exactEarth Ltd.
Annual Report 2017

Plain-text annual report

Annual Report 2017 Table of Contents MD&A Auditor’s Report Financial Statements Notes to Financial Statements Corporate Information 1 20 21 25 56 Table of Contents MD&A Auditor’s Report Financial Statements Notes to Financial Statements Corporate Information 1 20 21 25 56 EXACTEARTH LTD. (the “Company”) MANAGEMENT’S DISCUSSION AND ANALYSIS The following management discussion and analysis (“MD&A”) is prepared as of January 23, 2018, and provides information that management believes is relevant to an assessment and understanding of our operations and financial condition for the financial year ended October 31, 2017. This MD&A should be read in conjunction with our audited consolidated financial statements, including the notes thereto, (the “Consolidated Financial Statements”). The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). All amounts herein are stated in thousands of Canadian dollars (“CAD”) unless otherwise indicated. Unless otherwise noted, the information contained herein is dated as of October 31, 2017. Additional Information and Risk Factors Additional information relating to the Company, including risk factors that may adversely affect or prevent the Company from carrying out all or portions of its business strategy are discussed in the Company’s Annual Information Form (AIF) and other filings available on SEDAR at www.sedar.com. Caution Regarding Forward-Looking Statements This MD&A contains forward-looking statements that relate to our current expectations and views of future events. In some cases, these forward-looking statements can be identified by words or phrases such as “may”, “will”, “expect”, “anticipate”, “aim”, “estimate”, “intend”, “plan”, “seek”, “believe”, “potential”, “continue”, “is/are likely to” or the negative of these terms, or other similar expressions intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to: expectations regarding our revenue, expenses and operations; anticipated impact of changes to accounting policies; anticipated industry trends; anticipated new Order Bookings; research and development spending levels; selling, general and administrative spending; revenue growth guidance; gross margin trending, anticipated future launch dates and launch locations for satellite assets, including the satellites comprising the Second Generation Constellation; anticipated and continued benefits of the Second Generation Constellation on-board Iridium NEXT; expected useful lives of satellite assets and anticipated completion of additional ground stations; our intention to respond to certain procurement proposal requests and the outcome thereof. Forward-looking statements are based on certain assumptions and analysis made by us in light of our experience and perception of historical trends, current conditions and expected future developments and other factors we believe are appropriate, and are subject to risks and uncertainties. Although we believe that the assumptions underlying these statements are reasonable, they may prove to be incorrect. Whether actual results, performance or achievements will conform to our expectations and predictions is subject to a number of known and unknown risks, uncertainties, assumptions and other factors, which are discussed in greater detail in the Company’s AIF. Non-IFRS Measures In this MD&A, we provide information about Order Bookings; earnings before interest, taxes, depreciation and amortization (“EBITDA”); Adjusted EBITDA; EBITDA Margin; and Subscription Revenue. Order Bookings, EBITDA, Adjusted EBITDA, EBITDA Margin, and Subscription Revenue are not defined by IFRS and our measurement of them may vary from that used by others. These non-IFRS measures are not recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS, and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement the IFRS measures by providing further understanding of our results of operations from management’s perspective. Accordingly, they should not be considered in isolation or as a substitute for analysis of our financial information reported under IFRS. We define “Order Bookings” as the dollar sum of fully executed contracts for the supply of our products and/or services to our customers received during a defined period of time. Order Bookings are indicative of firm future revenue streams; however, they do not provide a guarantee of future net income and provide no information about the timing of future revenue. exactEarth Annual Report 2017 1 We measure EBITDA as net income plus interest, taxes, depreciation and amortization. We measure EBITDA Margin as EBITDA divided by our total revenue. We measure Adjusted EBITDA as EBITDA plus unrealized foreign exchange losses, share-based compensation costs, restructuring expense (recovery), and impairment losses, less unrealized foreign exchange gains and other income. We believe that EBITDA and Adjusted EBITDA provide useful supplemental information as they provide an indication of the income generated by our main business activities before taking into consideration how they are financed or taxed and exclude the impact of items that are considered by management to be outside of our ongoing operating results. EBITDA and Adjusted EBITDA should not be construed as an alternative to net income (loss) determined in accordance with IFRS as an indicator of our performance or to cash flows from operating, investing and financing activities as a measure of liquidity and cash flows. We define Subscription Revenue as the dollar sum of fully executed contracts for our products and/or services to our customers that are subscription-based, typically sold with a one-year period of service and recognized in our “Subscription Services” segmented revenue. Overview We are a leading provider of global maritime vessel data for ship tracking and maritime situational awareness solutions. Since our establishment in 2009, we have pioneered Satellite Automatic Identification System (“S-AIS”) maritime surveillance and have delivered to our clients a view of maritime behaviours across all regions of the world’s oceans that is unrestricted by terrestrial limitations. We have deployed an operational data processing supply chain with our First-Generation Constellation, receiving ground stations, patented decoding algorithms, and advanced Big Data processing and distribution facilities. This ground-breaking system provides a comprehensive picture of the location of AIS equipped maritime vessels throughout the world and allows us to deliver data and information services characterized by high performance, reliability, security, and simplicity to large international markets. The Consolidated Financial Statements include the accounts of our Subsidiary with inter-company transactions and balances eliminated. We have two locations, one in Cambridge, Ontario, Canada and the other in Harwell, United Kingdom. Key Components and Functions of our Product Offering Automatic Identification System (“AIS”) Since 2004 all major ships in the world have been required by the International Maritime Organization (“IMO”) to carry an AIS transponder which constantly transmits VHF radio signals containing information about the ship (name, destination, cargo) as well as its movement (position, course, heading speed, etc.) In a typical seven-day period, we track approximately 165,000 AIS-equipped vessels. This capability is further enhanced by our patented capability to track small vessels in the open ocean utilizing a new class of specially modified Class B AIS transponders. We anticipate that with this added capability, our addressable market will increase to more than one million vessels by 2020. AIS was originally designed as a collision avoidance system; however, it has been widely recognised for some time that such open broadcast information can be collected and used to track and monitor shipping activity close to shore from terrestrial AIS stations (terrestrial systems are physically limited by the curvature of the earth and are only effective for approximately 50 nautical miles, or approximately 100 kilometres). We have led the way in overcoming this limitation by pioneering the reception of such AIS signals from low earth orbit (“LEO”) satellites, thus eliminating the distance restriction imposed by the terrestrial AIS stations, and for the first time in maritime history providing a real-time unrestricted global view of all shipping regardless of location, and importantly, proximity to a coastline. Satellites We receive AIS data from our constellation of LEO satellites. The first satellite, EV-0 was launched by exactEarth’s previous parent company, COM DEV International Ltd., in 2008 for the purpose of validating the concept of collecting maritime AIS signals from space, but is now non-operational. Between 2011 and 2013, we launched and commissioned four more advanced AIS satellites, including EV-1, EV-2, EV-5 and EV-6. These satellites incorporated advanced AIS payloads designed to further improve AIS message detection from space. Our satellite constellation grew once again in December 2014 when we announced the successful integration of three advanced in-orbit AIS satellites into our exactView constellation through a contract under which we purchased one satellite, EV-11, and licensed data from two more. These are month to month lease agreements which can be terminated by the 2 exactEarth Annual Report 2017 company at any point and are subject to minimum service level requirements. Our new equatorial satellite, EV-9, was launched on September 28, 2015 and commissioning has been completed. The data from these additional AIS satellites significantly increased the capacity of our global vessel monitoring service and further enhanced our world-leading AIS message detection performance from space. We expect to receive data from two additional satellites EV-7 and EV-8. EV-7 was launched on June 22, 2016 and commissioning is underway. EV-8 has been built and the launch is expected to take place on February 10, 2018. EV- 8 will be launched on the PAZ satellite operated by Hisdesat, one of our significant shareholders. Upon successful launch of EV-8, we are obliged to pay €300 Euros to Hisdesat as a one- time fee. As part of our restructuring effort that commenced in October 2016, we cancelled our commitment on our two leased satellites in the first quarter of 2017. On February 3, 2017, we lost contact with EV-5. When subsequent recovery efforts were not successful, we filed an insurance claim which was paid in full in April 2017. For more details on this transaction please refer to the section titled “Other Income” later in this document. On April 28, 2017, the first four (of 58) of our Second-Generation Constellation of satellites using exactView™ RT Powered by Harris (“exactView RT”) were put into service, thereby beginning the world’s first global real-time S-AIS service. Fourteen additional exactView RT satellites are now commissioned, bringing the total number of satellites we have in service as of January 23, 2018 to 23 (5 First-Generation plus 18 Second-Generation) Our collaboration with Harris Corporation is further described in the “Strategic Alliances” section below. Ground infrastructure and data processing We have deployed a network of international ground stations designed for highly reliable satellite data downlinking, storage and transmission to our primary data processing centre (“DPC”) for processing and distribution. The ground station facilities provide reception of AIS payload downloads and securely cache the payload data locally. Ground stations are often equipped with redundant capabilities to ensure the highest level of reliability. Upon reception at a ground station, the AIS information is forwarded through an extensive secure Virtual Private Network using encrypted, high capacity links to one of our two DPCs, both of which are located in Ontario, Canada. Products and services Through a variety of products and services, we provide what we believe to be the most advanced location-based information on maritime traffic commercially available today. We provide the flexibility needed to customize our products and services to suit the needs of our customers on a timely basis. Subscription Services encompasses the sale of Data-as-a-Service (“DaaS”), Software-as-a-Service (“SaaS”) and Information-as-a-Service (“IaaS”). DaaS includes the provision of continuous data feeds in various formats and delivery systems through secure data connections over the Internet. We provide a SaaS solution that allows users to access the ship information derived from our AIS data sources within an easy-to-use mapping environment. Our value-add Information Services product offerings encompass our IaaS solutions. Data Products include raw data and customized reports derived from our extensive and growing archive which dates back to July 5, 2010. Revenue from the sale of these products is generally recognized when they are delivered to the customer and is not necessarily recurring in nature. Other Products and Services include special projects with Governments and space agencies to research methods and applications related to the satellite AIS business, Class B transponders (described in the “AIS” section above), as well as specific analysis and reporting contracts. These projects are sporadically announced by Governments and there are no guarantees that they will be awarded to exactEarth. Revenue from these projects may span several months with no certainty that there will be similar projects in the future from which we will be able to earn revenue. Customers Our S-AIS data service customers include both Government departments (defense; intelligence and security; search and rescue; border patrol and maritime safety; Government and space agencies; as well as other ministries and intelligence and risk organizations) and Commercial and Other customers (commercial fishing; business exactEarth Annual Report 2017 3 management; port management; commercial offshore (oil and gas); commercial shipping; hydrographic and charting; as well as other academic and research institutions). Our S-AIS data service provides enhanced maritime domain awareness for improved vessel management, scheduling, environmental protection, search and rescue operations, and defence and border securing applications. Strategic alliances and relationships On June 8, 2015 we announced the Harris Agreement which allows us to apply our expertise and technology in AIS signal detections from space on-board Iridium NEXT. The payloads utilize Harris’ powerful AppStar applications platform and employs an in-orbit version of our patented AIS detection algorithms, creating an unrivaled AIS detection capability for global maritime tracking. exactEarth’s Second-Generation Constellation, called exactView RT, collects information across the entire maritime frequency band and, once fully deployed, will provide real-time access to and from the ground enabling real-time delivery of the collected maritime information on a global scale. When fully deployed, exactView RT will provide persistent real-time global coverage with detection performance rivaling ground-based systems. The robustness of the constellation, programmability of the payloads and support for multiple in-orbit applications makes this the global maritime information collection system designed to meet and exceed the needs and expectations of the world’s maritime community for the foreseeable future. As part of the Harris Agreement, the two companies will share their respective AIS product revenue with each other. One of the stipulations of the revenue sharing agreement is that we will pay Harris $50 USD per year for each satellite put in service as part of the Second-Generation Constellation (up-to $750 USD per quarter). As of October 31, 2017 we have paid $47 and recorded $151 as being payable to Harris in our financial statements. Please refer to the Company’s AIF for details pertaining to the Harris Agreement. The first four SpaceX launches took place during the 2017 calendar year. Each launch carried ten Iridium satellites, of which thirty-two contained exactEarth hosted AIS payloads. To date, eighteen payloads have been brought into service. The remaining fourteen are expected to come into service in 2018 after they travel to their final orbits. Four more launches are scheduled to be completed during calendar 2018. Ultimately, we plan to have 58 second- generation satellites in orbit, not counting in-orbit spares. Our revenue stream from the Harris Agreement began in the fourth quarter of 2017, with a gradual ramp-up until 2020, when we expect to achieve the full potential revenue stream. On November 23, 2015, we announced an AUD$2,000 (CAD$1,894) minority ownership investment in technology company, Myriota Pty Ltd. (“Myriota”) of Adelaide, Australia. As part of the Myriota investment, exactEarth has obtained an exclusive license to utilise their technology in the maritime market. The Myriota technology uses advanced signal processing Intellectual Property (“IP”) developed at the University of South Australia (UniSA) in order to develop advanced terminals, infrastructure, and applications for the fast- growing Satellite Internet of Things (SIoT) global market. This core IP has been developed to create a disruptively low-cost solution for the SIoT market which will have the capability of supporting many millions of global users. Myriota is particularly focused on the location tracking and sensor data applications markets. Our investment of AUD $2,000 has been recorded as a technology licence and classified as an intangible asset. The Company will pay a 3.5% royalty on revenue derived from the technology under licence. It is expected that this intangible will be in use during Fiscal 2018 and therefore royalties will begin at that point. For additional information, refer to note 4 (Investment) and note 7 (Intangible assets) in the Notes to the Consolidated Financial Statements. On April 14, 2016, we announced a twenty-four-month Strategic Alliance with Larus Technologies Corporation (“Larus”), an Ottawa-based provider of adaptive learning and predictive analytics software. Under the Agreement, the two companies are working together to develop and market Big Data analytics-based software applications and information services for the global surveillance and intelligence markets. These products are part of the IaaS category described above. As part of the Agreement, exactEarth gains an exclusive license to Larus' Big Data analytics platform (Total::Insight™) for the Maritime market for consideration of $700, payable in twenty-four equal monthly payments commencing April 15, 2016. In return, Larus gains access to exactEarth's map visualisation IP for integration into Total::Insight-based solutions for non-Maritime markets and to exactEarth's extensive data archive to perform advanced pattern-of-life analysis. exactEarth will enhance existing, and develop new, maritime-focused information products and services by integrating technology from the Total::Insight™ platform into its existing Maritime Big Data processing and supply chain IT infrastructure. New application areas will include shipping