Kinaxis
Annual Report 2015

Plain-text annual report

Dear Shareholders, It was another tremendous year for Kinaxis and our revolutionary RapidResponse platform. We delivered 30% overall revenue growth over fiscal 2014 while maintaining strong bottom line earnings as demonstrated by our adjusted EBITDA margin of over 30%. Our consistency in delivering this unique combination of topline growth and strong bottom line results sets us apart from a growing pool of Cloud based companies. This commitment to profitable growth is why our financial position remains very strong. At year-end, Kinaxis had cash and equivalents of almost $100 million, having generated a record $45.2 million in cash from operations over the course of 2015, and remains debt-free. With the addition of new customers, expansions from existing customers and partnership influence, we expect to see the growth and breadth of our RapidResponse platform accelerate. The primary drivers of this growth remain our expanding partner network, emerging knowledge services offerings as well as enriching the RapidResponse features and scale of the platform. Our strategic partner initiatives are key to realizing accelerated growth. In 2015, we established a Joint Initiative agreement with Accenture, which has led to activities with several other large system integrator firms. These relationships will allow us to hasten the adoption rate of RapidResponse and assist Kinaxis in winning opportunities within our growing market segments and geographies. These partners have deep and trusted relationships with their clients which we can leverage to efficiently gain access to a broader group of global enterprises. Over time, we intend to further expand our partner network and sign additional strategic alliances to extend our reach across a variety of market verticals and geographies. In 2015, we began to strategically invest in our knowledge services offerings as we believe this initiative will play a pivotal role in our partner’s and customer’s success and our longer term growth. A key element of this initiative is our certification program which will expand the number of qualified deployment partners. In addition, this certification program assists existing customers to further leverage their investment in RapidResponse within their organization. Global organizations are increasingly recognizing that the traditional, highly-customized legacy approach to their supply chain management challenges cannot respond to today’s fast paced and ever changing business environment. Increasingly, they are turning to Kinaxis to utilize our breakthrough solution that provides end-to-end supply chain visibility, simulation and collaboration. Familiarity of Kinaxis amongst these organizations has been fueled by our growing industry recognition from influencers, including Gartner, who positions Kinaxis as the leader in both vision and execution, and through our expanding partner ecosystem. In the 22 years I have been with Kinaxis, I have had the distinct privilege of experiencing our evolution and growth, and collaborated with many talented people on the strategies that have led us to where we are today. This has offered me a unique understanding of both the intricate challenges of supply chain and the opportunity that exists for our revolutionary platform. In many ways, I feel as though our bigger journey is just getting started. I am confidently looking forward to 2016 and the years to come. On behalf of the entire Kinaxis team, I want to thank you for your ongoing support of Kinaxis. We look forward to updating you on our progress throughout the year. Sincerely, John Sicard President, Chief Executive Officer 700 Silver Seven Road, Ottawa, Ontario, Canada K2V 1C3 ■ +1 877.KINAXIS (546.2947) ■ kinaxis.com KINAXIS INC. MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2015 DATED: February 17, 2016 Management's Discussion and Analysis Unless the context requires otherwise, all references in this management’s discussion and analysis (the “MD&A”) to “Kinaxis”, “we”, “us”, “our” and the “Company” refer to Kinaxis Inc. and its subsidiaries as constituted on December 31, 2015. This MD&A has been prepared with an effective date of February 17, 2016. This MD&A for the years ended December 31, 2015 and 2014 should be read in conjunction with our annual consolidated financial statements as at and for the year ended December 31, 2015. The financial information presented in this MD&A is derived from our annual consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). This MD&A contains forward-looking statements that involve risks, uncertainties and assumptions, including statements regarding anticipated developments in future financial periods and our future plans and objectives. There can be no assurance that such information will prove to be accurate, and readers are cautioned not to place undue reliance on such forward-looking statements. See “Forward-Looking Statements”. This MD&A includes trade-marks, such as “Kinaxis”, and “RapidResponse”, which are protected under applicable intellectual property laws and are the property of Kinaxis. Solely for convenience, our trade-marks and trade names referred to in this MD&A may appear without the ® or ™ symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trade- marks and trade names. All other trade-marks used in this MD&A are the property of their respective owners. All references to $ or dollar amounts in this MD&A are to U.S. currency unless otherwise indicated. Additional information relating to Kinaxis Inc. including the Company’s most recently completed Annual Information Form, can be found on SEDAR at www.sedar.com. Non-IFRS Measures This MD&A makes reference to certain non-IFRS measures such as “Adjusted profit”, “Adjusted EBITDA” and “Adjusted diluted earnings per share”. These non-IFRS measures are not recognized, defined or standardized measures under IFRS. Our definition of Adjusted profit, Adjusted EBITDA and Adjusted diluted earnings per share will likely differ from that used by other companies and therefore comparability may be limited. Adjusted profit, Adjusted EBITDA and Adjusted diluted earnings per share should not be considered a substitute for or in isolation from measures prepared in accordance with IFRS. These non-IFRS measures should be read in conjunction with our annual consolidated financial statements as at and for the year ended December 31, 2015. Readers should not put undue reliance on non-IFRS measures and should instead view them in conjunction with the most comparable IFRS financial measures. See the reconciliations to these IFRS measures in the “Reconciliation of Non-IFRS Measures” section of this MD&A. Forward-Looking Statements This MD&A contains forward-looking statements that relate to our current expectations and views of future events. In some cases, these forward-looking statements can be identified by words or phrases such as “may”, “will”, “expect”, “anticipate”, “aim”, “estimate”, “intend”, “plan”, “seek”, “believe”, “potential”, “continue”, “is/are likely to” or the negative of these terms, or other similar expressions intended to identify forward-looking statements. Forward-looking statements are intended to assist readers in understanding managements’ expectations as of the date of this MD&A and may not be suitable for other purposes. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to: • • • • our expectations regarding our revenue, expenses and operations; our anticipated cash needs; our ability to protect, maintain and enforce our intellectual property rights; third-party claims of infringement or violation of, or other conflicts with, intellectual property rights by us; 2 Management's Discussion and Analysis • • • • • • • • • our plans for and timing of expansion of our solutions and services; our future growth plans; the acceptance by our customers and the marketplace of new technologies and solutions; our ability to attract new customers and develop and maintain existing customers; our ability to attract and retain personnel; our expectations with respect to advancement in our technologies; our competitive position and our expectations regarding competition; regulatory developments and the regulatory environments in which we operate; and anticipated trends and challenges in our business and the markets in which we operate. Forward-looking statements are based on certain assumptions and analysis made by us in light of our experience and perception of historical trends, current conditions and expected future developments and other factors we believe are appropriate. Although we believe that the assumptions underlying these statements are reasonable, they may prove to be incorrect. Whether actual results, performance or achievements will conform to our expectations and predictions is subject to a number of known and unknown risks and uncertainties, including those set forth below under the heading “Risks and Uncertainties”. These risks and uncertainties could cause our actual results, performance, achievements and experience to differ materially from our expectations, future results, performances or achievements expressed or implied by the forward-looking statements. In light of these risks and uncertainties, readers should not place undue reliance on forward-looking statements. The forward-looking statements made in this MD&A relate only to events or information as of the date on which the statements are made in this MD&A and are expressly qualified in their entirety by this cautionary statement. Except as required by law, we do not assume any obligation to update or revise any forward-looking statements, whether as a result of new information, future event or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. Readers should read this MD&A with the understanding that our actual future results may be materially different from what we expect. Risks and Uncertainties We are exposed to risks and uncertainties in our business, including the risk factors set forth below: • • • • • • • If we are unable to attract new customers or sell additional products to our existing customers, our revenue growth and profitability will be affected. We derive a significant portion of our revenue from a relatively small number of customers, and our growth depends on our ability to retain existing customers and add new customers. We encounter long sales cycles, particularly with our larger customers, which could have an adverse effect on the amount, timing and predictability of our revenue. We rely significantly on recurring revenue, and if recurring revenue declines or is not renewed our future results of operations could be harmed. Downturns or upturns in new sales will not be immediately reflected in operating results and may be difficult to discern. Our quarterly results of operations may fluctuate. As a result, we may fail to meet or exceed the expectations of investors or securities analysts which could cause our share price to decline. We are subject to risks associated with fluctuations in currency exchange rates. 3 Management's Discussion and Analysis If we are unable to develop new products and services, sell our solutions into new markets or further penetrate our existing markets, our revenue will not grow as expected. If we do not maintain the compatibility of our solutions with third-party applications that our customers use in their business processes, demand for our solutions could decline. If we fail to adapt to rapid technological change our ability to remain competitive could be impaired. We enter into service level agreements with all of our customers. If we fail to meet these contractual commitments, we could be obligated to provide credits or refunds for prepaid amounts related to unused subscription services or face contract terminations, which could adversely affect our revenues. Downturns in general economic and market conditions and reductions in IT spending may reduce demand for our solutions, which could negatively affect our revenue, results of operations and cash flows. Our ability to retain customers and attract new customers could be adversely affected by an actual or perceived breach of security relating to customer information. If we fail to protect our intellectual property and proprietary rights adequately, our business could be adversely affected. Our solutions are complex and customers may experience difficulty in implementing or upgrading our products successfully or otherwise achieving the benefits attributable to our products. The markets in which we participate are highly competitive, and our failure to compete successfully would make it difficult for us to add and retain customers and would reduce or impede the growth of our business. If we fail to retain our key employees, our business would be harmed and we might not be able to implement our business plan successfully. Our growth is dependent upon the continued development of our direct sales force. If we experience significant fluctuations in our rate of anticipated growth and fail to balance our expenses with our revenue forecasts, our results could be harmed. Interruptions or delays in the services provided by third-party data centers and/or internet service providers could impair the delivery of our solutions and our business could suffer. We may experience service failures or interruptions due to defects in the software, infrastructure, third- party components or processes that comprise our existing or new solutions, any of which could adversely affect our business. An assertion by a third-party that we are infringing its intellectual property could subject us to costly and time consuming litigation or expensive licenses which could harm our business. Mergers or other strategic transactions involving our competitors or customers could weaken our competitive position, which could harm our results of operations. We are subject to taxation in various jurisdictions and the taxing authorities may disagree with our tax positions. Because our long-term success depends, in part, on our ability to continue to expand the sales of our solutions to customers located outside of North America, our business will be susceptible to risks associated with international operations. • • • • • • • • • • • • • • • • • • A comprehensive discussion of risks, including risks not specifically listed above, can be found in our most recently filed Annual Information Form. Additional risks and uncertainties not presently known to us or that we currently consider immaterial also may impair our business and operations and cause the price of our shares to decline. If any of the noted risks actually occur, our business may be harmed and the financial condition and results of operation may suffer significantly. 4 Management's Discussion and Analysis Overview We are a leading provider of cloud-based subscription software that enables our customers to improve and accelerate analysis and decision-making across their supply chain operations. Our RapidResponse product provides supply chain planning and analytics capabilities that create the foundation for managing multiple, interconnected supply chain management processes, including demand planning, supply planning, inventory management, order fulfillment and capacity planning. Our professional services team supports deployment of RapidResponse in new customers and assists existing customers in fully leveraging the benefits of the product. Our target market is large enterprises that have significant unresolved supply chain challenges. We believe this market is growing as a result of a number of factors, including increased complexity and globalization of supply chains, outsourcing, a diversity of data sources and systems, and competitive pressures on our customers. We have established a consistent financial track record of strong revenue growth, solid earnings performance and cash generation. Both our subscription and total annual revenues have grown at a compound annual growth rate (CAGR) of 25% for the three years ended December 31, 2015. This growth is driven both by contracts with new customers and expansion of our solution and service engagements within our existing customer base. For the year ended December 31, 2015 our Adjusted EBITDA was 33% of revenue and ending cash balances grew to $99.4 million. Our customers are generally large national or multinational enterprises with complex supply chain requirements. We target multiple industry verticals including high technology and electronics manufacturing, aerospace and defense, industrial products, life sciences and pharmaceuticals, consumer packaged goods, and the automotive sector. We sell our product using a subscription-based model. Our agreements with customers are typically two to five years in length. Our subscription fee generally depends on the size of our customer, the number of applications deployed, the number of users and the number of manufacturing, distribution and inventory sites our product is required to model. Average annual contract value fluctuates from period to period depending on the size of new customers and the extent to which we are successful in expanding adoption of our products by existing customers. For the year ended December 31, 2015, our ten largest customers accounted for approximately 46% of our total revenues with one customer accounting for 10.6% of total revenues. Increasing revenues through new customer wins is one of our highest organizational priorities. Our sales cycle can be lengthy, as we generally target very large organizations with significant internal processes for adoption of new systems. We currently pursue a revenue growth model that includes both direct sales through our internal sales force, as well as indirect sales through channels including resellers and other partners. Due to the growth in the market and increasing need for solutions, competition in the industry from new entrants and larger incumbent vendors will increase. In addition to this increased competitive pressure, changes in the global economy may have an impact on the timing and ability of these enterprises to make buying decisions which may have an impact on our performance. Since our initial public offering in June 2014, we continue to drive growth in our business through new customer acquisition and expansion of existing customers through our land and expand philosophy. Over the last several years, approximately 40% of subscription revenue growth has been derived from our existing customer base. Our net revenue retention is greater than 100%, reflecting our longer term contract structure and renewal history. We continue to invest in developing our partner capabilities and in our technology. In August 2015, we released version 2015.3 of RapidResponse, reflecting our ongoing investment in our product’s scale and capabilities, and our commitment to supporting the needs of our expanding customer base. In October 2015, we announced an engagement with Accenture where Accenture will provide product development and product training services and together we will develop differentiated supply chain solutions designed to meet enterprise end-customer supply chain solutions. We are headquartered in Ottawa, Ontario. We have subsidiaries located in the United States, the Netherlands and Hong Kong and a subsidiary and office in Tokyo, Japan. We continue to expand our operations internationally. In the year ended December 31, 2015, 92% of our revenues derived from North America and our remaining revenues derived from outside North America, principally from Japan and Europe. 