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2017 Highlights
FINANCIAL HIGHLIGHTS – CONTINUING OPERATIONS
Revenues increased 2.1% to $ 361.4 million
Adjusted EBITDA grew to $ 40.6 million,
which is 11.2% of revenue
Total debt reduced by $14.3 million
Shareholder equity increased by $ 7.5 million
OPERATIONAL HIGHLIGHTS
Canadian business was positive with strong growth,
including a high demand for mixed-use, high-rise
housing, especially in key urban markets.
Infrastructure investment projects remained a
significant contributor to the business, including Eglinton
Crosstown Light Rail Transit (ECLRT), vivaNEXT, and
Edmonton Valley Line LRT.
Demonstrated continued leadership in Smart Cities,
with significant project wins in India and participation
in the North American Smart Cities Council.
Secured two major Bus Rapid Transit (BRT) projects
in Los Angeles market as part of Metro Measure M, one
of the largest infrastructure funding programs in the US.
Increased US and Canadian market share of our
511 traveller information product suite with multiple
new project wins. Our technology currently reaches
one in four Americans.
Provided and installed 235 toll lanes for tolled highways
in India, Greece, and Mexico in support of financing
highway infrastructure. Additionally, our back office
account management solution continues to be
a key part of our toll system deployments.
International operations finished the year well over target,
with a strong backlog of committed work for 2018.
Growth was achieved in India and the Gulf Region,
particularly in the areas of Smart Cities, regional
planning policy, and master planning.
2017 Contents
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60+ GLOBAL OFFICES
2,500 DIFFERENCE-MAKERS
AND COUNTING
2017 REVENUE BY REGION
56 % C ANADA
30 % U NITED STATES
8 % U NITED KINGDOM / IREL AND
6 % I NTERNATIONAL
We are a globally integrated design and technology firm.
We design every aspect of a truly integrated city
for people to live, work, and play.
OUR MISSION
Defining the Cities of Tomorrow
We define how cities look, how cities feel, and how cities work.
OUR VISION
We are the global partner to plan, design, build, and sustain the cities of tomorrow.
We are holistically minded, design inspired, and technology-driven.
OUR VALUES
Integrity We do what is right.
Partnerships We work together.
Excellence We pursue design excellence.
Innovation We embrace ingenuity.
Community We build community.
2
FOUNDED 1974
PUBLICLY TRADED SINCE 2004
CORPORATE HEAD OFFICE TORONTO, CANADA
THREE SECTORS OF EXPERTISE INTELLIGENCE, BUILDINGS, INFRASTRUCTURE
2017 REVENUES FROM CONTINUING OPERATIONS $ 361.4 MILLION
2017 PROJECT HIGHLIGHTS
1
2
3
HYDERABAD ITMS
HYDERABAD, INDIA
IBI Group developed and deployed
an Intelligent Traffic Management
System (ITMS) for the City of
Hyderabad – a first-of-its-kind at
this scale for the country – which
forms the foundation for our Smart
City Platform. The system offers
an inter-connected network of
software and field devices to create
an ecosystem for managing and
responding to traffic; ultimately
achieving a safe and efficient city
experience for residents.
TORONTO-YORK SPADINA
SUBWAY EXTENSION:
PIONEER VILL AGE &
FINCH WEST STATIONS
TORONTO, CANADA
As part of the Toronto Transit
Commission’s six-station
Toronto-York Spadina Subway
Extension, Finch West and
Pioneer Village Stations
form a crucial gateway to
York University and the City
of Vaughan. The extension is
the first new subway project
in Toronto in almost a decade.
FLORIDA 511
FLORIDA, USA
IBI designed and deployed
a traveller information system
for the State of Florida, providing
real-time traffic information
on interstate highways, toll roads,
and major metropolitan roadways.
System updates are available
to Florida travellers via phone,
web, mobile app, or by following
FL511 on Twitter. System usage
hit an all-time record, with two
million web sessions over a ten-
day period during Category Four
Hurricane Irma.
4
5
6
88 SCOTT STREET
TORONTO, CANADA
Just east of Toronto’s
downtown Yonge Street
artery, 88 Scott reimagines
an original 1951 limestone-
clad building with a beautifully
modernized glass façade.
Rising from an elegantly
repurposed five-storey
podium base, a 53-storey
tower spirals upwards into
the Toronto skyline, with over
525 condo units and 600,000
square feet of residential,
office, and retail environment.
BRIDGEL AND
EDUCATIONAL VILL AGE
CYPRESS, T X, USA
IBI designed this 128-acre campus
for pre-K-12 learning, which serves
almost 6,000 students and fosters
collaboration across grade levels.
It is a comprehensive curriculum
school that incorporates Science,
Technology, Engineering, and
Math (STEM) programming.
Its four-storey academic tower,
with the central library as its
anchor architectural feature,
symbolizes the intent of
developing lifelong learners.
SENSOR CIT Y
LIVERPOOL, UK
A collaboration between
the University of Liverpool
and Liverpool John Moores
University, Sensor City is
a highly adaptable research
environment and incubator
space for start-ups and
Small and Medium-Sized
Enterprises (SMEs) developing
digital sensor technologies
and applications. IBI’s design
expresses the same degree
of ingenuity and collaboration
that now occurs inside the facility.
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“Central to IBI’s new
Strategic Plan is a
pivot to a technology-
driven design firm…”
MESSAGE FROM THE CEO,
SCOTT STEWART
In 2017, IBI Group developed a new global Strategic Plan
that sets out a path to grow our traditional business and
leverage our leadership in technology to create new
markets, products, and services.
We reviewed our core markets related to infrastructure,
buildings, and intelligence, concluding that these markets
remain strong, being underpinned by:
• Global infrastructure deficit;
• Urbanization that continues in all major markets;
• Significant population growth in Canada and internationally;
• Availability of low-cost financing for capital investments; and
• Our Intelligence practice, which is unique to Architecture / Engineering (A / E) firms.
An outcome of the Plan is a need to strengthen core practice
areas, and to this end we have made strategic hires to add
depth and breadth to our leadership in key market areas.
A fundamental consideration of the Plan is the rapid and
pervasive impact of technology, which is affecting our clients
and their priorities. These advancements are creating new
opportunities, and IBI is uniquely qualified to be a leader in
this transition. Central to IBI’s new Strategic Plan is a pivot to
a technology-driven design firm, which consists of four elements:
1. Applying technology and improved processes to everything that IBI does
internally and for our clients, from the design tools we use, to our collaboration
platforms. This will make us more productive, efficient, and enhance the
creative quality of our work.
2. Repurposing our existing software to leverage Software as a Service (SaaS)
models, with the associated benefits of expanding our markets, shortening the
delivery cycle, improving margins, and enhancing our services to existing clients.
3. Assessing and adopting emerging technologies that affect both our clients’
needs and how we deliver our services. These technologies will be pervasive
and disruptive, ranging from 5G to blockchain, Artificial Intelligence (AI), and
quantum computing. Through early engagement with these technologies we
see opportunities to adapt and provide new services.
4. Engaging in the technology ecosystem in our major markets so we are part
of the creative process for new technology, ideas, and solutions. IBI brings
important qualities to this ecosystem: domain knowledge, channels to market,
and proven software platforms; important considerations for start-ups and
established technology partners.
IBI is recognized for its design excellence, the quality of its
people, and strong relationships with its clients. Our move
to become a technology-driven design firm will create a
more resilient firm with a solid basis for growth and financial
performance, creating value for all IBI stakeholders,
including staff, clients, and investors.
SCOTT STEWART
CEO
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MESSAGE FROM THE PRESIDENT,
DAVID THOM
2017 was a good year for IBI Group. We met or exceeded
the goals we set and continued growing our core business.
Over the course of the year we introduced new leadership
to our Infrastructure and Buildings sectors in the USA. This
new team led a restructuring that streamlined operations and
improved cross-sector collaboration, positioning us for growth.
The years to come will see the rollout of IBI’s new Strategic
Plan, a pivot towards a technology-driven design firm. While
the most visible part of the pivot will come from initiatives
that develop new products and services, our core business
will be critical to enable this top-line growth. Our A / E
consultancy business, which makes up about 85% of
our revenue, provides the financial resources required for
investment in the development of new solutions, and is
a key route to market for many of these solutions.
Our core business is bolstered by the application of technology
– in the way we work and the value-add we produce for our
clients. This pivot-to-tech within our core business has already
started with a series of initiatives and outcomes, including:
• The comprehensive rollout of building information software,
setting us up for the provision of downstream services for
our clients such as Asset Management as a Service (AMaaS);
• The application of bots to detect construction conflicts
in Building Information Modelling (BIM) models, automating
a time-consuming process;
• The launch of a research program targeted to global staff,
enabling innovation that pushes the boundaries of all
aspects of our business; and
• The continued commitment to immersive technologies –
virtual and augmented – supported by an expert
technology team.
For all its benefits, technology is not an end in itself. It is an
enabler for a culture of innovation and design excellence that
permeates everything we do and produce at IBI – the best
prospect for a strong core business upon which substantial
top-line growth can happen.
2018 will be an important year for IBI and I look forward to
the journey that the imagination, creativity, and remarkable
capabilities of our exceptional staff, and opportunities
posed by our clients, will take us on.
DAVID THOM
PRESIDENT
6
MESSAGE FROM THE CHAIR
OF THE BOARD, DALE RICHMOND
IBI Group’s core business in urban markets is not
only stable, but it has significant growth prospects
due to the ongoing global trends of urbanization
and the commensurate demand for infrastructure.
These favourable market conditions resulted in
strong performance in Canada, the Middle East,
India, and Latin America.
Technology continues to drive disruptive change
in many key sectors. This disruption is positive,
however, as IBI continues to enhance our
systems and intelligence expertise to develop
new products and services in a technology-
driven business environment.
We continued to optimize our operational efficiency
in 2017 through the extension of our global Enterprise
Resource Planning (ERP) system to every office in
the firm. A special quality management task force
developed Quality Assurance / Quality Control
(QA / QC) processes and controls, as we deepened
IBI’s commitment to quality outcomes for clients.
IBI appointed two new Board Members in
2017, both with experience in the technology
and innovation sectors. The Board, in combination
with management, will continue to steward the firm
through stable growth in its core business and by
leveraging emerging technologies to respond to
changing customer needs. This strategy will grow
the company and enhance shareholder value.
DALE RICHMOND
CHAIR OF THE BOARD
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“For all its benefits,
technology is not an end
in itself. It is an enabler
for a culture of innovation
and design excellence that
permeates everything we
do and produce at IBI…”
Growth
Financials
Operations
Grow our core business
and increase revenue
Provide a stable,
sustainable financial base
Maximize efficiency
and effectiveness
A FOCUSED APPROACH
EFFICIENT AND SUSTAINABLE
GLOBAL FIRM,
Focus on major revenue
generators, pursue areas that
have potential for substantial
growth, and concentrate on
higher margin services.
Continue to improve our
financial operations and work
on a sustainable and productive
long-term relationship with
capital markets.
PROFESSIONALLY MANAGED
Consolidate / regionalize services,
implement effective internal
processes and systems, and
improve operational efficiency.
Goals
Strategies
Metrics and
Performance
Increase our top-line revenue
consistent with industry norms
Achieve an EBITDA consistent
with industry norms, which are
typically 8 –12 %
$ 361.4 M
)
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Increase fee revenue share
on projects by leveraging
internal expertise, and increase
collaboration between offices
2015
• Created practice leader
roundtable discussions
• Established task force
to enhance cross-border
idea-sharing
• Adopted universal
design technology
• Launched global, cross-
sectoral design competition
2016
• Commissioned task forces
on quality management
and sustainability, ensuring
common, firm-wide
standards and approaches
• Adopted a company-wide
ERP system
2017
• Hired new senior leaders
for our US practice
• Rolled out quality management
program with global office
champions, supporting
ongoing risk management
• Deployed collaborative,
cloud-based systems
to connect our experts
• Adopted advanced
visualization, virtual reality,
and model-building tools
Talent
Agility
Nurture and develop
our internal pool of talent
Increase flexibility,
adaptability, and resilience
THOUGHT LEADERSHIP
Encourage a culture of curiosity
and innovation, engage, support
and mentor staff, and hire
the best and brightest.
A NET WORKED AND
DIVERSIFIED COMPANY
Diversify our regional services,
strengthen our cross-sector
initiatives, share resources and
information, and collaborate
across geographies.
Goals
Strategies
Metrics and
Performance
Diversify our business
to encompass operations
and maintenance as well
as design consulting
2016
• Developed solutions to
manage assets within facilities
across multiple sectors
• Operated 511 traveller
information system, reaching
one in four Americans
2017
Repurposed existing software
assets to provide cloud-based,
SaaS model to clients in areas
like asset management and
transportation operations
Increase our Intelligence revenue
share in the Buildings and
Infrastructure sectors
2015
• Increased Intelligence revenue
• Continued work on new
business models
2016
Adopted advanced
visualization tools
2017
Developed and piloted BIMbot
technology which automates
project workflows
Reduce voluntary turnover
2015
Voluntary turnover of 11.2 %
2016
Voluntary turnover of 11.1 %
2017
Voluntary turnover of 11.5 %
Increase staff development
opportunities
2016
• Executed firm-wide project
management and finance
101 training
• 2,300+ course certificates
issued by the ‘IBIU’ internal
training program
2017
Implemented global employee referral
program to support recruitment
Develop greater diversity
among staff
2015
Fostered emerging talent
through scholarship and
leadership programs
2016
Launched company wellness
program and women’s
leadership network
2017
• Launched Leadership
Engagement and Development
(LEAD) program to support
succession planning strategy
• Launched global
mentorship program
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CONSOLIDATED FINANCIAL STATEMENTS OF IBI GROUP INC. YEARS ENDED DECEMBER 31, 2017 AND 2016 T
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See accompanying notes to the consolidated financial statements. 2 IBI GROUP INC. CONSOLIDATED STATEMENT OF FINANCIAL POSITION DECEMBER 31, DECEMBER 31, (thousands of Canadian dollars) NOTES 2017 2016 ASSETS Current Assets Cash 6 $ 9,833 $ 8,008 Accounts receivable 6,12 111,219 108,593 Work in process 5 79,040 87,052 Prepaid expenses and other current assets 16,446 12,842 Income taxes recoverable 9 2,324 507 Total Current Assets $ 218,862 $ 217,002 Restricted cash 6,12 2,936 4,522 Other assets 360 421 Property and equipment 7 15,352 15,772 Intangible assets 8 7,639 7,672 Deferred tax assets 9 11,167 16,421 TOTAL ASSETS $ 256,316 $ 261,810 LIABILITIES AND DEFICIT LIABILITIES Current Liabilities Accounts payable and accrued liabilities 6,12 48,782 55,505 Deferred revenue 5 43,186 50,522 Income taxes payable 9 1,486 1,860 Finance lease obligation 6,12 36 37 Onerous lease provisions 4,197 1,018 Total Current Liabilities $ 97,687 $ 108,942 Onerous lease provisions 1,082 2,270 Finance lease obligation 6,12 31 67 Credit facilities 6 63,842 73,184 Convertible debentures 6 47,157 43,876 Other financial liabilities 6 13,011 9,089 Deferred tax liabilities 9 4,525 4,176 TOTAL LIABILITIES $ 227,335 $ 241,604 EQUITY Shareholders’ Equity Share capital 11 279,679 279,667 Capital reserve 11 1,362 453 Contributed surplus 11 7,397 7,397 Deficit (259,886) (269,351) Convertible debentures – equity component 6 561 561 Accumulated other comprehensive loss (7,232) (4,304) Total Shareholders’ Equity $ 21,881 $ 14,423 Non-controlling interest 11 7,100 5,783 TOTAL EQUITY $ 28,981 $ 20,206 TOTAL LIABILITIES AND EQUITY $ 256,316 $ 261,810
A-3
See accompanying notes to the consolidated financial statements. 3 IBI GROUP INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 2017 (thousands of Canadian dollars, except per share amounts) NOTES 2017 2016 Revenue $ 361,408 $ 354,140 Expenses Salaries, fees and employee benefits 10,18 255,915 248,869 Rent 14 25,702 22,740 Other operating expenses 39,688 41,781 Foreign exchange (gain) loss 12(a) (989) 7,363 Amortization of intangible assets 8 1,231 1,002 Depreciation of property and equipment 7 3,229 4,323 Loss (gain) in fair value of other financial liabilities 6(b) 3,922 (1,819) Impairment of financial assets 12 1,680 1,653 330,378 325,912 OPERATING INCOME $ 31,030 $ 28,228 Interest expense, net 12,15 10,326 25,553 Other finance costs 15 1,466 1,642 FINANCE COSTS $ 11,792 $ 27,195 Share of loss of equity accounted investee, net of tax 19 348 32 NET INCOME BEFORE TAX $ 18,890 $ 1,001 Current tax expense 9 1,963 2,908 Deferred tax expense (recovery) 9 5,555 (5,401) INCOME TAXES $ 7,518 $ (2,493) NET INCOME $ 11,372 $ 3,494 OTHER COMPREHENSIVE INCOME (LOSS) Items that are or may be reclassified to profit or loss Loss on translating financial statements of foreign operations (3,518) (105) OTHER COMPREHENSIVE LOSS (3,518) (105) TOTAL COMPREHENSIVE INCOME $ 7,854 $ 3,389 NET INCOME ATTRIBUTABLE TO: Common shareholders 9,465 2,814 Non-controlling interests 11 1,907 680 NET INCOME $ 11,372 $ 3,494 TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO: Common shareholders $ 6,537 $ 2,730 Non-controlling interests 11 1,317 659 TOTAL COMPREHENSIVE INCOME $ 7,854 $ 3,389 EARNINGS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS Basic and diluted earnings per share 11 $ 0.30 $ 0.11 T
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See accompanying notes to the consolidated financial statements. 4 IBI GROUP INC. CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2017 (thousands of Canadian dollars) NOTES 2017 2016 CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Net income $ 11,372 $ 3,494 Items not affecting cash: Onerous lease provision 14 1,991 (951) Depreciation of property and equipment 7 3,229 4,323 Amortization of intangible assets 8 1,231 1,002 Amortization of deferred financing costs 15 775 1,041 Impairment of financial assets 12 1,680 1,653 Share of loss of equity-accounted investee, net of tax 19 348 32 Foreign exchange (gain) loss 12 (989) 7,363 Interest expense, net 15 10,326 25,553 Deferred tax expense (recovery) 9 5,555 (5,401) Stock option expense 18 913 453 Loss on disposal of property and equipment 7 936 1,197 Loss (gain) in fair value of other financial liabilities 6(b) 3,922 (1,819) Interest paid (7,062) (8,608) Income taxes paid (3,941) (1,449) Change in non-cash operating working capital 13 (15,147) 4,164 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 15,139 $ 32,047 CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Payments on principal of notes payable - (4,076) Payments on principal of credit facilities 6 (8,210) (1,263) Payments on principal of consent fee - (3,545) Issuance of convertible debentures 6 - 46,000 Costs from issuance of convertible debentures 6 - (2,594) Redemption of convertible debentures 6 - (57,500) Deferred financing costs 6 (1,031) - Payments on principal of finance lease obligation (37) (148) Proceeds from shares issued 11 8 - NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ (9,270) $ (23,126) CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Purchase of property and equipment 7 (3,941) (6,726) Purchase of intangible assets 8 (1,326) (2,070) Increase investment in equity-accounted investee 19 (348) - Restricted cash 6 1,381 629 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ (4,234) $ (8,167) Effect of foreign exchange rate fluctuations on cash held 12 190 (714) NET INCREASE IN CASH $ 1,825 $ 40 Cash, beginning of period 8,008 7,968 CASH, END OF PERIOD $ 9,833 $ 8,008
A-5
See accompanying notes to the consolidated financial statements. 5 IBI GROUP INC. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY YEAR ENDED DECEMBER 31, 2017 (thousands of Canadian dollars) NOTES 2017 2016 SHARE CAPITAL Share capital, beginning of period $ 279,667 $ 248,422 Shares issued 11 12 31,245 SHARE CAPITAL, END OF PERIOD $ 279,679 $ 279,667 CAPITAL RESERVE Capital reserve, beginning of period $ 453 $ - Stock options granted 18 810 $ 453 Stock options exercised 18 (4) - Performance share units granted 18 103 - CAPITAL RESERVE, END OF PERIOD $ 1,362 $ 453 CONTRIBUTED SURPLUS Contributed surplus, beginning of period $ 7,397 3,002 Redemption of 6% debentures - 3,206 Conversion of 7% debentures - 1,189 CONTRIBUTED SURPLUS, END OF PERIOD $ 7,397 $ 7,397 DEFICIT Deficit, beginning of period $ (269,351) (272,165) Net income attributable to common shareholders 9,465 2,814 DEFICIT, END OF PERIOD $ (259,886) $ (269,351) CONVERTIBLE DEBENTURES – EQUITY COMPONENT Convertible debentures, beginning of period 6(b) 561 4,956 Redemption of 6% debentures 6(b) - (3,206) Conversion of 7% debentures 6(b) - (1,189) CONVERTIBLE DEBENTURES, END OF PERIOD $ 561 $ 561 ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive loss, beginning of period $ (4,304) (4,220) Other comprehensive loss attributable to common shareholders (2,928) (84) ACCUMULATED OTHER COMPREHENSIVE LOSS, END OF PERIOD $ (7,232) $ (4,304) TOTAL SHAREHOLDERS' EQUITY $ 21,881 $ 14,423 NON-CONTROLLING INTEREST Non-controlling interest, beginning of period $ 5,783 5,124 Total comprehensive income attributable to non-controlling interests 11 1,317 659 NON-CONTROLLING INTEREST, END OF PERIOD $ 7,100 $ 5,783 TOTAL EQUITY, END OF PERIOD $ 28,981 $ 20,206 T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6 NOTE 1: ORGANIZATION AND DESCRIPTION OF THE BUSINESS IBI Group Inc. (the “Company”) is a company incorporated pursuant to the provisions of the Canada Business Corporations Act (the “CBCA”) on September 30, 2010 and is the successor to IBI Income Fund (the “Fund”), an unincorporated, open-ended limited purpose trust established under the laws of Ontario. The Fund was created on July 23, 2004, to indirectly acquire the outstanding Class A partnership units of IBI Group Partnership (“IBI Group”), a general partnership formed and carrying on business under the laws of the Province of Ontario. As at December 31, 2017, the Company’s common share capital consisted of 31,190,153 (2016 – 31,186,819) issued and outstanding shares. Each share entitles the holder to one vote at all meetings of shareholders. IBI Group also issued Class B partnership units to IBI Group Management Partnership (the “Management Partnership”), the entity that carried on the operations of the Fund prior to its acquisition by the Fund. The Class B partnership units of IBI Group are indirectly exchangeable for shares on the basis of one share of the Company for each Class B subordinated partnership unit. Class B partnership units do not entitle the holder to voting rights at the meetings of shareholders of the Company. If all of the outstanding Class B partnership units were converted to common shares, the common share capital as at December 31, 2017 would be 37,472,375 (December 31, 2016 – 37,469,041). If the Class B partnership units were converted, the Management Partnership and affiliated partnerships would hold 35.2% of the voting shares as at December 31, 2017 (December 31, 2016 – 37.5%). The table below summarizes the ownership of the Company by the Management Partnership and affiliated partnerships as at December 31, 2017: NUMBER OF UNITS HELD PERCENTAGE OF TOTAL OWNERSHIP Class B partnership units and non-participating voting shares held by the Management Partnership 6,282,222 16.77% Common shares held by the Management Partnership and affiliated partnerships 6,910,276 18.44% The table below summarizes the ownership of the Company by the Management Partnership and affiliated partnerships as at December 31, 2016: NUMBER OF UNITS HELD PERCENTAGE OF TOTAL OWNERSHIP Class B partnership units and non-participating voting shares held by the Management Partnership 6,282,222 16.77% Common shares held by the Management Partnership and affiliated partnerships 7,763,329 20.72%
A-7
IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7 Through IBI Group, the Company is an international, multi-disciplinary provider of a broad range of professional services focused on the physical development of cities. IBI Group's business is concentrated in three main areas of development, being intelligence, buildings and infrastructure. The professional services provided by IBI Group include planning, design, implementation, analysis of operations and other consulting services related to these three main areas of development. The table below summarizes the trading symbols of the Company’s securities which are listed on the Toronto Stock Exchange as at December 31, 2017: SECURITY TRADING SYMBOL Common shares “IBG” 7.0% convertible debentures (Option A), $14,755 principal, convertible at “IBG.DB.C” $19.17 per share, matures on June 30, 2019 ("7.0% Debentures") 5.5% convertible debentures, $46,000 principal, convertible at $8.35 "IBG.DB.D" per share, matures on December 31, 2021 ("5.5% Debentures") The Company’s registered head office is 55 St. Clair Ave. West, 7th Floor, Toronto, Ontario, M4V 2Y7. NOTE 2: BASIS OF PREPARATION (a) STATEMENT OF COMPLIANCE These consolidated financial statements of the Company and its subsidiaries (the “consolidated group”) have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”). The consolidated financial statements were authorized for issuance by the Company’s Board of Directors on March 8, 2018. (b) BASIS OF MEASUREMENT These consolidated financial statements were prepared on a going concern basis. Amounts are recorded under the historical cost convention, except for certain financial liabilities measured at fair value through profit or loss (“FVTPL”), as described in Note 3(i). (c) BASIS OF CONSOLIDATION SUBSIDIARIES Subsidiaries are entities over which the Company has control. An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date that effective control commences and are de-consolidated from the date control ceases. JOINT ARRANGEMENTS The Company performs the majority of its construction projects through wholly owned subsidiary entities, which are fully consolidated. However, a number of projects, particularly some larger, multi-year, multi-disciplined projects, are executed through partnering agreements. As such, the classification of these entities as a subsidiary, joint operation, joint venture or associate requires judgment by management to T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8 analyze the various indicators that determine whether control exists. In particular, when assessing whether a joint arrangement should be classified as either a joint operation or a joint venture, management considers the contractual rights and obligations, voting shares, share of board members and the legal structure of the joint arrangement. Subject to reviewing and assessing all the facts and circumstances of each joint arrangement, joint arrangements contracted through agreements and general partnerships would generally be classified as joint operations whereas joint arrangements contracted through corporations would be classified as joint ventures. All current partnering arrangements are classified as joint operations. The Company recognizes its assets, liabilities and transactions in relation to its proportionate share of joint operations in the consolidated financial statements. TRANSACTIONS ELIMINATED ON CONSOLIDATION Transactions, balances, income and expenses incurred within the consolidated group are eliminated in full on consolidation. NON-CONTROLLING INTEREST Non-controlling interest in IBI Group is exchangeable into common shares of the Company. Changes in the equity of IBI Group and distributions to the non-controlling interest are recorded in non-controlling interest. (d) FUNCTIONAL AND PRESENTATION CURRENCY These consolidated financial statements are presented in Canadian dollars, which is the currency of the primary economic environment in which the Company and its Canadian subsidiaries, including IBI Group, operate (the “functional currency”). Each of the Company’s subsidiaries determines its functional currency, and items included in the financial statements of each subsidiary are measured using that functional currency. The Company’s foreign operations are translated into its reporting currency (Canadian dollar) as follows: assets and liabilities are translated at the rate of exchange in effect at the date of the consolidated statement of financial position, and items of revenues and expenses are translated at the average rate of exchange for the period. The resulting unrealized exchange gains and losses on foreign subsidiaries are recognized in accumulated other comprehensive loss (“AOCL”). Transactions in foreign currencies are translated to the functional currency of the respective entity at exchange rate in effect on the date of the transaction. Foreign exchange gains and losses on such transactions, as well as from the translation of monetary assets and liabilities not denominated in the functional currency of the respective entity, are recorded in earnings. On disposal, or partial disposal, of a foreign entity, or repatriation of the net investment in a foreign entity, resulting in a loss of control, significant influence or joint control, the cumulative translation recognized in AOCL relating to that particular foreign entity is recognized in earnings as part of the gain or loss on sale. On a partial disposition of a subsidiary that does not result in a loss of control, the amounts are reallocated to the non-controlling interest in the foreign operation based on their proportionate share of the cumulative amounts recognized in AOCL. On partial disposition of jointly controlled foreign entities or associates, the proportionate share of translation differences previously recognized in AOCL are reclassified to earnings. References to “$” in these consolidated financial statements denote Canadian dollars and references to “U.S$” are to U.S dollars. All amounts presented in Canadian dollars have been rounded to the nearest thousand.
A-9
IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 9 (e) USE OF ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of these consolidated financial statements requires management to exercise judgment and make estimates and assumptions that affect the application of accounting policies on reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the consolidated statement of financial position, and the reported amounts of revenue and expenses for the period covered by the consolidated statement of comprehensive income. Actual amounts may differ from these estimates. Within the context of these consolidated financial statements, a judgment is a decision made by management in respect of the application of an accounting policy, a recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant information that may include estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of balances recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that may include management’s historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable under the circumstances. Management continually evaluates the estimates and judgments it uses. Information about judgments made in applying accounting policies that have the most significant impact on the amounts recognized in the consolidated financial statements are as follows: RECOVERABILITY OF ACCOUNTS RECEIVABLE The Company records accounts receivable net of impairment losses determined based on the age of the outstanding receivables, factors specific to individual clients and its historical collection and loss experience. Information about assumptions and estimation uncertainties that have a significant impact on the amounts recognized in the consolidated financial statements for the year ended December 31, 2017 are as follows: REVENUE RECOGNITION The Company also enters into contracts that require multiple deliverables, which can include software and hardware elements. Management applies judgment when assessing whether certain deliverables in a customer arrangement should be included or excluded from a unit of account to which contract accounting is applied. The judgment is typically related to the sale and inclusion of third party hardware and licenses in a customer arrangement, and involves an assessment that principally addresses whether the deliverable has stand-alone value to the customer that is not dependent upon other components of the arrangement. The Company accounts for certain of its revenue in accordance with IAS 11 Construction Contracts, (“IAS 11”) which requires estimates to be made for contract costs and revenues and IAS 18 Revenue (“IAS 18”). Revenue from fixed-fee and variable-fee-with-ceiling contracts is recognized using the percentage of completion method based on the ratio of professional costs incurred to total estimated professional costs. Estimating total professional costs is subjective and requires the use of management’s best estimate based on the information available at that point in time. The Company also provides for estimated losses on contracts in-progress in the period in which such losses are determined. Changes in the estimates are reflected in the period in which they are made and would affect the Company’s revenue and work in process. T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10 ACCURACY OF WORK IN PROCESS AND DEFERRED REVENUE The Company records its work in process based on the time and materials charged into each project. Deferred revenue is recorded when billings to the clients exceeds the revenue that has been earned based on effort completed at the date of the consolidated statement of financial position. The work in process for each project is reviewed on a monthly basis to determine whether the amounts recorded are recoverable. Where the review determines that the value of work in process exceeds the amount that can be invoiced, review of project budgets is performed to determine whether an adjustment is required to the percentage of completion to accurately reflect revenue earned to date. The percentage complete is determined by estimating the professional costs to be incurred to complete the project. ONEROUS LEASE PROVISIONS The Company recognizes provisions when there is a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Management has recorded a provision related to lease exit liabilities which requires estimation of the expected sublease income and discount rate reflective of the risk specific to the obligation. DETERMINING PROBABLE FUTURE UTILIZATION OF TAX LOSS CARRYFORWARDS Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based on the likely timing and the level of future taxable profits, together with future tax-planning strategies. REVALUATION OF DERIVATIVE LIABILITY The Company has recognized a convertible debenture as a hybrid financial instrument which includes a derivative liability component. The derivative liability requires a remeasurement at each reporting period to its fair value. Factors and assumptions which affect the fair value remeasurement of the derivative include the bond market price, risk free interest rate, credit spread and IBI share price. NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Unless otherwise indicated, the significant accounting policies followed by the Company set out below have been applied consistently to all periods presented in these consolidated financial statements. (a) 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. Revenue is measured at the fair value of the consideration received. Revenue from fixed-fee and variable-fee-with-ceiling contracts is recognized by reference to the stage of completion using the cost approach. Stage of completion is measured by reference to professional costs incurred to date as a percentage of total professional costs for each contract. Where the contract outcome cannot be measured reliably, revenue is recognized only to the extent that the expenses incurred are eligible to be recovered. Revenue from time-and-material contracts without stated ceilings and short-term projects is recognized as costs are incurred. Revenue is calculated based on billing rates recoverable under the contract for the services performed. Provisions for estimated losses on contracts in-progress are made in the period in which the losses are determined. The effect of revisions to estimated revenues and costs is recorded when the amounts are
A-11
IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11 known or can be reasonably estimated. Where total contract costs exceed, or are expected to exceed, revenues, the anticipated loss based on a percentage of completion calculation is immediately recognized as an expense. Accounts receivable is valued at amortized cost net of allowances for impairment losses (refer to note 3(i) for further discussion on financial instruments). The Company's software license agreements are multiple-element arrangements as they may also include maintenance, professional services and hardware. Multiple-element arrangements are recognized as the revenue for each unit of accounting is earned based on the relative fair value of each unit of accounting as determined by an internal analysis of prices. A delivered element is considered a separate unit of accounting if it has value to the customer on a standalone basis, and delivery or performance of the undelivered elements is considered probable and substantially under the Company's control. If these criteria are not met, revenue for the arrangement as a whole is accounted for as a single unit of accounting. (b) WORK IN PROCESS AND DEFERRED REVENUE Work in process represents the fee revenue and recoverable disbursements which have not been billed but are expected to be billed and collected from clients for contract work performed to date, and is valued at estimated net realizable value. Billings in excess of time value incurred on jobs in progress, for which future services will be provided, are included in deferred revenue in the consolidated statement of financial position. An allowance account is also maintained on work in process, measured by the estimated amount of professional costs that are expected not to be invoiced. When work in process is determined not recoverable, the amount is written off in the reserve for work in process. (c) CASH Cash is comprised of cash on hand. Cash balances, which the Company has the ability and intent to offset, are used to reduce reported bank indebtedness and fund operations. (d) PROPERTY AND EQUIPMENT Items of property and equipment are measured at cost less accumulated depreciation, net of accumulated impairment losses, and amortized over their estimated useful lives as follows: ASSET BASIS RATE Office furniture and equipment Diminishing balance 20% Computer equipment Straight line 2 years Vehicles Diminishing balance 20% Leasehold improvements Straight line Term of lease Depreciation methods, useful lives and residual values are reviewed at each annual reporting date and adjusted if appropriate. The cost of repairs and maintenance of property and equipment are recognized as an expense as incurred. T
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A-12
IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12 (e) INTANGIBLE ASSETS Intangible assets are initially recorded at fair value at their acquisition date and stated at cost less accumulated amortization and net impairment losses, where applicable. The cost of intangible assets with determinable lives is amortized over the period in which the benefits of such assets are expected to be realized as follows: ASSET BASIS AMORTIZATION PERIOD Customer relationships Straight line 8-10 years Contracts backlog Straight line 1-2 years Non-competition provisions Straight line 3-4 years ERP Systems Straight line 10 years (f) IMPAIRMENT OF NON-FINANCIAL ASSETS The Company evaluates the recoverability of property and equipment and intangible assets with determinable lives for impairment at the end of each reporting period. If there are indicators of impairment, a review is undertaken to determine whether the carrying amounts are in excess of their recoverable amounts. The determination of recoverable amount is based on the higher of value in use or fair value less costs to sell. For the purposes of assessing impairment where it is not possible to estimate the recoverable amount of an individual asset, the recoverable amount of the cash generating unit (“CGU”) to which the asset belongs is estimated. A CGU is the smallest identifiable group of assets for which there are separately identifiable cash inflows. The carrying amount of a CGU includes the carrying amount of only those assets that can be attributed directly, or allocated on a reasonable and consistent basis, and are expected to generate the future cash inflows. An impairment loss is recognized in the consolidated statement of comprehensive income when a CGU's carrying amount exceeds its recoverable amount. The impairment loss is allocated on a pro rata basis to the assets in the CGU. For property and equipment and intangible assets with determinable useful lives, an impairment loss is reversed only to the extent that the asset’s carrying value does not exceed the carrying value that would have been determined, net of amortization, had no impairment loss been recognized. (g) INCOME TAXES Income tax expense consists of current tax charge and the change in deferred tax assets and liabilities. Current tax and deferred tax is recognized in the consolidated statement of comprehensive income except to the extent that it relates to a business combination, or to items recognized directly in equity or other comprehensive loss. Current tax represents the current tax payable (receivable) on the taxable income for the period, calculated in accordance with the rates and legislation of the respective tax jurisdiction in which the Company operated, enacted or substantively enacted as at the date of the consolidated statement of
A-13
IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13 financial position; it also reflects any adjustment resulting from new information to taxes payable (recoverable) in respect of previous years. Deferred tax assets and liabilities are recognized in respect of the expected income tax consequences attributable to temporary differences between the financial statement carrying values of existing assets and liabilities in the consolidated statement of financial position and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted, or substantively enacted, tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of comprehensive income in the period that includes the date of enactment or of substantive enactment of the future tax rates. Deferred tax assets are recognized for unused tax losses, tax credits, and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are evaluated at each reporting period and are reduced to the extent that it is no longer probable that future taxable profits will be available against which they can be utilized. (h) SHARE-BASED COMPENSATION Cash settled transactions The Company has a share-based compensation plan (“Deferred Share Plan”) which allows directors to receive director fees in the form of deferred shares rather than cash. These awards are accounted for as liabilities at FVTPL. On the grant date, the deferred shares are measured at fair value based on the market price with subsequent changes to the fair value recorded as salaries, fees and employee benefit expenses until settled. Equity settled transactions Stock options The grant date fair value of share based payment awards granted to employees is recognized as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. An option valuation model is used to fair value the stock options on the grant date. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. Performance share units The grant date fair value of share based payment awards granted to employees is recognized as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. A Monte Carlo valuation model is used to fair value the stock options on the grant date. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. The vesting and performance conditions are determined by the Board of Directors at the time of each grant. T
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A-14
IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14 (i) FINANCIAL INSTRUMENTS All financial assets and financial liabilities are required to be classified into one of the following categories: Financial assets are classified as either FVTPL, available-for-sale, held-to-maturity investments or loans and receivables; and Financial liabilities are classified as either FVTPL or other liabilities. All financial assets and liabilities are initially recognized at fair value plus directly attributable transaction costs, except for financial assets at FVTPL, for which transaction costs are expensed. Purchases or sales of financial assets are accounted for at trade dates. All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs. The table below summarizes the classification and subsequent measurement of the Company’s financial assets and liabilities: FINANCIAL INSTRUMENT CLASSIFICATION MEASUREMENT FINANCIAL ASSETS Cash FVTPL Fair value Restricted cash FVTPL Fair value Accounts receivable Loans and receivables Amortized cost FINANCIAL LIABILITIES Accounts payable and accrued liabilities Other liabilities Amortized cost Deferred share plan liability(1) FVTPL Fair value Due to related parties Other liabilities Amortized cost Finance lease obligation Other liabilities Amortized cost Credit facilities Other liabilities Amortized cost Convertible debentures – liability component Other liabilities Amortized cost Other financial liability FVTPL Fair value (1) The deferred share plan liability is grouped with accounts payable and accrued liabilities on the consolidated statement of financial position. See Note 16 – Deferred Share Plan, for further discussion. FINANCIAL ASSETS AT FVTPL At the end of each reporting period subsequent to initial recognition, financial assets at FVTPL are measured at fair value, with changes in fair value recognized directly in the consolidated statement of comprehensive income in the period in which they arise. LOANS AND RECEIVABLES Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the date of the consolidated statement of financial position. After their initial fair value measurement, they are measured at amortized cost using the effective interest rate method, net of allowance for impairment losses.
A-15
IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15 IMPAIRMENT The Company’s policy is to assess at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. The Company maintains an allowance for impairment losses on accounts receivable. The estimate is based on the best assessment of the collectability of the related receivable balance, based in part, on the age of the outstanding receivables and in part on the Company’s historical collection and loss experience. When the carrying amount of the receivable is reduced through the allowance, the reduction is recognized in impairment of financial assets in the consolidated statement of comprehensive income. Subsequent recoveries of the amounts previously written off are charged against the allowance account and recognized as income in the consolidated statement of comprehensive income. FINANCIAL LIABILITIES AND EQUITY Debt and equity instruments are classified as either financial liabilities or as equity (in accordance with the substance of the contractual arrangement). An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued are recorded net of direct issue costs. Debt securities issued and other liabilities are recognized at fair value on the date that they originated. Other financial liabilities are recognized initially on the trade date at which the Company becomes party to the contractual provisions of the instrument. Financial liabilities are classified as either financial liabilities at FVTPL or as other liabilities. FINANCIAL LIABILITIES AT FVTPL At the end of each reporting period subsequent to initial recognition, financial liabilities at FVTPL are measured at fair value, with changes in fair value recognized directly in the consolidated statement of comprehensive income in the period in which they arise. OTHER FINANCIAL LIABILITIES Other financial liabilities are recognized initially at fair value, net of any directly attributable transaction costs. Subsequent to initial recognition, these liabilities are carried at amortized cost using the effective interest rate method. EFFECTIVE INTEREST METHOD The effective interest method calculates the amortized cost of a financial instrument and allocates interest income or expense over the corresponding period. The effective interest rate is the rate that discounts estimated future cash flows over the expected life of the financial instrument to the net carrying amount of the financial instrument on initial recognition. COMPOUND FINANCIAL INSTRUMENTS Compound financial instruments issued by the Company consist of convertible debentures that can be converted into share capital at the option of the holder. The liability component of a compound financial instrument is measured initially at fair value, calculated as the net present value of the liability without a conversion option and using a discount rate reflective of a liability instrument without a conversion factor. The equity and derivative liability component is recognized initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any T
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A-16
IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16 directly attributable transaction costs are allocated to the liability, derivative liability, and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The derivative liability component is remeasured subsequent to initial recognition at fair value. The equity component of a compound financial instrument is not remeasured subsequent to initial recognition. Upon derecognition, the equity component of a compound financial instrument is reclassified to contributed surplus. DERECOGNITION OF FINANCIAL INSTRUMENTS A financial asset is derecognized when the contractual rights to the cash flows from the asset expire or when the Company transfers the financial asset to another party without retaining control or substantially all the risks and rewards of ownership of the assets. Any interest in transferred assets that are created or retained by the Company is recognized as a separate asset or liability. A financial liability is derecognized when the underlying contractual obligation is legally discharged, cancelled or expires. (j) LEASES The substance of the transaction at inception of the lease determines whether the lease is classified as operating or finance. Any modification to the terms of a lease requires reassessment by the Company of the classification of the lease. OPERATING LEASE Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments under an operating lease, net of any incentives received from the lessor, are recognized as rent in the consolidated statement of comprehensive income on a straight-line basis over the period of the lease. FINANCE LEASE Leases in which substantially all the risks and rewards of ownership are transferred to the Company are classified as finance leases. Assets which meet the finance lease criteria are capitalized at the lower of the present value of the related lease payments or the fair value of the leased asset at the inception of the lease and amortized over the term of the lease. Minimum lease payments are apportioned between the finance charge and the settlement of the obligation. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the obligation. (k) PROVISIONS Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expected expenditures to settle the obligation using a discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as an interest expense. All provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.
