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Annual Report 2016

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ANNUAL REPORT 2016 Year ended March 31, 2016 Stingray Digital Group Inc. A n n u a l R e p o r t 2 0 1 6 | S t i n g r a y D g i t a i l G r o u p I n c ALL GOOD VIBES TABLE OF CONTENT 01 Word from the CEO 05 06 08 14 18 44 Management Discussion and Analysis Company Profile Business Strategy Competitive Strength Key Business Risks Consolidated Financial Statements Eric Boyko, President, Co-founder and Chief Executive Officer WORD FROM THE CEO Dear shareholders, customers, partners, and colleagues, What a year it’s been for Stingray since our initial public offering in June 2015; a year when we succeeded in meeting the key objectives laid out in our prospectus, executed four (4) complex acquisitions – delivering on our ambitious business plan – focused on growth, seized strategic opportunities, and expanded our product offering to meet the needs of an evolving marketplace. Stingray’s executive team, board of directors, and employees are dedicated to delivering shareholders with value through thoughtful and sustained growth strategies. As always, this year we executed all operations with strict financial discipline. We increased our revenue by 26.7% to $89.9 million leading to a 22.1% increase of our recurring revenue. A predictable and sustained long-term growth of recurring revenues is one of Stingray’s key success indicators. With the benefit of international expansions via recent acquisitions such as the Brava Group in Netherlands, iConcerts in Europe and Asia, and Digital Music Distribution PTY (DMD) in Australia and organic growth, we continue to deliver strong results. We show growth in our operating results with an Adjusted EBITDA of $31.0 million, 13.7% above last year. Net income reached $13.9 million ($0.29 per share), an increase of 110.1% over last year. Our ability to generate cash flow remained an area of strength. Adjusted free cash flow reached $24.0 million representing an increase of 40.8% over last year. Cash flow from operating activities generated $19.0 million this year, an increase of 91.4% over last year. We are well positioned to capture growth opportunities and continue to generate strong value to shareholders. Over the past twelve months, our global subscriber reach across all products and services jumped from 110 million in 111 countries to 400 million in 152 countries. Our most impressive strides occurred in the Asia-Pacific region where, thanks to strategic acquisitions (iConcerts, DMD) and partnerships (Multichannels Asia), we gained important footholds in Singapore, South Korea, China, and Australia. High-quality, curated content continues to propel us to industry-leading positions. This year alone, we introduced Stingray Ambiance 4K, the first 4K UHD television channel in North America, and launched Vibes channels, a new and exciting feature of our Stingray Music mobile app. The 2,000 Vibes channels – currently available in Canada, Latin American, and the Netherlands – have been crucial in driving Stingray’s popularity with younger consumers. The proportion of Stingray Music listeners aged 18-34 reached a record 36% in 2015. Additionally, our product portfolio also experienced exceptional growth. In recent months we added two long-form television channels, Stingray Brava (classical music, opera, and ballet) and Stingray DJazz (jazz and jazz related genres) to our already diverse offering. The renewal and expansion of distribution agreements with some of the industry’s most important Pay-TV providers, amongst them Comcast and AT&T (United States), Telus (Canada), duTV (United Arab Emirates), and Telefonica (Latin America), underscore the trust clients have in Stingray’s offering and its capacity to engage subscribers with the highest quality music products and services. We’ve also inked agreements with Vidéotron Mobile, Sonos and Sonify, thus diversi- fying our distribution platforms. Revenues & Recurring Revenues $89.9 $71.0 $77.6 $63.5 $60.0 $51.8 2014 2015 2016 Non-recurring revenues Recurring revenues 1 Annual Report 2016 | Stingray Digital Group Inc.With the acquisition of Nümedia and the integration of Groupe Viva, we continue to ensure the development of Stingray Business, our commercial services division. Stingray Business had a banner year, completing pio- neering digital experience projects for Sports Experts, signing in-store music deals with the Liquor Control Board of Ontario and The Second Cup, and winning numerous awards. We are also incredibly proud to have been awarded “Best IR for an IPO” at the 2016 IR Magazine Awards – Canada and to have obtained a five-year renewal of our broadcasting license by the Canadian Radio-tele- vision and Telecommunications Commission (CRTC), enabling us to build our future on solid foundations. Looking to the future, I am confident Stingray will con- solidate its gains and pursue its global expansion. By 2020, we expect that international revenue will make up 70% of total revenue. I wish to take this opportunity to thank our clients and investors for their indefectible confidence, and every member of the Stingray team for their enthusi- asm, loyalty and vision. Together we can rise to any challenge and will reach Stingray’s goal of becoming the world-leading provider of curated music content, products, and services. Net Income & Adjusted EBITDA $13.9 $8.7 $6.6 Net income(1) $31.0 $27.3 $24.4 Adjusted EBITDA(1)(2) 2014 2015 2016 Eric Boyko 2 Cash Flow $9.9 $24.0 $19.0 $17.0 CF from operating activities Adjusted free cash flow(1)(2) 2015 2016 Notes: (1)In millions of Canadian dollars. (2) Refer to “Supplemental information on Non-IFRS measures” on page 21 and 25. Annual Report 2016 | Stingray Digital Group Inc.Stephanie Johnston | Marketing Manager Sasha Omer | Content Coordinator ‘‘Over the past twelve months, our global subscribers reach across all products and services jumped from 110 million in 111 countries to 400 million in 152 countries.’’ MANAGEMENT’S DISCUSSION AND ANALYSIS (cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:180)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:173)(cid:86)(cid:3)(cid:39)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3)(cid:11)(cid:170)(cid:48)(cid:39)(cid:9)(cid:36)(cid:171)(cid:12)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) (cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:180)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:87)(cid:76)(cid:81)(cid:74)(cid:85)(cid:68)(cid:92)(cid:3)(cid:39)(cid:76)(cid:74)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:15)(cid:3)(cid:11)(cid:170)(cid:54)(cid:87)(cid:76)(cid:81)(cid:74)(cid:85)(cid:68)(cid:92)(cid:171)(cid:3)(cid:82)(cid:85)(cid:3)(cid:170)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:171)(cid:12)(cid:15)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:75)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:69)(cid:72)(cid:3)(cid:85)(cid:72)(cid:68)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:82)(cid:81)(cid:77)(cid:88)(cid:81)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:173)(cid:86)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:180)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) (cid:68)(cid:70)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:81)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:48)(cid:39)(cid:9)(cid:36)(cid:3)(cid:85)(cid:72)(cid:181)(cid:72)(cid:70)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3) (cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:45)(cid:88)(cid:81)(cid:72)(cid:3)(cid:20)(cid:24)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:17)(cid:3)(cid:36)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3) on SEDAR at www.sedar.com. Rowan Bovaird | Administrative Assistant R&D and Marketing Laurent Charlot |(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:87) Kris Garcia | IT Administrator Geneviève Bélanger | Content Coordinator & Music Programmer COMPANY PROFILE Stingray is the leading B2B music products, services, and content provider operating on a global scale, reaching an estimated 400 million Pay-TV subscribers (or households) in 152 countries. Stingray is headquartered in Montreal and currently has close to 300 employees worldwide, including a team of expert music programmers. With its extensive product portfolio, Stingray is the one-stop-shop for Pay-TV providers looking for a diverse, high-quality, and expertly curated music offering; on TV, mobile and the web. Stingray offers its client a selection of multiplatform products (Stingray Music and Stingray Karaoke), long-form television channels (iConcerts,  Stingray Brava, Stingray Djazz, and Stingray Ambiance), and music video television channels (Stingray LiteTV).  Company Highlights HEADQUARTERS Montreal, Canada OFFICES United States, United Kingdom, Netherlands, Switzerland, France, Israel, Australia and South Korea 6 Zac Monson | Music Programmer & Host of PausePlay Phil Séguin | Programming Assistant Simon Tremblay | IT Technician Valérie Lamarche | Human Resources Advisor Rowan Bovaird | Administrative Assistant R&D and Marketing Sarah Després-Kaba | Associate, Sales and Affiliate Relations Annual Report 2016 | Stingray Digital Group Inc.COMPANY HIGHLIGHTS $180 million raised from June 3, 2015, IPO Over 1/3 of our listeners are between 18 34 subscribers reach of More than 10 million Canadians listen to Stingray every day 300 400 152 millions across all services in countries employees worldwide 7 Annual Report 2016 | Stingray Digital Group Inc.BUSINESS STRATEGY (cid:50)(cid:88)(cid:85)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:82)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:74)(cid:74)(cid:85)(cid:72)(cid:86)(cid:86)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:54)(cid:87)(cid:76)(cid:81)(cid:74)(cid:85)(cid:68)(cid:92)(cid:173)(cid:86)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:3) value to investors. We believe that we can achieve our goal by expanding and diversifying our client base, by developing new products, technologies, and digital platforms, and by continuing to pursue strategic acquisitions. Expand and diversify our client and partner base Stingray’s continued global success is due in great part to leveraging our clients’ trust and providing them with the highest level of service. This year, we continued to grow and strengthen our customer base and the distribution of our services. New Clients Renewed and Expanded Contracts Agreements SKY LATIN AMERICA TELEFONICA LATIN AMERICA DU TV (UAE) LCBO SPORTS EXPERTS VIDEOTRON MOBILE TELUS COGECO AT&T 8 Annual Report 2016 | Stingray Digital Group Inc. Develop new products, technologies and digital platforms Stingray has invested over $40 M in research and development. To maintain our position as world-leading multiplatform music products and services provider, we strive to constantly be at the cutting-edge of technology. 2 Highlights Launch of Stingray Ambiance, the first 100% 4K Ultra High Definition channel in North America Launch of Stingray Music on Sonos Launch of Stingray Music mobile app on tablet In Canada, the Stingray Music mobile app reaches an 8% penetration rate Release of 2,000 Vibes channels in the Stingray Music mobile app Introduction of Stingray Pass, a proprietary audio-watermarking technology 9 Annual Report 2016 | Stingray Digital Group Inc.Steven Chan | Software Developer Stéphanie Ip | IT Project Manager Sébastien Dion | Software Developer Daniel Lajoie | QA Manager Stingray has a track record of acquiring established, dynamic, and creative companies and partnering with industry leaders to achieve its aggressive global expansion plan. 3 Continue to pursue strategic acquisitions Highlights Expanded foothold in Asia-Pacific Subscribers reach jumps from 110 million to 400 million households Stingray now distributed in 152 countries Acquisitions Stingray Now the World’s Largest Digital Live Music Concerts TV Broadcaster Acquisition of iConcerts, a TV channel dedicated solely to live music (distribution in 85 countries to an estimated 250 M households) Stingray Enters the Australian Market Acquisition of Digital Music Distribution Pty Ltd., Australia’s most important digital music services provider. Stingray Diversifies its Product Offering and Expands its European Distribution Acquisition of Brava NL, Brava HD and Djazz, distributors of three successful thematic channels dedicated to high-end music and cultural content (distribution in 50 countries to an estimated 35 M households) New Partnership Stingray Enters into Strategic Partnership in Asia Strategic relationship with Multi Channels Asia (MCA), a Singapore-based media company, which owns, repre- sents and distributes a number of thematic Pay-TV networks serving Asia and the Pacific. 11 Annual Report 2016 | Stingray Digital Group Inc.New Markets since July 2015 2015 2016 12 (cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:95)(cid:3)(cid:54)(cid:87)(cid:76)(cid:81)(cid:74)(cid:85)(cid:68)(cid:92)(cid:3)(cid:39)(cid:76)(cid:74)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17) (cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:95)(cid:3)(cid:54)(cid:87)(cid:76)(cid:81)(cid:74)(cid:85)(cid:68)(cid:92)(cid:3)(cid:39)(cid:76)(cid:74)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17) 13 COMPETITIVE STRENGTHS We believe that the following competitive strengths will contribute to our ongoing commercial success and future performance: solutions provider 1 Leading B2B multi-platform music and in-store media With 400 million subscribers in 152 countries, our total reach is one of the largest relative to our peers. Our products and services are distributed through numerous platforms including digital TV, satellite TV, IPTV, the Internet, mobile devices, Wi-Fi systems, and game consoles. Total Reach (millions1) 2016 2015 2014 2013 110 95 63 400 We count Bell, AT&T, Rogers, Shaw, Vidéotron, Comcast, Cogeco, ALDO, and Sobeys amongst our blue- chip clients. We continue to build brand awareness through digital marketing, social media, television/media advertising, and trade marketing across Canada, the United States, Latin America, Europe and the rest of the world. 14 14 Annual Report 2016 | Stingray Digital Group Inc. Annual Report 2016 | Stingray Digital Group Inc.2 3 Strong and predictable cash flows from long-term contracts and client relationships Our business model is based on subscription revenues and long-term agreements with Pay-TV providers, which gives us significant predictability of future cash flows, reduces cyclicality of earnings, and increases customer retention. As a result, we have established deeply integrated relationships with many of our customers, providing recurring annual revenues of $86 million at the end of Fiscal 2016 (89% of our total revenue). We have implemented a non-interactive, linear business model that results in an advantageous rights structure (compared to service providers operating on an interactive and B2C business model). The lower cost of rights, our operational leverage and our value proposition help con- tribute to and support our margins. As a result, our revenue and cash flows are strong, predictable and growing, permitting us to pursue our proven track record of successful acquisitions and invest in product development. Proprietary innovative technologies We are a leader and innovator in the digital music space, and as such have developed a unique set of proprietary technologies that provide us with an important competitive advantage. We have extensive experience in developing technologies to distribute digital music on multiple platforms such as TV, mobile devices and the web. This expertise enables us to continuously build our customer base and expand our service offering to new customers. For instance, the Stingray Music mobile app is an innovative product that uses audio watermarking technology (Stingray Pass) to instantly authenticate Pay-TV subscribers who have access to Stingray Music audio channels on TV. Annual Report 2016 | Stingray Digital Group Inc. 15 15 Annual Report 2016 | Stingray Digital Group Inc.4 5 6 Track record of successful acquisitions and integrations Since Stingray’s inception in 2007, we have completed 24 acquisitions representing outlays of approximately $181 million, which brought new clients, new products and new geographical markets to our business. In Fiscal 2016, we have completed four acquisitions on four continents for an aggregate purchase value of $33.1 million. Stingray’s proven track record of successfully integrating these acquisitions is a result of our experienced management team’s rigorous and disciplined acquisition strategy. The versatility, portability and flexibility of Stingray’s products and technologies permit us to efficiently inte- grate and support the complementary products and technologies of the businesses we acquire. Leading content curation expertise Our business strategy is based on a lean-back, rather than lean-forward, music consumption model. Stingray provides some of the world’s most comprehensive music libraries and channels, all programmed by 100 expert programmers around the world. Our music products and services are adapted to local tastes and trends to create the ultimate user experience, all without adver- tisements or interruptions. Music that has been curated by humans provides a true, emotional connection. Stingray there- fore offers a more enjoyable and tailored listening experience. As a result, our content curation expertise leads to stronger relationships with listeners who become increasingly engaged with our product offering. High employee retention rate and low turnover As an entrepreneurial and growing Canadian company, we attract and retain talented professionals. Our team of 300 dedicated individuals is comprised of experienced and knowledgeable operations, financial, technology, marketing and communications, sales, and legal and regulatory experts who, prior to joining Stingray, garnered extensive experience with other industry leaders. 16 16 Annual Report 2016 | Stingray Digital Group Inc. Annual Report 2016 | Stingray Digital Group Inc.PROVEN ACQUISITION STRATEGY $181 million spent on acquisitions since inception Became a leading player in Mexico and Latin America through 2 acquisitions in less than 12 months in 2014 Successfully delivered acquisition plan for Fiscal 2016 with entry in AsiaPacific 2007 2009 Slep-Tone Entert. Corp/SoundChoice (Karaoke Channel) Canadian Broadcast Corp. (Galaxie) MaxTrax Music Ltd. Chum Satellites Services (CTV) 2010 Marketing Senscity Inc. Concert TV Inc. 2011 Music Choice Int’l 2012 Musicoola Ltd. Zoe Interactive Ltd. 2014 2015 DMX LATAM (Mood Media) Les Réseaux Urbains Viva Inc. Archibald Media Group Brava Group DMX Canada (Mood Media) Digital Music Distribution Telefonica – On the Spot iConcerts 2013 Executive Communication Emedia Networks Inc. Stage One Innovations Ltd. Intertain Media Inc 2016 Nümedia (cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:95)(cid:3)(cid:54)(cid:87)(cid:76)(cid:81)(cid:74)(cid:85)(cid:68)(cid:92)(cid:3)(cid:39)(cid:76)(cid:74)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17) Annual Report 2016 | Stingray Digital Group Inc. 17 17 KEY BUSINESS RISKS The key risks and uncertainties of our business drive our operating strategies. Additional risks and uncertain(cid:16) ties not presently known to us, or that we currently consider immaterial, may also affect us. If any of the events (cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:76)(cid:180)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:88)(cid:81)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:82)(cid:70)(cid:70)(cid:88)(cid:85)(cid:15)(cid:3)(cid:54)(cid:87)(cid:76)(cid:81)(cid:74)(cid:85)(cid:68)(cid:92)(cid:173)(cid:86)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:15)(cid:3)(cid:180)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3) (cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:70)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:69)(cid:72)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:75)(cid:68)(cid:85)(cid:80)(cid:72)(cid:71)(cid:17)(cid:3)(cid:41)(cid:82)(cid:85)(cid:3)(cid:73)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:180)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:86)(cid:3)(cid:90)(cid:72)(cid:3)(cid:73)(cid:68)(cid:70)(cid:72)(cid:15)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3) (cid:44)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:41)(cid:82)(cid:85)(cid:80)(cid:3)(cid:11)(cid:36)(cid:44)(cid:41)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:68)(cid:74)(cid:72)(cid:3)(cid:20)(cid:27)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:54)(cid:40)(cid:39)(cid:36)(cid:53)(cid:3)(cid:68)(cid:87)(cid:3)(cid:86)(cid:72)(cid:71)(cid:68)(cid:85)(cid:17)(cid:70)(cid:82)(cid:80)(cid:17) Our key risks are displayed as follows: Public performance and mechanical rights and royalties Integrating business acquisitions Long-term plan to expand into international markets We pay public performance and mechanical royalties to songwriters and publishers through contracts negotiated with labels and music rights collection societies in various parts of the world. If public perfor(cid:16) mance or mechanical royalty rates for digital music are increased, our (cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:180)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3) performance and condition may be adversely affected. We mitigate this risk by operating, whenever possible, under statutory licensing regimes and structures applicable (cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:80)(cid:88)(cid:86)(cid:76)(cid:70)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3) The royalty rates to be paid pursuant to statutory licenses can be established by either negotia(cid:16) tion or through a rate proceeding conducted by the Copyright Board; such royalty rates are generally (cid:86)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:79)(cid:76)(cid:78)(cid:72)(cid:79)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:181)(cid:88)(cid:70)(cid:87)(cid:88)(cid:68)(cid:87)(cid:72)(cid:3) from year to year. The Corporation has made or entered into, and will continue to pursue, various acquisitions, business combinations and joint ventures intended to complement or expand our business. The Corporation may (cid:72)(cid:81)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:72)(cid:85)(cid:3)(cid:71)(cid:76)(cid:73)(cid:180)(cid:70)(cid:88)(cid:79)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:74)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) acquired assets with our operations. (cid:41)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:80)(cid:82)(cid:85)(cid:72)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3) (cid:81)(cid:82)(cid:87)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:180)(cid:87)(cid:86)(cid:15)(cid:3)(cid:72)(cid:70)(cid:82)(cid:81)(cid:82)(cid:80)(cid:76)(cid:72)(cid:86)(cid:3) of scale and synergies we antici(cid:16) pated when we entered into these transactions.To mitigate this risk, the Corporation has committed to develop and improve our operational, (cid:180)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:86)(cid:15)(cid:3) enhance our reporting systems and procedures and recruit, train and retain highly skilled personnel, all of which will enable the Corporation to properly leverage our services into new markets, platforms and technologies. A key element of our growth strategy is to continue to expand our operations into international markets. (cid:41)(cid:82)(cid:85)(cid:3)(cid:41)(cid:76)(cid:86)(cid:70)(cid:68)(cid:79)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:91)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:79)(cid:92)(cid:3) (cid:23)(cid:20)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:85)(cid:76)(cid:89)(cid:72)(cid:71)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3) customers outside of Canada. Operating in international markets (cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:86)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:180)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:85)(cid:72)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) management attention and will subject us to regulatory, economic and political risks that are different from those in Canada. To mitigate this risk, the Corporation has committed to develop and improve (cid:82)(cid:88)(cid:85)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:15)(cid:3)(cid:180)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) management controls, enhance our reporting systems and procedures and recruit, train and retain highly skilled personnel, all of which will enable the Corporation to continue to expand into international markets. 