5 Management's Discussion and Analysis Key Performance Indicators The key performance indicators that we use to manage our business and evaluate our financial results and operating performance are: total revenue, total new customers, incremental subscription revenue and bookings, net revenue retention, secured subscription backlog, operating expenses, Adjusted profit (as discussed below), Adjusted EBITDA (as discussed below), Adjusted diluted earnings per share (as discussed below), and cash flow from operations. Some of these measures are non-IFRS measures. See “Non-IFRS Measures” above. Management reconciles non-IFRS measures to IFRS measures where a comparable IFRS measure exists. See “Reconciliation of Non-IFRS Measures” below. We evaluate our performance by comparing our actual results to budgets, forecasts and prior period results. Net revenue retention Our subscription customers generally enter into two to five year agreements, paid annually in advance, for use of our solution. In certain circumstances, customers will prepay subscription fees for the term of the agreement for various reasons. Subscription agreements are generally subject to price increases upon renewal reflecting both inflationary increases and the additional value provided by our solutions. In addition to the expected increase in subscription revenue from price increases over time, existing customers may subscribe for additional applications, users or sites during the terms of their agreements. Our subscription model results in a high proportion of recurring revenue, which we define as subscription revenue plus maintenance & support revenue (see “Significant Factors Affecting Results of Operations – Revenue”). The power of the subscription model is only fully realized when a vendor has high retention rates. High customer retention rates generate a long customer lifetime and a very high lifetime value of the customer. Our net revenue retention rates are over 100%, which includes sales of additional applications, users and sites to existing customers. The recurring nature of our revenue provides high visibility into future performance, and upfront payments result in cash flow generation in advance of revenue recognition. Typically, more than 80% of our annual subscription revenue is recognized from customers that are in place at the beginning of the year (excluding the effect of renewals) and this continues to be our target model going forward. However, this also means that agreements with new customers or agreements with existing customers purchasing additional applications, users or sites in a quarter may not contribute significantly to revenue in the current quarter. For example, a new customer who enters into an agreement on the last day of a quarter will typically have no impact on the revenue recognized in that quarter. Significant Factors Affecting Results of Operations Our results of operations are influenced by a variety of factors, including: Revenue Our revenue consists of subscription fees, professional service fees and maintenance and support fees. Subscription revenue is comprised of fixed term fees for licensed on-premise use of RapidResponse or fees for provision as software as a service (“SaaS”) in a hosted/cloud environment. Subscription revenue includes maintenance and support for the solution for the term of the contract as well as hosting services when provided under a SaaS arrangement. Professional services revenue is comprised of fees charged to assist organizations to implement and integrate our solution and train their staff to use and deploy our solution. Professional service engagements are contracted on a time and materials basis including billable travel expenses and are billed and recognized as revenue as the service is delivered. In certain circumstances, the Company enters into arrangements for professional services on a fixed price basis for which revenue is recognized by reference to the stage of completion of the contract. Maintenance & support revenue relates to fees for maintenance and support for certain legacy customers who licensed our software on a perpetual basis prior to our conversion to a SaaS model in 2005. Over time, this revenue stream is expected to decline as more customers eventually convert to our more comprehensive, subscription based service or customers choose to let their support contracts lapse. 6 Management's Discussion and Analysis Cost of revenue Cost of revenue consists of personnel, travel and other overhead costs related to implementation teams supporting initial deployments, training services and subsequent stand-alone engagements for additional services. Cost of revenue also includes personnel and overhead costs associated with our customer support team, the cost of our data centre facilities where we physically host our on-demand solution and network connectivity costs for the provisioning of hosting services under SaaS arrangements. Sales and marketing expenses Sales and marketing expenses consist primarily of personnel and related costs for our sales and marketing teams, including salaries and benefits, commissions earned by sales personnel and trade show and promotional marketing costs. We plan to continue to invest in sales and marketing by expanding our domestic and international selling and marketing activities, building brand awareness and sponsoring additional marketing events. We expect that in the future, sales and marketing expenses will continue to increase. Research and development expenses Research and development expenses consist primarily of personnel and related costs for the teams responsible for the ongoing research, development and product management of RapidResponse. These expenses are recorded net of any applicable scientific research and experimental development investment tax credits (“investment tax credits”) earned for expenses incurred in Canada against eligible projects. We only record non-refundable tax credits to the extent there is reasonable assurance we will be able to use the investment tax credits to reduce current or future tax liabilities. As the Company has an established history of profits, we do expect to realize the benefit of these tax credits in the near term. Further, we anticipate that spending on R&D will also be higher in absolute dollars as we expand our research and development and product management teams. General and administrative expenses General and administrative expenses consist primarily of personnel and related costs associated with administrative functions of the business including finance, human resources and internal IT support, as well as legal, accounting and other professional fees. We expect that, in the future, general and administrative expenses will increase in absolute dollars as we invest in our infrastructure and we incur additional employee-related costs and professional fees related to the growth of our business and international expansion, including associated public company costs. Foreign exchange Our presentation and functional currency with the exception of our subsidiaries in Japan (Japanese Yen) and the Netherlands (Euro) is U.S. dollars. We derive most of our revenue in U.S. dollars. Our head office and a significant portion of our employees are located in Ottawa, Canada, and as such a significant amount of our expenses are incurred in Canadian dollars. Loss due to change in fair value of redeemable preferred shares We have recorded significant losses related to changes in the fair value of the redeemable preferred share liability. Immediately prior to the completion of our initial public offering, all of our redeemable preferred shares were converted on a one-to-one basis to common shares and the liability was reduced to $Nil with a corresponding increase in share capital. In addition, the accumulated deficit of $41.0 million generated by the losses related to the changes in the fair value of the redeemable preferred shares that were converted to common shares was reclassified from deficit to share capital. Effective as of the date of our IPO, there will be no further impact on our results of operations from these redeemable preferred shares. 7 Management's Discussion and Analysis Results of Operations The following table sets forth a summary of our results of operations for the three months ended December 31, 2015 and 2014 along with the years ended December 31, 2015, 2014 and 2013: Three months ended December 31 Years ended December 31 2014 2015 2014 2015 (In thousands of U.S. dollars, except earnings (loss) per share) 2013 Statement of Operations Revenue ............................................................................. Cost of revenue .................................................................. Gross profit ........................................................................ Operating expenses ............................................................ Loss due to change in fair value of redeemable preferred shares ................................................................. Foreign exchange (loss) gain ............................................. Net finance income (expense) ........................................... Profit (Loss) before income taxes ...................................... Income tax expense ........................................................... Profit (Loss) ....................................................................... Adjusted profit(1)................................................................ Adjusted EBITDA(1) .......................................................... Basic earnings (loss) per share .......................................... Diluted earnings (loss) per share ....................................... Adjusted diluted earnings per share(1) ................................ $ 24,191 6,789 17,402 11,984 $ 18,820 5,433 13,387 10,763 $ 91,271 25,743 65,528 41,721 $ 70,054 20,745 49,309 37,039 $ 60,816 18,016 42,800 29,625 5,418 2,624 23,807 12,270 13,175 ̶ (18) 32 5,432 4,146 ̶ (465) 17 2,176 1,592 ̶ (1,041) 128 22,894 10,216 (6,760) (599) (490) 4,421 4,642 (17,884) (168) 31 (4,846) 4,874 $ 1,286 $ 584 $ 12,678 $ (221) $ (9,720) $ 2,515 $ 1,429 $ 17,130 $ 9,197 $ 9,167 $ 7,146 $ 0.05 $ 0.05 $ 0.10 $ 3,803 $ 0.02 $ 0.02 $ 0.06 $ 29,985 $ 0.53 $ 0.50 $ 0.67 $ 15,012 $ 16,079 $ (0.01) $ (0.59) $ (0.59) $ (0.01) $ 0.34 $ 0.41 As at December 31, 2015 December 31, 2014 December 31, 2013 (In thousands of U.S. dollars) Total assets ....................................................................... Deferred revenue .............................................................. Redeemable preferred shares ............................................ Other non-current liabilities ................................................ Note: $ 128,096 $ 91,209 54,633 37,518 ̶ 109 ̶ 1,065 $ 41,472 24,700 54,135 20,988 (1) Adjusted profit, Adjusted EBITDA and Adjusted diluted earnings per share are non-IFRS measures. See “Non-IFRS Measures”. For a reconciliation of these measures to the closest IFRS measure, where a comparable IFRS measure exists, see “Reconciliation of Non-IFRS Measures” below. 8 Management's Discussion and Analysis Reconciliation of Non-IFRS Measures Adjusted profit and Adjusted diluted earnings per share Adjusted profit represents profit adjusted to exclude the impact of our formerly outstanding redeemable preferred shares and our share-based compensation plans. Adjusted diluted earnings per share represents diluted earnings per share using Adjusted profit. We use Adjusted profit and Adjusted diluted earnings per share to measure our performance as these measures align our results and improve comparability against our peers. Adjusted EBITDA Adjusted EBITDA represents profit (loss) adjusted to exclude the impact of our formerly outstanding redeemable preferred shares, our share-based compensation plans, income tax expense, depreciation, foreign exchange loss (gain) and net financing (income) expense. We use Adjusted EBITDA to provide readers with a supplemental measure of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS financial measures. We believe that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers. Management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess our ability to meet our capital expenditure and working capital requirements. We have reconciled Adjusted profit and Adjusted EBITDA to the most comparable IFRS financial measure as follows: Three months ended December 31, 2015 2014 Years ended December 31 2014 2015 (In thousands of U.S. dollars) 2013 Profit (Loss) ...................................................................... $ 1,286 $ 584 $ 12,678 $ (221) $ (9,720) Loss due to change in fair value of redeemable preferred shares ................................................................. Share-based compensation ................................................ ̶ 1,229 1,229 ̶ 845 845 ̶ 4,452 4,452 6,760 2,658 9,418 Adjusted profit................................................................... Income tax expense ........................................................... Depreciation ...................................................................... Foreign exchange loss ...................................................... Net finance (income) expense ........................................... $ 2,515 4,146 499 18 (32) $ 1,429 1,592 334 465 (17) $ 17,130 10,216 1,726 1,041 (128) $ 9,197 4,642 1,151 599 490 17,884 1,003 18,887 $ 9,167 4,874 834 168 (31) Adjusted EBITDA ............................................................. $ 7,146 $ 3,803 $ 29,985 $ 16,079 $ 15,012 4,631 2,374 12,855 6,882 5,845 Revenue The following table displays the breakdown of our revenue according to revenue type: Three months ended December 31, 2015 2014 2014 to 2015 % Years ended December 31, 2015 2014 2014 to 2015 % (In thousands of U.S. dollars, except percentages) Revenue Subscription ............................ Professional services .............. Maintenance & Support ......... $ 16,963 6,977 251 $ 13,852 4,694 274 Total revenue ................................ 24,191 18,820 22% 49% (8%) 29% $ 65,199 25,002 1,070 $ 51,119 17,755 1,180 28% 41% (9%) 91,271 70,054 30% 9 Management's Discussion and Analysis Total revenue for the fourth quarter of 2015 was $24.2 million or an increase of 29% compared to the same period in 2014. For fiscal 2015 total revenue was $91.3 million compared to $70.1 million for the same period in 2014, representing an increase of 30%. Subscription Revenue Subscription revenue for the three months ended December 31, 2015 was $17.0 million, up from $13.9 million for the same period in 2014, for an increase of 22% or $3.1 million. For fiscal 2015, subscription revenue was $65.2 million or 28% higher than the same year to date period in 2014 driven by contracts secured with new customers and expansion of existing customer subscriptions. Approximately 73% of 2015 subscription revenue growth was derived from new customers acquired in fiscal 2014 and 2015. Professional services revenue Professional services revenue varies quarter to quarter due to the size, timing and scheduling of customer engagements. Professional services revenue for the fourth quarter of 2015 increased $2.3 million or 49% to $7.0 million from $4.7 million for the same period in 2014. For fiscal 2015, professional services revenue was $25.0 million compared to $17.8 million for the same period in 2014, representing an increase of $7.2 million or 41%. Professional services revenue growth was driven primarily by initiation of deployment projects for new customers acquired during the second half of fiscal 2014 and in fiscal 2015. Maintenance & support revenue Maintenance & support revenue was $0.3 million for both the fourth quarter of 2015 and 2014. For fiscal 2015, maintenance & support revenue was $1.1 million compared to $1.2 million for the same period in 2014. We expect to see a decrease over time in revenue from support contracts with legacy customers with perpetual licenses. Cost of revenue Three months ended December 31, 2015 2014 2014 to 2015 % Years ended December 31 2015 2014 (In thousands of U.S. dollars, except percentages) Cost of revenue ............................. Gross profit ................................... $ 6,789 17,402 $ 5,433 13,387 25% 30% $ 25,743 65,528 $ 20,745 49,309 Gross profit % ............................... 72% 71% 72% 70% 2014 to 2015 % 24% 33% Cost of revenue for the fourth quarter of 2015 increased $1.4 million, or 25%, to $6.8 million from $5.4 million for the same period in 2014. For fiscal 2015, cost of revenue increased $5.0 million, or 24%, to $25.7 million from $20.7 million for the same period in 2014. The increase in costs was due to an increase in headcount related compensation costs for customer support and data centre operations driven by our customer growth as well as higher variable compensation and share-based payments during the period. The increase in compensation costs is net of a favourable impact of foreign exchange rates on Canadian dollar denominated compensation costs. For the fourth quarter and fiscal year 2015, an increase in professional services activities drove an increase in costs associated with the use of third party providers to support these engagements as well as an increase in travel costs and billable expenses compared to the same periods in 2014. Depreciation and operating costs associated with the expansion of data centre capacity to support new and ongoing customer engagements also increased for the fourth quarter and fiscal year 2015 compared to the same periods in 2014. Gross profit for the three months and year ended December 31, 2015 was $17.4 million and $65.5 million respectively compared to $13.4 million and $49.3 million for the same periods in 2014. Gross profit as a percentage of revenue increased to 72% in the fourth quarter ended December 31, 2015 from 71% in the same period of 2014. The percentage increase in the fourth quarter was due to lower growth of cost of revenue in the fourth quarter of 2015 from investments in additional headcount and data centre capacity than the growth in total revenue in the 10 Management's Discussion and Analysis period compared to the fourth quarter of 2014. For the year ended December 31, 2015 gross profit as a percentage of revenue increased to 72% from 70% in the same period of 2014. The increase in gross profit percentage was due to the growth in total revenue for fiscal 2015 while leveraging the investments made in our capacity to support customer engagements. Selling and Marketing Expenses Three months ended December 31, 2015 2014 2014 to 2015 % Years ended December 31 2015 2014 2014 to 2015 % (In thousands of U.S. dollars, except percentages) Selling and marketing ................... $ 6,175 $ 5,275 17% $ 18,264 $ 15,296 19% As a percentage of revenue ........... 