Kew Media Group Inc. First Quarter 2017 Interim Report to Shareholders

Transcription

1 First Quarter 2017 Interim Report to Shareholders (Unaudited - Expressed in Canadian Dollars)

2 Consolidated Financial Statements and Notes Kew Media Group Inc. Interim Condensed Consolidated Statements of Financial Position (unaudited in thousands of Canadian dollars) March 31, 2017 December 31, 2016 ASSETS Current Cash and cash equivalents 32, Restricted cash and cash equivalents held in escrow (note 6) - 71,236 Accounts receivable (note 7) 94, Tax credits receivable (note 8) 21,309 - Prepaid expenses Accrued production costs 5,567 - Total current assets 154,243 71,351 Property, plant and equipment 2,618 - Goodwill and intangible assets (note 5) 66,859 - Film and television rights (note 9) 28,993 - Deferred income tax asset 4,377 - Total assets 257,090 71,351 LIABILITIES Current Accounts payable and accrued liabilities 83,799 2,018 Interim production financing (note 10) 20,017 - Deferred revenue 4,599 - Income taxes payable Current portion of long term borrowings (note 13) 22,869 - Current portion of contingent consideration (note 5) 4,586 - Working capital payable upon acquisition (note 5) 2,733 Deferred underwriters commissions (note 11) - 2,450 Deferred income tax liability Class A Restricted Voting Shares (note 12) - 69,860 Total current liabilities 139, ,328 Contingent consideration payable (note 5) 11,296 - Long-term borrowings (note 13) 15,084 Deferred income tax liability Total liabilities 166, ,328 EQUITY Share capital (note 14) 101,161 4,356 Warrants 1,047 1,047 Deficit (15,188) (8,380) Accumulated other comprehensive income 5 - Equity attributable to equity holders of the parent 87,025 (2,977) Non-controlling interest 3,904 - Total equity 90, (2,977) Total liabilities and equity 257,090 71,351 Commitments (note 19) Contingencies (note 20) Subsequent events (note 23) See accompanying notes to the interim condensed consolidated financial statements. Q KEW MEDIA GROUP INC. 1

3 Consolidated Financial Statements and Notes Kew Media Group Inc. Interim Condensed Consolidated Statements ts of Loss and Comprehensive Loss (unaudited in thousands of Canadian dollars,, except per share information tion) Three months ended March 31, 2017 Three months ended March 31, 2016 Revenue Production and distribution revenue 15,905 - Cost of sales 12,435 - Gross profit 3,470 - Expenses General and administrative expenses 1, Transaction costs (note 16) 6, Depreciation 42 - Interest expense, net of interest income 17 - Realized loss on change in fair value of financial liabilities 1,840 - Total expenses 10, Loss before income taxes (6,642) (212) Income tax expense 64 - Net loss for the period (6,706) (212) Net loss attributable to: Equity holders of the parent (6,808) (212) Non-controlling interest (6,706) (212) Loss per share attributable to equity holders of the parent: Basic and diluted loss per share (2.26) (212,076) Weighted average number of Class B shares outstanding basic and diluted 3,009,961 09,961 1 Net loss for the period (6,706) (212) Other comprehensive income, net of income taxes Items that may be reclassified subsequently to income: Exchange differences on translating foreign operations 5 - Comprehensive loss for the period (6,701) (212) Comprehensive loss attributable to: Equity holders of the parent (6,803) (212) Non-controlling interest (6,701) (212) See accompanying notes to the interim condensed consolidated financial statements. Q KEW MEDIA GROUP INC. 2

4 Consolidated Financial Statements and Notes Kew Media Group Inc. Interim Condensed Consolidated Statements of Changes in Shareholders Equity (unaudited in thousands of Canadian dollars) Installment receipts on Cumulative other Equity attributable to Non- Class B Class B comprehensive equity holders of controlling Total Shares Units Warrants Deficit income the parent interest equity Balance, January 1, ,356-1,047 (8,380) - (2,977) - (2,977) Net loss and comprehensive loss for the period (6,808) 5 (6,803) 102 (6,701) Conversion of Class A shares to Class B shares 47, ,669-47,669 Issued under Private Placement 20, ,000-20,000 Issued in Qualifying Acquisition 30, ,341 3,802 34,143 Issued pursuant to loan conversion Transaction costs charged to equity (1,274) (1,274) - (1,274) Balance, March 31, ,161-1,047 (15,188) 5 87,025 3,904 90,929 Balance, January 1, (540) Net loss and comprehensive loss for the period (212) - (212) - (212) Installments receipts on Class B units Balance, March 31, (752) See accompanying notes to the interim condensed consolidated financial statements. Q KEW MEDIA GROUP INC. 3