A-17
IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 17 ONEROUS CONTRACTS The Company’s onerous contracts consist of lease exit liabilities. The Company accrues charges when it ceases to use office space under an operating lease arrangement. The provision is calculated as the present value of the remaining lease payments, less the recovery of the tenant improvement allowance and the present value of the expected future sublease income. NOTE 4: CHANGES IN ACCOUNTING POLICIES (a) ACCOUNTING POLICY CHANGES ADOPTED IN 2017 Amendments to IAS 7 Statement of Cash Flows In January 2016, the IASB issued Disclosure Initiative (Amendments to IAS 7). The amendments apply prospectively for annual periods beginning on or after January 1, 2017. The Company adopted the amendments to IAS 7 in its financial statements for the annual period beginning on January 1, 2017. With the exception of additional note disclosures made in Note 6, the adoption of these amendments did not have a material impact on the Company’s financial statements. Amendments to IAS 12 Income Taxes In January 2016, the IASB issued Amendments to IAS 12 Income Taxes to provide clarification on the requirements relating to the recognition of deferred tax assets for unrealized losses on debt instruments measured at fair value. The Company adopted the amendments to IAS 12 in its financial statements for the annual period beginning on January 1, 2017. The adoption of these amendments did not have a material impact on the Company’s financial statements as the Company does not have any debt instruments measured at fair value through profit and loss. (b) FUTURE ACCOUNTING POLICY CHANGES NOT YET ADOPTED IFRS 15 Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”). The new standard is effective for annual periods beginning on or after January 1, 2018 and is available for early adoption. IFRS 15 will replace IAS 11, IAS 18, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31– Barter Transactions Involving Advertising Services. The new standard contains a single model that applies to contracts with customers and two approaches for recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of individual transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. In April 2016, the IASB issued Clarifications to IFRS 15, which is effective at the same time as IFRS 15. The clarifications to IFRS 15 provide additional guidance with respect to the five-step analysis, transition, and the application of the standard to licenses of intellectual property. T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 18 The Company will adopt IFRS 15 in its consolidated financial statements for the annual period beginning January 1, 2018. The Company has set out a project plan to determine the impact of the standard. The first phase was to review contracts in the different practice areas that may be impacted by the adoption of this standard given contracting practices. The second phase of the project plan involved review of contracts where the terms and conditions of the contract may impact the timing of the revenue recognized under the new standard. In 2015, the Company standardized its contract template to include terms and conditions that considered the criteria set out to recognize revenue in accordance with IFRS 15. The third and final phase of the project plan involves finalizing the assessment and quantifying the impacts to revenue recognized on contracts in accordance with IFRS 15. Management’s assessment determined that the standardization of contracts in 2015 and the implementation of key system functionalities in 2016, streamlined the review of financial information for contracts entered into in 2015 and beyond. It was concluded that the revenue recognized on these contracts will not result in a significant change. The guidance permits two methods of adoption: retrospectively to each reporting period presented (full retrospective method), or retrospectively with mixed requirements in the prior reporting period (partial retrospective). The Company plans to adopt the standard using the full retrospective method to restate each prior reporting period presented. The extent of the impact of adoption of the standard on the amounts and timing of revenue recognized is estimated to be a decrease in the range of $10 million - $15 million. Any adjustment will impact the timing of the revenue recognized, and will result in an adjustment through equity at time of adoption. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments (“IFRS 9”), with a mandatory effective date for annual periods beginning on or after January 1, 2018. Early adoption is permitted. The new standard brings together the classification and measurements, impairment and hedge accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement. In addition to the new requirements for classification and measurement of financial assets, a new general hedge accounting model and other amendments issued in previous versions of IFRS 9. The standard also introduces new impairment requirements that are based on a forward-looking expected credit loss model. The Company will adopt IFRS 9 in its consolidated financial statements for the annual period beginning January 1, 2018. The Company has adopted a transition plan and timeline to review the impact of the standard. Accounts Receivable and Work in Progress will be called Contract Assets under the new standard. Based on preliminary scoping, the Company expects the standard to have an immaterial impact on loss provisions against Accounts Receivable and Work in Progress. IFRS 16 Leases In January 2016, the IASB issued IFRS 16 Leases (“IFRS 16”). The new standard is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 has been adopted.
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 19 IFRS 16 will replace IAS 17 Leases. The new standard requires all leases to be reported on the balance sheet unless certain criteria for exclusion are met. The Company intends to adopt IFRS 16 in its consolidated financial statements for the annual period beginning on January 1, 2019. The Company has established a transition plan to collect the necessary information on all of the operating leases in the spring of 2018 to begin the process to quantify the impact of adopting the standard. The Company will evaluate the transition elections at that time. The extent of the impact of adoption of the interpretation has not yet been determined. Amendments to IFRS 2 Classification and Measurement of Share-Based Payment Transactions In June 2016, the IASB issued Amendments to IFRS 2 Share-Based Payments (“IFRS 2”), clarifying how to account for certain types of share-based payment transactions. The amendments apply for annual periods beginning on or after January 1, 2018. As a practical simplification, the amendments can be applied prospectively or retrospectively, with early application permitted if information is available without the use of hindsight. The amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, share based payment transactions with a net settlement feature for withholding tax obligations, and a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The Company will adopt the amendments to IFRS 2 in its consolidated financial statements for the annual period beginning January 1, 2018. Currently, the Company’s share based awards are all equity settled awards and do not contain cash-settled share-based payment features. To the extent an award is offered in the future with such features, the Company will evaluate the effect of these changes. IFRIC 22 Foreign Currency Transactions and Advance Consideration On December 8, 2016 the IASB issued IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration (“IFRIC 22”). The Interpretation clarifies which date should be used for translation when a foreign currency transaction involves an advance payment or receipt. The Interpretation is applicable for annual periods beginning on or after January 1, 2018. Earlier application is permitted. The Company intends to adopt the Interpretation in its financial statements for the annual period beginning on January 1, 2018. The Company does not expect the Interpretation to have a material impact on the financial statements. IFRIC 23 Uncertainty over Income Tax Treatments On June 7, 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax Treatments. The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation is applicable for annual periods beginning on or after January 1, 2019. The extent of the impact of adoption of the interpretation has not yet been determined. Annual Improvements to IFRS (2014 - 2016) Cycles On December 8, 2016, the IASB issued narrow-scope amendments to three standards as part of its annual improvements process. The IASB uses the annual improvements process to make non-urgent but necessary amendments to IFRS. The Company will adopt these amendments in its financial statements for the annual period beginning on January 1, 2018. The Company does not expect the amendments to have a material impact on the financial statements. T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 20 Annual Improvements to IFRS (2015-2017) Cycles On December 12, 2017, the IASB issued narrow-scope amendments to three standards as part of its annual improvements process. The amendments are effective on or after January 1, 2019, with early application permitted. Each of the amendments has its own specific transition requirements. IFRS 3 Business Combinations and IFRS 11 Joint Arrangements - to clarify how a company accounts for increasing its interest in a joint operation that meets the definition of a business; IAS 12 Income Taxes – to clarify that all income tax consequences of dividends are recognized consistently with the transactions that generated the distributable profits – i.e. in profit or loss, OCI, or equity; and IAS 23 Borrowing Costs – to clarify that specific borrowings – i.e. funds borrowed specifically to finance the construction of a qualifying asset – should be transferred to the general borrowings pool once the construction of the qualifying asset has been completed. The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the amendments has not yet been determined. NOTE 5: SEGMENT INFORMATION The Company is an international, multi-disciplinary provider of a broad range of professional services focused on the physical development of cities. The Company considers the basis on which it is organized, including geographic areas and service offerings, in identifying its reportable segments. (a) OPERATING SEGMENTS Operating segments of the Company are defined as components for which separate financial information is available that is evaluated regularly in allocating resources and assessing performance. The Company has one operating segment, consulting services. These services are provided throughout Canada, the U.S., and internationally. (b) GEOGRAPHIC SEGMENTS The following table demonstrates certain consolidated statement of financial position information line items segmented geographically as at December 31, 2017, with comparatives as at December 31, 2016: AS AT DECEMBER 31, 2017 CANADA U.S. INTERNATIONAL TOTAL Property and equipment $ 10,557 2,969 $ 1,826 $ 15,352 Intangible assets 5,285 1,901 453 7,639 Work in process, net 36,394 16,078 26,568 79,040 Deferred revenue 25,023 8,320 9,843 43,186 Total assets 123,529 56,606 76,181 256,316
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21 AS AT DECEMBER 31, 2016 CANADA U.S. INTERNATIONAL TOTAL Property and equipment $ 10,431 $ 3,837 $ 1,504 $ 15,772 Intangible assets 4,599 2,519 554 7,672 Work in process, net 44,294 12,121 30,637 87,052 Deferred revenue 31,064 6,504 12,954 50,522 Total assets 125,844 64,037 71,929 261,810 The following table demonstrates certain information contained in the consolidated statement of comprehensive income segmented geographically for the year ended December 31, 2017, with comparatives for the year ended December 31, 2016. The unallocated amounts pertain to interest on convertible debentures. YEAR ENDED DECEMBER 31, 2017 UNALLOCATED CORPORATE COSTS CANADA U.S. INTERNATIONAL TOTAL Revenues $ - $ 201,770 $ 109,470 $ 50,168 $ 361,408 Net income (loss) before tax $ (10,776) $ 24,262 $ 346 $ 5,058 $ 18,890 Foreign exchange (gain) loss - (1,646) (410) 1,067 (989) Net income (loss) before tax and foreign exchange $ (10,776) $ 22,616 $ (64) $ 6,125 $ 17,901 YEAR ENDED DECEMBER 31, 2016 UNALLOCATED CORPORATE COSTS CANADA U.S. INTERNATIONAL TOTAL Revenues $ - $ 186,377 $ 118,271 $ 49,492 $ 354,140 Net income (loss) before tax $ (26,107) $ 14,361 $ 8,792 $ 3,955 $ 1,001 Foreign exchange loss - 6,630 75 658 7,363 Net income (loss) before tax and foreign exchange $ (26,107) $ 20,991 $ 8,867 $ 4,613 $ 8,364 T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 22 NOTE 6: FINANCIAL INSTRUMENTS (a) INDEBTEDNESS On June 30, 2017, IBI Group secured an agreement to refinance its credit facilities under the existing banking agreement with its senior lenders. The arrangement consists of a $130,000 revolver facility, of which a maximum of $10,000 is available under a swing line facility and will mature on June 30, 2021. The commitment under the swing line facility will reduce availability under the revolver facility on a dollar-for-dollar basis. As at December 31, 2017, the interest rate on Canadian dollar borrowings was 4.45% (December 31, 2016 – 4.95%) and 5.75% on U.S dollar borrowings (December 31, 2016 – 6.25%). The terms of the amended and restated credit facilities exclude the requirement to maintain a segregated cash collateral account (“Sinking Fund”). As a result of this amendment the balance of the Sinking Fund, $1,381, has been reclassified from Restricted Cash to Cash. Under the previous agreement, the Company was required to make additional deposits each quarter to the Sinking Fund for pre-defined amounts, these deposits are no longer required. As at December 31, 2017, IBI Group has borrowings of $65,651 (December 31, 2016 - $74,737) under the credit facilities, which has been recognized net of deferred financing costs of $1,809 (December 31, 2016 - $1,553). As at December 31, 2017, IBI Group has letters of credit outstanding of $6,538 (December 31, 2016 - $8,034), of which $6,021 (December 31, 2016 - $5,816) is issued under a $30,000 facility which matures on June 30, 2018 and supports letters of credit backstopped by Export Development Canada. Advances under the revolver facility bear interest at a rate based on the Canadian dollar prime rate or U.S dollar base rate, LIBOR or Banker’s Acceptance rates plus, in each case, an applicable margin. At December 31, 2017, $65,651 (December 31, 2016 - $32,117) was outstanding under Bankers’ Acceptance. This facility is subject to compliance with certain financial, reporting and other covenants. The financial covenants under the agreement include a leverage ratio, interest coverage ratio, and restrictions on distributions, if certain conditions are not met. IBI Group was in compliance with its credit facility covenants as at December 31, 2017. Continued compliance with the covenants under the amended credit facilities is dependent on IBI Group achieving revenue forecasts, profitability, and reducing costs. Market conditions are difficult to predict and there is no assurance that IBI Group will achieve its forecasts. In the event of non-compliance, IBI Group’s lenders have the right to demand repayment of the amounts outstanding under the lending agreements or pursue other remedies if IBI Group cannot reach an agreement with its lenders to amend or waive the financial covenants. As in the past, IBI Group will carefully monitor its compliance with the covenants and will seek waivers, subject to lender approval, as may become necessary from time to time. YEAR ENDED DECEMBER 31, 2017 2016 Balance at January 1 73,184 72,277 Draws on credit facilities - 81,117 Payments on principal of credit facilities (8,210) (82,380) Deferred financing capitalization (1,031) - Amortization of deferred financing costs 775 1,041 Impact of foreign exchange (876) 1,129 Balance at December 31 63,842 73,184
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 23 (b) CONVERTIBLE DEBENTURES The Company had the following series of convertible debentures outstanding as at December 31, 2017 and December 31, 2016. LIABILITY COMPONENT EQUITY COMPONENT OTHER FINANCIAL LIABILITY COMPONENT TOTAL 7.0% Debentures (matures on June 30, 2019) Balance at January 1, 2016 29,618 1,750 - 31,368 Accretion of 7.0% Debentures 12,486 - - 12,486 Redemption of 7.0% Debentures (31,245) (1,189) - (32,434) Balance at January 1, 2017 10,859 561 - 11,420 Accretion of 7.0% Debentures 1,323 - - 1,323 Balance at December 31, 2017 12,182 561 - 12,743 5.5% Debentures (matures on December 31, 2021) Balance at January 1, 2016 - - - - Issuance of 5.5% Debentures 32,498 - 10,908 43,406 Accretion of 5.5% Debentures 519 - - 519 Gain in fair value of other financial liabilities - - (1,819) (1,819) Balance at January 1, 2017 33,017 - 9,089 42,106 Accretion of 5.5% Debentures 1,958 - - 1,958 Loss in fair value of other financial liabilities - - 3,922 3,922 Balance at December 31, 2017 34,975 - 13,011 47,986 BALANCE, DECEMBER 31, 2017 $ 47,157 $ 561 $ 13,011 $ 60,729 7.0% DEBENTURES ($46,000 PRINCIPAL, OPTION A MATURES ON JUNE 30, 2019 AND OPTIONS B AND C REDEEMED ON OCTOBER 31, 2016) On July 23, 2014, the Company entered into a supplemental trust indenture with CIBC Mellon Trust Company, the trustee for the 7.0% convertible unsecured subordinated debentures (“Debentures”) which were originally scheduled to mature on December 31, 2014, to give effect to the amendments approved at a special meeting of the Debenture holders to extend the maturity of the Debentures to June 30, 2019. In exchange for the extension of the maturity, Debenture holders that delivered and did not withdraw a valid proxy voting for the extension received either; a reduced conversion price to $5.00 per share from $19.17 per share with a consent fee note equal to $86.96 per $1,000 principal amount of Debentures (“Option B”) or the Debenture holders retained the conversion price of $19.17 per share and received a consent fee note equal to $195.65 per $1,000 principal amount of Debentures (“Option A”). The conversion price was also reduced to $5.00 per share from $19.17 per share for Debenture holders who did not deposit a proxy, abstained from voting or voted against the Debenture amendments (“Option C”). The Debentures bear interest from the date of issue at 7.0% per annum, payable in equal semi-annual payments in arrears on June 30th and December 31st of each year. The consent fee notes are unsecured, non-convertible, matured on December 31, 2016 and bear interest at the rate of 7.0% per annum which is payable on maturity. T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 24 The amendments to the Debentures resulted in them being accounted for as extinguishments for accounting purposes. Consequently, the original Debentures were derecognized and the new Debentures (under Option A, B and C) were recognized at fair value. On October 31, 2016, the Company redeemed the 7.0% Debentures under Options B and C (“IBG.DB”). The holders of $29,988 principal of the 7.0% Debentures had exercised the $5 share conversion option and received 5,997,600 shares. For the balance of $1,257 principal of the 7.0% Debentures, the Company issued 222,476 shares. The financial liability being redeemed under Options B and C were accreted to the full principal value, resulting in total accretion expense of $12,485 being recognized in the consolidated statement of comprehensive income during the year ended December 31, 2016. See Note 15 – Finance Costs for further detail regarding the accretion expense for the period. The Company recorded $31,245 in common shares and reclassified the equity component of the portion redeemed of $1,189 to contributed surplus. The fair value of the remaining 7.0% Debentures under Option A is $15,197 (December 31, 2016 - $15,043) with a face value of $14,755 should they be redeemed for cash prior to or at maturity. The consent fee notes issued under Option A and B were paid in full upon maturity as at December 31, 2016. 5.5% DEBENTURES ($46,000 PRINCIPAL, MATURES ON DECEMBER 31, 2021) In September 2016, the Company issued 5.5% Debentures of $46,000 with a maturity date of December 31, 2021. The 5.5% Debentures are convertible into common shares of the Company at the option of the holder at a conversion price of $8.35 per common share. The 5.5% Debentures are not redeemable at the option of the Company before December 31, 2019. The 5.5% Debentures are redeemable by the Company at a price of $1,000 per 5.5% Debenture, plus accrued and unpaid interest, on or after December 31, 2019 and prior to December 31, 2020 (provided that the volume weighted average trading price of the shares of the Company on the TSX for the 20 consecutive trading days ending five trading days preceding the date on which notice of redemption is given, is not less than 125% of the conversion price of $8.35 per share). On or after December 31, 2020 and prior to the maturity date, the 5.5% Debentures are redeemable by the Company at a price of $1,000 per 5.5% Debenture, plus accrued and unpaid interest. The 5.5% Debentures bear interest from the date of issue at 5.5% per annum, payable in equal semi-annual payments in arrears on June 30th and December 31st of each year, commencing June 30, 2017. The 5.5% Debentures are recorded as a hybrid financial instrument. The non-derivative debt (interest and principal portion) was recorded at fair value on the date of issue and was recognized at $32,498 which was net of deferred financing costs of $2,594, estimated using discounted future cash flows at an estimated discount rate discount rate of 11.5%. Subsequently the non-derivative debt component is measured at amortized cost using the effective interest method over the life of the debenture. The derivative component of this hybrid financial instrument representing the conversion feature of the 5.5% Debentures was measured at fair value of $10,908 at the date of issuance, and recorded as part of Other financial liabilities in the statement of financial position. This conversion feature is unique to this issuance of convertible debt given IBI has the right to settle any request to convert debentures to IBI shares by the Debenture holders for an equivalent amount of cash. As at December 31, 2017, the fair value of the derivative component was $13,011 (December 31, 2016 - $9,089).
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 25 The fair value of the convertible debentures as at December 31, 2017, based on a Level 1 quoted market price, is as follows: Carrying Value Fair Value 5.5% Debentures $ 34,975 $ 51,175 7.0% Debentures 12,182 15,198 BALANCE, DECEMBER 31, 2017 $ 47,157 $ 66,373 The fair value of the convertible debentures as at December 31, 2016, based on a Level 1 quoted market price, is as follows: Carrying Value Fair Value 5.5% Debentures $ 33,017 $ 46,920 7.0% Debentures 10,859 15,043 BALANCE, DECEMBER 31, 2016 $ 43,876 $ 61,963 T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 26 (c) FINANCIAL ASSETS AND LIABILITIES The fair values of cash, restricted cash, accounts receivable, accounts payable and accrued liabilities, vendor notes payable, consent fee notes payable and finance lease obligation approximate their carrying amounts due to their short-term maturity. The carrying amount of the Company’s financial instruments as at December 31, 2017 are as follows: FINANCIAL ASSETS AND LIABILITIES AT FVTPL LOANS AND RECEIVABLES OTHER FINANCIAL LIABILITIES TOTAL FINANCIAL ASSETS Cash $ 9,833 $ - $ - $ 9,833 Restricted cash 2,936 - - 2,936 Accounts receivable - 111,219 - 111,219 TOTAL $ 12,769 $ 111,219 $ - $ 123,988 FINANCIAL LIABILITIES Accounts payable and accrued liabilities $ - $ - $ 45,934 $ 45,934 Deferred share plan liability(1) 2,848 - - 2,848 Finance lease obligation - - 67 67 Credit facilities - - 63,842 63,842 Convertible debentures - - 47,157 47,157 Other Financial Liabilities 13,011 - - 13,011 TOTAL $ 15,859 $ - $ 157,000 $ 172,859 (1) The deferred share plan liability is grouped with accounts payable and accrued liabilities on the consolidated statement of financial position. See Note 16 – Deferred Share Plan, for further discussion.
