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BuildingIQ, IncConsolidated Financial Statements (In Canadian dollars) EQ INC. Years ended December 31, 2016 and 2015 INDEPENDENT AUDITORS' REPORT To the Shareholders of EQ Inc. the accompanying consolidated Inc. We have audited and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2016 and December 31, 2015 and the consolidated statements of loss and 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 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 EQ Inc. and its subsidiaries, as at December 31, 2016 and December 31, 2015 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 $1,495,000 during the year ended December 31, 2016 and, as of that date, the Company's current liabilities exceeded its current assets by $1,051,000. 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 28, 2017 Toronto, Ontario EQ INC. Consolidated Statements of Financial Position (In thousands of Canadian dollars) December 31, 2016 and 2015 Assets Current assets: Cash Accounts receivable (note 16(a)) Other current assets (note 8(a)) Non-current assets: Investment (note 3) Property and equipment (note 9) Domain properties and other intangible assets (note 10) Liabilities and Shareholders’ Deficiency Current liabilities: Accounts payable and accrued liabilities (note 8(b)) Deferred lease inducement Loans and borrowings (note 11(a) and (b)) Derivative liability - warrants (note 11(c)) Deferred revenue Non-current liabilities: Loans and borrowings (note 11(a) and (b)) Deferred lease inducement Shareholders’ deficiency Going concern (note 2(b)) Commitments and contingencies (note 17) On behalf of the Board: 2016 2015 $ 151 $ 890 138 1,179 - 8 121 115 677 202 994 251 16 242 $ 1,308 $ 1,503 1,892 63 268 - 7 2,230 2,421 - 4,651 (3,343) 2,050 20 1,323 259 22 3,674 - 63 3,737 (2,234) $ 1,308 $ 1,503 “Vernon Lobo” Director “Geoffrey Rotstein” Director 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) December 31, 2016 and 2015 Revenue (note 4) Expenses: Publishing costs Employee compensation and benefits Other operating costs Depreciation of property and equipment Amortization of domain properties and other intangible assets 2016 $ 3,414 $ 1,702 1,667 1,348 13 121 4,851 2015 3,684 1,977 1,978 1,733 119 112 5,919 Loss from operations (1,437) (2,235) Finance income (note 6) Realized gain on sale of investment (note 3) Loss on derivative liability – warrants (note 11(c)) Gain from extension of loan and borrowings (note 11(b)) Finance costs (note 6) Loss before income taxes Income tax recovery (note 7) Net loss Other Comprehensive income reclassified to profit or loss in Subsequent periods (net of tax): Net gain (loss) on sale of investment (note 3) Foreign currency translation of foreign operations Other Comprehensive income (loss), net of tax 12 201 - 179 (450) (1,495) - (1,495) (201) - (201) 92 - (24) - (147) (2,314) 18 (2,296) 201 (196) 5 Total Comprehensive loss (1,696) (2,291) Loss per share: Basic and diluted $ (0.09) $ (0.14) Weighted average number of shares outstanding basic and diluted 15,857,225 15,857,225 See accompanying notes to consolidated financial statements 4 EQ INC. Consolidated Statements of Changes in Shareholders' Deficiency (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 Common shares Balance, January 1, 2016 Net loss Share-based payments (note 13) Warrants issued (note 11 (c)) Other comprehensive income Number of shares (note 12) 15,857,225 - - - - Amount Contributed surplus Warrants Accumulated other comprehensive loss Deficit Total deficiency $ $ 66,278 - - - - $ 2,509 - 2 - - $ - - - 621 - $ (1,861) - - - (201) $ (69,160) (1,495) - (36) - (2,234) (1,495) 2 585 (201) Balance, December 31, 2016 15,857,225 66,278 $ 2,511 $ 621 $ (2,062) $ (70,691) $ (3,343) Common shares Number of shares Balance, January 1, 2015 Net loss Share-based payments (note 13) Other comprehensive income $ 15,857,225 - - - Amount 66,278 - - - $ Contributed surplus Warrants $ 2,450 - 59 - Accumulated other comprehensive loss $ (1,866) - - 5 Deficit (66,864) (2,296) - - $ Total deficiency (2) (2,296) 59 5 (1,861) $ (69,160) $ (2,234) - - - - - $ $ Balance, December 31, 2015 15,877,225 66,278 $ 2,509 $ See accompanying notes to consolidated financial statements 5 EQ INC. Consolidated Statements of Cash Flows (In thousands of Canadian dollars) December 31, 2016 and 2015 Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation of property and equipment Amortization of domain properties and other intangible assets Amortization of deferred lease inducement Loss on derivative liability – warrants Gain on extension of loan and borrowings Share-based payments (note 13) Unrealized foreign exchange loss (gain) Finance cost, net Current income tax recovery Gain on sale of investment (note 3) Loss on sale of domain properties and other intangible assets Change in non-cash operating working capital (note 19) Cash