movement and 4 exactEarth Annual Report 2017 behavioural analysis and the companies will work together to advance the capabilities in the exciting area of predictive analytics. The Agreement includes an option to purchase all of the shares of Larus during the twenty-four- month term of the agreement and during the six months following completion of the alliance. The option to purchase is currently valued at nil. At the end of the twenty-four-month term, we will begin paying a royalty of 30% on the gross sales of products that are derived from the Larus Total::Insight™ technology. For additional information, refer to note 7 (Intangible assets), note 9 (Loans payable, financial instruments and foreign exchange) and note 12 (Commitments and contingencies) in the Notes to the Consolidated Financial Statements. In December 2015, the Government of Canada (“GoC”) initiated a request-for-proposal (“RFP”) competitive process to procure S-AIS services. The contract was awarded exclusively to exactEarth on May 5, 2016 at a service level that was well below that which it previously subscribed to. The awarded contract value represented approximately $100 per year, which is approximately $7,100 per year lower than the annual revenue level generated by exactEarth for S- AIS data services that was previously provided to the GoC for their domestic use. The GoC initiated a second RFP to procure S-AIS services in October 2016. On February 24, 2017, we received notice from the GoC that our proposal had not been selected for the new S-AIS contract. While the loss of revenue from the current contract with the GoC is not significant, the GoC remains a customer of ours and we will continue to explore ways to work with them, such as the Polar Epsilon 2 project, which we announced in November 2016. On May 5, 2016, Innovation, Science and Economic Development Canada announced a $54,000 Technology Demonstration Program contribution to MDA Systems Ltd. (“MDA”) and its partners. The funding is designed to support large scale technology demonstration projects related to the Canadian aerospace, defence, space, and security industries. On May 9, 2016, exactEarth entered into a Technology Demonstration Program Collaboration Agreement (“TDP Agreement”) with MDA as a Partner Recipient under the Technology Demonstration Program related to Space Technology and Advanced Research (“STAR”). The TDP Agreement provides funding at 50% of eligible costs in respect of STAR projects to a maximum total funding value of $1,250. This funding is available to partially offset eligible STAR project costs during the period commencing August 12, 2014 and ending March 31, 2022. The funding recognized as an offset to cost of revenue in the year ended October 31, 2017 was $381. We had recognized $667 as at October 31, 2016, therefore, the total recovery to date is $1,048. In August 2016, we negotiated an agreement with Software Radio Technology (“SRT”) to be non-exclusive enabling us to partner with other Class B transponder vendors. SRT continues to act as a manufacturer and distributor for the physical identifiers (transponders) while we provide the data collection and distribution services. In August 2016, we won our first small-vessel contract with the Ghana Fisheries Commission, an agency of the Ministry of Fisheries and Aquaculture Development (MOFAD) of the Government of Ghana, for the supply, installation, training and commissioning of Class B AIS on 450 fishing vessels. The contract is for a twelve-month period. As of October 31, 2017, we have completed installation on 250 boats while the other 200 have been delivered as spares. The revenue recognized on this project as of October 31, 2017 is $1,250. We also announced a small vessel tracking contract with the UK Space Agency in the first quarter of fiscal 2017. This contract has a similar arrangement to the Ghana Fisheries Commission contract and involves 1,550 fishing vessels - 1,500 in South Africa and 50 in Madagascar. During fiscal 2017, 200 spare units were delivered and 11 units were deployed. Deployment remains in the very early stages. The total revenue recognized on this project as of October 31, 2017 is $474. On June 1, 2017 we entered into a collaboration agreement with German based JAKOTA Cruise Systems GmbH (Fleetmon) to enable Fleetmon the ability to use and sell exactEarth’s satellite AIS data (S-AIS) products and to enable exactEarth the ability to use and sell Fleetmon’s terrestrial AIS (T-AIS) data products. The addition of the Fleetmon real- time T-AIS capability further enhances exactEarth’s revolutionary real-time S-AIS service, and provides the most extensive and comprehensive AIS information available. Our agreement with Fleetmon operates on a revenue share basis. In general, both parties will co-ordinate opportunities in the market to minimize direct competition with each other. Our agreement with our previous Terrestrial AIS Data and Services provider, Genscape International Inc., expired in the third quarter. Staffing We rely on the knowledge and talent of our employees and we make use of their expertise in satellite operations, Big Data architecture, web services, software and product development, and consulting services. With the deployment exactEarth Annual Report 2017 5 of our First-Generation Constellation nearing completion, we are now able to reduce our satellite infrastructure operating costs as we continue to transition to an information and intelligence company. In November 2016, we announced a restructuring aimed at re-organizing and streamlining our organization in order to enhance our data delivery, strengthen our sales capabilities, and lower our cost base. The restructuring resulted in the termination of 14 employees effective October 13, 2016. The number of full-time employees at October 31, 2017 was 46 (October 31, 2016 – 49). Overall Performance Revenue was $12,833 for the year ended October 31, 2017, compared to $18,918 in 2016. Governments are our primary target market since our system capabilities are closely matched to their service requirements. Government customers contributed $6,789 to the revenue in the year ended October 31, 2017, compared to $13,635 in 2016. The change in year-over-year revenue was primarily due to lower revenue generated from the GoC contract during the first quarter of 2017 and the completion of revenue recognition related to the EV-9 asset transfer arrangement described later in this document in the section titled “Revenue”. Commercial revenue for the year ended October 31, 2017 was $6,044, up 14% compared to $5,283 in 2016. Revenue related to Subscription Service orders will typically be realized over a twelve-month period, while revenue related to product orders is realized upon delivery. The backlog of orders won but not yet recognized in revenue is $25,996, up 16% from the $22,551 backlog reported at October 31, 2016. Revenue of $7,904 from the current backlog is forecasted to be earned in 2018 while $6,854 is expected to be earned in 2019. The balance of $11,238 will be earned between 2020 and 2024. Our foreign currency denominated backlog gets affected by fluctuation in FX rates. Our closing backlog for any given quarter gets revalued as the Canadian dollar strengthens or weakens in relation to the USD, GBP or Euro, as applicable. The FX rates at October 31, 2017 were: USD $1.2893, GBP $1.7095, EUR $1.5014, while the rates at October 31, 2016 were: USD $1.3411, GBP $1.6412, EUR $1.4721. The strengthening of the Canadian dollar in the year resulted in a $998 downward adjustment to our closing backlog from 2016. The following chart summarises orders and backlog: Opening Backlog New Orders FX Adjustment on opening backlog Revenue Closing Backlog Three months ended October 31, Years ended October 31, 2017 2016 2017 2016 $ 25,858 $ 20,590 $ 22,551 $ 14,301 2,984 6 (2,852) 6,070 (801) 17,276 (998) (3,308) (12,833) 26,974 194 (18,918) $ 25,996 $ 22,551 $ 25,996 $ 22,551 Volatility in exchange rates between Canadian and foreign currencies such as the US dollar, the Euro and the Pound sterling impact the business as a portion of our revenues are billed in non-Canadian currencies (predominately in US dollars) and recognized in our Consolidated Statements of Financial Position in the form of cash, receivables, and payables. The Bank of Canada average noon GBP/CAD exchange rate during the year ended October 31, 2017 was $1.6666, compared to an average of $1.8565 in 2016. The Bank of Canada average noon Euro/CAD exchange rate during the year ended October 31, 2017 was $1.4519, compared to an average of $1.4711 in 2016. The Bank of Canada average noon USD/CAD exchange rate during the year ended October 31, 2017 was $1.2503, compared to an average of $1.3263 in 2016. Adjusted EBITDA for the year ended October 31, 2017 was ($4,387) compared to $523 in 2016. The decrease in Adjusted EBITDA for the year ended October 31, 2017 was driven primarily by lower revenue from the GoC contract renewal, partially offset by decreased cost of revenue and operating expenses. Please refer to the Adjusted EBITDA reconciliation included later in this MD&A. For an analysis of the risks we face, please refer to the “Risk Factors” section in our AIF. 6 exactEarth Annual Report 2017 Selected Annual Information (in thousands of dollars except per share amounts) 2017 2016 2015 Revenue Gross margin Gross margin Impairment loss Restructuring expense (recovery) Adjusted EBITDA(1) Adjusted EBITDA Margin(1) Earnings (loss) from operations Net loss Basic and diluted loss per share Total assets Deferred revenue Other current liabilities Loans and borrowings Other non-current liabilities (1) As defined in non-IFRS measures. Results of Operations Revenue $ 12,833 $ 18,918 $ 26,600 4,215 32.8% 26,886 (99) (4,387) (23.2%) (35,158) (33,834) (1.57) 30,960 2,064 4,843 662 388 9,146 48.3% 27,987 1,744 523 2.8% (32,903) (35,963) (1.90) 67,822 1,968 7,365 1,188 758 16,486 62.0% - - 9,033 34.0% 571 (1,055) (0.09) 82,044 1,037 11,622 46,237 82 We sell products in three broad categories: Subscription Services, Data Products, and Other Products and Services. Generally, Subscription Services are sold with a twelve-month period of service with revenue recognized equally over the contract term. Data Products and Other Products and Services are generally sold on an as-demanded basis and the revenue is recognized when the product is delivered to the customer, or for long-term projects, on a percentage of completion basis. Revenue for the Data Products and for the Other Products and Services tends to be less predictable and is subject to fluctuations from one period to the next. Revenues for the year ended October 31, 2017: (in thousands of dollars) Government departments Commercial and other Total revenue Subscription Services $ 5,344 5,273 $ 10,617 Data Products Other Products & Services Total Revenue $ $ 306 685 991 $ $ 1,139 86 1,225 $ 6,789 6,044 $ 12,833 Revenues for the year ended October 31, 2016: (in thousands of dollars) Government departments Commercial and other Total revenue Subscription Services $ 10,386 4,693 $ 15,079 Data Products Other Products & Services Total Revenue $ $ 1,855 590 2,445 $ $ 1,394 - 1,394 $ 13,635 5,283 $ 18,918 Our total revenue for the year ended October 31, 2017 was $12,833 compared to $18,918 in 2016. We anticipate that the drivers for the next phase of revenue growth will be the expansion of our Second-Generation constellation on-board Iridium NEXT, new analytics applications for the S-AIS and maritime information services markets and sales traction within the small vessel tracking market. exactEarth Annual Report 2017 7 Our Subscription Services revenue is generally earned on a monthly recurring basis under annual or multi-year contracts and therefore provides a solid foundation for our revenue growth. Subscription Services revenue for the year ended October 31, 2017, was $10,617 compared to $15,079 in 2016. The decrease in Subscription Services revenue was primarily due to lower revenue generated from the GoC contract during the first quarter of 2017 and the completion of revenue recognition related to the EV-9 asset transfer arrangement. The EV-9 asset transfer was an arrangement under which we provided in-kind datasets at a value of $3,666 in exchange for title to the EV-9 satellite. All datasets were transferred as at January 31, 2017. For additional information, refer to note 12 (Commitments and Contingencies) in the Notes to the Consolidated Financial Statements. Subscription-based revenue represented 83% of our total revenue in the year ended October 31, 2017 compared to 80% in 2016. Revenue from Data Products was $991 in the year ended October 31, 2017, compared to $2,445 earned in 2016. The Data Products revenue for 2016 was generated primarily from the provision of historical data of $1,687 as part of the EV-9 asset transfer. Revenue from Other Products & Services was $1,225 in the year ended October 31, 2017 compared to $1,394 in 2016. This revenue type is generated from on-demand customer requests and is therefore variable in its timing. Revenue by quarter (in thousands of dollars) Subscription Services Data Products Other Products & Services Total Revenue Basic & Diluted (Loss) per Share Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 $ $ $ $ $ $ $ $ 5,382 4,052 2,822 2,823 3,038 2,326 2,572 2,681 $ $ $ $ $ $ $ $ 304 959 1,016 166 208 341 309 133 $ $ $ $ $ $ $ $ 694 211 170 319 90 1,044 53 38 $ $ $ $ $ $ $ $ 6,380 5,222 4,008 3,308 3,336 3,711 2,934 2,852 $ $ $ $ $ $ $ $ (0.09) (1.89) (1.77) (1.90) (0.09) (0.02) (0.12) (1.34) The quarter over quarter variance in revenue is caused by the mix in the type of revenue earned in that quarter. Subscription Services revenue tends to be steady due to the generally recurring nature of those client agreements. Data Products Revenue is on-demand and therefore less predictable. Other Products & Services revenue is predominantly project based revenues and the timing of revenue recognition varies depending on the progress of the projects. For some of our projects this is based on percentage completion based on costs to date as a percentage of estimated total cost, while in the case of the small vessel contracts, it is based on our progress in the installation of the Class B transponders. Therefore, revenues will vary quarter to quarter based on the progress made on the various projects. The operating results for interim periods should not be relied upon as an indication of results to be expected or achieved in any future period or any fiscal year as a whole. The Company has experienced lower than planned revenues combined with operating losses resulting in a reduction in forecasted future cash flows. Factors affecting our revenue and results are described in greater detail under the heading “Risks Relating to Our Business and Industry” in our Annual Information Form. Growth in Subscription Services revenue is expected to be muted until our Second-Generation Constellation and exactView RT are fully capable of delivering S-AIS service in real-time. 8 exactEarth Annual Report 2017 Gross margin Three months ended Year ended (in thousands of dollars) October 31, 2017 October 31, 2016 October 31, 2017 October 31, 2016 Gross profit Gross margin $ 854 29.9% $ 701 21.2% $ 4,215 32.8% $ 9,146 48.3% Gross margin for the year ended October 31, 2017 was 32.8% compared to 48.3% in 2016. Our gross margin decreased from last year due to lower revenue in all three broad categories: Subscription Services, Data Products, and Other Products and Services. Our cost of revenue benefited, in part, by the reimbursement of costs related to the TDP Agreement. Costs increase relative to the number of satellites and ground stations, and volume of data processing, rather than relative to the number of customers. Therefore, as our customer base expands, we expect that our cost base will grow more slowly than the growth of our revenues which will result in increased gross margins. We have substantively completed the build-out of our ground station expansion. Selling, general and administrative expenses Selling, general and administrative (SG&A) expenses in the year ended October 31, 2017 were $7,004 compared to year due primarily to decreased payroll expenses resulting from the $7,463 in 2016. SG&A decreased year restructuring undertaken in October 2016. SG&A may fluctuate from quarter to quarter depending on the volume of new subscriptions versus renewals and the timing of renewals, since commission expenses are included in the SG&A line. over ‐ ‐ Product development & research and development (“R&D”) Product Development expenses in the year ended October 31, 2017 were $1,450 compared to $1,940 in 2016. We continued to focus on developing more web-based functionality as well as new analytics-based product offerings during fiscal 2017. We incurred $242 on Research and Development expenses in the year ended October 31, 2017 compared to $10 in 2016. The R&D expense was incurred on Project VESTA, which has an objective to demonstrate a satellite-based, two-way maritime communications system representing initial implementation of VHF Data Exchange System (VDES) technology. Our VESTA responsibilities focus on the ground segment of the VDES system, including the satellite feeder link, a ship-based test station and the ability to control the overall VESTA network. Once the VESTA satellite is launched, (forecasted for the first quarter of 2018), we will use the VESTA network to perform various VDES related demonstrations. VDES networks using low-earth orbit (LEO) satellites have the potential to become the next level of maritime services from exactEarth, complementary to our S-AIS business. Project VESTA is sponsored by the UK Space Agency and is a collaboration of various partners in the UK including ourselves through our exactEarth Europe subsidiary. Impairment losses At the end of each reporting period, the Company assesses whether there are events or circumstances indicating that an asset may be impaired. Such events or circumstances notably include material adverse changes which in the long-term impact the economic environment or the Company’s assumptions or objectives. The Company considers the relationship between its market capitalization and the book value of its equity, among other factors, when reviewing for indicators of impairment because the Company as a whole has been assessed as a single CGU. The recoverable amount is the greater of value in use (“VIU”) and fair value less costs of disposal. During fiscal 2017, the market capitalization of the Company was below the carrying value for a sustained period of time particularly during the fourth quarter of the fiscal year. This is considered an indicator of impairment. Management prepared a detailed forecast for use in a VIU model but there were significant uncertainties inherent in the input assumptions and therefore management decided it was prudent to deem that the recoverable amount used in the impairment test be based on fair value less cost to sell using a market approach. The fair value less cost to sell of $22,987 was determined using a market capitalization based on the 5-day volume-weighted average price up to and including October 31, 2017. The carrying