5 Consolidated Financial Statements and Notes Kew Media Group Inc. Interim Condensed Consolidated Statements of Cash Flows (unaudited in thousands of Canadian dollars) Three months ended March 31, 2017 Three months ended March 31, 2016 OPERATING ACTIVITIES Net loss for the period (6, ) (212) Adjustments to reconcile net loss to cash provided by operating activities: - Amortization of film and television rights Depreciation 42 - Deferred income taxes 67 - Net change in fair value of financial liabilities 1,840 - Net change in non-cash working capital balances related to operations (note 22) (9,220) 44 Net movement in accrued production costs Cash used in operating activities (13, ) (168) INVESTING ACTIVITIES Additions to property, plant and equipment (2) (3) Amounts paid for business combinations (note 5) (14,322) - Acquired cash in business combinations (note 5) 15,573 - Cash provided by (used( in) investing activities 1,249 (3) FINANCING ACTIVITIES Repayment of long-term borrowings (19,515) - Advances from Founders Payment of deferred underwriting commissions (2,450) - Restricted cash held in escrow, net of redemptions of Class A Restricted Voting Shares 47,205 (410) Issue of capital stock under Private Placement 20,000 - Issue of capital stock upon loan conversion 69 - Transaction costs charged to equity (1,27 274) - Cash provided by financing activities 44, Net change in cash and cash equivalents during the period 32, Effects of foreign exchange differences 5 - Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 32, Supplementary cash flow disclosures (note 22) See accompanying notes to the interim condensed consolidated financial statements. Q KEW MEDIA GROUP INC. 4

6 1. Company information Kew Media Group Inc. (the Company, Corporation or Kew ) was a special purpose acquisition corporation incorporated on November 3, 2015 under the laws of the Province of Ontario for the purpose of effecting an acquisition of one or more businesses or assets, by way of a merger, amalgamation, arrangement, share exchange, asset acquisition, share purchase, reorganization, or any other similar business combination (a Qualifying Acquisition ). As more fully described in the notes to these financial statements, Kew completed the Qualifying Acquisition on March 20, Kew s head office is located at Suite 400, 672 Dupont Street, Toronto, Ontario, M6G 1Z6. Commencing on the date of the Qualifying Acquisition, the Company s business activities were carried out in two business segments, production of multi-platform mass-audience, returnable television and film content for the global market ( Production ) and distribution of same ( Distribution ). The Company operates production and distribution entities and offices throughout Canada, the United States, the United Kingdom and other European countries. In measuring performance, the Company does not distinguish or group its production and distribution operations on a geographical basis. 2. Significant events and transactions On February 2, 2017, the Corporation announced that it had entered into definitive agreements to acquire all of the issued and outstanding shares of each of Content Media Corporation plc ( Content ), Architect Films Inc. ( Architect ), Bristow Global Media Inc. ( BGM ), Frantic Films Corporation ( Frantic ), Media Headquarters Film & Television Inc. ( Media HQ ), and Our House Media Inc. ( Our House ). The six acquisitions constitute the Corporation s Qualifying Acquisition under Part X of the TSX Company Manual. On February 10, 2017, the Corporation filed the Prospectus, containing further details of the terms and conditions of the Qualifying Acquisition. On March 13, 2017, the Qualifying Acquisition was approved by a simple majority (greater than 50%) of the votes cast, in person or by proxy, by the holders of Class A Restricted Voting Shares and Class B Shares voting together as a single class at a special meeting of the Corporation s shareholders. Regardless of whether shareholders voted for or against, or did not vote on, the Qualifying Acquisition, holders of Class A Restricted Voting Shares could elect to redeem all or a portion of their Class A Restricted Voting Shares at a per-share price of $10.17, payable in cash, which was equal to their pershare amount deposited in the escrow account, adjusted for interest or other amounts earned and net of applicable taxes payable on such interest and other amounts earned and net of direct expenses related to the redemption. In connection with the Qualifying Acquisition, 2,362,950 Class A Restricted Voting Shares were redeemed, representing an aggregate redemption amount of $24,031. In connection with the Qualifying Acquisition, the Corporation issued an additional 2,000,000 Class B Shares for aggregate gross proceeds of $20,000 by way of a private placement (the Private Placement ) that closed on March 20, The Qualifying Acquisition closed on March 20, 2017, at which time the funds held in the escrow account were released, and the Private Placement was completed, which in the aggregate, satisfied the amounts payable on account of (1) the cash component of the purchase consideration arising from the Qualifying Q KEW MEDIA GROUP INC. 5