used in operating activities Income taxes received Net cash used in operating activities Cash flows from financing activities: Repayment of finance lease Advance of term-loan Repayment of term-loan (note 11(a)) Issuance of promissory notes (note 11(b)) Interest paid Net cash from financing activities Cash flows from investing activities: Interest income received Proceeds from disposal of investment (note 3) Purchases of property and equipment Net cash from investing activities Increase (decrease) in cash Foreign exchange gain (loss) on cash held in foreign currency Cash, beginning of year 2016 2015 $ (1,495) $ (2,296) 13 121 (20) - (179) 2 (33) 450 - (201) - (259) (1,601) - (1,601) - - (102) 1,500 (10) 1,388 - 251 (5) 246 33 3 115 119 112 (12) 24 - 59 44 55 (18) - 1 389 (1,523) 18 (1,505) (64) 175 (73) 1,335 (25) 1,348 5 - - 5 (152) (44) 311 115 Cash, end of year $ 151 $ 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, 2016 and 2015 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 time through any web or mobile equilibrium for 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 1235 Bay Street, Suite 401, Toronto, ON, M5R 3K4. The Company is a publicly listed on the TSX Venture Exchange ("TSX-V"). reaching the right audience at the right 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 financial statements have been prepared in accordance with 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, 2016. The Board of Directors authorized the consolidated financial statements for issue on April 28, 2017. (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 $1,495 (2015 - $2,296) and negative cash flows from operations $1,601 (2015 - $1,505) in recent years, and has a working capital deficiency $1,051 (2015 – deficiency of $2,680). 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, 2016 and 2015 2. Significant accounting policies (continued): (c) Functional and presentation currencies: These consolidated financial statements are presented in Canadian dollars. The primary and secondary indicators when determining functional currency. Primary indicators are closely linked to the primary economic environment in which the entity operates and are given more weight. Secondary indicators provide supporting evidence to determine an entity’s functional currency. Once the functional currency of an entity is determined, it should be used consistently, unless significant changes in economic factors, events and conditions indicate that the functional currency has changed. A change in functional currency is accounted for prospectively from the date of the change by translating all assets and liabilities into the new functional currency using the exchange rate at the date of the change. Effective January 1, 2016, the functional currency changed from the U.S dollar to the Canadian dollar as a result of significant economic changes, including its predominant transaction currency for pricing of revenues, being the Canadian dollar. (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. 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 the percentage-of-completion for percentage-of-completion method. Estimates of 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. 8 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 2. Significant accounting policies (continued): (d) Use of estimates and judgments: (continued) (iv) Share-based payments - The estimated fair value of stock options is determined using Inputs to the model are subject to various the Black-Scholes option pricing model. 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. the Company estimates the expected forfeiture rate with respect to equity-settled share-based payments based on historical experience. In addition to the fair value calculation, (v) Warrants - The estimated fair value of warrants 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 warrants issued. Fair value inputs are subject to market factors, as well as internal estimates. 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. (e) 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: Subsidiary 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. Jurisdiction of incorporation December 31, 2016 December 31, 2015 Ownership interest 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, 2016 and 2015 2. Significant accounting policies (continued): (f) Foreign currency transactions: the dates of Transactions in foreign currencies are translated to the respective functional currencies of the transactions. the Company and its subsidiaries at exchange rates at Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency 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 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 exchange rate at For entities for which the functional currency is different than the currency is different than the presentation currency: Assets and liablitlies at