18 Annual Report 2016 | Stingray Digital Group Inc. Pay-TV providers dependence Rapid growth in evolving market The majority of the Stingray (cid:48)(cid:88)(cid:86)(cid:76)(cid:70)(cid:3)(cid:51)(cid:68)(cid:92)(cid:16)(cid:55)(cid:57)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:70)(cid:85)(cid:76)(cid:69)(cid:72)(cid:85)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3) reached through a small number of (cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:180)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:51)(cid:68)(cid:92)(cid:16)(cid:55)(cid:57)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:90)(cid:75)(cid:82)(cid:3) (cid:68)(cid:85)(cid:72)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:86)(cid:17)(cid:3) (cid:51)(cid:68)(cid:70)(cid:78)(cid:68)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:71)(cid:72)(cid:70)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:80)(cid:68)(cid:71)(cid:72)(cid:3)(cid:69)(cid:92)(cid:3)(cid:51)(cid:68)(cid:92)(cid:16) TV providers in respect of service offerings can impact the subscriber base. Moreover, the contractual (cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:51)(cid:68)(cid:92)(cid:16)(cid:55)(cid:57)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3) in Canada to distribute Stingray Music are subject to changes in CRTC rules, including the CRTC’s new policy framework set forth in Broadcasting Regulatory Policy (cid:38)(cid:53)(cid:55)(cid:38)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:16)(cid:28)(cid:25)(cid:17)(cid:3)(cid:54)(cid:72)(cid:72)(cid:3)(cid:170)(cid:53)(cid:72)(cid:70)(cid:72)(cid:81)(cid:87)(cid:3) (cid:39)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:36)(cid:44)(cid:41)(cid:171)(cid:17)(cid:3)(cid:3)(cid:58)(cid:72)(cid:3) mitigate this risk by understanding (cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:51)(cid:68)(cid:92)(cid:16)(cid:55)(cid:57)(cid:3) providers and offering compelling services, distributed across multiple platforms and proprietary technologies, with a demonstrable value proposition. Based on our strong relationships and our (cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:83)(cid:85)(cid:72)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3) (cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:51)(cid:68)(cid:92)(cid:16)(cid:55)(cid:57)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:3) Stingray expects that all Canadian (cid:51)(cid:68)(cid:92)(cid:16)(cid:55)(cid:57)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3) (cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:3)(cid:54)(cid:87)(cid:76)(cid:81)(cid:74)(cid:85)(cid:68)(cid:92)(cid:173)(cid:86)(cid:3)(cid:83)(cid:68)(cid:92)(cid:16)(cid:68)(cid:88)(cid:71)(cid:76)(cid:82)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3) on the most widely distributed (cid:88)(cid:81)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:180)(cid:85)(cid:86)(cid:87)(cid:16)(cid:87)(cid:76)(cid:72)(cid:85)(cid:3)(cid:83)(cid:68)(cid:70)(cid:78)(cid:68)(cid:74)(cid:72)(cid:3) (where available). The audio and video entertainment industry is rapidly evolving. The market for online digital music and videos has undergone rapid and dramatic changes in our relatively short history and is subject to (cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:180)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:70)(cid:75)(cid:68)(cid:79)(cid:79)(cid:72)(cid:81)(cid:74)(cid:72)(cid:86)(cid:17)(cid:3)(cid:44)(cid:81)(cid:3)(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3) our growth in certain markets could be impeded by existing contractual undertakings with competitors which forbid us to solicit customers in such markets. To mitigate this risk, our skilled and experienced sales personnel have placed a (cid:74)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3)(cid:72)(cid:80)(cid:83)(cid:75)(cid:68)(cid:86)(cid:76)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:70)(cid:85)(cid:82)(cid:86)(cid:86)(cid:16)(cid:86)(cid:72)(cid:79)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3) our growing suite of products and our capable engineers continue to innovate and develop new products and proprietary technologies to distribute digital music, which in turn allows us to attract and retain customers and expand our service offering on multiple digital platforms beyond the TV. To manage the growth of our operations and personnel, we continue to improve (cid:82)(cid:88)(cid:85)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:15)(cid:3)(cid:180)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) management controls and our reporting systems and procedures. Competition from other content providers The market for acquiring exclusive digital rights from content owners is competitive. Many of the more desirable music recordings are already subject to digital distribution agreements or have been directly placed with digital entertainment services. We face increasing competition for listeners and/or viewers from a growing variety of businesses that deliver audio and/or video media content through mobile phones and other wireless devices. The growth of social media could facilitate other forms of new entry that will compete with the Corporation. To mitigate this risk, the Corporation continues to rely upon human programming and content curation (cid:69)(cid:92)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:16)(cid:90)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:80)(cid:88)(cid:86)(cid:76)(cid:70)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:85)(cid:87)(cid:86)(cid:3) from around the world, each of whom adapt to the tastes and trends of listeners in order to create the ultimate user experience. In addition, the Corporation remains determined to create and acquire (cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:16)(cid:73)(cid:82)(cid:85)(cid:80)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:82)(cid:85)(cid:71)(cid:72)(cid:85)(cid:3) to grow its proprietary catalogue. Annual Report 2016 | Stingray Digital Group Inc. 19 EXECUTIVE OFFICERS Eric Boyko (cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:38)(cid:40)(cid:50)(cid:15)(cid:3)(cid:38)(cid:82)(cid:16)(cid:73)(cid:82)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) and Director Mario Dubois (cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:16)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) (cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:55)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:50)(cid:73)(cid:180)(cid:70)(cid:72)(cid:85) (cid:47)(cid:79)(cid:82)(cid:92)(cid:71)(cid:3)(cid:41)(cid:72)(cid:79)(cid:71)(cid:80)(cid:68)(cid:81) (cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:16)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) General Counsel Ratha Khuong General Manager, Stingray Business Inc. Mathieu Péloquin (cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:16)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3) Marketing and Communications Stephen Tapp Senior Vice President, Business Development (cid:45)(cid:72)(cid:68)(cid:81)(cid:16)(cid:51)(cid:76)(cid:72)(cid:85)(cid:85)(cid:72)(cid:3)(cid:55)(cid:85)(cid:68)(cid:75)(cid:68)(cid:81) (cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:73)(cid:180)(cid:70)(cid:72)(cid:85) Tom Pentefountas (cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:16)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3) International Sales, EMEA and Asia 20 Annual Report 2016 | Stingray Digital Group Inc. BASIS OF PREPARATION AND FORWARD LOOKING STATEMENTS This MD&A contains forward-looking information within the meaning of applicable Canadian securities laws. This forward-looking information includes, but is not limited to, statements with respect to management’s expectations regarding the future growth, results of operations, performance and business prospects of the Corporation. This forward-looking information relates to, among other things, our objectives and the strategies to achieve these objectives, as well as information with respect to our beliefs, plans, expectations, anticipations, estimations and intentions, and may also include other statements that are predictive in nature, or that depend upon or refer to future events or conditions. Statements with the words “could”, “expect”, “may”, “will”, “anticipate”, “assume”, “intend”, “plan”, “believes”, “estimates”, “guidance”, “foresee”, “continue” and similar expressions are intended to identify statements containing forward looking information, although not all forward-looking statements included such words. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management’s expectations, estimates and projections regarding future events. Although management believes the expectations reflected in such forward-looking statements are reasonable, forward-looking statements are based on the opinions, assumptions and estimates of management at the date the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking statements. These factors include, but are not limited to the following risk factors : increases in royalties or restricted access to music rights; our dependence on Pay-TV providers; the rapidly evolving audio and video entertainment industry; competition from other content providers; the expansion of our operations into international markets; our rapid growth and our growth strategy; our acquisitions, business combinations and joint ventures; our dependence on key personnel; exchange rate fluctuations; economic and political instability in emerging countries; royalty calculation methods; rapid technological and industry changes; unavailability of additional funding; failure to generate cash revenues; reliance on our credit facilities; costly and protracted litigation in defence of copyrighted content; our inability to protect our proprietary technology; our reliance on third party hardware, software and related services; our inability to maintain our corporate culture; unfavourable economic conditions; our exposure to foreign privacy and data security laws; unauthorized and pirated music and video content; natural catastrophic events and interruption by man-made problems; additional income tax liabilities; maintaining our reputation; litigation and other claims; credit risk; liquidity risk; failure to comply with CRTC requirements; failure to maintain or renew our CRTC licences; the increase in broadcasting licence fees payable by us; unfavourable changes in government regulation affecting our industry. In addition, if any of the assumptions or estimates made by management prove to be incorrect, actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this MD&A. Such assumptions include, but are not limited to, the following: our ability to generate sufficient revenue while controlling our costs and expenses; our ability to manage our growth effectively; the absence of material adverse changes in our industry or the global economy; trends in our industry and markets; the absence of any changes in law, administrative policy or regulatory requirements applicable to our business, including any change to our licences with the CRTC; minimal changes to the distribution of the pay audio services by Pay-TV providers in light of recent CRTC policy decisions; our ability to manage risks related to international expansion; our ability to maintain good business relationships with our clients, agents and partners; our ability to expand our sales and distribution infrastructure and our marketing; our ability to develop products and technologies that keep pace with the continuing changes in technology, evolving industry standards, new product introductions by competitors and changing client preferences and requirements; our ability to protect our technology and intellectual property rights; our ability to manage and integrate acquisitions; our ability to retain key personnel; and our ability to raise sufficient debt or equity financing to support our business growth. Accordingly, prospective purchasers are cautioned not to place undue reliance on such statements. All of the forward-looking information in this MD&A is qualified by these cautionary statements. Statements containing forward-looking information contained herein are made only as of the date of this MD&A. The Corporation expressly disclaims any obligation to update or alter statements containing any forward-looking information, or the factors or assumption underlying them, whether as a result of new information, future events or otherwise, except as required by law. SUPPLEMENTAL INFORMATION ON NON-IFRS MEASURES The Corporation believes that Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net income, Adjusted Net income per share, Adjusted free cash flow, Net debt including and excluding contingent considerations and Net debt to Adjusted EBITDA are important measures in evaluating our performance. Each of these non-IFRS financial measures is not an earnings or cash flow measure recognized by IFRS and does not have a standardized meaning prescribed by IFRS. Our method of calculating such financial measures may differ from the methods used by other issuers and, accordingly, our definition of these non-IFRS financial measures may not be comparable to similar measures presented by other issuers. Investors are cautioned that non-IFRS financial measures should not be construed as an alternative to net income determined in accordance with IFRS as indicators of our performance or to cash flows from operating activities as measures of liquidity and cash flows. Annual Report 2016 | Stingray Digital Group Inc. 21 KEY PERFORMANCE INDICATORS(1) For the year ended March 31, 2016: $89.9 M (cid:376) 26.7% from 2015 $77.6 M (cid:376) 22.1% from 2015 Revenues Recurring revenue $31.0 M 34.5% margin Adjusted EBITDA $24.0 M (cid:376) 36.3% from 2015 Adjusted free cash flow 41% $0.14 $13.9 M Of international revenues Annual dividend per share Or $0.29 per share Net income $19.0 M (cid:376) 91.4% from 2015 Cash flow from operating activities Note: (1) Refer to “Supplemental information on Non-IFRS measures” on page 21 and 25. For the years ended March 31, 2016 and 2015: Recurring Revenues (1)(2)(3) $89.9 $77.6 $71.0 $63.5 Net Income and Adjusted EBITDA(1)(2) $31.0 $27.1 $13.9 $6.6 CF from operating activities and Adjusted free cash flow(1)(2) $24.0 $19.0 $17.0 $9.9 2015 2016 Net income Adjusted EBITDA CF from operating activities Adjusted free cash flow Non-recurring revenues Recurring revenues 2015 2016 2015 2016 In millions of Canadian dollars. Notes: (1) (2) Refer to “Supplemental information on Non-IFRS measures” on page 21 and 25. (3) Recurring revenues include subscriptions and usage in addition to fixed fees charged to our customers on a monthly, quarterly and annual basis for continuous music services. Non-recurring revenues mainly include support, installation, equipment and one-time fees. 22 Annual Report 2016 | Stingray Digital Group Inc. FINANCIAL AND BUSINESS HIGHLIGHTS Highlights of the year ended March 31, 2016 Compared to the year ended March 31, 2015 (“Fiscal 2015”): (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) Revenues increased 26.7% to $89.9 million from $71.0 million for Fiscal 2015; Recurring revenues of $77.6 million (86% of total revenues), an increase of 22.1%; The contribution of International revenues increased to 40.5% from 32.8%; Adjusted EBITDA increased 13.7% to $31.0 million from $27.3 million for Fiscal 2015; Adjusted EBITDA margin was 34.5% compared with 38.4% for Fiscal 2015; Net income increased 110.1% to $13.9 million ($0.29 per share diluted) compared to $6.6 million ($0.19 per share diluted) for Fiscal 2015; Adjusted Net income increased 36.3% to $24.3 million ($0.50 per share diluted) compared to $17.8 million ($0.52 per share diluted) for Fiscal 2015; Cash flow from operating activities increased 91.4% to $19.0 million compared to $9.9 million for Fiscal 2015; and Adjusted free cash flow increased 40.8% to $24.0 million compared to $17.0 million for Fiscal 2015. Highlights of the fourth quarter ended March 31, 2016 Compared to the fourth quarter ended March 31, 2015 (“Q4 2015”): (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) Revenues increased 30.6% to $25.7 million from $19.6 million for Q4 2015; Recurring revenues of $21.9 million (85% of total revenues), an increase of 27.6%; The contribution of International revenues increased to 47.4% from 32.9%; Adjusted EBITDA increased 6.3% to $8.2 million from $7.7 million for Q4 2015; Adjusted EBITDA margin was 32.0% compared with 39.3% for Q4 2015; Net income increased 68.9% to $3.2 million ($0.06 per share diluted) compared to $1.9 million ($0.06 per share diluted) for Q4 2015; Adjusted Net income increased 35.6% to $7.1 million ($0.14 per share diluted) compared to $5.3 million ($0.15 per share diluted) for Q4 2015; Cash flow from operating activities increased 476.6% to $7.7 million compared to $1.3 million for Q4 2015; and Adjusted free cash flow increased 17.4% to $6.3 million compared to $5.4 million for Q4 2015. Additional business highlights for the fourth quarter and subsequent events: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) On May 2, 2016, the Corporation, announced the expansion of its distribution deal with Comcast to bring thousands of new music selections to Xfinity On Demand platforms. On April 18, 2016, the Corporation announced that it has signed a contract to provide custom in-store music to more than 650 LCBO locations. On March 15, 2016, the Corporation announced that its DJAZZ.tv television channel is now available as part of the “Grand Angle” package of French Pay-TV provider Bouygues Telecom. On February 29, 2016, the Corporation announced a strategic agreement with du. As a result of the agreement, Stingray Music and Stingray Concerts will now be available to du home customers across the UAE. On February 24, 2016 the Corporation announced that it has acquired Nümedia, which provides intelligent media solutions to its client by enabling in-venue music, experiences, communication, engagement, and activation. The transaction is valued at $1.9 million. On January 15, 2016, the Corporation introduced in the Latin American and Caribbean markets the new feature of the Stingray Music mobile app; the Vibes Channels. Annual Report 2016 | Stingray Digital Group Inc. 23 SELECTED CONSOLIDATED FINANCIAL INFORMATION (in thousands of Canadian dollars) Revenues Recurring Revenues Revenues Music programming, cost of services and content Selling and marketing Research and development, support and information technology General and administrative IPO expenses and CRTC tangible benefits Depreciation and amortization and write-off Net finance expenses(cid:3)(cid:11)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:12) (3) Change on fair value of investments Income before income taxes Income taxes Net income Adjusted EBITDA (1) Adjusted Net income (1) Adjusted free cash flow (1) Cash flow from operating activities 8,219 32.0 % 7,135 27.8 % 6,280 24.5 % 7,709 30.0 % Net income per share basic Net income per share diluted Adjusted Net income per share basic(1) Adjusted Net income per share diluted(1) 0.06 0.06 0.14 0.14 Quarters ended March 31 2015 2016 Q4 2015 Q4 2016 2016 Fiscal 2016 25,658 100.0 % 19,648 100.0 % 89,944 100.0 % 70,989 100.0 % 60,022 100.0 % 21,860 86 % 2014 Fiscal 2014 89 % 51,778 87 % 77,587 86 % 63,535 85 % 17,127 Years ended March 31 2015 Fiscal 2015 25,658 100.0 % 19,648 100.0 % 89,944 100.0 % 70,989 100.0 % 60,022 100.0 % 8,973 35.0 % 3,467 13.5 % 7,101 2,251 36.1 % 31,162 34.6 % 23,283 8,010 11.5 % 10,680 11.9 % 32.8 % 19,168 31.9 % 6,126 10.2 % 11.3 % 2,254 8.8 % 3,957 15.4 % 1,592 2,281 5,973 8.1 % 11.6 % 13,247 14.7 % 10,089 7,613 8.5 % 8.4 % 14.2 % 4,908 8.2 % 7,893 13.2 % 21 0.1 % – – % 5,821 6.5 % – – % – – % 3,218 12.5 % 836 3.3 % 1,113 4.3 % 1,819 7.1 % (1,428) (5.6) % 3,247 14.1 % 4,250 942 (451) 1,682 (241) 1,923 7,731 5,260 5,351 1,337 0.06 0.06 0.15 0.15 (418) 21.6 % 15,028 16.7 % 14,979 4,686 (0.5) % 4.8 % (1,801) (7,345) (8.2) % (2.3) % 5,770 8.6 % 14,156 15.7 % (837) (1.2) % 0.3 % 6,607 9.8 % 13,881 15.4 % 275 9,733 16.2 % 21.1 % 3,481 5.8 % 6.6 % (3,937) (6.6) % (2.5) % 8.1 % 12,650 21.1 % 3,959 6.6 % (1.2) % 8,691 14.5 % 9.3 % 39.3 % 31,004 34.5 % 27,275 26.8 % 24,309 27.0 % 17,834 27.2 % 23,994 26.7 % 17,037 9,908 6.8 % 18,968 21.1 % 38.4 % 24,151 40.2 % 25.1 % 14,389 24.0 % 24.0 % 13,853 23.1 % 14.0 % 12,853 21.4 % 0.29 0.29 0.51 0.50 0.20 0.19 0.54 0.53 0.27 0.25 0.44 0.42 Revenue by category Music Broadcasting Commercial Music Revenues Revenues by geography Canada International (4) Revenues Financial position Total assets Total non-current financial liabilities Net debt excluding contingent considerations(1) Net debt including contingent considerations(1) Net debt to Adjusted EBITDA(1)(2) Cash dividends and distributions declared per share 19,425 75.7 % 14,075 5,573 75.4 % 46,598 77.6 % 71.6 % 66,172 73.6 % 53,499 24.6 % 13,424 22.4 % 28.4 % 23,772 26.4 % 17,490 25,658 100.0 % 19,648 100.0 % 89,944 100.0 % 70,989 100.0 % 60,022 100.0 % 6,233 24.3 % 67.2 % 44,166 73.6 % 67.1 % 53,536 59.5 % 47,738 13,500 52.6 % 13,192 12,158 47.4 % 32.8 % 15,856 26.4 % 32.9 % 36,408 40.5 % 23,251 6,456 25,658 100.0 % 19,648 100.0 % 89,944 100.0 % 70,989 100.0 % 60,022 100.0 % 176,109 43,730 31,834 44,181 1.43x 0.13 125,170 75,549 107,423 119,832 4.39x 0.59 98,085 60,259 72,584 78,818 3.26x 0.45 Notes: (1) Refer to “Forward looking statements” and “Supplemental information on Non-IFRS measures” on page 21 and for reconciliations to the most directly comparable IFRS financial measure, refer to “Supplemental information on Non-IFRS measures” on page 25. (2) Net debt to Adjusted EBITDA consists of Net debt including contingent considerations divided by Adjusted EBITDA. (3) (4) Interest paid during the Q4 2016 was $244 (Q4 2015; $993) and $1,426 for the year ended March 31, 2016 (2015 - $3,845) International means all jurisdictions except Canada. 24 Annual Report 2016 | Stingray Digital Group Inc. SUPPLEMENTAL INFORMATION ON NON-IFRS MEASURES Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net income, Adjusted Net income per share, Adjusted free cash flow, Net debt including contingent considerations, Net debt excluding contingent considerations and Net debt to Adjusted EBITDA are non-IFRS measures that the Corporation uses to assess its operating performance. See “Supplemental information on Non-IFRS Measures” on page 21. The following tables show the reconciliation of Net income to Adjusted EBITDA: (in thousands of Canadian dollars) Net income Net finance expenses ((cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)) Change in fair value of investments Income taxes Depreciation of property and equipment and write-off Amortization of intangibles Stock-based compensation Restricted and deferred share unit expenses IPO expenses and CRTC tangible benefits Acquisition, restructuring and other various costs Adjusted EBITDA Net finance expenses (cid:11)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:12) Income taxes Depreciation of property and equipment and write-off Income taxes related to change in fair value of investment, share-based compensation, restricted and deferred share unit expenses, amortization of intangible assets, IPO expenses and CRTC tangible benefits and acquisition, restructuring and other various costs Adjusted Net income Quarters ended March 31 2016 Q4 2016 2015 Q4 2015 3,247 836 1,113 (1,428) 594 2,624 390 319 21 503 8,219 (836) 1,428 (594) 1,923 942 (451) (241) 597 3,653 376 221 (cid:884) 711 7,731 (942) 241 (597) Years ended March 31 2015 2016 Fiscal 2015 Fiscal 2016 6,607 13,881 4,686 (418) (1,801) (7,345) (837) 275 2,125 2,146 12,854 12,882 800 1,351 221 963 (cid:884) 5,821 2,620 1,448 27,275 31,004 (4,686) 418 837 (275) (2,125) (2,146) (1,082) 7,135 (1,173) 5,260 (4,692) 24,309 (3,467) 17,834 The following table shows the reconciliation of Cash flow from operating activities to Adjusted free cash flow: (in thousands of Canadian dollars) Quarters ended March 31 2016 Q4 2016 2015 Q4 2015 Years ended March 31 2015 2016 Q4 2015 Q4 2016 7,709 1,337 18,968 9,908 Cash flow from operating activities Add / Less : Capital expenditures Net change in non-cash operating working capital items Acquisition, restructuring and other various costs(1) IPO expenses and CRTC tangible benefits(1) Adjusted free cash flow (2,439) 8,018 1,550 (cid:884) 17,037 (1) Net of income taxes, except for IPO expenses and CRTC tangible benefits as only deferred income tax has been recognized on those items, thus (1,100) (718) 368 21 6,280 (3,429) 1,576 1,058 5,821 23,994 (528) 4,164 378 (cid:884) 5,351 having a non-cash impact. The following table shows the calculation of Net debt including and excluding contingent considerations: (in thousands of Canadian dollars) Term loan, including current portion Contingent considerations, including current portion Bridge loan Revolving facility (Cash and cash equivalents) bank overdraft Net debt including contingent considerations (“Net Debt”) Contingent considerations, including current portion Net debt excluding contingent considerations March 31, 2016 March 31, 2015 (cid:884) 12,347 (cid:884) 35,035 (3,201) 44,181 (12,347) 31,834 80,835 12,409 20,000 7,902 (1,314) 119,832 (12,409) 107,423 Annual Report 2016 | Stingray Digital Group Inc. 25 RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2016 AND 2015 Revenues Revenues in Fiscal 2016 increased 26.7% to $89.9 million, from $71.0 million for Fiscal 2015. The increase in revenues was primarily due to the acquisitions combined with growth in international markets and non-recurring revenues related to installation and equipment sales. In addition, revenues were favourably impacted by the exchange rate between the Canadian dollar and the U.S. dollar. Trends by Revenue Categories were as follow: Revenues by category(1) $66.2 $53.5 Music Broadcasting The most significant contributors to the increase of 23.7% or $12.7 million from Fiscal 2015 in Music Broadcasting revenues were as follows (arrows reflect the impact): (cid:376) Acquisition of Brava Group, Digital Media Distribution Pty Ltd. (“DMD”), Transmedia Communications SA (“iConcert”) and Telefonica – On The Spot. (cid:376) Organic growth in international markets (i.e. United States, $23.8 Europe and Latin America). $17.5 Commercial Music Music Broadcasting Commercial Music 2015 2016 Note: (1) In millions of Canadian dollars. The most significant contributors to the increase of 35.9% or $6.3 million from Fiscal 2015 in Commercial Music revenues were as follows (arrows reflect the impact): (cid:376) Acquisition of Les réseaux Urbains Viva Inc. was included in full in Fiscal 2016 (cid:376) Non-recurring revenues from installations and equipment sales related to new and existing customers. Trends by Revenues by Geographic Region: Revenues by geography(1) $53.5 $47.7 $36.4 $23.3 Canada International 2015 2016 Note: (1) In millions of Canadian dollars. Canada The most significant contributors to the increase of 12.1% or $5.8 million from Fiscal 2015 in revenues for Canada were as follows (arrows reflect the impact): (cid:376) As described above in Commercial Music, acquisition of Les Réseaux Urbains Viva is include in full in Fiscal 2016 and non-recurring revenues related to installation and equipment sales. International The most significant contributors to the increase of 56.6% or $13.1 million from Fiscal 2015 in International revenues were as follows (arrows reflect the impact): (cid:376) The contribution of acquisitions as mentioned above and organic growth related to music services and additional music products such as music videos and karaoke. (cid:376) Revenues were favourably impacted by the exchange rate between the Canadian dollar and the U.S. dollar. 