value, represented by the book value of the Company’s shareholder’s equity was $49,873. The carrying value was higher than the book value by $26,886 (2016 – $27,987). As exactEarth Annual Report 2017 9 a result, at October 31, 2017, impairment losses recognized are $18,804 (2016 – $17,728) related to property, plant and equipment and $8,082 (2016 – $10,259) related to intangible assets, allocated on a pro-rata basis. The impairment amount has been recorded in the Statement of loss and comprehensive loss. For additional information, refer to note 6 (Property, plant and equipment), note 7 (Intangible assets) and note 8 (Impairment of long-lived assets). Other expenses (income) Three months ended October 31 Year ended October 31 2017 2016 Change 2017 2016 Change Other Income Other expense $ - - - - $ (210) $ 210 $ (1,455) $ (55) $ (1,400) (12) 1,744 (1,756) (275) 9 101 (8) (376) 17 197 (99) (43) 52 - 197 1,744 (1,843) 1,026 (1,069) 304 (252) $ (278) $ 1,627 $ (1,905) $ (1,348) $ 3,019 $ (4,367) Restructuring expense (recovery) Foreign exchange loss (gain) Interest expense (income) Total other expense (income) Other income On February 3, 2017 the company lost contact with one of its Satellites, EV5. When subsequent recovery efforts were not successful, the company filed an insurance claim for the full insured value of the satellite amounting to $3,500. The settlement was received in April 2017. We accounted for this transaction by offsetting the remaining book value of the asset against the insurance settlement and including the net amount as other income. The details are as follows: Proceeds from insurance claim for EV 5 Total cost of EV 5 Depreciation and impairment charged to EV 5 Other income as reported $ $ 3,500 4,633 (2,588) 1,455 This isolated satellite issue has not had a material adverse effect on service levels. Additionally, the first eighteen of our second-generation satellites are in service as of the date of this report, which begins the roll-out of the 58-satellite exactView RT constellation being produced under the Company’s agreement with the Harris Corporation. Other expense The other expense of $197 in the year ended October 31, 2017 includes moving expenses, maternity leave top-up expense and severance expense for an employee that was terminated in June 2017. Restructuring expense (recovery) As set-out above in the “Staffing” section, we underwent a restructuring in October 2016. The $99 expense recovery relates to the adjusting of the restructuring reserve revalued in October 2017 for the accrual for Stock Options and RSU/PSU payouts owed to the 14 employees that were terminated. The reserve was reduced as there were two employees identified that no longer qualified for continuance payments. There was also a decrease in the share price from $1.48 at October 31, 2016 to $1.06 at October 31, 2017. Foreign exchange loss (gain) Foreign exchange amounts in the Consolidated Statements of Comprehensive Loss include realized and unrealized gains and losses that result from translation of foreign denominated balances in our Consolidated Statements of Financial Position. The impact of translation of outstanding foreign denominated balances in the Consolidated 10 exactEarth Annual Report 2017 Statements of Financial Position and of settling foreign denominated balances into cash during the year ended October 31, 2017 was a gain of $43 compared to a loss of $1,026 in 2016. Interest expense (income) Our net interest expense for the year ended October 31, 2017 was $52 compared to $304 in 2016. Interest expense is decreasing as outstanding loan balances are repaid. Adjusted EBITDA Three months ended October 31 Year ended October 31 2017 2016 2017 2016 Net loss $ (28,966) $ (4,135) $ (33,834) $ (35,963) Interest expense (income) Income tax expense Depreciation and amortization 9 8 916 (8) 41 926 52 24 3,791 304 41 4,649 EBITDA $ (28,033) $ (3,176) $ (29,967) $ (30,969) Unrealized foreign exchange loss Share-based compensation Impairment losses Restructuring expense (recovery) Other income Adjusted EBITDA (432) 173 26,886 (12) - 68 401 - 1,744 - (376) 624 26,886 (99) (1,455) $ (1,418) $ (963) $ (4,387) $ 906 855 27,987 1,744 - 523 Adjusted EBITDA for the year ended October 31, 2017, was a loss of $4,387 compared to a gain of $523 at October 31, 2016. The decrease was driven by decreased interest expense, depreciation, unrealized foreign exchange loss, share-based compensation, impairment losses and restructuring costs and increased other income, partially offset by a lower net loss. Management believes that Adjusted EBITDA provides a relevant measure of the results of our main business activities before taking into consideration how they are financed or taxed and excluding the impact of certain non-cash expenses and items that are considered to be outside of our ongoing operating results. Net loss Net loss was $33,834 in 2017, compared to $35,963 in 2016. The net loss for 2017 excluding the non-cash impairment of $26,886, other income of $1,455 and the restructuring reversal of $99 was $8,502. The net loss for 2016 excluding the non-cash impairment of $27,987 and the restructuring charge of $1,744 was $6,232. This adjusted net loss of $8,502 is greater than the 2016 net loss of $6,232 primarily due to lower revenue, which was partially offset by decreases in cost of revenue, selling, general and administrative expense, product development expenses and interest expense. Financial position The following chart outlines the changes in the Consolidated Statements of Financial Position between October 31, 2017 and October 31, 2016: (in thousands of dollars) Cash Accounts receivable Inventory Increase/ (Decrease) Explanation $ $ $ (5,563) The decrease in cash is due to ongoing operational expenses and lower billings/collections. 1,393 The accounts receivable balance fluctuates with changes in billings and collections. (425) Prior year inventory related to purchased small vessel tracking Class B transponders for customer contracts. These transponders have been delivered to the customer. exactEarth Annual Report 2017 11 (in thousands of dollars) Unbilled revenue Prepaid expenses and other assets Property, plant and equipment Increase/ (Decrease) Explanation $ $ (369) The unbilled revenue reflects the amount of revenue recognized in advance of billings. 399 The increase relates to other assets consisting of transponders paid for by and delivered to customers, but not yet installed. $ (18,847) The decrease in Property, plant and equipment is due to impairment of $18,804, depreciation of $2,958, write off EV-05 net book value of $2,045, cancellation of the southern hemisphere grounds station $695, and billings to LuxSpace for EV-10 of $396, offset by the increase from the transfer of EV-09 from intangible assets data rights to satellites $4,654 and other additions of $1,396. Other deductions and translation adjustments account for the difference. Intangible assets $ (13,450) The decrease in Intangible assets is due to impairment of $8,082, the transfer of EV-09 from intangible assets to property, plant and equipment of $4,654 and depreciation of $833, offset by additions of $119. $ (1,664) The decrease includes $988 resulting from the renegotiation of a ground station contract and $447 in payments for Small Vessel transponders hardware and installation. $ $ 96 Deferred revenue reflects billings that occur in advance of revenue recognition. (1,208) On going payments due to salary continuance for 14 employees affected by the restructuring in October 2016. $ (675) The decrease is due to principal payments made on the Government and Larus liabilities during the year. $ $ $ 129 The increase is due to the continuing accrual of RSU payable. 371 The increase is related to expense recognized on stock options during the year. These stock options will be equity settled. (89) The decrease is due to the foreign exchange translation of our UK subsidiary. Accounts payable and accrued liabilities (current and non- current) Deferred revenue Restructuring provision (current and non- current) Loans payable and Government loan payable (current and non-current) Long-term incentive plans (current and non- current) Contributed surplus Accumulated other comprehensive loss Deficit $ (33,834) Net loss of $33,834. 12 exactEarth Annual Report 2017 Liquidity and capital resources The key liquidity and capital resource items are as follows: (in thousands of dollars) October 31, 2017 October 31, 2016 % Change Cash Trade accounts receivable Inventory Prepaid and other current assets Accounts payable and accrued liabilities Loans payable Working Capital $ $ $ $ $ $ 8,117 3,171 - 1,266 3,722 1,229 $ $ $ $ $ $ 13,680 1,778 425 867 5,431 1,904 (41%) 78% (100%) 46% (32%) (35%) Working capital decreased $2,139 during 2017 to $6,072. The decrease since 2016 is driven by: (in thousands of dollars) Decrease in cash Increase in trade accounts receivable Decrease in inventory Decrease in unbilled revenue Increase in prepaid expenses and other assets Decrease in accounts payable and accrued liabilities Increase in deferred revenue Decrease in current portion of restructuring provision All other Total Increase / (Decrease) to working capital $ (5,563) 1,393 (425) (369) 399 1,709 (96) 766 47 $ 2,139 Current assets are available at varying times within twelve months following the balance sheet date. Cash is readily available to settle obligations related to current and future expenditures. Management believes these provisions will not adversely affect the Company’s ability to meet its commitments when due. Significant cash flows: (in thousands of dollars) Cash used in operating activities Cash from (used in) investing activities Cash (used in) from financing activities Effect of exchange rate changes on cash Net increase in cash Cash, beginning of the period Cash, end of the period 2017 2016 $ (7,707) $ (2,857) 2,995 (801) (50) (5,563) 13,680 8,117 $ $ (8,559) 22,744 (13) 11,315 2,365 13,680 $ $ The Company manages its liquidity and capital resources to provide sufficient cash to meet short and long-term operating and development plans, debt obligations, and other contractual obligations when due. Prior to the completion of the Spinout Transaction, the Company used loans from shareholders as primary sources of liquidity however, going forward, the Company plans to use cash flows from operations. For potential funding of large transactions such as acquisitions, the Company may look to the private and public capital markets and government exactEarth Annual Report 2017 13 incentive programs as a source of financing. Management believes capital resources at October 31, 2017 are sufficient to fund current operations, forecasted capital expenditures, and contractual obligations in 2018. With respect to longer-term funding requirements, the Company believes future cash flows generated from operations and other sources of liquidity will be available. Under present conditions, the Company believes it has sufficient access to capital and debt markets. There is a risk that the cost of obtaining capital resources from capital and debt markets may increase in the future as lenders and institutional investors may increase interest rates, impose tighter lending standards, or refuse to provide any new funding. Despite present market conditions, changes in the Company’s business, unforeseen opportunities or events, and other external factors may also adversely affect liquidity and the availability of additional capital resources. Due to these factors, the Company cannot be certain that funding, if needed, will be available to the extent required, or on acceptable terms. If the Company is unable to access funding when needed on acceptable terms, the Company may not be able to fully implement current business plans, take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on the Company’s operational and financial results. However, the Company may elect to reduce its planned expenditures concurrent with prevailing conditions. The Company believes that this financial flexibility to adjust its spending levels will provide it with sufficient liquidity to meet its future operational goals and financial obligations. For additional information, refer to note 2 b) (Significant Accounting Policies, Basis of presentation) in the Notes to the Consolidated Financial Statements. Operating activities Cash used in operations for the year ended October 31, 2017 was $7,707, compared to cash used in operations of $2,857 in 2016. The increase in cash used in operations for 2017 was primarily due to changes in working capital and payments related to the restructuring provision. Investing activities Cash from investing activities for the year ended October 31, 2017 was $2,995 compared to $8,559 used in 2016. The cash generated in the year includes the insurance settlement of $3,500 for the EV-5 satellite in April 2017 offset by acquisitions of long-lived assets. Financing activities Cash flows used in financing activities for the year ended October 31, 2017 were $801 compared with cash generated of $22,744 in 2016. Financing activities in 2017 were primarily related to repayment of long-term liabilities. The increased financing activities in the year ending October 31, 2016 was related to issuing common shares worth $20,440 and Shareholder loan advances, offset by repayment long-term liabilities. Contractual obligations The following table outlines the contractual cash obligations (excluding accounts payable and accrued liabilities) as at October 31, 2017: (in thousands of dollars) Lease obligation Government loan Larus Technologies debt Restructuring reserve Capital commitments Harris commitment Fleetmon revenue share guarantee for Q1 2018 Total Less than one year 1-3 years 4-5 years >-5 years $ 422 $ 1,190 145 388 3,298 6,450 53 $ 95 492 145 388 36 516 53 $ 327 698 - - 452 1,032 - $ - - - - 1,873 1,032 - - - - - 937 3,870 - Total contractual obligations $ 11,946 $ 1,725 $ 2,509 $ 2,905 $ 4,807 As at October 31, 2017, we had various contractual cash obligations, including Government debt and capital commitments. 14 exactEarth Annual Report 2017 Fourth Quarter Review Revenues for the three months ended October 31, 2017: (in thousands of dollars) Government departments Commercial and other Total revenue Subscription Services Data Products Other Products & Services Total Revenue $ $ 1,367 1,314 2,681 $ $ 7 126 133 $ $ 38 - 38 $ $ 1,412 1,440 2,852 Revenues for the three months ended October 31, 2016: (in thousands of dollars) Government departments Commercial and other Total revenue Subscription Services Data Products Other Products & Services Total Revenue $ $ 1,544 1,279 2,823 $ $ 31 135 166 $ $ 319 - 319 $ $ 1,894 1,414 3,308 Revenue for the three months ended October 31, 2017 was $2,852 with a cost of revenue of $1,998 resulting in a gross margin of $854. The corresponding results for the three months ended October 31, 2016 was revenue of $3,308, cost of revenue of $2,607 and a gross margin of $701. Though the remaining operating expenses for Q4 2017 were in line with the spending in Q4 2016, the Impairment losses of $26,886 recognized in 2017 were the primary driver of the increase in operating loss from $2,467 in Q4 2016 to $29,236 in Q4 2017. As mentioned in the “staffing” section above, we announced a restructuring on November 2, 2016. This resulted in us recording a restructuring expense of $1,744 in the “Other expenses” section of the Consolidated Financial Statements in Q4 2016. The Net loss for Q4 2017 was $28,966 while Q4 2016 reported a Net loss of $4,135. Credit facilities A Canadian Schedule I Bank has provided exactEarth Ltd. with a demand operating credit facility of $2,000. Canadian dollar loans will be available by way of overdrafts. Interest will be calculated at the bank’s prime rate per annum. US dollar loans will also be available by way of overdraft. US Interest will be calculated at US Base Rate per annum. This credit facility may be terminated by the bank at any time. There are no financial covenants established as yet, with the necessity for specific covenants assessed in future as financing needs of exactEarth Ltd. continue to evolve. As of October 31, 2017, $27 was drawn on the bank credit facility in the form of Letters of Guarantee required for certain customer contracts. There has been no further activity on this line of credit as of September 12, 2017. Off-balance sheet arrangements As at October 31, 2017, we do not have any off-balance sheet arrangements, other than operating leases as disclosed in note 12 (Commitments and Contingencies) in the Notes to the Consolidated Financial Statements. Proposed transactions We did not have any proposed transactions as at October 31, 2017. Summary of Significant Accounting Policies Critical accounting estimates The preparation of our Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. These estimates are based upon management’s historical experience and various other assumptions exactEarth Annual Report 2017 15 that are believed by management to be reasonable under the circumstances. Such assumptions and estimates are evaluated on an ongoing basis and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources as well as the periodic recognition of revenue and cost of revenue. Actual results could differ from these estimates. We believe the following critical accounting policies affect the more significant estimates and assumptions used in the preparation of our Consolidated Financial Statements. Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The Company assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. The Company has concluded that it is acting as a principal in all of its revenue arrangements. The following specific recognition criteria must also be met before revenue is recognized: Sale of Data The majority of revenue is derived from the sale of data subscriptions. For subscription revenue, the timing of cash flows generally precedes the recognition of revenue and income. Any initial payments are deferred and recognized rateably as data is delivered over the subscription period. Revenue is recognized upon delivery for non-subscription data sales. Provision of Products and Services We occasionally provide goods, including Class B transponders, and services to its customers under long-term contracts. When there are more than one good or service included in an arrangement, it is necessary to assess the whether those components should be separated or combined for purposes of recognizing revenue. Further, it is necessary to assess the fair value of distinct components and allocate the total contract value based on the relative fair values. The fair value of each product or service is determined considering sales of the products or services on a stand-alone basis, and the Company’s pricing policies. The Company recognizes revenue on long-term contracts based on the stage of completion in accordance with IAS 18 if the contract is a service contract or IAS 11 if the contract represents a construction contract. Depending on the nature of the contract, the stage of completion may be assessed based on costs incurred relative to the estimated total contract costs or other measures. Losses on such contracts are accrued when the estimate of total costs indicates that a loss will be realized. Accruals are drawn down as loss contracts progress. Contract billings received in excess of recognized revenue are included in current liabilities as deferred revenue. Project costs to complete At the outset of each customer project, an estimate of the total expected cost to complete the scope of work under contract is made. For those contracts where revenue is recognized based on actual costs incurred relative to estimated total costs, these estimates are reviewed and revised to reflect current expectations of cost to complete, and total cost. These estimates are based on specific knowledge of the status of the project, as well as historical understanding of costs on similar projects. Cost elements include material, direct labour, and overhead costs, with labour and overhead costs being determined using pre-established costing rates applied to estimated labour hours required to complete the scope of work under contract. These estimates are reviewed on a monthly and quarterly basis to ensure the estimates reflect the current expectations for total costs, however this is not a guarantee that unforeseen or additional costs won’t be incurred, which would have an impact on project total cost, reported revenue, and gross margins. Management believes it has effective control procedures in place to ensure the validity of these estimates at the time they are made. 16 exactEarth Annual Report 2017 Allowance for doubtful accounts We have established an allowance for doubtful accounts taking into consideration aging of the receivables, communications with customers, credit issues, and historical losses. We will increase the allowance for specific accounts if it has objective evidence that its customer is experiencing significant financial difficulty. Useful life of intangible and long-term assets We have established policies for determining the useful life of our intangible and long-term assets, and amortize the costs of these assets over those useful lives. The useful life for each category of asset is determined based on the expectation of our ability to continue to generate revenues, and thus, our cash flows. This ability is tested periodically to ensure the conditions still exist to allow the asset to be reflected at its net-recorded value in our accounts, and any impairment to the valuation is reflected in such accounts at the time the impairment is determined. Recoverable amount for long-lived assets An asset’s recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in use, and is determined for an individual asset or at the CGU level if individual assets do not have largely independent cash inflows. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. Given the Company is a single CGU, the market capitalization of the Company is a relevant measure of FVLCS. Capitalization of development costs When capitalizing development costs, we must assess the technical and commercial feasibility of the projects and estimate the useful lives of resulting products. Determining whether future economic benefits will flow from the assets, and therefore, the estimates and assumptions associated with these calculations are instrumental in: (i) deciding whether project costs can be capitalized, and (ii) accurately calculating the useful life of our projects. Financial instruments The valuation of our financial instruments requires estimation of the fair value of each instrument at the reporting date. Details of the basis on which fair value is estimated are provided in note 9 (Loans payable, financial instruments and foreign exchange) in the Condensed Notes to the Consolidated Financial Statements. Changes in Accounting Policies Including Initial Adoption There were no changes to accounting policies during the year ended October 31, 2017 compared to the accounting policies applied in the audited consolidated financial statements for the year ended October 31, 2016. Future changes in accounting policies A number of new standards, and amendments to standards and interpretations are not effective for the Company, and have not been applied in preparing the Consolidated Financial Statements. The following standards and interpretations have been issued by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Interpretations Committees with effective dates relating to the annual accounting periods starting on or after the effective dates as follows: IFRS 2, Share-based Payment (“IFRS 2”) In June 2016, the IASB issued final amendments to IFRS 2, which clarifies how to account for certain types of share- based payment transactions. The amendments provide requirements on the accounting for: (i) the effect of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; (ii) share-based payment transactions with a net settlement feature for withholding tax obligations; and (iii) a modification to the terms and conditions of a share-based payment that changes the classifications of the transaction from cash-settled to equity- settled. The amendments are effective for annual periods beginning on or after January 1, 2018, with early adoption exactEarth Annual Report 2017 17 permitted. The amendments become effective for the Company November 1, 2018. The Company is currently assessing the impact of adopting these amendments on its consolidated financial statements. IFRS 9 Financial instruments: classification and measurement (“IFRS 9”) In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments, which reflects all phases of the financial instruments project and replaces IAS 39, Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. The Company is evaluating the impact of adopting this new standard on its consolidated financial statements. IFRS 15 Revenue from contracts with customers (“IFRS 15”) In May 2014, the IASB issued IFRS 15, which establishes a single comprehensive model of accounting for revenue arising from contracts with customers that an entity will apply to determine the measurement of revenue and timing of when it is recognized. IFRS 15 supersedes current revenue recognition guidance, which is found currently across several standards and interpretations including IAS 11, Construction Contracts and IAS 18, Revenue. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the amount an entity expects to be entitled in exchange for those goods and services. The new standard will also result in enhanced disclosures about revenue that would result in an entity providing comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The standard becomes effective for the Company on November 1, 2018. The Company is currently assessing the impact of adopting this new standard on its consolidated financial statements. IFRS 16, Leases (“IFRS 16”) On January 13, 2016, the IASB issued IFRS 16 which will replace International Accounting Standard (“IAS”) 17, Leases. The new standard will be effective for fiscal years beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 at or before the date of initial adoption of IFRS 16. The standard becomes effective for the Company on November 1, 2019. The new standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other areas of the lease accounting model have been impacted, including the definition of a lease. The Company is currently assessing the impact of adopting this new standard on its consolidated financial statements. International Financial Reporting Interpretations Committee 22, Foreign Currency Transactions and Advance Consideration Foreign Currency Transactions and Advance Consideration clarifies the appropriate exchange rate to use on initial recognition of an asset, expense or income when advance consideration is paid or received in a foreign currency. The new interpretation is effective for annual periods beginning on or after January 1, 2018. The Company is currently assessing the impact of this new interpretation on its consolidated financial statements. International Financial Reporting Interpretations Committee 23, Uncertainty over Income Tax Treatments Uncertainty over Income Tax Treatments provides guidance when there is uncertainty over income tax treatments including (but not limited to) whether uncertain tax treatments should be considered separately; assumptions made about the examination of tax treatments by tax authorities; the determination of taxable profit, tax bases, unused tax losses, unused tax credits, and tax rates; and, the impact of changes in facts and circumstances. The new interpretation is effective for annual periods beginning on or after January 1, 2019. The Company is currently assessing the impact of the new interpretation in its consolidated financial statements. 18 exactEarth Annual Report 2017 CONTROLS AND PROCEDURES Disclosure controls and procedures The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company in reports filed under Canadian securities laws is recorded, processed, summarized and reported within the time periods specified under those laws, and include controls and procedures that are designed to ensure that information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Management’s report on internal control over financial reporting Internal control over financial reporting is designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with International Financial Reporting Standards. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. The Company used the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013 framework to evaluate the effectiveness of internal control over financial reporting. Changes in internal controls over financial reporting The Company made no changes to internal controls over financial reporting during the quarter ended October 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. OUTSTANDING SHARE DATA The number of issued and outstanding Common Shares was 21,614,120 as of the date of this MD&A. exactEarth Annual Report 2017 19 INDEPENDENT AUDITORS’ REPORT To the Shareholders of exactEarthTM Ltd. We have audited the accompanying consolidated financial statements of exactEarthTM Ltd., which comprise the consolidated statements of financial position as at October 31, 2017 and 2016, and the consolidated statements of changes in equity, loss and comprehensive loss, and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with 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 audits 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 auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, 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 exactEarthTM Ltd. as at October 31, 2017 and 2016, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Kitchener, Canada January 23, 2018 20 exactEarth Annual Report 2017 A member firm of Ernst & Young Global LimitedexactEarthTM Ltd. Consolidated Statements of Financial Position (in thousands of Canadian dollars) ASSETS Current assets Cash Trade accounts receivable Inventory Unbilled revenue Prepaid expenses and other assets Total current assets Property, plant and equipment Intangible assets Total assets LIABILITIES & EQUITY Current liabilities Accounts payable and accrued liabilities Deferred revenue Restructuring provision - current Loans payable - current Long-term incentive plan liability - current Total current liabilities Government loan payable Loans payable Long-term incentive plan liability Restructuring provision Other long-term liabilities Total liabilities Shareholders’ equity As at October 31, 2017 $ As at October 31, 2016 $ 8,117 3,171 - 425 1,266 12,979 12,576 5,405 30,960 3,722 2,064 388 567 166 6,907 662 - 343 - 45 7,957 13,680 1,778 425 794 867 17,544 31,423 18,855 67,822 5,431 1,968 1,154 716 64 9,333 1,045 143 316 442 - 11,279 (note 16) (notes 6, 8 and 17) (notes 7, 8 and 17) (notes 9 and 15) (note 16) (note 19) (note 9) (note 11) (notes 4 and 9) (note 9) (note 11) (note 19) (note 9) Share capital Contributed surplus Accumulated other comprehensive income (loss) Deficit Total shareholders' equity (note 11) (note 11) 123,781 1,070 (44) (101,804) 23,003 123,769 699 45 (67,970) 56,543 Total liabilities and shareholders’ equity 30,960 67,822 See accompanying notes On behalf of the Board: Maria Izurieta - Director - exactEarth Ltd. Peter Mabson - Director - exactEarth Ltd. exactEarth Annual Report 2017 21 exactEarth™ Ltd. Consolidated Statements of Changes in Equity (in thousands of Canadian dollars) For the Year Ended October 31, 2017 Balance at October 31, 2016 Stock-based compensation expense Issuance of common shares Comprehensive loss Balance at October 31, 2017 For the Year Ended October 31, 2016 Balance at, October 31, 2015 (note 11) (note 11) Stock-based compensation expense Comprehensive income (loss) 7,349,780 common shares issued on conversion of debt (note 18) (note 18) 3,144,615 common shares issued for cash (note 11) Balance at October 31, 2016 See accompanying notes Total $ 56,543 380 3 (33,923) 23,003 23,066 450 (35,622) 48,209 20,440 56,543 Deficit $ (67,970) - - (33,834) (101,804) (32,007) - (35,963) - - (67,970) Accumulated Other Comprehensive Income (Loss) Share Capital Contributed Surplus $ 45 - - (89) (44) (296) - 341 - - 45 $ 123,769 - - 12 123,781 55,120 - - 48,209 20,440 123,769 $ 699 380 (9) - 1,070 249 450 - - - 699 22 exactEarth Annual Report 2017 exactEarth™ Ltd. Consolidated Statements of Changes in Equity (in thousands of Canadian dollars) exactEarthTM Ltd. Consolidated Statements of Loss and Comprehensive Loss (in thousands of Canadian dollars) For the Year Ended October 31, 2017 Stock-based compensation expense Issuance of common shares Comprehensive loss Balance at October 31, 2017 For the Year Ended October 31, 2016 Total $ Deficit $ Accumulated Other Comprehensive Income (Loss) $ Share Capital $ Contributed Surplus $ (note 11) (note 11) 380 3 (33,923) 23,003 23,066 450 (35,622) 48,209 20,440 56,543 - - - - - (33,834) (101,804) (89) (44) 123,781 1,070 - - - - - 12 - - - - 48,209 20,440 123,769 699 380 (9) - 249 450 - - - 699 Balance at, October 31, 2015 (32,007) (296) 55,120 Stock-based compensation expense (note 11) Comprehensive income (loss) (35,963) 341 7,349,780 common shares issued on conversion of debt (note 18) 3,144,615 common shares issued for cash (note 18) (67,970) 45 Balance at October 31, 2016 See accompanying notes Balance at October 31, 2016 56,543 (67,970) 45 123,769 For the Year Ended Revenue Cost of revenue Gross margin Operating expenses Selling, general and administrative Product development and R&D Depreciation and amortization Impairment losses Loss from operations Other expenses (income) Other income Other expense Restructuring expense (recovery) Foreign exchange loss (gain) Interest expense Total other expenses (income) Income tax expense Net loss October 31, 2017 $ October 31, 2016 $ (notes 16 and 17) (note 4) (notes 6 and 7) (note 8) (note 20) (note 19) (notes 4 and 9) (note 13) 12,833 8,618 4,215 7,004 1,692 3,791 26,886 (35,158) (1,455) 197 (99) (43) 52 (1,348) 24 (33,834) 18,918 9,772 9,146 7,463 1,950 4,649 27,987 (32,903) (55) - 1,744 1,026 304 3,019 41 (35,963) Other comprehensive income (loss) Items that may be subsequently reclassified to net income: Foreign currency translation, net of income tax expense of nil Total other comprehensive income (loss) Comprehensive loss Loss per share Basic and diluted loss per share See accompanying notes (89) (89) 341 341 (33,923) (35,622) (note 11) (1.57) (1.90) exactEarth Annual Report 2017 23 exactEarth™ Ltd. Consolidated Statements of Cash Flows (in thousands of Canadian dollars) For the Year Ended Net loss Add (deduct) items not involving cash Non-monetary transaction Non-cash interest Impairment losses Depreciation and amortization Loss on disposal of assets Foreign exchange loss on revaluation of foreign currency shareholder loans Long-term incentive plan expense Gain on insurance settlement Stock-based compensation Technology demonstration program recovery Restructuring reserve - revaluation/cancellation of units Net change in non-cash working capital balances (note 12) (notes 4 and 9) (note 8) (notes 6 and 7) (note 11) (notes 6 and 20) (note 11) (note 4) (note 19) Other operating cash flows Restructuring provision - payment of salary continuance Settlement of RSU units Technology demonstration program funding received (note 19) (note 11) (note 4) Cash flows used in operations Investing activities Acquisition of property, plant and equipment Reimbursement of acquisition costs of property, plant and equipment Insurance recovery Acquisition of intangible assets (note 6) (note 6) (notes 6 and 20) (note 7) (notes 4 and 9) (note 9) (note 11) Cash flows from (used in) investing activities Financing activities Government loan repayment Long-term debt repayment Shares issued Shareholder loan advances Cash flows from (used in) financing activities Effect of exchange rate changes on cash Net increase (decrease) in cash Cash, beginning of the year Cash, end of the year Supplemental cash flow information Interest paid Interest received Income taxes paid See accompanying notes 24 exactEarth Annual Report 2017 October 31, 2017 $ October 31, 2016 $ (33,834) (35,963) (618) 126 26,886 3,791 3 - 245 (1,455) 380 (381) (99) (2,347) - (1,109) (112) 817 (7,707) (780) 396 3,500 (121) 2,995 (451) (350) - - (801) (50) (5,563) 13,680 8,117 - 79 24 (3,048) 153 27,987 4,649 - 452 320 - 450 (667) - 1,214 - 1,596 - - (2,857) (2,372) 120 - (6,307) (8,559) (492) (204) 20,440 3,000 22,744 (13) 11,315 2,365 13,680 334 110 41 exactEarth™ Ltd. Consolidated Statements of Cash Flows (in thousands of Canadian dollars) For the Year Ended Net loss Add (deduct) items not involving cash Non-monetary transaction Non-cash interest Impairment losses Depreciation and amortization Loss on disposal of assets Foreign exchange loss on revaluation of foreign currency shareholder loans Long-term incentive plan expense Gain on insurance settlement Stock-based compensation Technology demonstration program recovery Restructuring reserve - revaluation/cancellation of units Net change in non-cash working capital balances Other operating cash flows Restructuring provision - payment of salary continuance Settlement of RSU units Technology demonstration program funding received Cash flows used in operations Investing activities Acquisition of property, plant and equipment Reimbursement of acquisition costs of property, plant and equipment Insurance recovery Acquisition of intangible assets Cash flows from (used in) investing activities Financing activities Government loan repayment Long-term debt repayment Shares issued Shareholder loan advances Cash flows from (used in) financing activities Effect of exchange rate changes on cash Net increase (decrease) in cash Cash, beginning of the year Cash, end of the year Supplemental cash flow information Interest paid Interest received Income taxes paid See accompanying notes (note 12) (notes 4 and 9) (note 8) (notes 6 and 7) (note 11) (notes 6 and 20) (note 11) (note 4) (note 19) (note 19) (note 11) (note 4) (note 6) (note 6) (notes 6 and 20) (note 7) (notes 4 and 9) (note 9) (note 11) October 31, October 31, 2017 $ 2016 $ (33,834) (35,963) (618) 126 26,886 3,791 3 - - 245 (1,455) 380 (381) (99) (2,347) (1,109) (112) 817 (7,707) (780) 396 3,500 (121) 2,995 (451) (350) - - (801) (50) (5,563) 13,680 8,117 - 79 24 - - - - - - - (3,048) 153 27,987 4,649 452 320 450 (667) 1,214 1,596 (2,857) (2,372) 120 (6,307) (8,559) (492) (204) 20,440 3,000 22,744 (13) 11,315 2,365 13,680 334 110 41 exactEarthTM Ltd. Notes to the Consolidated Financial Statements October 31, 2017 (in thousands of Canadian dollars, except where otherwise noted and per share figures) 1. DESCRIPTION OF THE BUSINESS Founded in 2009, exactEarth™ Ltd. (the “Company” or “exactEarth”) is a provider of space-based maritime tracking data from its satellites. exactEarth leverages advanced microsatellite technology to deliver monitoring solutions. The Company is incorporated under the Canada Business Corporations Act and its shares are listed on the Toronto Stock Exchange. The Company’s head office is located at 260 Holiday Inn Drive, Cambridge, Ontario, Canada. The Company became a publicly traded company on February 9, 2016 through a spin-out transaction from Com Dev International Ltd. (the “Spinout Transaction”). 