Inscape
Annual Report 2020

Plain-text annual report

Annual Report 2020 0 2 0 2 – T R O P E R L A U N N A E P A C S N I 2 Contents 4 Letter to Shareholders 6 Management’s Discussion & Analysis 8 Vision & Strategy 10 Overview 11 Financial Highlights 12 Results of Operations 14 Summary of Quarterly Results 15 Liquidity & Capital Resources 17 Contractual Obligations 18 Future Accounting Changes 21 Controls & Procedures 23 Management Report 24 Independent Auditor’s Report 26 Consolidated Financial Statements 30 Notes to the Consolidated Financial Statements 66 Corporate Information 3 INSCAPE 2020 ANNUAL REPORTLetter to Shareholders Unprecedented. It’s a word that has been used almost continuously by the media and members of our industry, as well as most government leaders and economists, to describe the impact of the COVID-19 pandemic. As it accelerated its influence throughout the world economy, in parallel to the completion of our 2020 Fiscal Year ending April 30th, 2020 and our fourth quarter, your company and its leadership team engaged in real time strategies to react and adapt to its impact. During this time, the health and safety of our employees has been paramount. We were able to provide enough infrastructure to continue operating our factories in compliance with government restrictions while the balance of our employees primarily worked from home and continued to deliver for our customers. We are proud of our accomplishments protecting our employees during this time. Only some of our efforts are reflected in the results for the period presented at year-end: service our customer’s needs; build cash; manage working capital; reduce expenses; and, remain debt free. Other efforts will only start to become evident in future quarters including: adapt our product offering to anticipated demand trends post “COVID”; explore new channels to reach our customers; actively manage and reduce inventory levels; invest in rapid payback opportunities to drive plant efficiencies; and, monitor government programs to help support the business now and in the future... We look forward to demonstrating a new path forward and improved financial results as we begin to effect the necessary changes, which will take time to be in evidence as the economy recovers during our coming fiscal year. We wish to thank Brian Mirsky, Inscape’s CEO until March 5, 2020, for his valued contributions to the business and efforts to recruit a new generation of talent to the organization during his tenure. We once again thank the leadership team, our employees and our partners for their commitment, particularly during this time of economic uncertainty, and our Board of Directors for their unparalleled support. Bartley Bull, Chair Eric Ehgoetz, Director and Chief Executive Officer 4 Letter to Shareholders 5 Management’s Discussion & Analysis The following Management’s Discussion and Analysis (“MD&A”) of operating results and financial condition of Inscape Corporation and its subsidiaries (“Inscape” or “the Company”) for the year ended April 30, 2020 should be read in conjunction with the accompanying Consolidated Financial Statements and Notes for the years ended April 30, 2020 and 2019. The discussion and analysis are as of June 25, 2020 unless otherwise stated. Additional information relating to the Company, including the Annual Information Form, is available on SEDAR at sedar.com or on our website myinscape.com. Non GAAP Measures In this MD&A, reference is made to EBITDA, which is not a measure of financial performance under International Financial Reporting Standards (“IFRS”). Inscape calculates EBITDA as earnings or loss before interest, taxes, depreciation and amortization. Management believes EBITDA is a useful measure that facilitates period-to- period operating comparisons and we believe some investors and analysts use it as well. This measure, as calculated by Inscape, does not have any standardized meaning prescribed by IFRS and is not necessarily comparable to similar measures presented by other issuers. Reference is also made to both adjusted net income or loss before taxes and adjusted EBITDA. Adjusted net income or loss before taxes excludes derivative fair value adjustments, unrealized exchange gains or losses, share-based compensation, severance and other non- recurring expenses such as gains or losses on disposal of capital assets and intangibles, restructuring expenses and proceeds from government subsidies and grants. Adjusted EBITDA is earnings before interest, taxes, depreciation and amortization with the exclusion of derivative fair value adjustments, unrealized exchange gains or losses, share-based compensation, severance and other non- recurring expenses such as gains or losses on disposal of capital assets and intangibles, restructuring expenses and proceeds from government subsidies and grants. Management believes adjusted net income and loss before taxes and adjusted EBITDA are useful measures that facilitate period-to-period operating comparisons. The adjusted net loss before taxes and adjusted EBITDA are a non-GAAP measure, which does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. 6 Management’s Discussion & Analysis Forward‑looking Statements Company Profile and Core Business This report includes certain forward-looking statements Inscape Corporation is a limited company incorporated that are based on the Company’s best information and in Ontario, Canada, with Class B common shares listed judgments as at the date of this report. Readers are on the Toronto Stock Exchange (TMX). The Company’s cautioned not to place undue reliance on forward-looking registered office and headquarters is at 67 Toll Road, statements found throughout this document. These Holland Landing, Ontario, Canada. forward-looking statements are based on our plans, intentions or expectations which are based on, among Since 1888, Inscape has been designing products and other things, assumptions about the rate of economic services that are focused on the future, so businesses can growth in North America, growth expectations for the adapt and evolve without investing in their workspaces contract office furniture business and currency fluctuations. all over again. Our versatile portfolio includes systems furniture, storage, and walls – all of which are adaptable These forward-looking statements include known and and built to last. Inscape’s wide dealer network, unknown risks, uncertainties, assumptions and other showrooms in the United States and Canada, along with factors which may cause actual results or achievements full service and support for all of our clients, enables us to to be materially different from those expressed or implied. stand out from the crowd. We make it simple. We make The forward-looking statements are subject to risks and it smart. We make our clients wonder why they didn’t uncertainties that may cause the actual results to differ choose us sooner. materially from those anticipated in the discussion (see “Risks and Uncertainties” for more information). The Company reports in two business segments. The Office Furniture segment includes storage, benching, While management believes that the expectations systems and seating solutions products. The Walls expressed by such forward-looking statements are segment includes architectural and movable walls. reasonable, we cannot assure that they will be correct. In Inscape’s products are manufactured in two facilities: a evaluating forward-looking information and statements, 306,000 square foot plant in Holland Landing, Ontario, readers should carefully consider the various factors which and a 110,000 square foot plant in Falconer, New York. could cause actual results or events to differ materially The latter facility was recently sold and now leased back from those indicated in the forward-looking information by Inscape for its manufacturing. Inscape serves its and statements. Readers are cautioned that the foregoing clients through a network of dealers and representatives list of important factors is not exhaustive. Furthermore, supported by showrooms across North America. the Company will update its disclosure upon publication of each fiscal quarter’s financial results and otherwise disclaims any obligations to update publicly or otherwise revise any such factors or any of the forward-looking information or statements contained herein to reflect subsequent information, events or developments, changes in risk factors or otherwise. 7 INSCAPE 2020 ANNUAL REPORTVision & Strategy Management has identified five key strategic initiatives which focus on building a strong foundation for future growth. 1 2 3 Focus the Portfolio Develop the Inscape Brand Build Distribution Invest in new product development in Emphasize the core attributes of Focus investment on high opportunity high growth and high profit product our Brand, increase market and high margin markets. Reinforce categories. Review existing portfolio awareness and continue to improve existing Dealer presence and leverage of product categories to determine the customer experience both on site Inscape showrooms in core markets. long term viability. and on the web. Continue focus on growing the number of large customers with recurring annual sales. Develop new channels for growth. 8 Vision & Strategy 4 5 Improve Capacity Utilization Build Capability Improve manufacturing efficiencies Implement business process and other costs relating to product improvements and invest in new fulfillment through tactical investments equipment and technology to to increase insourcing and modernize enhance performance. Evaluate production methods. Accelerate strategic alliances that leverage product rationalization efforts to Inscape strengths and increase eliminate low volume or unprofitable our avenues for growth. products. Focus on what customers want and what sells. 9 INSCAPE 2020 ANNUAL REPORT Overview Fiscal year 2020 compared to fiscal year 2019 Fiscal year 2019 compared to fiscal year 2018 Fiscal year 2020 sales decreased by $14.8 million or Fiscal year 2019 sales decreased by $3.4 million or 3.6% 16.3% compared to the prior year. Both the Furniture and compared to the prior year. Furniture business unit sales Walls business units contributed to the decline in sales declined as the Company exited an unprofitable business which stemmed from a general reduction in customer which contributed $12.4 million in net sales in fiscal 2018. demand, as well as, both shipment delays and pushouts Excluding sales from the unprofitable business, fiscal 2019 of major projects to future quarters resulting from the sales increased by 9.2% over the prior year. economic impact of COVID-19. In fiscal year 2019, the Company incurred a net loss of In fiscal year 2020, the Company incurred a net loss of $8.7 million or 61 cents per share, compared to a net $5.4 million or 0.38 cents per share, compared to a net loss of $3.0 million, or 21 cent per share a year ago. loss of $8.7 million, or 61 cent per share a year ago. Both Both reporting periods included unrealized derivative reporting periods included unrealized derivative losses losses or gains relating to fair value of outstanding relating to fair value of outstanding derivative contracts derivative contracts and other unusual items, which have which have had a significant impact on the reported net a significant impact on the reported net income or loss. loss. In Fiscal 2020, there was a significant gain related to With the exclusion of these items, fiscal year 2019 had an the sale and leaseback and the proceeds related to the adjusted net loss before taxes of $6.9 million compared government forgivable loan. With the exclusion of these with last year’s adjusted net loss before taxes of $5.1 items in addition to other items such as stock based million. Unfavourable sales mix combined with incremental compensation and severance expenses, fiscal year 2020 investments in sales, marketing and product development had an adjusted net loss before taxes of $4.4 million initiatives accounted for the majority of the increase in compared with last year’s adjusted net loss before taxes adjusted net loss. of $6.9 million. 10 Overview Financial Highlights (In thousands, except for per share amounts) Sales Net loss Basic and diluted loss per share Adjusted net loss before taxes Adjusted EBITDA Sales Net loss Basic and diluted loss per share Adjusted net loss before taxes Adjusted EBITDA Total assets Total liabilities THR EE M ONT HS ENDED APRIL 30 20 20 14,443 (5,196) (0.36) (2,288) (1,038) 2019 18,629 (4,420) (0.31) (3,349) (2,723) $ $ $ $ $ Y EARS ENDED APRIL 30 20 20 75,818 (5,406) (0.38) (5,163) (1,381) 37,804 29,127 2019 90,583 (8,746) (0.61) (6,851) (4,710) 39,527 22,434 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Weighted average number of shares for basic and diluted EPS 14,380,701 14,380,701 Cash $ 5,885 $ 3,265 11 INSCAPE 2020 ANNUAL REPORT Results of Operations SAL ES (In th o us ands ) FISCAL 202 0 FI SC AL 201 9 CHANGE Three Months Ended April 30 Years Ended April 30 $ $ 14,443 75,818 $ $ 18,629 90,583 (22.5%) (16.3%) Sales in the fourth quarter were 22.5% lower than the same quarter of last year. The decline in the fourth quarter is primarily due to the economic impact of COVID-19 which resulted in both shipment delays and customer order pushouts in some of our major markets. The fiscal 2020 annual sales of $75.8 million were 16.3% lower than the previous year’s sales of $90.6 million, due to the timing of major customer projects in the prior year and reduced sales demand in the latter half of this year. GROSS PROFI T (In thous an ds ) FISCAL 20 20 % OF SALES FI SC AL 201 9 % OF SALES Three Months Ended April 30 Years Ended April 30 $ $ 3,877 20,791 26.8% 27.4% $ $ 4,090 24,382 22.0% 26.9% The fourth quarter gross profit as a percentage of sales of 26.8% was 4.8 percentage points higher than the same quarter of last year, primarily due to favourable product mix, improvements in quality expenses and cost efficiencies in the Walls business segment. Fiscal year 2020 gross profit as a percentage of sales increased by 0.5 percentage points from last year’s 26.9% to the current year’s 27.4%. SELLING, GENERAL & ADMINISTRATIVE EXP ENSES (SG & A) (In tho u sa nd s ) FISCAL 20 20 % OF SALES FI SC AL 201 9 % OF SALES Three Months Ended April 30 Years Ended April 30 $ $ 6,565 26,382 45.5% 34.8% $ $ 7,879 31,767 42.3% 35.1% SG&A for the quarter was 45.5% of sales compared with last year’s 42.3%. The current quarter SG&A of $6.6 million was $1.3 million lower than the same quarter of last year primarily due to reduced headcount levels, a decrease in marketing initiatives and lower selling and travel and entertainment expenses. SG&A for the year was 34.8% of sales versus 35.1% last year. The SG&A expense of $26.4 million was $5.4 million or 17.0% lower than last year, mainly due to a reduction in marketing initiatives, lower variable and fixed selling expenses, headcount reductions and cost savings from the exit of an unprofitable business unit. NET LO SS (In tho u sa nds ) FISCAL 20 20 % OF SALES FI SC AL 201 9 % OF SALES Three Months Ended April 30 Years Ended April 30 $ $ (5,196) (5,406) (36.0%) (7.1%) $ $ (4,420) (8,746) (23.7%) (9.7%) The fourth quarter net loss of $5.2 million is higher than the net loss of $4.4 million in the same quarter of last year, primarily due to a $2.3 million loss on the revaluation of derivative contracts and foreign exchange losses of $0.3 million. These were partially offset by reductions in SG&A expenses noted previously and $0.5 million in other income from government grants. 