26 Annual Report 2016 | Stingray Digital Group Inc. Operating Expenses (in thousands of Canadian dollars) Fiscal 2016 % of revenues Fiscal 2015 % of revenues Variance Significant contributions to variance : Music programming, cost of services and content $31,162 34.6% $23,283 32.8% $7,879 33.8% (cid:376) Primarily due to recent acquisitions, to the hiring of additional staff and to support our content costs international growth. In addition, increase in costs related to additional installation and equipment sales. These increases were partially offset by the calculation of rights on revenues and royalties. impact on favorable the Selling and marketing $10,680 11.9% $8,010 11.3% $2,670 33.3% (cid:376) Primarily due to costs to support revenue growth international markets. in Information Technology and Research and development $7,613 8.5% $5,973 8.4% $1,640 27.5% (cid:376) Increase related to additional hiring due to the international expansion developed internally and products. new General and administrative $13,247 14.7% $10,089 14.2% $3,158 31.3% (cid:376) increase Primarily due in to acquisition costs, public company obligations related costs, additional employees support growth, restricted share unit and deferred share unit plan for employees and directors. to Depreciation, amortization and write-off $15,028 16.7% $14,979 21.1% $49 0.3% (cid:376) Remained relatively stable. Adjusted EBITDA(1)(2) $27.3 $31.0 2015 2016 Notes: (1) (2) Refer to “Supplemental information on Non-IFRS measures” In millions of Canadian dollars. on page 21 and 25 Adjusted EBITDA in Fiscal 2016 increased 13.7% to $31.0 million, from $27.3 million in Fiscal 2015. Adjusted EBITDA margin was 34.5% in Fiscal 2016 compared to 38.4% in Fiscal 2015. The increase in Adjusted EBITDA was primarily due to the recent acquisitions of Brava, DMD and iConcert, from which future synergies are expected and to organic growth international market (cid:55)(cid:75)(cid:72)(cid:3) (cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3) (cid:76)(cid:81)(cid:3) (cid:40)(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(cid:3) (cid:80)(cid:68)(cid:85)(cid:74)(cid:76)(cid:81)(cid:3) (cid:90)(cid:68)(cid:86)(cid:3) (cid:80)(cid:68)(cid:76)(cid:81)(cid:79)(cid:92)(cid:3) (cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3) (cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3) (cid:87)(cid:82)(cid:3) (cid:86)(cid:88)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3) (cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3) (cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)(cid:3) (cid:76)(cid:81)(cid:3) (cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3) (cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:15)(cid:3) (cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3) (cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3) (cid:81)(cid:82)(cid:81)(cid:16) (cid:85)(cid:72)(cid:70)(cid:88)(cid:85)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3) (cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:86)(cid:3) (cid:73)(cid:85)(cid:82)(cid:80)(cid:3) (cid:76)(cid:81)(cid:86)(cid:87)(cid:68)(cid:79)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:72)(cid:84)(cid:88)(cid:76)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3) (cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3) (cid:87)(cid:72)(cid:81)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3) (cid:75)(cid:68)(cid:89)(cid:72)(cid:3) (cid:79)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3) (cid:80)(cid:68)(cid:85)(cid:74)(cid:76)(cid:81)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3) (cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3) (cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:71)(cid:80)(cid:76)(cid:81)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:83)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17) in Acquisition, restructuring and other various costs mainly included costs related to consultants for acquisitions and costs to support our acquisition pipeline. Annual Report 2016 | Stingray Digital Group Inc. 27 (cid:3) Initial public offering expenses and CRTC tangible benefits Initial public offering (“IPO”) expenses for Fiscal 2016 amounted to $1.6 million and were related to the secondary offering costs. The secondary offering consisted of the sale by Novacap and Télésystem of the aggregate of 9,112,900 shares to the public. IPO expenses for the treasury offering by the Corporation were recognized in the statement of financial position under share capital. The CRTC approved the change in ownership and effective control of the Corporation on April 22, 2015. Pursuant to the decision, the CRTC requires the Corporation to pay tangible benefits corresponding to an amount of $5.5 million over a seven- year period in equal annual payments. Since this expense does not meet capitalization criteria under IFRS, the Corporation recognized an expense of $4.2 million in Q1 2016, which reflects the fair value of the payment stream using a discount rate of 7.0%, which is the Corporation estimated effective interest rate plus a risk premium. Net Finance Expenses Finance expenses represented a net finance income of $0.4 million compared to a net finance expense of $4.7 million in Fiscal 2015. The decrease was related to fair value revaluations of contingent considerations and a lower interest expense. The Corporation repaid approximately $101 million of debt in June 2015 with the proceeds of the IPO and has increased its credit facility by $19.2 million, for a net decrease in debt excluding contingent considerations of $81.8 million. Change in fair value of investments In Fiscal 2016, a gain of $7.3 million was recorded on the investment’s fair value compared to a gain of $1.8 million in Fiscal 2015. On September 21, 2015, the Corporation invested an additional $0.3 million (US$ 0.3 million) in AppDirect, a company that offers a cloud services marketplace and management platform that enables companies to distribute web-based services. As at March 31, 2016, the Corporation held a 1.76% interest in AppDirect and the fair value was estimated at $15.6 million. Income Taxes I(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3) (cid:87)(cid:68)(cid:91)(cid:72)(cid:86)(cid:3) (cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3) (cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:72)(cid:71)(cid:3) (cid:68)(cid:81)(cid:3) (cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3) (cid:82)(cid:73)(cid:3) (cid:7)(cid:19)(cid:17)(cid:22)(cid:3) (cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3) (cid:76)(cid:81)(cid:3) (cid:41)(cid:76)(cid:86)(cid:70)(cid:68)(cid:79)(cid:3) (cid:21)(cid:19)(cid:20)(cid:25)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3) (cid:68)(cid:3) (cid:85)(cid:72)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:92)(cid:3) (cid:82)(cid:73)(cid:3) (cid:7)(cid:19)(cid:17)(cid:27)(cid:3) (cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3) (cid:41)(cid:76)(cid:86)(cid:70)(cid:68)(cid:79)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:72)(cid:86)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:80)(cid:68)(cid:76)(cid:81)(cid:79)(cid:92)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:76)(cid:80)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:15)(cid:3)(cid:82)(cid:73)(cid:73)(cid:86)(cid:72)(cid:87)(cid:3)(cid:69)(cid:92)(cid:3)(cid:79)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:79)(cid:92)(cid:3)(cid:82)(cid:73)(cid:73)(cid:86)(cid:72)(cid:87)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:73)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3) (cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:22)(cid:17)(cid:23)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:41)(cid:76)(cid:86)(cid:70)(cid:68)(cid:79)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:7)(cid:21)(cid:17)(cid:26)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:41)(cid:76)(cid:86)(cid:70)(cid:68)(cid:79)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:17) Net income and net income per share Net income increased to $13.9 million ($0.29 per share diluted) in Fiscal 2016 from $6.6 million ($0.19 per share diluted) in Fiscal 2015. The increase was mainly attributable to higher operating results, change in fair value of investments, lower net finance expenses and, offset by IPO expenses and CRTC tangible benefits expenses and higher income taxes. Adjusted Net income and Adjusted Net income per share Adjusted Net Income in Fiscal 2016 increased to $24.3 million ($0.50 per share diluted) from $17.8 million ($0.52 per share diluted) in Fiscal 2015. The increase was primarily due to higher Adjusted EBITDA resulting from recent acquisitions combined with international growth, additional sales for installation and equipment and lower net finance expenses, offset by higher income tax expenses. Net Income and Adjusted Net Income(1)(2) $24.3 $17.8 $13.9 $6.6 Net income Adjusted Net income 2015 2016 Notes: (1) (2) Refer to “Supplemental information on Non-IFRS In millions of Canadian dollars. measures” on page 21 and 25. 28 Annual Report 2016 | Stingray Digital Group Inc. Quarterly results Our revenues increased steadily over the last eight quarters from $15.6 million in the first quarter of Fiscal 2015 to $25.7 million in the fourth quarter of Fiscal 2016. The increase was mainly attributable to the successful integration of acquisitions and new contracts in Canada and in international markets. Over the past eight quarters, recurring revenues represented approximately 88% of total revenues. Adjusted EBITDA increased from $5.8 million in the first quarter of Fiscal 2015 to $8.2 million in the fourth quarter of Fiscal 2016. The increase was mainly attributable to the successful integration of acquisitions and organic growth in Canada and in international markets. Summary of Consolidated Quarterly Results (in thousands of Canadian dollars, except per share amounts) Revenue by category Music Broadcasting Commercial Music Total revenues Revenues by geography Canada International Total revenues Recurring revenues Recurring revenues as a March 31, 2016 Fiscal 2016 Dec. 31, 2015 Fiscal 2016 Sept. 30, 2015 Fiscal 2016 Quarters ended June 30, 2015 Fiscal 2016 March 31, 2015 Fiscal 2015 Dec. 31, 2014 Fiscal 2015 Sept. 30, 2014 Fiscal 2015 June 30, 2014 Fiscal 2015 19,425 6,233 25,658 17,013 6,076 23,089 15,614 5,688 21,302 14,120 5,775 19,895 14,075 5,573 19,648 13,896 4,633 18,529 13,064 4,115 17,179 12,464 3,169 15,633 13,500 12,158 25,658 13,759 9,330 23,089 13,094 8,208 21,302 13,183 6,712 19,895 13,192 6,456 19,648 12,144 6,385 18,529 11,714 5,465 17,179 10,688 4,945 15,633 21,860 19,699 18,785 17,243 17,127 16,416 15,618 14,374 percentage of total revenues 85% 85% 88% 87% 87% 89% 91% 92% Adjusted EBITDA 8,219 8,009 7,625 7,151 7,731 6,986 6,734 5,824 Net income (loss) 3,247 3,169 9,242 (1,777) 1,923 1,499 2,167 1,018 Net income (loss) per share basic Net income (loss) per share diluted 0.06 0.06 0.18 (0.05) 0.06 0.04 0.06 0.04 0.06 0.06 0.18 (0.05) 0.06 0.04 0.06 0.03 Adjusted Net income 7,135 6,194 6,198 4,783 5,260 4,376 4,607 3,591 Adjusted Net income per share basic Adjusted Net income per share 0.14 0.12 0.12 0.12 0.15 0.13 0.14 0.11 diluted 0.14 0.12 0.12 0.12 0.15 0.13 0.13 0.10 Annual Report 2016 | Stingray Digital Group Inc. 29 Reconciliation of Quarterly Non-IFRS Measures (in thousands of Canadian dollars) Net income (loss) Net finance expenses ((cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)) Change in fair value of investment Income taxes Depreciation of property and equipment and write-off Amortization of intangibles(cid:3) Stock-based compensation Restricted and deferred share unit expenses IPO expenses and CRTC tangible benefits Acquisition, restructuring and other various costs Adjusted EBITDA Net finance expenses (cid:11)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:12) Income taxes Depreciation of property and equipment and write-off(cid:3) Income taxes related to change in fair value of investment, share- based compensation, restricted and deferred share unit expenses, amortization of intangible assets, IPO expenses and CRTC tangible benefits and acquisition, restructuring and other various costs Adjusted Net income March 31, 2016 Fiscal 2016 3,247 836 1,113 (1,428) Dec. 31, 2015 Fiscal 2016 3,169 (810) (646) 920 Sept. 30, 2015 Fiscal 2016 9,242 (1,310) (7,549) 2,117 Quarters ended March 31, June 30, 2015 2015 Fiscal 2015 1,923 942 (451) (241) Fiscal 2016 (1,777) 866 (263) (1,334) Dec. 31, 2014 Fiscal 2015 1,499 1,310 (450) (114) Sept. 30, 2014 Fiscal 2015 2,167 1,202 (450) (348) 594 2,624 390 319 609 3,443 369 227 488 3,592 371 455 3,223 221 597 3,653 376 586 3,583 112 541 3,288 80 June 30, 2014 Fiscal 2015 1,018 1,232 (450) (134) 401 2,330 232 242 175 221 21 - 305 5,495 - - - - - - - 503 8,219 (836) 1,428 728 8,009 810 (920) 127 7,625 1,310 (2,117) 90 7,151 (866) 1,334 711 7,731 (942) 241 460 6,986 (1,310) 114 254 6,734 (1,202) 348 1,195 5,824 (1,232) 134 (594) (609) (488) (455) (597) (586) (541) (401) (1,082) 7,135 (1,096) 6,194 (132) 6,198 (2,381) 4,783 (1,173) 5,260 (828) 4,376 (732) 4,607 (734) 3,591 30 Annual Report 2016 | Stingray Digital Group Inc. LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED MARCH 31, 2016 The Corporation’s primary sources of cash consist of operating activities and available borrowings under the Revolving Facility. The Corporation’s primary uses of cash are to fund operations, working capital requirements, business acquisitions, capital expenditures and distributions to shareholders of the Corporation. The fluctuation of working capital requirements are primarily due to the non-recurring services and products, which revenues tend to peak in the third quarter of our financial year. Cash flows from recurring services and products are stable and predictable over the year and are our main source of cash inflows. The Corporation has a working capital deficiency as at March 31, 2016. The Corporation met its obligations with its strong cash flow from operations and its ability to access financing from banks or existing shareholders. In Fiscal 2016, the Corporation reduced significantly certain current and non-current liabilities. The Corporation expects to continue distributing dividends to the shareholders of the Corporation, and such dividends are expected to be funded by the cash flow generated from operating activities. CF from operating activities and Adjusted free cash flow(1)(2) $24.0 $19.0 $17.0 Cash flow from operating activities Cash flow generated from operating activities increased to $19.0 million in Fiscal 2016 from $9.9 million in Fiscal 2015. The increase was mainly due to acquisitions, international growth and lower net variation in non-cash working operating items. $9.9 Adjusted free cash flow CF from operating activities Adjusted free cash flow 2015 2016 Adjusted free cash flow increased to $24.0 million in Fiscal 2016 from $17.0 million in Fiscal 2015. The increase was mainly related to higher operating results, lower interest paid and lower income tax paid partially offset by higher capital expenditures. (cid:3) Notes: (1) (2) Refer to “Supplemental information on Non-IFRS In millions of Canadian dollars. measures” on page 21 and 25. Investing Activities Net cash flow used in investing activities amounted to $29.7 million in Fiscal 2016 compared to $23.0 million in Fiscal 2015. The increase of cash flow used of $6.7 million was primarily related to an aggregate cash disbursements related to the acquisitions in Fiscal 2016 compared to Fiscal 2015, capital expenditures and acquisition of investments in Fiscal 2016. Financing Activities Net cash flow generated from financing activities amounted to $12.7 million in Fiscal 2016 compared to $14.8 million in Fiscal 2015. The decrease of $2.1 million was attributable to several elements, such as the net repayment of term loan and bridge loan, proceeds from the issuance of share related to the IPO, higher repayment of other payables and lower payments of dividend. Annual Report 2016 | Stingray Digital Group Inc. 31 Contractual Obligations The Corporation is committed under the terms of contractual obligations with various expiration dates, primarily the rental of office space, financial obligations under our credit agreement, broadcast licence and commitments for copyright royalties. The following table summarizes the Corporation’s significant contractual obligations as at March 31, 2016, including its estimated payments and commitments related to leasing contracts: (in thousands of Canadian dollars) Commitments Operating lease agreements Financial obligations Revolving facility Accounts payables and accrued liabilities Other payables Total obligations Broadcast licence Less than 1 year 1–5 years More than 5 years Total amount 2,692 3,155 (cid:884) 5,847 (cid:884)(cid:3) 25,819 8,006 36,517 35,035(cid:3) (cid:884) (cid:25)(cid:15)(cid:23)(cid:23)(cid:22) 44,6(cid:22)3 (cid:884) (cid:884) 2,252 2,252 35,035 25,819 16,701 83,402 The CRTC requires Canadian pay audio services to draw certain proportions of their programming from Canadian content and, in most cases, to spend a portion of their revenues on Canadian content development. The Corporation must ensure that (i) a maximum of one non-Canadian pay audio channel is packaged or linked with each Canadian-produced pay audio channel and in no case may subscribers of the pay audio service be offered a package of pay audio channels in which foreign-produced channels dominate; (ii) 25% of all Canadian channels, other than those consisting entirely of instrumental music or of music entirely in languages other than English or French, devote a minimum of 65% of vocal music selections in the French language each broadcast week; and (iii) a minimum of 35% of the musical selections broadcast each broadcast week on our Canadian- produced pay audio channels, considered together, are Canadian. Pursuant to the conditions of our National Pay Audio Service Licence, the Corporation is required to contribute each year a minimum of 4% of our annual Canadian regulated broadcast revenues to encourage Canadian content development in the following manner: (i) 1% of gross revenues to be devoted to the Foundation Assisting Canadian Talent On Recordings (FACTOR), a non-profit organization dedicated to providing assistance toward the growth and development of the Canadian music industry; (ii) 1% of gross revenues to be devoted to Musicaction, a non-profit organization dedicated to the development of local francophone music by offering financial support to projects by independent record labels and Canadian artists; and (iii) 2% of gross revenues to be devoted to our Stingray Rising Star Program, a program which was created to discover, encourage, promote and champion new Canadian artists. The CRTC approved the change in ownership and effective control of the Corporation on April 22, 2015. Pursuant to the decision, the CRTC requires the Corporation to pay tangible benefits corresponding to an amount of $5.5 million over a seven- year period in equal annual payments. The Corporation recognized an expense of $4.2 million, which reflects the fair value of the payment stream using a discount rate of 7.0%, which is the Corporation effective interest rate plus a risk premium. On August 18, 2015, the Canadian Radio-television and Telecommunications Commission (CRTC) issued a decision renewing until August 31, 2020 the broadcasting licence. During Fiscal 2016, an amount of $0.4 million ($0.8 million – 2015) was recognized as an expense in the music programming, cost of services and content. Copyright royalties The Corporation must pay royalties for the use of music for the majority of its music services. Through copyright collective societies, the Corporation pays royalties to two sets of rights holders: (i) rights holders in music works, which are the music and the lyrics, and (ii) rights holders in artists’ performances and sounds recordings, which are the actual performances and recordings of the musical works. 32 Annual Report 2016 | Stingray Digital Group Inc. Capital resources On June 11, 2015, the Corporation renegotiated its credit agreement in order to merge the outstanding balance of the term loan into the amended revolving credit facility (“revolving facility”), to provide for the repayment of the bridge loan, to increase its borrowing capacity to $100.0 million and to make modifications in relation to interest, maturity, security and covenants. The revolving facility matures in June 2019, bears interest at an annual rate equal to the banker’s acceptance rate plus between 1.38% and 3.00% and is secured by guarantees from subsidiaries and first ranking lien on universality of all its assets, tangible and intangible, present and future. In addition, the Corporation incurs standby fees between 0.28% and 0.60% on the unused portion of the revolving facility. The Corporation is required to comply with financial covenants. As at March 31, 2016, the Corporation was in compliance with all the requirements of its credit agreement. The following table summarizes the impact on the Net debt including contingent considerations that occurred in the year ended March 31, 2016 including related ratios: Movement in Net debt(1)(2) $ 119.8 $(80.8) $ 27.1 $(20.0) $(0.1) $(1.9) $44.1 As at March 31, 2015 Repayment of term loan Net change in revolving facility Repayment of bridge loan Net change in fair value of contingent considerations Change in cash and cash equivalents As at March 31, 2016 27.3 4.4 Adjusted EBITDA(1)(2) Net debt to Adjusted EBITDA(1)(2) 31.0 1.4 Notes: (1) (2) Refer to “Supplemental information on Non-IFRS measures” on page 21 and 25. In millions of Canadian dollars. Off Balance-Sheet Arrangements The Corporation had no off-balance sheet arrangements, other than operating leases (which have been disclosed under “Contractual Obligations”), that have, or are reasonably likely to have, a current or future material effect on its consolidated financial position, financial performance, liquidity, capital expenditures or capital resources. Annual Report 2016 | Stingray Digital Group Inc. 33 CONSOLIDATED FINANCIAL POSITION AS AT MARCH 31, 2016 AND 2015 The following table shows the main variances that have occurred in the consolidated financial position of the Corporation for the year ended March 31, 2016: (in thousands of Canadian dollars) March 31, 2016 March 31, 2015 Variance Significant contributions Trade and other receivables $27,761 $17,370 $10,391 (cid:376) Intangibles assets $47,901 $45,441 $2,460 (cid:376) Goodwill $62,022 $39,129 $22,893 (cid:376) Accounts payable and accrued liabilities $25,819 $16,923 $8,896 (cid:376) Contingent considerations, including current portion $12,347 $12,409 $(62) (cid:378) CRTC Tangible Benefits $4,230 $340 $3,890 (cid:376) to related longer payment Attributable international to cycles revenues including acquisitions, longer days outstanding commercial and broadcast in Canada, and favorable impact on the exchange Canadian dollar and the U.S. dollar. receivables between rate intangible assets Mainly attributable to the recognition of the acquisitions that occurred in Fiscal 2016, net of amortization. for Mainly related to the recognition of goodwill for the acquisitions that occurred in Fiscal 2016. Mainly attributable to payables assumed on the opening balance sheet of the acquisitions that occurred in Fiscal 2016 and increase in operating expenses. Mainly related to the recognition of contingent considerations for the Brava and DMD acquisitions net of payments for the DMX Canada and DMX Latin America acquisitions and change in the fair value of remaining contingent considerations. to Attributable in ownership and effective control clause following the IPO. the change Revolving Facility $35,035 $7,902 $27,133 (cid:376) the Attributable cash to consideration for acquisitions that occurred in Fiscal 2016 and contingent consideration payments. Bridge Loan Term loan, including current portion $(cid:884) $(cid:884) $20,000 $(20,000) (cid:378) Attributable to repayment of debt with the net proceeds from the IPO. $80,835 $(80,835) (cid:378) Attributable to repayment of debt with the net proceeds from the IPO. 34 Annual Report 2016 | Stingray Digital Group Inc. RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2016 AND 2015 Revenues Revenues for the quarter ended March 31, 2016 (“Q4 2016”) increased 30.6% to $25.7 million, from $19.6 million for the Q4 2015. The increase in revenues was primarily due to acquisitions combined with significant growth in international markets as well as the launch of new products. In addition, revenues were favourably impacted by the exchange rate between the Canadian dollar and the U.S. dollar. Trends by Revenue Categories were as follow: Revenues by category(1) $19.4 $14.1 Music Broadcasting The most significant contributors to the increase of 38.0% or $5.4 million from Q4 2015 in Music Broadcasting revenues were as follows (arrows reflect the impact): (cid:376) Acquisitions in Fiscal 2016 of Brava, DMD and iConcert. (cid:376) New customer contracts mainly in the United States, Europe and Middle East. $5.6 $6.2 Commercial Music Music Broadcasting Commercial Music The most significant contributors to the increase of 11.8% or $0.7 million from Q4 2015 in Commercial Music revenues were as follows (arrows reflect the impact): Q4 2015 Q4 2016 (cid:376) Non-recurring revenues from installation and equipment sales to new and existing customers. Note: (1) In millions of Canadian dollars. Trends by Revenues by Geographic Region: Revenues by geography(1) $13.2 $13.5 $12.2 Canada The most significant contributors to the increase of 2.3% or $0.3 million from Q4 2015 in revenues for Canada were as follows (arrows reflect the impact): (cid:376) Non-recurring revenues related to installation and equipment sales to new and existing customers. $6.5 International Canada International (cid:376) As described above in Broadcast, acquisitions are included The most significant contributors to the increase of 88.3% or $5.7 million from Q4 2015 in international revenues were as follows (arrows reflect the impact): Q4 2015 Q4 2016 Note: (1) In millions of Canadian dollars. in full for Q4 2016 and international organic growth. (cid:376) In addition, revenues were favourably impacted by the exchange rate between the Canadian dollar and the U.S. dollar. Annual Report 2016 | Stingray Digital Group Inc. 35 Operating Expenses (in thousands of Canadian dollars) Q4 2016 % of revenues Q4 2015 % of revenues Variance Significant contributions to variance : Music programming, cost of services and content $8,973 35.0% $7,101 36.1% $1,872 26.4% (cid:376) Selling and marketing $3,467 13.5% $2,251 11.5% $1,216 54.0% (cid:376) to costs Primarily due to acquisitions and to the hiring of additional staff and content support international growth. In addition, increase to installation and equipment sales. These increases were partially offset by the favorable impact on the calculation of rights on revenues and royalties. in costs related Primarily due to increase costs to support in international markets. revenue growth Information Technology and Research and development $2,254 8.8% $1,592 8.1% $662 41.6% (cid:376) related Increase to additional hiring due to the international expansion and new products developed. General and administrative $3,957 15.4% $2,281 11.6% $1,676 73.5% (cid:376) Primarily due to hiring of additional to support growth, employees administrative expenses included in recent acquisitions, increase in acquisition costs, public company obligations costs, restricted share unit and deferred share unit plan for employees and directors. related Depreciation, amortization and write-off $3,218 12.5% $4,250 21.6% $(1,032) (24.3)% (cid:378) Primarily due to prior acquisitions intangible assets being fully amortized. Adjusted EBITDA(1)(2) $7.7 $8.2 Q4 2015 Q4 2016 Notes: (1) (2) Refer to “Supplemental information on Non-IFRS measures” on In millions of Canadian dollars. page 21 and 25. increased 6.3% Adjusted EBITDA to for Q4 2016 $8.2 million, from $7.7 million for Q4 2015. Adjusted EBITDA margin was 32.0% for Q4 2016 compared to 39.3% for Q4 2015. The increase in Adjusted EBITDA was primarily due to recent acquisitions of Brava, DMD and iConcert, from which future synergies are expected. The increase was also related to organic growth in international market. The decrease to administrative expenses included in recent acquisitions, hiring of additional staff, content costs to support recent acquisitions and additional general and administrative costs for public company obligations. in EBITDA margin was mainly related Acquisition, various costs mainly included costs related to consultant for acquisitions and costs to support our acquisition pipeline. restructuring other and 36 Annual Report 2016 | Stingray Digital Group Inc. (cid:3) Net Finance Expenses Finance expenses decreased to $0.8 million from $0.9 million for Q4 2015. The decrease was related to lower gain on fair value revaluations of contingent considerations and lower interest expenses. The Corporation repaid approximately $101 million of debt in June 2015 with the proceeds of the IPO and has increased its credit facility by $(cid:21)(cid:26)(cid:17)(cid:20)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:17) Change in fair value of investments For Q4 2016, a loss of $1.1 million was recorded on AppDirect compared to a gain of $0.5 million for Q4 2015. The loss in Q4 2016 represented the translation in US$ considering a weaker exchange rate. On September 21, 2015, the Corporation invested an additional $0.3 million (US$ 0.3 million) in AppDirect, a company that offers a cloud services marketplace and management platform that enables companies to distribute web-based services. As at March 31, 2016, the Corporation held, on a fully diluted basis, a 1.76% interest in AppDirect and the fair value was estimated at $15.6 million. Income Taxes Recovery of income taxes increased to $1.4 million for Q4 2016 from $0.2 million for Q4 2015. The increase in income taxes was mainly related to the recognition of prior unrecognized tax losses of a foreign subsidiary. Net income and net income per share Net income increased to $3.2 million ($0.06 per share diluted) for Q4 2016 compared to $1.9 million ($0.06 per share diluted) for Q4 2015.