the reporting date are translated at the month-end exchange rate and revenues and expenses are translated are translated at monthly average rates. Equity is translated at historical cost. Foreign exchange gains and losses resulting from the translation of functional to presentation currecy are recorded to other comprehensive income (loss) (“OCI”). (g) 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 classification depends on the purpose and is determined upon initial for measurement purposes, grouped into categories. The recognition. instruments are, 10 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 2. Significant accounting policies (continued): (g) 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 fair value plus any directly attributable current assets, are recognized initially at loans and receivables are transaction costs. Subsequent less any measured at amortized cost using the effective interest method, impairment Accounts receivable comprise trade receivables, net of losses. allowance for doubtful accounts. to initial recognition, Cash comprise cash balances and cash deposits. repayable on demand and form an integral part of management are included as a component of cash for consolidated statements of cash flows. Bank overdrafts that are the Company's cash the the purpose of (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 (“AOCI”). When an investment is derecognized, the cumulative gain or loss in AOCI 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, 2016 and 2015 2. Significant accounting policies (continued): (g) 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. liabilities consist of accounts payable and The Company's non-derivative financial 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: liabilities. The Company’s derivative financial assets and liabilities consist of warrant 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 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: the three-level hierarchy that 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, 2016 and 2015 2. Significant accounting policies (continued): (h) 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 year end and adjusted, if appropriate. lives and residual values are reviewed at each financial (i) 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 less accumulated amortization and accumulated impairment losses. lives are measured at cost 13 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 2. Significant accounting policies (continued): (j) 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: Customer relationships Technology Domain properties and content Computer Software (iii) Research and development: 1 - 5 years 4 years 7 years 2 years 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 life of the only. Capitalized development costs are amortized over the estimated useful Internally generated intangible assets are internally generated intangible asset. 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, 2016 $104 (2015 - $115) 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, 2016 and 2015 2. Significant accounting policies (continued): (j) 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 the statement of profit or loss. When available-for-sale financial assets are impaired, the cumulative gain (loss) previously recognized directly in equity is recognized in profit or loss. (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. Animpairment test is conducted annually, for intangible assets that are not yet available for use. (k) 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, 2016 and 2015 2. Significant accounting policies (continued): (l) 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. (m) 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 Provisions for estimated losses on and labour costs which are expensed as incurred. 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, 2016 and 2015 2. Significant accounting policies (continued) (m) 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 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. trade discounts and volume rebates. If it 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. (n) 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, 2016 and 2015 2. Significant accounting policies (continued): (o) 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 losses fair value through profit or recognized on financial assets. loss and impairment instruments at financial 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). (p) 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 In these cases, the taxes are also recognized in OCI or directly in equity, respectively. equity. income tax consequences attributable to temporary differences between 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 the future 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 the reporting date and are expected to apply when enacted or substantively enacted at 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 The Company recognizes the effect of a change in income tax rates in the year of enactment or substantive enactment. the related tax benefit will be realized. is no longer probable that that it 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. 