12 Results of Operations Fiscal year 2020 ended with a net loss of $5.4 million compared to a net loss of $8.7 million in fiscal year 2019. This is primarily due to a $5.4 million reduction in SG&A and $1.5 million reduction in non-operating or unusual items including the $1.8 million gain on the sale and leaseback of the Falconer facility and sale of the DC Rollform business and $0.5 million of other income in the form of a grant related to the forgivable government loan. The adjusted net loss before taxes and adjusted EBITDA are non-GAAP measures, which do not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. The following is a reconciliation of net loss before taxes calculated in accordance with GAAP to adjusted net loss before taxes, the non-GAAP measure: (In th o us ands ) Net loss before taxes Adjust non-operating or unusual items: Unrealized loss on derivatives Unrealized loss (gain) on foreign exchange (Gain) loss on disposal of PP&E and intangibles Other income – government grant Stock based compensation Severance obligation Adjusted net loss before taxes $ $ $ $ $ $ $ $ THR EE MONTH S ENDED APR I L 30 YE ARS ENDED APRIL 30 20 20 (5,237) 3,032 224 (188) (517) (102) 500 (2,288) $ $ $ $ $ $ $ $ 20 19 (4,400) 692 (78) 1 — 272 164 (3,349) $ $ $ $ $ $ $ $ 20 20 (5,391) 1,994 289 (1,957) (517) (379) 798 (5,163) $ $ $ $ $ $ $ $ 2019 (8,726) 1,746 (81) (294) — 256 248 (6,851) The following is a reconciliation of net loss before taxes calculated in accordance with GAAP to EBITDA and adjusted EBITDA, the non-GAAP measures: (In th o us ands ) Net loss before taxes Interest Depreciation Amortization EBITDA Adjust non-operating or unusual items: Unrealized loss on derivatives Unrealized loss (gain) on foreign exchange (Gain) loss on disposal of PP&E and intangibles Other income – government grant Stock based compensation Severance obligation Adjusted EBITDA THR EE MONTH S ENDED APR I L 30 YE ARS ENDED APRIL 30 20 20 (5,237) 191 602 457 (3,987) 3,032 224 (188) (517) (102) 500 (1,038) $ $ $ $ $ $ $ $ $ $ $ $ 20 19 (4,400) (4) 630 — (3,774) 692 (78) 1 — 272 164 (2,723) $ $ $ $ $ $ $ $ $ $ $ $ 20 20 (5,391) 184 2,158 1,440 (1,609) 1,994 289 (1,957) (517) (379) 798 (1,381) $ $ $ $ $ $ $ $ $ $ $ $ 2019 (8,726) (30) 2,171 — (6,585) 1,746 (81) (294) — 256 248 (4,710) $ $ $ $ $ $ $ $ $ $ $ $ Income Tax In accordance with IFRS requirements, deferred tax benefits relating to tax loss carry-forward were not recognized during fiscal 2020. See the notes to the consolidated financial statements which include a reconciliation of the income tax expense and valuation allowance. Investment Income The Company earned interest income and dividends from short-term investments of its excess cash in money market instruments and preferred shares. The investments generated investment income of $9 in fiscal year 2020 and $30 in fiscal year 2019. 13 INSCAPE 2020 ANNUAL REPORT Summary of Quarterly Results Selected unaudited quarterly financial information for the previous eight quarters from July 31, 2018 through April 30, 2020 is provided below: Selected Quarterly Information (in thousands, except per share amounts) (Unaudited) Sales Gross profit Gross profit % Net (loss) income Basic & diluted (loss) income per share Adjusted net (loss) income before taxes Adjusted EBITDA QUAR TERS ENDED APR 30, 2020 JAN 31 , 20 20 OCT 3 1, 20 19 JULY 31, 2019 $ $ $ $ $ $ 14,443 3,877 26.84% (5,196) (0.36) (2,288) (1,038) $ $ $ $ $ $ 17,376 4,371 25.20% 142 0.01 (1,591) (739) $ $ $ $ $ $ 23,322 6,765 29.00% 392 0.03 231 1,076 $ $ $ $ $ $ 20,677 5,778 27.90% (744) (0.05) (1,515) (680) APR 30, 2019 JAN 31 , 20 19 OCT 3 1, 20 18 JULY 31, 2018 QUAR TERS ENDED Sales Gross profit Gross profit % Net (loss) income Basic & diluted (loss) income per share $ $ $ $ Adjusted net (loss) income before taxes $ Adjusted EBITDA $ 18,629 4,090 22.00% (4,420) (0.31) (3,349) (2,723) $ $ $ $ $ $ 28,878 8,240 28.50% 1,300 0.09 1,055 1,606 $ $ $ $ $ $ 21,850 6,560 30.00% (2,421) (0.17) (2,098) (1,609) $ $ $ $ $ $ 21,226 5,492 25.90% (3,205) (0.22) (2,459) (1,984) Quarterly earnings per share may not add up to year-to-date earnings per share due to rounding 14 Liquidity & Capital Resources Cash Flow Summary (i n t hous and s) Net cash flow generated from (used in): Operating activities before changes in working capital Net change in working capital Investing activities Financing activities Foreign exchange loss on cash Net increase in cash Cash, beginning of period Cash, end of period (i n t hous and s) Net cash flow generated from (used in): Operating activities before changes in working capital Net change in working capital Investing activities Financing activities Foreign exchange loss on cash Net increase (decrease) in cash Cash, beginning of year Cash, end of year THR EE M ONT HS ENDED APRIL 30 FISCAL 202 0 FISCAL 2019 $ $ $ $ $ $ $ $ (1,549) 4,093 (81) 454 246 3,163 2,722 5,885 $ $ $ $ $ $ $ $ (1,974) 3,277 (134) — (803) 366 2,899 3,265 TW ELVE M ONT HS ENDED APRIL 30 FISCAL 20 20 FISCAL 2019 $ $ $ $ $ $ $ $ (2,144) 402 3,799 454 109 2,620 3,265 5,885 $ $ $ $ $ $ $ $ (3,870) 1,162 1,315 — (722) (2,115) 5,380 3,265 The fourth quarter cash outflow from operations (before changes in working capital) was $1.5 million compared to the previous year’s outflow of $2.0 million. The movement is primarily due to the economic impact of COVID-19 on interest rates, exchange rate and share price which affected the valuation of derivative contracts, remeasurement of retirement benefit obligations and share-based compensation. Net increase in working capital of $4.1 million consisted primarily of improvement in working capital management initiatives. Net cash inflow from financing activities of $0.5 million consisted of a forgivable government loan of $1.8 million partially offset by $1.4 million payments of the principal portion of lease liabilities. 15 INSCAPE 2020 ANNUAL REPORT On an annual basis, fiscal 2020 cash outflow from operations (before changes in working capital) was $2.1 million, compared to a cash outflow of $3.9 million in the previous year, primarily due to lower operating expenditure in SG&A during 2020 relative to prior year when there were incremental investments in marketing, sales coverage and supply chain initiatives. Net working capital movement of $0.4 million is primarily due to movements in lease liabilities and inventories. Cash inflow of $3.8 million from investing activities consisted of $4.4 million proceeds from the sale and leaseback and sale of the DC Rollform business. Net cash inflow from financing activities of $0.5 million comprised lease liabilities and the forgivable government loan. Credit Facility The Company has a demand credit facility for foreign exchange contracts of US $8.0 million and a demand operating credit facility of $5.0 million. As at April 30, 2020, the Company had $4.5 million available in its borrowing base. The interest rate on the demand operating credit facility is Prime Rate plus 1.00% for Canadian dollar loans, US Base Rate plus 1.00% for US dollar loans and 2.5% for Canadian dollar Banker’s Acceptance and 2.5% for US dollar Libor loans. The agreement is secured by the Company’s assets, including property related to both accounts receivable and inventory. The credit facility agreement has the following covenants: 1. The ratio of “total liabilities less postponed debt, 2. Current ratio, excluding any derivative assets non-cash provisions up to $1,000 and lease liabilities” and liabilities, not to be less than 1.25 to 1.0, to “shareholders’ equity less intangible assets” measured quarterly. does not exceed 1.60 to 1.0 at any time, measured quarterly. Although the Company had no borrowings as at April 30, 2020, the Company was not in compliance with one of its financial covenants and received a waiver from its bank on June 18, 2020 (2019 – not in compliance with one covenant but waiver received from bank). 16 Contractual Obligations The following is a summary of the Company’s contractual obligations as at April 30, 2020: (i n m i l l io n s) Lease liabilities Foreign exchange contracts TOTAL 1 YEAR OR LESS 1 – 5 YEARS AFTER 5 YEARS P AY ME NT S D UE BY PERIOD $ $ 3.9 3.4 7.3 $ $ 2.0 2.1 4.1 $ $ 1.4 1.3 2.7 $ $ 0.5 — 0.5 Lease contracts are primarily in respect of the Company’s four showrooms and its US manufacturing facilities. See “Financial Instruments” discussed below for the Company’s obligations for foreign exchange contracts. Share Capital The Company has 3,345,881 Class A multiple voting shares and 11,034,820 Class B subordinated voting shares outstanding at April 30, 2020. The Class A multiple voting shares carry ten votes each. The Class B subordinated voting shares, which are listed on the Toronto Stock Exchange, carry one vote each. Related Party Transactions The following was the remuneration of directors and other members of key management personnel, including Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Brand Officer, VP Supply Chain and VP Human Resources. Compensation of two directors are paid through companies they control. (i n t ho u sa nds ) Salaries and short-term benefits Post-employment benefits Share-based compensation Three Months Ended April 30 Years Ended April 30 20 20 410 8 656 1,074 $ $ $ $ 20 19 362 52 272 686 $ $ $ $ 20 20 2,163 42 379 2,584 $ $ $ $ 2019 2,084 52 256 2,392 $ $ $ $ During the year, the Company paid out $21K (2019 - $nil) to former related parties for goods and services. 17 INSCAPE 2020 ANNUAL REPORT Future Accounting Changes In 2020, there were no future accounting standard Reserve for warranty is based on management’s judgment changes which impacted on the Company’s business. and review of any known exposures and historical claim experience. Significant Accounting Judgements, Estimates and Assumptions Percentage of completion percentages are based on In the application of the Company’s accounting policies, Inscape’s onsite project management estimate of management is required to make judgments, estimates job progress. and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other Identification of cash generating units for the purposes sources. The estimates and associated assumptions are of performing impairment test of assets is based on based on historical experience and other factors that are management’s judgment of what constitutes the lowest considered to be relevant. Actual results may differ from group of assets that can generate cash flows largely these estimates. independent of other assets. Significant Estimates and Judgments in Determination to not recognize deferred tax assets is Applying Accounting Policies based on management’s judgment of the ability of the The following are the estimates and judgments that the Company to achieve sufficient taxable income to use the management has made in the process of applying the deferred tax assets. Company’s accounting policies and that have the most significant effect on the amounts recognized in the Significant Estimates financial statements. Significant Judgments Estimated useful lives and residual values of intangible assets, property, plant and equipment are based on management’s experience, the intended usage of the The Company assesses on a forward-looking basis assets and the expected technological advancement that the expected credit losses (“ECL”) associated with may affect the life cycle and residual values of the assets. its assets carried at amortized costs, including other receivables. For trade and other receivables only, the Defined benefit pension obligations are based on Company applies the simplified approach permitted management’s best estimates on the long-term investment by IFRS 9, which requires the expected lifetime losses return on pension fund assets, the discount rate of (based on management’s judgement and review of known obligations, mortality and the future rate of salary increase. exposures, credit worthiness, and collection experience) to be recognized from initial recognition of Liability for the Company’s performance and restricted the receivables. share units is based on management’s best estimate of the Company’s financial performance during the vesting period Reserve for inventory is based on the aging of inventory of the performance and restricted share units. and management’s judgement of product life cycles in identifying obsolete items. 18 Future Accounting Changes Determination of the company’s fair value of the principal Natural Disasters and Pandemics assets of each CGU less the costs to sell the assets is Extraordinary weather conditions, or natural disasters, such as used to perform an impairment test of the assets. hurricanes, tornadoes, floods, droughts, tsunamis, typhoons, Financial Instruments and earthquakes and pandemics could disrupt operations at our facilities or those of our suppliers and customers and The Company’s activities expose it primarily to the financial increase our cost of sales and other operating expenses. risks of changes in the US dollar exchange rates. The Company enters into a variety of derivative financial The Company is monitoring the outbreak of the novel instruments to hedge the exchange rate risk arising on the coronavirus. Should the outbreak become more widespread anticipated sales to the US The use of financial derivatives in Canada and the United States and adversely affect is governed by the Company’s policies approved by general economic conditions, it may impact demand for the the Board of Directors. Compliance with policies and Company’s products and negatively affect the Company’s exposure limits is reviewed by the Board on a regular revenue and profitability. basis. The Company does not enter into or trade financial instruments, including derivative financial instruments, for General Economic and Market Conditions speculative purposes. Demand for office furniture is sensitive to general economic conditions such as the white-collar employment rate, As at April 30, 2020, the Company had outstanding US corporate growth and profitability, government spending, dollar hedge contracts with settlement dates from May office relocations and commercial property development. 