7 2. Significant events and transactions (continued) Acquisition, (2) Class A Restricted Voting Shares redeemed, (3) transaction-related expenses and (4) the deferred underwriters commission, which was due and payable by the Corporation to the underwriters upon the closing of a qualifying acquisition. On March 20, 2017, the 4,637,050 Class A Restricted Voting Shares not otherwise redeemed were automatically converted into Class B Shares on a one-for-one basis (note 12). The Class B Shares commenced trading under the symbol KEW on the TSX on March 23, 2017, concurrent with the delisting of the Class A Restricted Voting Shares. In connection with the Qualifying Acquisition, the Corporation adopted a shareholders rights plan (the Shareholders Rights Plan ). Pursuant to the Shareholders Rights Plan, one Class B Share purchase right will be issued for each outstanding Class B Share to shareholders of record at the close of business on the closing date of the Qualifying Acquisition, being March 20, In the first quarter of fiscal 2017 and prior to the Closing, the Sponsor advanced $500 to the Corporation by way of an unsecured loan bearing interest at prime plus 1%. On March 20, 2017: (i) 50 Class B Shares were issued in settlement of the loan; and (ii) the transaction fee and interest on the loan was converted into 5,345 Class B Shares. 3. Statement of Compliance These interim condensed consolidated financial statements (the interim financial statements ) of the Company for the three months ended March 31, 2017 have been prepared in accordance with International Accounting Standard ( IAS ) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ( IASB ). These interim condensed consolidated financial statements of the Company were approved and authorized for issue by the Board of Directors on May 12, Significant Accounting Policies BASIS OF PRESENTATION The interim condensed consolidated financial statements are prepared on a historical cost basis, except for certain fair value through profit and loss amounts. The consolidated financial statements are presented in Canadian dollars, and all values are rounded to the nearest thousand, except per share amounts or where otherwise noted. BASIS OF CONSOLIDATION Subsidiaries The consolidated financial statements comprise the financial statements of the Company and its subsidiaries, which are the entities over which the Company has control. Control exists when the entity is exposed, 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 non-controlling interest component of the Company s subsidiaries is included in equity. Q KEW MEDIA GROUP INC. 6

8 4. Significant Accounting Policies (continued) Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control ceases. The determination of control is assessed either through share ownership and/or control of the subsidiaries board of directors, which may require significant judgment. The financial statements of the Company s subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. All intra-company balances, transactions, unrealized gains and losses resulting from intra-company transactions and dividends are eliminated in full. Details of the principal subsidiaries included in the consolidation are set out below: Description of shares held Proportion of nominal value of issued shares held Name of company Principal activity Content Media Corporation plc and its Ordinary $1 shares 100% Distribution wholly owned subsidiaries (3) Content Media Corporation Ordinary $1 shares 100% Film and TV sales International Limited (3) Content Media Corporation (2) Ordinary $1 shares 100% Film and TV sales Content West Limited (3) Ordinary 1 shares 67.5% Film and TV sales Aito Media OY (1) Ordinary 0.69 shares 50.1% TV Production Spirit Digital Media LLC (3) Member interest 55% Creation and distribution of digital media Collins Avenue LLC (2) Member interest 51% TV production Jigsaw Productions LLC (2) Member interest 50.1% Film and TV production Preferred Film & Television LLC (2) Member interest 51% Film and TV production Architect Films Inc. and its wholly owned subsidiaries Our House Media Inc. and its wholly owned subsidiaries Bristow Global Media Inc. and its wholly owned subsidiaries Frantic Films Inc. and its wholly owned subsidiaries Media HQ Inc. and its wholly owned subsidiaries (1) Incorporated and operates in Finland (2) Incorporated and operates in the US (3) Incorporated and operates in the UK All other companies are incorporated and operate in Canada. Ordinary $1 shares 100% TV production Ordinary $1 shares 100% TV production Ordinary $1 shares 100% TV production Ordinary $1 shares 100% TV production Ordinary $1 shares 100% TV production BUSINESS COMBINATIONS AND GOODWILL Business combinations are accounted for by applying the acquisition method. The acquisition method involves the recognition of the acquiree s identifiable assets and liabilities, including contingent liabilities, regardless of whether they were recorded in the financial statements prior to acquisition. The acquiree s Q KEW MEDIA GROUP INC. 7