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 27 The carrying amount of the Company’s financial instruments as at December 31, 2016 are as follows: FINANCIAL ASSETS AND LIABILITIES AT FVTPL LOANS AND RECEIVABLES OTHER FINANCIAL LIABILITIES TOTAL FINANCIAL ASSETS Cash $ 8,008 $ - $ - $ 8,008 Restricted cash 4,522 - - 4,522 Accounts receivable - 108,593 - 108,593 TOTAL $ 12,530 $ 108,593 $ - $ 121,123 FINANCIAL LIABILITIES Accounts payable and accrued liabilities $ - $ - $ 53,145 $ 53,145 Deferred share plan liability(1) 2,360 - - 2,360 Finance lease obligation - - 104 104 Credit facilities - - 73,184 73,184 Convertible debentures - - 43,876 43,876 Other Financial Liabilities 9,089 - - 9,089 TOTAL $ 11,449 $ - $ 170,309 $ 181,758 (1) The deferred share plan liability is grouped with accounts payable and accrued liabilities on the consolidated statement of financial position. See Note 16 – Deferred Share Plan, for further discussion. The following tables summarize the Company’s fair value hierarchy for those assets and liabilities that are measured at fair value on a recurring basis as at December 31, 2017 and December 31, 2016: AS AT DECEMBER 31, 2017 LEVEL 1 LEVEL 2 LEVEL 3 Cash $ 9,833 $ - $ - Restricted cash 2,936 - - Deferred share plan liability(1) - (2,848) - Other Financial Liabilities - (13,011) - $ 12,769 $ (15,859) $ - AS AT DECEMBER 31, 2016 LEVEL 1 LEVEL 2 LEVEL 3 Cash $ 8,008 $ - $ - Restricted cash 4,522 - - Deferred share plan liability(1) - (2,360) - Other Financial Liabilities - (9,089) - $ 12,530 $ (11,449) $ - T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 28 NOTE 7: PROPERTY AND EQUIPMENT The following table presents the Company’s property and equipment as at December 31, 2017 and December 31, 2016: OFFICE FURNITURE AND EQUIPMENT COMPUTER EQUIPMENT VEHICLES LEASEHOLDS TOTAL COST January 1, 2016 $ 11,872 $ 18,046 $ 421 $ 13,155 $ 43,494 Additions 2,059 1,465 36 3,166 6,726 Disposals (1,069) (247) - (197) (1,513) Write off of fully amortized assets (32) (188) - (216) (436) Foreign currency translation loss (355) (589) (65) (274) (1,283) December 31, 2016 $ 12,475 $ 18,487 $ 392 $ 15,634 $ 46,988 Additions 328 1,492 326 1,795 3,941 Disposals (390) (398) (299) (904) (1,991) Write off of fully amortized assets (272) (744) - (639) (1,655) Foreign currency translation gain / (loss) (241) (333) 7 (93) (660) DECEMBER 31, 2017 $ 11,900 $ 18,504 $ 426 $ 15,793 $ 46,623
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 29 OFFICE FURNITURE AND EQUIPMENT COMPUTER EQUIPMENT VEHICLES LEASEHOLDS TOTAL ACCUMULATED DEPRECIATION January 1, 2016 $ 6,856 $ 14,914 $ 170 $ 6,631 $ 28,571 Depreciation from continuing operations 1,211 1,962 72 1,078 4,323 Disposals (130) (54) - (132) (316) Write off of fully amortized assets (32) (188) - (216) (436) Foreign currency translation (gain) (290) (449) (27) (160) (926) December 31, 2016 $ 7,615 $ 16,185 $ 215 $ 7,201 $ 31,216 Depreciation from continuing operations 552 1,510 61 1,106 3,229 Disposals (336) (203) (40) (476) (1,055) Write off of fully amortized assets (272) (744) - (639) (1,655) Foreign currency translation loss / (gain) (117) (299) 2 (50) (464) DECEMBER 31, 2017 $ 7,442 $ 16,449 $ 238 $ 7,142 $ 31,271 NET CARRYING AMOUNT DECEMBER 31, 2016 $ 4,860 $ 2,302 $ 177 $ 8,433 $ 15,772 DECEMBER 31, 2017 $ 4,458 $ 2,055 $ 188 $ 8,651 $ 15,352 Loss on disposal of property and equipment of $936 as at December 31, 2017 (December 31, 2016 - $1,197) is reflected in other operating expenses on the Statement of Comprehensive Income. T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 30 NOTE 8: INTANGIBLE ASSETS The following table presents the Company’s intangible assets as at December 31, 2017 and December 31, 2016: ERP SYSTEM CLIENT RELATIONSHIPS OTHER TOTAL COST Balance at January 1, 2016 $ 2,765 $ 5,368 $ 831 $ 8,964 Additions 1,757 - 313 2,070 Foreign exchange translation gain - (332) (26) (358) December 31, 2016 $ 4,522 $ 5,036 $ 1,118 $ 10,676 Additions 1,010 - 316 1,326 Foreign exchange translation loss - (250) - (250) DECEMBER 31, 2017 $ 5,532 $ 4,786 $ 1,434 $ 11,752 ERP SYSTEM CLIENT RELATIONSHIPS OTHER TOTAL ACCUMULATED AMORTIZATION Balance at January 1, 2016 $ - $ 1,416 $ 657 $ 2,073 Amortization 227 600 175 1,002 Foreign exchange translation gain - (53) (18) (71) December 31, 2016 $ 227 $ 1,963 $ 814 $ 3,004 Amortization 604 582 45 1,231 Foreign exchange translation gain - (122) - (122) DECEMBER 31, 2017 $ 831 $ 2,423 $ 859 $ 4,113 NET CARRYING AMOUNT DECEMBER 31, 2016 $ 4,295 $ 3,073 $ 304 $ 7,672 DECEMBER 31, 2017 $ 4,701 $ 2,363 $ 575 $ 7,639
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 NOTE 9: INCOME TAXES The major components of income tax expense include the following: YEAR ENDED DECEMBER 31, 2017 2016 CURRENT TAX EXPENSE Current period $ 1,672 $ 2,904 Provision to file / withholding taxes 291 4 1,963 2,908 DEFERRED TAX EXPENSE / (RECOVERY) Origination and reversal of temporary differences 5,078 (3,037) Impact of US Tax Reform 1,430 - Change in tax rates (215) 64 Adjustment for prior periods (655) (54) Change in unrecognized deductible temporary differences (83) (2,374) 5,555 (5,401) TOTAL TAX EXPENSE / (RECOVERY) $ 7,518 $ (2,493) T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 32 The provision for income taxes in the consolidated statement of comprehensive income (loss) represents an effective tax rate different than the Canadian enacted or substantively enacted statutory rate of approximately 26.5% (December 31, 2015 – 26.5%). The differences are as follows: YEAR ENDED DECEMBER 31, 2017 2016 Net income $ 11,372 $ 3,494 Total tax expense / (recovery) 7,518 (2,493) Net income before tax $ 18,890 $ 1,001 Income tax using the Company's domestic tax rate $ 5,006 $ 265 Income tax effect of: Non-deductible expenses 2,450 1,113 Change in deferred tax rates (215) 64 Impact of US tax reform 1,430 - Operating in jurisdictions with different tax rates 267 1,082 Change in unrecognized temporary differences (83) (2,374) Prior period adjustments to current tax (5) (14) Prior period adjustments to deferred tax (655) (54) Withholding taxes 285 139 Recognition of previously unrecognized deferred tax asset (867) (2,972) Other (95) 258 INCOME TAX EXPENSE / (RECOVERY) $ 7,518 $ (2,493) The applicable tax rate is the aggregate of the Canadian Federal income tax rate of 15% (2015 – 15%) and the Provincial income tax rate of 11.5% (2015 – 11.5%). The increase in the effective tax rate was primarily a result of non-deductible expenses arising from an increase of $1,040 due to accounting loss on revaluation of a financial instrument, and an increase of $410 due to accretion expense and a decrease of $867 due to the U.S operations recognizing previously unrecognized deferred tax assets. In addition, the US tax reform also had an impact of $1,430 as deferred tax assets set up on December 31, 2016 were revalued from the 35% Federal Tax rate to the newly enacted tax rate of 21%. UNRECOGNIZED DEFERRED TAX LIABILITIES As at December 31, 2017, the Company has approximately $17,736 (December 31, 2016 - $16,089) of temporary differences associated with its investments in foreign subsidiaries for which no deferred taxes have been provided on the basis that the company is able to control the timing of the reversal of such temporary differences and that such reversal is not probable in the foreseeable future.
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 33 UNRECOGNIZED DEFERRED TAX ASSETS Deferred tax assets have not been recognized in respect of the following gross temporary differences: YEAR ENDED DECEMBER 31, 2017 2016 Deductible temporary differences $ 6,983 $ 6,658 Tax losses – Federal 2,746 3,293 Tax losses – State 34,520 35,707 $ 44,249 $ 45,658 The tax effected amount of unrecognized gross temporary differences is as follows: YEAR ENDED DECEMBER 31, 2017 2016 Deductible temporary differences $ 1,572 $ 2,525 Tax losses – Federal 590 1,107 Tax losses – State 1,955 1,571 $ 4,117 $ 5,203 Deferred tax assets are recognized for operating loss carry forwards to the extent that the realization of the related tax benefit through future taxable profits is probable. As at December 31, 2017, the Company’s affiliated entities have $30,369 of Federal and $34,520 of U.S State operating loss carry forwards (December 31, 2016 - $45,292 and $35,707 respectively) available for income tax purposes, which expire in the years 2022 through 2036. The ability of the Company to realize the tax benefits of the loss carry forwards is contingent on many factors, including the ability to generate future taxable profits in the jurisdictions in which the tax losses arose. The Company regularly assesses the status of open tax examinations and its historical tax filing positions for the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. The Company believes that it has adequately provided for any tax adjustments that are more likely than not to occur as a result of ongoing tax examinations or historical filing positions. The tax effect of temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases that give rise to significant portions of the deferred tax assets at December 31, 2017 and December 31, 2016 are presented below: T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 34 RECOGNIZED DEFERRED TAX ASSETS AND LIABILITIES Deferred tax assets and liabilities are attributable to the following: YEAR ENDED DECEMBER 31, 2017 ASSETS LIABILITIES TOTAL Property and equipment $ 1,071 $ (866) $ 205 Non-capital loss 6,211 - 6,211 Reserves 667 (3,448) (2,781) Financing costs 259 - 259 Intangible assets 2,902 (141) 2,761 Other 57 (70) (13) $ 11,167 $ (4,525) $ 6,642 YEAR ENDED DECEMBER 31, 2016 ASSETS LIABILITIES TOTAL Property and equipment $ 1,128 $ (552) $ 576 Non-capital loss 11,156 - 11,156 Reserves 556 (3,518) (2,962) Financing costs 302 - 302 Intangible assets 3,209 (94) 3,115 Other 70 (12) 58 $ 16,421 $ (4,176) $ 12,245 NOTE 10: RELATED PARTY TRANSACTIONS Pursuant to the Administration Agreement, IBI Group and certain of its subsidiaries are paying to the Management Partnership an amount representing the base compensation for the services of the partners of the Management Partnership. The amount paid for such services during the year ended December 31, 2017 was $12,726 (2016 - $15,486). As at December 31, 2017, there were 60 partners (December 31, 2016 – 64 partners). IBI Group from time to time makes a monthly distribution to each Class B partnership unit holder equal to the dividend per share (on a pre-tax basis) declared to each shareholder. All of the Class B partnership units are held by the Management Partnership. As at December 31, 2017 and 2016, the amount of distributions payable to the Management Partnership were nil. As noted in Note 18 – Share Based Compensation, during the year the Company issued stock options to management under the terms of the Company’s stock option plan.
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 35 COMPENSATION OF KEY MANAGEMENT PERSONNEL The Company’s key management personnel are comprised of members of the executive team, to the extent that they have the authority and responsibility for planning, directing and controlling the day-to-day activities of the Company. The Company also provides compensation to the members of the Board of Directors. YEAR ENDED DECEMBER 31, 2017 2016 Directors fees, salaries and other short-term employee benefits $ 3,692 $ 3,076 Share–based compensation 1,178 840 Total compensation $ 4,870 $ 3,916 NOTE 11: EQUITY (a) SHAREHOLDERS’ EQUITY The Company is authorized to issue an unlimited number of common shares. As at December 31, 2017, the Company’s common share capital consisted of 31,190,153 shares issued and outstanding (December 31, 2016 – 31,186,819 shares). Each share entitles the holder to one vote at all meetings of shareholders. The 6,282,222 Class B partnership units of IBI Group are indirectly exchangeable for common shares of the Company on the basis of one share of the Company for each Class B subordinated partnership unit. If all such Class B partnership units of IBI Group had been exchanged for shares on December 31, 2017, the units issued on such exchange would have represented a 16.77% interest in the Company. Class B partnership units do not entitle the holder to voting rights at the meetings of shareholders, although the holder also holds an equal number of non-participating voting shares in the Company. The Class B partnership units have been recorded as a non-controlling interest in the consolidated financial statements as at December 31, 2017 and 2016. T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 36 SHARE ISSUANCES 2017 During the year ended December 31, 2017, the Company issued 3,334 common shares as a result of an exercise of stock options granted in January 2016. 2016 During the year ended December 31, 2016, the Company issued 6,220,076 common shares upon redemption of 7.0% Debentures Options B and C valued at $31,245. EARNINGS PER SHARE FROM CONTINUING AND DISCONTINUED OPERATIONS YEAR ENDED DECEMBER 31, 2017 2016 Net income $ 11,372 $ 3,494 Net income attributable to owners of the Company $ 9,465 $ 2,814 Weighted average common shares outstanding 31,190 26,020 Dilutive effect of Class B partnership units 6,282 6,282 Dilutive effect of stock options granted 385 193 Diluted weighted average common shares outstanding 37,857 32,495 Basic and diluted earnings per common share $ 0.30 $ 0.11 For the purposes of calculating diluted earnings per share, any impact of the convertible rights on the convertible debentures are not included in the calculation of net income per common share or weighted average number of common shares outstanding as they would be anti-dilutive. (b) NON-CONTROLLING INTEREST Non-controlling interest in the Company’s subsidiaries is exchangeable into the common shares of the Company on a one for one basis, subject to certain conditions. The movement in non-controlling interest is shown in the consolidated statement of changes in equity. The calculation of net income and total comprehensive income attributable to non-controlling interest is set out below: YEAR ENDED DECEMBER 31, 2017 2016 Net income $ 11,372 $ 3,494 Non-controlling interest share of ownership(1) 16.77% 19.45% Net income attributable to non-controlling interest $ 1,907 $ 680 (1) For the purposes of allocating net income and total comprehensive income to non-controlling interest, the average share of non-controlling interest for the year ended December 31, 2017 was used.
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 37 YEAR ENDED DECEMBER 31, 2017 2016 Total comprehensive income $ 7,854 $ 3,389 Non-controlling interest share of ownership(1) 16.77% 19.45% Total comprehensive income attributable to non-controlling interest $ 1,317 $ 659 (1) For the purposes of allocating net income and total comprehensive income to non-controlling interest, the average share of non-controlling interest for the year ended December 31, 2017 was used. NOTE 12: FINANCIAL RISK MANAGEMENT The Company has exposure to market, credit and liquidity risk. The Company’s primary risk management objective is to protect the Company’s consolidated statement of financial position, comprehensive income and cash flow in support of sustainable growth and earnings. The Company’s financial risk management activities are governed by financial policies that cover risk identification, tolerance, measurement, authorization levels, and reporting. (a) MARKET RISK INTEREST RATE RISK The Company’s credit facilities have floating-rate debt, which subjects it to interest rate cash flow risk. Advances under these credit facilities bear interest at a rate based on the Canadian dollar or U.S dollar prime rate, LIBOR or banker’s acceptance rates, plus, in each case, an applicable margin. If the interest rate on the Company’s variable rate loan balance as at December 31, 2017, had been 50 basis points higher or lower, with all other variables held constant, net income for the year ended December 31, 2017 would have decreased or increased by approximately $241. CURRENCY RISK The Company’s foreign exchange risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate as a result of changes in foreign exchange rates. The Company’s policy has been to economically hedge foreign exchange exposures rather than purchasing currency swaps and forward foreign exchange contracts. Foreign exchange gains or losses in the Company’s net income arise on the translation of foreign-denominated intercompany loans held in the Company’s Canadian operations and financial assets and liabilities held in the Company’s foreign operations. The Company minimizes its exposure to foreign exchange fluctuations on these items by matching U.S-dollar liabilities when possible. If the exchange rates had been 100 basis points higher or lower during the year ended and as at December 31, 2017, with all other variables held constant, total comprehensive income would have increased or decreased by $179 for the year ended December 31, 2017. If the exchange rates had been 100 basis points higher or lower during the year ended December 31, 2017, with all other variables held constant, net income would have increased or decreased by $41 for the year ended December 31, 2017. T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 38 (b) CREDIT RISK Financial instruments that subject the Company to credit risk consist primarily of accounts receivable. The Company maintains an allowance for estimated credit losses on accounts receivable. The estimate is based on the best assessment of the ultimate collection of the related accounts receivable balance based, in part, on the age of the outstanding accounts receivable and on its historical impairment loss experience. The Company provides services to diverse clients in various industries and sectors of the economy, and its credit risk is not concentrated in any particular client, industry, economic or geographic sector. In addition, management reviews accounts receivable past due on an ongoing basis with the objective of identifying matters that could potentially delay the collection of funds (at an early stage). The Company monitors accounts receivable with an internal target of working days of revenue in accounts receivable (a non-IFRS measure). At December 31, 2017, there were 62 working days of revenue in accounts receivable, compared to 60 days at December 31, 2016. The maximum exposure to credit risk, at the date of the consolidated statement of financial position to recognized financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the consolidated statement of financial position. A significant portion of the accounts receivable are due from government and public institutions. Receivables that are neither past due nor impaired are considered by management to have no significant collection risk. The liquidity of customers and their ability to pay receivables are considered in assessing the impairment of such assets. No collateral is held in respect of impaired assets or assets that are past due but not impaired. The aging of the accounts receivable are detailed below with the entire allowance for impairment losses relating to accounts receivable over 90 days: AS AT DECEMBER 31, DECEMBER 31, 2017 2016 Current $ 42,780 $ 46,057 30 to 90 days 38,405 29,315 Over 90 days 39,316 43,097 Gross accounts receivable 120,501 118,469 Allowance for impairment losses (9,282) (9,876) TOTAL $ 111,219 $ 108,593 (c) LIQUIDITY RISK The Company strives to maintain sufficient financial liquidity to withstand sudden adverse changes in economic circumstances. Management forecasts cash flows for its current and subsequent fiscal years to identify financing requirements. These requirements are then addressed through a combination of committed credit facilities (as described in Note 6 – Financial Instruments) and access to capital markets. On June 30, 2017, IBI Group signed an amendment to refinance its credit facilities with its senior lenders (refer to Note 6 – Financial Instruments). As at December 31, 2017, a foreign subsidiary of the Company had issued letters of credit in the amount of U.S $2,300, which is equal to CAD $2,936 (December 31, 2016 – CAD $3,141). The Company has
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 39 pledged U.S $2,300 (December 31, 2016 - $2,300) of cash as security for these letters of credit issued by a foreign financial institution on behalf of the foreign subsidiary. The Company has the following contractual obligations as at December 31, 2017: YEARS ENDED DECEMBER 31 2017 CARRYING AMOUNT 2018 2019 AND 2020 2021 AND 2022 2023 AND BEYOND Accounts payable and accrued liabilities $ 48,783 $ 48,783 $ - $ - $ - Credit facilities 63,842 - - 65,651 - Interest on credit facilities - 3,085 6,169 1,542 - Convertible debentures 47,157 - 14,755 46,000 - Interest on convertible debentures - 3,563 5,576 2,530 - Finance lease obligation 67 36 31 - - Total obligations $ 159,849 $ 55,467 $ 26,531 $ 115,723 $ - (d) CAPITAL MANAGEMENT The Company’s objective in managing capital is to maintain a strong capital base so as to maintain investor, creditor, and market confidence and to sustain future growth within the business. The Company defines its capital as the aggregate of credit facilities, convertible debentures and equity. The Company’s financing strategy is to access capital markets to raise debt and equity financing and utilize the banking market to provide committed term and operating credit facilities to support its short-term and long-term cash flow needs. The Company has used the credit facilities to fund working capital. The credit facilities contain financial covenants including a leverage ratio, interest coverage ratio, minimum Adjusted EBITDA1 threshold, and restrictions on distributions, if certain conditions are not met. The Company was in compliance with all financial covenants as at December 31, 2017. (e) FAIR VALUE MEASUREMENTS The fair values of cash, restricted cash, accounts receivable, accounts payable and accrued liabilities, and finance lease obligation approximate their carrying amounts due to their short-term maturity. The fair value of the Company’s credit facilities (net of deferred financing costs) approximate carrying value due to the variable rate of interest of the debt. 1 As defined in the credit facilities agreement, references to “Adjusted EBITDA” is to earnings before interest, income taxes, depreciation and amortization; adjusted for gain/loss arising from extraordinary, unusual or non-recurring items; acquisition costs and deferred consideration revenue; non-cash expenses; gain/loss realized upon the disposal of capital property; gain/loss on foreign exchange translation; gain/loss on purchase or redemption of securities issued; gain/loss on fair valuation of financial instruments; amounts attributable to minority equity investments; and interest income. Adjusted EBITDA is not a recognized measure under IFRS and does not have a standardized meaning prescribed by IFRS, and the Company’s method of calculating Adjusted EBITDA may differ from the methods used by other similar entities. T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 40 IFRS 7 Financial Instruments – Disclosures, requires disclosure of all financial instruments at fair value other than short term and carried at amortized cost, grouped in Levels 1 to 3, in the fair value hierarchy, based on the degree to which the fair value is observable. The three levels of the fair value hierarchy are: Level 1 – inputs derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and Level 3 – fair value derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). For financial instruments recognized at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by reassessing categorization at the end of each reporting period. There were no transfers between Level 1 and Level 2 for the years ended December 31, 2017 and December 31, 2016. NOTE 13: CHANGE IN NON-CASH OPERATING WORKING CAPITAL YEAR ENDED DECEMBER 31, 2017 2016 Accounts receivable $ (5,966) $ (1,825) Work in process 6,672 (9,457) Prepaid expenses and other assets (3,041) (1,610) Accounts payable and accrued liabilities (5,125) 2,383 Deferred revenue (5,866) 13,036 Net income taxes payable (1,821) 1,637 Change in non-cash operating working capital $ (15,147) $ 4,164 NOTE 14: COMMITMENTS Non-cancellable operating leases where the Company is the lessee are payable as set out below. These amounts represent the minimum annual future lease payments (excluding common area maintenance costs and property taxes), in aggregate, that the Company is required to make under existing operating lease agreements. 2018 $ 23,820 2019 $ 33,370 2020 $ 15,146 2021 $ 14,521 2022 $ 13,084 Thereafter $ 41,276
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 41 The Company leases certain property and equipment under operating leases. The leases typically run for an initial lease period with the potential to renew the leases after the initial period at the option of the Company. The rent expense recognized in the consolidated statement of comprehensive income: YEAR ENDED DECEMBER 31, 2017 2016 Lease expense $ 25,809 $ 25,148 Onerous lease provision 1,991 (951) Sublease income (2,098) (1,457) Total rent expense $ 25,702 $ 22,740 NOTE 15: FINANCE COSTS YEAR ENDED DECEMBER 31, 2017 2016 Interest on credit facilities $ 3,149 $ 3,057 Interest on convertible debentures 3,563 5,872 Interest on consent fee notes payable - 255 Non-cash accretion of convertible debentures 3,281 15,403 Non-cash accretion of consent fee notes payable - 479 Other 333 487 INTEREST EXPENSE $ 10,326 $ 25,553 Amortization of deferred financing costs 775 1,041 Other 691 601 OTHER FINANCE COSTS $ 1,466 $ 1,642 FINANCE COSTS $ 11,792 $ 27,195 NOTE 16: DEFERRED SHARE PLAN The Company offers a deferred share plan (“DSP”) for independent members of the Board of Directors (“Board”). Under the DSP, directors of the Company may elect to allocate all or a portion of their annual compensation in the form of deferred shares rather than cash. These shares are fully vested upon issuance and are recorded as a financial liability at FVTPL in the consolidated statement of financial position amounting to $2,848. Directors can only redeem their DSPs for shares when they leave the Board. During the year ended December 31, 2017, the Company granted 70,278 deferred shares (December 31, 2016 – 73,764) and redeemed 123,641 deferred shares (December 31, 2016 – nil), for a total of 349,403 deferred shares outstanding as at December 31, 2017 (December 31, 2016 – 402,766). Compensation expense for the year ended December 31, 2017 related to the deferred shares was $1,333 (December 31, 2016 – $1,633). There is no unrecognized compensation expense related to deferred shares, since these awards vest immediately when granted. T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 42 The table below shows the DSP transactions for the year ended December 31, 2017: DEFERRED SHARES FAIR VALUE Balance, January 1, 2017 402,766 $ 2,360 Deferred shares issued 70,278 505 Deferred shares redeemed (123,641) (846) Change in fair value due to share price - 828 BALANCE, DECEMBER 31, 2017 349,403 2,847 The table below shows the DSP transactions for the year ended December 31, 2016: DEFERRED SHARES FAIR VALUE Balance, January 1, 2016 329,002 $ 727 Deferred shares issued 73,764 384 Change in fair value due to share price - 1,249 BALANCE, DECEMBER 31, 2016 402,766 $ 2,360 NOTE 17: CONTINGENCIES (a) LEGAL MATTERS In the normal course of business, the Company is a defendant in a number of lawsuits. The potential liability, if any, is not determinable and in management's opinion, it would not have a material effect on these consolidated financial statements, therefore no provisions have been recorded. (b) INDEMNIFICATIONS The Company provides indemnifications and, in very limited circumstances, bonds, which are often standard contractual terms, to counterparties in transactions such as purchase and sale contracts for assets or shares, service agreements, and leasing transactions. The Company also indemnifies its directors and officers against any and all claims or losses reasonably incurred in the performance of their service to the Company to the extent permitted by law. These indemnifications may require the Company to compensate the counterparty for costs incurred as a result of various events, including changes in or in the interpretation of laws and regulations, or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. The terms of these indemnifications will vary based upon the contract, the nature of which prevents the Company from making a reasonable estimate of the maximum potential amount that it could be required to pay to counterparties. The Company carries liability insurance, subject to certain deductibles and policy limits that provides protection against certain insurable indemnifications. Historically, the Company has not made any significant payments under such indemnifications, and no provisions have been accrued in the accompanying consolidated financial statements with respect to these indemnifications as it is not probable that there will be an outflow of resources.