2020 to August 2021. The total notional amounts under The Company manages to moderate the impact of this risk the contracts are US $40,000 to $50,000 (2019 - $41,000 by increasing the differentiation of our products to attract to $51,400). Dependent on the spot CAD/US rate on each new customers, the launching of new products to gain settlement date, the Company can sell US dollars at rates market share and enhancing the coverage of customers ranging from $1.28 CAD/US to $1.50 CAD/US (2019 - and designers. $1.24 CAD/US to $1.41 CAD/US). These contracts had a mark-to-market unrealized loss of $3,391 (US $2,437) Competitive Environment as at April 30, 2020 (2019 – unrealized gain of $1,397 or Office furniture is a mature and highly competitive industry. US $1,042), which was recognized on the consolidated Our main competitors include global companies with statement of financial position as derivative liabilities. Any strong brand name recognition and capability to utilize changes in the net gain or loss from the prior reporting offshore outsourcing. This competitive environment period due to addition of forward contracts, movements results in price pressure and limits certain distributors’ in the US currency exchange rate, reclassification of the ability to carry Inscape products along with those of the unrealized gains or losses to realized income or loss are competitors. The Company competes on product design, recognized on the consolidated statement of operations functionality, innovation and customer service. as unrealized gain or loss on derivatives of the year. There Our success will depend on building a distribution network were realized losses of $275 on the settlement of contracts that is aligned with Inscape, targeting committed dealers during fiscal year 2020 (2019 - $3). who lead with Inscape’s product lines and automating processes to keep improving our productivity, quality and Risks and Uncertainties customer service. The following risks and uncertainties may adversely affect the Company’s business, operating results, cash flows Raw Material and Commodity Costs and financial condition. These may not be the Company’s Fluctuations in raw material and commodity prices could only risks and uncertainties. Other unknown or currently have a significant impact on the Company’s cost of sales insignificant risks and uncertainties not discussed below and operating results. Since most of the raw materials can have an adverse impact on the Company’s business and commodities used by the Company are not unique to and financial performance. the office furniture industry, their costs are often affected by supply and demand in other industries and countries. As a result, the Company may experience rising raw 19 INSCAPE 2020 ANNUAL REPORTmaterial and commodity costs that cannot be recovered closely developments in various US statutes, regulations, from customers in a highly competitive environment. procurement requirements and border crossing The Company manages its manufacturing costs by restrictions. Where appropriate, the Company publicizes locking in supply contract prices, improving production its extensive investment in the US and contribution to the yields, reducing spoilage, focusing on quality control and economy by operating a production plant in New York overseas sourcing, where appropriate. State, providing employment opportunities in different states and purchasing from US suppliers. US Dollar Exchange Rate The US is the main market for the Company. Fluctuations Effectiveness of Market Representatives in the US/Canadian dollar exchange rate have a significant The Company relies on the effectiveness of independent impact on the operating results, cash flows and financial market representatives to market our products to condition of the Company. One method the Company customers. A market representative may choose to uses to manage its foreign currency exposure is through terminate its relationship with us or the effectiveness the use of US dollar hedge instruments. The hedge of a market representative may decline. Disruption of instruments provide the Company with an opportunity to the relationship or transition of an underperforming lock in the US currency conversion rate at a prevailing representative could have an adverse impact on our hedge rate to facilitate the business planning process business in the affected market. The Company manages with pre-determined exchange rate exposure. However, this risk by maintaining strong connection to performing the instruments do not completely eliminate the effects representatives at the regional senior management level. of exchange rate fluctuations. To minimize the effect of The Company also assesses the effectiveness of the exchange rate fluctuations, the Company endeavors to representatives on a regular basis. create natural hedges through increasing US suppliers where appropriate and seeks to increase Canadian Effectiveness of Growth Strategy Implementation dollar sales. The Company seeks to grow its business and market share by building committed distribution, developing Access to the US Markets products and applications to meet customer needs, and The Company depends heavily on unrestricted access to providing visualization tools to assist designers and clients the US markets as a significant portion of the Company’s with solutions for workspaces. Effective implementation sales is derived from there. The Company’s business, of these strategies is essential to the future growth of the operating results, cash flows and financial condition Company. The Company’s sales and results of operations will be seriously affected if access to the US markets is will be adversely affected if there are delays or difficulties in restricted due to political, social, economic or regulatory carrying out the strategies. reasons. Buy America sentiment and regulations may deny the Company’s chance in bidding contracts, especially with the government. The Company needs to monitor 20 Controls & Procedures Disclosure Controls and Procedures During the year ended April 30, 2020, there has been The Chief Executive Officer and the Chief Financial Officer no change in the Company’s ICFR that has materially (the “Certifying Officers”), along with other members of affected, or is reasonably likely to materially affect, the management, have designed, or caused to be designed Company’s ICFR. under their supervision, Disclosure Controls and Procedures (“DC&P”) to provide reasonable assurance that (i) material information relating to the Company is made known to them by others, particularly during the period in which the annual filings are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. The Certifying Officers have evaluated, or caused to be evaluated under their supervision, the design and operating effectiveness of DC&P and have found that the Company’s DC&P are effective at the financial year-end. Internal Control over Financial Reporting Limitations of an Internal Control System The Certifying Officers, along with other members of The Certifying Officers believe that any DC&P or ICFR, no management, have also designed, or caused to be matter how well designed and operated, can provide only designed under their supervision, Internal Control over reasonable, not absolute, assurance that the objectives Financial Reporting (“ICFR”) to provide reasonable of the control system are met and that all control issues, assurance regarding the reliability of financial reporting and including instances of fraud, if any, within the Company the preparation of financial statements for external purposes have been prevented or detected. Further, the design of a prepared in accordance with IFRS. The Certifying Officers control system must reflect the fact that there are resource have used the Internal Control – Integrated Framework constraints, and the benefits of controls must be considered (2013 COSO Framework) issued by the Committee of relative to their costs. The design of any system of controls Sponsoring Organizations of the Treadway Commission is also based in part upon certain assumptions about the (“COSO”) to design the Company’s ICFR. likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals The Certifying Officers have evaluated, or caused to under all potential (future) conditions. be evaluated under their supervision, the design and operating effectiveness of ICFR and have found that the Company’s ICFR is effective in design and operation at the financial year end. 21 INSCAPE 2020 ANNUAL REPORT22 Management Report TO THE SHAREHOLDERS OF INSCAPE CORPORATION Preparation of the consolidated financial statements accompanying this annual report and the presentation of all other information in the report is the responsibility of Management. The financial statements have been prepared in accordance with International Financial Reporting Standards and reflect Management’s best estimates and judgments. All other financial information in the report is consistent with that contained in the financial statements. The Board of Directors, through its Audit Committee, oversees Management in carrying out its responsibility for financial reporting and systems of internal control. The Audit Committee, which is composed of non-executive directors, meets regularly with Management and external auditors to satisfy itself as to the reliability and integrity of financial information and the safeguarding of assets. The financial statements have been reviewed and approved by the Board of Directors on the recommendation of the Audit Committee. Eric Ehgoetz, Director and Chief Executive Officer Jon Szczur Chief Financial Officer June 25, 2020 23 INSCAPE 2020 ANNUAL REPORT Independent Auditor’s Report To the Shareholders and the Board of Directors of Inscape Corporation Opinion Other Information We have audited the consolidated financial statements of Management is responsible for the other information. Inscape Corporation and its subsidaries (the “Company”), The other information comprises: which comprise the consolidated statements of financial position as at April 30, 2020 and 2019, and the consolidated statements of operations, comprehensive loss, changes in shareholders’ equity and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the “financial statements”). In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at April 30, 2020 and 2019, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards (“Canadian GAAS”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. • • Management’s Discussion and Analysis The information, other than the financial statements and our auditor’s report thereon, in the Annual Report. Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. The Annual Report is expected to be made available to us after the date of the auditor’s report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. 24 Responsibilities of Management and Those Charged • Obtain an understanding of internal control relevant with Governance for the Financial Statements to the audit in order to design audit procedures that Management is responsible for the preparation and fair are appropriate in the circumstances, but not for the presentation of the financial statements in accordance purpose of expressing an opinion on the effectiveness with IFRS, and for such internal control as management of the Company’s internal control. determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. In preparing the financial statements, management is • Conclude on the appropriateness of management’s use of responsible for assessing the Company’s ability to continue the going concern basis of accounting and, based on the as a going concern, disclosing, as applicable, matters audit evidence obtained, whether a material uncertainty related to going concern and using the going concern exists related to events or conditions that may cast basis of accounting unless management either intends to significant doubt on the Company’s ability to continue as a liquidate the Company or to cease operations, or has no going concern. If we conclude that a material uncertainty realistic alternative but to do so. exists, we are required to draw attention in our auditor’s Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian GAAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other • Identify and assess the risks of material misstatement matters that may reasonably be thought to bear on our of the financial statements, whether due to fraud independence, and where applicable, related safeguards. or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, The engagement partner on the audit resulting in this independent auditor’s report is Devin Thompson McLeod. forgery, intentional omissions, misrepresentations, or Chartered Professional Accountants the override of internal control. Licensed Public Accountants June 25, 2020 25 INSCAPE 2020 ANNUAL REPORTConsolidated Financial Statements Consolidated Statements of Operations Years ended April 30 (In thousands of Canadian dollars) SALES COST OF GOODS SOLD GROSS PROFIT EXPENS ES NOTE 19 20 AS AT APR IL 30 , 20 20 AS AT APR I L 30, 2019 $ 75,818 55,027 20,791 $ 90,583 66,201 24,382 Selling, general and administrative Unrealized loss (gain) on foreign exchange Other income Unrealized loss on derivatives Loss (gain) on disposal of property, plant and equipment & intangibles Investment income 7 10.2 20 Loss before taxes INC OM E TAX ES Current NET LOSS 14 .1 NET LOSS PER SHARE AVAILABLE TO SHAREHOLDERS 18 Basic Diluted 26,382 289 (2,504) 1,994 30 (9) 26,182 (5,391) 15 15 (5,406) (0.38) (0.38) $ $ $ 31,767 (81) — 1,746 (294) (30) 33,108 (8,726) 20 20 (8,746) (0.61) (0.61) $ $ $ Consolidated Statements of Comprehensive Loss Years ended April 30 (In thousands of Canadian dollars) NET LOSS OTHER COMPREHENSIVE LOSS Items that may not be reclassified to earnings Remeasurement of defined benefit pension liabilities Items that may be reclassified to earnings Exchange gain on translating foreign operations Other comprehensive loss TOTAL COMPREHENSIVE LOSS NOTE 20 20 2019 $ (5,406) $ (8,746) 13.2 (3,140) (865) 130 (3,010) (8,416) $ 377 (488) (9,234) $ The accompanying notes are an integral part of these consolidated financial statements. 26 Consolidated Statements of Financial Position Years ended April 30 (in thousands of Canadian dollars) A SSE TS CU RREN T AS SETS Cash Trade and other receivables Inventories Income taxes receivable Prepaid expenses NON-CU RR ENT A SSET S Property, plant and equipment Right-of-use assets Intangible assets TOTAL ASSETS LI AB ILI TI ES CU RR ENT LIAB ILI TI ES Trade and other payables Lease liabilities Derivative financial liabilities Forgivable government loan Provisions NON-CU RR ENT LIAB ILI TI ES Retirement benefit obligation Lease liabilities Derivative financial liabilities Provisions Other long-term obligations TOTAL LIABILITIES SHA R EHOLDERS’ EQUI TY Shareholders’ capital Contributed surplus Accumulated other comprehensive loss Deficit TOTAL SHAREHOLDERS’ EQUITY TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY NOTE 20 20 2019 4 5 14 6 9.1 8 11 9.2 10.2 22 12 13 9.2 10.2 12 15 16 $ $ $ $ $ 5,885 10,255 5,785 — 690 22,615 9,915 3,637 1,637 15,189 37,804 11,923 2,035 2,122 1,199 203 17,482 7,340 1,856 1,269 1,057 123 11,645 29,127 $ $ 3,265 13,416 6,577 9 692 23,959 13,800 — 1,768 15,568 39,527 $ 15,157 — 1,052 — 387 16,596 3,917 — 345 1,053 523 5,838 22,434 52,868 2,675 (3,588) (43,278) 8,677 37,804 $ 52,868 2,675 (578) (37,872) 17,093 39,527 $ Approved by the Board of Directors, Bartley Bull, Chair Eric Ehgoetz, Director and Chief Executive Officer The accompanying notes are an integral part of these consolidated financial statements. 