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. 18 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 2. Significant accounting policies (continued): (p) Income taxes (continued): 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. (q) Earnings per share 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. (r) Recently issued accounting pronouncements: The following new standards, amendments to standards and interpretations have been issued, but are not effective for the current fiscal year, and have not been applied in preparing these financial statements. Future changes to our existing accounting policies and other note that new disclosures may result. The Company pronouncements may have on its results of operations, financial position and disclosure. is currently assessing impact the Effective for annual periods beginning on or after January 1, 2017: (i) (ii) On January 7, 2016, the IASB issued Disclosure Initiative (amendments to IAS 7). The amendments apply prospectively for annual periods beginning on or after January 1, 2017. Earlier application is permitted. The amendment require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financial activities, including both changes arising from cash flow and non-cash changes. On January 19, 2016, the IASB issued Recognition of Deferred Tax Assets for Unrealized Losses. The amendments apply retrospectively for annual periods beginning on or after January 1, 2017. Earlier application is permitted. The amendments clarify that the existence of a deductible temporary difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or expected manner of recovery of the asset. The amendments also clarify the methodology to determine the future taxable profits used for assessing the utilization of deductible temporary differences. 19 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 2. Significant accounting policies (continued): (r) Recently issued accounting pronouncements (continued): (iii) IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) was issued 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 to which the Company expect to be entitled in exchange for those goods or services. IFRS 15 will also result in enhanced disclosures about revenue, and provide guidance for transactions that were not previously addressed comprehensively (for example, multiple- element arrangements and contract modifications). Application of the standard is mandatory and it applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts. IFRS 15 is available for early application with mandatory adoption required for fiscal years commencing on or after January 1, 2018 and is to be applied using the retrospective or the modified transition approach. (iv) On June 20, 2016, the IASB issued amendments to IFRS 2 Share-based Payment, clarifying how to account for certain types of share-based payment transactions. The amendments apply for annual periods beginning on or after January 1, 2018. As a practical simplification, the amendments can be applied prospectively. Retrospective, or early, application is permitted if information is available without the use of hindsight. (v) (vi) the IASB issued In November 2009, IFRS 9, which covers classification and measurement as the first part of its project to replace IAS 39. In October 2010, the IASB also incorporated new accounting requirements for liabilities. The standard introduces new requirements for measurement and eliminates the current classification of loans and receivables, available-for-sale and held-to maturity, currently in IAS 39. There are new requirements for the accounting of financial liabilities as well as a carryover of requirements from IAS 39. In 2013, the IASB also incorporated new accounting requirements for hedging and introduced a new expected-loss impairment model that will require more timely recognition of expected credit losses. Specifically, the new standard requires entities to account for expected credit losses from when financial instruments are first recognized and to recognize full lifetime expected losses on a timelier basis. The effective date of this pronouncement has been set to be effective for annual periods beginning on or after January 1, 2018. In January 2016, the IASB issued IFRS 16 - Leases (“IFRS 16”), which replaces IAS 17 – Leases (“IAS 17”) and related interpretations. IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and liabilities for all leases, unless the lease term is 12-months or less or the underlying asset has a low value. IFRS 16 substantially carries forward the lessor accounting in IAS 17 with the distinction between operating IFRS 16 will be applied retrospectively for annual periods beginning on or after January 1, 2019. finance leases being retained. leases and 3. Investment: In July 2012, the Company acquired 116,267 shares of an available-for-sale equity investment (“Investment”) in a private company for $50. On February, 2016, the Company sold its Investment for $251. The gross realized gain on the sale of such Investment was $201. 