(cid:3) (cid:55)(cid:75)(cid:72)(cid:3) (cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3) (cid:90)(cid:68)(cid:86)(cid:3) (cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3) (cid:71)(cid:88)(cid:72)(cid:3) (cid:87)(cid:82)(cid:3) (cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:85)(cid:3) (cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:15)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:85)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:92)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) (cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:73)(cid:3) (cid:83)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3) (cid:88)(cid:81)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3) (cid:79)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3) (cid:68)(cid:80)(cid:82)(cid:85)(cid:87)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:73)(cid:3) (cid:76)(cid:81)(cid:87)(cid:68)(cid:81)(cid:74)(cid:76)(cid:69)(cid:79)(cid:72)(cid:86)(cid:15)(cid:3) (cid:82)(cid:73)(cid:73)(cid:86)(cid:72)(cid:87)(cid:3) (cid:69)(cid:92)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3) (cid:76)(cid:81)(cid:3) (cid:73)(cid:68)(cid:76)(cid:85)(cid:3) (cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3) (cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17) (cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:15)(cid:3) (cid:87)(cid:68)(cid:91)(cid:3) Adjusted Net income and Adjusted Net income per share Adjusted net income for Q4 2016 increased to $7.1 million ($0.14 per share diluted) from $5.3 million ($0.15 per share diluted) for Q4 2015. (cid:55)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:85)(cid:3) (cid:36)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3) (cid:40)(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(cid:3) (cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3) (cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:70)(cid:82)(cid:80)(cid:69)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3) (cid:82)(cid:73)(cid:3) (cid:81)(cid:72)(cid:90)(cid:3) (cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3) (cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:85)(cid:3) (cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3) (cid:87)(cid:68)(cid:91)(cid:3) (cid:85)(cid:72)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:92)(cid:17) Net Income and Adjusted Net Income(1)(2) $7.1 $5.3 $3.2 $1.9 Net income Adjusted Net income Q4 2015 Q4 2016 Notes: (1) (2) Refer to “Supplemental information on Non-IFRS In millions of Canadian dollars. measures” on page 21 and 25. Annual Report 2016 | Stingray Digital Group Inc. 37 LIQUIDITY FOR THE QUARTER ENDED MARCH 31, 2016 CF from operating activities and Adjusted free cash flow(1)(2) $7.7 $6.2 $5.4 $1.3 Q4 2015 Q4 2016 Cash flow from operating activities Cash flow generated from operating activities increased to $7.7 million for Q4 2016 from $1.3 million for Q4 2015. The increase was mainly due to higher operating results and lower net change in non-cash operating items. Adjusted free cash flow Adjusted free cash flow for Q4 2016 increased to $6.2 million from $5.4 million for Q4 2015. The increase was primarily related to higher operating results and lower financing costs, partially offset by higher capital expenditures. Increase in capital expenditures of $0.6 million compared to Q4 2015 was mainly due to the upgrade of subscriber music boxes for commercial customers. Notes: (1) (2) Refer to “Supplemental information on Non-IFRS In millions of Canadian dollars. measures” on page 21 and 25. Investing Activities Net cash flow used in investing activities amounted to $2.4 million for Q4 2016 compared to $2.0 million for Q4 2015. The increase of $0.4 million was mainly related to the increase in capital expenditures. Financing Activities Net cash flow used in financing activities amounted to $4.6 million for Q4 2016 compared to net cash flow generated from financing activities amounted to $1.5 million for Q4 2015. The decrease of $6.1 million was mainly attributable to the repayment of the credit facility, the payment of the quarterly dividend and payment of other payables. 38 Annual Report 2016 | Stingray Digital Group Inc. Transactions Between Related Parties The key management personnel of the Corporation are the Chief Executive Officer, Chief Financial Officer and certain other key employees of the Corporation. Key management personnel compensation and directors fees include the following: (in thousands of Canadian dollars) Short-term employee benefits Management fees Share-based compensation Restricted share unit Deferred share unit 2016 2,927 (cid:884) 976 178 371 4,452 $ $ 2015 $ 1,918 315 423 50 $ 2,706 Disclosure of Outstanding Share Data Issued and outstanding shares and outstanding stock options consisted of: Issued and outstanding shares: Subordinate voting shares Variable Subordinate voting shares Multiple voting shares Outstanding stock options: Stock options June 15, 2016 March 31, 2016 34,340,171 498,519 16,294,285 51,132,975 34,178,371 635,319 16,294,285 51,107,975 1,229,722 1,288,757 Furthermore, as part of the Offering, the Corporation has established a new stock option plan to attract and retain employees, directors, officers and consultants. The plan provides for the granting of options to purchase subordinate voting shares. Under this plan, 2,500,000 subordinate voting shares have been reserved for issuance. In the year ended March 31, 2016, 479,787 options were exercised, 14,035 were forfeited and 512,880 options were granted to eligible employee, subject to service vesting periods which range from 3 to 4 years. Financial risks Currency risk: The Corporation is exposed to currency risk on sales and expenses that are denominated in currencies other than the functional currency of the Corporation subsidiaries, primarily the US dollar, the Australian dollar and the euro. Also, additional earnings variability arises from the translation of monetary assets and liabilities denominated in currencies other than the functional currency of the Corporation subsidiaries at the rate of exchange at each balance sheet date, the impact of which is reported as a foreign exchange gain or loss in the consolidated statements of comprehensive income. The Corporation's objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows, by transacting with third parties in the above currencies to the maximum extent possible and practical, given that this will act as natural economic hedges for each of these currencies. Liquidity risk: Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they become due. The Corporation also manages liquidity risk by continuously monitoring actual and budgeted cash flows under both normal and stressed conditions. Also, the Board of Directors reviews and approves the Corporation’s operating and capital budgets, as well as any material transactions out of the ordinary course of business, including proposals on mergers, acquisitions or other major investments or divestitures. Annual Report 2016 | Stingray Digital Group Inc. 39 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. The Corporation's interest rate risk is primarily related to the Corporation's operating revolving facility bearing interest at variable rate. Credit risk: Credit risk is the risk of an unexpected financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet contractual obligations, and it arises primarily from the Corporation's trade and other receivables. The Corporation’s credit risk is principally attributable to its trade receivables. The amounts presented in the consolidated statements of financial position are net of an allowance for doubtful accounts, estimated by the Corporation’s management and based, in part, on the age of the specific receivable balance and the current and expected collection trends. The Corporation's exposure to credit risk is mainly influenced by the characteristics of each customer. The demographics of the Corporation's customer base, including the default risk of the industry and country in which the customer operates, have less of an influence on the credit risk. Generally, the Corporation does not require collateral or other security from customers for trade account receivable; however, credit is extended following an evaluation of creditworthiness. In addition, the Corporation performs ongoing credit reviews of its customers and establishes an allowance for doubtful accounts when the likelihood of collecting the account has significantly diminished. The Corporation believes that the credit risk of trade accounts receivable is limited. Critical accounting estimates The preparation of these consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. This note provides an overview of the areas that involved a higher degree of judgement or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be wrong. Estimates are based on management’s best knowledge of current events and actions that the Corporation may undertake in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Any revision to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected by these revisions. The areas involving significant estimates or judgments are: Estimation of current tax payable and current tax expense In the calculation of current tax, the Company is required to make significant estimates due to the fact that it is subject to tax laws of the many jurisdictions in which it operates. Recorded income taxes and tax credits are subject to review and approval by tax authorities and therefore, could be different from the amounts recorded. Recognition of deferred tax asset for carried forward tax losses In the calculation of deferred tax, estimates must be used to determine the appropriate rates and amounts and to take into account the probability of their occurrence. Deferred income tax assets also reflect the benefit of unutilized tax losses than can be carried forward to reduce income taxes in future years. The deferred tax assets include an amount which relates to carried forward tax losses of some European and Australian subsidiaries. The subsidiaries have incurred the losses over the last financial years before the acquisition by the Corporation. The subsidiaries now generate taxable income. The Corporation has concluded that the deferred assets will be recoverable using the estimated future taxable income based on the approved business plans and budgets for the subsidiaries. Estimated fair value of certain financial assets (investments) The fair value of investments that are not traded in an active market is determined using valuation techniques. The Corporation uses judgement to select a valuation method and make assumptions that are mainly based on market conditions existing at the end of each reporting period. Estimation of fair values of contingent consideration in business combinations The contingent consideration related to business combinations are payable based on the achievement of targets for growth in revenues for a period from the date of the acquisition and upon renewal of client contract. The fair value of the contingent consideration of was estimated by calculating the present value of the future expected cash flows. 40 Annual Report 2016 | Stingray Digital Group Inc. Business Combinations Under the acquisition method, on the date that control is obtained, the identifiable assets, liabilities and contingent liabilities of the acquired business are measured at their fair values. Depending on the complexity of determining the valuation for certain assets, the Company uses appropriate valuation techniques in arriving at the estimated fair value at the acquisition date for these assets. These valuations are generally based on a forecast of the total expected future net discounted cash flows and relate closely to the assumptions made by management regarding the future performance of the related assets and the discount rate applied as it would be assumed by a market participant. Future Accounting Changes IFRS 9 - Financial instruments In July 2014, the International Accounting Standards Board (“IASB”) released the final version of IFRS 9 - Financial Instruments (IFRS 2014). IFRS 9 (2014) presents a few differences with IFRS 9 (2009) and IFRS (2010), early adopted by the Corporation on April 1, 2012, with respect to the classification and measurement of financial assets and accounting of financial liabilities. IFRS 9 (2014) also includes a new expected credit loss model for calculating impairment on financial assets, and a new general hedge accounting requirements. The standard is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. The Corporation does not intend to early adopt IFRS 9 (2014). The Corporation is currently evaluating the impact of the standard on its consolidated financial statements. IFRS 15 - Revenue recognition In May 2014, the IASB issued IFRS 15 - Revenue from Contracts with Customers. IFRS 15 replaces all previous revenue recognition standards, including IAS 18 - Revenue, and related interpretations such as IFRIC 13 - Customer Loyalty Programs. The standard sets out the requirements for recognizing revenue. Specifically, the new standard introduces a comprehensive framework with the general principle being that an entity recognizes revenue to depict the transfer of promised goods and services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard introduces more prescriptive guidance than was included in previous standards and may result in changes in classification and disclosure in addition to changes in the timing of recognition for certain types of revenues. The new standard is effective for annual periods beginning on or after January 1, 2018 with early adoption permitted. The Corporation is currently evaluating the impact that this standard will have on its consolidated financial statements. The Corporation does not intend to early adopt the standard. IAS 1 - Presentation of financial statements On December 18, 2014, the IASB issued amendments to IAS 1 - Presentation of financial statements as part of its major initiative to improve presentation and disclosure in financial reports. These amendments will not require any significant change to current practice, but should facilitate improved financial statement disclosures. The Corporation intends to adopt these amendments in its financial statements for the annual period beginning on April 1, 2016. The Corporation does not expect the amendments to have a material impact on the financial statements. IAS 16 – Property, Plant and Equipment On May 12, 2014, the IASB issued amendments to IAS 16 - Property, Plant and Equipment and IAS 38 - Intangible Assets. The amendments made to IAS 16 explicitly state that revenue-based methods of depreciation cannot be used for property, plant and equipment. This is because such methods reflect factors other than the consumption of economic benefits embodied in the asset. The amendments in IAS 38 introduce a rebuttable presumption that the use of revenue-based amortization methods for intangible assets is inappropriate. This presumption could be overcome only when revenue and consumption of the economic benefits of the intangible asset are highly correlated or when the intangible asset is expressed as a measure of revenue. The amendments apply prospectively for annual periods beginning on or after January 1, 2016 with early adoption permitted. The Corporation intends to adopt the amendments to IAS 16 and IAS 38 in its financial statements for the annual period beginning on April 1, 2016. The Corporation does not expect the amendments to have a material impact on the financial statements. IAS 7 – Disclosure Initiative On January 7, 2016, the IASB issued amendments to IAS 7– Disclosure Initiative. The amendments require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flow and non-cash changes. One way to meet this new disclosure requirement is to provide a reconciliation between the opening and closing balances for liabilities from financing activities. The Corporation intends to adopt the amendments to IAS 7 in its financial statements for the annual period beginning on April 1, 2017. The extent of the impact of adoption of the amendments has not yet been determined. Annual Report 2016 | Stingray Digital Group Inc. 41 IFRS 16 – Leases On January 13, 2016, the IASB issued IFRS 16 Leases. This new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17 Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other areas of the lease accounting model have been impacted, including the definition of a lease. Transitional provisions have been provided. The Corporation intends to adopt IFRS 16 in its financial statements for the annual period beginning on April 1, 2019. The extent of the impact of adoption of the standard has not yet been determined. Evaluation of disclosure controls and procedures, and internal control over financial reporting Internal control over financial reporting ("ICFR") is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and of the preparation of financial statements for external purposes in accordance with IFRS. The President and Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), together with Management, are responsible for establishing and maintaining adequate disclosure controls and procedures ("DC&P") and ICFR, as defined in National Instrument 52-109. The Corporation’s internal control framework is based on the criteria published in the updated version released in May 2013 of the report Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“2013 COSO Framework”). At March 31, 2016, it is the first reporting year ending after the completion of the IPO resulting in the Corporation’s Subordinate Voting Shares and Variable Subordinate Voting Shares being listed on the Toronto Stock Exchange. Consequently, the Corporation’s management, under the supervision of the CEO and CFO, designed ICFR to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS and based on 2013 COSO Framework. The DC&P have been designed to provide reasonable assurance that material information relating to the Corporation is made known to the CEO and CFO by others, and that information required to be disclosed by the Corporation in its annual filings, interim filings or other reports filed or submitted by the Corporation under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. As at March 31, 2016, an evaluation was carried out, under the supervision of the CEO and the CFO, of the design and operating effectiveness of the Company’s DC&P. Based on this evaluation, the CEO and the CFO concluded that the Company’s DC&P were appropriately designed and were operating effectively as at March 31, 2016. As at March 31, 2016, an evaluation was carried out, under the supervision of the CEO and the CFO, of the effectiveness of the ICFR based on the 2013 COSO Framework. Based on this evaluation, they have concluded that the Corporation’s ICFR were effective as at March 31, 2016. There have been no changes in the Corporation’s internal control over financial reporting that occurred during the period that have materially affected, or are likely to materially affect, the Corporation’s ICFR. Management’s assessment of and conclusion on the design and the effectiveness of the Corporation’s ICFR as at June 16, 2016, did not include the controls or procedures of the operations of 9076-3392 Québec Inc. (doing business as Nümédia), Transmedia Communications SA, Digital Music Distribution Pty Ltd., Brava HDTV B.V., Brava NL B.V. and Djazz TV B.V. and, which were acquired in Fiscal 2016. The Corporation has accordingly availed itself of provision 3.3(1)(b) of Regulation 52-109 which permits exclusion of these acquisitions in the design and operating effectiveness assessment of its ICFR for a maximum period of 365 days from the date of acquisition. The following table summarizes the financial information for 9076-3392 Québec Inc. (doing business as Nümédia), Transmedia Communications SA (iConcerts), Digital Music Distribution Pty Ltd.(DMD), Brava HDTV B.V., Brava NL B.V. and Djazz TV B.V. (altogether, Brava Group) : (in thousand of Canadian dollars) Nümedia iConcerts DMD Results of operations Revenues Net income Financial Position Current assets Non-current assets Current liabilities Non-currents liabilities 42 $ $ 233 $ 14 394 $ 1,776 276 306 1,794 $ 101 2,093 $ 9,531 3,473 462 $ $ 1,364 326 728 12,987 661 1,733 Brava group 3,555 78 2,841 12,451 1,830 1,072 Annual Report 2016 | Stingray Digital Group Inc.  Subsequent events Acquisition On June 15, 2016, 2Connect Media BV, a wholly-owned subsidiary of the Corporation, acquired the Festival 4k television channel, the leading Ultra HD Channel with an international customer base, for a total consideration of $3,126 (EUR2,174) including contingent consideration. New lease On May 9, 2016, the Corporation signed a letter of intent for the renewal of its lease and to add additional space in the building under construction located at 99 Prince, Montréal, with a commencement date of July 1 2017. The renewal of the lease is for a period of five years with an option to extend for an additional term of five years. The estimated commitment under the terms of the operating lease for the premises amounts to $5,810. Notice of complaint On June 6, 2016, the Corporation received notice of a complaint for patent infringement brought by Music Choice in the United States District Court for the Eastern District of Texas, Marshall Division, alleging infringement of certain claims under U.S. Patent no. 8,769,602; no. 9,357,245; no. 7,320,025; and no. 9,351,045. The Corporation believes that Music Choice’s complaint is without merit and it intends to vigorously defend itself against this action. Additional information Additional information about the Corporation is available on our website at www.stingray.com and on the SEDAR website at www.sedar.com. Annual Report 2016 | Stingray Digital Group Inc. 43 (cid:46)(cid:51)(cid:48)(cid:42)(cid:3)(cid:47)(cid:47)(cid:51) 600 de Maisonneuve Blvd. West Suite 1500, Tour KPMG Montréal (Québec) H3A 0A3 Canada Telephone Fax Internet (514) 840-2100 (514) 840-2187 www.kpmg.ca INDEPENDENT AUDITORS' REPORT To the Shareholders of Stingray Digital Group Inc. We have audited the accompanying consolidated financial statements of Stingray Digital Group Inc., which comprise the consolidated statements of financial position as at March 31, 2016 and March 31, 2015, the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, 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 audit. We conducted our audit 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. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Stingray Digital Group Inc. as at March 31, 2016 and March 31, 2015, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. June 15, 2016 Montréal, Canada *CPA auditor, CA, public accountancy permit No. A115894 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. 