26% 28% 20% 22% Selling and marketing expenses for the fourth quarter of 2015 increased $0.9 million, or 17%, to $6.2 million from $5.3 million in the fourth quarter of 2014. For the year ended December 31, 2015 selling and marketing expenses increased $3.0 million or 19% to $18.3 million from $15.3 million for the same period in 2014. The increase in sales and marketing costs was due to higher headcount and related compensation costs driven by our investment in our knowledge services and customer success organizations. This was partially offset by lower commission expenses which varies based upon the timing of closing of customer contracts. Marketing program expenses related to our annual user conference also increased due to its continued success in growing attendance from both current and prospective customers. In addition, sales and marketing expenses for the fourth quarter and fiscal year 2015 compared to the same periods in 2014 increased due to investments in the joint initiative with Accenture announced in the third quarter of 2015. As a percentage of revenue, selling and marketing expenses were 26% in the fourth quarter of 2015 compared to 28% for the same period in 2014 due to lower growth in selling and marketing costs relating to the investment activity relative to the growth in revenue. For the year ended December 31, 2015 selling and marketing costs were 20% of revenue compared to 22% for the year ended December 31, 2014 reflecting the higher growth in revenue for the period. Research and Development Expenses Three months ended December 31, 2015 2014 2014 to 2015 % Years ended December 31 2015 2014 2014 to 2015 % (In thousands of U.S. dollars, except percentages) $ 4,280 (585) 3,695 $ 3,940 (578) 3,362 9% 1% 10% $ 16,786 (1,589) 15,197 $ 15,422 (1,993) 13,429 9% (20%) 13% Research and development - gross Less: Investment tax credits .......... Research and development ........... As a percentage of revenue ........... Gross ....................................... Net .......................................... 18% 15% 21% 18% 18% 17% 22% 19% Gross research and development expenses for the fourth quarter of 2015 increased $0.4 million to $4.3 million or 9% and for the year ended December 31, 2015 increased $1.4 million to $16.8 million or 9%, in each case compared to the same periods in 2014. The increase in research and development expenses was due to an increase in headcount and related compensation costs net of a favourable impact of foreign exchange rates on Canadian dollar denominated compensation costs. The investment in headcount was made to support ongoing programs to develop the RapidResponse product and solution offering for new and existing customers. Investment tax credits earned on research and development activity in Canada increased was $0.6 million for both the fourth quarter of 11 Management's Discussion and Analysis 2015 and 2014. For fiscal 2015, investment tax credits earned decreased 20% to $1.6 million from $2.0 million for the same period in 2014. The decrease in investment tax credits earned is the result of lower rates earned for public companies applied in 2015. As a percentage of revenues, gross research and development expenses were 18% for both the fourth quarter and the year to date of 2015 compared to 21% and 22% for the same periods in 2014, reflecting the growth in revenue in the current period. Net research and development as a percentage of revenue for the fourth quarter of 2015 was 15% and 17%, respectively, for the year to date compared to 18% and 19% for the same periods in 2014. This was due to the growth in revenue for the period. General and Administrative Expenses Three months ended December 31, 2015 2014 2014 to 2015 % Years ended December 31 2015 2014 2014 to 2015 % (In thousands of U.S. dollars, except percentages) General and administrative ........... $ 2,114 $ 2,126 (1%) $ 8,260 $ 8,314 (1%) As a percentage of revenue ........... 9% 11% 9% 12% General and administrative expenses were $2.1 million for both the fourth quarter of 2015 and 2014, and $8.3 million for years ended December 31, 2015 and 2014. General and administrative expenses decreased due to lower compensation costs driven by a functional realignment of information technology resources to customer data centre support completed in the first quarter of 2015. The decrease in compensation costs includes a favourable impact of foreign exchange rates on Canadian dollar denominated compensation. In addition, higher expenses related to share- based payments were incurred. These decreases were offset by lower accounting, audit and legal fees which were incurred in 2014 relating to the IFRS conversion and the initial public offering. As a percentage of revenue, general and administrative expenses were 9% for both the fourth quarter and fiscal 2015, compared to 11% and 12% for the same periods in 2014 due to the growth in revenue in those periods. Other Income and Expense The following table provides a breakdown of other income and expense by type: Three months ended December 31, 2015 2014 2014 to 2015 % Years ended December 31 2015 2014 2014 to 2015 % (In thousands of U.S. dollars, except percentages) Other income (expense) Loss due to change in fair value of redeemable preferred shares ...................... Foreign exchange (loss) ........ Net finance income (expense) ................................ Total other expense ....................... $ ̶ $ ̶ ̶ $ ̶ $ (6,760) (100%) (18) 32 (14) (465) 17 (448) (96%) 88% (97%) (1,041) (599) 74% 128 (913) (490) (7,849) ̶ (1) (88%) For the three months ended December 31, 2015, total other expense was $Nil compared to a total other expense of $0.4 million for the fourth quarter of 2014, and for fiscal year 2015 was $0.9 million compared to $7.8 million for the same period in 2014. The decrease in expenses is due to the non-cash fair value adjustment recorded in 2014 for the redeemable preferred shares which were converted to common shares at the time of our initial public offering in the second quarter of 2014 coupled with a decrease in interest expenses that were incurred in the first half of 2014 on the term loan, which was repaid from the proceeds of the initial public offering. This was partially offset by an 12 Management's Discussion and Analysis increase in foreign exchange loss which was primarily due to the revaluation of Canadian dollar denominated assets against a strengthening U.S. dollar. Income Taxes Three months ended December 31, 2015 2014 2014 to 2015 % Years ended December 31 2015 2014 (In thousands of U.S. dollars, except percentages) Income tax expense Current ................................... Deferred ................................. Total income tax expense ............. $ 3,143 1,003 4,146 $ 193 1,399 1,592 1,528% (28%) 160% $ 3,487 6,729 10,216 $ 819 3,823 4,642 2014 to 2015 % 326% 76% 120% For the three months and year ended December 31, 2015, income tax expense of $4.1 million and $10.2 million were recognized compared to $1.6 million and $4.6 million for the same periods in 2014. The change is the result of increased profit before income taxes as well as the taxable foreign exchange gains included in Canadian taxable income realized upon the revaluation of U.S. dollar denominated monetary assets to the Canadian dollar Profit (loss) Three months ended December 31, 2015 2014 2014 to 2015 % Years ended December 31 2015 2014 (In thousands of U.S. dollars, except percentages) Profit (Loss) .................................. Adjusted profit(2) ........................... Adjusted EBITDA(2) ..................... Basic earnings (loss) per share ...... Diluted earnings (loss) per share ... Adjusted diluted earnings per share(2)........................................... Note: $ 1,286 $ 584 2,515 7,146 0.05 0.05 1,429 3,803 0.02 0.02 0.10 0.06 483% 219% 88% $ 12,678 $ (221) 17,130 29,985 0.53 0.50 0.67 9,197 16,079 (0.01) (0.01) 0.41 2014 to 2015 % ̶ (1) 108% 86% (1) The percentage change has been excluded as it is not meaningful. (2) Adjusted profit, Adjusted EBITDA and Adjusted diluted earnings per share are non-IFRS measures. See “Non-IFRS Measures”. For a reconciliation of these measures to the closest IFRS measure, where a comparable IFRS measure exists, see “Reconciliation of Non- IFRS Measures” above. Profit for the three months ended December 31, 2015 increased $0.7 million to $1.3 million or $0.05 per basic share and diluted share, from $0.6 million or $0.02 per basic share and diluted share for the same period in 2014. For the year ended December 31, 2015, profit increased $12.9 million to $12.7 million or $0.53 per basic share and $0.50 per diluted share compared to a loss of $0.2 million or $0.01 per basic and diluted share in the same period in 2014. The increase in profit was driven primarily by our growth in revenue for the fourth quarter and fiscal year 2015 and the lower Canadian dollar versus the U.S. dollar had a positive effect on operating expenses and profitability. In addition, profit for fiscal 2014 was impacted by a non-cash fair value adjustment on redeemable preferred shares that were converted to common shares at the time of our initial public offering in June 2014. These were partially offset by an increase in income tax expenses due to foreign exchange gains on U.S. denominated monetary assets included in Canadian taxable income. Adjusted EBITDA for the fourth quarter of 2015 was $7.1 million, an increase of $3.3 million from $3.8 million for the corresponding period in 2014. For the fiscal year 2015, Adjusted EBITDA increased $13.9 million to $30.0 million for 2015 from $16.1 million in the same period in 2014. The increase in Adjusted EBITDA in the three months and year ended December 31, 2015 is due to an increase in operating profits. 13 Management's Discussion and Analysis Key Balance Sheet Items Total assets ............................................................................... Total liabilities ......................................................................... $ 128,096 62,492 $ 91,209 44,572 As at December As at December 31, 2015 31, 2014 (In thousands of U.S. dollars) An analysis of the key balance sheet items driving the change in total assets and liabilities is as follows: Trade and other receivables As at December As at December 31, 2015 31, 2014 (In thousands of U.S. dollars) Trade and other receivables...................................................... $ 15,833 $ 17,023 Trade and other receivables were $15.8 million at December 31, 2015, a decrease of $2.8 million compared to $17.0 million at December 31, 2014. The change in trade and other receivables was due to timing of billings and collections on receivables which can have a significant impact on the balance at any point in time due to the annual subscription billing cycle. The aging of trade receivables is generally current and we have no history of bad debts. Investment tax credits As at December As at December 31, 2015 31, 2014 (In thousands of U.S. dollars) Investment tax credits receivable ............................................. Long-term investment tax credits recoverable ......................... $ 1,532 2,083 $ 1,974 3,091 Investment tax credits receivable of $1.5 million at December 31, 2015 were $0.5 million lower compared to $2.0 million at December 31, 2014. The decrease is due to the receipt of a portion of the outstanding balance during the period and foreign exchange losses on the refundable investment tax credits denominated in Canadian dollars revalued against a strengthening U.S. dollar. The investment tax credits receivable relate to refundable tax credits filed for the 2013 tax year and the 2014 tax period prior to our initial public offering that remains outstanding. Long- term investment tax credits recoverable are the non-refundable portion of investment tax credits earned. The balance decreased $1.0 million to $2.1 million at December 31, 2015 from $3.1 million at December 31, 2014 due to utilization of investment tax credits against current income taxes payable. This decrease was partially offset by estimated non-refundable credits earned during 2015 net of foreign exchange losses incurred upon revaluation of the recoverable balance denominated in Canadian dollars against a stronger U.S. dollar. Deferred revenue Current ..................................................................................... Non-current .............................................................................. $ 40,442 14,191 54,633 $ 35,740 1,778 37,518 As at December As at December 31, 2015 31, 2014 (In thousands of U.S. dollars) Deferred revenue at December 31, 2015 was $54.6 million, an increase of $17.1 million compared to $37.5 million at December 31, 2014. We generally bill our customers annually in advance for subscriptions resulting in the amount billed initially recorded as deferred revenue and drawn down to revenue over the term. The increase is due primarily to the prepayment of a multi-year subscription of approximately $20.0 million in the first quarter of 2015 as well as other new subscription arrangements. Deferred revenue relating to subscription term periods beyond one year totaled $14.2 million at December 31, 2015. 14 Management's Discussion and Analysis Summary of Quarterly Results The following table summarizes selected results for the eight most recent completed quarters to December 31, 2015. December 31, 2015 September 30, 2015 June 30, 2015 Three months ended March 31, 2015 December 31, 2014 September 30, 2014 June 30, 2014 March 31, 2014 Revenue: Subscription ..................................... Professional services ........................ Maintenance and support ................. Cost of revenue .................................... Gross profit .......................................... Operating expenses .............................. $ 16,963 6,977 251 24,191 6,789 17,402 11,984 5,418 $ 16,544 6,870 251 23,665 6,862 16,803 10,402 6,401 Loss due to change in fair value of redeemable preferred shares ................. Foreign exchange (loss) gain ................ Net finance income (expense)…….. Profit (loss) before income taxes .......... Income tax expense .............................. - (18) 32 5,432 4,146 - (497) 30 5,934 2,128 $ 16,284 7,137 283 23,704 6,287 17,417 9,677 7,740 - (47) 42 7,735 2,537 $ 15,408 $ 13,852 4,018 285 19,711 5,805 13,906 9,658 4,248 - (479) 24 3,793 1,405 4,694 274 18,820 5,433 13,387 10,763 2,624 - (465) 17 2,176 1,592 $ 13,302 4,081 298 17,681 4,855 12,826 8,697 4,129 $ 12,645 4,979 306 17,930 5,628 12,302 9,934 2,368 - (262) 3 3,870 1,358 (6,581) 81 (253) (4,385) 889 $ 11,320 4,001 302 15,623 4,829 10,794 7,645 3,149 (179) 47 (257) 2,760 803 Profit (loss) .......................................... $ 1,286 $ 3,806 $ 5,198 $ 2,388 $ 584 $ 2,512 $ (5,274) $ 1,957 Loss due to change in fair value of redeemable preferred shares ................. Share-based compensation ................... Adjusted profit(1) .................................. - 1,229 1,229 - 1,176 1,176 - 1,083 1,083 - 964 964 - 845 845 - 794 794 6,581 631 7,212 179 388 567 $ 2,515 $ 4,982 $ 6,281 $ 3,352 $ 1,429 $ 3,306 $ 1,938 $ 2,524 Income tax expense .............................. 4,146 2,128 2,537 Depreciation ......................................... Foreign exchange loss (gain) ................ Net finance (income) expense .............. 499 18 (32) 461 497 (30) 412 47 (42) 1,405 354 479 (24) 4,631 3,056 2,954 2,214 1,592 334 465 (17) 2,374 1,358 317 262 (3) 1,934 889 260 (81) 253 1,321 803 240 (47) 257 1,253 Adjusted EBITDA(1) ............................. $ 7,146 $ 8,038 $ 9,235 $ 5,566 $ 3,803 $ 5,240 $ 3,259 $ 3,777 Basic earnings (loss) per share ............. $ 0.05 $ 0.16 $ 0.22 $ 0.10 $ 0.02 $ 0.11 $ (0.34) $ 0.15 Diluted earnings (loss) per share .......... $ 0.05 $ 0.15 $ 0.20 $ 0.10 $ 0.02 $ 0.10 $ (0.34) $ 0.10 Adjusted diluted earnings per share(1)……………………………… Note: $ 0.10 $ 0.20 $ 0.25 $ 0.13 $ 0.06 $ 0.13 $ 0.09 $ 0.13 (1) Adjusted profit, Adjusted EBITDA and Adjusted diluted earnings per share are non-IFRS measures. See “Non-IFRS Measures”. For a reconciliation of these measures to the closest IFRS measure, where a comparable IFRS measure exists, see “Reconciliation of Non- IFRS Measures” above. Subscription revenue has increased steadily over the quarters due to acquisition of new customers and expansion of existing customers. Professional services revenue varies quarter to quarter due to the size, timing and scheduling of customer engagements. Maintenance & support revenue has declined over the quarters due to support contracts with legacy customers with perpetual licenses that have lapsed and the migration of customers to a subscription model. Cost of revenue has increased as we continue to invest in the capacity to support the growth in our business with gross margin ranging from 69% to 73% of revenue. Operating expenses have increased as we invest in sales and marketing and product development. In addition to increased investment, our quarterly operating 15 Management's Discussion and Analysis expenses are impacted by timing of sales commissions and marketing events. We also experienced an increase in general and administrative expenses to support our initial public offering in the second quarter of 2014 and to support ongoing compliance and governance requirements. As a significant component of our operating expenses are denominated in Canadian dollars, fluctuations in the foreign exchange rate with the U.S. dollar have had a positive impact on operating expenses and quarterly profit during fiscal 2015. Our 2014 quarterly profit was impacted significantly by the non-cash fair value adjustment on the redeemable preferred shares prior to our initial public offering. Upon completion of the initial public offering in June 2014, we converted the redeemable preferred shares into common shares and profit will no longer be impacted by this expense. Liquidity and Capital Resources Our primary source of cash flow is sales of subscriptions for our software and sales of services. Our approach to managing liquidity is to ensure, to the extent possible, that we always have sufficient liquidity to meet our liabilities as they come due. We do so by continuously monitoring cash flow and actual operating expenses compared to budget. As at December As at December 31, 2015 31, 2014 (In thousands of U.S. dollars) Cash and cash equivalents ........................................................ $ 99,390 $ 56,725 Cash and cash equivalents increased $42.7 million to $99.4 million at December 31, 2015, from $56.7 million at December 31, 2014. The increase is due to cash generated from operations and the receipt of prepayment of a multi- year subscription of approximately $20.0 million in the first quarter of 2015 as well as other subscription arrangements. In addition to the cash balances, we have a Cdn. $20.0 million revolving demand credit facility available to be drawn to meet ongoing working capital requirements. Our principal cash requirements are for working capital and capital expenditures. Excluding deferred revenue, working capital at December 31, 2015 was $112.3 million. Given the ongoing cash generated from operations and our existing cash and credit facilities, we believe there is sufficient liquidity to meet our current and planned financial obligations. The following table provides a summary of cash inflows and outflows by activity: Three months ended December 31, Years ended December 31 2015 2014 2015 2014 (In thousands of U.S. dollars) (In thousands of U.S. dollars) Cash Inflow (Outflows) by activity Operating activities .............................. Investing activities ............................... Financing activities .............................. Effects of exchange rates ..................... $ 8,522 (573) 868 (53) $ 1,293 (416) 159 (239) $ 45,248 (4,334) 1,858 (107) Net cash inflows (outflows) ................. 8,764 797 42,665 $ 16,250 (3,487) 30,595 (437) 42,921 Cash provided by operating activities Cash generated by operating activities for the three months ended December 31, 2015 was $8.5 million, up from $1.3 million for the same period in 2014. The increase was due to an increase in the change in working capital driven by a decrease in accounts receivable which was partially offset by a decrease in deferred revenue and accrued liabilities. These changes were coupled with higher net income and an increase in share based compensation. For fiscal 2015, cash generated by operating activities was $45.2 million compared to $16.3 million for the same period in 2014. The increase in cash provided by operating activities of $28.9 million was due primarily to the receipt of 16 Management's Discussion and Analysis prepayment of subscription arrangements, the timing of subscription billings, and the increase in net income, share based compensation and income tax expense. Cash used in investing activities Cash used in investing activities is driven by the purchase of property and equipment primarily related to computer equipment for use in our hosting facilities and to support research and development. Cash used in the purchase of property and equipment for the three months ended December 31, 2015 was $0.9 million, an increase of $0.7 million from $0.2 million in 2014. For fiscal 2015, cash used to purchase property and equipment was $4.3 million, an increase of $0.8 million from $3.5 million in 2014. We expect to continue to invest in additional property and equipment to support the growth in our customer base and to take advantage of new and advanced technology. Cash provided by financing activities Cash provided by financing activities was $0.9 million and $1.9 million for the three months and year ended December 31, 2015 respectively compared to $0.2 million and $30.6 million for the same periods in 2014. The cash provided by financing activities for fiscal 2015 is comprised of proceeds received upon exercise of options. The cash provided by financing activities for fiscal 2014 was comprised of $1.2 million of proceeds from shares issued for cash and upon exercise of options prior to completion of our initial public offering, $54.3 million of proceeds from the initial public offering net of share issuance costs incurred, $5.0 million drawn on the term debt facility to fund the Part VI.1 tax liability resulting from the shares repurchased in the fourth quarter of 2013, less repayment of the term debt facility in full for $30.0 million. Revolving Credit Facility We have a Cdn.$20.0 million revolving demand credit facility (the “Revolving Facility”). As of December 31, 2015, and as of the date of this MD&A, no amounts had been drawn against the Revolving Facility. The interest rate on the Revolving Facility is RBC U.S. prime plus 0.50% per annum for U.S. dollar denominated amounts and RBC U.S. base rate plus 0.50% per annum for Canadian dollar denominated amounts. In the event our aggregate borrowings under the Revolving Facility exceed Cdn. $2.5 million a borrowing limit applies that is based principally on our accounts receivable. 17 Management's Discussion and Analysis Contractual Obligations The following table summarizes our contractual obligations as at December 31, 2015, including commitments relating to leasing contracts: Commitments Operating lease agreements ........................... Financial Obligations Trade payables and accrued liabilities ........... Less than 1 year More than 5 1 to 5 years years (In thousands of U.S. dollars) Total amount $ 1,462 $ 5,097 $ 1,374 $ 7,933 6,794 ̶ ̶ 6,794 Total Obligations $ 8,256 $ 5,097 $ 1,374 $ 14,727 The following table summarizes our contractual obligations as at December 31, 2014, including commitments relating to leasing contracts: Commitments Operating lease agreements ........................... Financial Obligations Trade payables and accrued liabilities ........... Less than 1 year More than 5 1 to years 5 years (In thousands of U.S. dollars) Total amount $ 1,206 $ 5,498 $ 2,658 $ 9,362 6,945 ̶ ̶ 6,945 Total Obligations $ 8,151 $ 5,498 $ 2,658 $ 16,307 Off-Balance Sheet Arrangements We have no off-balance sheet arrangements, other than operating leases (which have been disclosed under “Liquidity and Capital Resources - Contractual Obligations”), that have, or are likely to have, a current or future material effect on our consolidated financial position, financial performance, liquidity, capital expenditures or capital resources. Transactions with Related Parties We did not have any transactions during the year ended December 31, 2015 and 2014 that would be considered to be between the Company and a related party. Financial Instruments and Other Instruments We recognize financial assets and liabilities when we become party to the contractual provisions of the instrument. On initial recognition, financial assets and liabilities are measured at fair value plus transaction costs directly attributable to the financial assets and liabilities, except for financial assets or liabilities at fair value through profit and loss, whereby the transactions costs are expensed as incurred. Credit risk Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Our credit risk is primarily attributable to trade and other receivables. The nature of our subscription based business results in payments being received in advance of the majority of the services being delivered; as a result, our credit risk exposure is low. As the majority of our revenues are earned 18 Management's Discussion and Analysis over a period of time, the potential impact on our operating results is low as any uncollectible amounts would affect trade and other receivables and deferred revenue. Currency risk A portion of our revenues and operating costs are realized in currencies other than our functional currency, such as the Canadian dollar, Euros, the Hong Kong dollar and Japanese Yen. As a result, we are exposed to currency risk on these transactions. Also, additional earnings volatility arises from the translation of monetary assets and liabilities, investment tax credits recoverable and deferred tax assets and liabilities denominated in foreign currencies at the rate of exchange on each date of the Consolidated Statements of Financial Position; the impact of which is reported as a foreign exchange gain or loss or as income tax expense for deferred tax assets and liabilities. Our objective in managing our currency risk is to minimize exposure to currencies other than our functional currency. We do so by matching foreign denominated assets with foreign denominated liabilities. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. We believe that interest rate risk is low for our financial assets as the majority of investments are made in fixed rate instruments. We do have interest rate risk related to our credit facilities. The rates on our Revolving Facility are variable to bank prime rate. Capital management Our capital is composed of our common shares and shareholders’ equity. Our objective in managing our capital is financial stability and sufficient liquidity to increase shareholder value through organic growth and investment in sales, marketing and product development. Our senior management team is responsible for managing the capital through regular review of financial information to ensure sufficient resources are available to meet operating requirements and investments to support our growth strategy. The Board of Directors is responsible for overseeing this process. In order to maintain or adjust our capital structure, we could issue new shares, repurchase shares, approve special dividends or issue debt. Critical Accounting Policies and Estimates Revenue We derive revenue from subscriptions for our product comprised of our hosted SaaS application and fixed term subscription licenses of our software products (“On-premise licenses”). In addition, we derive revenue from the provision of professional services including implementation services, technical services and training and, to a lesser degree, from maintenance and support services provided to customers with legacy perpetual licenses to our software products. Professional services do not include significant customization to, or development of, the software. We commence revenue recognition when all of the following conditions are met: • • • it is probable that the economic benefits of the transaction will flow to the entity; the amount of revenue can be measured reliably; and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. We provide our SaaS, On-premise licenses and professional services on a stand-alone basis or as part of a multiple element arrangement. Stand-alone sales occur through renewals of the SaaS or On-premise license and stand-alone purchases of the same or similar professional services on an ongoing basis by customers. When sold in a multiple element arrangement, the SaaS or On-premise license and the professional services elements are considered separate units of accounting as they have stand-alone value to the customer. The total consideration for the arrangement is allocated to the separate units of accounting based on their relative fair value and the revenue is recognized for each unit when the requirements for revenue recognition have been met. We determine the fair value of each unit of accounting based on the selling price when they are sold separately. When the fair value cannot be determined based on when it was sold, we determine a value that most reasonably reflects the selling price that might be achieved in a stand-alone transaction. Inputs considered in making this determination include the specific 19 Management's Discussion and Analysis parameters and model used in determining the contract price, contracted renewal rates, the history of pricing, renewals and stand-alone sales activity of similar customers. Subscription revenue related to the provision of SaaS or On-premise term licenses is recognized ratably over the contract term as the service or access to the software is delivered. The contract term begins when the service is made available or the license is delivered to the customer. We enter into arrangements for professional services primarily on a time and materials basis. Revenue for professional services entered into on a time and material basis is recognized as the services are performed. In certain circumstances, the Company enters into arrangements for professional services on a fixed price basis. Revenue for fixed price arrangements is recognized by reference to the stage of completion of the contract, taking into consideration the cost incurred to date in relation to the total expected cost to complete the deliverable. If the estimated cost to complete a contract results in a loss on the contract, the loss is recognized immediately in profit or loss. Maintenance and support services provided to customers with legacy perpetual licenses are sold as a single element arrangement with one unit of accounting. Revenue for these arrangements is recognized ratably over the term of the maintenance contract. Judgment is applied in determining the components of a multiple element revenue arrangement. In allocating the consideration received among the multiple elements of a revenue arrangement, we must make estimates as to the fair value of each individual element. The selling price of the element on a stand-alone basis is used to determine the fair value. Where stand-alone sales do not exist, various inputs are used to determine the fair value. Changes to these inputs may result in different estimates of fair value for an element and impact the allocation of consideration and timing of revenue recognition. Income taxes Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from, or paid to, the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, by the reporting date, in the countries where we operate and generate taxable income. Deferred income tax assets and liabilities are recorded for the temporary differences between transactions that have been included in the financial statements or income tax returns. Deferred income taxes are provided for using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities and for certain carry-forward items. Deferred income tax assets are recognized only to the extent that, in the opinion of management, it is probable that the deferred income tax assets will be realized. The recognition of deferred tax assets requires that we assess future taxable income available to utilize deferred tax assets related to deductible or taxable temporary differences. We consider the nature and carry-forward period of deferred tax assets, our recent earnings history and forecast of future earnings in performing this assessment. The actual deferred tax assets realized may differ from the amount recorded due to factors having a negative impact on our operating results and lower future taxable income. Investment tax credits recoverable The recognition of investment tax credits recoverable requires that we assess future tax payable available to utilize the investment tax credits. We consider the carry-forward period of the investment tax credits, our recent earnings history and forecast of future earnings in performing this assessment. We determine the value of effort expended towards research and development projects that qualify for investment tax credits and calculate the estimated recoverable to be recognized. The allocation of direct salaries to qualifying projects is derived from time records and assessment by management. The actual investment tax credits claimed and realized may differ from the estimate based on the final tax returns and review by tax authorities. 20 Management's Discussion and Analysis Fair value of share-based payments We use the Black-Scholes valuation model to determine the fair value of equity settled stock options. Estimates are required for inputs to this model including the fair value of the underlying shares, the expected life of the option, volatility, expected dividend yield and the risk-free interest rate. Variation in actual results for any of these inputs will result in a different value of the stock option realized from the original estimate. Adoption of New Accounting Standards Amendments to IFRS 2 In December 2013, the IASB issued amendments to IFRS 2 Share-based payments. The amendments clarify vesting conditions by separately defining a performance condition and a service condition, both of which were previously incorporated within the definition of a vesting condition. The amendments became effective for annual periods beginning on or after July 1, 2014 and interim periods within those annual periods. The adoption of these amendments did not have a material impact on the consolidated financial statements. Amendments to IFRS 13 In December 2013, the IASB issued amendments to IFRS 13 Fair Value Measurements, which relate to the measurement of short-term receivables and payables, and the scope of the portfolio exemption. Short term receivables and payables with no stated interest rate can still be measured at the invoice amount without discounting, if the effect of discounting is immaterial. The portfolio exemption permits an entity to measure the fair value of a group of financial assets and financial liabilities on a net basis. The amendment clarifies that the portfolio exemption applies to all contracts within the scope of IAS 39 Financial Instruments: Recognition and Measurement (or IFRS 9 Financial Instruments if this has been adopted early), regardless of whether they meet the definition of financial assets or financial liabilities in IAS 32 Financial Instruments: Presentation. The amendments became effective for annual periods beginning on or after July 1, 2014. The adoption of these amendments did not have a material impact on the consolidated financial statements. Changes to standards and interpretations IFRS 9: Financial Instruments In July 2014, the IASB issued the final version of IFRS 9, bringing together the classification and measurement, impairment and hedge accounting phases of the project to replace IAS 39, Financial Instruments: Recognition and Measurement. This standard simplifies the classification of a financial asset as either at amortized cost or at fair value as opposed to the multiple classifications which were permitted under IAS 39. This standard also requires the use of a single impairment method as opposed to the multiple methods in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The standard also adds guidance on the classification and measurement of financial liabilities. IFRS 9 is to be applied retrospectively for annual periods beginning on or after January 1, 2018. Early application is permitted. The Company does not intend to adopt this standard early and is currently evaluating the impact of adopting this standard on the consolidated financial statements. IFRS 15: Revenue from Contracts with Customers (“IFRS 15”) In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which provides a single, principles-based five-step model for revenue recognition to be applied to all customer contracts, and requires enhanced disclosures. The IASB recently confirmed a one-year deferral of this standard, which will now be effective January 1, 2018 and allows early adoption. The Company does not intend to adopt this standard early and is currently evaluating the impact of adopting this standard on the consolidated financial statements. IFRS 16: Leases In January 2016, the IASB issued IFRS 16, Leases, which specifies how to recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Consistent with its predecessor, IAS 17, the new lease standard continues to require lessors to classify leases as operating or finance. 