27 INSCAPE 2020 ANNUAL REPORT Consolidated Statements of Changes in Shareholders’ Equity (in thousands of Canadian dollars) SHARE CAPITAL CONTRIBUTED SURPLUS CUMULATIVE REMEASUREMENT OF RETIREMENT BENEFIT OBLIGATION CUMULATIVE TRANSLATION GAIN TOTAL SHAREHOLDERS’ EQUITY DEFICIT Balance, April 30, 2018 $ 52,868 $ 2,675 $ (979) $ 889 $ (29,126) $ 26,327 Net loss Other comprehensive income (loss) — — — — — — (8,746) (8,746) (865) 377 — (488) Balance, April 30, 2019 $ 52,868 $ 2,675 $ (1,844) $ 1,266 $ (37,872) $ 17,093 Net loss Other comprehensive income (loss) — — — — — — (5,406) (5,406) (3,140) 130 — (3,010) Balance, April 30, 2020 $ 52,868 $ 2,675 $ (4,984) $ 1,396 $ (43,278) $ 8,677 The accompanying notes are an integral part of these consolidated financial statements. 28 Consolidated Statements of Cash Flows Years ended April 30 (in thousands of Canadian dollars) Net inflow (outflow) of cash related to the following activities: OP ERA T ING Net loss IT E M S NOT A FFECT I NG CAS H Amortization and depreciation Interest expense on lease liabilities NOTE 20 20 2019 $ (5,406) $ (8,746) 6, 8, 9, 20.2 Unrealized loss on derivatives Share-based compensation Unrealized loss (gain) on foreign exchange 7 Non-cash portion of other income 7 Disposal of property, plant and equipment & intangibles Retirement benefit obligation expense net of employer contributions Cash used for operating activities before non‑cash working capital 10.2 M OV EM ENTS IN NON‑ CASH W OR K IN G C API TAL Trade and other receivables Inventories Prepaid expenses Accounts payable and accrued liabilities Lease liability Provisions Income tax receivables and payables Changes in non‑cash operating items Interest payment on lease liabilities Restricted shares settled Cash used in operating activities IN VE STI NG Proceeds from sales of short-term investments Additions to property, plant and equipment Additions to intangible assets Proceeds from disposal of property, plant and equipment Proceeds from sale of business Cash generated from investing activities FI NANCI NG Proceeds from forgivable government loan Payment of principal portion of lease liabilities Cash generated from (used in) financing activities Unrealized foreign exchange loss on cash Net cash inflow (outflow) Cash, beginning of year Cash, end of year CA SH CONSIS TS O F: Cash 9.2 9.2 6 8 7.1 7.2 22 9.2 $ $ $ The accompanying notes are an integral part of these consolidated financial statements. 3,598 222 1,994 (379) 18 (2,504) 30 283 (2,144) 3,299 844 29 (3,484) 204 (263) 13 642 (219) (21) (1,742) — (558) (63) 3,449 971 3,799 1,808 (1,354) 454 109 2,620 3,265 5,885 5,885 5,885 $ $ $ 2,171 — 1,746 256 (81) — (294) 1,078 (3,870) (805) 248 268 959 — 490 2 1,162 — — (2,708) 3,614 (2,148) (153) 2 — 1,315 — — — (722) (2,115) 5,380 3,265 3,265 3,265 29 INSCAPE 2020 ANNUAL REPORT Notes to the Consolidated Financial Statements (In thousands of Canadian dollars, except were indicated per share amounts.) 1. GENERAL INFORMATION Inscape Corporation (the “Company”) is a limited company incorporated in Ontario, Canada, with Class B common shares listed on the Toronto Stock Exchange (TMX). The Company’s registered office is at 67 Toll Road, Holland Landing, Ontario, Canada. The Company is an office furniture manufacturer with production at two facilities in Canada and the United States in approximately 416,000 square feet of space. Inscape serves its clients through a network of dealers and representatives supported by showrooms across North America. The Company reports in two business segments. The Office Furniture segment includes storage, benching, systems and seating solutions products. The Walls segment includes architectural and movable walls. Inscape’s products are manufactured in two facilities: a 306,000 square foot plant in Holland Landing, Ontario, and approximately 110,000 square foot plant in Falconer, New York. During the year, the latter facility was sold and leased back by Inscape for its manufacturing. 2. SIGNIFICANT ACCOUNTING POLICIES Statement of compliance with IFRS including comparatives These consolidated financial statements have been prepared in accordance with International Financial Reporting Standard (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements were prepared on a going concern assumption using the historical cost basis except for financial instruments. These consolidated financial statements were approved and authorized for issuance by the Board of Directors of the Company on June 25, 2020. The consolidated financial statements are presented in Canadian dollars, the functional currency of the Company, and all values are rounded to the nearest thousands, except where indicated. Basis of consolidation The consolidated financial statements include the accounts of Inscape and its two wholly owned US subsidiaries, Inscape Inc. and Inscape (New York) Inc. Subsidiaries are consolidated from the date of acquisition and control and continue to be consolidated until the date that such control ceases. The Company controls an entity when the Company is exposed or has rights to variable returns from its involvement with the investee and has the ability to 30 Notes to the Consolidated Financial Statements affect these returns through the Company’s power over the in opening retaining earnings and no restatement of investee. All intra-group transactions, balances, income prior period financial information. IFRS 16 supersedes and expenses are eliminated in full on consolidation. IAS 17 Leases (“IAS 17”), IFRIC 4 Determining whether Revenue recognition Sale of manufactured goods an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The Company’s revenue is generated from sales and The standard sets out the principles for the recognition, installation of manufactured goods to customers through measurement, presentation and disclosure of leases and a dealer network. For manufactured goods, revenue is requires lessees to account for most leases under a single recognized when the goods are shipped. Revenue is on-balance sheet model. The nature and effect of these recognized when control of the assets passes to the changes are disclosed below. customer; the Company’s terms and condition state that control of the assets transfers at shipping point. This is IFRS 16 introduces changes to the lessee accounting where the customer gains control of the asset. by removing the distinction between operating and finance leases and requiring the recognition of a right- Revenue from installation is recognized on a percentage of-use asset (“ROU asset”) and a lease liability at the of completion based on physical stage of completion of lease commencement for all leases, except for short- the contract. This output method is the best measure of term leases (lease terms of twelve months or less) and progress as the nature of the products installed enable leases of low value assets (a lease of an asset that, when measurement to be reliably observed. new is less than US $5,000). In applying IFRS 16, the Company recognizes the ROU assets and lease liabilities The Company invoices the customer as the installation in the consolidated statement of financial position, initially occurs. The payments are received as per normal payment measured at the present value of future lease payments; terms established with the customer. recognizes the depreciation of ROU assets and interest on lease liabilities in the consolidated statements of operations Revenue from the sale of manufactured goods and and comprehensive loss; and separates the total amount installation is measured at fair value of the consideration of cash paid into a principal portion (presented in financing received less applicable sales taxes, discounts, rebates and activities) and interest (presented within operating activities) dealer incentives. Sales-related warranties associated with in the consolidated statements of cash flows. For short-term the sales and installation of manufactured goods cannot be leases and leases of low value assets, the Company has purchased separately and they serve as an assurance that opted to recognize a lease expense on a straight-line basis, the products sold comply with agreed-upon specifications. and this expense is presented within selling, general and Accordingly, the Company accounts for warranties in administrative expenses in the consolidated statements of accordance with IAS 37 (see Note 12). operations and comprehensive loss. Dealer incentives For leases that were classified as operating leases under The Company offers a variety of incentives to its dealer IAS 17, lease liabilities at transition have been measured at the base to support sales initiatives. An obligation arises from present value of remaining lease payments, discounted at the the incentives when the Company sells manufactured Company’s incremental borrowing rate as at May 1, 2019. goods and/or installations through the dealer network. The The rate applied is the US treasury rate or Canadian obligation is measured at fair value of the incentive earned. benchmark bond rate (depending on the location of the ROU The dealer incentives are recorded as a reduction to revenue asset and remaining lease term) adjusted for the Company’s in the Consolidated Statement of Operations interest rate spread and the LIBOR spread (for ROU assets Leases The Company adopted IFRS 16 Leases (“IFRS 16”) on May 1, 2019, using the modified retrospective approach with the cumulative effects of initial application recorded in the US) or CDOR spread (for ROU assets in Canada). Generally, ROU assets at transition have been measured at an amount equal to the corresponding lease liabilities, adjusted for any prepaid or accrued rent and deferred rent relating to that lease, with no net impact on retained earnings. 31 INSCAPE 2020 ANNUAL REPORTIn applying IFRS 16 for the first time, the Company has used the following practical expedients permitted by the standard: • the Company has applied the recognition exemptions for low value leases and leases that end within twelve months of the date of initial application, and account for them as low value and short-term leases respectively; • the Company has not reassessed, under IFRS 16, contracts that were identified as leases under the previous accounting standard (IAS 17); • the Company has excluded initial direct costs in the measurement of the right-of-use asset; and • the Company has used hindsight in determining the lease term where the lease contracts contain options to extend or terminate the lease. The cumulative effect of the changes made to the May 1, 2019 consolidated statement of financial position for the adoption of IFRS 16 is as follows: ASS ET S Right-of-use assets, net LIA BI LIT I ES Accrued liabilities Lease liabilities, current Lease liabilities, non-current BALANCE AS AT APRIL 30, 2019 (AS REPORTED) IFRS 16 ADJUSTMENTS BALANCE AS AT MAY 1, 2019 $ $ $ $ - 4,170 $ 4,170 6,634 - - (336) 1,331 $ $ 3,070 $ 6,298 1,331 3,070 Instead of performing an impairment review on the right-of-use assets at the date of initial application, the Company has relied on its historic assessment as to whether leases were onerous immediately before the date of initial application of IFRS 16. The Company used its incremental borrowing rates at May 1, 2019 to measure lease liabilities. The weighted average incremental borrowing rate was 5.06%. The weighted average lease term remaining as at May 1, 2019 was approximately 5 years. 32 The following tables reconcile the lease liabilities recognized on May 1, 2019 and the operating lease commitments disclosed under IAS 17 as at April 30, 2019 discounted using the incremental borrowing rates as at the date of initial application: Balance as at May 1, 2019 Operating lease commitment as at April 30, 2019 Effect from discounting at the incremental borrowing rate as at May 1, 2019 Lease liabilities due to initial application of IFRS 16 as at May 1, 2019 LEA S E TER M: Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years New accounting policy for leases under IFRS 16 $ $ 5,100 (699) 4,401 As at April 30, 2019 $ $ 1,491 2,912 697 5,100 The Company assesses whether a contract is or contains a lease, at inception of a contract. The Company recognizes a ROU asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, at the commencement of the lease. The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any incentives received. They are subsequently measured at cost less accumulated depreciation and impairment losses. The ROU asset is depreciated over the shorter of the lease term or the useful life of the underlying asset. The ROU asset is subject to testing for impairment if there is an indicator of impairment. The lease liability is initially measured at the present value of outstanding lease payments at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company uses its incremental borrowing rate. The Company’s incremental borrowing rate for a lease is the rate that the Company would pay to borrow an amount necessary to obtain an asset of a similar value to the right-of-use asset on a collateralized basis over a similar term. Lease payments include fixed payments less any lease incentives and any variable lease payments where variability depends on an index or rate. Management exercises judgment in the process of applying IFRS 16 and determining the appropriate lease term on a lease by lease basis. Management considers many factors including any events that create an economic incentive to exercise a renewal option including performance, expected future performance and past business practice. Renewal options are only included if the Management is reasonably certain that the option will be renewed. Variable lease payments that do not depend on an index or rate are not included in the measurement of the ROU asset and lease liability. The related payments are recognized as an expense in the period in which the triggering event occurs and are included in the consolidated statements of operations and comprehensive loss. 33 INSCAPE 2020 ANNUAL REPORT Investment income end of the reporting period. Exchange differences arising, Dividend income from investments is recognized when if any, are recognized in other comprehensive income or the Company’s right to receive payment has been loss and accumulated in equity until the disposal of the established, it is probable that the economic benefits will foreign operation, when all of the accumulated exchange flow to the Company and the amount of dividend can be differences in respect of that operation are reclassified measured reliably to profit or loss. Revenues and expenses are translated into Canadian dollars at the average exchange rate for Interest income is recognized when it is probable that the month in which the transactions occurred, unless the economic benefits will flow to the Company and the exchange rates fluctuated significantly during that period amount of interest can be measured reliably. or for non-recurring transactions of material amounts, in which case the exchange rates at the dates of the Foreign currencies transactions are used. The Canadian dollar is the functional currency of the Company and the presentation currency for the Employee future benefits consolidated financial statements. Transactions in foreign currencies are recognized at the average exchange rate for the month in which the Contributions to defined contribution retirement benefit plans are recognized as an expense when employees have rendered service entitling them to the contributions. transactions occurred, unless exchange rates fluctuated For defined benefit retirement benefit plans, the cost of significantly during that period or for non-recurring transactions of material amounts, in which case the exchange rates at the dates of the transactions are used. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences are recognized in profit or loss in the period in which they arise. For the Company’s foreign operation where the Canadian dollar is its functional currency, the same policy described above is applied to the translation of its assets and liabilities for the purpose of presenting consolidated financial statements. For the Company’s foreign operation where the US dollar is its functional currency, the assets and liabilities of the foreign operation for the purpose of presenting consolidated financial statements are expressed in Canadian dollars using exchange rates prevailing at the providing benefits is determined using the Projected Unit Credit Method. Actuarial gains and losses and related taxes are recognized in other comprehensive income or loss as remeasurement of defined benefit liabilities. The retirement benefit obligation recognized in the statements of financial position represents the present value of the defined benefit obligation as reduced by the fair value of plan assets. Any asset resulting from this calculation is limited to the present value of available refunds and reductions in future contributions to the plan. The determination of a benefit expense requires assumptions such as the discount rate to measure obligations and the expected return on asset, the expected mortality rate and the expected rate of future compensation increases. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds and that have terms to maturity approximating the terms of the related pension liability 34 Share‑based compensation generally recognized for all taxable temporary differences. For share-based compensation arrangement in which the Deferred tax assets are generally recognized for all deductible term of the arrangement provides the employees and others temporary differences to the extent that it is probable that providing similar services with the choice of settlement by taxable profits will be available against which those deductible equity instruments or in cash, the transaction is accounted for temporary differences can be utilized. The carrying amount of as a cash-settled share-based payment transaction. deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable For cash-settled share-based compensation, a liability is that sufficient taxable profits will be available to allow all or part recognized for the goods or services acquired, measured of the asset to be recovered. initially at the fair value of the liability. The liability is subsequently measured at fair value using mark to market Deferred tax assets and liabilities are measured at the tax rates accounting. Under the stock option plan, the fair value is that are expected to apply in the period in which the liability is determined by using the Black-Scholes-Merton Option Pricing settled or the asset realized, based on tax rates (and tax laws) Model, which factors in the Company’s estimate of the number that have been enacted or substantively enacted by the end of of options that will eventually vest. Under the executives’ cash the reporting period. settled long- term incentive plan and the cash settled deferred share unit plan, the fair value is based on the share price at the Government grant end of the reporting period as well as the Company’s estimate Government grant is recognized when there is reasonable of the number of shares that will eventually vest. assurance that the Company will comply with any conditions attached to the grant and the grant will be received. At the end of each reporting period until the liability is settled, Government grant is recognized in other income on a and at the date of settlement, the fair value of the liability is systematic basis over the periods in which the Company remeasured, with any changes in fair value recognized in profit recognizes expenses for the related costs for which the grants or loss for the year. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. Current tax are intended to compensate, which in the case of grants related to assets requires setting up the grant as deferred income or deducting it from the carrying amount of the asset. A portion of the Small Business Administration (“SBA”) loan received from the US government is forgivable subject to the terms of the Paycheck Protection Program (“PPP”) - all Current tax is based on taxable profit for the year. Taxable profit employees are kept on the payroll for eight weeks and the differs from profit as reported in the consolidated statements of money is used for payroll, rent, mortgage interest, or utilities. operations due to items of income or expense that are taxable or deductible in other years and items that are never taxable or When a government loan is issued to the Company at a deductible. The Company’s liability for current tax is calculated below-market rate of interest, the loan is initially recorded at its using tax rates that have been enacted or substantively net present value and accreted to its face value over the period enacted by the end of the reporting period. of the loan. The benefit of the below-market rate of interest is Deferred tax accounted for as a government grant. It is measured as the difference between the initial carrying value of the loan and the Deferred tax is recognized on temporary differences between cash proceeds received. the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are 35 INSCAPE 2020 ANNUAL REPORTLoss per share (“LPS”) Basic loss per common share is calculated using the weighted daily average number of common shares outstanding. Diluted loss per share is calculated using the treasury stock method. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is recognized when property, plant and equipment is available for use so as to write off the cost less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis. Depreciation ceases at the earlier of when the asset or component is derecognized, or when it is held for sale or included in a group that is classified as held for sale. Each component of an item of property, plant and equipment with a cost which is significant in relation to the total cost of the item and has a significantly different estimated useful life than the parent asset is depreciated separately. Component accounting is used for the Company’s buildings. Depreciation is calculated over the estimated useful life of the assets, at the following rates and methods: ASS ET CA T EG OR Y DEP RE CI AT ION RAT E DEP RE CIATION METHOD Land Building / Roof Leasehold improvements Machinery and equipment Tools, dies and jigs Office furniture and equipment Intangible assets nil 2.5% - 4% The lower of the estimated useful life and the term of the lease 6.6% - 20% 33.33% 10% - 50% nil Straight line Straight line Straight line Straight line Straight line Intangible assets are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each year-end, with the effect of any changes in estimate being accounted for on a prospective basis. Expenditure on research activities is recognized as an expense in the period in which it is incurred. Amortization is calculated over the estimated useful life of the assets, at the following rates and methods: ASS ET CA T EG OR Y AMOR TIZAT ION R AT E AMOR TIZ AT ION METHOD Licensed products Computer software Intellectual property 20% – 33.33% 20% – 33.33% 10% Straight line Straight line Straight line 36 Impairment of long‑lived non‑financial assets recognized for the asset (or cash-generating unit) in prior At the end of each reporting period, the Company reviews years. A reversal of an impairment loss is recognized the carrying amounts of its long-lived non-financial immediately in profit or loss. assets to determine whether there is any indication that those assets have suffered an impairment loss. If any Inventories such indication exists, the recoverable amount of the Raw materials are measured at the lower of cost and asset is estimated in order to determine the extent of the net realizable value, determined on a first-in, first-out impairment loss, if any. Where it is not possible to estimate basis. Recoverable costs of raw materials that have no the recoverable amount of an individual asset, consumption over a period of eighteen months may be the Company estimates the recoverable amount of the written down based on the Company’s assessment of their cash-generating unit (“CGU”) to which the asset belongs. future usage. When circumstances that previously caused A CGU is the smallest identifiable group of assets that inventories to be written down below cost no longer exist, generates cash flows that are largely independent of the the amount of the write-down previously recorded is cash flows from other assets or group of assets. reversed. Work-in-progress and finished goods are measured at the lower of cost and net realizable Recoverable amount is the higher of fair value less costs value, determined on a first-in, first-out basis. Net to sell and value in use, which is the present value of the realizable value is the estimated selling price in the ordinary estimated future cash flows from the use of the asset course of business less the estimated costs necessary (or cash-generating unit). to make the sale. The cost of work-in-progress and finished goods includes the cost of raw materials, and the The discount rates used in the present value calculation applicable share of the cost of labour, fixed and variable are the pre-tax rates that reflect current market production overheads. assessments of the time value of money and the risks specific to the asset. Provisions Provisions are recognized when the Company has a If the recoverable amount is estimated to be less than the present obligation (legal or constructive) as a result of a carrying amount of the asset (or cash-generating unit), the past event, it is probable that the Company will be required carrying amount is reduced to its recoverable amount. An to settle the obligation, and a reliable estimate can be impairment loss is recognized immediately in profit or loss. made of the amount of the obligation. At the end of each reporting period, the Company reviews whether there is any indication that an impairment loss The amount recognized as a provision is the best estimate recognized in prior periods for an asset other than goodwill of the consideration required to settle the present (or cash-generating unit) may no longer exist or may have obligation at the end of the reporting period, taking into decreased. If any such indication exists, the recoverable account the risks and uncertainties surrounding the amount of the asset (or cash-generating unit) is estimated obligation. Where a provision is measured using the cash in order to determine whether the impairment loss should flows estimated to settle the present obligation, its carrying be reversed. Where an impairment loss subsequently amount is the present value of those cash flows. reverses, the carrying amount of the asset (or cash- generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been 37 INSCAPE 2020 ANNUAL REPORTFinancial assets Impairment of financial assets Financial assets consist of cash and cash equivalents and The Company recognizes an allowance for expected trade and other receivables. These financial assets are credit loss on accounts receivable that are measured initially measured at fair value plus transaction costs. at amortized cost. The amount of expected credit loss They are subsequently measured at amortized cost. (“ECL”) is updated at each reporting date to reflect changes in credit risk since initial recognition of the Amortized cost is determined using the effective interest respective financial instrument. The Company recognizes rate method, factoring in acquisition costs paid to third lifetime ECL for its accounts receivables. The expected parties, and loss allowance. The effective interest rate is credit losses on these financial assets are estimated using the rate that exactly discounts the estimated future cash the Company’s historical credit loss experience, adjusted receipts through the expected life of the financial asset to for factors that are specific to the debtors, general the carrying amount. When calculating the effective interest economic conditions, and an assessment of both the rate, the Company estimates future cash flows considering current as well as the forecast direction of conditions at the all contractual terms of the financial instrument. reporting date. The Company does not have any financial assets that Financial liabilities are subsequently measured at fair value except for the Financial liabilities are recognized initially at fair value and derivative financial instrument which may be in an asset subsequently measured at either fair value or amortized or liability position depending on the prevailing foreign cost. The Company’s financial liabilities are classified exchange rates at such time. as ‘financial liabilities at amortized cost’ and include any borrowings and trade and other payables and are Financial assets are derecognized when the rights to subsequently measured at amortized cost using the receive cash flows from the asset have expired or the effective interest method. The effective interest method is Company has transferred its rights to receive cash flows a method of calculating the amortized cost of a financial from an asset. liability and of allocating interest expense over the relevant year. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability. 