9 4. Significant Accounting Policies (continued) identifiable assets and liabilities that meet the conditions for recognition under IFRS 3, Business Combinations ( IFRS 3 ), are recognized at their fair value at the acquisition date, except for: (i) deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements which are recognized and measured in accordance with IAS 12, Income Taxes, and IAS 19, Employee Benefits, respectively; and (ii) assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, which are measured and recognized at fair value less costs to sell. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree. For each business combination, the Company elects whether to measure the non-controlling interest in the acquiree at fair value or at the proportionate share of the acquiree s identifiable net assets. Transaction costs related to the acquisition are expensed as they are incurred. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is determined to be a financial asset or liability will be recognized in accordance with IAS 39, Financial Instruments: Recognition and Measurement ( IAS 39 ), at fair value through profit or loss. Goodwill arising on acquisition is recognized as an asset and represents the excess of acquisition cost over the fair value of the Company s share of the identifiable net assets of the acquiree at the date of the acquisition. Any excess of identifiable net assets over the acquisition cost is recognized in net earnings or loss immediately after acquisition. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Where goodwill forms part of a CGU and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative fair value of the operation disposed of and the portion of the CGU retained. REVENUE RECOGNITION Production Production and licensing revenue comprises broadcaster license fees and other pre-sales receivable for work carried out in producing film and television programs. Profit on production activity is recognized over the period of the production and in accordance with the underlying contract. The predominant contract is a fixed fee contract for the performance of production services, culminating in the delivery to the commissioning network - or other party; e.g. a third party financier of the finished film or television show. Revenues are recognized over the period of the performance of the production services, predominantly on a percentage of completion basis, taking account of both the percentage of expected costs that have been incurred and the project revenue milestones that have been achieved. Within the context of the main fixed fee contract, certain rights can be granted to the production company, including rights such as international distribution rights, format rights and merchandising Q KEW MEDIA GROUP INC. 8

10 4. Significant Accounting Policies (continued) rights. On other occasions, the network (or other party) may retain these types of rights but provide the production company with a royalty on the sales of these, or similar, rights. Revenues from these rights grants and any other royalties, are recognized in the period in which the sale of the rights is made or within the period related to the royalty payment. Distribution There are three main types of contracts: 1) Distribution rights licensed for a fixed period for a flat amount: Revenue is recognized when the materials have been delivered or are available to be delivered and the licence period start date has commenced; 2) Distribution rights licensed for a fixed period for a royalty or revenue share: Revenue is recognized over the period of the related contract as the royalty or revenue share is determined; and 3) Distribution rights licensed for a fixed period for a minimum guaranteed amount with the possibility of an additional royalty or back end payment: Guaranteed revenue is recognized when the materials have been delivered (or are available to be delivered) and the licence period start date has commenced. Any subsequent royalties are recognized over the period of the related contract as the royalties are determined. Cash payments received before all of the above conditions are met are recorded as deferred revenues. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and short-term deposits with maturities of less than three months at the date of purchase. RESTRICTED CASH AND CASH EQUIVALENTS HELD IN ESCROW Restricted cash and cash equivalents were held in escrow and subject to certain release conditions (note 2). BORROWING COSTS Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. Borrowing costs directly attributable to the production of qualifying assets, are added to the cost of those assets, until such time as the assets are substantially complete and ready for use. All other borrowing costs are recognized as a finance expense in the consolidated statement of income in the period in which they are incurred. GOVERNMENT ASSISTANCE AND TAX CREDITS The Company has access to several government programs that are designed to assist film and television production and distribution in Canada. The Company records government assistance when the related costs have been incurred and there is reasonable assurance that the government assistance will be realized. Amounts received or receivable, including federal and provincial production tax credits, are recorded as a reduction of the accrued production costs. The tax credits must be examined and approved by the tax authorities and it is possible that the amounts granted will differ from the amounts recorded. Q KEW MEDIA GROUP INC. 9