2. SIGNIFICANT ACCOUNTING POLICIES a) Statement of compliance These consolidated financial statements present the Company’s results of operations and financial position as at and for the year ended October 31, 2017, including the comparative period, under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below. These consolidated financial statements were authorized for issuance by the Board of Directors of the Company on January 23, 2018. b) Basis of presentation These consolidated financial statements include the accounts of the Company and its subsidiary with intercompany transactions and balances eliminated. The Company has two divisions, one in Cambridge, Ontario, Canada, and one in Harwell, United Kingdom. These consolidated financial statements are presented in Canadian dollars and have been prepared on a historical cost basis. The Company has experienced lower than planned revenues that when combined with the fixed operating costs of the Company’s satellite system have generated operating losses and result in a reduction in cash. Management has reviewed the forecast of the business and has assessed and concluded that there are no material uncertainties related to events or conditions that may cast significant doubt upon the Company’s ability to continue as a going concern. Management applied significant judgment in assessing the Company's ability to be generate sufficient cash flow to continue to fund operations and other committed expenditures including: • • • • • The amount of the sales pipeline, new sales orders generated in the first quarter 2018, contracted backlog and total revenue ; The timing of generating those new sales and recognizing contracted backlog and the timing of the related cash flow; The ability to draw upon existing financing facilities and/or to add additional funding sources ; The ability to re-negotiate existing contracts to reduce expenditures or delay the timing of payments; and The assessment of expenditures that could be reduced, eliminated or delayed. exactEarth Annual Report 2017 25 Management is currently assessing potential additional financing alternatives including government incentive programs and other funding sources. Given the judgement involved, actual results may lead to a materially different outcome. c) Cash Cash consists of balances with banks and short-term investments that mature within 90 days from the date of acquisition. Short-term investments are carried at their fair values. d) Property, plant and equipment Property, plant and equipment (“PP&E”) are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing component parts of the PP&E and borrowing costs for eligible long-term construction projects. When significant parts of an item of PP&E are required to be replaced at intervals, the Company derecognizes the replaced part and recognizes the new part with its own associated useful life and depreciation. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the PP&E as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognized in the consolidated statements of loss and comprehensive loss as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows: Leasehold improvements Satellites Electrical equipment Computer hardware Furniture and fixtures five years ten years ten years three to five years three to five years An item of PP&E and any significant part initially recognized are derecognized upon disposal or when no future economic benefits are expected from their use or eventual disposition. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statements of loss and comprehensive loss when the asset is derecognized. The assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year-end and adjusted prospectively, if appropriate. e) Intangible assets Finite-life intangible assets are valued at cost less accumulated amortization and accumulated impairment losses, if any, and which is provided at rates sufficient to write off the costs over the estimated useful lives of the assets, using the straight-line method as follows: Computer software not integral to the hardware on which it operates Internally developed technology Data rights Technology licences three to ten years five to seven years ten years seven years Intangible assets with finite lives are assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization 26 exactEarth Annual Report 2017 method for an intangible asset with a finite useful life are reviewed at least as at the end of each reporting period. Changes in the expected useful life, or the expected pattern of consumption of future economic benefits embodied in the asset, are accounted for by changing the amortization period or method, as appropriate, and are treated prospectively as a change in accounting estimate. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of loss and comprehensive loss in the expense category consistent with the function of the intangible assets. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognized in the consolidated statements of loss and comprehensive loss when the asset is derecognized. Costs that are directly attributable to the development and testing of identifiable and unique internally developed technology controlled by the Company are recognized as intangible assets when the criteria specified in International Accounting Standards (“IAS”) 38, Intangible Assets (“IAS 38”) are met. Capitalized costs include employee costs for staff directly involved in technology development and other expenditures directly related to the project. Research and development expenditures Research costs are expensed as incurred. Development expenditures, on an individual project, are recognized as an intangible asset only when they have met the conditions of IAS 38. Investment tax credits (“ITCs”) reduce research and development expense and/or intangible assets in the same period in which the related expenditures are charged to income or capitalized provided there is reasonable assurance the benefit will be realized. Otherwise, the incentives are recorded when the benefit is expected to be realized. Following initial recognition of the development expenditure as an asset, the cost model is applied requiring the asset to be carried at cost less any accumulated amortization and accumulated impairment losses. Amortization begins when development is complete and the asset is available for use. It is amortized over the period of expected future benefit. During the period of development, the asset is tested for impairment annually. Research and development costs that are funded by the Company are presented separately on the consolidated statements of loss and comprehensive loss. Government grants, ITCs, and other funding for research activity are presented as a reduction of the related expense. f) Impairment of long-lived assets The Company assesses as at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s fair value less costs to sell (“FVLCS”) and its value in use (“VIU”), and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets in which case the assessment is made at the cash-generating unit (“CGU”) level. A CGU is the smallest identifiable group of assets that generate cash flows that are largely independent of cash inflows from other assets or groups of assets. The Company currently is a single CGU. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Given the Company is a single CGU, the market capitalization of the Company is a relevant measure of FVLCS. exactEarth Annual Report 2017 27 g) Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date, whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Leases where the Company does not assume substantially all of the risks and benefits of ownership of the asset are classified as operating leases. All of the Company’s leases are classified as operating leases and are recognized as an expense in the consolidated statements of loss and comprehensive loss on a straight-line basis over the lease term. h) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective asset. All other borrowing costs are expensed in the period they occur. i) Income taxes Current income taxes Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, by the reporting date, in the countries where the Company operates and generates taxable income. Current income taxes related to items recognized directly in equity are recognized in equity and not in the consolidated statements of loss and comprehensive loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred income taxes Deferred taxes are provided using the liability method on temporary differences as at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted as at the reporting date. Deferred taxes are recognized for all taxable temporary differences, except in specific circumstances outlined in IAS 12, Income Taxes (“IAS 12”). Deferred tax assets are recognized for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and unused tax losses can be utilized, except in specific circumstances outlined in IAS 12. The carrying amount of deferred tax assets is reviewed as at each reporting date and reduced to the extent that it is no longer probable that all or part of the deferred tax asset will be utilized. Unrecognized deferred tax assets are reassessed as at each reporting date and are recognized to the extent that it has become probable the benefit will be recovered. 28 exactEarth Annual Report 2017 Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, would be recognized subsequently if new information about facts and circumstances existing at the acquisition date changed. The adjustment would either be treated as a reduction to goodwill (as long as it does not exceed goodwill) if it is incurred during the measurement period or in profit or loss. Revenue, expenses and assets are recognized net of the amount of sales tax, except where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable. Trade accounts receivable or accounts payable and accrued liabilities are stated with the amount of sales tax included. The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of trade accounts receivable or accounts payable and accrued liabilities in the consolidated statements of financial position. j) Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The Company assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. The Company has concluded that it is acting as a principal in all of its revenue arrangements. The following specific recognition criteria must also be met before revenue is recognized: Sale of data The majority of revenue is derived from the sale of data subscriptions. For subscription revenue, the timing of cash flows generally precedes the recognition of revenue and income. Any initial payments are deferred and recognized rateably as data is delivered over the subscription period. Revenue is recognized upon delivery for non-subscription data sales. Provision of products and services The Company may enter into arrangements involving multiple products or services including data subscriptions and sales of historic, archive data or sales of Class B transponders and data subscriptions. The Company allocates the arrangement consideration to the various products and services based on the relative fair value of each component. The fair value of each product or service is determined considering sales of the products or services on a stand-alone basis, and the Company’s pricing policies. The Company occasionally provides goods and services to its customers under long-term contracts. The Company recognizes revenue on such long-term contracts on the percentage of completion basis, based on costs incurred relative to the estimated total contract costs. Losses on such contracts are accrued when the estimate of total costs indicates that a loss will be realized. Accruals are drawn down as loss contracts progress. Contract billings received in excess of recognized revenue are included in current liabilities as deferred revenue. exactEarth Annual Report 2017 29 k) Fair value of data transferred in non-monetary transactions The Company is providing data in exchange for unrestricted title to the EV9 satellite. The fair value of the data provided and recognized as revenue is determined based on comparable revenue transactions with third parties and the Company’s pricing methodology. l) Foreign currency translation A functional currency is the currency of the primary economic environment in which the entity operates and is normally the currency in which the entity generates and expends cash. Each entity that is part of the Company determines its own functional currency. Each entity’s financial statements are translated from their functional currency to Canadian dollars, which is the presentation currency of these consolidated financial statements. Transactions Foreign currency transactions are initially recorded at the foreign exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange spot rate as at the reporting date. All differences are recorded in the consolidated statements of loss and comprehensive loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value is determined. Translation The assets and liabilities of foreign operations are translated into Canadian dollars at year-end exchange rates and their revenue and expense items are translated at exchange rates prevailing at the date of the transactions. The resulting exchange differences are recognized in “Other comprehensive income (loss)”. On disposal of a foreign operation, the foreign exchange in “Accumulated other comprehensive income (loss)” relating to that particular foreign operation is recognized in income in the consolidated statements of loss and comprehensive loss. m) Financial instruments Financial assets Financial assets within the scope of IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”), are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial assets at initial recognition. All financial assets are recognized initially at fair value plus directly attributable transaction costs. The Company’s financial assets include cash and trade accounts receivable. Trade accounts receivable Trade accounts receivable are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Trade accounts receivable are non- interest bearing and are generally on 30- to 90-day payment terms. Trade accounts receivable are reported net of allowance for doubtful accounts, which is based on an assessment of the aging of the receivables and specific credit issues. Any impairment of trade 30 exactEarth Annual Report 2017 accounts receivable is recorded through “Selling, general and administrative expenses” in the consolidated statements of loss and comprehensive loss. Derecognition A financial asset is derecognized when the rights to receive cash flows from the asset have expired and the Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either the Company has transferred substantially all the risks and rewards of ownership of the asset or the Company has neither transferred nor retained substantially all the risks and rewards of ownership of the asset, but has transferred control of the asset. Impairment of financial assets The Company assesses as at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors are experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization, and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. Financial liabilities Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value, except for related party balances, which are at the exchange amount and, in the case of loans and borrowings, carried at amortized cost. This includes directly attributable transaction costs. The Company’s financial liabilities include accounts payable and accrued liabilities, restructuring provision, long-term incentive plan liability, loans payable and government loan payable. The measurement of financial liabilities depends on their classification as follows: Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. exactEarth Annual Report 2017 31 Gains or losses on liabilities held for trading are recognized in the consolidated statements of loss and comprehensive loss. The Company has not designated any financial liabilities upon initial recognition as fair value through profit or loss. Loans payable After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the consolidated statements of loss and comprehensive loss when the liabilities are derecognized as well as through the effective interest rate method amortization process. Derecognition A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statements of loss and comprehensive loss. n) Government assistance Government assistance is periodically received in the form of grants, loans or ITCs (see “Research and development expenditures”) that may be repayable in the form of royalties based on future sales levels related to the technology funded. Amounts that are repayable will be accounted for in the period in which conditions arise that will cause repayment. Government assistance with predetermined repayment requirements or conditional criteria is recorded as a liability when received or until the conditions are satisfied. If no predetermined repayment requirements exist, the assistance is treated as a reduction in the cost of the related item. Interest-free government loans are measured at amortized cost using the effective interest rate method. The interest rate used is based on the market rate for a comparable instrument with a similar term. The difference between the fair value at inception and the loan proceeds received is recorded as a government grant. The grant portion is split between operating costs and capital costs based on the costs to which the loan relates. The grant related to capital is recognized as a reduction to the carrying amount of an eligible asset and is realized over the life of the asset as reduced amortization expense. The grant related to operating expense is recognized in “Other income”. o) Stock-based compensation and Employee Share Purchase Plan (“ESPP”) Stock options The Company recognizes compensation cost for all stock options granted to employees under the exactEarth stock option plan. exactEarth measures at fair value all stock options issued to employees or directors. The option exercise price is the share price