38 Classification of financial assets and liabilities The following is the classification of the Company’s financial assets and liabilities based on their characteristics and management’s choices and intentions related to them: A SSE T/ LIA BI LIT Y NEW CLASSIFICAT ION UNDER I FR S 9 Cash and cash equivalents Trade and other receivables Accounts payable and accrued liabilities Derivative assets and liabilities Amortized cost Amortized cost Amortized cost FVTPL Derivative financial instruments The Company enters into a variety of derivative financial instruments to manage its exposure to foreign exchange rate risk. Derivatives are initially recognized at fair value at the date the derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately since the derivatives are not designated as hedging instruments for hedge accounting. A derivative with a positive fair value is recognized as a financial asset; a derivative with a negative fair value is recognized as a financial liability. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realized or settled within 12 months. Other derivatives are presented as current assets or current liabilities. Non-performance risk, including the Company’s own credit risk, is considered when determining the fair value of financial instruments. Share capital Common shares issued by the Company are recorded in the amount of the proceeds received, net of direct issue costs. 39 INSCAPE 2020 ANNUAL REPORTSIGNIFICANT ACCOUNTING JUDGMENTS, Percentage of completion percentages are based ESTIMATES AND ASSUMPTIONS on Inscape’s onsite project management estimate of In the application of the Company’s accounting policies, job progress. management is required to make judgments, estimates and assumptions about the carrying amounts of assets Identification of cash generating units for the purposes and liabilities that are not readily apparent from other of performing impairment test of assets is based on sources. The estimates and associated assumptions are management’s judgment of what constitutes the lowest based on historical experience and other factors that are group of assets that can generate cash flows largely considered to be relevant. Actual results may differ from independent of other assets. these estimates. SIGNIFICANT ESTIMATES AND JUDGMENTS IN based on management’s judgment of the ability of the APPLYING ACCOUNTING POLICIES Company to achieve sufficient taxable income to use the Determination to not recognize deferred tax assets is The following are estimates and judgments that the deferred tax assets. management has made in the process of applying the Company’s accounting policies and that have the most Significant estimates significant effect on the amounts recognized in the Estimated useful lives and residual values of intangible financial statements. assets, property, plant and equipment are based on management’s experience, the intended usage of the Significant judgments assets and the expected technological advancement that The Company assesses on a forward-looking basis the may affect the life cycle and residual values of the assets. expected credit losses (“ECL”) associated with its assets carried at amortized costs, including other receivables. For Defined benefit pension obligations are based on trade and other receivables only, the Company applies the management’s best estimates on the long-term investment simplified approach permitted by IFRS 9, which requires return on pension fund assets, the discount rate of the expected lifetime losses (based on management’s obligations, mortality and the future rate of salary increase. judgement and review of known exposures, credit worthiness, and collection experience) to be recognized Liability for the Company’s performance and restricted from initial recognition of the receivables. share units is based on management’s best estimate of the Company’s financial performance during the vesting period Reserve for inventory is based on the aging of inventory of the performance and restricted share units. and management’s judgement of product life cycles in identifying obsolete items. Determination of the company’s fair value of the principal assets of each CGU less the costs to sell the assets is Reserve for warranty is based on management’s used to perform an impairment test of the assets. judgment and review of any known exposures and historical claim experience. 40 3. NEW ACCOUNTING STANDARDS ADOPTED IFRS Interpretations Committee (“IFRIC”) 23, Uncertainty over Income Tax Treatments (“IFRIC 23”) IFRIC 23 provides guidance to be applied in the determination of taxable profit or loss, tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12, Income Taxes (“IAS 12”). IFRIC 23 was issued by the IASB in June 2017 and is effective for annual periods beginning on or after January 1, 2019. There was no material impact to our consolidated financial statements as a result of adopting IFRIC 23 4. TRADE AND OTHER RECEIVABLES Trade account receivables, gross Loss allowance for expected credit losses Other receivables An aging analysis of trade receivables: Current 1-30 days 31-60 days 61-90 days > 90 days 5. INVENTORIES Raw materials Work-in-progress Finished goods AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 $ $ 9,754 (216) 9,538 717 10,255 $ 13,576 (333) 13,243 173 $ 13,416 AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 $ $ 3,892 1,987 1,438 472 1,965 9,754 $ 6,616 1,736 2,070 1,134 2,020 $ 13,576 AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 $ $ 5,004 219 562 5,785 $ 5,505 287 785 $ 6,577 The cost of inventories recognized as cost of goods sold was $51,959 (2019 - $61,230). During the year, there was an inventory write-down to net realizable value of $282 (2019 - $250). 41 INSCAPE 2020 ANNUAL REPORT 6. PROPERTY, PLANT AND EQUIPMENT AS AT APRIL 30, 2020 LAND BUILDINGS/ ROOF LEASEHOLD IMPROVEMENTS MACHINERY & EQUIPMENT TOOLS, DIES & JIGS OFFICE FURNITURE & EQUIPMENT CAPITAL PROJECTS IN PROGRESS TOTAL COST: Opening balance, May 1, 2019 Additions Disposals Transfers Exchange differences Ending balance, April 30, 2020 AC CUMULATED DEPRECI A T IO N: Opening balance, May 1, 2019 Depreciation charge for the year Disposals Exchange differences Ending balance, April 30, 2020 — (2) 300 — — — — — $ 488 $ 19,079 $ 6,448 $ 39,933 $ 20,981 $ 12,403 $ 162 $ 99,494 — 61 (186) (3,864) — (39) 71 (206) 11 (6) 80 (130) 59 37 11 (10) — 27 233 (684) (11) 24 102 — (149) 2 558 (5,080) (90) 43 15,237 6,318 39,979 21,009 11,965 117 94,925 11,463 368 (1,744) (17) 10,070 4,601 476 (113) (3) 37,274 20,733 11,623 511 (92) 29 115 (10) 26 401 (654) 23 4,961 37,722 20,864 11,393 — — — — — 85,694 1,871 (2,613) 58 85,010 Net book value, April 30, 2020 $ 300 $ 5,167 $ 1,357 $ 2,257 $ 145 $ 572 $ 117 $ 9,915 AS AT APRIL 30, 2019 COST: LAND BUILDINGS/ ROOF LEASEHOLD IMPROVEMENTS MACHINERY & EQUIPMENT TOOLS, DIES & JIGS OFFICE FURNITURE & EQUIPMENT CAPITAL PROJECTS IN PROGRESS TOTAL Opening balance, May 1, 2018 $ 480 $ 18,908 $ 11,150 $ 39,828 $ 21,860 $ 13,026 $ 908 $ 106,160 Additions Disposal Transfers Exchange differences — — 8 — — 171 1,337 (6,049) — 10 52 — (1) 54 50 561 (1,178) (1,231) 216 33 19 28 Ending balance, April 30, 2019 488 19,079 6,448 39,933 20,981 12,403 AC CUMULATED DEPRECI A T IO N: Opening balance, May 1, 2018 Depreciation charge for the year Disposal Exchange differences Ending balance, April 30, 2019 — — — — — 11,000 10,320 36,739 21,742 12,435 391 — 72 316 (6,041) 6 496 — 39 112 394 (1,152) (1,233) 31 27 11,463 4,601 37,274 20,733 11,623 148 2 (896) — 162 — — — — — 2,148 (8,456) (662) 304 99,494 92,236 1,709 (8,426) 175 85,694 Net book value, April 30, 2019 $ 488 $ 7,616 $ 1,847 $ 2,659 $ 248 $ 780 $ 162 $ 13,800 42 7. OTHER INCOME Details of other income during the year are presented below: DES CRIPT IO N Sale and leaseback Sale of business Government grant TOTAL 7.1 Sale and leaseback NO TE 7.1 7.2 22 $ $ 1,252 735 517 2,504 On December 31, 2019, the Company completed a sale and leaseback of certain land and buildings (“property”) related to the Walls segment. The sale generated cash proceeds of $3,449 (US $2,618) compared to a carrying value of $2,346 (US $1,792) which resulted in a gain of $1,252 (US $939) recorded in loss (gain) on disposal of property, plant and equipment and intangibles. Following the sale, the Company leased back the majority of the property via a triple net lease agreement which expires in February 2021. The leaseback resulted in the recognition of a right-of-use asset of $732 (US $527) and lease liabilities of $512 (US $368) at April 30, 2020. 7.2 Sale of business On December 31, 2019, the Company sold its DC Rollform business, which engaged in metal fabrication within our Walls segment. The assets and liabilities disposed of at December 31, 2019 consisted of inventory, machinery and equipment, and tools for cash proceeds of $971 (US $737) and gain of $735 (US $557) recorded in loss (gain) on disposal of property, plant and equipment and intangibles. The DC Rollform business did not represent a strategic shift in our business and will not have a major effect on our operations and financial results. 43 INSCAPE 2020 ANNUAL REPORT 8. INTANGIBLE ASSETS AS A T A PR IL 30, 2 020 CO ST : Opening balance, May 1, 2019 Additions Disposals Transfers from CIP (Note 6) Exchange differences Ending balance, April 30, 2020 ACCUM ULAT E D A M ORT I ZA TI O N: Opening balance, May 1, 2019 Amortization Disposals Exchange differences Ending balance, April 30, 2020 Net book value, April 30, 2020 AS A T A PR IL 30, 2 019 CO ST : LICEN SED P RODUCTS COMPUTE R SOFTWAR E INT ELLECTUAL PR OPE RT Y TOTAL $ 122 $ 10,906 $ 524 $ 11,552 — — — — 63 (51) 90 13 — — — — 63 (51) 90 13 122 $ 11,021 $ 524 $ 11,667 122 — — — 122 — $ $ $ 9,138 288 (50) 8 9,384 1,637 $ $ $ 524 — — — 524 — $ $ $ 9,784 288 (50) 8 10,030 1,637 $ $ $ $ LI CENSED PRODUCTS COMPUTER SOFT WAR E I NTELLECT UAL PROPER TY TOTAL Opening balance, May 1, 2018 $ 122 $ 10,213 $ Additions Disposals Transfers from CIP (Note 6) Exchange differences — — — — 153 (139) 663 16 826 — (302) — — $ 11,161 153 (441) 663 16 Ending balance, April 30, 2019 $ 122 $ 10,906 $ 524 $ 11,552 ACCUM ULAT E D A M ORT I ZA TI O N: Opening balance, May 1, 2018 $ 122 $ 8,799 $ Amortization Disposals Exchange differences Ending balance, April 30, 2019 Net book value, April 30, 2019 $ $ — — — 122 — $ $ 462 (139) 16 9,138 1,768 $ $ 826 — (302) — 524 — $ $ $ 9,747 462 (441) 16 9,784 1,768 44 9. LEASES 9.1 Right‑of‑use assets The following table presents changes in the cost and accumulated depreciation of the Company’s right-of-use assets: SHOWROOMS MANUFACTURING FACILITIES OTHER TOTAL CO ST : Opening balance, May 1, 2019 $ — $ Initial application of IFRS 16 (Note 2) 4,050 Additions Impact of foreign currency translation — — Ending balance, April 30, 2020 $ 4,050 $ A CCUM ULA T ED DEPR ECIA TI ON Opening balance, May 1, 2019 Depreciation Impact of foreign currency translation Ending balance, April 30, 2020 Net book value, April 30, 2020 $ $ $ — $ 1,244 — 1,244 2,806 $ $ — — 871 34 905 — 170 3 173 732 $ $ $ $ $ — $ 119 — 5 — 4,169 871 39 124 $ 5,079 — 25 — 25 99 $ $ $ — 1,439 3 1,442 3,637 There were no expenses related to short-term or low-value leases during the year. 9.2 Lease liabilities The following table presents the Company’s lease liabilities at April 30, 2020: SHOWROOMS MANUFACTURING FACILITIES OTHER May 1, 2019 $ — $ Initial application of IFRS 16 (Note 2) Additions Principal payments Impact of foreign currency translation 4,282 — (1,109) 104 April 30, 2020 $ 3,277 $ Current lease liabilities Non-current lease liabilities 1,492 1,785 April 30, 2020 $ 3,277 $ — — 722 (223) 13 512 512 — 512 $ — $ 119 — (22) 5 102 $ 31 71 102 $ $ $ TOTAL — 4,401 722 (1,354) 122 3,891 2,035 1,856 3,891 A S AT A PRIL 30, 202 0 LEA SE T ER M : Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years $ $ 2,035 1,408 448 3,891 45 INSCAPE 2020 ANNUAL REPORT 10. FINANCIAL INSTRUMENTS 10.1 Capital risk management The Company’s objective when managing capital are to safeguard the entity’s ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders through growth in earnings. Management defines capital as the Company’s total capital and reserves excluding accumulated other comprehensive loss as summarized in the following table: Issued capital Contributed surplus Deficit AS AT APR IL 30 , 20 20 AS AT APR I L 30, 2019 $ $ 52,868 2,675 (43,278) 12,265 $ 52,868 2,675 (37,872) $ 17,671 The Company manages its capital structure and makes modifications in response to changes in economic conditions and the risks associated with the underlying strategic initiatives. In order to maintain or adjust the capital structure, the Company may return capital to shareholders, or draw on its line of credit. See Credit Facility for a description of the Company’s externally imposed covenants – Note 21. 10.2 Foreign currency risk management The Company’s activities expose it primarily to the financial risks of changes in the US dollar exchange rates. The Company enters into a variety of derivative financial instruments to hedge the exchange rate risk arising on the anticipated sales to the US. The use of financial derivatives is governed by the Company’s policies approved by the Board of Directors. Compliance with policies and exposure limits is reviewed by the Board on a regular basis. The Company does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. As at April 30, 2020, the Company had outstanding US dollar hedge contracts with settlement dates from May 2020 to August 2021. The total notional amounts under the contracts are US $40,000 to $50,000 (2019 - $41,000 to $51,400). Dependent on the spot CAD/US rate on each settlement date, the Company can sell US dollars at rates ranging from $1.28 CAD/US to $1.50 CAD/US (2019 - $1.24 CAD/US to $1.41 CAD/US). These contracts had a mark-to-market unrealized loss of $3,391 (US $2,437) as at April 30, 2020 (2019 – unrealized loss of $1,397 or US $1,042), which was recognized on the consolidated statement of financial position as derivative liabilities. Any changes in the net gain or loss from the prior reporting period due to addition of forward contracts, movements in the US currency exchange rate, reclassification of the unrealized gains or losses to realized income or loss are recognized on the consolidated statement of operations as unrealized gain or loss on derivatives of the year. There were realized losses of $275 on the settlement of contracts during fiscal year 2020 (2019 – gains $3). 