Consolidated 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