21 Management's Discussion and Analysis IFRS 16 is to be applied retrospectively for annual periods beginning on or after January 1, 2019. Earlier application is permitted if IFRS 15 Revenue from contract with customers has also been applied. The Company does not intend to adopt this standard early and is currently evaluating the impact of adopting this standard on the consolidated financial statements. Amendments to IAS 16 and IAS 38 In May 2014, the IASB issued amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets. These amendments prohibit entities from using a revenue-based depreciation method for items of property, plant and equipment. They also introduce a rebuttable presumption that revenue is not an appropriate basis for amortization of an intangible asset. The amendments explain that an expected future reduction in selling prices could be indicative of a reduction of the future economic benefits embodied in an asset. These amendments are to be applied prospectively for annual periods beginning on or after January 1, 2016. Early adoption is allowed. The Company is currently evaluating the impact of adopting these amendments on the consolidated financial statements. Controls and Procedures Disclosure Controls and Procedures The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are responsible for establishing and maintaining disclosure controls and procedures for the Company. The Company maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis. The CEO and CFO have evaluated the design and effectiveness of the Company’s disclosure controls and procedures at the financial year end and based on the evaluation, the CEO and CFO have concluded that the disclosure controls and procedures are effective. Internal Controls over Financial Reporting The Company’s internal controls over financial reporting (“ICFR”) are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s management is responsible for establishing and maintaining adequate ICFR for the Company. Management, including the CEO and CFO, does not expect that the Company’s ICFR will prevent or detect all errors and all fraud or will be effective under all future conditions. A control system is subject to inherent limitations and even those systems determined to be effective can provide only reasonable, but not absolute, assurance that the control objectives will be met with respect to financial statement preparation and presentation. National Instrument 52-109 of the Canadian Securities Administrators requires the CEO and CFO to certify that they are responsible for establishing and maintaining ICFR for the Company and that those internal controls have been designed and are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. The CEO and CFO are also responsible for disclosing any changes to the Company’s internal controls during the most recent period that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. The Company’s management under the supervision of the CEO and CFO has evaluated the effectiveness of the Company’s ICFR based on the Internal Control – Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. As at December 31, 2015, management assessed the effectiveness of the Company’s ICFR and concluded that such ICFR is effective and that there are no material weaknesses in the Company’s ICFR that have been identified by management. There have been no changes in the Company's internal control over financial reporting during the period that have materially affected, or are likely to materially affect, the Company's internal control over financial reporting. 22 Management's Discussion and Analysis Outstanding Share Information As of December 31, 2015, our authorized capital consists of an unlimited number of common shares with no stated par value. Changes in the number of common shares, options, restricted share units and deferred shares units outstanding for the year ended December 31, 2015 and as of February 17, 2016 are summarized as follows: Number outstanding at December 31, 2014 23,739,342 2,170,802 53,333 - Net issued during the fiscal year ended December 31, 2015 680,662 400,404 36,666 9,000 Number outstanding at December 31, 2015 24,420,004 2,571,206 89,999 9,000 Net issued during the period ending on December 31, 2015 and ending on February 17, 2016 Number outstanding at February 17, 2016 13,963 (13,963) - - 24,433,967 2,557,243 89,999 9,000 Class of Security Common shares Stock Options Restricted Share Units Deferred Share Units Our outstanding common shares increased by 680,662 shares in 2015 due to 622,328 options exercised and the vesting of 58,334 restricted share units which were settled by the issuance of common shares. Our outstanding stock options increased by 400,404 options during 2015 due to the grant of 1,048,000 options less 622,328 options exercised and 25,268 options forfeited or expired. Each option is exercisable for one common share. Our outstanding restricted share units increased by 36,666 during 2015 due to the grant of 95,000 restricted share units and the vesting of 58,334 such restricted shares units which were settled by the issuance of common shares. Our outstanding deferred share units increased by 9,000 during 2015 due to the grant of 9,000 deferred share units. Upon vesting, each restricted share unit and deferred share unit can be paid out or settled in cash, common shares, or a combination thereof, as elected by the Compensation Committee of the Board of Directors. 23 Consolidated Financial Statements of Kinaxis Inc. Years ended December 31, 2015 and 2014 KPMG LLP Suite 1800 150 Elgin Street Ottawa ON K2P 2P8 Canada Telephone (613) 212-KPMG (5764) Fax Internet (613) 212-2896 www.kpmg.ca INDEPENDENT AUDITORS’ REPORT To the Shareholders of Kinaxis Inc. We have audited the accompanying consolidated financial statements of Kinaxis Inc., which comprise the consolidated statements of financial position as at December 31, 2015 and December 31, 2014, the consolidated statements of comprehensive income, changes in shareholders’ equity (deficiency) and cash flows for the years ended December 31, 2015, and December 2014, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.         Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Kinaxis Inc. as at December 31, 2015 and December 31, 2014, and its consolidated financial performance and its consolidated cash flows for the years ended December 31, 2015 and December 31, 2014 in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants February 17, 2016 Ottawa, Canada       Kinaxis Inc. Consolidated Statements of Financial Position As at December 31 (Expressed in thousands of U.S. dollars) Assets Current assets: Cash and cash equivalents Trade and other receivables (note 4) Investment tax credits receivable (note 16) Investment tax credits recoverable (note 16) Prepaid expenses Non-current assets: Property and equipment (note 5) Investment tax credits recoverable (note 16) Deferred tax assets (note 16) 2015 2014 $ 99,390 15,833 1,532 2,083 1,906 120,744 7,352 ‒ ‒ $ 56,725 17,023 1,974 ‒ 1,926 77,648 4,744 3,091 5,726 $ 128,096 $ 91,209 Liabilities and Shareholders’ Equity Current liabilities: Trade payables and accrued liabilities (note 6) Deferred revenue $ Non-current liabilities: Lease inducement Deferred revenue Deferred tax liability (note 16) Shareholders’ equity Share capital (note 10) Contributed surplus Accumulated other comprehensive income loss Deficit Commitments (note 20) Contingencies (note 23) 6,794 40,442 47,236 62 14,191 1,003 15,256 90,808 8,873 (474) (33,603) 65,604 $ 6,945 35,740 42,685 109 1,778 ‒ 1,887 87,219 6,152 (453) (46,281) 46,637 $ 128,096 $ 91,209 See accompanying notes to consolidated financial statements. On behalf of the Board of Directors: (signed) Douglas Colbeth Director (signed) John (Ian) Giffen Director 1 Kinaxis Inc. Consolidated Statements of Comprehensive Income Years ended December 31 (Expressed in thousands of U.S. dollars, except share and per share data) Revenue (note 12) Cost of revenue Gross profit Operating expenses: Selling and marketing Research and development (note 13) General and administrative Other income (expense): Loss due to change in fair value of redeemable preferred shares (note 9) Foreign exchange loss Net finance income (expense) (note 15) Profit before income taxes Income tax expense (note 16): Current Deferred Profit (loss) Other comprehensive loss: Items that are or may be reclassified subsequently to profit or loss: Foreign currency translation differences - foreign operations Total comprehensive profit (loss) Basic earnings (loss) per share 2015 2014 $ 91,271 $ 70,054 25,743 65,528 18,264 15,197 8,260 41,721 23,807 ‒ (1,041) 128 (913) 20,745 49,309 15,296 13,429 8,314 37,039 12,270 (6,760) (599) (490) (7,849) 22,894 4,421 3,487 6,729 10,216 12,678 (21) $ $ 12,657 0.53 $ $ 819 3,823 4,642 (221) (93) (314) (0.01) Weighted average number of basic common shares (note 11) 23,953,609 19,076,464 Diluted earnings (loss) per share 0.50 (0.01) Weighted average number of diluted common shares (note 11) 25,465,632 19,076,464 See accompanying notes to consolidated financial statements 2 Kinaxis Inc. Consolidated Statements of Changes in Shareholders’ Equity (Deficiency) Years ended December 31 (Expressed in thousands of U.S. dollars) Accumulated other Contributed comprehensive loss surplus Share capital Total equity (deficiency) Deficit Balance, December 31, 2013 $ 9,902 $ 3,948 $ (360) $ (87,070) $ (73,580) Loss Other comprehensive loss Total comprehensive loss ‒ ‒ ‒ Conversion of Class A preferred shares to Common Shares (notes 8 and 9) Shares issued per offering (note 8) Share issuance costs net of tax (note 8) Reduction of share capital (note 8) Shares issued for cash Share options exercised Restricted share units vested Share-based payments Total shareholder transactions 60,895 59,562 (3,837) (41,010) 585 804 318 ̶ 77,317 ‒ ‒ ‒ ‒ ‒ ‒ ‒ ‒ (136) (318) 2,658 2,204 ‒ (93) (93) ‒ ‒ ‒ ‒ ‒ ‒ ‒ ‒ ‒ (221) ̶ (221) (221) (93) (314) ‒ ‒ ‒ 41,010 ‒ ‒ ‒ ‒ 41,010 60,895 59,562 (3,837) ‒ 585 668 ‒ 2,658 120,531 Balance, December 31, 2014 $ 87,219 $ 6,152 $ (453) $ (46,281) $ 46,637 Profit Other comprehensive loss Total comprehensive profit Share options exercised Restricted share units vested Share-based payments Total shareholder transactions ‒ ‒ ‒ 2,721 868 ̶ 3,589 ‒ ‒ ‒ (863) (868) 4,452 2,721 ‒ (21) (21) ‒ ‒ ‒ ‒ 12,678 ̶ 12,678 ‒ ‒ ‒ ‒ 12,678 (21) 12,657 1,858 ‒ 4,452 6,310 Balance, December 31, 2015 $ 90,808 $ 8,873 $ (474) $ (33,603) $ 65,604 See accompanying notes to consolidated financial statements 3 Kinaxis Inc. Consolidated Statements of Cash Flows Years ended December 31 (Expressed in thousands of U.S. dollars) Cash flows from operating activities: Profit (loss) Items not affecting cash: Depreciation of property and equipment (note 5) Loss due to change in fair value of redeemable preferred shares Share-based payments (note 10) Amortization of lease inducement Investment tax credits recoverable Income tax expense Changes in operating assets and liabilities (note 17) Interest paid Income taxes paid 2015 2014 $ 12,678 $ (221) 1,726 ‒ 4,452 (47) 1,008 10,216 16,100 ‒ (885) 45,248 1,151 6,760 2,658 (46) (983) 4,642 7,800 (545) (4,966) 16,250 Cash flows used in investing activities: Purchase of property and equipment (note 5) (4,334) (3,487) Cash flows from financing activities: Non-Voting Common Shares issued and share subscriptions received Common Shares issued Common Shares issued per offering Share issuance costs Issuance of long-term debt Repayment of long-term debt Increase in cash and cash equivalents Cash and cash equivalents, beginning of year ‒ 1,858 ‒ ‒ ‒ ‒ 1,858 42,772 56,725 991 262 59,562 (5,220) 5,000 (30,000) 30,595 43,358 13,804 Effects of exchange rates on cash and cash equivalents (107) (437) Cash and cash equivalents, end of the year $ 99,390 $ 56,725 See accompanying notes to consolidated financial statements. 4 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 1. Corporate information: Kinaxis Inc. (“Kinaxis” or the "Company") is incorporated under the Canada Business Corporations Act and domiciled in Ontario, Canada. The address of the Company’s registered office is 700 Silver Seven Road, Ottawa, Ontario. The consolidated financial statements of the Company as at and for the year ended December 31, 2015 comprise the Company and its subsidiaries. Kinaxis is a leading provider of cloud-based subscription software that enables its customers to improve and accelerate analysis and decision-making across their supply chain operations. Kinaxis is a global enterprise with offices in Chicago, United States; Tokyo, Japan; Hong Kong, China; Eindhoven, The Netherlands; and Ottawa, Canada. 2. Basis of preparation: (a) Statement of compliance: The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), and include the accounts of Kinaxis Inc. and its four wholly-owned subsidiaries, Kinaxis Corp., Kinaxis Asia Limited, Kinaxis Japan K.K. and Kinaxis Europe B.V. The consolidated financial statements were authorized for issue by the Board of Directors on February 17, 2016. (b) Measurement basis: The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. (c) Presentation currency: These consolidated financial statements are presented in United States dollars (“USD”) which is the functional currency of the Company and its subsidiaries unless otherwise stated. Tabular amounts are presented in thousands of USD. 5 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 2. Basis of preparation (continued): (d) Foreign currency: Foreign currency transactions The financial statements of the Company and its wholly-owned subsidiaries (excluding Kinaxis Japan K.K. and Kinaxis Europe B.V.), are measured using the United States dollar as the functional currency. Transactions in currencies other than the U.S. dollar are translated at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are translated to the functional currency at the rates prevailing at that date. Exchange differences on monetary items are recognized in profit or loss in the period in which they arise. Non-monetary items carried at fair value that are denominated in foreign currencies are translated to the functional currency 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 translated using the rates at the date of the transaction. Foreign operations The consolidated financial statements also include the accounts of its wholly-owned subsidiaries Kinaxis Japan K.K. and Kinaxis Europe B.V., translated into U.S. dollars. The financial statements of Kinaxis Japan K.K. are measured using the Japanese Yen as its functional currency and the financial statements of Kinaxis Europe B.V. are measured using the European Euro as its functional currency. Assets and liabilities have been translated into U.S. dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in shareholders’ equity (deficiency). (e) Use of estimates and judgments: The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenue, expenses and disclosure of contingent assets and liabilities. Actual results may differ from these estimates. Estimates and judgments included, but not limited to, the determination of the value of redeemable preferred shares, the allocation of consideration for a multiple element revenue arrangement, recognition of deferred tax assets, valuation of investment tax credits recoverable and valuation of share-based payments. Estimates and assumptions are reviewed periodically and the effects of revisions are recorded in the consolidated financial statements in the period in which the estimates are revised and in any future periods affected. 6 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 2. Basis of preparation (continued): (e) Use of estimates and judgments (continued): Fair value of redeemable preferred shares The estimate of the fair value of the redeemable preferred shares is supported by an independent valuation report prepared by a Chartered Business Valuator to provide a value for each class of share at the reporting date. The valuator applied both the discounted cash flow approach and a market based approach to estimate the value of the Company. An option pricing model that considers the legal rights of all security classes and the respective claims of each security class on the value of the Company was applied to determine the fair value of the redeemable preferred shares. Changes to any one of the inputs into the discounted cash flow or market based approaches may result in a different estimate of value for the Company and a different estimate of the fair value of the redeemable preferred shares. Furthermore, changes to inputs in the option pricing model may result in a different value allocated to the redeemable preferred shares. Immediately prior to the completion of the initial public offering on June 10, 2014, the fair value of the redeemable preferred shares was measured at the offering price of the shares. Allocation of consideration to multiple elements of a revenue arrangement Judgment is applied in determining the components of a multiple element revenue arrangement. In allocating the consideration received among the multiple elements of a revenue arrangement, management must make estimates as to the fair value of each individual element. The selling price of the element on a stand-alone basis is used to determine the fair value. Where stand-alone sales do not exist, various inputs as detailed in note 3(b) are used to determine the fair value. Changes to these inputs may result in different estimates of fair value for an element and impact the allocation of consideration and timing of revenue recognition. Income taxes The recognition of deferred tax assets requires the Company to assess future taxable income available to utilize deferred tax assets related to deductible or taxable temporary differences. The Company considers the nature and carry-forward period of deferred tax assets, the Company’s recent earnings history and forecast of future earnings in performing this assessment. The actual deferred tax assets realized may differ from the amount recorded due to factors having a negative impact on operating results of the Company and lower future taxable income. 