20 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 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: 2016 3,023 $ 391 3,414 $ 2015 2,796 888 3,684 $ $ 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 all Company services customers in the United States and internationally. located in Canada; however, the The Company generates revenue across three geographical regions; customer revenue by region is as follows: Canada United States Outside North America 2016 3,262 $ 112 40 3,414 $ 2015 3,394 278 12 3,684 $ $ there was one customer that comprised 26% of the Company's total revenue from In 2016, operations. No other customers exceeded 10% of revenue. In 2015, there were two customers that comprised 13% and 11%, respectively, 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, 2016 and 2015 6. Finance income and finance cost: Finance income: Interest income on cash Foreign exchange gain, net Total finance income Finance costs: Other interest expense Accretion on interest (note 11) Interest on loans and borrowings (note 11) Foreign exchange loss, net Total finance costs 7. Income taxes: (a) Income tax expense: 2016 2015 - 12 12 5 87 92 2016 2015 (13) $ (278) (159) - (450) (24) (24) (99) - (147) $ $ $ $ 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 (taxable) Other Change in valuation allowance Income tax recovery 2016 (1,495) $ 26.5% (396) 26 244 126 2015 (2,314) 26.5% (613) (10) (3,360) 3,965 - $ (18) $ $ 22 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 7. Income taxes: (b) Deferred income taxes: The temporary differences that give rise to deferred income tax assets and deferred income tax liabilities are presented below: Amounts related to tax loss and credit carry forwards Other Capital and intangible assets Net deferred tax assets Deferred tax assets not recognized $ 2016 18,119 $ 17 757 2015 18,523 19 235 18,903 (18,903) 18,777 (18,777) - - 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 $602 related to scientific research and experimental development costs. The Company also has non-capital losses of approximately $37,874 available to apply against future taxable income and capital losses of $59,430. If not utilized, the non-capital losses will expire as follows: 2029 2030 2031 2032 2033 2034 2035 2036 $ 1,093 8,211 3,858 2,906 3,077 14,245 1,974 2,510 $ 37,874 8. 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 23 2016 2015 $ $ 106 $ - 32 138 $ 94 69 39 202 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 8. Other current assets and accounts payable and accrued liabilities (continued): (b) Accounts payable and accrued liabilities: The major components of accounts payable and accrued liabilities are as follows: Trade accounts payable Accrued liabilities 9. Property and equipment: 2016 1,516 $ 376 1,892 $ 2015 1,460 590 2,050 $ $ Furniture and fixtures Computer equipment Leasehold improvements Total Cost Balance, January 1, 2015 Effect of movements in exchange rates Balance, December 31, 2015 Cost Balance, January 1, 2016 Additions Balance, December 31, 2016 Depreciation Balance, January 1, 2015 Depreciation Effect of movements in exchange rates Balance, December 31, 2015 Depreciation Balance, January 1, 2016 Depreciation Balance, December 31, 2016 Carrying amounts December 31, 2015 December 31, 2016 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 822 370 1,192 1,192 – 1,192 815 2 370 1,187 1,187 3 1,190 5 2 3,493 $ 1,118 4,611 $ 4,611 $ 5 4,616 $ 3,376 $ 117 1,107 4,600 $ 4,600 $ 10 4,610 $ 11 $ 6 $ $ $ $ $ $ $ $ $ 361 135 496 496 – 496 361 – 135 496 496 – 496 – – 4,676 1,623 6,299 6,299 5 6,304 4,552 119 1,612 6,283 6,283 13 6,296 16 8 24 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 10. Domain properties and other intangible assets: (a) Intangible assets by category are as follows: Customer relationships Technology Domain properties and content Computer software Total Cost Balance, January 1, 2015 $ Disposals Effect of movements in exchange rates 18,085 - 122 $ 10,326 $ - 772 $ 7,881 (241) 1,206 $ - 37,498 (241) 236 202 1,332 Balance, December 31, 2015 $ 18,207 $ 11,098 $ 7,876 $ 1,408 $ 38,589 Balance, December 31, 2016 $ 18,207 $ 11,098 $ 7,876 $ 1,408 $ 38,589 Amortization and impairment loss Balance, January 1, 2015 Amortization Disposals Effect of movements in exchange rates Customer relationships Technology Domain properties and content Computer software