of the Company’s common shares at the date of the grant. IFRS 2, Share-based Payments, requires that the Company record these amounts as “Contributed surplus”. The fair value of the direct grants of stock is determined by the quoted market price of the Company’s stock at the time of the award and the fair value of stock options is determined using the Black-Scholes option pricing model. The fair value of awards at the date of grant is recorded as an expense in these 32 exactEarth Annual Report 2017 consolidated financial statements and is recognized over the vesting period based on the number of options expected to vest. When options are exercised, they are settled with shares. Long-term incentive plan The Company has established a long-term incentive plan (“LTIP”) for executives and certain employees. Under the terms of this plan, participants are eligible to receive incentive remuneration in the form of Restricted Share Units (“RSUs”) and Performance Share Units (“PSUs”). RSUs are time-based and will vest on a cliff or graded basis, depending on the type of RSU. Type one RSUs cliff vest three years after the grant date. Type two RSUs vest on a graded basis at 25% one year after the grant date and 75% two years after the grant date. Type three RSUs vest on a graded basis of 50% at two and three years after the grant date. Type four RSUs vest on a graded basis of 33.3% at three, four and five years after the grant date. Each RSU, once vested, entitles the holder to receive the cash value of one common share of the Company. PSUs cliff vest three years after the grant date, multiplied by the performance multiplier. The performance multiplier is based on adjusted earnings before interest, taxes, depreciation and amortization (“AEBITDA”) growth over the vesting period. An AEBITDA compound annual growth rate (“CAGR”) of 10% or less corresponds with the minimum multiplier of 0, a CAGR of 20% corresponds with a multiplier of 1 and a CAGR of 30% or more corresponds with the maximum multiplier of 2. CAGRs between 10% and 30% during the vesting period will result in multipliers calculated on a straight-line basis along the scale between 0 and 2. Each PSU, once vested, entitles the holder to receive the cash value of one common share of the Company. The Company intends to cash settle the RSUs and PSUs to satisfy obligations under the LTIP plan. The estimated value of the RSUs and PSUs is recognized as compensation expense over the vesting period based on the market value of the Company’s shares at the end of each period and the time elapsed during the vesting period and is presented as a liability in the consolidated statements of financial position. Deferred share unit plan The Company has adopted a deferred share unit (“DSU”) plan for non-employee directors. Directors are required to receive a portion of their annual compensation in the form of DSUs, and can elect to increase the percentage paid in DSUs. The DSUs vest over the quarterly service period for the director after the grant date and will be settled upon the director’s retirement from the Board. Each DSU entitles the holder to receive either cash, based on the share value at the time of settlement, or one common share of the Company. The estimated value of the DSUs is recognized as compensation expense over the vesting period based on the market value of the Company’s shares at the end of each period and the time elapsed during the vesting period and is presented as a liability in the consolidated statements of financial position. Employee Share Purchase Plan The Company implemented the ESPP during the quarter ended July 31, 2016. The ESPP offers employees the option of contributing between 1% and 10% of their gross salary towards the purchase of common shares of the Company. The Company will issue one share for every four shares that employees purchase during the ESPP year, which runs from March 1 to February 28. The Company’s matching contribution will be issued to the employee contingent upon the employee remaining employed by the Company on the last day of the ESPP year. The fair values on the date that the employees commit to purchase shares are used to exactEarth Annual Report 2017 33 determine the applicable compensation expense to the Company. The compensation expense is recognized over the period from the date the employee acquires the shares to the date the Company matching shares are issued to the employee. The accumulated amount of ESPP expense charged to income, but not yet issued, is included in contributed surplus. p) Employee future benefit plan Defined contribution pension plan The Company sponsors a defined contribution pension plan for certain of its employees. The cost of providing benefits through the defined contribution pension plan is charged to income in the period in which the contributions become payable. q) Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated statements of loss and comprehensive loss net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost. r) Inventory Inventory consists of purchased small vessel tracking transponders and is stated at the lower of cost and net realizable value. Cost is determined on a weighted average cost basis. Net realizable value represents the estimated selling price in the ordinary course of business, less estimated selling costs. There have been no inventory amounts included in cost of revenue during the year. s) Critical judgments and estimates The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. The key assumptions concerning the future and other key sources of estimation uncertainty as at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Company bases its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market fluctuations or circumstances arising beyond the control of the Company. Such changes are reflected in the assumptions when they occur. 34 exactEarth Annual Report 2017 The following are the critical judgments, estimates and assumptions that have been made in applying the Company’s accounting policies and that have the most significant effect on the amounts in the consolidated financial statements: Allowance for doubtful accounts The Company establishes an allowance for doubtful accounts taking into consideration aging of the trade accounts receivable, communications with customers, credit issues, and historical losses. The Company will increase the allowance for specific accounts if it has objective evidence that the customer is experiencing significant financial difficulty. Capitalization of development costs When capitalizing development costs, the Company must assess the technical and commercial feasibility of the projects and estimate the useful lives of resulting products. Determining whether future economic benefits will flow from the assets and, therefore, the estimates and assumptions associated with these calculations are instrumental in: (i) deciding whether project costs can be capitalized; and (ii) accurately calculating the useful life of the projects for the Company. Capitalization of borrowing costs The Company must assess whether borrowing costs are directly attributable to an asset in progress and capitalize those costs. To the extent that borrowings are general in nature, the Company must assess how much interest is attributable to assets in progress. Judgment is required to determine when to commence, suspend or cease capitalization of borrowing costs. Impairment The recoverable amount for intangible assets and PP&E is based on estimates of future cash flows and in particular, assumptions regarding the expected market outlook, the discount rate and terminal growth rate applied to future cash flows. Revenue recognition and contracts in progress Revenue on construction contracts is recognized on a percentage of completion basis. In applying the accounting policy on construction contracts, judgment is required in determining the estimated costs to complete a contract. These cost estimates are reviewed as at each reporting period and by their nature may give rise to income volatility. Income (loss) on completion of contracts accounted for under the percentage of completion method To estimate income (loss) on completion, the Company takes into account factors inherent to the contract by using historical and/or forecast data. When total contract costs are likely to exceed total contract revenue, the expected loss is recognized immediately and recorded in “Accounts payable and accrued liabilities” in the consolidated statements of financial position. The accrual is drawn down over the completion of the contract using the percentage of completion method. 3. FUTURE ACCOUNTING CHANGES Standards issued, but not yet effective or amended up to the date of issuance of the Company’s consolidated financial statements, are listed below. This listing is of standards and interpretations exactEarth Annual Report 2017 35 issued, which the Company reasonably expects to be applicable at a future date. The Company intends to adopt these standards when they become effective. IFRS 2, Share-based Payment (“IFRS 2”) In June 2016, the IASB issued final amendments to IFRS 2, which clarifies how to account for certain types of share-based payment transactions. The amendments provide requirements on the accounting for: (i) the effect of vesting and non-vesting conditions on the measurement of cash- settled share-based payments; (ii) share-based payment transactions with a net settlement feature for withholding tax obligations; and (iii) a modification to the terms and conditions of a share-based payment that changes the classifications of the transaction from cash-settled to equity-settled. The amendments are effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The amendments become effective for the Company November 1, 2018. The Company is currently assessing the impact of adopting these amendments on its consolidated financial statements. IFRS 9, Financial Instruments (“IFRS 9”) In July 2014, the IASB issued the final version of IFRS 9, which reflects all phases of the financial instruments project and replaces IAS 39, and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. The standard becomes effective for the Company on November 1, 2018. Retrospective application is required, but comparative information is not compulsory. The Company is evaluating the impact of adopting this new standard on its consolidated financial statements. IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) In May 2014, the IASB issued IFRS 15, which establishes a single comprehensive model of accounting for revenue arising from contracts with customers that an entity will apply to determine the measurement of revenue and timing of when it is recognized. IFRS 15 supersedes current revenue recognition guidance, which is found currently across several standards and interpretations including IAS 11, Construction Contracts, and IAS 18, Revenue. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the amount an entity expects to be entitled in exchange for those goods and services. The new standard will also result in enhanced disclosures about revenue that would result in an entity providing comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The standard becomes effective for the Company on November 1, 2018. The Company is currently assessing the impact of adopting this new standard on its consolidated financial statements. IFRS 16, Leases (“IFRS 16”) On January 13, 2016, the IASB issued IFRS 16, which will replace IAS 17, Leases (“IAS 17”). The new standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other areas of the lease accounting model have been impacted, including the definition of a lease. The new standard will be effective for fiscal years beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 at or before the date of initial adoption of IFRS 16. The standard becomes effective for the Company on November 1, 36 exactEarth Annual Report 2017 2019. The Company is currently assessing the impact of adopting this new standard on its consolidated financial statements. International Financial Reporting Interpretations Committee 22, Foreign Currency Transactions and Advance Consideration Foreign Currency Transactions and Advance Consideration clarifies the appropriate exchange rate to use on initial recognition of an asset, expense or income when advance consideration is paid or received in a foreign currency. The new interpretation is effective for annual periods beginning on or after January 1, 2018. The Company is currently assessing the impact of this new interpretation on its consolidated financial statements. International Financial Reporting Interpretations Committee 23, Uncertainty over Income Tax Treatments Uncertainty over Income Tax Treatments provides guidance when there is uncertainty over income tax treatments including (but not limited to) whether uncertain tax treatments should be considered separately; assumptions made about the examination of tax treatments by tax authorities; the determination of taxable profit, tax bases, unused tax losses, unused tax credits, and tax rates; and the impact of changes in facts and circumstances. The new interpretation is effective for annual periods beginning on or after January 1, 2019. The Company is currently assessing the impact of the new interpretation in its consolidated financial statements. 4. GOVERNMENT ASSISTANCE Federal Development Agency Loan On November 16, 2012, exactEarth signed an interest-free loan agreement with the Federal Development Agency for Southern Ontario (“FED DEV”). Under this agreement, exactEarth was eligible to receive interest-free repayable funding for certain expenditures incurred from May 6, 2011 to March 31, 2014 to a maximum of $2,491. The interest-free loan is repayable in 60 equal consecutive monthly instalments that began on April 1, 2015. During the year ended October 31, 2017, the Company made payments of $451 (2016 – $492). The undiscounted amount payable related to the FED DEV loan is $1,190 (2016 – $1,641) (note 9). The FED DEV interest-free loan is measured at amortized cost, using the effective interest rate method at a rate of 8%. An interest rate of 8% was used based on the market interest rate for a comparable instrument with a similar term when the funding was received. The difference between the fair value at inception and the loan proceeds received is recorded as a government grant, which is recognized as an operating grant and a capital grant based on the relative proportion of eligible expenditures incurred. The operating grant is recorded as “Other expense (income)” in the consolidated statements of loss and comprehensive loss and the capital grant is recorded as a reduction in the cost of the related asset and amortized to income over the life of the asset. The amounts recognized in respect of the FED DEV arrangement are as follows: Recognized in the consolidated statements of loss and comprehensive loss as follows: Interest expense Reduction of amortization expense Net impact 2017 101 (30) 71 $ $ 2016 131 (32) 99 $ $ exactEarth Annual Report 2017 37 Technology Demonstration Program Funding On May 5, 2016, Innovation, Science and Economic Development Canada announced a $54,000 Technology Demonstration Program contribution to MDA Systems Ltd. (“MDA”) and its partners. The funding is designed to support large scale technology demonstration projects related to the Canadian aerospace, defence, space and security industries. On May 9, 2016, exactEarth entered into a Technology Demonstration Program Collaboration Agreement (“TDP Agreement”) with MDA as a Partner Recipient under the Technology Demonstration Program related to Space Technology and Advanced Research (“STAR”). The TDP Agreement provides funding at 50% of eligible costs in respect of STAR projects to a maximum total funding value of $1,250. This funding is available to partially offset eligible STAR project costs during the period commencing August 12, 2014 and ending March 31, 2022. The funding recognized as an offset to cost of revenue in the year ended October 31, 2017 was $381 (2016 – $667). 5. INVESTMENT On November 10, 2015, the Company entered into a shareholder’s agreement, licence agreement and services agreement with Myriota Pty. Ltd. (“Myriota”). Myriota is located in Adelaide, Australia, and has a fiscal year ending June 30. The Company invested AUD$2,000 (CAD$1,894) in exchange for 34% ownership, options for further equity investment, and a licence to an advanced signal processing technology. This technology was developed at the University of South Australia in order to develop advanced terminals, infrastructure and applications for the fast-growing Satellite Internet of Things (“SIoT”) focused on the location tracking and sensor data applications global market. The Company assessed the fair value of each component and allocated the full value of the investment to the licence based on a relative fair value calculation. The fair value of the technology was assessed using a discounted cash flow method. The Company will pay a 3.5% royalty on revenue derived from the technology under licence. Services will be provided to Myriota in exchange for additional equity or for cash consideration. Management is expecting amortization of this licence to commence in late calendar 2019 when the development of the technology is incorporated into exactEarth’s product lines. The Company has significant influence over Myriota, and as a result, will account for the investment using the equity method. Myriota incurred losses during the year ended October 31, 2017. The Company’s share of these losses is not reflected in the Company’s consolidated statements of loss and comprehensive loss, because the investment has a carrying value of nil based on the relative fair value calculation. The Company does not have an obligation to fund losses and will recognize its share of Myriota’s income only after its share of the income equals its share of losses not recognized. 