44 Annual Report 2016 | Stingray Digital Group Inc. (cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:85)(cid:72)(cid:75)(cid:72)(cid:81)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3)(cid:44)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars) Note 2016 2015 Revenues $ 89,944 $ 70,989 Music programming, cost of services and content Selling and marketing Research and development, support and information technology, net of tax credit of $850 (2015 - $518) General and administrative Initial public offering expenses and CRTC tangible benefits Depreciation, amortization and write-off Net finance (income) expense Change in fair value of investments Income before income taxes Income taxes (recovery) Net income Net income per share – Basic Net income per share – Diluted Weighted average number of shares – Basic Weighted average number of shares – Diluted Comprehensive income Net income Other comprehensive income, net of tax Items that may be reclassified to profit and loss Exchange differences on translation of foreign operations Items that will not be reclassified to profit and loss Remeasurements of post-employment benefit obligations Total other comprehensive income (loss) 5, 18, 19 5 6 15 7 8 8 8 8 31,162 10,680 7,613 13,247 5,821 15,028 (418) (7,345) 14,156 275 23,283 8,010 5,973 10,089 – 14,979 4,686 (1,801) 5,770 (837) $ 13,881 $ 6,607 0.29 0.29 0.20 0.19 47,822,515 48,380,253 33,642,546 34,393,243 $ 13,881 $ 6,607 804 (67) 737 – (79) (79) Total comprehensive income $ 14,618 $ 6,528 Net income is entirely attributable to Shareholders. The accompanying notes are an integral part of these consolidated financial statements. Annual Report 2016 | Stingray Digital Group Inc. 45 Consolidated Statements of Financial Position March 31, 2016 and March 31, 2015 (In thousands of Canadian dollars) Assets Current assets Cash and cash equivalents Trade and other receivables Research and development tax credits Inventories Prepaid expenses and other current assets Non-current assets Property and equipment Intangible assets Goodwill Investments Investment in joint venture Other assets Deferred tax assets Total assets Liabilities and Equity Current liabilities Revolving facility Accounts payable and accrued liabilities Dividends payable Deferred revenues Current portion of other payables Income taxes payable Bridge loan Current portion of term loan Non-current liabilities Revolving facility Term loan Derivative financial instruments Other payables Deferred tax liabilities Total liabilities Shareholders’ equity Share capital Contributed surplus Deficit Accumulated other comprehensive income Total equity Commitments (note 22) Subsequent events (note 2) Total liabilities and equity Note March 31, 2016 March 31, 2015 (recasted, see note 3) 9 10 11 12 13 14 15 7 17 16 19 18 17 17 17 17 18 7 19 $ $ 3,201 27,761 236 910 3,487 35,595 4,628 47,901 62,022 16,943 815 1,088 7,117 1,314 17,494 334 876 2,667 22,685 4,330 45,441 39,129 7,933 858 919 3,875 $ 176,109 $ 125,170 $ $ – 25,819 1,789 915 8,006 1,711 – – 38,240 35,035 – – 8,695 3,745 85,715 102,040 2,196 (14,646) 804 90,394 7,902 16,743 – 714 8,463 393 20,000 9,830 64,045 – 71,005 110 4,434 3,418 143,012 2,240 1,759 (21,841) – (17,842) $ 176,109 $ 125,170 The accompanying notes are an integral part of these consolidated financial statements. Approved by the Board of Directors, (Signed) Eric Boyko, Director (Signed) L. Jacques Ménard, Director 46 Annual Report 2016 | Stingray Digital Group Inc. (cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, except number of share capital) Share Capital Number Amount Contributed surplus Deficit Accumulated other comprehensive income Total shareholders’ equity Balance at March 31, 2014 32,670,254 $ 1,006 $ 2,500 $ (8,721) $ Issuance of shares upon exercise of options (note 19) 1,310,834 1,682 (1,472) – Dividends and reduction of stated capital on common shares (note 19) Share-based compensation (note 21) Repurchase of stock options (note 19) Net income Other comprehensive loss – – – – – (448) – (19,601) – – – – 800 (69) – – – (47) 6,607 (79) Balance at March 31, 2015 33,981,088 $ 2,240 $ 1,759 $ (21,841) $ Issuance of shares upon exercise of options (note 19) 479,787 1,298 (914) – Dividends (note 19) – – Issuance of subordinate voting shares and variable subordinate voting shares (note 19) Share issuance costs – net of income taxes of $1,993 (note 19) Share-based compensation (note 21) Net income Other comprehensive income 16,647,100 104,044 – – – – (5,542) – – – – – – 1,351 (6,619) – – – – – 13,881 (67) Balance at March 31, 2016 51,107,975 $ 102,040 $ 2,196 $ (14,646) $ – – – – – – – – – – – – – – 804 804 $ (5,215) 210 (20,049) 800 (116) 6,607 (79) $ (17,842) 384 (6,619) 104,044 (5,542) 1,351 13,881 737 $ 90,394 The accompanying notes are an integral part of these consolidated financial statements. Annual Report 2016 | Stingray Digital Group Inc. 47 (cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:41)(cid:79)(cid:82)(cid:90)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars) Note 2016 2015 Operating activities: Net income Adjustments for: Share-based compensation Restricted share unit expense Deferred share unit expense Depreciation and write-off of property and equipment Amortization of intangible assets Amortization and write-off of financing fees Other interest expense Change in fair value of derivative Change in fair value of investments Change in fair value of contingent considerations Write-off of other assets Accretion expense of CRTC tangible benefits Share of results of joint venture Income taxes expense Other Interest paid Income taxes paid Net change in non-cash operating items Financing activities: Increase in the revolving facility Issuance of term loan Issuance of bridge loan Repayment of term loan and bridge loan Payment of dividend and stated capital of common shares Repurchase of stock options Proceeds from the exercise of stock options Issuance of shares Share capital issuance costs Deferred financing costs Repayment of other payables Other Investing activities: Business and assets acquisitions, net of cash acquired Acquisition of investments Acquisition of property and equipment Acquisition of intangible assets Increase in cash and cash equivalents Cash and cash equivalents (bank overdraft), beginning of year $ 13,881 $ 6,607 21 21 21 12 13 20 17 17 17 19 19 19 19 19 3 15 1,351 592 371 2,146 12,882 263 1,627 (110) (7,345) (2,064) – 248 43 275 – (1,426) (2,190) 20,544 (1,576) 18,968 26,948 – – (100,960) (4,830) – 384 104,044 (7,535) (431) (4,851) (91) 12,678 (24,665) (1,665) (2,300) (1,129) (29,759) 1,887 1,314 800 211 – 2,057 12,854 369 3,961 (72) (1,801) 485 (200) – (128) (837) 11 (3,845) (2,546) 17,926 (8,018) 9,908 2,704 20,000 20,000 (6,564) (20,049) (116) 210 – – (161) (1,154) (108) 14,762 (20,572) – (1,688) (751) (23,011) 1,659 (345) Cash and cash equivalents, end of year $ 3,201 $ 1,314 The accompanying notes are an integral part of these consolidated financial statements.(cid:3) (cid:3) 48 Annual Report 2016 | Stingray Digital Group Inc. Notes to Consolidated Financial Statements Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 1. Significant changes and highlights: The consolidated financial position and performance of the Stingray Digital Group Inc. (the "Corporation") was particularly affected by the following events and transactions during the year ended March 31, 2016: - The completion of its Initial public offering (“IPO”) in June 2015, which resulted in an increase in the share capital (note 19), recognition of IPO expenses related to the secondary offering (note 19) and in the repayment of the term loan and bridge loan (note 17). - The acquisitions of the Brava Group based in Netherlands in July 2015, iConcerts based in Geneva in December 2015, Digital Media Distribution based in Australia in December 2015 and Nümédia based in Canada in February 2016 (note 3). It resulted in the recognition of goodwill (note 3 and 14), intangibles assets (note 3 and 13), contingent considerations (note 3 and 18) and additional operating profit related to those acquisitions (note 3). The Corporation financed those acquisition using its amended revolving facility. - The approval by the CRTC of the change in ownership and effective control of the Corporation in April 2015, which resulted in the recognition of a tangible benefits payable (note 18) and CTRC tangible benefits expenses. - The additional investment in AppDirect Inc. and following fair value valuation, which resulted in an increase in investments (note 15) and the recognition of a gain on fair value revaluation (note 24). 2. Subsequent events: Acquisition On June 15, 2016, 2Connect Media BV, a wholly-owned subsidiary of the Corporation, acquired the Festival 4k television channel, the leading Ultra HD Channel with an international customer base, for a total consideration of $3,126 (EUR2,174) including contingent consideration. New lease On May 9, 2016, the Corporation signed a letter of intent for the renewal of its lease and to add additional space in the building under construction located at 99 Prince, Montréal, with a commencement date of July 1 2017. The renewal of the lease is for a period of five years with an option to extend for an additional term of five years. The estimated commitment under the terms of the operating lease for the premises amounts to $5,810. Notice of complaint On June 6, 2016, the Corporation received a notice of a complaint for patent infringement brought by Music Choice in the United States District Court for the Eastern District of Texas, Marshall Division, alleging infringement of certain claims under U.S. Patent no. 8,769,602; no. 9,357,245; no. 7,320,025; and no. 9,351,045. The Corporation believes that Music Choice’s complaint is without merit and it intends to vigorously defend itself against this action. Annual Report 2016 | Stingray Digital Group Inc. 49 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 3. Business acquisitions: Year ended March 31, 2016 Nümédia On February 15, 2016, the Corporation purchased all of the outstanding shares of 9076-3392 Québec Inc. (“Nümédia”) for a total consideration of $1,851. This acquisition will enable the Corporation to strengthen its Canadian operations. As a result of the acquisition, a goodwill of $775 has been recognized and is related to the operating synergies expected to be achieved from integrating the acquired business into the Corporation existing assets. The goodwill will not be deductible for tax purposes. The fair value of acquired trade receivables was $260 which represented the gross contractual amount. The contingent consideration arrangement requires the Corporation to pay, in cash, to the former owners, a certain multiple of the revenues for 12 months and other conditions, of up to $300 and would be payable on February 15, 2017. The fair value of the contingent consideration has been determined using an income approach based on the estimated amount and timing of projected cash flows. The results of the business acquisition of Nümédia for the year ended March 31, 2016 have been included in results since the date of the acquisition. Revenues recorded from the acquisition date to March 31, 2016 were $233 and net income of $14. Had the acquisition occurred at the beginning of the fiscal year, revenues related to this acquired business would have been approximately $1,397 and net income of $83. Assets acquired : Cash and cash equivalents Accounts receivable Prepaid expense and other current assets Property and equipment Intangible assets Goodwill Liabilities assumed : Accounts payable and accrued liabilities Long-term debt Deferred tax liabilities Net assets acquired at fair value Consideration given : Cash Contingent consideration $ Nümédia 257 260 33 185 841 775 2,351 289 185 26 500 $ 1,851 1,700 151 $ 1,851 50 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) iConcerts On December 17, 2015, the Corporation purchased all of the outstanding shares of Transmedia Communications SA (“iConcerts”) for a total consideration of CHF5,600 (CA$7,810). This acquisition will enable the Corporation to strengthen its international operations within Europe. As a result of the acquisition, a goodwill of $6,979 has been recognized and is related to the operating synergies expected to be achieved from integrating the acquired business into the Corporation existing worldwide assets. The goodwill will not be deductible for tax purposes. The fair value of acquired trade receivables was $912. The gross contractual amount for trade receivables due is $1,587, of which $675 is expected to be uncollectible. The contingent consideration arrangement requires the Corporation to pay, in cash, to the former owners, a certain multiple of the revenues for 12 months and other conditions, of up to CHF2,100 (CA$2,929) and would be payable on November 30, 2016. Based on management estimates, it has been determined that the fair value of the contingent consideration was nil. The results of the business acquisition of iConcerts for the year ended March 31, 2016 have been included in results since the date of the acquisition. Revenues recorded from the acquisition date to March 31, 2016 were $1,794 and net income of $101. Had the acquisition occurred at the beginning of the fiscal year, revenues related to this acquired business would have been approximately $5,382 and net income of $303. Preliminary Adjustments Adjusted Assets acquired : Cash and cash equivalents Accounts receivable Prepaid expense and other current assets Property and equipment Intangible assets Goodwill Liabilities assumed : Accounts payable and accrued liabilities Income taxes payable Deferred tax liabilities $ 505 1,966 997 51 2,334 6,921 12,774 4,410 209 345 4,964 $ $ (1,054) (546) 116 58 (1,426) (977) (209) (240) (1,426) Net assets acquired at fair value $ 7,810 $ – $ Consideration given : Cash 7,810 $ 7,810 $ – $ 505 912 451 51 2,450 6,979 11,348 3,433 – 105 3,538 7,810 7,810 7,810 Annual Report 2016 | Stingray Digital Group Inc. 51 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Digital Media Distribution On December 14, 2015, the Corporation purchased all of the outstanding shares of Digital Music Distribution Pty Ltd. (“DMD”) for a total consideration of AUD11,990 (CA$11,853). This acquisition will enable the Corporation to strengthen its international operations within Asia-Pacific. As a result of the acquisition, a goodwill of $7,326 has been recognized and is related to the operating synergies expected to be achieved from integrating the acquired business into the Corporation existing worldwide assets. The goodwill will not be deductible for tax purposes. The fair value of acquired trade receivables was $98 which represented the gross contractual amount. The contingent consideration arrangement requires the Corporation to pay, in cash, to the former owners, AUD4,002 (CA$3,956) upon renewal of clients’ contract before December 2017. The results of the business acquisition of DMD for the year ended March 31, 2016 have been included in results since the date of the acquisition. Revenues recorded from the acquisition date to March 31, 2016 were $1,364 and net income of $326. Had the acquisitions occurred at the beginning of the fiscal year, revenues related to this acquired business would have been approximately $4,093 and net income of $979. Assets acquired : Cash and cash equivalents Accounts receivable Prepaid expense and other current assets Intangible assets Goodwill Liabilities assumed : Accounts payable and accrued liabilities Deferred tax liabilities Preliminary Adjustments Adjusted $ $ 210 123 292 2,924 9,166 12,715 306 497 803 $ (5) (25) 5 2,576 (1,840) 711 (19) 789 770 205 98 297 5,500 7,326 13,426 287 1,286 1,573 Net assets acquired at fair value $ 11,912 $ (59) $ 11,853 Consideration given : Cash Working capital adjustment Contingent consideration 7,862 – 4,050 (183) 218 (94) 7,679 218 3,956 $ 11,912 $ (59) $ 11,853 52 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Brava Group In July 2015, the Corporation purchased all of the outstanding shares of Brava HDTV B.V., Brava NL B.V. and DjazzTV B.V. (“Brava Group”) for a total consideration of EUR8,334 (CA$11,548). This acquisition will enable the Corporation to strengthen its international operations within Europe. As a result of the acquisition, a goodwill of $7,428 has been recognized and is related to the operating synergies expected to be achieved from integrating the acquired business into the Corporation existing worldwide assets. The goodwill will not be deductible for tax purposes. The fair value of acquired trade receivables was $1,594, which represented the gross contractual amount. The contingent consideration arrangement requires the Corporation to pay, in cash, to the former owners, a certain multiple of the revenues for 36 months, of up to EUR2,971 (CA$4,117) and will be paid out on each anniversary date for the next three years, ending in June 2018. The fair value of the contingent consideration has been determined using an income approach based on the estimated amount and timing of projected cash flows and discounted for time value. The results of the business acquisitions of Brava Group for the year ended March 31, 2016 have been included in results since the date of the acquisition. Revenues recorded from the acquisition date to March 31, 2016 were $3,555 and net income of $78. Had the acquisitions occurred at the beginning of the fiscal year, revenues related to these acquired businesses would have been approximately $4,740 and net income of $104. Assets acquired : Cash and cash equivalents Accounts receivable Prepaid expense and other current assets Property and equipment Intangible assets Goodwill Liabilities assumed : Accounts payable and accrued liabilities Income taxes payable Deferred tax liabilities Preliminary Adjustments Adjusted $ $ 18 275 293 $ 282 1,576 164 61 4,795 7,153 14,031 1,186 391 1,199 2,776 282 1,594 164 61 4,795 7,428 14,324 1,186 391 1,199 2,776 Net assets acquired at fair value $ 11,255 $ 293 $ 11,548 Consideration given : Cash Working capital adjustment Contingent consideration 8,502 25 2,728 275 18 8,502 300 2,746 $ 11,255 $ 293 $ 11,548 As of the reporting date, the Corporation has not completed all purchase price allocation of the year over the identifiable net assets and goodwill as information to confirm working capital items is still to be obtained. Annual Report 2016 | Stingray Digital Group Inc. 53 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Year ended March 31, 2015 Les Réseaux Urbains Viva Inc. On February 10, 2015, the Corporation purchased all of the outstanding shares of Les Réseaux Urbains Viva Inc. for a total consideration of $4,420. This acquisition will enable the Corporation to strengthen its Canadian position for in-store media solutions and digital signage solutions. As a result of the acquisition, a goodwill of $2,621 has been recognized and is related to the strategic expertise from the former owner and employees and operating synergies expected to be achieved from integrating the acquired business into the Corporation existing business and the leverage of the Corporation expertise in music and digital signage. The goodwill will not be deductible for tax purposes. The contingent consideration arrangement requires the Corporation to pay, in cash, to the former owners, a certain multiple of the annualized revenues for 24 months, of up to $3,881 and will be paid out in March 2018. The fair value of the contingent consideration has been determined using an income approach based on the estimated amount and timing of projected cash flows and discounted for time value. The Corporation finalized the assessment of the fair values of the assets acquired and liabilities assumed related to this acquisition and adjustments to the preliminary assessment has been recorded in the statement of financial position as show below. The comparative figures have been adjusted to reflect these changes. Assets acquired : Cash and cash equivalents Accounts receivable Inventories Property and equipment Intangible assets Goodwill Liabilities assumed : Accounts payable and accrued liabilities Deferred revenues Long-term debt Deferred income tax liabilities Preliminary Adjustments Final $ $ 495 973 531 108 2,160 2,235 6,502 1,019 333 150 580 2,082 $ – 124 (283) – – 386 227 227 – – – 227 495 1,097 248 108 2,160 2,621 6,729 1,246 333 150 580 2,309 Net assets acquired at fair value $ 4,420 $ – $ 4,420 Consideration given : Cash Contingent consideration 2,000 2,420 $ 4,420 $ – – – 2,000 2,420 $ 4,420 54 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Telefonica – On The Spot On October 10, 2014, the Corporation purchased the music division of Telefonica On The Spot Services S.A.U. (“On The Spot”) for a total consideration of US$3,490 (CA$3,906). This acquisition will enable the Corporation to strengthen its international operations within Latin America. The contingent consideration arrangement requires the Corporation to pay, in cash, to the former owners, a certain multiple of the revenues for 24 months, of up to $US887 (CA$1,110) and will be paid out in November 2016. The fair value of the contingent consideration has been determined using an income approach based on the estimated amount and timing of projected cash flows and discounted for time value. DMX Canada On June 27, 2014, the Corporation purchased the Canadian assets from the Commercial division of Mood Media Entertainment LTD (“DMX Canada”) for a total consideration of $11,770. This acquisition will enable the Corporation to reinforce its status of largest commercial music provider in Canada and it is expected to reduce costs through economies of scale. As a result of the acquisition, a goodwill of $4,260 has been recognized and is related to the operating synergies expected to be achieved from integrating the acquired business into the Corporation existing business and the leverage of the Corporation expertise in Canada. A portion of the goodwill amounted to $2,816 is expected to be deductible for income tax purposes. The contingent consideration arrangement requires the Corporation to pay, in cash, to the former owners, a certain percentage of the revenues for 12 months, of up to $1,803 and has been paid out during the year ended March 31, 2016. The fair value of the contingent consideration has been determined using an income approach based on the estimated amount and timing of projected cash flows and discounted for time value. The Corporation finalized the assessment of the fair values of the assets acquired and liabilities assumed related to these acquisitions and no adjustments to the preliminary assessment were recorded in the statement of financial position. Assets acquired : Property and equipment Intangible assets Goodwill Liabilities assumed : Deferred income tax liabilities Telefonica DMX Canada $ $ – 3,906 – 3,906 – 511 7,504 4,260 12,275 505 505 Net assets acquired at fair value $ 3,906 $ 11,770 Consideration given : Cash Contingent consideration 2,978 928 10,217 1,553 $ 3,906 $ 11,770 Annual Report 2016 | Stingray Digital Group Inc. 55 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Archibald Media Group On June 12, 2014, the Corporation purchased all of the outstanding shares of Archibald Media Group B.V. for a total consideration of EUR5,319 (CA$7,824). This acquisition will enable the Corporation to strengthen its international operations within Europe. As a result of the acquisition, a goodwill of $3,918 has been recognized and is related to the operating synergies expected to be achieved from integrating the acquired business into the Corporation existing worldwide assets and the leverage of the Corporation expertise in Europe. The goodwill will not be deductible for tax purposes. The contingent consideration arrangement requires the Corporation to pay, in cash, to the former owners, a certain multiple of the revenues for 24 months, of up to EUR1,378 (CA$1,880) and will be paid out in July 2016. The fair value of the contingent consideration has been determined using an income approach based on the estimated amount and timing of projected cash flows and discounted for time value. The Corporation finalized the assessment of the fair values of the assets acquired and liabilities assumed related to this acquisition, and adjustments to the preliminary assessment has been recorded in the statement of financial position as show below. The comparative figures have been adjusted to reflect these changes. Assets acquired : Cash and cash equivalents Accounts receivable Property and equipment Intangible assets Investment in joint venture Goodwill Liabilities assumed : Accounts payable and accrued liabilities Deferred income tax liabilities Preliminary Adjustments Final $ $ 207 511 111 4,070 – 4,255 9,154 486 844 1,330 $ – – – (303) 730 (337) 90 – 90 90 207 511 111 3,767 730 3,918 9,244 486 934 1,420 Net assets acquired at fair value $ 7,824 $ – $ 7,824 Consideration given : Cash Contingent consideration 6,079 1,745 $ 7,824 $ – – – 6,079 1,745 $ 7,824 The results of the business acquisitions of DMX Canada, On The Spot, Archibald Media Group B.V. and Les Réseaux Urbains Viva Inc. for the year ended March 31, 2015 have been included in results since the date of the respective acquisitions. Revenues recorded from the acquisition date to March 31, 2015 were $6,300 and net income related to these acquired businesses is impracticable to determine. Had the acquisitions occurred at the beginning of the fiscal year, revenues related to these acquired businesses would have been approximately $12,000 and net income is impracticable to determine. The Corporation fully integrated those acquisitions within its operations and consequently it is impractical to adequately separate costs. 56 Annual Report 2016 | Stingray Digital Group Inc. Notes to Consolidated Financial Statements Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Other The Corporation also amended the purchase price allocation of the acquisition of Pay Audio Services Limited Partnership by reducing goodwill and deferred tax liabilities by $3,321. Significant estimate Under the acquisition method, on the date that control is obtained, the identifiable assets, liabilities and contingent liabilities of the acquired business are measured at their fair values (financial instrument level 3). Depending on the complexity of determining the valuation for certain assets, the Corporation uses appropriate valuation techniques in arriving at the estimated fair value at the acquisition date for these assets. These valuations are generally based on a forecast of the total expected future net discounted cash flows and relate closely to the assumptions made by management regarding the future performance of the related assets and the discount rate applied as it would be assumed by a market participant. 4. Segment information: Business description The Corporation is incorporated under the Canada Business Corporations Act. The Corporation is domiciled in Canada and its registered office is located at 730 Wellington, Montréal, Québec, H3C 1T4. The Corporation is a provider of multi- platform music services. It broadcasts high quality music and video content on a number of platforms including digital TV, satellite TV, IPTV, the Internet, mobile devices and game consoles. Operating segments Under IFRS 8, Operating Segments, the Corporation determined that it operated in a single operating segment for the years ended March 31, 2016 and 2015 since operations, resources and assets are mainly centralized, optimized and managed in Canada. International operations are leveraged from Canadian expertise. The following tables provide geographic information on Corporation’s revenues, property and equipment, intangibles assets and goodwill. Revenue is derived from the following geographic areas based on selling locations. Revenues Canada Other countries 2016 53,535 36,409 89,944 $ $ Long-term assets are derived from the following geographic areas based on subsidiaries locations. Property and equipment, intangible assets and goodwill Canada Netherlands United Kingdom Australia Other countries $ 2016 53,524 18,811 16,857 12,620 12,739 $ 114,551 Annual Report 2016 | Stingray Digital Group Inc. $ $ $ $ 2015 47,738 23,251 70,989 2015 56,681 7,597 20,847 – 3,775 88,900 57 Notes to Consolidated Financial Statements Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 5. Other information: Expenses by nature are as follows: Salaries and other short-term employee benefits Research and development Equipment costs Share-based compensation Restricted share units Deferred share units $ 2016 19,780 5,725 4,505 1,351 592 371 $ 2015 16,480 4,966 1,760 800 211 – The following table shows the depreciation and amortization and IPO expenses and CRTC tangible benefits distributed by function: Depreciation, amortization and write-off : Music programming, cost of services and content General and administrative IPO expenses and CRTC tangible benefits : Music programming, cost of services and content General and administrative 2016 13,749 1,279 15,028 4,158 1,663 5,821 $ $ $ $ 2015 13,237 1,742 14,979 – – – $ $ $ $ The music programming, cost of services and content and the general and administrative expense would have been respectively $49,069 (2015 – $36,520) and $16,189 (2015 – $11,831), if the presentation by function of the depreciation, amortization and write-off expense, IPO expenses and CRTC tangible benefits would have been adopted in the statements of comprehensive income. Transaction costs related to business acquisitions amounting to $691 (2015 – $233) have been recognized in general and administrative in the statements of comprehensive income. Share of the profit of a joint venture of $105 has been presented in general and administrative in the statements of comprehensive income (2015 – $200). Dividend received from the joint venture amounted to $148 (2015 - $72). 