11 4. Significant Accounting Policies (continued) The Company receives amounts from the Canada Media Fund which are repayable should certain conditions be met. When those conditions are not met, the funding is recorded as government assistance and treated as a reduction of accrued production costs. FOREIGN CURRENCY TRANSLATION Functional currency These consolidated financial statements are presented in Canadian dollars, which is also the parent company s functional currency. For each entity within the consolidated group comprising the Company, functional currency is determined based on the currency of the primary economic environment in which the entity operates. Primary and secondary indicators are used to determine the functional currency (primary indicators have priority over secondary indicators). In addition to the parent company, the Canadian dollar has been determined to be the functional currency for, Architect, BGM, Frantic, Media HQ and Our House. The functional currency for the holding company of Content is UK pounds sterling and the functional currency of each of the main operating subsidiaries of Content is US dollars. Foreign operations The financial statements of entities within the consolidated group that have a functional currency other than Canadian dollars ( foreign operations ) are translated into the Canadian dollar presentation currency as follows: a) Assets and liabilities at the closing rate at the date of the balance sheet; and b) Income and expenses at the average rate for the period (as this is considered to be a reasonable approximation of actual rates). All resulting changes are recognized in other comprehensive income ( OCI ) as cumulative translation adjustments. On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is recognized in profit or loss. Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency of the respective entity, using the exchange rates prevailing at the dates of the transactions (spot exchange rate). Foreign exchange gains and losses resulting from the settlement of such transactions and from the remeasurement of monetary items denominated in foreign currency at period-end exchange rates are recognized in profit or loss. Non-monetary items are not retranslated at period-end and are measured at historical cost (translated using the exchange rates at the transaction date), except for non-monetary items measured at fair value which are translated using the exchange rates at the date when fair value was determined. INCOME TAXES The income tax expense for the period comprises current and deferred tax. Tax is recognized in the consolidated statement of income, except to the extent it relates to items recognized in other Q KEW MEDIA GROUP INC. 10

12 4. Significant Accounting Policies (continued) comprehensive income or directly in equity. In this case, the tax is recognized in other comprehensive income or equity, respectively. Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted, at the end of the reporting period, and any adjustments to tax payable in respect to previous periods. Deferred tax is calculated using the asset and liability method on temporary differences between the carrying amount of assets and liabilities and their related tax bases. Deferred income taxes are measured using substantively enacted tax rates that will be in effect when the amounts are expected to be settled. Deferred tax assets are only recognizable to the extent it is probable that they will be utilized against future taxable income. The assessment of probability of future taxable income in which deferred tax assets can be utilized is based on the Company s latest approved forecast, which is adjusted for significant non-taxable income and expenses. If a positive forecast of taxable income indicates the probable use of a deferred tax asset, the deferred tax asset is generally recognized to the extent it is recoverable. Deferred income taxes are not recognized if they arise from the initial recognition of goodwill, nor are they recognized on temporary differences arising from the initial recognition of an asset or liability in a transaction that is not a business combination and that affects neither accounting nor taxable profit nor loss. Deferred income taxes are also not recognized on temporary differences relating to investments in subsidiaries to the extent that it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are only offset when the Company has the right and intention to offset current tax assets and liabilities from the same taxation authority. Changes in deferred tax assets and liabilities are recognized as a component of income or expense in net earnings or loss, except where they relate to items that are recognized in other comprehensive income or equity in the period in which they are incurred. ACCRUED PRODUCTION COSTS C Accrued production costs relate to the Company s Production segment and they represent the cost of productions in progress. Costs related to producing film and television productions are recognized as an asset when they have been incurred but the related revenue has not been fully recognized. Costs that do not satisfy the capitalization criteria are recognized as expenses as incurred and alongside the related revenue recognition. Costs related to film and television productions include production costs, post-production costs, financing costs and other costs that expect future economic benefits. Financing costs are capitalized to the cost of a film and television program until substantially all of the necessary activities to prepare the television program for delivery are complete. These costs are expensed in the cost of sales line of the consolidated statement of income over the period of future economic benefits. Accrued production costs are included within current assets. The normal operating cycle of a production can be greater than 12 months. Q KEW MEDIA GROUP INC. 11