38 exactEarth Annual Report 2017 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: Cost Leasehold Improvements Satellites Electrical Equipment Computer Hardware Furniture and Fixtures Total at October 31, 2016 $ 46 $ 55,664 $ 6,061 $ 3,053 $ 147 $ 64,971 Transfers EV5 satellite write-off Deductions Additions Translation adjustment - - (46) 53 - 6,893 (4,633) (396) 884 - (424) - (695) 9 20 424 - (3) 446 - - - (60) 4 - 6,893 (4,633) (1,200) 1,396 20 at October 31, 2017 $ 53 $ 58,412 $ 4,971 $ 3,920 $ 91 $ 67,447 Accumulated Depreciation Leasehold Improvements Satellites Electrical Equipment Computer Hardware Furniture and Fixtures Total at October 31, 2016 $ 46 $ 28,069 $ 2,647 $ 2,657 $ 129 $ 33,548 Depreciation expense (recovery) Impairment (note 8) Deductions Transfers EV5 satellite write-off Translation adjustment 8 27 (46) - - - 2,475 16,907 - 2,239 (2,588) - 307 1,457 - (424) - 11 189 391 (3) 424 - - (21) 22 (52) - - - 2,958 18,804 (101) 2,239 (2,588) 11 at October 31, 2017 $ 35 $ 47,102 $ 3,998 $ 3,658 $ 78 $ 54,871 Net Book Value Leasehold Improvements Satellites Electrical Equipment Computer Hardware Furniture and Fixtures Total at October 31, 2016 at October 31, 2017 $ $ - $ 27,595 18 $ 11,310 $ $ 3,414 973 $ $ 396 262 $ $ 18 13 $ 31,423 $ 12,576 Included in property, plant and equipment as at October 31, 2017 is $5,805 (2016 – $16,356) of satellite equipment that has not yet commenced being depreciated as the assets are under construction and not yet ready for use. The Company moved its offices to a new location in Cambridge, Ontario, Canada, in January 2017. At the time, the book value of the leasehold improvements made to the former location along with furniture and equipment that was not transferred to the new location was written off. These amounts are reflected in the “deductions” line of the table above. The transfer from intangible assets of $6,893 in the same table relates to an asset transfer arrangement that the Company made to provide in-kind datasets at a value of $3,666 in exchange for title to the EV9 satellite. This commitment was satisfied as at January 31, 2017, resulting in the Company transferring the carrying value of the EV9 data rights of $6,893 from intangible assets to property, plant and equipment. The transfer out is reflected in note 7 (Intangible Assets) while more detail with respect to the in-kind contribution can be found in note 12 (Commitments and Contingencies). On February 3, 2017, the Company lost contact with one of its satellites, EV5. When subsequent recovery efforts were not successful, the Company filed an insurance claim for the full insured value exactEarth Annual Report 2017 39 of the satellite amounting to $3,500. The settlement was received in April 2017. The remaining net book value (“NBV”) (cost of $4,633 less accumulated depreciation of $2,588 for NBV of $2,045) of EV5 was written off at the same time. Details with respect to this transaction can be found in note 20 (Other Income). In November 2016, the Company renegotiated its service contract with its ground station developer, Kongsberg Satellite Services. Following that negotiation, the Company cancelled its requirement for a planned ground station in Chile and received a credit for the amount expended. This is reflected as a deduction of $695 in the electrical equipment section of the table above. This ground station was in the process of being developed and hence is included in capital in progress, which is why there is no corresponding reduction to accumulated depreciation. Additions to satellites for the year ended October 31, 2017 are shown net of $396 (2016 – $120) of cost reimbursements received by the Company for assisting in the development of a satellite under construction. Borrowing costs capitalized in the cost of certain assets were nil (2016 – $408 using an average capitalization rate of 8%). 7. INTANGIBLE ASSETS Intangible assets consist of the following: Cost Computer Software Internally Developed Technology Technology Licences Data Rights Total at October 31, 2016 $ 3,672 $ 8,880 $ 2,715 $ 19,924 $ 35,191 Transfers Additions 47 76 (47) 43 - - (6,893) (6,893) - 119 at October 31, 2017 $ 3,795 $ 8,876 $ 2,715 $ 13,031 $ 28,417 Accumulated Amortization Computer Software Internally Developed Technology Technology Licences Data Rights Total at October 31, 2016 $ 3,112 $ 5,170 $ 1,003 $ 7,051 $ 16,336 Transfer to property, plant, and equipment Amortization expense Impairment (note 8) - 289 232 - 503 - - (2,239) (2,239) 41 833 1,924 1,026 4,900 8,082 at October 31, 2017 $ 3,633 $ 7,597 $ 2,029 $ 9,753 $ 23,012 Net Book Value at October 31, 2016 at October 31, 2017 Computer Software Internally Developed Technology Technology Licences Data Rights Total $ $ 560 162 $ $ 3,710 1,279 $ $ 1,712 $ 12,873 $ 18,855 686 $ 3,278 $ 5,405 Included in intangible assets is $2,804 of data rights (2016 – $8,215) that have not yet commenced being amortized as the underlying assets that will provide data rights are still under development and not yet ready for use. Other intangible assets that have not yet commenced amortization are technology licences of $686 (2016 – $1,712). Borrowing costs capitalized in the cost of certain assets were nil (2016 – $260 using an average capitalization rate of 8%). 40 exactEarth Annual Report 2017 Significant individual assets included in the amounts above as at October 31, 2017 are as follows: Description Category De-collision software Internally developed technology Alora ground control software Internally developed technology Class B detection technology Internally developed technology Larus licence Myriota licence Technology licence Technology licence Harris data licence Data rights Remaining Amortization Period (Months) Carrying Amount $ $ $ $ $ $ 847 327 55 168 518 3,278 123 41 42 84 84 119 The Harris data licence represents access to data from the full constellation of Iridium Next. As these satellites are put into service, they begin depreciating on an individual satellite basis. The remaining amortization period is calculated based on the amortization taken to date as a percentage of the total expected amortization, applied to the useful life of the constellation. 8. IMPAIRMENT OF LONG-LIVED ASSETS At the end of each reporting period, the Company assesses whether there are events or circumstances indicating that an asset may be impaired. Such events or circumstances notably include material adverse changes that, in the long-term, impact the economic environment or the Company’s assumptions or objectives. The Company considers the relationship between its market capitalization and the book value of its equity, among other factors, when reviewing for indicators of impairment, because the Company as a whole has been assessed as a single CGU. The recoverable amount is the greater of VIU and fair value less costs of disposal. During fiscal 2017, the market capitalization of the Company has been frequently below the carrying value. Since the market capitalization is below the carrying value for a sustained period of time, this is considered an indicator of impairment. In particular during the fourth quarter of the fiscal year, the market capitalization declined significantly below the carrying value. The recoverable amount used in the impairment test was based on fair value less cost to sell using a market approach determined using a market capitalization. The market capitalization, based on the five-day volume-weighted average price up to and including October 31, 2017, was $22,987. The carrying value, represented by the book value of the Company’s shareholder’s equity was $49,873. The carrying value was higher than the book value by $26,886 (2016 – $27,987). As a result, at October 31, 2017, impairment losses recognized are $18,804 (2016 – $17,728) related to property, plant and equipment and $8,082 (2016 – $10,259) related to intangible assets, allocated on a pro rata basis. The impairment amount has been recorded in the consolidated statement of loss and comprehensive loss. The effect of this is to write the carrying value of the Company down to the fiscal year-end market capitalization value. The market capitalization of the Company is considered a Level 1 measurement within the fair value hierarchy. exactEarth Annual Report 2017 41 9. LOANS PAYABLE, FINANCIAL INSTRUMENTS AND FOREIGN EXCHANGE a) Loans payable Loans payable are comprised of the following: FED DEV (note 4) Larus Technologies debt (note 9 b) Less: current portion of loans Long-term loans payable Principal repayments are due as follows: For the years ending October 31 2018 2019 2020 b) Financial instruments Fair values 2016 1,437 467 1,904 716 1,188 $ $ $ 2017 1,087 142 1,229 567 662 637 492 206 $ $ $ $ $ $ Cash and trade accounts receivable are considered “loans and receivables” and measured at amortized cost. Accounts payable and accrued liabilities, the FED DEV loan, Larus Technologies debt and restructuring provision are classified “financial liabilities at amortized cost”. For the Company’s cash, trade accounts receivable and accounts payable and accrued liabilities, the fair values approximate their respective carrying amounts due to their short- term maturities. The FED DEV loan, included in government loan payable, has a carrying value as at October 31, 2017 of $1,087 (2016 – $1,437), which approximates fair value as the loan was recorded at fair value when the cash was received, and the Company’s borrowing rate has not materially changed. The fair value of the FED DEV loan was calculated using discounted cash flows with a discount rate of 8% indicative of the Company’s borrowing rate. The Company entered into an agreement to licence the Total::Insight™ IP from Larus Technologies Corporation (“Larus”) for $700, payable in 24 equal monthly payments commencing April 15, 2016. During 2017, $350 was paid against the note payable (2016 – $204). The fair value of the Larus Technologies debt, which is interest-free, was calculated using the effective interest rate method to arrive at discounted cash flows with a discount rate of 8% indicative of the Company’s borrowing rate. Imputed interest will be recognized over the remaining term as interest expense. The Larus loan has a carrying value as at October 31, 2017 of $142 (2016 – $467), which approximates fair value as the loan was recorded at fair value when the cash was received, and the Company’s borrowing rate has not changed during the year. The Larus agreement also includes an option to purchase all the shares of Larus during the 24-month term of the agreement, and for the following six months. The option to purchase is currently valued at nil. 42 exactEarth Annual Report 2017 As at October 31, 2017, approximately 31% of cash, 84% of trade accounts receivable, and 21% of accounts payable and accrued liabilities are denominated in foreign currencies (2016 – 28%, 31%, and 28%, respectively). These foreign currencies include the US dollar, British pound and euro. The Company is exposed to foreign exchange risk on the following cash, trade accounts receivable, and accounts payable and accrued liabilities denominated in foreign currencies: Cash 322 136 1,253 $ £ € Trade Accounts Receivable Accounts Payable and Accrued Liabilities $ £ € 1,777 46 391 $ £ € 263 194 74 Currency USD GBP EUR Fair value hierarchy The Company categorizes financial assets and liabilities recorded at fair value in the consolidated statements of financial position based on a fair value hierarchy. Fair values of assets and liabilities included in Level I are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level II include valuations using inputs other than the quoted prices for which all significant inputs are based on observable market data, either directly or indirectly. Level III valuations are based on inputs that are not based on observable market data. The disclosure of both the fair value of the FED DEV loan and the Larus Technologies debt is considered to be a Level II measurement. Foreign currency risk Transaction exposure The Company is exposed to foreign exchange risk as a result of transactions in currencies other than its functional currency, the Canadian dollar. The majority of the Company’s revenue is transacted in Canadian dollars. Portions of the revenue are denominated in US dollars, British pounds and euros. The majority of salaries, purchases, certain operating costs and manufacturing overhead are incurred primarily in Canadian dollars. Translation exposure The Company’s foreign operation is exactEarth Europe. The assets and liabilities of the foreign operations are translated from British pounds into Canadian dollars using the exchange rates in effect as at the dates of the consolidated statements of financial position. Unrealized translation gains and losses are recognized in “Other comprehensive income (loss)”. The accumulated currency translation adjustments are recognized in income when there is a reduction in the net investment in the foreign operations. Foreign currency risks arising from translation of assets and liabilities of foreign operations into the Company’s functional currency are generally not hedged. The majority of the Company’s foreign exchange risk resides with US dollar, euro and British pound transactions. To evaluate the sensitivity of net income to potential changes in exchange rates, actual changes in exchange rates during the fiscal year were considered as an indicative range of potential changes in exchange rates as noted in the table below. The exactEarth Annual Report 2017 43 rates were entered into models that show the valuation impact to customer contracts, cash balances and foreign currency denominated monetary balance sheet items. For the year ended October 31, 2017 Currency Change in Exchange Increase (Decrease) in Rate vs CAD Net Income USD EUR GBP +2% -2% +1% - 1% + 10% - 10% $144 ($144) $20 $(20) $150 ($150) For the year ended October 31, 2016 Currency Change in Exchange Increase (Decrease) in Rate vs CAD Net Income USD EUR GBP Interest rate risk +1% -1% + 2% - 2% + 8% - 8% $65 ($65) $55 $(55) $26 ($26) The Company’s risk exposure to market interest rates relates primarily to new financing or renewals of existing financing arrangements. The Company’s policy is to review its borrowing requirements on a continual basis and to enter into fixed or variable interest rate borrowing arrangements as required. Both the FED DEV loan and Larus loans are non-interest bearing loans recorded at amortized cost. Therefore, the Company is not exposed to fluctuations in interest rates. Credit risk Credit risk arises from the inability of customers to discharge their obligation to the Company. If one or more customers were to delay, reduce or cancel orders, the overall orders of the Company may fluctuate and could adversely affect the Company’s operations and financial condition. The maximum exposure to credit risk as at the consolidated statements of financial position dates is best represented by the carrying amount of the Company’s trade accounts receivable and unbilled revenue. The Company is exposed to credit risk from the potential default by counterparties that carry the Company’s cash, and attempts to mitigate this risk by dealing only with large financial institutions with good credit ratings. All of the financial institutions the Company transacts with meet these qualifications. The Company, in the normal course of business, monitors the financial condition of its customers and reviews the credit history of each new customer. Trade accounts receivable 44 exactEarth Annual Report 2017 are non-interest bearing and are generally on 30- to 60-day payment terms. Seven customers comprise 67% of total trade accounts receivable as at October 31, 2017 (2016 – five customers comprised 67%). The Company has reviewed its outstanding trade accounts receivable in detail and provided an allowance for doubtful accounts with respect to three customers. The aging profiles for the remaining customers are within historical expectations and have no apparent credit issues. The trade accounts receivable balance outstanding greater than 60 days past due as at October 31, 2017, but not impaired, is $1,389 (2016 – $646). The carrying amount of trade accounts receivable is reduced through the use of an allowance account. An allowance of $354 (2016 – $393) was recognized in the consolidated statements of loss and comprehensive loss within “Selling, general and administrative” expenses for trade accounts receivable that were considered impaired as a result of delays in collection and credit issues. When a receivable balance is considered uncollectible, it is written off against the allowance for doubtful accounts and trade accounts receivable. Subsequent recoveries of amounts previously written off are credited against “Selling, general and administrative” expenses. The Canadian Imperial Bank of Commerce (“CIBC”) has provided exactEarth with a demand operating credit facility of $2,000. Canadian dollar loans will be available by way of overdrafts. Interest will be calculated at the CIBC prime rate per annum. US dollar loans will also be available by way of overdraft. US interest will be calculated at the US base rate per annum. This credit facility may be terminated by CIBC at any time. There are no financial covenants established as yet, the necessity for specific covenants will be assessed in the future as financing needs of exactEarth continue to change and evolve. As at October 31, 2017, $27 (2016 – $234) was drawn on the CIBC credit facility in the form of Letters of Guarantee required for certain customer contracts. Liquidity risk Liquidity risk is the Company’s ability to meet its financial obligations when they come due. The Company monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of its financial assets (e.g., trade accounts receivable and other financial assets), liabilities (e.g., accounts payable and accrued liabilities and loans), and projected cash flows from operations. The Company’s objective is to maintain a balance between continuity of funding and flexibility through borrowing facilities available through the Company’s bank, and purchase contracts. The Company’s policy is to ensure that adequate funding is available from operations, established lending facilities and other sources as required. The tables below summarize the maturity profile of the Company’s financial liabilities based on contractual payments. October 31, 2017 < 3 Months 3 to 12 Months Government loan payable $ Larus Technologies debt Accounts payable and accrued liabilities Restructuring provision Long-term incentive plan liability $ 123 87 369 58 2,249 1,473 164 - 224 166 1 to 5 Years $ 698 $ - 45 - 343 Total 1,190 145 3,767 388 509 Total $ 2,623 $ 2,290 $ 1,086 $ 5,999 exactEarth Annual Report 2017 45 October 31, 2016 < 3 Months Government loan payable $ Larus Technologies debt Accounts payable and accrued liabilities Restructuring provision Long-term incentive plan liability 123 87 4,962 433 - $ 3 to 12 Months 369 263 447 721 86 1 to 5 Years $ 1,149 $ 146 - 442 316 Total 1,641 496 5,409 1,596 402 Total $ 5,605 $ 1,886 $ 2,053 $ 9,544 10. CAPITAL MANAGEMENT The primary objectives of the Company’s capital management are: • • to ensure that the Company maintains strong credit ratings and exceeds its borrowing covenants in order to support its business and maximize shareholder value; and to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk undertaken. The Company monitors capital on a basis consistent with others in the industry, based on total debt to shareholders’ equity. Capital is defined as shareholders’ equity as presented in the consolidated statements of financial position, excluding “Accumulated other comprehensive income (loss)”, and total debt is defined as the sum of short-term and long-term debt. The Company uses the percentage of total debt to total capital to monitor the capitalization of the Company. The Company is not subject to any capital requirements imposed by a regulator. 