6. Net finance (income) expense: Interest expense and standby fees Change in fair value of contingent considerations Change in fair value of derivative Accretion expenses of CRTC tangible benefits payable Amortization and write-off of financing fees Write-off of other assets Foreign exchange gain 2016 1,627 (2,064) (107) 248 263 – (385) (418) $ $ 2015 3,961 485 (72) – 369 200 (257) 4,686 $ $ 58 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 7. Income taxes: The income taxes expense consists of the following: Current income tax: Current year Adjustment for prior years Deferred income tax : Origination and reversal of temporary differences Adjustment for prior years Change in recognized tax losses and deductible temporary differences $ 2016 4,160 70 4,230 (447) (67) (3,441) (3,955) $ 2015 2,780 111 2,891 (1,052) 30 (2,706) (3,728) Total income tax expense $ 275 $ (837) The following table reconciles income taxes computed at the Canadian statutory rate of 26.9% (2015 – 26.9%) and the total income tax expense for the years ended March 31: 2016 2015 Income before income taxes $ 14,156 $ 5,770 Income tax at the combined Canadian statutory rate (Decrease) increase resulting from: Impact of foreign tax rate differences Permanent differences Non-taxable portion of capital gain Change in recognized tax losses and deductible temporary differences Withholdings taxes Change in future tax rate applicable to investments Other Total income tax expense Significant estimate 3,808 (599) 1,009 (993) (3,441) 1,170 (687) 8 275 $ 1,552 (240) 404 (242) (2,706) 543 – (148) (837) $ Recorded income taxes and tax credits are subject to review and approval by tax authorities and therefore could be different from the amounts recorded. Annual Report 2016 | Stingray Digital Group Inc. 59 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Recognized deferred tax assets and liabilities: The tax effects of significant components of temporary differences that give rise to deferred tax assets and liabilities are as follows: $ Property and equipment Intangible assets and goodwill Financing fees Tax losses carried forward Investments CRTC tangible benefits Others Tax assets and liabilities Offsetting of assets and liabilities Net tax assets and liabilities $ Unrecognized deferred tax assets 2016 2015 Assets Liabilities Assets Liabilities 339 $ 114 2,016 6,666 – 1,138 273 10,546 (3,429) 7,117 $ $ 22 5,177 – – 1,930 – 45 7,174 (3,429) 3,745 $ 266 $ 121 157 4,446 – – 385 5,375 (1,500) 3,875 $ 42 6,762 – – 1,624 – 28 8,456 (5,038) 3,418 The Corporation has operating tax losses carried forward of $115,379 and unrecognized deductible temporary differences of $5,217 that are available to reduce future taxable income. A tax benefit was not recognized for $79,862 of these tax losses carried forward. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Corporation can utilized the benefits therefrom. As at March 31, 2016 and 2015, the amounts and expiry dates of the tax losses carried forward and other unrecognized deductible temporary differences without time limitation were as follows: Tax losses carried forward: 2017 2018 2019 2020 2021 2026 2027 2028 2029 2030 2034 Indefinite Other deductible temporary difference without time limitation Canada Australia Switzerland 2016 United Kingdom Canada 2015 United Kingdom $ – $ – – – – 23 373 84 49 7 – – – $ – – – – – – – – – – 684 8,040 $ 4,613 5,116 4,844 3,474 – – – – – – – – – – – – – – – – – – 88,072 $ – $ – – – – – 262 324 28 – 175 – – – – – – – – – – – – 91,481 – $ 536 $ – 684 – 5,217 – 6,258 26,087 $ 93,289 $ 789 $ 97,739 Unrecognized deferred tax liabilities The Corporation has not recognized a deferred tax liability for the undistributed earnings of its subsidiaries in the current and prior years because the Corporation does not currently expect those undistributed earnings to reverse and become taxable in the foreseeable future. A deferred income tax liability will be recognized when the Corporation expects that it will recover those undistributed earnings in a taxable manner, such as the sale of the investment or through the receipt of dividends. 60 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Significant estimate The deferred tax assets include an amount of $6,666 which relates to carried forward tax losses of some Canadian, European and Australian subsidiaries. The subsidiaries have incurred the losses over the last financial years before the acquisition by the Corporation. The subsidiaries now generate taxable income. The Corporation has concluded that it is probable that these deferred assets will be recoverable considering the estimated future operating results as per the approved business plans and budgets for the subsidiaries. 8. Earnings per share: 2016 2015 Net income $ 13,881 $ 6,607 Basic weighted average number of common share and subordinate voting shares, variable subordinate voting shares and multiple voting shares Dilutive effect of stock options Diluted weighted average number of common share and subordinated voting shares, variable subordinated voting shares and multiple voting shares 47,822,515 557,738 33,642,546 750,697 48,380,253 34,393,243 Earnings per share – Basic Earnings per share – Diluted 9. Trade and other receivables: Trade Other receivables $ $ $ $ 0.29 0.29 2016 25,447 2,314 27,761 $ $ $ $ 0.20 0.19 2015 16,379 1,115 17,494 10. Research and development tax credits: As at March 31, 2016, tax credits receivable of $236 (2015 - $334) comprise research and development tax credits receivable from the provincial government, which relate to qualifiable research and development expenditures under the applicable tax laws. The amounts recorded as receivables are subject to a government tax audit and the final amounts received may differ from those recorded. 11. Inventories: Music transmission equipment hardware Television equipment, speakers and other 2016 586 324 910 $ $ 2015 451 425 876 $ $ Annual Report 2016 | Stingray Digital Group Inc. 61 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 12. Property and equipment: Cost: Balance at March 31, 2014 Additions Additions through business acquisitions Disposals and write-off Balance at March 31, 2015 Additions Additions through business acquisitions Disposals and write-off Foreign exchange differences Balance at March 31, 2016 Accumulated depreciation: Balance at March 31, 2014 Depreciation for the year Disposal and write-off Balance at March 31, 2015 Depreciation for the year Disposals and write-off Foreign exchange differences Balance at March 31, 2016 Net carrying amounts: March 31, 2015 March 31, 2016 Furniture, fixtures and equipment Computer hardware Other Total $ $ $ $ 3,400 $ 2,063 618 (119) 5,962 2,750 $ 835 112 (33) 3,664 807 44 (224) (2) 6,587 2,040 1,123 (66) 3,097 1,019 246 (3) 6 4,932 1,843 691 (26) 2,508 869 (58) – 3,908 $ 854 (3) 4 3,363 $ 821 $ 125 – (89) 857 320 7 – 1 1,185 454 169 (75) 548 257 – – 805 $ 6,971 3,023 730 (241) 10,483 2,146 297 (227) 5 12,704 4,337 1,983 (167) 6,153 1,980 (61) 4 8,076 2,865 $ 2,679 $ 1,156 $ 1,569 $ 309 $ 380 $ 4,330 4,628 62 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 13. Intangible assets: Music catalog Client list and relationships Trademark Cost: Balance at March 31, 2014 Additions Additions through business acquisitions Balance at March 31, 2015 Additions Additions through business acquisition Foreign exchange differences Balance at March 31, 2016 Accumulated depreciation: Balance at March 31, 2014 Amortization for the year Balance at March 31, 2015 Amortization for the year Foreign exchange differences Balance at March 31, 2016 Net carrying amounts: March 31, 2015 March 31, 2016 $ $ $ $ 14. Goodwill: Balance, beginning of year Business acquisitions (note 3) Foreign exchange differences Balance, end of year $ 58,921 – $ 6,977 308 450 7,735 352 156 (1) 8,242 2,462 774 3,236 530 1 3,767 15,679 74,600 – 11,818 296 86,714 28,049 10,519 38,568 10,634 3 $ 49,205 $ $ $ 4,499 4,475 $ 36,032 $ 37,509 2,147 – 735 2,882 – 1,492 3 4,377 414 175 589 336 – 925 2,293 3,452 $ $ Licenses, website application and computer software $ $ $ $ 4,346 585 46 4,977 883 264 (1) 6,123 3,217 764 3,981 872 (1) 4,852 996 1,271 Non- compete agreement Total $ 3,097 $ 75,488 893 – 427 3,524 17,337 93,718 – 1,235 79 2 3,605 13,809 299 109,061 1,281 622 1,903 35,423 12,854 48,277 510 (2) 12,882 1 2,411 $ 61,160 1,621 $ 45,441 1,194 $ 47,901 $ $ $ 2016 39,129 22,508 385 62,022 2015 (recasted- see note 3) $ $ 28,330 10,799 – 39,129 For the purpose of impairment testing, goodwill of $62,022 was allocated to the single CGU representing all music services. The Corporation performed its annual impairment test for goodwill during the last quarter of 2016. The recoverable value of the CGU exceeded its carrying value. There is no reasonable possible change in assumptions that would cause the carrying amount to exceed the estimated recoverable amount. As a result, no goodwill impairment was recorded. Valuation technique and significant estimate The recoverable value of the CGU was based on fair value less costs to sell. The following methodology and assumptions were applied to determine the fair value less costs to sell. Annual Report 2016 | Stingray Digital Group Inc. 63 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) The fair value less costs to sell was calculated using unobservable (Level 3) inputs such as the budgeted and projected 2017-2021 revenues and EBITDA margin. The EBITDA is defined as net income before net finance costs, change in fair value of investment, income taxes, depreciation and amortization. The Corporation considered past experience, economic trends as well as industry and market trends in assessing if the level of EBITDA can be maintained in the future. For the purpose of this test, management uses a five-year period to project future cash flows. Beyond this period, the Corporation uses a growth rate of 2% with an EBITDA margin of 35%. The Corporation also used a discount rate of 10%, which represents the weighted average cost of capital (“WACC”). The WACC is an estimate of the overall rate of return required by debt and equity holders on their investment. Determining the WACC requires analyzing the cost of equity and debt separately, and takes into account a risk premium that is based on the CGU. For the purpose of impairment testing of tangible and intangible assets and goodwill, management must use its judgment to identify the smallest group of assets that generates cash inflows that are largely independent of those from other assets (“cash generating unit” or ”CGU”). The amounts used for impairment calculations are based on estimates of future cash flows of the Corporation, including estimates of future revenues, EBITDA, discount rates (WACC) and market prices. By their nature, these estimates and assumptions are subject to measurement uncertainty and, consequently, actual results could differ from estimates used. 15. Investments: Balance, beginning of year Additions during the year Change in fair value during the year, including foreign exchange gain Balance, end of year 2016 7,933 1,665 7,345 16,943 $ $ 2015 6,132 – 1,801 7,933 $ $ Investments consists of an investment in convertible preferred shares of a private entity, AppDirect, and an investment in a convertible note of a private entity, Multi-Channels Asia PTE Ltd. (“MCA”). AppDirect The investment made by the Corporation into convertible preferred shares of AppDirect is classified as measured at fair value through profit and loss. On September 21, 2015, the Corporation invested US$300 (CA$330) in convertible preferred shares. MCA The investment made by the Corporation into convertible note of MCA is classified as at fair value through profit and loss. On November 11, 2015, the Corporation invested US$1,000 (CA$1,335) in convertible note. The convertible note matures in five years, bears interest at 7% per annum and the principal amount is convertible, at the option of the Corporation, into common shares of MCA, at any time, until maturity. Significant estimate The fair value of investments that are not traded in an active market is determined using valuation techniques. The Corporation uses judgement to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting year. For details of the key assumptions used and the impact of changes to these assumptions, see note 24. 64 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 16. Accounts payable and accrued liabilities: Trade Accrued liabilities Sales taxes payable 17. Loans and borrowings: Movements in loans and borrowings are as follows: Year ended March 31, 2015 Opening net book amount as at March 31, 2014 Increase of revolving facility (net) New debt Repayments of borrowings New financing fees Amortization of financing fees Closing net book amount as at March 31, 2015 Current portion Non-current portion Year ended March 31, 2016 Opening net book amount as at March 31, 2015 Increase of revolving facility (net) Repayments of borrowings Amortization and write-off of financing fees Closing net book amount as at March 31, 2016 Current portion Non-current portion Revolving credit facility 2016 8,624 16,338 857 25,819 $ $ 2015 2,624 14,021 98 16,743 $ $ Revolving facility Bridge loan Term loan $ $ $ 5 198 2 704 – – – – 7,902 7,902 – $ $ $ – – 20,000 – – – 20,000 20,000 – $ $ $ 67,041 – 20,150 (6,564) (161) 369 80,835 9,830 71,005 Revolving facility Bridge loan Term loan $ $ $ 7 902 27,133 – – 35,035 – 35,035 $ $ $ 20,000 – (20,000) – – – – $ $ $ 80,835 – (80,960) 125 – – – On June 11, 2015, the Corporation renegotiated its credit agreement in order to merge the outstanding balance of the term loan into the amended revolving credit facility (“revolving facility”), to provide for the repayment of the bridge loan, to increase its borrowing capacity to $100,000 and to make modifications in relation to interest, maturity, security and covenants. The revolving facility matures in June 2019, bears interest at an annual rate equal to the banker’s acceptance rate plus between 1.38% and 3.00% and is secured by guarantees from subsidiaries and first ranking lien on universality of all its assets, tangible and intangible, present and future. In addition, the Corporation incurs standby fees between 0.28% and 0.60% on the unused portion of the revolving facility. The Corporation is required to comply with financial covenants. As at March 31, 2016, the Corporation was in compliance with all the requirements of its credit agreement. Term loan The term loan was repaid on June 11, 2015, was bearing interest at prime rate plus the applicable margin (between 1.00% and 3.00%), representing an interest rate of 4.85% at March 31, 2015, and was maturing on December 18, 2016. Annual Report 2016 | Stingray Digital Group Inc. 65 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Bridge loan The Corporation repaid in full the outstanding amount on June 11, 2015. The bridge loan was bearing interest at an annual rate equal to either the prime loans or acceptances rates plus 3.00% and 4.00% up to December 13, 2015, respectively, and 3.50% and 4.50%, respectively, thereafter, representing an interest rate of 6.85% at March 31, 2015, was maturing in March 2016 and was secured by guarantees from subsidiaries and first ranking lien on universality of tangible and intangible assets. Under the credit agreement, the Corporation was to comply with quarterly financial covenants. 18. Other payables: Other payables consist of the following: Contingent considerations CRTC tangible benefits Post-employment benefit obligations Current position CRTC tangible benefits 2016 12,347 4,230 124 16,701 (8,006) 8,695 $ $ 2015 12,409 340 148 12,897 (8,463) 4,434 $ $ The CRTC approved the change in ownership and effective control of the Corporation on April 22, 2015. Pursuant to the decision, the CRTC requires the Corporation to pay tangible benefits corresponding to an amount of $5,508 over a seven- year period in equal annual payments. The Corporation recognized an expense of $4,382, which reflects the fair value of the payment stream using a discount rate of 7.0%, which is the Corporation effective interest rate plus a risk premium. On August 18, 2015, the Canadian Radio-television and Telecommunications Commission (“CRTC”) issued a decision renewing until August 31, 2020 the Corporation’s broadcast license. Significant estimate – contingent considerations In the event that certain predetermined sales volumes, specific contract renewals and other conditions are achieved by the acquired companies, additional consideration may be payable in the future. The fair value of the contingent consideration of $12,347 was estimated by calculating the present value of the future expected outflows. For details of the key assumptions used and the impact of changes to these assumptions, see note 24. The estimates are based on a discount rate ranging from 5% to 15%. During the year ended March 31, 2016, the contingent considerations of DMX Canada, DMX Latin, Brava Group and Archibald Media Group have been reviewed, as the actual sales revenue expected to be achieved by the acquired companies are either above or below the maximum threshold. An aggregate gain of $2,064 was included in net finance expenses. During the year ended March 31, 2016, the contingent considerations of DMX Canada and DMX Latin have been paid. 66 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 19. Share capital: Authorized: Prior to the closing of the initial public offering (the “Offering”), the Corporation’s authorized share capital was comprised of an unlimited number of Classes A, B, and C common shares, voting and participating, without par value and an unlimited number of Classes A, B and C preferred shares, voting and non-participating, without par value. The Corporation’s authorized share capital was amended immediately prior to the closing of the Offering and all the classes of shares included in the authorized share capital of the Corporation prior to the amendment were repealed and replaced by: Unlimited number of subordinate voting shares, participating, without par value Unlimited number of variable subordinate voting shares, participating, without par value Unlimited number of multiple voting shares (10 votes per share), participating, without par value Unlimited number of special shares, participating, without par value Unlimited number of preferred shares issuable in one or more series, non-participating, without par value Issued and outstanding: The movements in share capital were as follows: Year ended March 31, 2015 As at March 31, 2014 Class A common shares Class B common shares Class C common shares Issued upon exercise of stock options Class A common shares Dividend and reduction of stated capital Class A common shares Class C common shares As at March 31, 2015 Class A common shares Class B common shares Class C common shares Number of shares Carrying amount 16,440,535 6,229,719 10,000,000 32,670,254 1,310,834 – – – 17,751,369 6,229,719 10,000,000 33,981,088 $ $ 562 12 432 1,006 1,682 (16) (432) (448) 2,228 12 – 2,240 Annual Report 2016 | Stingray Digital Group Inc. 67 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Year ended March 31, 2016 As at March 31, 2015 Class A common shares Class B common shares Class C common shares Issued upon exercise of stock options Class A common shares Converted Class A common shares Class B common shares Class C common shares Subordinate voting shares and variable subordinate voting shares Multiple voting shares Issued upon initial public offering and exercise of over-allotment option Subordinate voting shares and variable subordinate voting shares Share issuance costs, net of income taxes of $1,993 Issued upon exercise of stock options Subordinate voting shares As at March 31, 2016 Subordinate voting shares and variable subordinate voting shares Multiple voting shares Number of shares Carrying amount 17,751,369 6,229,719 10,000,000 33,981,088 80,000 (17,831,369) (6,229,719) (10,000,000) 17,766,803 16,294,285 – 16,647,100 – $ 2,228 12 – 2,240 192 (2,420) (12) – 1,316 1,116 – 104,044 (5,542) 399,787 1,106 34,813,690 16,294,285 51,107,975 100,924 1,116 102,040 $ To comply with the Broadcasting Act and the regulations and directions promulgated thereunder from time to time, which permit non-Canadians (as defined in the Direction to the CRTC (Ineligibility of Non-Canadians) (SOR/97-192)) to own and control, directly or indirectly, up to 20% of the voting shares and 20% of the votes of an operating licensee that is a corporation, such as the Corporation, the Corporation has imposed restrictions respecting the issuance, transfer and, if applicable, voting of the Corporation’s shares. Restrictions include limitations over foreign ownership of the issued and outstanding voting shares. Transactions for the year ended March 31, 2016 During the year, 479,787 stock options were exercised and, consequently, the Corporation issued 80,000 class A common shares and 399,787 subordinate voting shares. The proceeds amounted to $384. An amount of $914 of contributed surplus related to those stock options was transferred to the Class A common shares or subordinate voting shares’ account balance. On March 23, 2016, the Corporation has declared dividend of $0.035 per subordinate voting share, variable subordinate voting share and multiple voting share that will be payable on or around June 15, 2016 to holders of subordinate voting shares, variable subordinate voting shares and multiple voting shares on record as of May 31, 2016. On February 3, 2016, the Corporation declared a dividend of $0.035 per subordinate voting share, variable subordinate voting share and multiple voting share. The dividend of $1,781 has been paid on March 15, 2016. On November 11, 2015, the Corporation declared a dividend of $0.03 per subordinate voting share, variable subordinate voting share and multiple voting share. The dividend of $1,526 has been paid on December 15, 2015. On August 11, 2015, the Corporation declared a dividend of $0.03 per subordinate voting share, variable subordinate voting share and multiple voting share. The dividend of $1,523 has been paid on September 15, 2015. 68 Annual Report 2016 | Stingray Digital Group Inc. Notes to Consolidated Financial Statements Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) On June 3, 2015, the Corporation completed the Offering of its subordinate voting shares and variable subordinate voting shares with the securities regulatory authorities in each of the provinces and territories of Canada. The Corporation issued 13,287,100 subordinate voting shares and variable subordinate voting shares and received gross proceeds of $83,044 from the issuance. On June 9, 2015, the Corporation issued 3,360,000 subordinate voting shares and variable subordinate voting shares following the exercise of the over-allotment option granted to the underwriters in connection with the Offering. The Corporation received gross proceeds of $21,000 from the issuance. Transaction costs for transactions above amounted to $9,198, of which $1,663 have been recognized as an expense in the consolidated statements of comprehensive income and $7,535, net of tax benefits of $1,993, amounting to $5,542, as a reduction of share capital. Transactions for the year ended March 31, 2015 During the year, 1,310,834 stock options were exercised and, consequently, the Corporation issued 1,310,834 Class A common shares. The proceeds amounted to $210. An amount of $1,472 of contributed surplus related to those stock options was transferred to the Class A common shares’ account balance. On March 18, 2015, the Corporation declared and paid to Class A, Class B and Class C common shareholders cash dividends of $0.59 per share, including a reduction of the stated capital of Class A and Class C common shares by $16 and $432, respectively. On July 29, 2014, the Corporation purchased 54,167 options held by formers employees for a purchase price equal to $116. These options have been cancelled thereafter. 