Total $ $ 18,085 - - 10,290 $ 16 - 122 766 $ 7,593 96 (220) 191 1,206 $ - - 37,174 112 (220) 202 1,281 Balance, December 31, 2015 $ Amortization Balance, $ 18,207 - 11,072 $ 17 $ 7,660 104 1,408 $ - 38,347 121 December 31, 2016 $ 18,207 $ 11,089 $ 7,764 $ 1,408 $ 38,468 Carrying amounts Balance, December 31, 2015 Balance, December 31, 2016 $ $ - $ - $ 26 $ 216 $ 9 $ 112 $ - $ - $ 242 121 25 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 11. Loans and borrowings: (a) Bank credit facilities: The Company has a credit card facility with a Canadian chartered bank. As at December 31, 2016, $53 (2015 - $58) was outstanding under the credit card facility 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 fully repaid the non-revolving demand facility in July 2016 (2015- $102). (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. On August 18, 2016, the Company completed the first tranche of a debt financing. Pursuant to this first tranche closing, the Company issued $1,155 non-convertible promissory notes (the “New Promissory Notes”). The New Promissory Notes accrues interest at a rate of 8% per annum, calculated annually, and have a maturity of February 18, 2018. 26 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 11. Loans and borrowings (continued): (b) Promissory note payable (continued): On November 18, 2016, the Company completed the second tranche of the New Promissory Notes. Pursuant to this second tranche closing, the Corporation issued $345 non-convertible secured promissory notes. In connection with the issuance of the New Promissory Notes, the lenders received seven non- transferable warrants (the “New Bonus Warrants”) for each dollar of principal amount of New Promissory Notes, with each New Bonus Warrant being exercisable for a period of fifteen months from the date of issuance for one common share of the Corporation (a “Common Share”) at an exercise price of $0.08 per Common Share. The Company also extended the maturity dates of $1,175 including accrued interest of $68 of the outstanding New Notes from November 25, 2016 to eighteen months from the date of issuance of the New Promissory Notes. $246 of the New Notes were not extended and, including accrued interest $22, classified as current liabilities. In connection with the above-mentioned extension of $1,175 plus interest of $68 of New Notes, the Corporation cancelled the existing non-transferable Bonus Warrants with New Bonus Warrants on a one-for-one basis. The extension of the maturity dates was considered a substantial change in terms of the loan and, accordingly, the Company applied debt extinguishment accounting and calculated a gain on extinguishment of the New Notes of $179 and a loss on extinguishment of the Bonus Warrants of $36, as the difference between the fair value of the New Promissory Notes immediately after the amendment and the amortized costs of the New Notes immediately prior to the extension. The New Notes and New Promissory Notes were separated into their liability and equity components using the effective interest rate method. The fair value of the liability component at the time of issue was calculated as the discounted cash flows for the debentures assuming an 29.4% and 25.0% effective interest rate, respectively which was the estimated rate for the debentures without the warrants. The fair value of the warrants was determined at the time of issue as the difference between the face value of the debentures and the fair value of the liability component. 27 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 11. Loans and borrowings (continued): (b) Promissory note payable (continued): The following table outlines the activity for loans and borrowings: Promissory notes balance, January 1, Promissory notes Warrants Accretion of interest Gain on extension of loans and borrowings Accrued interest Total promissory notes payable Term-loan Repayment of term-loan Net term loan Total loans and borrowings Current Non-current (c) Derivative liability - warrants: 2016 1,221 $ 1,500 (290) 278 (179) 159 2,689 102 (102) - 2015 - 1,421 (235) 24 - 11 1,221 175 (73) 102 2,689 $ 1,323 268 $ 2,421 $ 1,323 - $ $ $ $ As a result of the change in the functional currency of the Company to the Canadian dollar on January 1, 2016, the conversion feature of the New Notes is no longer treated as an embedded derivative liability measured at fair value, with changes in fair value recorded at each reporting date in the consolidated statement of loss. The value of the derivative liability on the date of the change in functional currency has been re-classified as a component of equity. 28 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 11. Loans and borrowings (continued): (c) Derivative liability - warrants: The fair value of the derivative liability for the Bonus Warrants and New Bonus Warrants is as follows: Balance, January 1 Issuance of derivative liability November 25, 2015 Transferred to equity Gain on revaluation of derivative liability for the period Derivative balance – December 31, 2016 2016 2015 $ $ 259 $ (259) - - $ - 235 - 24 259 12. 