The Company's
cash as at December 31, 2015 is not subject to external restrictions and is held with
Schedule I banks in Canada.
34
EQ INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
17.
Financial risk management: (continued)
(b) Liquidity risk:
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as
they become due. The Company's approach to managing liquidity is to ensure, to the
extent possible, that it will always have sufficient liquidity to meet its liabilities when due,
under both normal and stressed conditions, without incurring unacceptable losses or risking
damage to the Company's reputation. The Company manages its liquidity risk by continually
monitoring forecasted and actual revenue and expenditures and cash flows from
operations. Management is also actively involved in the review and approval of planned
expenditures. The Company's principal cash requirements are for principal and interest
payments on its debt, capital expenditures and working capital needs. The Company uses
its operating cash flows, o perating facilities and cash balances to maintain liquidity.
35
EQ INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
17.
Financial risk management: (continued)
(b) Liquidity risk:
The following are the contractual maturities for the Company’s obligations:
Carrying
amount
Contractual
cash flow
On demand
1 year
1 - 3 years
>3 years
Less than
2015
Trade and other payables(i)
Operating leases
Loan and borrowings
$
$
2,050
1,171
1,323
4,544
$
$
2,050
1,171
1,323
4,544
$
$
–
-
-
-
$
2,050
$
–
$
646
-
–
234
-
$
646
$
234
291
1,323
3,664
$
Less than
2014
Carrying
amount
Contractual
cash flow
On demand
1 year
1 - 3 years
>3 years
Trade and other payables(i)
$
Operating leases
Finance leases
$
1,480
1,372
64
1,480
1,372
64
$
$
2,916
$
2,916
$
–
-
-
-
$
1,480
$
–
$
280
64
571
-
–
521
-
$
1,824
$
571
$
521
(i)
Trade and other payables exclude sales tax payable and other non-contractual liabilities.
36
EQ INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
17.
Financial risk management: (continued)
(c) Market risk:
Market risk is the risk that changes in market prices, such as foreign exchange rates,
interest rates and the Company's share price, will affect the Company's income or the value
of its financial instruments.
(i)
Interest rate risk:
The Company’s Interest rate risk arises primary from its loans and borrowings
obligations, which bear an interest rate of 8%. Management believes that the Company
is not significantly exposed to interest rate risk in the next twelve months.
(ii) Currency risk:
The Company operates internationally with the U.S. dollar as its functional currency and
is exposed to foreign exchange risk from purchase transactions and payroll, as well as
recognized financial assets and liabilities denominated in Canadian dollars. In addition,
the Company is exposed to exchange gains or losses on translation from its U.S. dollar
functional currency to its Canadian dollar presentation currency. The Company's main
objective in managing its foreign exchange risk is to maintain Canadian cash on
hand to support Canadian forecasted obligations and cash flows. To achieve this
objective, the Company monitors forecasted cash flows in foreign currencies and
attempts to mitigate the risk by modifying the nature of cash and cash equivalents held.
The Company has performed a sensitivity analysis model for foreign exchange
exposure over fiscal 2015. The analysis used a modeling technique that compares the
U.S. dollar equivalent of all revenue recognized and expenses incurred in Canadian
dollars, at the actual exchange rate, to a hypothetical 10% adverse movement in the
foreign currency exchange rates against the U.S. dollar, with all other variables held
constant. Foreign currency exchange rates used were based on the market rates in
effect during fiscal 2015. The sensitivity analysis indicated that a hypothetical 10%
adverse movement in foreign currency exchange rates would result in an increase in
net loss for fiscal 2015 of approximately $64. There can be no assurances that the
above projected exchange rate decrease will materialize.
37
EQ INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
17.
Financial risk management (continued):
(c) Market risk: (continued)
(ii) Currency risk: (continued)
If a shift in foreign currency exchange rates of 10% were to occur, the foreign exchange
gain or loss on the Company's net monetary assets could change by approximately
$140 due to the fluctuation and this would be recorded in the consolidated statements
of comprehensive income (loss).
Balances held in Canadian dollars are as follows:
Cash and cash equivalents
Accounts receivable
Other current assets
Accounts payable and accrued liabilities
Loan and borrowings
Finance lease
2015
2014
$
120
643
68
811
1,523
-
$ 3 0 6
707
132
501
-
64
18.
Commitments and contingencies:
Non-cancellable operating lease rentals are payable as follows:
Less than 1 year
Between 1 and 5 years
More than 5 years
2015
291
880
-
$
1,171
$
2014
280
1,092
-
1,372
$
$
The Company has one office facility under operating lease. The lease terms is 5 years, with an
option to renew the lease after that date.
During the year ended December 31, 2015, a net amount of $258 was recognized as an expense
in profit or loss in respect of operating leases (2014 - $312).
The Company sublet the unused space at the current location. Sublease payments of
approximately $60 are expected to be received during 2016.
38
EQ INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2015 and 2014
19.
Related party transactions and balances:
During March 2015, the Company announced the closing of the Offering, which consisted of $700
Promissory notes, $300 of such Promissory notes having been subscribed for by officers and directors of
the Corporation.
During November 2015, the Company announced the closing of the aforementioned financing involving
the New Notes, which consisted of $1,421 New Notes, $588 of such New Notes having been subscribed
for by officers and directors of the Company.
Transactions with key management personnel:
The key management personnel of the Company are the members of the Company's executive
management team and Board of Directors.
The remuneration of key management personnel of the Company during the years ended December 31,
2015 and 2014 was as follows:
Short-term employee benefits
Share-based payments
2015
$
663
54
717
$
$
$
20.
Consolidated statements of cash flows:
The change in non-cash operating working capital comprises the following:
Accounts receivable
Other current assets
Accounts payable and accrued liabilities
Deferred revenue
Lease inducement
$
$
2015
58
(9)
427
(87)
-
$
389
$
2014
650
31
681
2014
1,535
26
(821)
(503)
109
346
21.
Subsequent event
On February 24, 2016, EQ Works was able to negotiate and sell its investment for $251.
39