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 43 NOTE 18: SHARE-BASED COMPENSATION CASH SETTLED TRANSACTIONS The Company has a share-based compensation plan which allows directors to receive director fees in the form of deferred shares rather than cash. These awards are accounted for as financial liabilities at Fair Value Through Profit and Loss (“FVTPL”). On the grant date, the deferred shares are measured at fair value based on the market price with subsequent changes to the fair value until settlement recorded as salaries, fees and employee benefit expenses. The change in fair value of the deferred shares is recognized in other operating expenses in the consolidated statement of income and comprehensive income. During the year ended December 31, 2017 an expense of $505 was recognized (December 31, 2016 - $384) due to market movement in the share price. On May 11, 2017, two members of the Board of Directors settled 123,641 deferred share units for $846 upon their resignation. EQUITY SETTLED TRANSACTIONS Stock options The Company has an equity-settled stock option plan. The grant-date fair value of the stock options is recognized as salaries, fees and employee expenses, with a corresponding increase to capital reserve over the vesting period of the stock options. Market conditions are reflected in the initial measurement of fair-value, with no subsequent true-up for differences between expected and actual outcomes. Under the terms of the Company’s stock option plan, the options vest evenly over a three year period on each of the first, second and third anniversary dates of the grant, expire on the tenth anniversary of the date of the grant, and are measured using the Black-Scholes model. T
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 44 The following inputs were used in the measurement of the fair values at the grant date of the options: Grant date Options issued Fair value at grant date Share price at grant date Exercise price Expected volatility (weighted average) Expected life (weighted average) Expected dividends Risk-free interest rate January 15, 2016 Tranche 1 178,333 $ 1.14 $ 2.13 $ 2.33 64.2% 5.5 years 0% 0.64% Tranche 2 178,333 $ 1.16 $ 2.13 $ 2.33 62.1% 6.0 years 0% 0.72% Tranche 3 178,334 $ 1.17 $ 2.13 $ 2.33 60.2% 6.5 years 0% 0.81% 535,000 May 25, 2016 Tranche 1 33,071 $ 2.63 $ 4.53 $ 4.49 66.9% 5.5 years 0% 0.86% Tranche 2 33,071 $ 2.63 $ 4.53 $ 4.49 64.3% 6.0 years 0% 0.92% Tranche 3 33,071 $ 2.67 $ 4.53 $ 4.49 62.3% 6.5 years 0% 0.99% 99,213 May 12, 2017 Tranche 1 23,036 $ 4.31 $ 7.30 $ 7.01 67.1% 5.5 years 0% 1.07% Tranche 2 23,036 $ 4.36 $ 7.30 $ 7.01 65.1% 6.0 years 0% 1.14% Tranche 3 23,035 $ 4.39 $ 7.30 $ 7.01 62.8% 6.5 years 0% 1.20% 69,107 July 17, 2017 Tranche 1 105,500 $ 3.88 $ 6.63 $ 6.63 67.0% 5.5 years 0% 1.55% Tranche 2 105,500 $ 3.95 $ 6.63 $ 6.63 65.2% 6.0 years 0% 1.60% Tranche 3 105,500 $ 3.97 $ 6.63 $ 6.63 62.8% 6.5 years 0% 1.64% 316,500 August 9, 2017 Tranche 1 25,772 $ 3.97 $ 6.77 $ 6.79 67.0% 5.5 years 0% 1.57% Tranche 2 25,772 $ 4.02 $ 6.77 $ 6.79 65.0% 6.0 years 0% 1.61% Tranche 3 25,771 $ 4.05 $ 6.77 $ 6.79 62.8% 6.5 years 0% 1.66% 77,315 Expected volatility is based on an evaluation of the historical volatility of the Company’s share price over the historical period commensurate with the expected term. The expected term of the instruments has been based on general option-holder behavior. For the year ended December 31, 2017, the Company has recognized an expense of $810 (December 31, 2016 – $453) in salaries, fees and employee benefits for stock options in the consolidated statement of income and comprehensive income.
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IBI GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 45 The following stock option arrangements were in existence as at December 31, 2017: Grant date Expiry date Options issued Options exercised Options cancelled/ forfeited Options outstanding Options exercisable Exercise price Fair value at grant date 15-Jan-16 15-Jan-26 535,000 3,334 15,000 516,666 174,999 $ 2.33 $ 618,816 25-May-16 25-May-26 99,213 - - 99,213 33,071 $ 4.49 $ 262,253 16-May-17 16-May-27 69,107 - - 69,107 - $ 7.01 $ 300,846 17-Jul-17 17-Jul-27 316,500 - - 316,500 - $ 6.63 $ 1,245,954 9-Aug-17 9-Aug-27 77,315 - - 77,315 - $ 6.79 $ 310,550 1,097,135 3,334 15,000 1,078,801 208,070 $ 2,738,419 Performance share units On August 9, 2017, the Company adopted a PSU plan for senior executives. Under that plan, the Board of Directors may grant PSUs to participants which entitles them to receive one common share for each PSU. The vesting and performance conditions are determined by the Board of Directors at the time of each grant. The Company has recognized an expense of $103 for the year ended December 31, 2017 (December 31, 2016 - $nil), in salaries, fees and employee benefits for PSUs in the consolidated statement of income and comprehensive income. NOTE 19: INVESTMENT IN EQUITY ACCOUNTED INVESTEE On October 2, 2014, the Company’s interest in China decreased from 100% to 51% by way of a sale of the China operations. Although the Company retained 51% interest in China, the Company has determined that it does not have control of this entity and thus it is being accounted for as an equity investment subsequent to the sale. For the year ended December 31, 2017, the Company made an additional cash investment in China of $348 (December 31, 2016 - $Nil), and has recognized its share of the losses on the investment of $348 (December 31, 2016 - $32). IBI GROUP INC. MANAGEMENT DISCUSSION AND ANALYSIS FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2017 FORWARD-LOOKING STATEMENTS ......................................................................................................... 2 FORWARD LOOKING STATEMENTS AND RISK FACTORS .................................................................... 2 COMPANY PROFILE .................................................................................................................................... 3 OUTLOOK ..................................................................................................................................................... 4 FINANCIAL HIGHLIGHTS ............................................................................................................................ 5 OVERVIEW ................................................................................................................................................... 6 KEY EVENTS ............................................................................................................................................ 6 STATEMENT OF COMPREHENSIVE INCOME (LOSS) ......................................................................... 6 RESULTS OF OPERATIONS ....................................................................................................................... 8 DESCRIPTION OF VARIANCES IN OPERATING RESULTS ................................................................. 9 SUMMARY OF FOREIGN EXCHANGE IMPACT ................................................................................... 12 SELECTED ANNUAL INFORMATION ....................................................................................................... 13 ADJUSTED EBITDA FOR THE PREVIOUS EIGHT QUARTERS ............................................................. 14 IMPACT OF TRENDS ON QUARTERLY RESULTS .............................................................................. 15 LIQUIDITY AND CAPITAL RESOURCES .................................................................................................. 16 WORKING CAPITAL ............................................................................................................................... 16 CASH FLOWS ............................................................................................................................................ 18 OPERATING ACTIVITIES ....................................................................................................................... 18 FINANCING ACTIVITIES ........................................................................................................................ 19 INVESTING ACTIVITIES ......................................................................................................................... 19 CREDIT FACILITY ...................................................................................................................................... 20 SECURITY INTEREST OF SENIOR LENDERS ........................................................................................ 21 CONVERTIBLE DEBENTURES ................................................................................................................. 22 FINANCIAL RISK MANAGEMENT ............................................................................................................. 24 MARKET RISK ........................................................................................................................................ 24 CREDIT RISK .......................................................................................................................................... 24 LIQUIDITY RISK ...................................................................................................................................... 25 CONTRACTUAL OBLIGATIONS ................................................................................................................ 25 CAPITAL MANAGEMENT .......................................................................................................................... 25 FUTURE CASH GENERATION .................................................................................................................. 26 SHARE CAPITAL .................................................................................................................................... 27 TRANSACTIONS WITH RELATED PARTIES ........................................................................................ 27 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS ..................................................................... 28 ACCOUNTING DEVELOPMENTS ............................................................................................................. 29 DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING ............................................................................................................................................... 32 DEFINITION OF NON-IFRS MEASURES .................................................................................................. 33 T
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3 – IBI Group Inc. – December 31, 2017 believes to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of March 8, 2018. The factors used to develop revenue forecast in this MD&A include the total amount of work the Company has signed an agreement with its clients to complete, the timeline in which that work will be completed based on the current pace of work the company achieved over the last 12 months and expects to achieve over the next 12 months. The Company updates these assumptions at each reporting period and adjusts its forward looking information as necessary. COMPANY PROFILE The business of the Company is conducted through IBI Group, a global architecture, engineering, planning and technology entity, which operates 63 offices in 11 countries across the world. IBI Group has one operating segment, consulting services, which is concentrated in three practice areas: – Intelligence – Buildings – Infrastructure IBI Group’s professionals have a broad range of professional backgrounds and experience in urban design and planning, architecture, civil engineering, transportation engineering, traffic engineering, systems engineering, urban geography, real estate analysis, landscape architecture, communications engineering, software development, and many other areas of expertise, all contributing to the three areas in which IBI Group practices. The firm’s clients include national, provincial, state, and local government agencies and public institutions, as well as leading companies in the real estate building, land and infrastructure development, transportation and communication industries, and in other business areas. T
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3 – IBI Group Inc. – December 31, 2017 believes to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of March 8, 2018. The factors used to develop revenue forecast in this MD&A include the total amount of work the Company has signed an agreement with its clients to complete, the timeline in which that work will be completed based on the current pace of work the company achieved over the last 12 months and expects to achieve over the next 12 months. The Company updates these assumptions at each reporting period and adjusts its forward looking information as necessary. COMPANY PROFILE The business of the Company is conducted through IBI Group, a global architecture, engineering, planning and technology entity, which operates 63 offices in 11 countries across the world. IBI Group has one operating segment, consulting services, which is concentrated in three practice areas: – Intelligence – Buildings – Infrastructure IBI Group’s professionals have a broad range of professional backgrounds and experience in urban design and planning, architecture, civil engineering, transportation engineering, traffic engineering, systems engineering, urban geography, real estate analysis, landscape architecture, communications engineering, software development, and many other areas of expertise, all contributing to the three areas in which IBI Group practices. The firm’s clients include national, provincial, state, and local government agencies and public institutions, as well as leading companies in the real estate building, land and infrastructure development, transportation and communication industries, and in other business areas. 4 – IBI Group Inc. – December 31, 2017 OUTLOOK The following represents forward looking information and users are cautioned that actual results may vary. Management is forecasting approximately $366 million in total revenue for the year ended December 31, 2018. The Company currently has $331 million of work that is committed and under contract for the next three years. This committed workload is a material factor and assumption used to develop revenue forecasts. The Company continues to see an increase in committed work to be delivered in 2018. The Company has approximately ten months of backlog (calculated on the basis of the current pace of work that the Company has achieved during the 12 months ended December 31, 2017). The Company bases its view of industry performance on: 1. Annual survey completed by The Environmental Financial Consulting Group, Inc (“EFCG”) which focuses on architecture and engineering industries. 2. The reported performance of the Company’s direct competitors. 3. The reports published by market analysts covering firms in the Company’s business sectors. The Company has returned to Adjusted EBITDA1 margins in line with industry averages. Based on the most recent review of this information, EBITDA margins in the industry average 8-12%. 1 See “Definition of Non-IFRS Measures”.