13 4. Significant Accounting Policies (continued) Production costs are included in cost of sales in the consolidated statement of income. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is carried at cost, less accumulated depreciation and accumulated impairment losses. Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company. Depreciation is provided when the asset is available for use, over the estimated useful life of the asset, using the following annual rates and methods: Computer equipment Leasehold improvements Furniture and fixtures 33%, declining balance straight-line, over the term of the lease 10-50%, declining balance Gains and losses on disposal of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included in the consolidated statement of income. FILM AND TELEVISION RIGHTS Film and television rights relate to the Company s Distribution segment. Film and television rights represent film and television rights acquired by the Company from third parties. They are stated at the lower of cost less accumulated amortization except those acquired as part of a business combination, which are shown at fair value at the date of the acquisition less accumulated amortization. Film and television rights are amortized over their useful economic lives and assessed for impairment whenever there is an indication that the intangible assets may be impaired. Film and television rights are amortized using the declining balance method based on the estimated future benefit by year or years as established separately for each film or television program. For current film and television programs, the rate of amortization will depend on a variety of factors including the timing of its delivery, the type of film or television program and the expected longevity of the future benefits but is typically within a range of 40-85% in the first year. For future years, the amortization rate may range significantly depending on the estimated future benefits of the particular film or television program. Amortization is included in cost of sales in the consolidated statement of income. FINANCIAL INSTRUMENTS Financial instruments are recognized on the consolidated statement of financial position when the Company becomes a party to the contractual provisions of a financial instrument. The Company is required to initially recognize all of its financial assets and liabilities, including derivatives and embedded derivatives in certain contracts, at fair value. Loans and receivables, held to maturity financial assets and other financial liabilities are subsequently measured at amortized cost. The Company classifies financial assets and liabilities according to their characteristics and management's choices and intentions related thereto for the purpose of ongoing measurements. Classification choices for financial assets, and the impact on subsequent measurement, include: a) FVTPL Q KEW MEDIA GROUP INC. 12

14 4. Significant Accounting Policies (continued) - measured at fair value with changes in fair value recorded in net earnings; b) held to maturity - recorded at amortized cost with gains and losses recognized in net earnings in the period that the asset is derecognized or impaired; c) available for sale - measured at fair value with changes in fair value recognized in other comprehensive income for the current period until realized through disposal or impairment; and d) loans and receivables - recorded at amortized cost with gains and losses recognized in net earnings in the period that the asset is no longer recognized or impaired. Classification choices for financial liabilities include: a) FVTPL - measured at fair value with changes in fair value recorded in net earnings and b) other liabilities - measured at amortized cost with gains and losses recognized in net earnings in the period that the liability is derecognized. The Company s financial assets and liabilities are classified and subsequently measured as follows: Asset/Liability Classification Measurement Cash and cash equivalents Loans and receivables Amortized cost Restricted cash and cash equivalents held in escrow Loans and receivables Amortized cost Accounts receivable Loans and receivables Amortized cost Accounts payable and accrued liabilities Other liabilities Amortized cost Interim production financing Other liabilities Amortized cost Long-term borrowings Other liabilities Amortized cost Contingent consideration payable Fair value through Fair value profit or loss Working capital payable Other liabilities Amortized cost Class A Restricted Voting Shares Fair value through profit or loss Fair value With respect to financial assets measured at amortized cost, the Company assesses whether there are any indications of impairment. When there is an indication of impairment, and if the Company determines that during the year there was a significant adverse change in the expected timing or amount of future cash flows from a financial asset, they will then recognize a reduction as an impairment loss in the consolidated statement of income. The reversal of a previously recognized impairment loss on a financial asset measured at amortized cost is recognized in the consolidated statement of income in the year the reversal occurs. Transaction costs other than those related to financial instruments classified as FVTPL, which are expensed as incurred, are added to or deducted from the fair value of the financial asset or financial liability, as appropriate, on initial recognition and amortized using the effective interest method. A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire or if the Company transfers the financial asset to another party without retaining control or substantially all the risks and rewards of ownership of the financial asset. A financial liability is derecognized when its contractual obligations are discharged, cancelled or expire. Q KEW MEDIA GROUP INC. 13