7 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 2. Basis of preparation (continued): (e) Use of estimates and judgments (continued): Investment tax credits recoverable The recognition of investment tax credits recoverable requires the Company to assess future tax payable available to utilize the investment tax credits. The Company considers the carry- forward period of the investment tax credits, the Company's recent earnings history and forecast of future earnings in performing this assessment. The Company determines the value of effort expended towards research and development projects that qualify for investment tax credits and calculates the estimated recoverable to be recognized. The allocation of direct salaries to qualifying projects is derived from time records and assessment by management. The actual investment tax credits claimed and realized may differ from the estimate based on the final tax returns and review by tax authorities. Fair value of share-based payments The Company uses the Black-Scholes valuation model to determine the fair value of equity settled stock options. Estimates are required for inputs to this model including the fair value of the underlying shares, the expected life of the option, volatility, expected dividend yield and the risk-free interest rate. Variation in actual results for any of these inputs will result in a different value of the stock option realized from the original estimate. The assumptions and estimates used are further outlined in note 10. 3. Significant accounting policies: (a) Basis of consolidation: Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Company. All intercompany transactions, balances, revenues and expenses between the Company and its subsidiaries have been eliminated. (b) Revenue recognition: its hosted software-as-a-service application (“SaaS”) and The Company derives revenue from subscription of its product (“subscription revenue”) comprised of term subscription license of its software products (“On-premise license”). In addition, the Company derives including implementation services, technical services and training and, to a lesser degree, from maintenance and support services provided to customers with legacy perpetual licenses to its software products. Professional services do not include significant customization to, or development of, the software. the provision of professional services revenue fixed from 8 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 3. Significant accounting policies (continued): (b) Revenue recognition (continued): The Company commences revenue recognition when all of the following conditions are met: • • • it is probable that the economic benefits of the transaction will flow to the entity; the amount of revenue can be measured reliably; and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. The Company provides its SaaS, On-premise licenses and professional services on a stand- alone basis or as part of a multiple element arrangement. Stand-alone sales occur through renewals of the SaaS or On-premise term license and stand-alone purchases of the same or similar professional services on an ongoing basis by customers. When sold in a multiple element arrangement, the SaaS or On-premise license and the professional services elements are considered separate units of accounting as they have stand-alone value to the customer. The total consideration for the arrangement is allocated to the separate units of accounting based on their relative fair value and the revenue is recognized for each unit when the requirements for revenue recognition have been met. The Company determines the fair value of each unit of accounting based on the selling price when they are sold separately. When the fair value cannot be determined based on when it was sold separately, the Company determines a value that most reasonably reflects the selling price that might be achieved in a stand-alone transaction. Inputs considered in making this determination include the specific parameters and model used in determining the contract price, contracted renewal rates, the history of pricing, renewals and stand-alone sales activity of similar customers. Subscription revenue related to the provision of SaaS or On-premise term licenses is recognized ratably over the contract term as the service or access to the software is delivered. The contract term begins when the service is made available or the license is delivered to the customer. The Company enters into arrangements for professional services primarily on a time and materials basis. Revenue for professional services entered into on a time and material basis is recognized as the services are performed. In certain circumstances, the Company enters into arrangements for professional services on a fixed price basis. Revenue for fixed price arrangements is recognized by reference to the stage of completion of the contract, taking into consideration the cost incurred to date in relation to the total expected cost to complete the deliverable. If the estimated cost to complete a contract results in a loss on the contract, the loss is recognized immediately in profit or loss. Maintenance and support services provided to customers with legacy perpetual licenses are sold as a single element arrangement with one unit of accounting. Revenue for these arrangements is recognized ratably over the term of the maintenance contract. 9 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 3. Significant accounting policies (continued): (c) Financial instruments: Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss (“FVTPL”)) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. Financial assets All financial assets are recognized and de-recognized on trade date and are initially recorded at fair value plus transaction costs, except for those financial assets classified FVTPL whose transaction costs are expensed as incurred. The Company determines the classification of its financial assets at initial recognition. Financial instruments are classified as follows: Financial Asset Cash and cash equivalents Trade and other receivables Investment tax credits receivable Loans and receivables Classification under IAS 39 Loans and receivables – amortized cost Loans and receivables – amortized cost Loans and receivables – amortized cost Financial assets classified as loans and receivables have fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost by using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate except for short-term receivables where the interest revenue would be immaterial. Effective interest method The effective interest method is a method of calculating the amortized cost of a debt or asset instrument and allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period to the net carrying amount on initial recognition. 10 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 3. Significant accounting policies (continued): (c) Financial instruments (continued): Impairment of financial assets Financial assets, other than those categorized as FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been negatively affected. Certain categories of financial assets, such as trade and other receivables, are assessed for impairment individually and on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Company’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, as well as observable changes in national or local economic conditions that correlate with default on receivables. For all other financial assets, objective evidence of impairment could include significant financial difficulty of the issuer or counterparty, default or delinquency in interest or principal payments or it becoming probable that the borrower will enter bankruptcy or financial re- organization. For financial assets carried at amortized cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. Financial liabilities Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. The Company determines the classification of its financial liabilities at initial recognition. Financial instruments are classified as follows: Financial liability Trade payables and accrued liabilities Redeemable preferred shares Financial liabilities – FVTPL Classification under IAS 39 Other financial liabilities – amortized cost Other financial liabilities The Company classifies non-derivative financial liabilities as other financial liabilities. Other financial liabilities are accounted for at amortized cost by using the effective interest method. Financial liabilities - FVTPL Financial liabilities that contain one or more embedded derivatives may be designated as other financial liabilities at FVTPL and accounted for as one hybrid instrument rather than separating the embedded derivatives from the host contract. 11 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 3. Significant accounting policies (continued): (c) Financial instruments (continued): De-recognition of financial liabilities The Company de-recognizes financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire. (d) Cash and cash equivalents: Cash and cash equivalents include cash investments in interest-bearing accounts which can readily be redeemed for cash without penalty or are issued for terms of ninety days or less from the date of acquisition. (e) Property and equipment: Property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Property and equipment under finance leases are stated at the present value of minimum lease payments. Cost includes expenditures that are directly attributable to the acquisition of the asset. The assets are depreciated over their estimated useful lives using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. Property and equipment Computer equipment Computer software Office furniture and equipment Leasehold improvements Rate 3 - 5 years 1 - 5 years 3 - 5 years Shorter of useful life or term of lease Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. At the end of each reporting period, the Company reviews the carrying amounts of its property and equipment to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit, or CGU”). If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss. 12 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 3. Significant accounting policies (continued): (e) Property and equipment (continued): Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (f) Leases: Leases are classified as either finance or operating in nature. Finance leases are those which substantially transfer the benefits and risks of ownership to the Company. Assets acquired under finance leases are depreciated at the same rates as those described in note 3(e). Obligations recorded under finance leases are reduced by the principal portion of lease payments. The imputed interest portion of lease payments is charged to finance costs. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. (g) Employee benefits: The Company offers a defined contribution plan to its employees which is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. (h) Provisions: A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost. A provision for onerous contracts is recognized when the expected benefits to be derived by the Company from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Company recognizes any impairment loss on the assets associated with that contract. (i) Research and development expense: Research and development costs are expensed as incurred unless the criteria for capitalization are met. No research or development costs have been capitalized to date. 13 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 3. Significant accounting policies (continued): (j) Income taxes: Current and deferred income taxes are recognized as an expense or recovery in profit or loss, except when they relate to items that are recognized outside profit or loss (whether in other comprehensive income or directly in equity), in which case the tax is also recognized outside of profit or loss. Current income tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from, or paid to, the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, by the reporting date, in the countries where the Company operates and generates taxable income. Deferred income tax Deferred income tax assets and liabilities are recorded for the temporary differences between transactions that have been included in the consolidated financial statements or income tax returns. Deferred income taxes are provided for using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities and for certain carry- forward items. Deferred income tax assets are recognized only to the extent that, in the opinion of management, it is probable that the deferred income tax assets will be realized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment or substantive enactment. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. Investment tax credits Investment tax credits relating to scientific research and experimental development expenditures are recorded in the fiscal period the qualifying expenditures are incurred based on management’s interpretation of applicable legislation in the Income Tax Act of Canada. Credits are recorded provided there is reasonable assurance that the tax credit will be realized. Credits claimed are subject to review by the Canada Revenue Agency. Credits claimed in connection with research and development activities are accounted for using the cost reduction method. Under this method, assistance and credits relating to the acquisition of equipment is deducted from the cost of the related assets, and those relating to current expenditures, which are primarily salaries and related benefits, are included in the determination of profit or loss as a reduction of the research and development expenses. 14 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 3. Significant accounting policies (continued): (k) Share-based payments: The Company uses the fair value based method to measure share-based compensation for all share-based awards made to employees and directors. The grant date fair value of equity- settled share-based payment awards granted to employees is generally recognized as an expense, with a corresponding increase in equity, over the vesting period of the awards. The grant date fair value is determined using the Black-Scholes model for option grants. The market value of the Company’s shares on the date of the grant is used to determine the fair value of share units issued. Each tranche of an award is considered a separate award with its own vesting period and grant date fair value. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognized is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting (i.e. performance) conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. Where the terms of an equity-settled transaction award are modified, the minimum expense recognized is the expense as if the terms had not been modified and if the original terms of the award are met. An additional expense is recognized for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification. (l) Earnings per share: Basic earnings per share are calculated by dividing profit or loss by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share are calculated similar to basic earnings per share except the weighted average number of common shares outstanding is adjusted for the effects of all dilutive potential common shares, which are comprised of additional shares from the assumed exercise or conversion of share options and redeemable preferred shares outstanding. Options and redeemable preferred shares that have a dilutive impact are assumed to have been exercised or converted on the later of the beginning of the period or the date granted. (m) Lease inducement: The lease inducement represents rent-free periods and a tenant allowance provided to the Company by a lessor in connection with a leased property. These amounts have been deferred as a lease inducement and are being amortized as a reduction in rent expense over the expected term of the lease. 15 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 3. Significant accounting policies (continued): (n) Standards and interpretations in issue: Amendments to IFRS 2 In December 2013, the IASB issued amendments to IFRS 2 Share-based payments. The amendments clarify vesting conditions by separately defining a performance condition and a service condition, both of which were previously incorporated within the definition of a vesting condition. The amendments became effective for annual periods beginning on or after July 1, 2014 and interim periods within those annual periods. The adoption of these amendments did not have a material impact on the consolidated financial statements. Amendments to IFRS 13 In December 2013, the IASB issued amendments to IFRS 13 Fair Value Measurements, which relate to the measurement of short-term receivables and payables, and the scope of the portfolio exemption. Short term receivables and payables with no stated interest rate can still be measured at the invoice amount without discounting, if the effect of discounting is immaterial. The portfolio exemption permits an entity to measure the fair value of a group of financial assets and financial liabilities on a net basis. The amendment clarifies that the portfolio exemption applies to all contracts within the scope of IAS 39 Financial Instruments: Recognition and Measurement (or IFRS 9 Financial Instruments if this has been adopted early), regardless of whether they meet the definition of financial assets or financial liabilities in IAS 32 Financial Instruments: Presentation. The amendments became effective for annual periods beginning on or after July 1, 2014. The adoption of these amendments did not have a material impact on the consolidated financial statements. (o) Standards and interpretations in issue not yet adopted: The following is a list of standards and amendments that have been issued but not yet adopted by the Company. IFRS 9: Financial Instruments In July 2014, the IASB issued the final version of IFRS 9, bringing together the classification and measurement, impairment and hedge accounting phases of the project to replace IAS 39, Financial Instruments: Recognition and Measurement. This standard simplifies the classification of a financial asset as either at amortized cost or at fair value as opposed to the multiple classifications which were permitted under IAS 39. This standard also requires the use of a single impairment method as opposed to the multiple methods in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The standard also adds guidance on the classification and measurement of financial liabilities. IFRS 9 is to be applied retrospectively for annual periods beginning on or after January 1, 2018. Early application is permitted. The Company does not intend to adopt this standard early and is currently evaluating the impact of adopting this standard on the consolidated financial statements. 