46 The following reconciles the changes in the fair value of the derivatives at the beginning and the end of the year: Fair value of derivative (liabilities) assets, beginning of year $ (1,397) $ 349 AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 CH A NGES IN FA IR VA LU E D UR I N G T HE YEAR : Decrease in fair value of new contracts added Reversal of derivative assets (liabilities) of contracts settled Decrease in fair values of outstanding contracts Net decrease in fair value of derivative liabilities recognized during the year Fair value of derivative liabilities assets, end of year Current Long-term (2,581) 728 (141) (1,994) (3,391) (2,122) (1,269) (3,391) (1,240) (362) (144) (1,746) (1,397) (1,052) (345) (1,397) $ $ $ $ $ $ 10.3 Foreign currency sensitivity analysis Based on the existing average US currency hedge contract rates and the mix of US dollar denominated sales and expenses for the year ended April 30, 2020, a 1% change in the Canadian dollar against the US dollar would have an impact of approximately $56 on the Company’s pre-tax earnings (2019 – $271). Based on the US dollar denominated assets and liabilities as at April 30, 2020, a 1% change in the Canadian dollar against the US dollar would have an impact of $281 on the unrealized exchange gain or loss reported in the Consolidated Statements of Operations (2019 - $181) and an impact of $168 on the Consolidated Statements of Comprehensive Loss (2019 - $257). 10.4 Credit risk management Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a financial loss to us. We believe our credit risk of counterparty non-performance continues to be relatively low, notwithstanding the impact of COVID-19. The Company’s cash, trade accounts receivable and derivative assets are subject to the risk that the counterparties may fail to discharge their obligation to pay the Company. As at April 30, 2020, the Company’s maximum direct exposure to credit risk is $16,140 (2019 – $16,681). We are in regular contact with our customers, suppliers and logistics providers, and to date have not experienced significant counterparty non-performance. However, if a key supplier (or any company within such supplier’s supply chain) or customer experiences financial difficulties or fails to comply with their contractual obligations, which may occur as the pandemic continues, this could result in a significant financial loss to us. We would also suffer a significant financial loss if an institution from which we purchased foreign exchange contracts and/or annuities for our pension plans defaults on their contractual obligations. With respect to our financial market activities, we have adopted a policy of dealing only with credit-worthy counterparties. In light of COVID-19, we assessed the financial stability and liquidity of our customers at the reporting date. No significant adjustments were made to our allowance for expected credit loss in connection with this assessment. 47 INSCAPE 2020 ANNUAL REPORT The Company’s investment policy specifies the types of permissible investments, the credit ratings required, and the maximum balances allowed. The purchase of any securities carrying a credit rating below BBB for bonds or R1- Low for commercial paper is prohibited. On a quarterly basis, management reviews the Company’s investment portfolio with the Audit Committee to demonstrate compliance with the investment policy. The credit risk on liquid funds and derivative financial instruments is limited as the counterparties are banks with high credit ratings assigned by international credit-rating agencies. The Company measures the loss allowance for trade receivables at an amount equal to lifetime expected credit losses (“ECL”). The ECL on trade receivables are estimated by assessing new customers’ credit history, reviewing credit limits, monitoring aging of accounts receivable, assessing specific customer information and reviewing general historical trends. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable. As at April 30, 2020, the allowance for expected credit losses was $216 (2019 - $333). The Company’s allowance for expected credit losses consist of sales allowances released during the year of $104 (2019 – provisions made $95) mainly from adjustments to expected lifetime credit losses. The amount written-off of $22 (2019 - $89) was from one customer where the Company could not collect. Below is a breakdown of the Company’s ECL: MOVE MENT I N T HE ALLO WA NC E F OR E CL Balance, beginning of year Sales allowances (reduced) added Amount written-off Currency exchange Balance, end of year AS AT APR IL 30 , 202 0 AS AT APRI L 30, 2019 $ $ 333 (104) (22) 9 216 $ $ 312 95 (89) 15 333 10.5 Liquidity risk management Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities as they fall due. The Company has a demand credit for foreign exchange contracts of US $8,000 and a demand operating facility of $5,000 with its bank. As at April 30, 2020, the Company had $4,547 available in its borrowing base based on accounts receivable and inventory. These facilities are secured by the Company’s property. As at April 30, 2020 the Company had not drawn down on the demand operating facilities (2019 – not drawn). The Company expects to meet its other obligations from operating cash flows and proceeds of maturing financial assets. 10.6 Fair value hierarchy The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable. • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. 50 • Level 2 fair value measurements are those derived from 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). • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). The following table illustrates the classification of financial liabilities in the fair value hierarchy as at April 30, 2020. Derivative financial liabilities Total net financial assets LEVEL 1 LEVEL 2 LEVEL 3 $ $ — — $ $ 3,391 3,391 $ $ — — The following table illustrates the classification of financial liabilities in the fair value hierarchy as at April 30, 2019: Derivative financial liabilities Total net financial assets LEVEL 1 LEVEL 2 LEVE L 3 $ — — $ 1,397 1,397 $ — — There were no transfers between Level 1, 2 and 3 in the periods. 11. TRADE AND OTHER PAYABLES Trade accounts payable Accrued liabilities Sales tax payable Other payables 12. PROVISIONS PR OV ISI ON DUE T O WA RRA NT Y Balance, beginning of year Provisions (settled) made during the year Provisions reversed and used during the year Currency exchange Balance, end of year Current Non‑Current AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 $ $ 4,375 5,972 145 1,431 5,691 6,634 290 2,542 $ 11,923 $ 15,157 AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 $ $ $ 1,440 143 (369) 46 1,260 203 1,057 $ $ $ 919 1,195 (723) 49 1,440 387 1,053 51 INSCAPE 2020 ANNUAL REPORT 13. RETIREMENT BENEFIT OBLIGATION 13.1 Defined contribution plans Actuarial valuations are prepared at least every three years The Company operates a defined contribution retirement for the Canadian plan and every year for the US plan. The benefit plan for all qualifying employees. The assets of the most recent actuarial valuations were as at plans are held separately from those of the Company in December 31, 2017 for the Canadian plan and funds under the control of trustees. An actuarial valuation July 1, 2017 for the US plan. The present value of the was prepared as at December 31, 2019. defined benefit obligation, and the related current service cost and past service cost, were measured using the The total expense recognized in the consolidated Projected Unit Credit Method. Actuarial gains and losses statements of operations of $164 (2019 - $177) are recognized immediately in other comprehensive represents contributions made to the plan by the income as a part of remeasurement. The total employer’s Company. The total employer’s expected contribution to expected contribution to the Canadian defined benefit the plan for the upcoming fiscal year is anticipated to be plan for the upcoming fiscal year is anticipated to be approximately $167. approximately $376. The expected contribution to the US plan for the upcoming fiscal year are approximately $52. 13.2 Defined benefit pension plans The Company operated one defined benefit pension plan for qualifying employees in Canada and one defined benefit pension plan for qualifying employees in the US No other post-retirement benefits are provided to these employees. The Canadian defined benefit pension plan is contributory in nature. The US defined benefit plan is non-contributory, and the accrued benefits were frozen in August 2013. The Canadian plan is registered under the Ontario Pension Benefits Act, RSO 1990 and the Income Tax Act. The US plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Both plans are legally separate from the Company and are monitored by a pension committee. The pension committee is responsible for policy setting. The pension plans expose the Company to actuarial risk, currency risk, credit risk, interest rate risk and market risk. 52 Amounts recognized in the cost of goods sold and other comprehensive income in respect of these defined benefit plans are as follows: DEFI NED B ENEFI T PLANS Benefits earned during the year Participant contribution Net interest cost Pension expense recognized RE M EA SUREM ENTS O F T HE NET D EFI NED B EN EFIT LIAB IL I TIE S Actuarial (loss) gain due to actuarial experience Actuarial loss due to financial assumption changes Actuarial gain due to demographic assumption changes Return on plan assets (less) greater than discount rate AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 $ $ $ 659 (132) 157 684 (59) (2,050) 27 (1,058) (3,140) $ $ $ $ $ $ 605 (145) 121 581 58 (1,063) 23 117 (865) (979) (865) (1,844) Remeasurements effects recognized in other comprehensive income $ CUM ULA TIV E A CT UA RI AL LO S SES R ELATI NG T O N ET DE F IN ED B EN EFIT LIA BI LITI ES Balance, beginning of year Remeasurements recognized in the year Balance, end of year $ $ (1,844) (3,140) (4,984) The significant actuarial assumptions used in measuring the accrued defined benefit pension plans obligations are as follows: Discount rate at year end Rate of increase in future compensation M OR T ALI TY T AB LES Canadian Plan U.S. Plan 20 20 2.49% to 3.20% 2.0% 20 20 2019 3.91% to 3.40% 2.0% 2019 2014 CPM Private Sector Table 2014 CPM Private Sector Table RP – 2014 / MP-2019 (Society of Actuaries) RP – 2014 / MP-2017 (Society of Actuaries) A 1% increase in the discount rate would reduce the Canadian defined benefit obligation by approximately $3,085 (2019 - $2,922) and a 1% decrease in the discount rate would increase the Canadian defined benefit obligation by approximately $3,873 (2019 - $3,678). A 1% increase in the discount rate would reduce the US defined benefit obligation by approximately US $707 (2019 – US $559) and a 1% decrease in the discount rate would increase the US defined benefit obligation by approximately US $864 (2019 – US $676). The discount rates are based on a review of current market interest rates of AA corporate bond yields with a similar duration as the expected future cash outflows for the pension payments. 53 INSCAPE 2020 ANNUAL REPORT The amount included in the consolidated statements of financial position arising from the entity’s obligation in respect of its defined benefit plans is as follows: DEFINED BENEFIT OBLIGATION, BEGINNING OF YEAR Current service cost Interest cost Benefits and expenses paid Actuarial loss Foreign exchange rate changes Defined benefit obligation, end of year FAIR VALUE OF PLAN ASSETS, BEGINNING OF YEAR Interest Income Employer contributions Employee contributions Benefits and expenses paid Return on plan assets greater than discount rate Foreign exchange rate changes Fair value of plan assets, end of year Defined benefit obligation, net end of year The major categories of plan assets at the end of the year are as follows: Equity securities Debt securities Cash and cash equivalents Total AS AT APR IL 30 , 202 0 AS AT APRI L 30, 2019 $ $ $ $ $ 27,509 659 978 (1,225) 2,082 238 30,241 23,592 821 433 132 (1,225) (1,058) 206 22,901 7,340 $ 25,539 605 979 (897) 982 301 $ 27,509 $ 22,700 858 428 145 (897) 116 242 $ $ 23,592 3,917 AS AT APR IL 30 , 202 0 AS AT APRI L 30, 2019 64% 23% 13% 100% 58% 31% 11% 100% 54 14. INCOME TAXES 14.1 Income tax recognized in profit or loss Consistent with 2019, the Company continues to not recognize certain deferred tax assets as a result of a lack of a history of accounting or taxable profits in 2020 or the preceding three years. INC OM E T A X COM PRI SES OF: Current Deferred AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 $ $ 15 — 15 $ $ 20 — 20 The income tax provision for the years can be reconciled to the accounting loss as follows: Loss before income taxes Basic statutory income tax rate RE CONCILING I T EMS: Tax effect of non-taxable (non-recoverable items) True-up Impact of tax rate differences Impact of changes in tax law Non-recognition/(recognition) of deferred tax assets Other Income tax AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 $ $ (5,391) 25.34% (1,366) $ (8,726) 25.26% (2,204) 50 35 (117) (7) 1,075 345 15 $ (167) 2 (58) — 2,427 20 20 The Company’s basic Canadian statutory income tax rate is the aggregate of the federal income tax rate of 15% (2019 -15%) and the blended provincial tax rate of 10.34% (2019 – 10.26%). The basic US statutory income tax rate is the aggregate of the federal income tax rate of 21% (2019 – 21%) and the average rate for various states of 3.4% (2019 – 4%). 55 INSCAPE 2020 ANNUAL REPORT 14.2 Deferred tax assets and liabilities DEFE RRE D T AX A SSETS AND LI A BILI T IES AP R IL 30, 20 19 R ECOGNIZED IN P ROFIT OR LOSS EX CHANGE RECOGNIZED DIFFE RENCES AND OT HER IN OCI APRIL 30, 2020 Property, plant and equipment $ (776) $ (568) $ — $ — $ (1,344) Reserves Loss carryforwards (253) 1,029 253 315 — — — — $ — $ — $ — $ — $ — 1,344 — 14.3 Loss carry forwards As at April 30, 2020, the Company has unused non-capital losses of $37,872 (2019 - $32,972), consisting of Canadian non-capital loss of $10,828 and US net operating losses of $27,044 – US $19,442 (2019 – Canadian $8,458 and US net operating losses of $24,514 – US $18,670) which may be carried forward and used to reduce future years’ taxable income. The future income tax benefit of these losses of $1,344 (2019 - $1,029) has been included in the deferred tax assets. The unrecognized DTA relating to unused tax loss carryforwards is $8,365. US non-capital losses of $27,044, of which $11,315 are limited to 80% of taxable income (determined without regard to the deduction), have an indefinite life and no expiry period. The Canadian non-capital losses expire as follows: EXPI RY DA T E LOSS CARR Y FORWARDS $ — — 2,008 2,519 1,704 — 2,223 — 2,374 $ 10,828 2032 2033 2034 2035 2036 2037 2038 2039 2040 Total 56 15. OTHER LONG‑TERM OBLIGATIONS Other long-term obligations are comprised of the fair value of the Company’s stock-based compensation liabilities. Deferred Share Units Stock Options Restricted Share Units 16. ISSUED CAPITAL Authorized 7,670,881 Class A multiple voting shares, 10 votes per share Unlimited Class B subordinating voting shares, 1 vote per share IS SUED AND OUT ST A NDING Class A multiple voting Class B subordinated voting AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 $ $ 32 30 61 123 $ $ 113 249 161 523 AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 3,345,881 11,034,820 3,345,881 11,034,820 14,380,701 14,380,701 17. SHARE‑BASED COMPENSATION 17.1 Stock option plan The Company has allotted and reserved 1,500,000 Class B subordinated voting shares under its Stock Option Plan. At the end of the year, the reserves available for grant are 356,585 (2019 – 487,205). Under the plan, options may be granted to purchase Class B subordinated voting shares at the market price determined at the time of grant. The plan also allows for the issuance of stock options with tandem share appreciation rights, which give the holder the right to elect to either receive cash in an amount equal to the excess of the quoted market price over the option price or to receive a Class B subordinated voting share by making a cash payment equal to the option. During the year, stock options with share appreciation rights for 408,185 Class B subordinated voting shares to expire in 5 years were granted (2019 – 494,219). 