20. Supplemental cash flow information: Trade and other receivables Research and development tax credit Inventories Prepaid expenses and other current assets Other assets Accounts payable and accrued liabilities Income taxes payable Deferred revenues Other payables (CRTC tangible benefits) 2016 (7,684) (214) (34) 169 124 1,493 695 203 3,672 (1,576) $ $ 2015 (2,893) 148 (238) (990) (519) (487) (2,599) (440) – (8,018) $ $ Additions to property and equipment and intangible assets and not affecting cash and cash equivalents amounted to $341 (2015 – $495) and $249 (2015 – $142), respectively, during the year ended March 31, 2016. Annual Report 2016 | Stingray Digital Group Inc. 69 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 21. Share-based compensation: Stock options plan As part of the Offering, the Corporation has established a new stock option plan to attract and retain employees, directors, officers and consultants. The plan provides for the granting of options to purchase subordinate voting shares. Under this plan, 2,500,000 subordinate voting shares have been reserved for issuance. The terms and conditions for acquiring and exercising options are set by the Board of Directors, as well as the term of the options; however, it cannot be more than seven years or any other shorter period as specified by the Board of Directors, according to the regulations of the plan. The total number of shares issued to a single person cannot exceed 5% of the Corporation’s total issued and outstanding common shares on a fully diluted basis. Under the former and new stock option plan, 1,288,757 stock options were outstanding as at March 31, 2016. Outstanding options are subject to employee service vesting criteria which range from nil to four years of service. The following summarizes the changes in the plan’s position for the years ended March 31, 2016 and 2015: 2016 Number of options Weighted average exercise price 2015 Number of options Weighted average exercise price Options outstanding, beginning of year Granted Exercised (note 19) Forfeited Repurchased Options outstanding, end of year 1,269,699 $ 512,880 (479,787) (14,035) – 1,288,757 Exercisable options, end of year 482,427 $ 1.29 6.43 0.80 2.26 – 3.50 1.21 2,326,734 $ 504,699 (1,310,834) (196,733) (54,167) 1,269,699 673,333 $ 0.57 2.26 0.16 1.06 0.70 1.29 0.56 The following is a summary of the information on the outstanding stock options as at March 31, 2016 and 2015: Exercise price(i) March 31, 2016 $ 0.46 1.46 2.26 6.25 7.00 $ 3.50 March 31, 2015 $ 0.46 1.46 2.26 $ 1.29 Outstanding options Weighted average outstanding contractual life outstanding (years) Number of options outstanding 260,000 75,000 440,877 387,880 125,000 1,288,757 615,000 150,000 504,699 1,269,699 3.11 4.63 5.91 6.12 6.36 5.38 3.99 5.57 6.43 5.15 Exercisable options Number 260,000 50,000 172,427 – – 482,427 615,000 50,000 8,333 673,333 70 Annual Report 2016 | Stingray Digital Group Inc. Notes to Consolidated Financial Statements Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) The weighted average fair value of the stock options granted during the year ended March 31, 2016 was $3.43 (2015 – $1.65). This fair value was estimated at the date on which the options were granted by using the Black-Scholes option pricing model with the following assumptions: 2016 2015 Weighted average volatility Weighted average risk-free interest rate Weighted average expected life of options Weighted average value of the subordinate voting share at grant date Weighted average expected dividend rate 65.0% – 70.0% 0.73% – 1.01% 5 – 6.25 years $6.43 nil - 2.0% 70% 0.59% - 1.72% 5 years $2.85 nil The weighted average volatility used is calculated based on comparable publicly-traded companies over the same period as of the expected life. Total share-based compensation costs recognized under this stock option plan amount to $1,351 for the year ended March 31, 2016 (2015 – $800). The weighted average share price at the date of exercise for share options exercised during the year ended March 31, 2016 was $6.93 (2015 – $2.85). (i) For the year ended March 31, 2015, the Corporation’s directors cancelled all issued and outstanding stock options and issued new options having an exercise price that was reduced by $0.59, being the amount paid as dividend or reduction of stated capital to the holders of Classes A, B and C common shares (note 19). This new rebate of the exercise price of the related stock options increased the share-based compensation cost by $434 of which $278 has been recognized for each year, respectively. Restricted share unit plan The Corporation established on April 1, 2014 a restricted share unit plan (“RSU”) that can be granted to directors, officers, executives and employees as part of their long-term compensation package, which is expected to be settled in cash. The value of the payout is determined by multiplying the number of RSU vested at the payout date by the fair value of the Corporation’s shares on the day prior to the payout date. The fair value of the payout is determined at each reporting date based on the fair value of the Company’s shares at the reporting date. The fair value is amortized over the vesting period, being three years. During the year ended March 31, 2016, 65,469 RSU (2015 – 166,349) were granted at $6.25 (2015 – $2.85) per unit to executives and employees and no RSU was vested. The total share-based compensation expense related to RSU plans amounted to $592 in 2016 (2015 – $211). As at March 31 2016, the fair value per unit was $7.05 (2015 – $3.52) for a total amount of $771 (2015 – $205) and was presented in accrued liabilities on the consolidated statements of financial position. Deferred share unit plan The Corporation established on June 3, 2015 a deferred share unit plan (“DSU”) that can be granted to directors, officers and employees as part of their compensation package, which is expected to be settled in cash. The value of the payout is determined by multiplying the number of DSU vested at the payout date by the fair value of the Corporation’s shares on the day prior to the payout date. The fair value of the payout is determined at each reporting date based on the fair value of the Corporation’s shares at the reporting date. During the year ended March 31, 2016, 52,722 DSU (2015 – nil) were granted at a range of $6.90 to $7.04 to directors. The total expense related to DSU plans amounted to $371 in 2016 (2015 – nil). As at March 31 2016, the fair value per unit was $7.05 for a total amount of $371 presented in accrued liabilities on the statements of financial position. Annual Report 2016 | Stingray Digital Group Inc. 71 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 22. Commitments: Operating leases As at March 31, 2016, the balance of the commitments under the terms of the operating leases for premises amounts to $5,847. Minimum lease payments over the next five years are as follows: 2017 2018 2019 2020 2021 $ 2,692 1,801 1,093 192 69 During the year ended March 31, 2016, an amount of $1,068 (2015 – $741) was recognized as an expense in respect of operating leases, which is included in general and administrative expenses. Broadcast license A condition of the broadcast license from the Canadian Radio-Television and Telecommunications Commission (“CRTC”) requires Canadian pay audio services to draw certain proportions of their programming from Canadian content and, in most cases, to spend a portion of their revenues on Canadian content development. The Corporation must ensure that (i) a maximum of one non-Canadian pay audio channel is packaged or linked with each Canadian produced pay audio channel and in no case subscribers of the pay audio service may be offered a package of pay audio channels in which foreign-produced channels dominate; (ii) 25% of all Canadian channels, other than those consisting entirely of instrumental music or of music entirely in languages other than English or French, devote a minimum of 65% of vocal music selections in the French language each broadcast week; and (iii) a minimum of 35% of the musical selections broadcast, each broadcast week, on our Canadian-produced pay audio channels, considered together, are Canadian. Pursuant to the conditions of our National Pay Audio Service Licence, the Corporation is required to contribute each year a minimum of 4% of our annual Canadian regulated broadcast revenues to encourage Canadian content development in the following manner: (i) 1% of gross revenues to be devoted to the Foundation Assisting Canadian Talent On Recordings (“FACTOR”), a non-profit organization dedicated to providing assistance toward the growth and development of the Canadian music industry; (ii) 1% of gross revenues to be devoted to Musicaction, a non-profit organization dedicated to the development of local francophone music by offering financial support to projects by independent record labels and Canadian artists; and (iii) 2% of gross revenues to be devoted to our Stingray Rising Star Program, a program which was created to discover, encourage, promote and champion new Canadian artists. During the year ended March 31, 2016, an amount of $382 (2015 – $780) was recognized as an expense in the music programming, cost of services and content. Copyright royalties The Corporation must pay royalties for the use of music for the majority of its music services. Through copyright collective societies, the Corporation pays royalties to two sets of rights holders: rights holders in music works, which are the music and the lyrics; and rights holders in artists’ performances and sounds recordings, which are the actual performances and recordings of the musical works. 72 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 23. Use of estimates and judgments: The preparation of these consolidated financial statements in conformity with International Financial Reporting Standards (“IFRS”) requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. This note provides an overview of the areas that involved a higher degree of judgment or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be wrong. Detailed information about each of these estimates and judgments is included in notes 4 to 18 together with information about the basis of calculation for each affected line item in the consolidated financial statements. Significant estimates The areas involving significant estimates are: • Estimation of current tax payable and current tax expense – note 7 • Recognition of deferred tax asset for carried forward tax losses – note 7 • Estimated fair value of certain investments – note 15 • Estimated goodwill impairment – note 14 • Estimation of fair values of identified assets, liabilities and contingent considerations in business combinations – note 3 and 18. Estimates are based on management’s best knowledge of current events and actions that the Corporation may undertake in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Any revision to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected by these revisions. Critical judgments Critical judgements in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements include the following: • Impairment of non-current assets: For the purpose of impairment testing of tangible and intangible assets and goodwill, management must use its judgment to identify the smallest group of assets that generates cash inflows that are largely independent of those from other assets (“cash generating unit” or ”CGU”). The amounts used for impairment calculations are based on estimates of future cash flows of the Corporation, including estimates of future revenues, operating costs, discount rates and market prices. By their nature, these estimates and assumptions are subject to measurement uncertainty and, consequently, actual results could differ from estimates used. Annual Report 2016 | Stingray Digital Group Inc. 73 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 24. Financial instruments: Fair values The Corporation has determined that the carrying amount of cash and cash equivalents, trade and other receivables, accounts payable and accrued liabilities and current other payables excluding the contingent considerations is a reasonable approximation of their fair value due to the short-term maturity of those instruments. As such, information on their fair values is not presented below. The fair value of the revolving facility, bridge loan and term loan bearing interest at variable rates approximate their carrying value as they bear interest at prime or banker’s acceptance rate plus a credit spread, which approximate current rates that could be obtained for debts with similar terms and credit risk. The carrying and fair value of financial assets and liabilities, including their level in the fair value hierarchy, consist of the following: As at March 31, 2016 Carrying value Fair value Level 1 Level 2 Level 3 Financial assets measured at amortized cost Cash and cash equivalents Trade and other receivables $ 3,201 27,456 Financial assets measured at fair value Investments Financial liabilities measured at amortized cost Revolving facility Account payable and accrued liabilities Other payables other than contingent considerations Financial liabilities measured at fair value Contingent considerations $ 16,943 $ 16,943 $ – $ – $ 16,943 $ 35,035 24,963 4,354 4,354 – – 4,354 $ 12,347 $ 12,347 $ – $ – $ 12,347 As at March 31, 2015 Carrying value Fair value Level 1 Level 2 Level 3 Financial assets measured at amortized cost Cash and cash equivalents Trade and other receivables $ 1,314 17,494 Financial assets measured at fair value Investments Financial liabilities measured at amortized cost Revolving facility Accounts payable and accrued liabilities Bridge loan Other payables other than contingent considerations Term loan Financial liabilities measured at fair value Contingent considerations Derivative financial instruments $ 7,933 $ 7,933 $ – $ – $ 7,933 $ 7,902 16,645 20,000 488 80,835 488 – – 488 $ 12,409 110 $ 12,409 $ 110 – $ – – $ 12,409 – 110 74 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Fair value measurement (Level 2 and 3): Year ended March 31, 2015 Opening amount as at March 31, 2014 Additions through business acquisitions Change in fair value Payments Closing amount as at March 31, 2015 Year ended March 31, 2016 Opening amount as at March 31, 2015 Additions through business acquisitions Additions during the year Change in fair value Payments Closing amount as at March 31, 2016 Investments Derivative instrument Contingent considerations $ $ 6,132 – 1,801 – 7,933 $ $ 182 – (72) – 110 $ $ 6,234 6,644 487 (956) 12,409 Investments Derivative instrument Contingent considerations $ $ 7,933 – 1,665 7,345 – 16,943 $ $ 110 – – (107) (3) – $ $ 12,409 6,852 – (2,063) (4,851) 12,347 There were no changes in the valuation techniques for the derivative instrument and contingent considerations during the years ended March 31, 2016 and 2015. Investments Equity instrument in a private entity The fair value of the equity instrument in a private entity, AppDirect, was estimated using the market approach. For the year ended March 31, 2016, the fair value has been measured by using the latest market transaction stock issue price, minus a liquidity discount of 25%. The liquidity discount was used to reflect the marketability of the asset. In measuring fair value, management used the best information available in the circumstances and also an approach that it believes market participants would use. There has been a change in valuation techniques used as the Corporation believes it better reflects fair value. For the year ended March 31, 2016, the equity instrument in a private entity is classified as a financial asset at fair value through profit and loss. A change of 5.0% in the liquidity discount would have increased / decreased the fair value of the investment by approximately $1,043 during the year ended March 31, 2016. For the year ended March 31, 2015, the valuation technique included an allocation of the value of the underlying categories of shares, which involved calibrating the Black-Scholes option pricing model to the latest market transaction stock issue price. This fair value was estimated by using the Black-Scholes option pricing model with the following assumptions: Volatility Risk-free interest rate Period Dividend yield 2015 60.0% 0.5% 2 years – Annual Report 2016 | Stingray Digital Group Inc. 75 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) For the year ended March 31, 2015, the equity instrument in a private entity is classified as a financial asset at fair value through profit and loss. A change of 5.0% in the value per common share would have increased / decreased the fair value of the investment by approximately $317 during the year ended March 31, 2015. Convertible note The convertible note has two components of value – a conventional note and an option on the equity of Multi Channels Asia PTE Ltd. (“MCA”) through conversion. Based on its terms, the conversion option and the convertible note, together the hybrid contract, have been assessed as a whole for classification. The hybrid contract has been recognized at fair value on initial recognition and was classified as at fair value through profit or loss. The fair value of the option component has been measured using the Black-Scholes model with the latest market transaction stock issue price. The fair value of the option component was estimated by using the Black-Scholes model with the following assumptions: Volatility Risk-free interest rate Period Dividend yield 2016 40.0% 1.69% 5 years – The fair value was calculated as the present value of the future cash flows based on risk-adjusted discount rate. A change of 5.0% in the common share price would have increased / decreased the fair value of the investment by approximately $10 during the year ended March 31, 2016. Contingent considerations The contingent considerations related to business combinations are payable based on the achievement of targets for growth in revenues for a period from the date of the acquisition and upon renewal of client contract. The fair value measurement of the contingent consideration is determined using unobservable (Level 3) inputs. These inputs include (i) the estimated amount and timing of projected cash flows; and (ii) the risk-adjusted discount rate used to present the value of the cash flows, which is based on the risk associated with the revenue targets being met. If projected cash flows were 10 % higher or lower, the fair value would have increased / decreased by $3,319. A discount rate ranging from 5% to 15% has been applied and considers time value of money. A change in the discount rate by 100 basis points would have increased / decreased the fair value by $111. The contingent consideration is classified as a financial liability and is included in other payables (note 18). The change in fair value is recognized in net finance expenses (note 6). Derivative The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves. The derivative is classified as a financial liability at fair value through profit and loss. The change in fair value is recognized in net finance expenses (note 6). 76 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Credit risk Credit risk is the risk of an unexpected financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet contractual obligations, and it arises primarily from the Corporation's trade and other receivables. The Corporation’s credit risk is principally attributable to its trade receivables. The amounts presented in the consolidated statements of financial position are net of an allowance for doubtful accounts, estimated by the Corporation’s management and based, in part, on the age of the specific receivable balance and the current and expected collection trends. The Corporation's exposure to credit risk is mainly influenced by the characteristics of each customer. The demographics of the Corporation's customer base, including the default risk of the industry and country in which the customer operates, have less of an influence on the credit risk. Generally, the Corporation does not require collateral or other security from customers for trade account receivable; however, credit is extended following an evaluation of creditworthiness. In addition, the Corporation performs ongoing credit reviews of its customers and establishes an allowance for doubtful accounts when the likelihood of collecting the account has significantly diminished. The Corporation believes that the credit risk of trade accounts receivable is limited. The aging of trade receivable balances and the allowance for doubtful accounts as at March 31, 2016 and March 31, 2015 were as follows: Current Past due 0-30 days Past due 31-60 days Past due 61-90 days Past due more than 90 days Total trade receivables Less : allowance for doubtful account 2016 11,089 5,537 1,253 1,261 6,656 25,796 349 25,447 $ $ The movement in allowance for doubtful accounts in respect to trade receivables was as follows: Balance, beginning of year Bad debt expenses Write-off against reserve Balance, end of year 2016 452 228 (331) 349 $ $ 2015 2,761 5,698 3,133 1,975 3,264 16,831 452 16,379 2015 194 447 (189) 452 $ $ $ $ The Corporation also has credit risk relating to cash and cash equivalents, other receivables, investment in a convertible note and derivatives financial instruments. The Corporation manages its risk by investing only in sound financial institutions. The carrying amounts of financial assets in the consolidated statements of financial position represent the Corporation's maximum credit exposure. Annual Report 2016 | Stingray Digital Group Inc. 77 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Liquidity risk Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they become due. The Corporation also manages liquidity risk by continuously monitoring actual and budgeted cash flows under both normal and stressed conditions. Also, the Board of Directors reviews and approves the Corporation’s operating and capital budgets, as well as any material transactions out of the ordinary course of business, including proposals on mergers, acquisitions or other major investments or divestitures. The following are the contractual maturities of financial liabilities including estimated interest payments as at March 31, 2015: Revolving facility Accounts payables and accrued liabilities Other payables Market risk Total carrying amount Contractual cash flows Less than 1 year 1 to 5 years More than 5 years $ 35,035 $ 35,035 $ – $ 30,035 $ – $ 25,819 16,701 25,819 16,701 $ 25,819 8,006 $ $ – 6,443 $ – 2,252 Market risk is the risk that the changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect the Corporation's earnings or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimizing the return on risk. Currency risk The Corporation is exposed to currency risk on sales and expenses that are denominated in currencies other than the functional currency of the Corporation subsidiaries, primarily the US dollar (“USD”), the Australian dollar (“AUD”) and the euro (“EURO”). Also, additional earnings variability arises from the translation of monetary assets and liabilities denominated in currencies other than the functional currency of the Corporation subsidiaries at the rate of exchange at each balance sheet date, the impact of which is reported as a foreign exchange gain or loss in the consolidated statements of comprehensive income. The Corporation's objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows, by transacting with third parties in the above currencies to the maximum extent possible and practical, given that this will act as natural economic hedges for each of these currencies. The Corporation's exposure to currency risk on its consolidated financial statements was as follows: March 31, 2016 USD AUD EURO March 31, 2015 USD EURO Cash and cash equivalents Accounts receivable Income tax receivable (payable) Investments Investments in joint venture Credit facility Accounts payable and accrued liabilities Contingent considerations Net balance exposure Equivalent in Canadian dollars 313 8,368 201 13,046 – (4,450) (3,929) (438) 13,111 17,027 – – – – – – (34) (4,002) (4,036) (4,019) 1,006 1,960 (50) – 85 – (1,349) (2,765) (1,113) (1,644) 206 6,043 – 6,340 – (700) (2,580) (3,844) 5,465 6,922 375 1,150 – – 94 – (1,640) (1,267) (1,288) (1,754) 78 Annual Report 2016 | Stingray Digital Group Inc. Notes to Consolidated Financial Statements Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) The following exchange rates are those applicable to the following periods and dates: USD per CAD AUD per CAD EURO per CAD 2016 2015 Average Reporting Average Reporting 1.3210 0.9922 1.4721 1.2987 0.9957 1.4775 1.1362 – 1.4383 1.2666 – 1.3615 Based on the Corporation’s foreign currency exposures noted above, varying the above foreign exchange rates to reflect a 5% strengthening of the US dollar, AUD dollar and EURO would have increased the net income and reduced the deficit as follows, assuming that all other variables remained constant: Increase in net income 622 (147) (60) 253 (64) March 31, 2016 USD AUD EURO March 31, 2015 USD EURO An assumed 5% weakening of the foreign currency would have had an equal but opposite effect on the basis that all other variables remained constant. 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. The Corporation's interest rate risk is primarily related to the Corporation's operating revolving facility bearing interest at variable rate. The Corporation holds the majority of its cash and cash equivalents balance in accounts bearing interest at rates less than 1.25%. The Corporation is, therefore, not materially exposed to future cash flow fluctuations coming from changes in market interest rates for its cash and cash equivalents. Cash equivalents consist of term deposits with maturity of less than three months and are therefore also exposed to interest rate risk on fair value. However, fair value risk is not significant, considering the relatively short period to maturity of these instruments. The revolving facility is a variable interest rate instrument that is due in more than one year. This instrument is exposed to changes in future interest rates that could result in future cash flow fluctuations. As at the reporting date, the interest rate profile of the Corporation's interest-bearing financial liabilities consists of the revolving facility, which had a carrying amount of $35,035 and bears interest at a variable rate. A change of 100 basis points in the interest rate on variable rate instruments would have increased / decreased the deficit and decreased the net income by approximately $149 (2015 – $795) during the year. This analysis assumes that all other variables, in particular foreign currency rates, remained constant. Annual Report 2016 | Stingray Digital Group Inc. 79 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 25. Capital management: The Corporation’s objectives when managing capital are as follows: Pursue its growth strategy through acquisitions and organic growth by maintaining financial flexibility; and Provide the Corporation’s shareholders with an appropriate return on their investment. For capital management, the Corporation has defined its capital as the combination of net debt and total equity. Total managed capital is as follows: Term loan, including current portion Contingent considerations, including current portion Bridge loan Revolving facility Cash and cash equivalents Net debt including contingent considerations Total equity $ 2016 – 12,347 – 35,035 (3,201) 44,181 90,394 $ 2015 80,835 12,409 20,000 7,902 (1,314) 119,832 (17,842) $ 134,575 $ 101,990 The Corporation’s financing strategy is to maintain a flexible structure, to respond adequately to the changes in economic conditions and to allow growth through business acquisitions. The Corporation monitors its capital structure using the net debt to adjusted EBITDA ratio. In order to maintain or adjust the capital structure, the Corporation may adjust the amount of dividends paid to shareholders of the Corporation, issue or repay debt, issue shares or undertake any other activities as deemed appropriate under the specific circumstances, on a quarterly basis. 26. Related parties: The key management personnel of the Corporation are the Chief Executive Officer, Chief Financial Officer and other key employees of the Corporation. Key management personnel compensation, prior shareholder’s management fees and director’s fees, are as follows: Short-term employee benefits Management fees Share-based compensation Restricted share unit Deferred share unit 2016 2,927 – 976 178 371 4,452 $ $ 2015 1,918 315 423 50 – 2,706 $ $ 80 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 27. Basis of preparation: a) Statement of compliance: The consolidated financial statements of the Corporation have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (''IASB''). The consolidated financial statements were authorized for issue by the Board of Directors on June 15, 2016. b) Basis of measurement: The consolidated financial statements have been prepared on the historical cost basis, except for the following: • Contingent considerations payable which are measured at fair value at each reporting period in accordance with IFRS 3; • Investments measured at fair value at year-end in accordance with IFRS 9; • Derivatives measured at fair value at year-end end in accordance with IFRS 9; • Liabilities related to deferred share unit plan and restricted share unit measured at fair value at year-end in accordance with IFRS 2; and • Equity stock options which are measured at fair value at date of grant pursuant to IFRS 2. c) Foreign currency translation (i) Functional and presentation currency: Items included in the financial statements of each of the subsidiaries are measured using the currency of the primary economic environment in which the subsidiary operates (‘the functional currency’). The consolidated financial statements are presented in Canadian dollars, which is the Corporation’s functional and presentation currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand. (ii) Transactions and balances: Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year-end exchange rates are recognized in profit or loss. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign currency gains and losses are reported on a net basis. (iii) Subsidiaries: The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each statement of profit or loss and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and Annual Report 2016 | Stingray Digital Group Inc. 81 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) • all resulting exchange differences are recognized in other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. 