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5 – IBI Group Inc. – December 31, 2017 FINANCIAL HIGHLIGHTS (in thousands of Canadian dollars except for per share amounts) THREE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2017 2016 2017 2016 (unaudited) (unaudited) Number of working days (unaudited) 62 63 253 251 Revenue $ 86,886 $ 86,841 $ 361,408 $ 354,140 Net income (loss) $ (2,891) $ 7,594 $ 11,372 $ 3,494 Cash flows provided by operating activities $ 3,305 $ 17,247 $ 15,139 $ 32,047 Basic and diluted earnings (loss) per share $ (0.08) $ 0.24 $ 0.30 $ 0.11 Adjusted EBITDA1 (unaudited) $ 7,643 $ 7,480 $ 40,615 $ 39,247 Adjusted EBITDA1 as a percentage of revenue (unaudited) 8.8% 8.6% 11.2% 11.1% 1- See “Definition of Non-IFRS Measures”. T
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7 – IBI Group Inc. – December 31, 2017 receivables balances more frequently, which is expected to reduce the amount of foreign exchange gains and losses recorded in net income. Basic and diluted loss per share was $0.08 per share for the three months ended December 31, 2017, compared to a basic and diluted earnings per share of $0.24 per share for the same period in 2016. Basic and diluted earnings per share decreased primarily due to the decrease in net income of $10.5 million, which is due to the $3.7 million increase in losses from the change in the fair value of the derivative liability and $3.0 million increase in rent expense due to the renegotiation of the sublease associated with the onerous lease. Net income was further reduced due to the $3.3 million increase in tax expenses as a result of reduced availability of tax losses, particularly in the Canadian business. For the year ended December 31, 2017, the Company had net income of $11.4 million compared with net income of $3.5 million for the same period in 2016. Net income for the year ended December 31, 2017 is inclusive of foreign exchange gains of $1.0 million, compared with foreign exchange losses of $7.4 million for the same period in 2016. The foreign exchange gain for the year ended December 31, 2017 reflects the positive trend in the Canadian dollar currency, as the Canadian dollar strengthened against the U.S. dollar and British pound compared to the same period in 2016. During the third quarter of 2017, management completed an initiative to convert foreign denominated inter-company receivables to investments in equity of its foreign subsidiaries. As a result of this initiative, the impacts of the foreign exchange gains and losses on the investment balances will be recorded in other comprehensive income. Subject to cash availability in the foreign jurisdictions, the Company intends to settle inter-company receivables balances more frequently, which is expected to reduce the amount of foreign exchange gains and losses recorded in net income. Basic and diluted earnings per share were $0.30 per share for the year ended December 31, 2017, compared to basic and diluted earnings per share of $0.11 for the same period in 2016. Basic and diluted earnings per share increased primarily due to the increase in net income of $7.9 million, which is due to the $15.2 million decrease in interest expense, offset by the $10.0 million increase in income tax expense. The decrease in interest expense is a result of decreased interest and accretion on debentures after the redemption of the 7% and 6% Convertible Debentures in 2016. The increase in tax expense is a result of reduced availability of tax losses, particularly in the Canadian business. T
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8 – IBI Group Inc. – December 31, 2017 RESULTS OF OPERATIONS The results of operations presented below should be read in conjunction with the applicable annual audited consolidated financial statements and related notes thereto, prepared in accordance with IFRS. THREE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2017 2016 2017 2016 (thousands of Canadian dollars, except per share amounts) (unaudited) (unaudited) Revenue $ 86,886 $ 86,841 $ 361,408 $ 354,140 Expenses Salaries, fees and employee benefits 63,903 61,914 255,915 248,869 Rent 8,550 5,947 25,702 22,740 Other operating expenses 9,873 10,502 39,688 41,781 Foreign exchange (gain) loss 256 (1,215) (989) 7,363 Amortization of intangible assets 333 293 1,231 1,002 Depreciation of property and equipment 164 1,168 3,229 4,323 Loss (gain) in fair value of other financial liabilities 1,953 (1,819) 3,922 (1,819) Impairment of financial assets 148 558 1,680 1,653 85,180 77,348 330,378 325,912 OPERATING INCOME $ 1,706 $ 9,493 $ 31,030 $ 28,228 Interest expense, net 2,602 3,064 10,326 25,553 Other finance costs 259 414 1,466 1,642 FINANCE COSTS $ 2,861 $ 3,478 $ 11,792 $ 27,195 Share of loss of equity accounted investee, net of tax (0) - 348 32 NET INCOME (LOSS) BEFORE TAX $ (1,155) $ 6,015 $ 18,890 $ 1,001 Current tax expense 959 1,147 1,963 2,908 Deferred tax expense (recovery) 777 (2,727) 5,555 (5,401) INCOME TAX EXPENSE (RECOVERY) $ 1,736 $ (1,580) $ 7,518 $ (2,493) NET INCOME (LOSS) $ (2,891) $ 7,595 $ 11,372 $ 3,494 OTHER COMPREHENSIVE INCOME (LOSS) Items that are or may be reclassified to profit or loss Gain (loss) on translating financial statements of foreign operations, from continuing operations, net of tax 1,051 (1,265) (3,518) (105) OTHER COMPREHENSIVE INCOME (LOSS) 1,051 (1,265) (3,518) (105) TOTAL COMPREHENSIVE INCOME (LOSS) $ (1,840) $ 6,330 $ 7,854 $ 3,389 NET INCOME (LOSS) ATTRIBUTABLE TO: Common shareholders (2,407) 6,090 9,465 2,814 Non-controlling interests (484) 1,505 1,907 680 NET INCOME (LOSS) $ (2,891) $ 7,595 $ 11,372 $ 3,494 TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO: Common shareholders (1,532) 5,080 6,537 2,730 Non-controlling interests (308) 1,250 1,317 659 TOTAL COMPREHENSIVE INCOME (LOSS) $ (1,840) $ 6,330 $ 7,854 $ 3,389 EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS Basic and diluted earnings (loss) per share $ (0.08) $ 0.24 $ 0.30 $ 0.11
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9 – IBI Group Inc. – December 31, 2017 DESCRIPTION OF VARIANCES IN OPERATING RESULTS i) REVENUE The Company reports revenue net of direct recoverable costs as these costs can vary significantly from contract to contract and are not indicative of its professional services business. Revenue for the three months ended December 31, 2017 remained consistent when compared to the same period in 2016. Revenue for the year ended December 31, 2017 increased by $7.3 million or 2.1% compared to the same period in 2016. The increase in revenue is due to growth in the Canadian Geographical segment, including continuing work on significant transit projects. The impact of foreign exchange on revenue for the three months ended December 31, 2017 was a decrease in revenue of $1.8 million compared to the same period in 2016, and for the year ended December 31, 2017 was a decrease in revenue of $3.9 million when compared to the same period in 2016. The following table provides quarterly historical financial working days for the Company for each of the eight most recently completed quarters: DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, (unaudited) 2017 2017 2017 2017 2016 2016 2016 2016 Number of working days 62 64 63 63 63 63 64 62 ii) SALARIES, FEES, AND EMPLOYEE BENEFITS Salaries, fees, and employee benefits for the three months ended December 31, 2017 was $63.9 million compared with $61.9 million in the same period in 2016. As a percentage of revenues, salaries, fees and employee benefits for the three months ended December 31, 2017 was 73.5% compared to 71.3% for the same period in 2016, which is consistent with the budgeted compensation target of 70% of revenue. Salaries, fees and employee benefits for the year ended December 31, 2017 was $255.9 million, compared with $248.9 million for the same period in 2016. As a percentage of revenues, salaries, fees and employee benefits for the year ended December 31, 2017 was 70.8% compared to 70.3% for the same period in 2016, which is consistent with the budgeted compensation target of 70% of revenue. The impact of foreign exchange on salaries, fees and employee benefits for three months ended December 31, 2017 was a decrease in expense of $1.4 million compared to the same period in 2016, and for the year ended December 31, 2017 was a decrease in expense of $2.9 million compared with the same period in 2016. iii) RENT Rent for the three months ended December 31, 2017 was $8.6 million compared with $5.9 million in the same period in 2016. Rent for the year ended December 31, 2017 was $25.7 million, compared with $22.7 million for the same period in 2016. The increase in rent for both periods is a result of the renegotiation of the sublease associated with the Company’s onerous lease causing an additional expense of $3.0 million. iv) OTHER OPERATING EXPENSES Other operating expenses for the three months ended December 31, 2017 was $9.9 million, compared with $10.5 million for the same period in 2016. As a percentage of revenues, operating expenses for the three months ended December 31, 2017 were 11.4% compared to 12.1% for the same period in 2016. T
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10 – IBI Group Inc. – December 31, 2017 Other operating expenses for the year ended December 31, 2017 was $39.7 million, compared to $41.8 million for the same period in 2016. As a percentage of revenues, operating expenses for the year ended December 31, 2017 were 11.0% compared to 11.8% for the same period in 2016. The impact of foreign exchange on other operating expenses for the three months ended December 31, 2017 was a decrease in expense of $0.1 million compared to the same period in 2016, and for the year ended December 31, 2017 was a decrease $0.2 million of expense compared to the same period in 2016. A reduction in overhead expenses as a percentage of revenues has been a continued area of focus for the Company as we look to improve overall efficiency. v) FOREIGN EXCHANGE GAIN & LOSS Foreign exchange loss for the three months ended December 31, 2017 was $0.3 million compared to a foreign exchange gain of $1.2 million in the same period in 2016. Foreign exchange gain for the year ended December 31, 2017 was $1.0 million compared to a foreign exchange loss of $7.4 million for the same period in 2016. The foreign exchange gain for the year ended December 31, 2017 reflects the positive trend in the Canadian dollar currency, as the Canadian dollar strengthened against the U.S. dollar and British pound compared to the same period in 2016. The foreign exchange loss (gain) is primarily attributable to foreign exchange rate movements between the Canadian dollar, U.S dollar and British pound as functional currencies of the Company’s subsidiaries and other local currencies of international subsidiaries, intercompany loans made by the Canadian parent company in the functional currencies of foreign subsidiaries that is not considered part of the permanent investment in the foreign subsidiaries, offset by the foreign exchange impact of its U.S dollar drawings on its credit facilities. During the third quarter of 2017, management completed an initiative to convert foreign denominated inter-company receivables to investments in equity of its foreign subsidiaries. As a result of this initiative, the impacts of the foreign exchange gains and losses on the investment balances will be recorded in other comprehensive income. Subject to cash availability in the foreign jurisdictions, the Company intends to settle inter-company receivables balances more frequently, which is expected to reduce the amount of foreign exchange gains and losses recorded in net income. Although the Company strives to minimize its exposure to foreign exchange fluctuations on the translation of foreign-denominated intercompany loans held in the Company’s Canadian operations by matching U.S dollar liabilities when possible, the Company’s primary objective is to ensure it has sufficient cash flow to meet its short and long-term obligations. As such, the Company closely monitors its availability in its credit facilities based on foreign exchange rate fluctuations between the Canadian and U.S dollar, as well as ensures that tax efficiencies continue to exist in order to meet its short and long-term cash obligations. vi) GAIN & LOSS IN FAIR VALUE OF OTHER FINANCIAL LIABILITIES Loss in fair value of other financial liabilities for the three months ended December 31, 2017 was $2.0 million compared to a gain of $1.8 million for the same period in 2016. Loss in fair value of other financial liabilities for the year ended December 31, 2017 was $3.9 million compared to a gain of $1.8 million for the same period in 2016. The movement is related to the revaluation of the derivative liability, which was set up in September 2016 as a result of the issuance of the 5.5% Debentures. The movement in fair value is impacted by several factors, which include IBI share price, the Canadian risk free rate, and IBI’s credit risk.
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11 – IBI Group Inc. – December 31, 2017 vii) IMPAIRMENT OF FINANCIAL ASSETS Impairment of financial assets for the three months ended December 31, 2017 was $0.1 million compared to $0.6 million in the same period in 2016. Impairment of financial assets for the year ended December 31, 2017 was $1.7 million compared to $1.7 million for the same period in 2016. Overall, the company continues to manage its billings & collections process to minimize impact of any impairment of financial assets. viii) INTEREST EXPENSE Interest expense for the three months ended December 31, 2017 was $2.6 million compared to $3.1 million for the same period in 2016. The interest expense decreased due to the redemption of the 7% and 6% Convertible Debentures in 2016 as well as more favourable terms on the amended credit facilities secured on June 30, 2017, see discussion in the liquidity risk section of this MD&A for further details. Interest expense for the year ended December 31, 2017 was $10.3 million compared with $25.6 million for the same period in 2016. The interest expense decreased due to the redemption of the 7% and 6% Convertible Debentures in 2016 as well as more favourable terms on the amended credit facilities secured on June 30, 2017, see discussion in the liquidity risk section of this MD&A for further details. ix) OTHER FINANCE COSTS Other finance costs for the three months ended December 31, 2017 was $0.3 million compared to $0.4 million for the same period in 2016. Other finance costs for the year ended December 31, 2017 were $1.5 million compared to $1.6 million for the same period in 2016. x) INCOME TAXES Income taxes for the three months ended December 31, 2017 was an expense of $1.7 million with an effective income tax rate of 150.0% compared to a recovery of $1.6 million with an effective income tax rate of (26.3%) for the same period in 2016. The increase in the effective tax rate for the three months ended December 31, 2017 was primarily a result of non-deductible expenses arising from accounting loss on revaluation of a financial instrument, accretion expense and the U.S operations recognizing previously unrecognized deferred tax assets during 2017. In addition, the impact of the U.S tax reform also had a significant impact as our deferred tax assets that were set up on December 31, 2016 needed to be revalued from the 35% Federal Tax rate to the newly enacted tax rate of 21%. Income taxes for the year ended December 31, 2017 was an expense of $7.5 million with an effective tax rate of 39.8% compared to a recovery of $2.5 million with an effective tax rate of (249.0%) for the same period in 2016. The increase in the effective tax rate was primarily a result of non-deductible expenses arising from loss on revaluation of financial instrument, and due to accretion expense offset by a decrease due to the U.S operations recognizing previously unrecognized deferred tax assets. In addition, the US tax reform also had an impact of $1,430 as our deferred tax assets needed to be revalued from the 35% Federal Tax rate to the newly enacted tax rate of 21%. xi) NET INCOME Net loss for the three months ended December 31, 2017 was $2.9 million compared to net income of $7.6 million for the same period in 2016. The factors impacting this are set out in the description of individual line items above. Net income for the year ended December 31, 2017 was $11.4 million compared to $3.5 million for the same period in 2016. The factors impacting this are set out in the description of individual line items above. T
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12 – IBI Group Inc. – December 31, 2017 Adjusted EBITDA1 for the three months ended December 31, 2017 has increased by $0.2 million compared to the same period in 2016 (see table for adjusted EBITDA1 for the previous eight quarters in this MD&A), and for the year ended December 31, 2017 has increased by $1.4 million compared to the same period in 2016. Following is a summary of finance costs for the year ended December 31, 2017 and December 31, 2016: YEAR ENDED DECEMBER 31, 2017 2016 Interest on credit facilities $ 3,149 $ 3,057 Interest on convertible debentures 3,563 5,872 Interest on consent fee notes payable - 255 Non-cash accretion of convertible debentures 3,281 15,403 Non-cash accretion of consent fee notes payable - 479 Other 333 487 INTEREST EXPENSE $ 10,326 $ 25,553 Amortization of deferred financing costs 775 1,041 Other 691 601 OTHER FINANCE COSTS $ 1,466 $ 1,642 FINANCE COSTS $ 11,792 $ 27,195 SUMMARY OF FOREIGN EXCHANGE IMPACT The following is a summary of the foreign exchange impact on revenue and total expenses for the three months and year ended December 31, 2017: THREE MONTHS ENDED FOREIGN (in thousands of Canadian dollars) DECEMBER 31, EXCHANGE OPERATING (unaudited) 2017 2016 CHANGE IMPACT CHANGE Revenue 86,886 86,841 45 (1,813) 1,858 Total operating expenses, net of foreign exchange gain & loss 84,924 78,455 6,469 (1,826) 8,295 YEAR ENDED FOREIGN (in thousands of Canadian dollars) DECEMBER 31, EXCHANGE OPERATING (unaudited) 2017 2016 CHANGE IMPACT CHANGE Revenue 361,408 354,140 7,268 (3,854) 11,122 Total operating expenses, net of foreign exchange gain & loss 331,367 318,440 12,927 (3,879) 16,806 1 See “Definition of Non-IFRS Measures”.
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13 – IBI Group Inc. – December 31, 2017 SELECTED ANNUAL INFORMATION The selected information presented below should be read in conjunction with the applicable annual audited consolidated financial statements and related notes thereto, prepared in accordance with IFRS. YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, (in thousands of Canadian dollars, except per share amounts) 2017 2016 2015 Revenue $ 361,408 $ 354,140 $ 327,092 Net income from continuing operations $ 11,372 $ 3,494 $ 11,336 Net loss from discontinued operations $ - $ - $ (1,873) NET INCOME $ 11,372 $ 3,494 $ 9,463 Basic and diluted earnings per share $ 0.30 $ 0.11 $ 0.41 Basic and diluted earnings per share from continuing operations $ 0.30 $ 0.11 $ 0.49 Basic and diluted loss per share from discontinued operations $ - $ - $ (0.08) DECEMBER 31, DECEMBER 31, DECEMBER 31, (in thousands of Canadian dollars) 2017 2016 2015 TOTAL ASSETS $ 256,316 $ 261,810 $ 255,240 Onerous lease provisions $ 1,082 $ 2,270 $ 3,244 Finance lease obligation $ 31 $ 67 $ 104 Credit facilities $ 63,842 $ 73,184 $ 72,277 Convertible debentures $ 47,157 $ 43,876 $ 84,720 Other financial liabilities $ 13,011 $ 9,089 $ - Deferred tax liabilities $ 4,525 $ 4,176 $ 6,660 TOTAL LONG-TERM LIABILITIES $ 129,648 $ 132,662 $ 167,005 xii) ADJUSTED EBITDA1 All of the factors outlined above have been adjusted for the discussion in the non-IFRS measure, Adjusted EBITDA1. The following summary of quarterly results outlines all the items which comprise the difference between net income (loss) from continuing operations in each of the following quarters. 1 See “Definition of Non-IFRS Measures”. T
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14 – IBI Group Inc. – December 31, 2017 ADJUSTED EBITDA1 FOR THE PREVIOUS EIGHT QUARTERS The following table provides quarterly historical financial data for the Company for each of the eight most recently completed quarters. This information should be read in conjunction with the applicable interim unaudited and annual audited consolidated financial statements and related notes thereto, prepared in accordance with IFRS. (in thousands of Canadian dollars except for per share amounts) DECEMBER SEPTEMBER JUNE MARCH DECEMBER SEPTEMBER JUNE MARCH (unaudited) 31, 2017 30, 2017 30, 2017 31, 2017 31, 2016 30, 2016 30, 2016 31, 2016 Revenue 86,886 89,828 93,328 91,366 86,841 88,211 90,443 88,645 Net Income (Loss) (2,891) 5,495 4,850 3,918 7,594 (4,728) 4,465 (3,837) Add: Interest expense, net 2,602 2,505 2,538 2,681 3,064 14,384 4,054 4,051 Current and deferred tax expense (recovery) 1,736 1,986 2,046 1,750 (1,580) (873) 234 (274) Amortization and Depreciation 497 1,394 1,285 1,284 1,461 1,345 1,242 1,277 4,835 5,885 5,869 5,715 2,945 14,856 5,530 5,054 EBITDA 1,944 11,380 10,719 9,633 10,539 10,128 9,995 1,217 EBITDA as a percentage of revenue 2.2% 12.7% 11.5% 10.5% 12.1% 11.5% 11.1% 1.4% Items excluded in calculation of Adjusted EBITDA1 Foreign exchange (gain)/loss 256 (2,269) 1,120 (96) (1,215) (392) 1,723 7,247 Loss (gain) in fair value of other financial liabilities 1,953 1,527 174 268 (1,819) - - - Change in fair value of DSP 252 251 27 298 (85) 365 349 620 Payment of DSP - - (846) - - - - - Stock based compensation expenses 344 282 115 65 133 132 109 79 Performance share units expenses 26 77 - - - - - - Deferred financing charges 144 117 259 256 261 262 259 259 Onerous lease provision 2,724 (304) (165) (264) (334) (275) (119) (223) Share of loss of equity accounted investee, net of tax - - 348 - - - - 32 5,699 (319) 1,032 527 (3,059) 92 2,321 8,014 Adjusted EBITDA1 7,643 11,061 11,751 10,160 7,480 10,220 12,316 9,231 Adjusted EBITDA1 as a percentage of revenue 8.8% 12.3% 12.6% 11.1% 8.6% 11.6% 13.6% 10.4% Earnings per share attributed to common shareholders (0.08) 0.15 0.13 0.10 0.24 (0.15) 0.14 (0.12) Earnings per share attributed to common shareholders from continuing operations (0.08) 0.15 0.13 0.10 0.24 (0.15) 0.14 (0.12) Weighted average share outstanding 31,189,736 31,190,153 31,190,153 31,188,486 26,020,418 24,966,744 24,966,744 24,966,744 1 See “Definition of Non-IFRS Measures”. 1 See “Definition of Non-IFRS Measures”.
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15 – IBI Group Inc. – December 31, 2017 IMPACT OF TRENDS ON QUARTERLY RESULTS i) REVENUE Consolidated quarterly revenue is impacted by the available chargeable hours which are typically lowest in the third and fourth quarters as a result of staff ensuring that they use their vacation hours prior to the year end. Chargeable hours are also impacted by the number of working days in the quarter (See historical working days table in the Description of Variances in Operating Results section of this MD&A). In addition, revenue is impacted by the movement in foreign exchange rates. The following table provides the impact of foreign exchange on revenue when compared to the same period in the previous year for each of the eight most recently completed quarters: DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, (in thousands of Canadian dollars) 2017 2017 2017 2017 2016 2016 2016 2016 Gain (loss) of foreign exchange on revenue (1,813) (448) (1,072) (521) 318 (314) (119) 2,359 ii) NET INCOME (LOSS) Net loss in the fourth quarter of 2017 was negatively impacted by an increase in rent expense of $3.0 million as a result of the renegotiation of a sublease agreement during the period. The net loss in the third quarter of 2016 was negatively impacted by the accelerated accretion of $10.3 million resulting from the redemption of the Convertible Debentures. Net income (loss) is impacted by the fluctuations of foreign exchange and the fair value of other financial liabilities. The impact of these gains (loss) are noted in the above adjusted EBITDA table. iii) ADJUSTED EBITDA1 For the three months ended December 31, 2017, adjusted EBITDA was $7.6 million (three months ended December 31, 2016 - $7.5 million). For the year ended December 31, 2017, adjusted EBITDA was $40.6 million (year ended December 31, 2016 - $39.2 million). During the second quarter of 2017 two members of the Board of Directors settled 123,641 deferred share units for $846 (2016 - $nil) upon leaving the Board. This reduced the adjusted EBITDA for the year ended December 31, 2017. 1 See “Definition of Non-IFRS Measures”. T
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16 – IBI Group Inc. – December 31, 2017 LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL The following table represents the working capital information: DECEMBER 31, DECEMBER 31, (in thousands of Canadian dollars) 2017 2016 CHANGE Current assets $ 218,862 $ 217,002 $ 1,860 Current liabilities (97,687) (108,942) 11,255 WORKING CAPITAL 121,175 108,060 13,115 Current assets increased by $1.9 million as at December 31, 2017 when compared with December 31, 2016. This was due to a $8.0 million decrease in work in progress, offset by a $1.8 million increase in cash, a $2.6 million increase in accounts receivable, a $3.6 million increase in prepaid expenses and other current assets, and a $1.8 million increase in income taxes recoverable. Consistent with the continued increase in revenue and improvements made in the billing and collection cycle, on a combined basis accounts receivable and Work in Process (“WIP”) has decreased by $8.0 million. There was a decrease in current assets due to foreign exchange as at December 31, 2017 of $2.4 million. Current liabilities decreased by $11.2 million as at December 31, 2017 when compared with December 31, 2016. This was due to a $6.7 million decrease in accounts payable and accrued liabilities, a $7.3 million decrease in deferred revenue, a $0.4 million decrease in income taxes payable, offset by an increase in onerous lease provisions of $3.2 million. The decrease in deferred revenue is a result of the Company recognizing revenue on projects upon completion of significant milestones during the year. The decrease in accounts payable is due to the Company reducing the payment cycle to vendors. The increase in onerous lease provision is a result of the renegotiation of the sublease related to the onerous lease. There was a decrease in current liabilities due to foreign exchange as at December 31, 2017 of $3.6 million. WORKING CAPITAL MEASURED IN NUMBER OF DAYS OF GROSS BILLINGS1 Included in working capital of the Company are amounts reflecting project costs and sub-consultant expenses. The Company only reports its net fee volume as revenue, which would not include the billings for the recovery of these incurred costs. Therefore, to measure number of days outstanding of working capital, the gross billings, which include the billings for recovery of project expenses, would result in a more consistent calculation. 1 See “Definition of Non-IFRS Measures”.