16 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 3. Significant accounting policies (continued): (o) Standards and interpretations in issue not yet adopted (continued): IFRS 15: Revenue from Contracts with Customers In May 2014, the International Accounting Standards Board issued IFRS 15, Revenue from Contracts with Customers, which provides a single, principles-based five-step model for revenue recognition to be applied to all customer contracts, and requires enhanced disclosures. The IASB recently confirmed a one-year deferral of this standard, which will now be effective January 1, 2018 and allows early adoption. The Company does not intend to adopt this standard early and is currently evaluating the impact of adopting this standard on the consolidated financial statements. IFRS 16: Leases In January 2016, the International Accounting Standards Board issued IFRS 16, Leases, which specifies how to recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Consistent with its predecessor, IAS 17, the new lease standard continues to require lessors to classify leases as operating or finance. IFRS 16 is to be applied retrospectively for annual periods beginning on or after January 1, 2019. Earlier application is permitted if IFRS 15 Revenue from contract with customers has also been applied. The Company does not intend to adopt this standard early and is currently evaluating the impact of adopting this standard on the consolidated financial statements. Amendments to IAS 16 and IAS 38 In May 2014, the International Accounting Standards Board issued amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets. These amendments prohibit entities from using a revenue-based depreciation method for items of property, plant and equipment. They also introduce a rebuttable presumption that revenue is not an appropriate basis for amortization of an intangible asset. The amendments explain that an expected future reduction in selling prices could be indicative of a reduction of the future economic benefits embodied in an asset. These amendments are to be applied prospectively for annual periods beginning on or after January 1, 2016. Early adoption is allowed. The Company is currently evaluating the impact of adopting these amendments on the consolidated financial statements. 4. Trade and other receivables: Trade accounts receivable Other 2015 2014 $ 14,912 921 $ 16,387 636 $ 15,833 $ 17,023 There have been no balances written off for the years ended December 31, 2015 and December 31, 2014 or any allowance for doubtful accounts recorded as at December 31, 2015 (2014 - $Nil). 17 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 5. Property and equipment: Computer equipment Computer software Office furniture and equipment Leasehold improvements Total property and equipment Cost Balance, December 31, 2013 $ 3,881 $ 677 $ 882 $ 2,174 $ 7,614 Additions Balance, December 3,171 282 12 22 3,487 31, 2014 $ 7,052 $ 959 $ 894 $ 2,196 $ 11,101 Additions 4,334 Dispositions (1,757) (298) (782) (6) (2,843) Balance, December 4,062 221 39 12 31, 2015 $ 9,357 $ 700 $ 124 $ 2,411 $ 12,592 Accumulated depreciation Computer equipment Computer software Office furniture and equipment Leasehold improvements Total property and equipment Balance, December 31, 2013 $ 2,001 $ 354 $ 795 $ 2,056 $ 5,206 Depreciation Balance, December 914 155 51 31 1,151 31, 2014 $ 2,915 $ 509 $ 846 $ 2,087 $ 6,357 Depreciation 1,726 Dispositions (1,757) (298) (782) (6) (2,843) Balance, December 1,519 139 51 17 31, 2015 $ 2,677 $ 350 $ 81 $ 2,132 $ 5,240 Carrying value Computer equipment Computer software Office furniture and equipment Leasehold improvements Total property and equipment December 31, 2014 $ December 31, 2015 4,137 6,680 $ 450 350 $ $ 48 43 109 279 $ 4,744 7,352 There were no proceeds associated with the asset dispositions in 2015. 18 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 5. Property and equipment (continued): The following table presents the depreciation expense by function for the year ended December 31: Cost of revenue Selling and marketing Research and development General and administrative 6. Trade payables and accrued liabilities: $ 2015 1,139 2 324 261 $ 2014 591 5 280 275 $ 1,726 $ 1,151 2015 2014 721 Trade accounts payable Accrued liabilities 5,569 Taxes payable 504 $ $ 637 6,176 132 $ 6,794 $ 6,945 7. Credit facility: On October 30, 2015, the Company’s revolving demand facility was increased to CAD$20,000. The revolving demand facility bears interest at bank prime plus 0.50% per annum and has not been drawn at December 31, 2015. In addition to providing a general security agreement representing a first charge over the Company’s assets, the Company must meet certain financial covenants as specified in the facility agreement. The Company was in compliance with these financial covenants as at December 31, 2015 and continues to be at the time of approval of these consolidated financial statements. 8. Capital reorganization: Prior to the Company’s initial public offering, the Company’s authorized capital consisted of an unlimited number of Common Shares, an unlimited number of Non-Voting Common Shares and an unlimited number of Class A Preferred Shares. At the annual general and special meeting of the shareholders held on May 22, 2014 the shareholders approved a capital reorganization consisting of an amalgamation of one of our shareholders, 1170233 Alberta ULC (“Alberta ULC”), and the Company with the resulting amalgamated entity having the following authorized capital: • • • • an unlimited number of Class B Preferred Shares; an unlimited number of Class A-1 Voting Common Shares; an unlimited number of Class A-2 Non-Voting Common Shares; an unlimited number of Class B Voting Common Shares; 19 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 8. Capital reorganization (continued): • • an unlimited number of Class C Preferred Shares; and an unlimited number of Common Shares. Following the filing of the final prospectus for the Company’s initial public offering on June 3, 2014 the Company and Alberta ULC amalgamated. As a result of the amalgamation: • • • • • the holders of Common Shares and Non-Voting Common Shares received an equivalent number of Class A-1 Voting Common Shares and Class A-2 Non-Voting Common Shares respectively; the Common Shares, Non-Voting Common Shares and Class A Preferred Shares held by Alberta ULC were cancelled; the shareholders of Alberta ULC received an aggregate of 1,253,892.5 Class B Preferred Shares, 5,114,607.98 Class A-1 Voting Common Shares and 800,000 Class A-2 Non-Voting Common Shares in exchange for their shares in Alberta ULC; the remaining 3,858,025 Class A Preferred Shares were exchanged for Class B Preferred Shares on a one-for-one basis; as elected by certain holders, 1,078,525.47 Class A-1 Voting Common Shares and 1,128,633.44 Class A-2 Non-Voting Common Shares were converted into an aggregate of 2,207,132 Class B Voting Common Shares for purposes of receiving a stock dividend, which was satisfied by issuing an aggregate of 2,207,132 Class C Preferred Shares. Upon completion of the initial public offering on June 10, 2014: • • • • all of the issued and outstanding Class B Preferred Shares, Class A-1 Voting Common Shares, and Class A-2 Non-Voting Common Shares were converted into Common Shares on a one-for-one basis with any fractional Common Shares that would otherwise have been issued upon such conversion being cancelled; all of the issued and outstanding Class B Voting Common Shares and Class C Preferred Shares were converted into Common Shares on the basis of one Class B Voting Common Share together with one Class C Preferred Shares into one Common Share; the accumulated deficit generated by the non-cash fair value adjustments amounting to $41,010 related to the converted preferred shares was reclassified from deficit to share capital; 5,000,000 Common Shares were issued from treasury for CAD$13.00 (USD$11.91) per share; and • Share issuance costs totaling $5,220 net of future tax recoveries of $1,383 was recorded to share capital. 20 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 9. Redeemable preferred shares: The Class A Preferred Shares mandatorily converted to Common Shares in the event of a qualifying initial public offering. As at June 3, 2014, upon filing of the final prospectus for the Company’s initial public offering, the Company had 5,111,917 (December 31, 2013 - 5,111,917) Class A Preferred Shares issued and outstanding. Concurrent with the filing of the prospectus a capital reorganization occurred pursuant to which the Class A Preferred Shares were converted into Class B Preferred Shares on a one-to-one basis. Immediately prior to the completion of the initial public offering on June 10, 2014, the Class B Preferred Shares were converted into Common Shares on a one-to-one basis. Measurement of fair value The valuation techniques used to measure the fair value of the redeemable preferred shares during fiscal 2015 and 2014 were unchanged from December 31, 2013. The redeemable preferred shares were converted to Common Shares immediately prior to completion of the Company’s initial public offering. The fair value of the redeemable preferred shares was measured at the offering price of the shares at the time of conversion. The following table reconciles the opening balances to the closing balances for Level 3 fair values. Balance at December 31, 2013 Increase in fair value Conversion to Common Shares (note 8) Fair value of redeemable preferred shares 54,135 6,760 (60,895) Balance, December 31, 2014 $ ̶ 21 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 10. Share capital: Authorized The Company is authorized to issue an unlimited number of Common Shares. Issued: Shares outstanding at January 1, 2014 Shares issued for cash Shares issued from exercised options Shares issued from vested restricted share units Conversion of non-voting common Common shares Non-voting common shares Shares Amount Shares Amount 7,674,049 4,252 5,332,504 5,650 ̶ 137,801 26,667 ̶ 398 318 60,000 396,471 ̶ 585 406 ̶ to Common Shares (note 8) 5,788,975 6,641 (5,788,975) (6,641) Fractional shares cancelled upon conversion (note 8) Conversion of preferred shares (67) ̶ to Common Shares (note 8 and 9) 5,111,917 ̶ 5,000,000 Reduction of share capital (note 8) Shares issued per offering (note 8) Share issuance costs 60,895 (41,010) 59,562 net of tax (note 8) ̶ (3,837) ̶ ̶ ̶ ̶ ̶ 23,739,342 $ 87,219 ̶ $ Shares outstanding at December 31, 2014 Shares issued from exercised options Shares issued from 622,328 2,721 vested restricted share units 58,334 868 Shares outstanding at December 31, 2015 Stock option plans 24,420,004 $ 90,808 ̶ ̶ ̶ $ The Company has outstanding stock options issued under its 2000, 2010 and 2012 stock option plans. No further options may be granted under the 2000 and 2010 stock option plans. In January 2014, the aggregate pool of options to purchase common stock that could be granted under the 2012 plan was increased by 400,000 to 1,500,000. In June 2015, the option pool was increased by 715,698 to 2,215,698. Stock options are granted with an exercise price equal to or greater than the stock’s TSX price at the date of grant as determined by the Board of Directors and the maximum term of an option is typically ten years. Options are granted periodically and typically vest over four years. 22 ̶ ̶ ̶ ̶ ̶ ̶ ̶ ̶ ̶ Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 10. Share capital (continued): Stock option plans (continued): A summary of the status of the plan is as follows: December 31, 2015 Weighted average Shares exercise price December 31, 2014 Weighted average exercise price Shares 2,170,802 1,048,000 (622,328) (24,818) (450) $ 5.74 29.71 2.99 9.26 0.87 1,945,580 865,000 (534,272) (102,506) (3,000) $ 2.21 10.91 1.25 5.58 3.20 2,571,206 $ 15.62 2,170,802 $ 5.74 787,393 $ 3.97 880,642 $ 2.26 Options outstanding, beginning of year Granted Exercised Forfeited Expired Options outstanding, end of year Options exercisable, end of year The following table summarizes information about stock options outstanding at December 31, 2015: Options outstanding Options exercisable Range of exercise prices Number outstanding at 12/31/15 Weighted average Weighted average exercise price remaining contractual life $ 0.95 to 3.20 6.60 to 9.75 10.50 to 15.35 15.70 to 22.65 27.39 to 32.90 736,056 654,150 135,000 261,000 785,000 6.06 8.09 8.86 9.30 9.96 $ 2.51 9.57 12.61 19.76 32.10 Number exercisable at 12/31/15 620,743 144,150 22,500 ‒ ‒ Weighted average exercise price $ 2.38 9.45 12.57 ‒ ‒ 2,571,206 8.24 $ 15.62 787,393 $ 3.97 23 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 10. Share capital (continued): Stock option plans (continued): At December 31, 2015, there were 72,698 (2014 -384,250) stock options available for grant under the Plan. In 2015, the Company granted 1,048,000 (2014 - 865,000) options and recorded share- based compensation expense of $2,997 (2014 - $2,144) related to the vesting of options granted in 2015 and previous years. The per share weighted-average fair value of stock options granted in 2015 was $9.84 (2014 - $5.73) on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: exercise price is equal to the price of the underlying share, expected dividend yield 0%, risk-free interest rate of 1.64% (2014 - 1.98%), an expected life of 3 to 8 years (2014 - 8 years), and estimated volatility of 40% (2014 - 46%). Volatility is estimated based on Kinaxis’ historical volatility and also by benchmarking to comparable publicly traded companies operating in a similar market segment. The forfeiture rate was estimated at 10% (2014 - 5%). In 2015, optionholders that had options with U.S. dollar strike prices were given the option to convert them to Canadian dollar strike prices based on the exchange rate that would be in effect on the date of the election, being May 7, 2015. The conversion was accounted for as a modification. As the fair value of the options was the same immediately prior to and after the conversion there was no accounting impact resulting from the modification. Share Unit Plan At December 31, 2015, there were 566,000 (2014 – 670,000) share units available for grant under the Plan. In 2015, the Company granted 95,000 (2014 – 80,000) restricted share units (“RSU”). There were 89,999 (2014 – 53,333) RSUs outstanding at December 31, 2015. Each RSU entitles the participant to receive one Common Share. The RSUs vest based over time in three equal annual tranches. The fair value of the RSUs granted in 2015 was $17.35 (2014 - $11.91) per unit using the fair value of a Common Share at time of grant. The Company recorded share-based compensation expense for the year ended December 31, 2015 of $1,299 (2014 - $514) related to the RSUs. On December 10, 2015, 58,334 of the RSUs granted in 2015 and prior years vested and were released. In 2015, the Company granted 9,000 deferred share units (“DSU”). There were 9,000 DSUs outstanding at December 31, 2015. Each DSU entitles the participant to receive one Common Share. The DSUs vest immediately as the participants are entitled to the shares upon termination of their service. The fair value of the DSUs granted was $17.35 per unit using the fair value of a Common Share at time of grant. The Company recorded share-based compensation expense for the year ended December 31, 2015 of $156 (2014 - $NIL) related to the DSUs. 24 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 10. Share capital (continued): Stock option plans (continued): The following table presents the share-based payments expense by function: Cost of revenue Selling and marketing Research and development General and administrative 11. Earnings (loss) per share: $ 2015 854 863 995 1,740 $ 2014 331 621 533 1,173 $ 4,452 $ 2,658 The following table summarizes the calculation of the weighted average number of basic and diluted common shares. Issued common shares at beginning of period 23,739,342 13,006,553 2015 2014 Effect of shares issued for cash Effect of shares issued per offering Effect of preferred shares converted to Common Shares Effect of fractional shares cancelled upon conversion Effect of shares issued from exercise of options Effect of shares issued from vesting of restricted share units ‒ 50,440 ‒ 2,802,198 ‒ 2,864,921 ‒ 210,911 (37) 350,851 3,356 1,538 Weighted average number of basic common shares at December 31 23,953,609 19,076,464 Effect of share options on issue 1,401,382 Effect of share units on issue 110,641 Weighted average number of diluted common ‒ ‒ shares at December 31 25,465,632 19,076,464 For the year ended December 31, 2015, 841,000 options were excluded from the weighted average number of diluted common shares as their effect would have been anti-dilutive. Due to the loss in December 31, 2014 all outstanding options, restricted share units and redeemable preferred shares were excluded from the diluted weighted average number of shares as their effect would have been anti-dilutive. 