28. Significant accounting policies: The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements and have been applied consistently by the Corporation’s subsidiaries. (a) Basis of consolidation: Business combinations The Corporation measures goodwill as the fair value of the consideration transferred which includes the fair value of contingent consideration, less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Corporation incurs in connection with a business combination are expensed as incurred. Subsidiaries Subsidiaries are entities controlled by the Corporation. The Corporation controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. These consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, Stingray Music USA Inc., Stingray Music Rights Management LLC, 2144286 Ontario Inc., Pay Audio Services Limited Partnership, Stingray Business Inc., Music Choice Europe Limited, Stage One Innovations Ltd., Stingray Digital International Ltd., Music Choice India Private Ltd., Music Choice Europe Deutschland GmbH, Xtra Music Ltd., 2Connect Media BV, Alexander Medien Gruppe BV, Les Réseaux Urbains Viva Inc., Brava HDTV B.V., Brava NL B.V., DJazz B.V., Transmedia Communications SA and its wholly-owned subsidiaries, Digital Music Distribution Pty Ltd. and 9076-3392 Québec Inc. (doing business as Nümédia). Interest in joint venture A joint venture is an arrangement whereby the Corporation and other parties that have joint control of the arrangement have rights to the net assets of the arrangement. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. 82 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) (b) Financial instruments: (i) Financial assets and financial liabilities: The Corporation initially recognizes financial assets on the trade date at which the Corporation becomes a party to the contractual provisions of the instrument. On initial recognition, the Corporation classifies its financial assets as subsequently measured at either amortized cost or fair value, depending on its business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. If the financial asset is not subsequently accounted for at fair value through profit or loss, then the initial measurement includes transaction costs that are directly attributable to the asset’s acquisition or origination. Financial assets measured at amortized cost A financial asset is measured at amortized cost if both of the following conditions are met and is not designated as at fair value through profit and loss: • The asset is held within a business model whose objective is to hold the asset in order to collect contractual cash flows. • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The Corporation currently classifies its cash and cash equivalents and trade and other receivables as financial assets measured at amortized cost. Financial assets measured at fair value All equity investments and other financial assets that do not meet the conditions to be classified as financial assets measured at amortized cost are measured at fair value through profit and loss. Changes therein, including any interest or dividend income, are recognized in profit or loss. The Corporation’s investments are classified as financial asset measured at fair value through profit and loss. The Corporation derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred, or it neither transfers not retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognized financial assets that is created or retained by the Corporation is recognized as a separate asset or liability. Financial liabilities The Corporation initially recognizes debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities are recognized initially on the trade date at which the Corporation becomes a party to the contractual provisions of the instruments. Financial liabilities are initially measured at fair value. If the financial liabilities is not subsequently accounted for at fair value through profit or loss, then the initial measurement includes directly attributable transaction costs. The Corporation classifies all financial liabilities at amortized cost using the effective interest method, except for contingent considerations recorded at fair value through profit and loss and financial liabilities designated at fair Annual Report 2016 | Stingray Digital Group Inc. 83 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) value through profit or loss when doing so results in more relevant information. Such liabilities, including derivatives that are liabilities, shall be subsequently measured at fair value. The Corporation derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the consolidated statements of financial position when, and only when, the Corporation has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. (ii) Impairment of financial assets: At the end of each reporting year, the Corporation assesses whether there is any objective evidence that a financial asset or group of financial assets is impaired. Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Corporation on terms that the Corporation would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. With respect to certain categories of financial assets, such as trade and other receivables, assets that are not individually determined to be impaired are measured for impairment on an aggregate basis. Objective evidence of impairment in the trade and other receivables portfolio may include the Corporation's past experience with debt recovery, an increased number of days exceeding payment terms in the portfolio, as well as a change - internationally or nationally - in economic conditions correlating with default payments in trade and other receivables. If there is objective evidence that an impairment loss on loans and receivables has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (i.e. the effective interest rate computed at initial recognition). The amount of the loss is recognized in profit or loss. If, in a subsequent year, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor's credit rating), the previously recognized impairment loss is reversed. The reversal is recognized to the extent of the improvement without exceeding what the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed. The amount of the reversal is recognized in profit or loss. (iii) Share capital: Common shares, subordinate voting shares, variable voting shares and multiple voting shares are classified as equity. Incremental costs that are directly attributable to their issuance are recognized in reduction of equity, net of tax effects. (iv) Other equity instruments: Warrants issued outside of share-based payment transactions that do not meet the definition of a derivative financial instrument are recognized initially at fair value in equity. Upon simultaneous issuance of multiple equity instruments, consideration received, net of issue costs, is allocated based on their relative fair values. Equity instruments are not subsequently remeasured. 84 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) (v) Derivatives and other non-trading derivatives: From time to time, the Corporation holds derivative financial instruments to reduce its interest rate risks. The Corporation does not hold or use derivative financial instruments for speculation purposes. Derivatives are recognized initially at fair value and any transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value and all changes in their fair value are recognized immediately in profit or loss. (c) Revenue recognition: The Corporation derives revenue primarily from rendering of services, sales of on-demand products, media solutions projects and other revenues. Revenue is measured at the fair value of the consideration received or receivable. The Corporation recognizes revenues when the services are rendered and collectability is reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Rendering of services Rendering of services primarily relates to continuous music and video distribution in a form of subscription fees on a monthly, quarterly or annual basis. The Corporation recognizes revenues from rendering of services when the services are rendered. The Corporation records deferred revenues when customers pay their subscription fees in advance. On-demand products On-demand products relate primarily to music and concert services online or through TV subscriptions. Revenues are recognized in the year in which the services are rendered. Media solutions projects Revenue for media solutions projects relates to long-term media projects. Revenues are recognized using the percentage of completion method, which is calculated on the ratio of contract costs incurred to anticipated costs. The effect of revisions of estimated revenues and costs is recorded when the amounts are known and can be reasonably estimated. Where contract costs exceed total contract revenues, the expected loss is recognized as an expense immediately via a provision for losses to completion, irrespective of the stage of completion. Other revenues Other revenues relate primarily to sales of equipment, support and installation services. Revenues are recognized in the period in which the sales of goods occur and services are rendered. (d) Research and development: Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in profit or loss as incurred. Development costs are charged to profit or loss, unless they meet specific criteria related to technical, market and financial feasibility in order to be capitalized. Deferred development costs, net of government assistance, are amortized starting from the date the products and services are commercialized. (e) Government grants: Investment tax credits are accounted for as a reduction of the research and development costs during the year in which the costs are incurred, provided that there is reasonable assurance that the Corporation has met the requirements of the approved grant program and there is reasonable assurance that the grant will be received. The investment tax credits must be reviewed and approved by the tax authorities and it is possible that the amounts granted will differ from the amounts recorded. Annual Report 2016 | Stingray Digital Group Inc. 85 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) (f) Lease assets and payments: Operating leases are not recognized in the Corporation’s consolidated statements of financial position. 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. Contingent lease payments are accounted for in the year in which they are incurred. (g) Finance income and finance costs: Finance income comprises interest income on funds invested, change in fair value of derivatives and contingent considerations. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, change in fair value of derivatives and contingent considerations, amortization of deferred financing costs, foreign exchange (gain) loss and impairment losses recognized on financial assets. The Corporation recognizes finance income and finance costs as a component of operating activities in the consolidated statements of cash flows. (h) Income taxes: Income tax expense comprises current and deferred taxes. Current and deferred taxes are recognized in profit or loss except to the extent that they relate to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: • • • temporary difference on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; temporary differences relating to investments in subsidiaries, associates and joint arrangements to the extent that the Corporation is able to control the timing of the reversal of the temporary difference and it is probable that they will not reverse in the foreseeable future; and taxable temporary differences arising on the initial recognition of goodwill. A deferred tax asset is recognized for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profit will be available against which they can be used. Deferred tax assets are measured at the end of each reporting year and their carrying amount is reduced to the extent that it is no longer probable that a taxable profit will be realized. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. 86 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) (i) Earnings per share: Basic earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during the year. Diluted earnings per share are computed using the weighted average number of common shares, subordinate voting shares, variable subordinated voting shares and multiple voting shares outstanding during the year adjusted to include the dilutive impact of stock options, restricted share units and deferred share units. The number of additional shares is calculated by assuming that all instruments with a dilutive effect are exercised and that the proceeds from such exercises, as well as the amount of unrecognized share-based compensation which is considered to be assumed proceeds, are used to repurchase subordinate voting shares, variable subordinated voting shares and multiple voting shares at the average share price for the year. For restricted share units, only the unrecognized share-based compensation is considered assumed proceeds since there is no exercise price paid by the holder. (j) Cash and cash equivalents: Cash and cash equivalents consist of cash on hand and balances with banks. (k) Inventories: Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the first- in, first-out cost method. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated selling expenses. (l) Property and equipment: Recognition and measurement Items of property and equipment are recognized at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset and the costs of dismantling and removing the item and restoring the site on which it is located, if any. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components). Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount and are recognized in net profit (loss). Subsequent costs The cost of replacing a part of an item of property and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Corporation, and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property and equipment are recognized in profit (loss) as incurred. Depreciation Depreciation is calculated over the cost of the asset less its residual value and is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives, unless it is reasonably certain that the Corporation will obtain ownership by the end of the lease term. Annual Report 2016 | Stingray Digital Group Inc. 87 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) The estimated useful lives for the current and comparative years are as follows: Property and equipment Furniture, fixtures and equipment Computer hardware Leasehold improvements Period 3 to 5 years 3 years Lease term or 3 years Estimates for depreciation methods, useful lives and residual values are reviewed at each reporting year-end and adjusted if appropriate. (m) Intangible assets: Intangible assets that are acquired by the Corporation and have finite useful lives are measured at cost less accumulated amortization and any accumulated impairment losses. The fair value of non-compete agreements acquired in a business combination are based on the discounted estimated revenues losses that have been avoided as a result of the non-compete being signed. The fair value of client list and relationships acquired in a business combination is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows. The fair value of music catalog acquired in a business combination is determined using the estimated costs for creating such music catalog. The fair value of trademark acquired in a business combination is based on the discounted estimated future royalty payments that have been avoided. Amortization Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of the definite life intangible assets. The estimated useful lives for the current and comparative years are as follows: Intangible Music catalog Client list and relationships Trademarks Licenses, website applications and computer software Non-compete agreements Period 5 to15 years 3 to 14 years 2 to 20 years 1 to 5 years 2 to 10 years Estimates for depreciation methods, useful lives and residual values are reviewed at each reporting year-end and adjusted if appropriate. (n) Goodwill: Goodwill arising on the acquisition of businesses is measured at cost less accumulated impairment losses. Goodwill is not amortized but is subject to an impairment evaluation. (o) Impairment of non-financial assets: The Corporation reviews the carrying amount of its non-financial assets, which include intangible assets with a finite useful life and property and equipment on each reporting date in order to determine if specific events or changes in circumstances indicate that their carrying amounts may not be recoverable. The recoverable amount of goodwill is tested for impairment each year at the same date, or more frequently if indications of impairment exist. 88 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) For impairment testing purposes, assets that cannot be tested individually are grouped in the CGU. Goodwill is allocated to the CGU or CGU group that is expected to benefit from the synergies resulting from the business combination. Each unit or group of units to which goodwill is allocated shall not be larger than an operating segment and represents the lowest level at which goodwill is monitored for internal management purposes. An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. Impairment losses are recognized in profit or loss. Impairment losses are first allocated to reduce the carrying amount of goodwill allocated to the CGU, and then to reduce the carrying amount of the other assets of the CGU on a pro rata basis. (p) Provisions: A provision is recognized if, as a result of a past event, the Corporation 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. Contingent liability A contingent liability is a possible obligation that arises from past events and of which the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not within the control of the Corporation; or a present obligation that arises from past events (and therefore exists), but is not recognized because it is not probable that a transfer or use of assets, provision of services or any other transfer of economic benefits will be required to settle the obligation, or the amount of the obligation cannot be estimated reliably. (q) Employee benefits: (i) Short-term employee benefits Short-term employee benefits are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Corporation has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. (ii) Defined contribution plan The Corporation pays contributions under a defined contribution plan for employees of one of its subsidiaries. Obligations for contributions to defined contribution plans are expensed as the related service is provided. The obligation under this plan is expensed when the services are rendered by the employees. (iii) Defined benefit plans The Corporation’s net obligation in respect of defined benefit plan is calculated by estimating the amount of future benefit that employees have earned in the current and prior years, discounting that amount and deducting the fair value of any plan assets. The calculation of defined benefit obligation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Corporation, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements. Annual Report 2016 | Stingray Digital Group Inc. 89 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) Remeasurement of the net defined benefit liability, which comprises actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Corporation determines the net interest expense (income) on the net defined benefit obligation at the beginning of the year to the net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the year as a result of contributions and benefits payments. Net interest expense and other expenses related to defined benefit plans are recognized in profit or loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past services or the gain or loss on curtailment is recognized immediately in profit or loss. The Corporation recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs. (iv) Stock option plan The fair value at the grant date of equity settled share-based payment awards granted to management and key employees of the Corporation is recognized as an employee benefit expense, with a corresponding increase in equity, over the vesting period of the awards. The amount expensed is adjusted to reflect the number of awards for which it is expected that the service conditions will be met, so that the amount ultimately expensed will depend on the number of awards that meet the service conditions at the vesting date. (v) Restricted share units and deferred share units plans Restricted share units (“RSU”) and deferred share units (“DSU”) expected to be settled in cash are accounted for as cash settled awards, with the recognized compensation cost included in accounts payable and accrued liabilities. Compensation cost is initially measured at fair value at the grant date and is recognized in net income over the vesting year. The liability is remeasured based on the fair value price of the Corporation’s common shares, at each reporting date. Remeasurements during the vesting year are recognized immediately to net income to the extent that they relate to past services and amortized over the remaining vesting year to the extent that they relate to future services. The cumulative compensation cost that will ultimately be recognized is the fair value of the Corporation’s shares at the settlement date. 90 Annual Report 2016 | Stingray Digital Group Inc. (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) 29. New and amended standards not yet adopted by the Corporation: IFRS 9 - Financial instruments In July 2014, the IASB released the final version of IFRS 9 - Financial Instruments (IFRS 2014). (“IFRS 9 (2014)”) presents a few differences with IFRS 9 (2009) and IFRS 9 (2010), early adopted by the Corporation on April 1, 2012, with respect to the classification and measurement of financial assets and accounting of financial liabilities. IFRS 9 (2014) also includes a new expected credit loss model for calculating impairment on financial assets and a new general hedge accounting requirements. The standard is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. The Corporation does not intend to early adopt IFRS 9 (2014). The Corporation is currently evaluating the impact of the standard on its consolidated financial statements. IFRS 15 - Revenue recognition In May 2014, the IASB issued IFRS 15 - Revenue from Contracts with Customers. IFRS 15 replaces all previous revenue recognition standards, including IAS 18 - Revenue and related interpretations such as IFRIC 13 - Customer Loyalty Programs. The standard sets out the requirements for recognizing revenue. Specifically, the new standard introduces a comprehensive framework with the general principle being that an entity recognizes revenue to depict the transfer of promised goods and services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard introduces more prescriptive guidance than was included in previous standards and may result in changes in classification and disclosure in addition to changes in the timing of recognition for certain types of revenues. The new standard is effective for annual periods beginning on or after January 1, 2018 with early adoption permitted. The Corporation is currently evaluating the impact that this standard will have on its consolidated financial statements. The Corporation does not intend to early adopt the standard. IAS 1 - Presentation of financial statements On December 18, 2014, the IASB issued amendments to IAS 1 - Presentation of financial statements as part of its major initiative to improve presentation and disclosure in financial reports. These amendments will not require any significant change to current practice, but should facilitate improved financial statement disclosures. The Corporation intends to adopt these amendments in its consolidated financial statements for the annual period beginning on April 1, 2016. The Corporation does not expect the amendments to have a material impact on the consolidated financial statements. IAS 16 – Property, Plant and Equipment On May 12, 2014, the IASB issued amendments to IAS 16 - Property, Plant and Equipment and IAS 38 - Intangible Assets. The amendments made to IAS 16 explicitly state that revenue-based methods of depreciation cannot be used for property, plant and equipment. This is because such methods reflect factors other than the consumption of economic benefits embodied in the asset. The amendments in IAS 38 introduce a rebuttable presumption that the use of revenue-based amortization methods for intangible assets is inappropriate. This presumption could be overcome only when revenue and consumption of the economic benefits of the intangible asset are highly correlated or when the intangible asset is expressed as a measure of revenue. The amendments apply prospectively for annual periods beginning on or after January 1, 2016 with early adoption permitted. The Corporation intends to adopt the amendments to IAS 16 and IAS 38 in its consolidated financial statements for the annual period beginning on April 1, 2016. The Corporation does not expect the amendments to have a material impact on the consolidated financial statements. Annual Report 2016 | Stingray Digital Group Inc. 91 (cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Years ended March 31, 2016 and 2015 (In thousands of Canadian dollars, unless otherwise stated) IAS 7 – Disclosure Initiative On January 7, 2016, the IASB issued amendments to IAS 7– Disclosure Initiative. The amendments require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. One way to meet this new disclosure requirement is to provide a reconciliation between the opening and closing balances for liabilities from financing activities. The Corporation intends to adopt the amendments to IAS 7 in its consolidated financial statements for the annual period beginning on April 1, 2017. The extent of the impact of adoption of the amendments has not yet been determined. IFRS 16 – Leases On January 13, 2016, the IASB issued IFRS 16 - Leases. This new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 - Revenue from Contracts with Customers at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17 - Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other areas of the lease accounting model have been impacted, including the definition of a lease. Transitional provisions have been provided. The Corporation intends to adopt IFRS 16 in its consolidated financial statements for the annual period beginning on April 1, 2019. The extent of the impact of adoption of the standard has not yet been determined. 92 Annual Report 2016 | Stingray Digital Group Inc. BOARD OF DIRECTORS Eric Boyko Claudine Blondin L. Jacques Ménard Jacques Parisien Mark Pathy Gary S. Rich François-Charles Sirois Robert G. Steele Pascal Tremblay SHAREHOLDER INFORMATION Exchange Listing Investor Relations General Meeting TSX: Ray.A; Ray.B Transfer Agent CST Trust Company 1-416-682-3860 1-800-387-0825 Inquiries@canstockta.com canstockta.com 730, Wellington Street Montreal, Quebec H3C 1T4 Investors@stingray.com Wednesday, August 3, 2016 Montreal Science Centre 2 de la Commune St. West Montreal, QC H2X 4B2 4 Annual Report 2016 | Stingray Digital Group Inc.A n n u a l R e p o r t 2 0 1 6 | S t i n g r a y D g i t a i l G r o u p I n c . stingray.com 

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