11. SHARE CAPITAL Issued capital The Company has authorized an unlimited number of preferred shares of which none are outstanding. The Company has authorized an unlimited number of common shares with no par value. As at October 31, 2017, the issued and outstanding shares total 21,614,120 (2016 – 21,605,506). Details of share capital are as follows: Balance as at October 31, 2015 Add: Share issuances Less: Share repurchases Balance as at October 31,2016 Add: Share issuances Less: Share repurchases Balance as at October 31,2017 Stock-based compensation Number of Shares Value of Shares 11,111,111 10,494,395 - 21,605,506 8,614 - 21,614,120 $ $ $ 55,120 68,649 - 123,769 12 - 123,781 The Company recognizes compensation cost for all stock options granted to employees under the exactEarth stock option plan. The exercise price for all options is the Spinout Transaction share price of the Company’s common shares at the date of the grant. During the year ended October 31, 46 exactEarth Annual Report 2017 2017, exactEarth granted nil (2016 – 1,428,222) stock options to its employees. The maximum number of common shares authorized for grant under the option plan is 2,160,550. All options vest on a graded basis depending on the type of option. Type one options vest on a 40%, 30% and 30% basis over three years and have a contractual life of six years. Type two options vest on a 25% and 75% basis over two years and have a contractual life of six years. Type three options vest on a 40%, 30% and 30% basis in years three through five and have a contractual life of eight years. All stock options are accounted for as equity-settled awards. The fair value of options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: Average risk-free interest rate Dividend yield Average volatility Average expected life of options (years) Remaining contractual life Weighted average fair value of options outstanding Weighted average exercise price of options outstanding Type One Type Two Type Three 0.65% 0% 77.1% 4 4.3 1.08 6.50 $ $ 0.63% 0% 77.4% 3.75 4.3 1.06 6.50 $ $ 0.94% 0% 74.4% 6 6.3 1.32 6.50 $ $ Volatility was calculated using the historical volatility of comparable companies for the period commencing when those entities were publicly traded and corresponding to the expected life of each option type. The estimated fair value of the options is amortized to expense over the vesting periods of the options. For the year ended October 31, 2017, the stock-based compensation expense recognized was $362 (2016 – $371). This amount was added to contributed surplus. Vested options can be exercised prior to their expiry date. 123,047 options have vested as at October 31, 2017 (2016 – nil) with weighted average exercise price of $6.50. A summary of the option activity is as follows: Balance as at October 31, 2015 Granted Forfeited Balance as at October 31, 2016 Granted Forfeited Balance as at October 31, 2017 Stock Options - 1,428,222 (336,954) 1,091,268 - (843) 1,090,425 Options forfeited had a weighted average exercise price of $6.50. Employee Share Purchase Plan The ESPP expense amount for the year ended October 31, 2017 was $18 (2016 – $3). The estimated number of shares, if all outstanding ESPP shares were issued, is 432,110. exactEarth Annual Report 2017 47 Long-term incentive plan The following details the RSUs, PSUs and DSUs as at October 31, 2017: RSU PSU DSU Share unit balance, beginning of period 410,424 33,725 Share units granted Share units settled Share units forfeited Share unit balance, end of period - (55,183) (296) 354,945 89,355 154,861 - - - - - 33,725 244,216 Aggregate fair value of units granted as at the end of the period Fair value of share units outstanding as at the end of the period $ $ 376 1.06 $ $ 36 1.06 $ $ 284 1.06 The corresponding details as at October 31, 2016 were as follows: Share unit balance, beginning of period Share units granted Share units forfeited Share unit balance, end of period RSU - 479,964 (69,540) 410,424 PSU - 54,997 (21,272) 33,725 DSU - 89,355 - 89,355 Aggregate fair value of units granted as at the end of the period Fair value of share units outstanding as at the end of the period $ $ 607 1.48 $ $ 50 1.48 $ $ 132 1.48 For the year ended October 31, 2017, compensation expense of $245 (2016 – $402) was recognized for the Company’s LTIP. Loss per share The following table sets forth the computation of basic and diluted loss per share: Numerator for basic and diluted loss per share available to common shareholders: Net loss attributable to common shareholders Denominator for basic and diluted loss per share: Weighted average number of shares outstanding Basic and diluted loss per share There are 447,873 (2016 – 152,717) units that are antidilutive. 2017 2016 $ $ (33,834) $ (35,963) 21,614,120 18,881,551 (1.57) $ (1.90) 48 exactEarth Annual Report 2017 12. COMMITMENTS AND CONTINGENCIES Lease commitments The Company has incurred $182 (2016 – $178) in lease expenses during the year ended October 31, 2017. The Company has commitments under lease agreements as follows: Facilities Photocopier lease Computer lease Total Capital commitments Less than 1 Year 1 to 5 Years After 5 Years $ $ 69 2 24 95 $ $ 319 8 - 327 $ $ - - - - As at October 31, 2017, capital commitments in respect of the purchase of property, plant and equipment were $3,298 (2016 – $4,598). There were no other material capital commitments outstanding as at October 31, 2016. Harris commitment As at October 31, 2017, there were eight Sea Smart AC units for the Iridium Next Constellation commissioned and in service. The Company is committed to pay an operational fee of USD$50 per unit per year to a maximum of USD$750 per quarter. This payment will continue for 12.5 years following the date at which all Sea Smart AC units are in service. Harris Fees Less than 1 Year 1 to 5 Years After 5 Years Operational fees payable $ 516 $ 2,064 $ 3,870 In-kind contribution commitment The Company entered into an arrangement effective March 17, 2015, and has committed to provide in-kind datasets at a value of $3,666, not licensed for commercial use, in exchange for title to the EV9 satellite, subject to certain restrictions on the use, sale or transfer of the satellite within the six-year period ending March 31, 2021. During the year, datasets with a value of $618 were transferred to qualifying third parties and recognized as revenue. This commitment was satisfied as at January 31, 2017 as data assets with a total value at $3,666 were transferred to qualifying third parties under the terms of the arrangement, fulfilling final condition of the transfer agreement. As such, the value of the datasets that had been added to the carrying value of the EV9 data rights classified as an intangible asset was transferred to property, plant and equipment and reported as a satellite cost as at January 31, 2017. Royalty commitment The Company has entered into an agreement with Larus, which includes a commitment that takes effect after the conclusion of the 24-month term of the agreement, to pay a 30% royalty on the gross sales of products that are derived from the Larus Total::Insight™ technology. The technology is expected to be put in use in the second quarter of fiscal 2018 and royalty payments are expected to commence at that time. Claims or legal actions The Company does not have any outstanding claims or legal actions. exactEarth Annual Report 2017 49 13. INCOME TAXES The following are the major components of income tax expense (recovery) for the years ended October 31: Current income tax expense Deferred income tax expense: Origination and reversal of temporary differences Losses not recognized Deferred income tax expense Total income tax expense 2017 24 (8,768) 8,768 - 24 $ $ $ $ 2016 41 (8,648) 8,648 - 41 $ $ $ $ The Company’s consolidated effective tax rate for the year ended October 31, 2017 was 0% (2016– 0%). The difference in the effective tax rates compared to the Company’s statutory income tax rates were mainly caused by the following: Loss before income taxes Statutory tax rate Income taxes based on the statutory income tax rate Losses not recognized Permanent differences – other Permanent differences – non-deductible impairment Argentinian withholding taxes Income tax expense 2017 2016 $ (33,810) $ (35,922) 26.5% (8,960) 8,768 192 - 24 24 $ 26.5% (9,519) 8,648 294 577 41 41 $ The Canadian statutory tax rate during fiscal 2017 was 26.5% (2016 – 26.5%). The income tax expense of $24 (2016 – $41) represents a 15% withholding tax on revenue generated from Argentina. The Company has deemed the $24 to be unrecoverable and has recognized the amount as an expense. Components of deferred income taxes movement are as follows for the years ended October 31: Taxable temporary differences Property, plant and equipment and intangible assets Non-capital losses Total change in deferred income taxes 2017 26 - (26) - $ $ 2016 35 3,590 (3,625) - $ $ The deferred income tax asset (liability) recognized in the consolidated statements of financial position for the years ended October 31 is comprised of the following: Taxable temporary differences Non-capital losses Deferred income tax 2017 (28) 28 - $ $ 2016 (54) 54 - $ $ 50 exactEarth Annual Report 2017 For the purposes of the above table, deferred income tax assets are shown net of deferred income tax liabilities where these occur in the same entity and jurisdiction. Deductible temporary differences and unused tax losses for which no deferred income tax assets have been recognized are attributable to the following: Canadian deductible temporary differences Scientific research and experimental development (“SRED”) pool Property, plant and equipment and intangible assets Canadian non-capital tax losses Canadian capital tax losses UK non-capital losses 2017 1,093 2,710 33,089 53,403 617 2,121 $ $ $ $ $ $ 2016 2,024 2,881 12,351 41,142 617 1,931 $ $ $ $ $ $ These unused Canadian income tax losses expire from 2029 through 2037. The UK non-capital losses have an unlimited carry-forward period. The SRED pool does not expire. Unrecorded ITCs are as follows: Federal Ontario These unrecorded ITCs expire from 2029 through 2035. 2017 680 166 $ $ 2016 706 174 $ $ 14. EMPLOYEE BENEFITS Defined contribution pension plan The Company has a defined contribution pension plan for its employees. During the year ended October 31, 2017, the Company’s contributions, which are based on the contributions by employees, were $190 (2016 – $264) and are included in “Cost of revenue” and “Selling, general and administrative” expenses in the consolidated statements of loss and comprehensive loss. Long-term profit sharing plan The Company had a long-term profit sharing plan for certain of its employees, which ceased at the time of the Company’s spinout. During the year ended October 31, 2016, the amount recognized as a recovery based on the forecasted net income was $82. There was nil recovery in 2017. The long- term profit sharing plan expense previously recognized was reversed upon completion of the Spinout Transaction. Salaries and benefits Total salaries and employee benefits expense for the year ended October 31, 2017 were $6,387 (2016 – $8,699). 15. RELATED PARTIES Compensation of key management personnel and Board of Directors The following table includes compensation of the key management personnel and Board of Directors for the years ended October 31, 2017 and 2016, included in the consolidated statements of loss and exactEarth Annual Report 2017 51 comprehensive loss. Key management personnel include the Company’s Chief Executive Officer (CEO) and the executives who report directly to him. Short-term salaries and benefits $ Post-employment benefits Long-term incentive plans Stock options 2017 1,372 29 163 275 $ 2016 2,007 23 289 198 $ 1,839 $ 2,517 Short-term salaries and benefits include expenses for base salaries, bonuses and other short-term benefit expenses. Post-employment benefits represent the Company’s defined contribution pension plan. Related parties The following table details the transactions and balances between the Company and COM DEV (and its subsidiaries). COM DEV was a related party up until the Spinout Transaction on February 4, 2016. For the years ended October 31: Purchase of services Purchase of property, plant and equipment Rent Interest charged by COM DEV 2017 - - - - $ $ $ $ 2016 102 36 18 703 $ $ $ $ The following table details transactions and balances between the Company and Hisdesat, a shareholder that has significant influence through an equity investment. For the years ended October 31: Interest charged by Hisdesat Revenue from Hisdesat Directors’ expenses As at October 31: Trade accounts receivable 2017 - 492 87 2017 242 $ $ $ $ 2016 221 294 74 2016 - $ $ $ $ On June 1, 2015, exactEarth recorded a payable to Hisdesat for the purchase of property, plant and equipment related to the Company’s payload on the PAZ satellite. The accounts payable to Hisdesat was converted to share capital as of February 4, 2016. The accounts payable bore interest at 8%. For the year ended October 31, 2017, total interest charged with respect to this balance was nil (2016 – $100), which was capitalized through assets under construction. The agreement related to the PAZ satellite includes a commitment to pay a monthly operating fee of $20 to Hisdesat once the satellite is commissioned. 52 exactEarth Annual Report 2017 16. CONSTRUCTION CONTRACT REVENUE The following details the construction contracts in progress as at October 31: Percentage of completion revenue contracts Costs incurred Estimated profits Progress billings Total contracts in progress Disclosed as: Unbilled revenue Deferred revenue Total contracts in progress 2017 75 73 (300) (152) - (152) (152) $ $ $ $ 2016 1,249 1,328 (2,878) (301) 665 (966) (301) $ $ $ $ The unbilled revenue and deferred revenue from construction contracts are included in unbilled revenue and deferred revenue in the consolidated statements of financial position. The amount of contract revenue recognized in fiscal 2017 was $226 (2016 – $1,394). 17. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION The Company has one reportable business segment, which is engaged in the sale of space-based maritime tracking data and related products and services from satellites. Revenue by product type Revenue is divided into three categories based on the types of products sold. Subscription services are recognized over the life of the contract term, data products are sold on demand and recognized on delivery, and other products and services include various other revenue streams and are recognized based on the contract terms. For the years ended October 31: Subscription services Data products Other products and services 2017 $ 10,617 991 1,225 $ 12,833 Geographic information Revenue by geography is based on where the customer is located. For the years ended October 31: Canada United States Europe Other $ 2017 1,266 931 5,414 5,222 $ $ $ 2016 15,079 2,445 1,394 18,918 2016 8,619 1,050 6,161 3,088 $ 12,833 $ 18,918 exactEarth Annual Report 2017 53 Property, plant and equipment are attributed to the country in which they are located or, for space- based assets, the country in which they are owned. Intangible assets are attributed to the country where ownership of the asset resides. As at October 31: Property, plant and equipment Canada United Kingdom Intangible assets Canada United Kingdom 2017 12,502 74 12,576 5,405 - 5,405 $ $ $ $ 2016 31,218 205 31,423 18,855 - 18,855 $ $ $ $ For the year ended October 31, 2017, one customer had revenue in excess of 10% of the Company’s total revenue (2016 - three customers). The details are as follows: 2017 2016 Revenue $ 1,605 - - % of Total Revenue 13% $ - - Revenue 5,379 3,048 2,444 $ 1,605 13% $ 10,871 % of Total Revenue 28% 16% 13% 57% Customer 1 Customer 2 Customer 3 18. SPINOUT TRANSACTION COM DEV completed a Spinout Transaction of the Company’s shares on February 4, 2016. At the date of the Spinout Transaction, COM DEV, Hisdesat and Company executives subscribed for an additional 3,144,615 common shares, in exchange for $20,440 in cash. The COM DEV and Hisdesat debt outstanding as of the date of the Spinout Transaction of $48,209 was converted into 7,349,780 common shares. COM DEV’s investment in the Company was spun out to its existing shareholders. When the Spinout Transaction was completed, the Company became a reporting issuer in all of the Provinces of Canada and became subject to the continuous disclosure reporting requirements under the securities laws of each province. 19. RESTRUCTURING PROVISION The Company underwent a restructuring in October 2016, and a restructuring provision was set up to provide for the salary continuance and RSU/PSU amounts due to the affected employees. As of October 31, 2017, there was $388 of restructuring provision remaining. The entire amount is recorded in current liabilities since the last payment is due in May 2018. The liability also includes RSUs that will be earned during their continuance period for certain terminated employees. Two of the employees that were terminated in October 2016 have since found other suitable employment thereby enabling the Company to reduce the provision that needs to be carried forward. This adjustment of $74 was recorded in the third quarter. 54 exactEarth Annual Report 2017 The details of the restructuring provision are as follows: As at October 31, 2016 Market revaluation of RSUs during 2017 Reduction related to terminated employees Salary continuance As at October 31, 2017 Represented by: Current Long-term $ 1,596 (25) (74) (1,109) 388 388 - 388 $ $ $ As part of the restructuring, the stock options granted to certain former employees will vest during the continuance period and the full expense of nil (2016 – $79) has been recognized and recorded in contributed surplus as at October 31, 2017. 20. OTHER INCOME On February 3, 2017, the Company lost contact with one of its satellites, EV5. When subsequent recovery efforts were not successful, the Company filed an insurance claim for the full insured value of the satellite amounting to $3,500. The settlement was received in April 2017. The remaining net book value of $2,045 was written off at the same time resulting in a net gain of $1,455. Details are as follows: Proceeds from insurance claim for EV5 Total cost of EV5 satellite Depreciation and impairment charged to EV5 Other income as reported $ $ 3,500 4,633 (2,588) 1,455 21. COMPARATIVE BALANCES The comparative financial statements may have been reclassified from the statements previously presented in order to conform to the current period’s presentation. exactEarth Annual Report 2017 55 Corporate Information Board of Directors Senior Management Eric Zahler (3) Chairman of the Board Peter Mabson President & Chief Executive Officer Pui-Ling Chan (1, 2) Chairman of the Human Resources and Compensation Committee Sean Maybee Chief Financial Officer David Martin Vice President, Global Sales & Marketing Miguel Angel Garcia Primo (2) Maria Izurieta (1, 2) Chairman of the Audit Committee The Honorable Dennis Kloske (1, 3) Chairman of the Corporate Governance and Nominating Committee Peter Mabson President & Chief Executive Officer of exactEarth Miguel Angel Panduro Panadero (3) William (Mac) Evans Member of: (1) Audit Committee, (2) Human Resources and Compensation Committee, (3) Corporate Governance and Nominating Committee Head Office 260 Holiday Inn Drive Cambridge, Ontario Canada N3C 4E8 Tel: 519-622-4445 www.exactearth.com Investor Relations Dave Mason Tel: 416-247-9652 investors@exactearth.com Ticker Symbol: TSX: XCT 56 exactEarth Annual Report 2017 This page is intentionally left blank. exactEarth Annual Report 2017 57 Annual Report 2017 

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