25 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 12. Revenue: Subscription Professional services Maintenance and support 13. Research and development: Research and development expenses Investment tax credits 2015 2014 $ $ 65,199 25,002 1,070 51,119 17,755 1,180 $ 91,271 $ 70,054 2015 2014 $ 16,786 (1,589) $ 15,422 (1,993) $ 15,197 $ 13,429 14. Personnel expenses: The following table presents the personnel expenses incurred by the Company for the years ended December 31, 2015, and 2014: Salaries including bonuses Benefits Commissions Share-based payments 2015 2014 $ 33,099 5,334 5,718 4,452 $ 31,028 4,555 5,783 2,658 $ 48,603 $ 44,024 15. Net finance (expense) income: The following table presents the net finance (expense) income incurred by the Company: Interest income on cash equivalents Less finance costs: Interest expense on long term debt 2015 2014 $ 128 $ 40 ‒ (530) $ 128 $ (490) 26 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 16. Income taxes: The income tax amounts recognized in profit and loss are as follows: Current tax expense Current income tax Deferred tax expense (recovery): Origination and reversal of temporary differences 2015 2014 $ 3,487 3,487 $ 819 819 6,729 6,729 3,823 3,823 $ 10,216 $ 4,642 A reconciliation of the income tax expense to the expected amount using the Company’s Canadian tax rate is as follows: Canadian tax rate 2015 2014 26.50% 26.50% Expected Canadian income tax expense $ 6,067 $ 1,172 Increase (reduction) in income taxes resulting from: Tax effect of loss due to change in fair value of preferred shares ‒ Difference between current and future tax rates and other (149) Foreign tax rate differences Permanent difference of share-based payments Foreign exchange differences 214 1,180 2,904 1,791 (5) 221 704 759 $ 10,216 $ 4,642 Taxable foreign exchange differences arise upon conversion of the financial statements of Kinaxis Inc. from U.S. dollars, its functional currency, to Canadian dollars, the currency used for tax filing purposes. 27 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 16. Income taxes (continued): The tax effects of temporary differences and carry-forwards are as follows: Deferred tax assets (liabilities): Non-capital loss carry-forwards Unclaimed scientific research and experimental development Tax effect of investment tax credits Share issuance costs Property and equipment Other 2015 2014 $ ‒ $ 2,509 ‒ (948) 732 (827) 2,013 (867) 1,138 863 40 70 $ (1,003) $ 5,726 The movements in the deferred tax balances were as follows: Balance at January 1, 2015 Recognized in profit and loss Balance at Recognized December 31 2015 in equity Non-capital loss carry-forwards Unclaimed scientific research and experimental development Tax effect of investment tax credits Share issuance costs Property and equipment Other $ 2,509 $ (2,509) $ 2,013 (867) 1,138 863 70 (2,013) (81) (406) (1,690) (30) ‒ ‒ ‒ ‒ ‒ ‒ $ ‒ ‒ (948) 732 (827) 40 $ 5,726 $ (6,729) $ ‒ $ (1,003) 28 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 16. Income taxes (continued): Non-capital loss carry-forwards Unclaimed scientific research and experimental development Tax effect of investment tax credits Share issuance costs Property and equipment Other Balance at January 1, 2014 Recognized in profit and loss Balance at Recognized December 31 2014 in equity $ 6,349 $ (3,840) $ ‒ $ 2,509 1,828 (1,480) ‒ 1,407 62 185 613 (245) (544) 8 ‒ ‒ 1,383 ‒ ‒ 2,013 (867) 1,138 863 70 $ 8,166 $ (3,823) $ 1,383 $ 5,726 The Company has non-capital losses available to reduce taxable income of $Nil as at December 31, 2015 (2014 - $9,470). The Company has investment tax credits available to reduce federal income taxes payable in Canada of $2,083 as at December 31, 2015 (2014 - $2,643) which begin to expire in 2033 and provincial income taxes payable in Ontario of $Nil as at December 31, 2015 (2014 - $448). The Company recognizes deferred tax assets pursuant to an assessment of the likelihood that the Company will generate sufficient future taxable income against which the benefit of the deferred tax assets may or may not be realized. This assessment requires management to exercise significant judgment and make estimates with respect to the Company’s ability to generate taxable income in future periods and utilize deferred tax assets. The Company considered all existing evidence in performing this assessment including the history of profitability, secured backlog, forecasted earnings potential for new business growth, and the ability to realize the assets prior to expiry. Deferred tax liabilities have not been recognized for temporary differences associated with investments in subsidiaries as the Company is able to control the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. The aggregate amount of these temporary differences at December 31, 2015 was $4,660 (2014 - $3,860). 29 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 17. Statement of cash flows: Changes in operating assets and liabilities: 2015 2014 Trade and other receivables Investment tax credits receivable Prepaid expenses Trade payables and accrued liabilities Deferred revenue $ 1,141 442 18 (2,737) 17,236 $ (4,696) (644) (729) 651 13,218 $ 16,100 $ 7,800 18. Financial instruments: Fair value of financial instruments The fair value of financial assets and liabilities, together with their carrying amounts are as follows: Carrying value 2015 Fair value Carrying value 2014 Fair value Financial assets Loans and receivables, measured at amortized cost: Cash and cash equivalents Trade and other receivables Investment tax credits receivable $ 99,390 15,833 1,532 $ 99,390 15,833 1,532 $ 56,725 17,023 1,974 $ 56,725 17,023 1,974 $ 116,755 $ 116,755 $ 75,722 $ 75,722 Carrying value 2015 Fair value Carrying value 2014 Fair value Financial liabilities Other financial liabilities, measured at amortized cost: Accounts payables and accrued liabilities $ 6,794 6,794 6,945 6,945 $ 6,794 $ 6,794 $ 6,945 $ 6,945 30 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 18. Financial instruments (continued): Measurement of fair value The Company’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are: Level 1 values are based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. Level 2 values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. When the inputs used to measure fair value fall within more than one level of the hierarchy, the level within which the fair value measurement is categorized is based on the Company’s assessment of the lowest level input that is the most significant to the fair value measurement. The fair value of financial assets and liabilities are determined as follows: • The carrying amounts of trade and other receivables, investment tax credits receivable and trade payables and accrued liabilities approximate fair market value due to the short-term maturity of these instruments. 31 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 18. Financial instruments (continued): Financial risk management: (a) Credit risk: Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company’s credit risk is primarily attributable to its trade and other receivables. The nature of the Company’s subscription based business results in payments being received in advance of the majority of the services being delivered; as a result, the Company’s credit risk exposure is low. At December 31, 2015, two customers accounted for greater than 10% of total trade receivables (2014 - one customer - 10%). For the year ended December 31, 2015, one customer individually accounted for 10.6% of revenue (2014 - no customer accounted for greater than 10%). As the majority of the Company’s revenues are earned over a period of time, the potential impact on the Company’s operating results is low as any uncollectible amounts would affect trade and other receivables and deferred revenue. The maximum exposure to credit risk for trade receivables by geographic region was as follows: Canada United States Other foreign $ 2015 265 14,056 591 $ 2014 430 15,049 908 $ 14,912 $ 16,387 The aging of the trade receivables at the reporting date was as follows: Current Past due: 0 – 30 days 31 – 60 days Greater than 60 days 2015 2014 $ 10,096 $ 13,757 $ 4,440 235 141 $ 2,250 195 185 $ 14,912 $ 16,387 32 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 18. Financial instruments (continued): Financial risk management (continued): (a) Credit risk (continued): The Company establishes an allowance for doubtful accounts based on amounts which are past due, historical trends, and any available information indicating that a customer could be experiencing liquidity or going concern problems. During the year ended December 31, 2015, the Company did not write off any trade receivables that were deemed not collectible and did not record an allowance for doubtful accounts as at December 31, 2015 (2014 - $Nil). The Company invests its excess cash in short-term investments with the objective of maintaining safety of principal and providing adequate liquidity to meet all current payment obligations and future planned capital expenditures with the secondary objective of maximizing the overall yield of the investment. The Company manages its credit risk on investments by dealing only with major Canadian banks and investing only in instruments that management believes have high credit ratings. Given these high credit ratings, the Company does not expect any counterparties to these investments to fail to meet their obligations. The Company’s exposure to credit risk is limited to the carrying amount of financial assets recognized at the date of Consolidated Statement of Financial Position, as summarized below: Cash and cash equivalents Trade and other receivables Investment tax credits receivable (b) Liquidity risk: $ 2015 99,390 15,833 1,532 $ 2014 56,725 17,023 1,974 $ 116,755 $ 75,722 Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity risk to is ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. The Company also manages liquidity risk by continuously monitoring actual and budgeted expenses. Furthermore, the Board of Directors reviews and approves the Company’s operating and capital budgets, as well as any material transactions out of the ordinary course of business, including acquisitions or other major investments or divestitures. At December 31, 2015, the Company had cash and cash equivalents totaling $99,390 (2014 - $56,725). Further, the Company has a credit facility as disclosed in note 7. 33 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 18. Financial instruments (continued): (b) Liquidity risk (continued): The following are the remaining contractual maturities of financial liabilities at December 31, 2015 and 2014: December 31, 2015 Trade payables and accrued liabilities Contractual cash flows Carrying amount Total 3 months or less 3 to 12 months 1 to 5 years More than 5 years $ 6,794 $ 6,794 $ 6,794 $ 6,794 $ 6,794 $ 6,794 $ $ ‒ ‒ $ $ ‒ $ ‒ ‒ $ ‒ Contractual cash flows Carrying amount Total 3 months or less 3 to 12 months 1 to 5 years More than 5 years $ 6,945 $ 6,945 $ 6,945 $ 6,945 $ 6,945 $ 6,945 $ $ ‒ ‒ $ $ ‒ $ ‒ ‒ $ ‒ December 31, 2014 Trade payables and accrued liabilities (c) Market risk: Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company’s income or the value of its holdings of financial instruments. Currency risk A portion of the Company’s revenues and operating costs are realized in currencies other than its functional currency, such as the Canadian dollar, Euro, Hong Kong dollar and Japanese Yen. As a result, the Company is exposed to currency risk on these transactions. Also, additional earnings volatility arises from the translation of monetary assets and liabilities denominated in foreign currencies at the rate of exchange on each date of the Consolidated Statements of Financial Position; the impact of which is reported as a foreign exchange gain or loss. 34 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 18. Financial instruments (continued): (c) Market risk (continued): The Company’s objective in managing its currency risk is to minimize its exposure to currencies other than its functional currency. The Company does so by matching foreign denominated assets with foreign denominated liabilities. The Company is mainly exposed to fluctuations between the U.S. dollar and the Canadian dollar. For the year ending December 31, 2015, if the Canadian dollar had strengthened 5% against the U.S. dollar with all other variables held constant, pre-tax income for the year would have been $1,099 lower (2014 - $984 lower). Conversely, if the Canadian dollar had weakened 5% against the U.S. dollar with all other variables held constant, there would be an equal, and opposite impact, on pre-tax income. The summary quantitative data about the Company’s exposure to currency risk is as follows: December 31, 2015 In thousands of (local currency) USD CAD JPY EUR HKD Trade receivables Other receivables Trade payables Accrued liabilities 14,321 587 (86) (3,198) – 253 (301) (3,337) 27,986 3,891 (46,872) (33,092) 329 152 22 (105) – – (43) (278) 11,624 (3,385) (48,087) 398 (321) December 31, 2014 In thousands of (local currency) USD CAD JPY EUR HKD Trade receivables Other receivables Trade payables Accrued liabilities Interest rate risk 15,480 576 (354) (3,985) – 45 (25) (1,988) 60,328 – (31,145) (21,095) 332 4 – (95) – – (18) (528) 11,717 (1,968) 8,088 241 (546) Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. The Company believes that interest rate risk is low as the majority of investments are made in fixed rate instruments. At December 31, 2015, the Company has not drawn on the revolving demand facility. 35 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 19. Segmented information: The Company’s Chief Executive Officer (“CEO”) has been identified as the chief operating decision maker. The CEO evaluates the performance of the Company and allocates resources based on the information provided by the Company’s internal management system at a consolidated level. The Company has determined that it has only one operating segment. Geographic information Revenue from external customers is attributed to geographic areas based on the location of the contracting customers. External revenue on a geographic basis is as follows: United States Canada Europe Japan Other foreign $ 2015 75,864 7,923 2,955 4,403 126 $ 2014 56,317 5,829 4,077 3,693 138 $ 91,271 $ 70,054 Total property and equipment on a geographic basis are as follows: 2015 2014 Canada United States 2,084 5 Japan $ 5,263 $ 3,453 1,284 7 $ 7,352 $ 4,744 20. Commitments: The Company’s minimum payments required under operating leases are as follows: Less than one year Between one and five years More than five years $ 1,462 5,097 1,374 $ 7,933 The Company’s operating leases are primarily for office space. These leases generally contain renewal options for periods ranging from one to five years and require the Company to pay operating costs such as utilities and maintenance. Gross rental expense for operating leases for the year ending December 31, 2015 was $961 (2014 - $898). 36 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 21. Related party transactions: Details of the Company’s subsidiaries at December 31, 2015 and 2014 are as follows: Name of subsidiary activity operation voting power held Principle Place of incorporation and Proportion of ownership interest and Kinaxis Corp. Sales State of Delaware, USA Kinaxis Japan K.K. Sales Japan Kinaxis Europe B.V. Sales The Netherlands Kinaxis Asia Sales Hong Kong 2015 100% 100% 100% 100% 2014 100% 100% 100% 100% Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. During the year, the Company did not enter into any related party transactions. Compensation of key management personnel The Company defines key management personnel as being the Board of Directors, the CEO and his direct reports. The remuneration of directors and other members of key management personnel during the year were as follows: Salary and other short-term benefits Share-based payments 2015 $ 3,206 2,456 $ 2014 2,772 1,309 $ 5,662 $ 4,081 37 Kinaxis Inc. Notes to Consolidated Financial Statements Years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars, except share and per share amounts) 22. Capital management: The Company’s capital is composed of its shareholders’ equity. The Company’s objective in managing its capital is to ensure financial stability and sufficient liquidity to increase shareholder value through organic growth and investment in sales, marketing and product development. The Company’s senior management is responsible for managing the capital through regular review of financial information to ensure sufficient resources are available to meet operating requirements and investments to support its growth strategy. The Board of Directors is responsible for overseeing this process. In order to maintain or adjust its capital structure, the Company could issue new shares, repurchase shares, approve special dividends or issue debt. The Company has access to a revolving demand facility bears interest at bank prime plus 0.50% per annum which has not been drawn as at December 31, 2015. The terms of the facility require the Company to meet certain financial covenants which are monitored by senior management to ensure compliance. 23. Contingencies: In the normal course of business, the Company and its subsidiaries enter into lease agreements for facilities or equipment. It is common in such commercial lease transactions for the Company or its subsidiaries as the lessee to agree to indemnify the lessor and other related third parties for liabilities that may arise from the use of the leased assets. The maximum amount potentially payable under the foregoing indemnities cannot be reasonably estimated. The Company has liability insurance that relates to the indemnifications described above. The Company includes standard intellectual property indemnification clauses in its software license and service agreements. Pursuant to these clauses, and subject to certain limitations, the Company holds harmless and agrees to defend the indemnified party, generally the Company’s business partners and customers, in connection with certain patent, copyright or trade secret infringement claims by third parties with respect to the Company’s products. The term of the indemnification clauses is generally for the subscription term and applicable statutory period after execution of the software license and service agreement. In the event an infringement claim against the Company or an indemnified party is successful, the Company, at its sole option, agrees to do one of the following: (i) procure for the indemnified party the right to continue use of the software; (ii) provide a modification to the software so that its use becomes non-infringing; (iii) replace the software with software which is substantially similar in functionality and performance; or (iv) refund the residual value of the software license fees paid by the indemnified party for the infringing software. The Company believes the estimated fair value of these intellectual property indemnification clauses is minimal. Historically, the Company has not made any significant payments related to the above-noted guarantees and indemnities and accordingly, no liabilities have been accrued in the consolidated financial statements. 38 

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