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. 29 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 13. Share-based payments: The following table summarizes the continuity of options issued under the Company’s stock option plan for the year ended: 2016 2015 Number of options Weighted average exercise price Number of options Weighted average exercise price Outstanding, beginning of year Granted Forfeited or cancelled - $ 1,305,000 - - 0.05 - 1,037,498 $ - (1,307,000) Outstanding, end of year 1,305,000 $ Options exercisable, end of year - $ - - - - $ 0.99 - 0.99 - - A summary of the status of the Company's options under the Plan is as follows: Range of exercise price Number of options 2016 Weighted average remaining contractual life (years) Number of options exercisable Number of options 2015 Weighted average remaining contractual life (years) Number of options exercisable $0.05 1,305,000 5.0 300,000 - - - During the year ended December 31, 2016, the Company recorded share-based payments of $2 compared to $59 during the same period in 2015. In the year ended December 31, 2015, the Company forfeited and cancelled the issued and outstanding stock options. During the year ended December 31, 2016, 1,305,000 stock options were granted and no stock options were exercised. During the year ended December 31, 2015, no stock options were granted and no stock options were exercised. The weighted average grant date fair value of options granted during 2016 was $0.05. 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 average the year ended December 31, 2016: dividend yield assumptions used for grants for of nil, expected volatility term-life using historical prices, weighted average risk-free interest rate of 1%, and expected lives of 2.5 years and forfeiture rate of 36% calculated using the historical information for forfeitures. 155% calculated based on the contract following weighted the of 30 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 14. Fair values of financial instruments: (a) Classification of financial instruments: The following table provides the allocation of financial financial instrument classifications, their carrying values, and fair values including their most appropriate level within the fair value hierarchy, based on the inputs used to determine the fair value at the measurement date: instruments, their associated December 31, 2016 Measurement basis Financial assets: Cash Accounts receivable Financial liabilities: Accounts payable and accrued liabilities Loans and borrowings Loans and receivables/ other financial liabilities Amortized cost Carrying value total Fair value total $ $ $ $ 151 $ 890 151 $ 890 151 890 1,041 $ 1,041 $ 1,041 1,892 $ 2,689 1,892 $ 2,689 1,892 2,689 4,581 $ 4,581 $ 4,581 31 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 14. Fair values of financial instruments (continued): (a) Classification of financial instruments: (continued) December 31, 2015 Measurement basis Financial assets: Cash Accounts receivable SR&ED credits receivable Investment (level 3) Financial liabilities: Accounts payable and accrued liabilities Derivative liability- warrants (level 3) Loans and borrowings $ $ $ Loans and receivables/ other financial liabilities Available – for-sale securities Carrying value total Fair value total FVTPL Amortized cost Fair value Fair value 115 $ 677 - $ - - $ - 69 - 861 $ - - - - 251 115 $ 677 69 251 115 677 69 251 $ 251 $ 1,112 $ 1,112 2,050 $ - $ - $ 2,050 $ 2,050 - 1,323 259 - $ 3,373 $ 259 $ - - - 259 1,323 259 1,323 $ 3,632 $ 3,632 There have been no transfers of assets between levels during the years ended December 31, 2016 and 2015. 15. Capital risk management: that 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 its shareholders' equity, which it manages as the aggregate of Company defines capital 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. the Company, upon approval 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 2016 from 2015. In order to maintain or adjust its capital structure, from its Board of Directors, may 32 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 16. Financial risk management: The Company's Board of Directors has overall 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. responsibility for (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, 2016, two customers represented 34% and 14% of the gross accounts receivable balance of $932, respectively. At December 31, 2015, three customers represented 16%, 13% and 12% of the gross accounts receivable balance of $724, respectively. No other individual customers represented more than 10% of accounts receivable. As at December 31, 2016, the allowance for doubtful accounts was $42 (2015 - $47). 