1,143,415 stock options were outstanding as at April 30, 2020 (2019 – 1,012,795). Fair values of these stock options based on the Black-Scholes-Merton Option Pricing Model are accounted for as liabilities and amortized over the vesting periods. Fair values of the amortized liabilities as at April 30, 2020 totaled $30 (April 30, 2019 - $249). Fair values of the stock options were estimated using the Black-Scholes-Merton option pricing model. The intrinsic value of the vested stock options outstanding as at April 30, 2020 was $nil (April 30, 2019 - $95). 57 INSCAPE 2020 ANNUAL REPORT The assumptions used to compute the fair values and compensation expense under the model are as follows: INPUT S T O T HE BLA CK‑SCHOLE S‑MER TO N M O DEL 20 20 VALUES 20 19 VALUES BASIS Expected remaining life of the options 0.2 to 4.9 years 0.3 to 4.7 years Risk-free interest rates 0.11% to 0.36% 2.2% to 2.5% Expected volatility 52% to 86% 45% to 59% Expiry dates of the options, history of forfeiture rates and early exercise Market yield on US Treasury securities at terms commensurate with the expected remaining life of the options The Company’s daily share price over a period of time commensurate with the expected remaining life of the options Expected dividend yield 0% 0% The Company’s current dividend yield 17.2 Movements in share options during the year The following reconciles the share options outstanding at the beginning and the end of the year: Outstanding, beginning of year Granted Expired Forfeited Outstanding, end of year AS AT APR IL 30, 2 020 AS AT APRIL 30, 2019 SHARES 1,012,795 408,185 (120,000) (157,565) 1,143,415 WEI GHTED AVE R A GE EXERCISE PRICE WEIGHTED AVERAGE EXERCISE PRICE SHARES $ $ 2.51 1.22 3.27 2.63 1.95 739,628 $ 494,219 (115,000) (106,052) 1,012,795 $ 3.25 1.75 3.78 2.76 2.51 58 17.3 Share options outstanding at the end of the year The following summarizes the share options outstanding at the end of the year: A PRI L 3 0, 2 020 OP TIONS OUT STANDING OPT IONS EXERCISABL E RANGE OF EXERCISE PRICE $0.78 to $2.55 $2.98 to $3.41 $3.65 to $4.02 $0.78 to $4.02 NUMBER OF WEIGHTED AVERAGE OUTSTANDING REMAINING LIFE IN YEARS OPTIONS WEIGHTED AVERAGE EXERCISE PRICE NUMBER EXERCISABLE AT WEIGHTED AVERAGE YEAR END EXERCISE PRICE 890,206 158,004 95,205 1,143,415 3.09 1.35 1.97 2.76 $ $ 1.53 2.02 3.82 1.95 212,500 $ 111,605 36,150 360,255 $ 1.48 3.08 4.02 2.23 A PRI L 3 0, 2 019 OPTI ONS OUTSTAN DI NG OPTI ONS EXERCISABLE RANGE OF EXERCISE PRICE $0.78 to $2.55 $2.98 to $3.41 $3.65 to $4.02 $0.78 to $4.02 NUMBER OF OUTSTANDING OPTIONS WEIGHTED AVERAGE REMAINING LIFE IN YEARS WEIGHTED AVERAGE EXERCISE PRICE NUMBER EXERCISABLE AT YEAR END WEIGHTED AVERAGE EXERCISE PRICE 581,719 298,355 132,721 1,012,795 3.34 1.56 2.95 2.77 $ $ 1.82 3.24 3.83 2.51 32,500 $ 188,517 10,000 231,017 $ 2.10 3.28 4.02 3.14 59 INSCAPE 2020 ANNUAL REPORT 17.4 Employee stock purchase plan The Company prior to April 26, 2019 offered an Employee Stock Purchase Plan where employees who had one year of service could choose to have up to 10% of their annual base salaries withheld to purchase Class B subordinated voting shares of the Company. The Company contributes 20% of employees’ contributions to the plan. Both parties’ contributions are held by the plan’s trustees, who can purchase the Class B subordinated voting shares in the open market, from treasury or other plan participants’ accounts. The purchase price of the shares from treasury is equal to the weighted average trading price of the Company’s Class B subordinated voting shares on the TMX on the five trading days immediately prior to the subscription. Effective April 26, 2019 the employee stock purchase plan was cancelled. 17.5 Deferred share unit plan The Company has a Deferred Share Unit Plan for the members of the Board of Directors and the executives. Under the plan, each director receiving Director’s fees may elect to receive all or a percentage of the fees in the form of notional Class B subordinated voting shares of the Company called deferred share units (“DSU”). The issue price of each DSU is equal to the weighted average share price at which Class B subordinate voting shares of the Company were traded on the TMX during the last five-day period of the quarter prior to the DSU issue. Upon retirement from the Board, a director’s DSU is redeemed for cash based on the market price of the shares at the time of redemption. The intrinsic value of vested deferred share units outstanding as at April 30, 2020 were $nil (April 30, 2019 - $nil). As at April 30, 2020, 57,799 DSUs were outstanding with a total fair value of $32 measured at the closing price of the shares at year end (April 30, 2019 – 57,799 units, fair value $112). 17.6 Movements in deferred share units during the year The following reconciles the deferred share units at the beginning and the end of the year: Outstanding, beginning of year Granted Outstanding, end of year AS AT APR IL 30 , 202 0 AS AT APRI L 30, 2019 57,799 — 57,799 55,405 2,394 57,799 60 17.7 Executives long‑term incentive plan The Company has a long-term incentive plan for eligible executives. Under the plan, annual grants of stock options and restricted share units (“RSU”) are issued to eligible executives based on each executive’s responsibilities and base salaries. The value of RSU redeemable at the end of a three-year vesting period is dependent upon the market price of the Class B subordinated voting shares of the Company. During the year the Company issued 123,518 RSU (2019 – 101,472). As at April 30, 2020, 225,279 RSU were outstanding (April 30, 2019 – 184,979). The intrinsic value of the Company’s vested RSUs outstanding as at April 30, 2020 was $nil (April 30, 2019 - $13). 17.8 Movements in restricted share units during the year The following summarizes the movements in RSU during the year: Outstanding, beginning of year Granted Forfeited Maturities Outstanding, end of year 18. LOSS PER SHARE AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 184,979 123,518 (53,137) (30,081) 225,279 116,447 101,472 (12,226) (20,714) 184,979 The net loss and weighted average number of shares used in the calculation of basic and diluted loss per share are as follows: Net Loss Weighted average number of shares outstanding basic Dilution impact of stock options Weighted average number of shares outstanding diluted Basic and diluted loss per share AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 $ $ (5,406) 14,380,701 — 14,380,701 (0.38) $ (8,746) 14,380,701 — 14,380,701 $ (0.61) Stock options are anti-dilutive and are therefore, not included in the computation of basic and diluted loss per share for the years ended April 30, 2020 and April 30, 2019. 61 INSCAPE 2020 ANNUAL REPORT 19. SEGMENTED REPORTING Inscape’s reportable segments include Furniture and Walls. In determining reportable segments, the Company looks at the shared economic characteristics. The chief decision maker, the CEO monitors the operating results of the segments separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements. Additionally, the product offerings, process and production are distinct and different between the operating segments. Aggregated in the Furniture segment are Systems, Benching, Storage and Seating. The aggregation is based on the similarity in those products’ functionalities, production or procurement, process of distribution and gross margin. Walls is a separate segment due to the different nature of movable walls compared to furniture, the production process and the installation services involved in the selling of movable walls. The following is an analysis of the Company’s revenue and results from continuing operations, capital expenditures, amortization and depreciation by reportable segments: AS AT APR IL 30 , 202 0 AS AT APRI L 30, 2019 SE GM ENT ED SA LES Furniture Walls Total SE G M ENT ED LOSS Furniture Walls Unrealized loss (gain) on foreign exchange Unrealized loss on derivatives Other income (Note 7) (Loss) gain on sale of property, plant and equipment & intangibles Loss on sale of intangible Investment income (loss) Loss before taxes Income tax Net loss AMO RT IZ AT IO N A ND DEPR ECI A T ION Furniture Walls Total ADDI T IO NS T O PRO PE RT Y, PLA NT AND EQUIP M ENT AND INT ANG IB LE S Furniture Walls Total $ $ $ $ $ $ $ $ 55,592 20,226 75,818 (2,795) (2,796) (5,591) (289) (1,994) 2,504 (30) — 9 (5,391) 15 (5,406) 3,227 371 3,598 516 105 621 $ $ $ 63,539 27,044 90,583 (3,442) (3,943) (7,385) 81 (1,746) — 31 263 30 (8,726) 20 $ (8,746) $ $ $ $ 2,011 160 2,171 2,152 149 2,301 62 Segment assets and liabilities AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 A SSE TS Furniture Walls Total assets LI AB ILI T IES Furniture Walls Total liabilities $ $ $ $ 27,719 10,089 37,808 20,451 8,717 29,168 IN SCA PE ’S REVENUE IS B AS ED ON GE OG R AP HI CAL LOC ATI ON AS D ETAI LED B ELO W: SA LES F ROM: United States Canada Total $ $ 69,876 5,942 75,818 IN SCA PE ’S IDENTI FI AB LE NO N ‑CUR R EN T ASS ET S (I .E. PR OP ER TY , P LAN T A ND EQ UIPM ENT A ND INT A NGI B LE S) BY GE OGR AP HI CAL LOCAT ION AR E DE TAI LE D B EL OW: United States Canada Total $ $ 3,658 11,531 15,189 20. SUPPLEMENTAL INFORMATION 20.1 Salaries, wages and benefits $ $ $ $ $ $ $ $ 27,742 11,785 39,527 15,301 7,133 22,434 84,606 5,977 90,583 4,072 11,496 15,568 IN CLU D ED I N: Cost of goods sold Selling, general and administrative 20.2 Amortization and depreciation IN CLU D ED I N: Cost of goods sold Selling, general and administrative AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 $ $ 16,008 14,298 30,306 $ $ 16,515 16,571 33,086 AS AT APR IL 30 , 201 9 AS AT APRIL 30, 2018 $ $ 861 2,737 3,598 $ $ 707 1,464 2,171 63 INSCAPE 2020 ANNUAL REPORT 21. CREDIT FACILITY The Company has a demand credit facility for foreign exchange contracts of US $8,000 and a demand operating credit facility of $5,000 with its bank. As at April 30th the Company had $4,547 available in its borrowing base. Although the Company had no borrowings as at April 30, 2020, the Company was not in compliance with one of its financial covenants and received a waiver from its bank on June 18, 2020 (2019 – not in compliance with one covenant but waiver received from bank). The interest rate on the demand operating credit facility is Prime Rate plus 1.0% for Canadian dollar loans, US Base Rate plus 1.0% for US dollar loans, 2.5% for Canadian dollar Banker’s Acceptance and 2.5% for US dollar Libor loans. The agreement is secured by the Company’s property based on its accounts receivable and inventory (borrowing base). The credit facility agreement has the following covenants: 1. The ratio of “total liabilities less postponed debt” to “shareholders’ equity less intangible assets” does not exceed 1.6 to 1.0 at any time, measured quarterly. 2. Current ratio, excluding any derivative assets and liabilities, not to be less than 1.25 to 1.0, measured quarterly. As at April 30, 2020, the Company has not drawn on the demand operating credit facility. (2019 – not drawn). 22. FORGIVABLE GOVERNMENT LOAN In response to the COVID-19 pandemic, the Company received from the US government an unsecured forgivable loan for $1,808 (US $1,300) at 1.00% per annum, repayable in 24 months. The indebtedness may be forgiven subject to the terms of the Paycheck Protection Program. The loan is forgivable if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent or utilities. As at April 30, 2020, the Company incurred $517 of the qualifying expenditures. The fair value of the SBA loan is measured at the cost of a comparable US dollar loan at the Company’s borrowing rate of 4.75% (US base rate plus 1%) at April 30, 2020. Under IFRS 9, the loan must initially be measured at fair value at inception. The fair value of the loan was determined to be $1,711 (US $1,230), with a grant (deferred income) of $97 (US $70). The latter would be released into income on a systematic basis per IAS 20 - Accounting for Government Grants and Disclosure of Government Assistance. 64 23. RELATED PARTY TRANSACTIONS The following was the remuneration of directors and other members of key management personnel, including Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Brand Officer, VP Supply Chain, and VP Human Resources. Salaries and short-term benefits Post-employment benefits Share based compensations AS AT APR IL 30 , 202 0 AS AT APRIL 30, 2019 $ $ 2,163 42 379 2,584 $ 2,084 52 256 $ 2,392 24. COMPARATIVE FINANCIAL STATEMENTS Certain figures in the comparative Financial Statements have been reclassified from statements previously presented to conform to the presentation of the current period’s Financial Statements. 65 INSCAPE 2020 ANNUAL REPORT Corporate Information Chief Executive Officer Eric Ehgoetz Board of Directors Eric Ehgoetz, Director Bartley Bull, Chair of the Board Tania Bortolotto, Director Dezsö J. Horváth, Director Quentin Kong, Director David LaSalle, Director Listing of Capital Stock Financial Calendar Toronto Stock Exchange (INQ) May 1 to April 30 Transfer Agent and Registrar 2020 Annual Meeting AST Trust Company (Canada) The annual meeting of shareholders PO Box 700, Postal Station B will be held on September 17th, 2020 Montreal, QC H3B 3K3 at 4:00 pm at Inscape’s T 416 682 3860 or 800 387 0825 Corporate Headquarters: F 514 985 8843 or 888 249 6189 67 Toll Road astfinancial.com/ca-en Holland Landing, ON L9N 1H2 Auditor Deloitte LLP Investor Information Shareholders seeking assistance Bay Adelaide East or information about the Company 8 Adelaide Street West, Suite 200 are invited to contact Jon Szczur, Toronto, ON M5H OA9 Chief Financial Officer, at: Corporate Office 67 Toll Road 67 Toll Road Holland Landing, ON L9N 1H2 T 905 952 4102 Holland Landing, ON L9N 1H2 info@myinscape.com T 905 836 7676 myinscape.com myinscape.com 66 67 Toll Road, Holland Landing, ON L9N 1H2 T 905 836 7676 F 905 836 6000 Toll Free 1 866 467 2273 myinscape.com © Inscape Corporation 2020 ® Trademarks of Inscape Corporation. Patents may be pending. Certain names, words, logos and graphics or designs contained herein are trademarks or service marks of Inscape Corporation. 

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