B-17
17 – IBI Group Inc. – December 31, 2017 The table below calculates working days on a trailing twelve month basis, measured as days outstanding on gross billings, which is estimated to be approximately 30% greater than net fee volume. WORKING DAYS OF GROSS DECEMBER SEPTEMBER JUNE MARCH DECEMBER BILLINGS OUTSTANDING1 31, 2017 30, 2017 30, 2017 31, 2017 31, 2016 (unaudited) Accounts receivable 61 51 51 58 60 WIP 43 48 51 46 49 Deferred revenue (24) (21) (22) (24) (29) 80 78 80 80 80 The days sales outstanding as at December 31, 2017 remained at 80 days when compared to December 31, 2016. The Company continues to carry out regular comprehensive reviews of its WIP and accounts receivable and has achieved significant improvements in the results of the billings and collections process. Monitoring the days outstanding in WIP and accounts receivable is a significant area of focus for the Company. COMPONENTS OF WORKING CAPITAL (in millions of DECEMBER SEPTEMBER JUNE MARCH DECEMBER Canadian dollars) 31, 2017 30, 2017 30, 2017 31, 2017 31, 2016 (unaudited) (unaudited) (unaudited) Accounts receivable 111.2 91.7 92.8 105.2 108.6 WIP 79.0 86.4 93.5 84.6 87.0 Deferred revenue (43.2) (38.2) (40.6) (44.6) (50.5) 147.00 139.9 145.7 145.2 145.1 i) Accounts Receivable The table below demonstrates the aging of receivables: Accounts receivable aging (net of DECEMBER SEPTEMBER JUNE MARCH DECEMBER allowance) 31, 2017 % 30, 2017 % 30, 2017 % 31, 2017 % 31, 2016 % (in thousands of Canadian dollars) (unaudited) (unaudited) (unaudited) Current 42,780 38 38,253 42 32,416 35 47,630 45 46,057 42 30 to 90 days 38,405 35 23,165 25 28,487 31 25,434 24 29,315 27 Over 90 days 30,034 27 30,289 33 31,913 34 32,132 31 33,221 31 TOTAL 111,219 100 91,707 100 92,816 100 105,196 100 108,593 100 Accounts receivable has increased by $2.6 million since December 31, 2017. There was a $1.6 million decrease in accounts receivable due to foreign exchange during the year ended December 31, 2017 compared to a $3.4 million decrease due to foreign exchange for the same period in 2016. As a result of successful implementation of the Enterprise Resource Planning (“ERP”) system, the Company has improved operational efficiencies as it experienced an increase in billings and collections with a corresponding increase in cash, and a decrease in WIP. The Company focused on ensuring that the overall days sales outstanding during the three and twelve month periods maintained stability to minimize the risk to the working capital of the firm. It is an initiative of senior management to improve the timeliness of billings so that outstanding invoices can be collected sooner. T
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B-18
18 – IBI Group Inc. – December 31, 2017 ii) Work In Process WIP has decreased by $8.0 million since December 31, 2016. There was a decrease in WIP due to foreign exchange during the year ended December 31, 2017 of $1.4 million compared to a decrease due to foreign exchange of $3.0 million for the same period in 2016. As a result of successful implementation of the ERP system, the Company has improved operational efficiencies as it experienced an increase in billings and collections with a corresponding increase in cash, and a decrease in WIP. The Company focused on ensuring that the overall days sales outstanding during the three and twelve month periods maintained stability to minimize the risk to the working capital of the firm. The Company monitors WIP to ensure that any accounts where billing may be an issue are being dealt with in a timely manner. iii) Deferred Revenue Deferred revenue has decreased by $7.3 million since December 31, 2016. There was a decrease in deferred revenue due to foreign exchange during the year ended December 31, 2017 of $1.5 million, compared to a decrease due to foreign exchange of $1.2 million for the same period in 2016. This decrease is a result of the Company recognizing revenue on projects upon completion of significant milestones during the year. The balance is monitored on a regular basis to ensure that amounts are recognized in fee revenue appropriately. CASH FLOWS Cash flows from operating, financing, and investing activities, as reflected in the Consolidated Statement of Cash Flows, are summarized in the following tables: THREE MONTHS ENDED (in thousands of Canadian dollars) DECEMBER 31, (unaudited) 2017 2016 CHANGE Cash flows provided by operating activities 3,305 17,247 (13,942) Cash flows used in financing activities (4,548) (24,329) 19,781 Cash flows used in investing activities (2,419) 7,420 (9,839) YEAR ENDED (in thousands of Canadian dollars) DECEMBER 31, (unaudited) 2017 2016 CHANGE Cash flows provided by operating activities 15,139 32,047 (16,908) Cash flows used in financing activities (9,270) (23,126) 13,856 Cash flows used in investing activities (4,234) (8,167) 3,933 OPERATING ACTIVITIES Cash flows from operating activities for the three months ended December 31, 2017 were $3.3 million, a decrease of $13.9 million compared to cash flows provided by operating activities of $17.2 million for the same period in 2016. The decrease in operating cash flows is primarily the result of an increase in income taxes paid of $5.1 million, and a decrease in non-cash operating working capital of $9.6 million, offset by an increase in net income adjusted for non-cash items of $0.4 million, and a decrease in interest paid of $0.2 million. Cash flows from operating activities for the year ended December 31, 2017 were $15.1 million, a decrease of $16.9 million compared to cash flows provided by operating activities of $32.0 million for the same period in 2016. The decrease in operating cash flows is primarily a result of an increase in income taxes paid of
B-19
19 – IBI Group Inc. – December 31, 2017 $2.5 million, and a decrease in non-cash operating working capital of $19.3 million, offset by an increase in net income adjusted for non-cash items of $3.4 million, and a decrease in interest paid of $1.5 million. FINANCING ACTIVITIES Cash flows used in financing activities for the three months ended December 31, 2017 were $4.5 million compared with $24.3 million for the same period last year. During the three months ended December 31, 2017, the Company repaid $3.5 million towards its credit facility. During the same period in 2016, the Company took advances of $36.7 million from its credit facilities offset by $57.5 million from redemption of Convertible Debentures and $3.5 million from settling the consent fee payable. Cash flows used in financing activities for the year ended December 31, 2017 were $9.3 million compared to $23.1 million for the same period last year. During the year ended December 31, 2017, the Company repaid $8.2 million towards its credit facilities and incurred $1.0 million in deferred financing costs related to the refinancing of the credit facilities in June 2017. During the same period in 2016, the Company repaid advances of $1.3 million on its credit facilities, repaid vendor notes of $4.1 million and consent fee of $3.5 million, and used $14.1 million in cash related to activities on convertible debentures during the year. INVESTING ACTIVITIES Cash flows used in investing activities for the three months ended December 31, 2017 were $2.4 million compared to $6.2 million in cash flows provided by investing activities for the same period in 2016. During the three months ended December 31, 2017, the company invested $1.8 million in property and equipment, and $0.6 million in intangible assets, and $nil contributions towards restricted cash. For the same period in 2016, the Company invested $3.8 million in property and equipment, $0.4 million in intangible assets, and advances of $10.4 million was drawn from the restricted cash sinking fund and was used to redeem the convertible debentures. Cash flows used in investing activities for the year ended December 31, 2017 were $4.2 million compared to $8.2 million for the same period last year. During the year ended December 31, 2017, the Company gained access to $1.4 million of restricted cash, $3.9 million was invested in property and equipment, and $1.3 million invested in intangible assets. For the year ended December 31, 2016, $5.5 million was invested in property and equipment, $2.1 million invested in intangible assets, and advances of $0.6 million was drawn from restricted cash sinking fund. T
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B-20
20 – IBI Group Inc. – December 31, 2017 CREDIT FACILITY On June 30, 2017, IBI Group secured an agreement to refinance its credit facilities under the existing banking agreement with its senior lenders. The arrangement consists of a $130.0 million revolver facility, of which a maximum of $10.0 million is available under a swing line facility and will mature on June 30, 2021. The commitment under the swing line facility will reduce availability under the revolver facility on a dollar-for-dollar basis. As at December 31, 2017, the interest rate on Canadian dollar borrowings was 4.45% (December 31, 2016 – 4.95%) and 5.75% on U.S dollar borrowings (December 31, 2016 – 6.25%). The terms of the amended and restated credit facilities exclude the requirement to maintain a segregated cash collateral account (“Sinking Fund”). As a result of this amendment the balance of the Sinking Fund, $1.4 million, has been reclassified from Restricted Cash to Cash. Under the previous agreement, the Company was required to make additional deposits each quarter to the Sinking Fund for pre-defined amounts, these deposits are no longer required. The definitions under the new facility are substantially the same. The financial covenants outlined in the new facility are substantially the same except for the removal of the minimum EBITDA requirement. New facility interest margins: Applicable Margin Level R is the Leverage Ratio for Floating Rate Loans is for Libor Loans, Acceptances and Standby Instruments is for the Commitment Fee is I R < 1.00:1 0% +1.50% +0.30% II 1.00:1 < R < 1.50:1 +1.00% +2.00% +0.40% III 1.50:1 < R < 2.00:1 +1.25% +2.25% +0.50625% IV 2.00:1 < R < 2.50:1 +1.50% +2.50% +0.5625% V R > 2.50:1 +1.75% +2.75% +0.61875%
B-21
21 – IBI Group Inc. – December 31, 2017 Previous facility interest margins: Applicable Margin Level R is the Leverage Ratio for Floating Rate Loans is for Libor Loans, Acceptances and Standby Instruments is for the Commitment Fee is I R < 1.00:1 +1.50% +2.50% +0.56250% II 1.00:1 < R < 1.50:1 +2.00% +3.00% +0.67500% III 1.50:1 < R < 2.00:1 +2.25% +3.25% +0.73125% IV 2.00:1 < R < 2.50:1 +2.50% +3.50% +0.78750% V R > 2.50:1 +2.875% +3.875% +0.871875% As at December 31, 2017, IBI Group has borrowings of $65.7 million (December 31, 2016 - $74.7 million) under the credit facilities, which has been recognized net of deferred financing costs of $1.8 million (December 31, 2016 - $1.6 million). As at December 31, 2017, IBI Group has letters of credit outstanding of $6.5 million (December 31, 2016 - $8.0 million), of which $6.0 million (December 31, 2016 - $5.8 million) is issued under a $30.0 million facility which matures on June 30, 2018 and supports letters of credit backstopped by Export Development Canada. Advances under the revolver facility bear interest at a rate based on the Canadian dollar prime rate or U.S dollar base rate, LIBOR or Banker’s Acceptance rates plus, in each case, an applicable margin. At December 31, 2017, $65.7 million was outstanding under Bankers’ Acceptance. This facility is subject to compliance with certain financial, reporting and other covenants. The financial covenants under the agreement include a leverage ratio, interest coverage ratio, and restrictions on distributions, if certain conditions are not met. IBI Group was in compliance with its credit facility covenants as at December 31, 2017. Continued compliance with the covenants under the amended credit facilities is dependent on IBI Group achieving revenue forecasts, profitability, reducing costs and the continued improvement of working capital. Market conditions are difficult to predict and there is no assurance that IBI Group will achieve its forecasts. In the event of non-compliance, IBI Group’s lenders have the right to demand repayment of the amounts outstanding under the lending agreements or pursue other remedies if IBI Group cannot reach an agreement with its lenders to amend or waive the financial covenants. As in the past, IBI Group will carefully monitor its compliance with the covenants and will seek waivers, subject to lender approval, as may become necessary from time to time. SECURITY INTEREST OF SENIOR LENDERS Guarantees from certain subsidiaries of IBI Group as well as IBI Group Architects (Ontario), and a first ranking security interest in all of the assets of IBI Group and the guarantors, subject to certain permitted encumbrances, have been pledged as security for the indebtedness and obligations of IBI Group under the credit facilities. The indebtedness secured by these security interests will rank senior to all other security over the assets of IBI Group and the guarantors, subject to certain permitted encumbrances. T
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B-22
22 – IBI Group Inc. – December 31, 2017 CONVERTIBLE DEBENTURES The Company had the following series of convertible debentures outstanding as at year ended December 31, 2017 and 2016. (in thousands of Canadian dollars) LIABILITY COMPONENT EQUITY COMPONENT OTHER FINANCIAL LIABILITY COMPONENT TOTAL 7.0% Debentures (matures on June 30, 2019) Balance at January 1, 2016 29,618 1,750 - 31,368 Accretion of 7.0% Debentures 12,486 - - 12,486 Redemption of 7.0% Debentures (31,245) (1,189) - (32,434) Balance at January 1, 2017 10,859 561 - 11,420 Accretion of 7.0% Debentures 1,323 - - 1,323 Balance at December 31, 2017 12,182 561 - 12,743 5.5% Debentures (matures on December 31, 2021) Balance at January 1, 2016 - - - - Issuance of 5.5% Debentures 32,498 - 10,908 43,406 Accretion of 5.5% Debentures 519 - - 519 Gain in fair value of other financial liabilities - - (1,819) (1,819) Balance at January 1, 2017 33,017 - 9,089 42,106 Accretion of 5.5% Debentures 1,958 - - 1,958 Loss in fair value of other financial liabilities - - 3,922 3,922 Balance at December 31, 2017 34,975 - 13,011 47,986 BALANCE, DECEMBER 31, 2017 $ 47,157 $ 561 $ 13,011 $ 60,729 7.0% DEBENTURES ($46.0 MILLION PRINCIPAL, OPTION A MATURES ON JUNE 30, 2019 AND OPTIONS B AND C REDEEMED ON OCTOBER 31, 2016) On July 23, 2014, the Company entered into a supplemental trust indenture with CIBC Mellon Trust Company, the trustee for the 7.0% convertible unsecured subordinated debentures (“Debentures”) which were originally scheduled to mature on December 31, 2014, to give effect to the amendments approved at a special meeting of the Debenture holders to extend the maturity of the Debentures to June 30, 2019. In exchange for the extension of the maturity, Debenture holders that delivered and did not withdraw a valid proxy voting for the extension received either; a reduced conversion price to $5.00 per share from $19.17 per share with a consent fee note equal to $86.96 per $1,000 principal amount of Debentures (“Option B”) or the Debenture holders retained the conversion price of $19.17 per share and received a consent fee note equal to $195.65 per $1,000 principal amount of Debentures (“Option A”). The conversion price was also reduced to $5.00 per share from $19.17 per share for Debenture holders who did not deposit a proxy, abstained from voting or voted against the Debenture amendments (“Option C”). The Debentures bear interest from the date of issue at 7.0% per annum, payable in equal semi-annual payments in arrears on June 30th and December 31st of each year. The consent fee notes are unsecured, non-convertible, mature on December 31, 2016 and bear interest at the rate of 7.0% per annum which is payable on maturity. The amendments to the Debentures resulted in them being accounted for as extinguishments for accounting purposes. Consequently, the original Debentures were derecognized and the new Debentures (under Option A, B and C) were recognized at fair value.
B-23
23 – IBI Group Inc. – December 31, 2017 On October 31, 2016, the Company redeemed the 7.0% Debentures under Options B and C (“IBG.DB”). The holders of $30.0 million principal of the 7.0% Debentures had exercised the $5 share conversion option and received 5,997,600 shares. For the balance of $1.3 million principal of the 7.0% Debentures, the Company issued 222,476 shares. The financial liability being redeemed under Options B and C were accreted to the full principal value, resulting in total accretion expense of $12.5 million being recognized in the consolidated statement of comprehensive income (loss) during the year ended December 31, 2016. See Note 15 – Finance Costs for further detail regarding the accretion expense for the period. The Company recorded $31.2 million in common shares and reclassified the equity component of the portion redeemed of $1.2 million to contributed surplus. The fair value of the remaining 7.0% Debentures under Option A is $15.2 million(December 31, 2016 - $15.0 million) with a face value of $14.8 million should they be redeemed for cash prior to or at maturity. The consent fee notes issued under Option A and B were paid in full upon maturity as at December 31, 2016. 5.5% DEBENTURES ($46.0 MILLION PRINCIPAL, MATURES ON DECEMBER 31, 2021) In September 2016, the Company issued 5.5% Debentures of $46.0 million with a maturity date of December 31, 2021. The 5.5% Debentures are convertible into common shares of the Company at the option of the holder at a conversion price of $8.35 per common share. The 5.5% Debentures are not redeemable at the option of the Company before December 31, 2019. The 5.5% Debentures are redeemable by the Company at a price of $1,000 per 5.5% Debenture, plus accrued and unpaid interest, on or after December 31, 2019 and prior to December 31, 2020 (provided that the volume weighted average trading price of the shares of the Company on the TSX for the 20 consecutive trading days ending five trading days preceding the date on which notice of redemption is given, is not less than 125% of the conversion price of $8.35 per share). On or after December 31, 2020 and prior to the maturity date, the 5.5% Debentures are redeemable by the Company at a price of $1,000 per 5.5% Debenture, plus accrued and unpaid interest. The 5.5% Debentures bear interest from the date of issue at 5.5% per annum, payable in equal semi-annual payments in arrears on June 30th and December 31st of each year, commencing June 30, 2017. The 5.5% Debentures are recorded as a hybrid financial instrument. The non-derivative debt (interest and principal portion) was recorded at fair value on the date of issue and was recognized at $32.5 million which was net of deferred financing costs of $2.6 million, estimated using discounted future cash flows at an estimated discount rate discount rate of 11.5%. Subsequently the non-derivative debt component is measured at amortized cost using the effective interest method over the life of the debenture. The derivative component of this hybrid financial instrument representing the conversion feature of the 5.5% Debentures was measured at fair value of $10.9 million at the date of issuance, and recorded as part of Other financial liabilities in the statement of financial position. This conversion feature is unique to this issuance of convertible debt given IBI has the right to settle any request to convert debentures to IBI shares by the Debenture holders for an equivalent amount of cash. As at December 31, 2017, the fair value of the derivative component was $13.0 million (December 31, 2016 - $9.1 million). T
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B-24
24 – IBI Group Inc. – December 31, 2017 FINANCIAL RISK MANAGEMENT The Company has exposure to market, credit and liquidity risk. The Company’s primary risk management objective is to protect the Company’s consolidated statement of financial position, comprehensive income (loss) and cash flow in support of sustainable growth and earnings. The Company’s financial risk management activities are governed by financial policies that cover risk identification, tolerance, measurement, authorization levels, and reporting. MARKET RISK INTEREST RATE RISK The Company’s credit facilities have floating-rate debt, which subjects it to interest rate cash flow risk. Advances under these credit facilities bear interest at a rate based on the Canadian dollar or U.S dollar prime rate, LIBOR or banker’s acceptance rates, plus, in each case, an applicable margin. If the interest rate on the Company’s variable rate loan balance as at December 31, 2017, had been 50 basis points higher or lower, with all other variables held constant, net income for the year ended December 31, 2017 would have decreased or increased by approximately $0.2 million. CURRENCY RISK The Company’s foreign exchange risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate as a result of changes in foreign exchange rates. The Company’s policy has been to economically hedge foreign exchange exposures rather than purchasing currency swaps and forward foreign exchange contracts. Foreign exchange gains or losses in the Company’s net income arise on the translation of foreign-denominated intercompany loans held in the Company’s Canadian operations and financial assets and liabilities held in the Company’s foreign operations. The Company minimizes its exposure to foreign exchange fluctuations on these items by matching U.S-dollar liabilities when possible. If the exchange rates had been 100 basis points higher or lower during the year ended and as at December 31, 2017, with all other variables held constant, total comprehensive income would have increased or decreased by $0.2 million for the year ended December 31, 2017. If the exchange rates had been 100 basis points higher or lower during the year ended December 31, 2017, with all other variables held constant, net income would have been $nil. for the year ended December 31, 2017. CREDIT RISK Financial instruments that subject the Company to credit risk consist primarily of accounts receivable. The Company maintains an allowance for estimated credit losses on accounts receivable. The estimate is based on the best assessment of the ultimate collection of the related accounts receivable balance based, in part, on the age of the outstanding accounts receivable and on its historical impairment loss experience. A portion of the accounts receivable are due from government and public institutions. Receivables that are neither past due nor impaired are considered by management to have no significant collection risk. The liquidity of customers and their ability to pay receivables are considered by management to have no significant collection risk. The liquidity of customers and their ability to pay receivables are considered in assessing the impairment of such assets. No collateral is held in respect of impaired assets or assets that are past due but not impaired.