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, 2016, approximately 53%, $46 (2015 – 31%, $21) 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, 2016 is not subject to external restrictions and is held with Schedule I banks in Canada. (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 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, operating facilities and cash balances to maintain liquidity. forecasted and 33 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 16. Financial risk management (continued): (b) Liquidity risk: The following are the undiscounted contractual maturities for the Company’s obligations: 2016 Carrying amount Contractual cash flow Less than 1 year 1-3 years >3 years Trade and other payables(i) Operating leases Loans and borrowings $ 1,892 $ 1,892 $ 1,892 $ - $ 881 2,689 881 3,335 161 269 690 3,066 $ 5,462 $ 6,108 $ 2,322 $3,756 $ (i)trade and other payables exclude other non-contractual liabilities - 30 - 30 (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: rate risk arises primary from its loans and borrowings The Company’s interest obligations, which bear a fixed interest rate of 8%. Management believes that the Company is not significantly exposed to cash flow interest rate risk in the next twelve months. (ii) Currency risk: The Company operates internationally with the Canadian dollar as its functional currency and is exposed to foreign exchange risk from purchase transactions, as well as recognized financial assets and liabilities denominated in U.S dollars. The Company's main objective in managing its foreign exchange risk is to maintain U.S. cash on hand to support international the Company monitors forecasted cash flows in foreign currencies and attempts to mitigate the risk by modifying the nature of cash held. forecasted obligations and cash flows. To achieve this objective, 34 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 16. Financial risk management (continued): (c) Market risk: (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 $126 (2015- $140) due to the fluctuation and this would be recorded in the consolidated statements of comprehensive income (loss). Balances held in non functional currencies dollars are as follows: Cash and cash equivalents Accounts receivable Other current assets Accounts payable and accrued liabilities 17. 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 2016 US 2015 Canadian 20 $ 11 67 1,037 120 643 68 811 2016 161 $ 690 30 2015 291 880 - 881 $ 1,171 $ $ $ The Company has one office facility under operating lease. The lease term is 5 years, with an option to renew the lease after that date. During the year ended December 31, 2016, a net amount of $251 was recognized as an expense in profit or loss in respect of operating leases (2015 - $258). The Company sublet the unused space at the current location. Sublease payments of $54 received during 2016 (2015 - $60). 35 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 18. Related party transactions and balances: During March 2015, the Offering, which consisted of $700 Promissory notes, $300 of such Promissory notes having been subscribed for by officers and directors of the Corporation. the Company announced the closing of During November 2015, the Company announced the closing of the aforementioned financing involving the New Notes, which consisted of $1,421 New Notes, $587 of such New Notes having been subscribed for by officers and directors of the Company. During August 2016, the Company announced the closing of the August 2016 financing involving the New Promissory Notes, which consisted of $1,155 New Promissory Notes, $400 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 December 31, 2016 and 2015 was as follows: the Company during the years ended Short-term employee benefits Share-based payments 2016 535 $ 1 536 $ 2015 663 54 717 $ $ 19. 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 2016 2015 $ $ (177) $ 53 (123) (12) (259) $ 58 (9) 427 (87) 389 36 EQ INC. Notes to Consolidated Financial Statements (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2016 and 2015 20. Subsequent event Subsequent to December 31, 2016, the Company renegotiated the operating building lease (“New Lease”) with the landlord and downsized the square footage of the lease and reduced the overall cost associated with the lease. The new lease was extended to a new five year term with the options to terminate the New Lease within 2 years if required. Subsequent to December 31, 2016 the Company extended the demand loan of $246 along with accrued interest to April 1, 2017 and remains outstanding. Subsequent to December 31, 2016, certain promissory note holders exercised 6,147,633 warrants to acquire 6,147,633 common shares of the Company, at an exercise price of $0.08 per share for total proceeds of $492. 37
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