B-25
25 – IBI Group Inc. – December 31, 2017 LIQUIDITY RISK The Company strives to maintain sufficient financial liquidity to withstand sudden adverse changes in economic circumstances. Management forecasts cash flows for its current and subsequent fiscal years to identify financing requirements. These requirements are then addressed through a combination of committed credit facilities and access to capital markets. CONTRACTUAL OBLIGATIONS As part of continuing operations, the Company enters into contractual obligations from time to time. The table below summarizes the contractual obligations due on financial liabilities and commitments as of December 31, 2017: Contractual Obligations Payment Due by Period (in millions of Canadian dollars) TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS Accounts payable and accrued liabilities $ 48.8 $ 48.8 $ - $ - $ - Credit facilities1 63.8 - - 65.7 - Interest on credit facilities1,2 - 3.1 6.2 1.5 - Convertible debentures 47.2 - 14.8 46.0 - Interest on convertible debentures3 - 3.6 5.6 2.5 - Operating leases 141.3 23.8 48.5 27.6 41.3 TOTAL CONTRACTUAL OBLIGATIONS $ 301.1 $ 79.3 $ 75.1 $ 143.3 $ 41.3 1 See liquidity risk section of this MD&A. 2 Advances under the revolver facility bear interest at a rate based on the Canadian dollar prime rate or U.S dollar base rate, LIBOR or Banker’s Acceptance rates plus, in each case, an applicable margin. 3 Includes the amount of cash interest due on the convertible debentures and does not include non-cash accretion. CAPITAL MANAGEMENT The Company’s objective in managing capital is to maintain a capital base that will maintain investor, creditor, and market confidence and to sustain future growth within the business. The Company defines its capital as the aggregate of credit facilities, convertible debentures, and equity. The Company has reviewed its anticipated revenues and costs over future years and has determined that the business has the ability to generate sufficient cash resources to fund its activities. A downturn in the economy or other unfavourable events may cause this situation to change. In conjunction with this analysis, the Company’s financing strategy is to access capital markets to raise debt and equity financing and utilize the banking market to provide committed term and operating credit facilities to support its short-term and long-term cash flow needs. T
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B-26
26 – IBI Group Inc. – December 31, 2017 FUTURE CASH GENERATION Specific items of consideration in future cash generation are as follows: 1. ABILITY TO GENERATE SUFFICIENT CASH The Company’s existing business plan indicates that future earnings and cash flow generated will be sufficient to fund growth and re-finance existing amounts outstanding within current thresholds acceptable to lenders. Reference should be made to commentary on forward looking statements in this document. 2. CIRCUMSTANCES THAT COULD AFFECT FUNDING In the event that capital markets deteriorate or the Company does not execute on its business plan this will affect ability to attract and / or generate sufficient funds. 3. WORKING CAPITAL REQUIREMENTS In the short term the business has sufficient financing to fund its working capital requirements. Management is implementing procedures and systems that are expected to assist management with their objective to reduce the level of working capital on the balance sheet. If achieved, this will reduce existing borrowing amounts. 4. SITUATIONS INVOLVING EXTENDED PAYMENT There are situations where arrangements with clients result in extended payment arrangements on projects. Management is implementing procedures and systems to improve cash flow forecasting before contracts are signed with clients to continue to ensure that sufficient cash flow is generated from each project. 5. CIRCUMSTANCES THAT IMPACT ESSENTIAL TRANSACTIONS Certain larger projects in the architecture and engineering marketplace require capital investment to participate in the business opportunity. While the Company will continue to participate in these activities it will continue to do so only where probability of sufficient cash flow generation is determined at the beginning of the project. 6. SOURCES OF FUNDS TO MEET CAPITAL EXPENDITURE REQUIREMENTS The Company does not have significant capital needs in relation to its cash generating ability. In the event that capital markets deteriorate or the Company does not execute on its business plan this situation may change. Reference should be made to commentary on forward looking statements in this document. 7. CREDIT FACILITY On June 30, 2017, IBI Group secured an agreement to refinance its Credit Facilities under the existing banking arrangement with its senior lenders. See liquidity risk section of this MD&A. 8. CONVERTIBLE DEBENTURES As outlined above, the Company has two series of debentures that provide a basis of capital, which requires repayment or refinancing over the period from June 2019 to December 2021.
B-27
27 – IBI Group Inc. – December 31, 2017 SHARE CAPITAL The Company is authorized to issue an unlimited number of common shares. As at March 8, 2018, the Company’s common share capital consisted of 31,219,211 shares issued and outstanding. Each share entitles the holder to one vote at all meetings of shareholders. The 6,282,222 Class B partnership units of IBI Group are indirectly exchangeable for common shares of the Company on the basis of one share of the Company for each Class B subordinated partnership unit. If all such Class B partnership units of IBI Group had been exchanged for shares on December 31, 2017, the units issued on such exchange would have represented a 16.77% interest in the Company. Class B partnership units do not entitle the holder to voting rights at the meetings of shareholders. The Class B partnership units have been recorded as a non-controlling interest in the consolidated financial statements as at December 31, 2017. SHARE ISSUANCES During the year ended December 31, 2017, the Company issued 3,334 common shares as a result of an exercise of stock options granted in January 2016. ACCUMULATED OTHER COMPREHENSIVE LOSS During the year ended December 31, 2017, the Company incurred a $3.5 million loss related to the translation of financial statements of foreign operations, of which 83.2% is attributable to common shareholders. TRANSACTIONS WITH RELATED PARTIES Pursuant to the Administration Agreement, IBI Group and certain of its subsidiaries are paying to the Management Partnership an amount representing the base compensation for the services of the partners of the Management Partnership. The amount paid for such services during the year ended December 31, 2017 was $12.7 million (2016 - $15.5 million). As at December 31, 2017, there were 60 partners (December 31, 2016 – 64 partners). IBI Group from time to time makes a monthly distribution to each Class B partnership unit holder equal to the dividend per share (on a pre-tax basis) declared to each shareholder. All of the Class B partnership units are held by the Management Partnership. As at December 31, 2017 and 2016, the amount of distributions payable to the Management Partnership were nil. As noted in Note 18 of the Consolidated Financial Statements – Share Based Compensation, during the year the Company issued stock options to management under the terms of the Company’s stock option plan. T
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28 – IBI Group Inc. – December 31, 2017 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of these consolidated financial statements requires management to exercise judgment and make estimates and assumptions that affect the application of accounting policies on reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the consolidated statement of financial position, and the reported amounts of revenue and expenses for the period covered by the consolidated statement of comprehensive income (loss). Actual amounts may differ from these estimates. Within the context of these consolidated financial statements, a judgment is a decision made by management in respect of the application of an accounting policy, a recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant information that may include estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of balances recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that may include management’s historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable under the circumstances. Management continually evaluates the estimates and judgments it uses. Information about judgments made in applying accounting policies that have the most significant impact on the amounts recognized in the consolidated financial statements are as follows: RECOVERABILITY OF ACCOUNTS RECEIVABLE The Company records accounts receivable net of impairment losses determined based on the age of the outstanding receivables, factors specific to individual clients and its historical collection and loss experience. Information about assumptions and estimation uncertainties that have a significant impact on the amounts recognized in the consolidated financial statements for the year ended December 31, 2017 are as follows: REVENUE RECOGNITION The Company also enters into contracts that require multiple deliverables, which can include software and hardware elements. Management applies judgment when assessing whether certain deliverables in a customer arrangement should be included or excluded from a unit of account to which contract accounting is applied. The judgment is typically related to the sale and inclusion of third party hardware and licenses in a customer arrangement, and involves an assessment that principally addresses whether the deliverable has stand-alone value to the customer that is not dependent upon other components of the arrangement. The Company accounts for certain of its revenue in accordance with IAS 11 Construction Contracts, (“IAS 11”) which requires estimates to be made for contract costs and revenues and IAS 18 Revenue (“IAS 18”). Revenue from fixed-fee and variable-fee-with-ceiling contracts is recognized using the percentage of completion method based on the ratio of professional costs incurred to total estimated professional costs. Estimating total professional costs is subjective and requires the use of management’s best estimate based on the information available at that point in time. The Company also provides for estimated losses on contracts in-progress in the period in which such losses are determined. Deferred revenue is recorded when billings to the clients exceeds the revenue that has been earned based on effort completed at the date of the consolidated statement of financial position. Changes in the estimates are reflected in the period in which they are made and would affect the Company’s revenue and work in process.
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29 – IBI Group Inc. – December 31, 2017 ACCURACY OF WORK IN PROCESS AND DEFERRED REVENUE The Company records its work in process based on the time and materials charged into each project. Deferred revenue is recorded when billings to the clients exceeds the revenue that has been earned based on effort completed at the date of the consolidated statement of financial position. The work in process for each project is reviewed on a monthly basis to determine whether the amounts recorded are recoverable. Where the review determines that the value of work in process exceeds the amount that can be invoiced, review of project budgets is performed to determine whether an adjustment is required to the percentage of completion to accurately reflect revenue earned to date. The percentage complete is determined by estimating the professional costs to be incurred to complete the project. ONEROUS LEASE PROVISIONS The Company recognizes provisions when there is a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Management has recorded a provision related to lease exit liabilities which requires estimation of the expected sublease income and discount rate reflective of the risk specific to the obligation. DETERMINING PROBABLE FUTURE UTILIZATION OF TAX LOSS CARRYFORWARDS Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based on the likely timing and the level of future taxable profits, together with future tax-planning strategies. REVALUATION OF DERIVATIVE LIABILITY The Company has recognized a convertible debenture as a hybrid financial instrument which includes a derivative liability component. The derivative liability requires a remeasurement at each reporting period to its fair value. Factors and assumptions which affect the fair value remeasurement of the derivative include the bond market price, risk free interest rate, credit spread and IBI share price. ACCOUNTING DEVELOPMENTS Amendments to IAS 7 Statement of Cash Flows In January 2016, the IASB issued Disclosure Initiative (Amendments to IAS 7). The amendments apply prospectively for annual periods beginning on or after January 1, 2017. The Company adopted the amendments to IAS 7 in its financial statements for the annual period beginning on January 1, 2017. With the exception of additional note disclosures in Note 6 of the Financial statements, the adoption of these amendments did not have a material impact on the Company’s financial statements. Amendments to IAS 12 Income Taxes In January 2016, the IASB issued Amendments to IAS 12 Income Taxes to provide clarification on the requirements relating to the recognition of deferred tax assets for unrealized losses on debt instruments measured at fair value. The Company adopted the amendments to IAS 12 in its financial statements for the annual period beginning on January 1, 2017. The adoption of these amendments did not have a material impact on the Company’s financial statements as the Company does not have any debt instruments measured at fair value through profit and loss. T
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30 – IBI Group Inc. – December 31, 2017 a) FUTURE ACCOUNTING POLICY CHANGES NOT YET ADOPTED IFRS 15 Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”). The new standard is effective for annual periods beginning on or after January 1, 2018 and is available for early adoption. IFRS 15 will replace IAS 11, IAS 18, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31– Barter Transactions Involving Advertising Services. The new standard contains a single model that applies to contracts with customers and two approaches for recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of individual transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. In April 2016, the IASB issued Clarifications to IFRS 15, which is effective at the same time as IFRS 15. The clarifications to IFRS 15 provide additional guidance with respect to the five-step analysis, transition, and the application of the standard to licenses of intellectual property. The Company will adopt IFRS 15 in its consolidated financial statements for the annual period beginning January 1, 2018. The Company has set out a project plan to determine the impact of the standard. The first phase was to review contracts in the different practice areas that may be impacted by the adoption of this standard given contracting practices. The second phase of the project plan involved review of contracts where the terms and conditions of the contract may impact the timing of the revenue recognized under the new standard. In 2015, the Company standardized its contract template to include terms and conditions that considered the criteria set out to recognize revenue in accordance with IFRS 15. The third and final phase of the project plan involves finalizing the assessment and quantifying the impacts to revenue recognized on contracts in accordance with IFRS 15. Management’s assessment determined that the standardization of contracts in 2015 and the implementation of key system functionalities in 2016, streamlined the review of financial information for contracts entered into in 2015 and beyond. It was concluded that the revenue recognized on these contracts will not result in a significant change. The guidance permits two methods of adoption: retrospectively to each reporting period presented (full retrospective method), or retrospectively with mixed requirements in the prior reporting period (partial retrospective). The Company plans to adopt the standard using the full retrospective method to restate each prior reporting period presented. The extent of the impact of adoption of the standard on the amounts and timing of revenue recognized is estimated to be a decrease in the range of $10 million - $15 million. Any adjustment will impact the timing of the revenue recognized, and will result in an adjustment through equity at time of adoption. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments (“IFRS 9”), with a mandatory effective date for annual periods beginning on or after January 1, 2018. Early adoption is permitted.
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31 – IBI Group Inc. – December 31, 2017 The new standard brings together the classification and measurements, impairment and hedge accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement. In addition to the new requirements for classification and measurement of financial assets, a new general hedge accounting model and other amendments issued in previous versions of IFRS 9. The standard also introduces new impairment requirements that are based on a forward-looking expected credit loss model. The Company will adopt IFRS 9 in its consolidated financial statements for the annual period beginning January 1, 2018. The Company has adopted a transition plan and timeline to review the impact of the standard. Accounts Receivable and Work in Progress will be called Contract Assets under the new standard. Based on preliminary scoping, the Company expects the standard to have an immaterial impact on loss provisions against Accounts Receivable and Work in Progress. IFRS 16 Leases In January 2016, the IASB issued IFRS 16 Leases (“IFRS 16”). The new standard is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 has been adopted. IFRS 16 will replace IAS 17 Leases. The new standard requires all leases to be reported on the balance sheet unless certain criteria for exclusion are met. The Company intends to adopt IFRS 16 in its consolidated financial statements for the annual period beginning on January 1, 2019. The Company has established a transition plan to collect the necessary information on all of the operating leases in the spring of 2018 to begin the process to quantify the impact of adopting the standard. The Company will evaluate the transition elections at that time. The extent of the impact of adoption of the interpretation has not yet been determined. Amendments to IFRS 2 Classification and Measurement of Share-Based Payment Transactions In June 2016, the IASB issued Amendments to IFRS 2 Share-Based Payments (“IFRS 2”), clarifying how to account for certain types of share-based payment transactions. The amendments apply for annual periods beginning on or after January 1, 2018. As a practical simplification, the amendments can be applied prospectively or retrospectively, with early application permitted if information is available without the use of hindsight. The amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, share based payment transactions with a net settlement feature for withholding tax obligations, and a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The Company will adopt the amendments to IFRS 2 in its consolidated financial statements for the annual period beginning January 1, 2018. Currently, the Company’s share based awards are all equity settled awards and do not contain cash-settled share-based payment features. To the extent an award is offered in the future with such features, the Company will evaluate the effect of these changes. IFRIC 22 Foreign Currency Transactions and Advance Consideration On December 8, 2016 the IASB issued IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration (“IFRIC 22”). The Interpretation clarifies which date should be used for translation when a foreign currency transaction involves an advance payment or receipt. The Interpretation is applicable for annual periods beginning on or after January 1, 2018. Earlier application is permitted. The Company intends to adopt the Interpretation in its financial statements for the annual period beginning on January 1, 2018. The Company does not expect the Interpretation to have a material impact on the financial statements. T
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32 – IBI Group Inc. – December 31, 2017 IFRIC 23 Uncertainty over Income Tax Treatments On June 7, 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax Treatments. The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation is applicable for annual periods beginning on or after January 1, 2019. The extent of the impact of adoption of the interpretation has not yet been determined. Annual Improvements to IFRS (2014 - 2016) Cycles On December 8, 2016, the IASB issued narrow-scope amendments to three standards as part of its annual improvements process. The IASB uses the annual improvements process to make non-urgent but necessary amendments to IFRS. The Company will adopt these amendments in its financial statements for the annual period beginning on January 1, 2018. The Company does not expect the amendments to have a material impact on the financial statements. Annual Improvements to IFRS (2015-2017) Cycles On December 12, 2017 the IASB issued narrow-scope amendments to three standards as part of its annual improvements process. The amendments are effective on or after January 1, 2019, with early application permitted. Each of the amendments has its own specific transition requirements. IFRS 3 Business Combinations and IFRS 11 Joint Arrangements - to clarify how a company accounts for increasing its interest in a joint operation that meets the definition of a business; IAS 12 Income Taxes – to clarify that all income tax consequences of dividends are recognized consistently with the transactions that generated the distributable profits – i.e. in profit or loss, OCI, or equity; and IAS 23 Borrowing Costs – to clarify that specific borrowings – i.e. funds borrowed specifically to finance the construction of a qualifying asset – should be transferred to the general borrowings pool once the construction of the qualifying asset has been completed. The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the amendments has not yet been determined. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING As required by National Instrument 52-109 of the Canadian Securities Administrators, the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) will be making certifications related to the information contained in the Company’s quarterly filings. As part of certification, the CEO and CFO must certify as to the design of disclosure controls and procedures (“DC&P”) and internal controls over financial reporting (“ICFR”). DC&P are designed to provide reasonable assurance that information required to be disclosed by the Company is processed and reported on a timely basis to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions with respect to required disclosure. The Company has adopted or formalized such controls as it believes are necessary and consistent with its business and internal management and supervisory practices. ICFR is a process designed to provide reasonable assurances regarding the reliability of the Company’s financial reporting and of the preparation of financial statements for external purposes in compliance with generally accepted accounting principles. A control
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33 – IBI Group Inc. – December 31, 2017 system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of the financial reporting and of the preparation of the financial statements. The Company’s CEO and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company’s ICFR and disclosure controls and DC&P as at December 31, 2017, and have concluded that such controls and procedures are effective. There have been no changes in the Company’s internal control over financial reporting that occurred during the period beginning on January 1, 2017, and ended on December 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. DEFINITION OF NON-IFRS MEASURES Non-IFRS measures do not have a standardized meaning within IFRS and are therefore unlikely to be comparable to additional measures presented by other issuers. In commentary and tables within this document IFRS measures are presented along with non-IFRS measures. Where non-IFRS measures are used, there is a reconciliation to IFRS amounts provided. Any changes in the definition of non-IFRS are disclosed and quantified. 1. ADJUSTED EBITDA The Company believes that Adjusted EBITDA, defined below, is an important measure for investors to understand the Company’s ability to generate cash to honour its obligations. Management of the Company believes that in addition to net income (loss), Adjusted EBITDA is a useful supplemental measure as it provides readers with an indication of cash available for debt service, capital expenditures, income taxes and dividends. Readers should be cautioned, however, that EBITDA should not be construed as an alternative to net income (loss) determined in accordance with IFRS as an indicator of the Company’s performance or to cash flows from operating activities as a measure of liquidity and cash flows. The Company defines Adjusted EBITDA in accordance with what is required in its lending agreements with its senior lenders. References in this MD&A to Adjusted EBITDA are based on net income adjusted for the following items: - Gain/loss arising from extraordinary, unusual or non-recurring items, such as debt extinguishments - Acquisition costs and deferred consideration revenue (i.e. restructuring costs, integration costs, compensation expenses, transaction fees and expenses) - Non-cash expenses (i.e. grant of stock options, restricted share units or Capital stock to employees as compensation) - Gain/Loss realized upon the disposal of capital property - Gain/loss on foreign exchange translation - Gain/loss on purchase or redemption of securities issued by that person or any subsidiary - Gain/loss on fair valuation of financial instruments - Amounts attributable to minority equity investments - Interest income Adjusted EBITDA is not a recognized measure under IFRS and does not have a standardized meaning prescribed by IFRS, and the Company’s method of calculating Adjusted EBITDA may differ from the methods used by other similar entities. Accordingly, Adjusted EBITDA may not be comparable to similar measures used by such entities. Reconciliations of net income (loss) to adjusted EBITDA have been provided under the heading “Results of Operations”. BOARD OF DIRECTORS,
IBI GROUP
MANAGEMENT
TEAM
SHAREHOLDER
INFORMATION
Scott Stewart
CEO
David Thom
President
Stephen Taylor
CFO
Derek Sims
Global Director, Intelligence
Mansoor Kazerouni
Global Director, Buildings
Matt Cunningham
Global Director, Infrastructure
Transfer Agent
AST Trust Company
Toronto, ON, Canada
Auditors
KPMG LLP
Toronto, ON, Canada
Principal Bank
Toronto Dominion Bank
Securities Exchange Listing
IBI Group shares are traded on
the Toronto Stock Exchange
under the symbol IBG.
Investor Relations
Bayfield Strategy, Inc.
Annual Meeting
May 10, 2018
10:00 am ET
IBI Group
55 St. Clair Avenue West
Toronto, ON M4V 2Y7 Canada
Scott Stewart P. Eng.
Toronto, ON, Canada
CEO, IBI Group
David Thom AIBC, MRAIC, AIA
Vancouver, BC, Canada
President, IBI Group
Dale Richmond FCMA, FCPA
Oakville, ON, Canada
Independent Director;
Chair of the Board of Directors;
Member of the Audit Committee;
Chair of the Governance and
Compensation Committee
Lorraine Bell CPA, CA
New York City, NY, USA
Independent Director;
Chair of the Audit Committee
Michael Nobrega FCPA, FCA
Toronto, ON, Canada
Independent Director;
Member of the Audit Committee;
Member of the Governance and
Compensation Committee
John Reid FCPA, FCA
Toronto, ON, Canada
Independent Director;
Member of the Audit Committee;
Member of the Governance
and Compensation Committee
Detailed biographies of Board Members
are available in the Annual Information
Form (AIF).
COMMON SHARES TRADE AS IBG
7.0% JUNE 30, 2019 DEBENTURES WITH A $19.17 CONVERSION PRICE TRADE AS IBG.DB.C
5.5% DECEMBER 31, 2021 DEBENTURES WITH A $8.35 CONVERSION PRICE TRADE AS IBG.DB.D
All amounts in this report are presented in Canadian Dollars (CAD).
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INVESTOR CONTACT
Stephen Taylor
CFO
IBI Group
55 St. Clair Avenue West, 7th Floor
Toronto, ON M4V 2Y7 Canada
Tel +1 416 596 1930
MEDIA CONTACT
Riyaz Lalani
Bayfield Strategy, Inc.
357 Bay Street, Suite 502
Toronto, ON M5H 2T7 Canada
Tel +1 416 907 9365
rlalani@bayfieldstrategy.com
For specific office contact information,
visit ibigroup.com/contact-us/
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ABOUT THIS PUBLICATION
The 2017 Annual Report was developed, designed,
and produced by the IBI Group Corporate Marketing
and Communications team.
Written and Edited by
Charles Finley and Julia Harper
Designed and Produced by
Robyn Gillrie
‘Driverless Future’ Rendering by
Jeff Bittenbender and Siyu Xiao
Portraiture by
Linden Laserna
QA Review by
Arpana Chakravarty
Printed by
Hemlock Printers Ltd.
IBI Group’s 2017 Annual Report is printed on
FSC ® Certified Paper. This paper has been certified
to meet the environmental and social standards of
the Forest Stewardship Council ® (FSC) and comes
from well-managed forests and other responsible
sources. Cover enhancements have been created
with a spot matte and gloss varnish treatment.
To view a copy of this Annual Report online,
please visit ibigroup.com/investor-relations/
For more information about IBI Group,
please visit ibigroup.com
© 2018 IBI Group
IBI Group is a globally integrated design and technology firm.
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