15 4. Significant Accounting Policies (continued) FAIR VALUE Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement of a nonfinancial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within a three-level hierarchy, based on observability of significant inputs, as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; or Level 3: Unobservable inputs for the asset or liability. Inputs into the determination of the fair value require management judgment or estimation. If different levels of inputs are used to measure a financial instrument s fair value, the classification within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Changes to valuation methods may result in transfers into or out of an investment s assigned level. IMPAIRMENT OF NON-FI FINANCIAL ASSETS Non-financial assets, including capital assets, accrued production costs, film and television rights, goodwill and intangibles, are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Goodwill and indefinite-lived intangibles are tested for impairment at least annually even if no indicators of impairment exist. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are largely independent cash inflows, cash generating units ( CGUs ). Goodwill acquired in a business combination is, from the acquisition date, allocated to a CGU (or group of CGUs) that is expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. The group of CGUs for which impairment is assessed is not larger than the level at which management monitors goodwill or the Company s operating segments. The recoverable amount is the higher of the fair value less cost of disposal and value in use, being the present value of the expected future cash flows of the relevant CGU. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. Impairment losses for CGUs reduce first the carrying amount of any goodwill allocated to that CGU. Any remaining impairment loss is charged pro rata to the other assets in the CGU. With the exception of goodwill, all Q KEW MEDIA GROUP INC. 14

16 4. Significant Accounting Policies (continued) assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. An impairment loss is reversed if the asset s or cash-generating unit s recoverable amount exceeds its carrying amount. Due to the timing of the Qualifying Acquisition, the Company has not yet determined its CGUs for purposes of impairment testing. No indicators of impairment existed as of March 31, LEASES Upon initial recognition, the Company classifies all leases as either a finance or an operating lease, depending on the substance of the transaction. Lease payments on operating leases are charged to the statement of consolidated income on a straightline basis over the term of the lease. LOSS PER SHARE Basic and diluted loss per share is computed using the weighted average number of capital stock outstanding. Shares that are subject to forfeiture are excluded from the determination of the weighted average number of capital stock outstanding until such time as these shares are no longer subject to forfeiture. CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, and the related disclosures of contingent assets and liabilities, if any. The Company evaluates its estimates on an ongoing basis. Actual results could differ from those estimates. The most significant estimates made by management in the preparation of the Company s consolidated financial statements include estimates related to: Business combinations Management uses valuation techniques when determining the fair values of certain assets and liabilities acquired in a business combination (note 5). Furthermore, the fair value of contingent consideration is dependent on the outcome of many variables including the acquirees future profitability (note 21). Future revenue projection used in determining amortization of film and television rights The amortization is based on the future benefits by year or years as established separately by each film or television program. This estimate depends on management s judgement and assumptions based on a pattern of historical experience or other factors. Warrant valuation The Company has issued warrants pursuant to the offering of Class A Restricted Voting Units and Class B Units. Estimating the fair value of share purchase warrants at the date of issuance requires application of the most appropriate valuation model which is dependent on the terms and conditions of the warrant. The Company applied an option-pricing model to measure the fair value of the warrants issued and then Q KEW MEDIA GROUP INC. 15

17 4. Significant Accounting Policies (continued) applied a further discount to reflect the uncertainty associated with the completion of a Qualifying Acquisition which is a prerequisite for the warrants to become exercisable. Application of the optionpricing model requires estimates in various input variables including expected volatility in the underlying assets and the expected life of the warrant The most significant judgments made by management in the preparation of the Company s consolidated financial statements include judgments related to: Accounting for Class A Restricted Voting Shares The Class A Restricted Voting Shares are recorded in the Company s statement of financial position as a financial liability and classified at fair value through profit and loss ( FVTPL ). Holders of Class A Restricted Voting Shares have a Redemption Right with respect to their shares, such that the Company has a contractual obligation to deliver cash to those shareholders electing to exercise their Redemption Rights. The Company has elected to apply the fair value measurement option with respect to the Class A Restricted Voting Shares as the Redemption Right is an embedded derivative allowing holders of such shares to put their shares to the Company for cash under certain circumstances. Income taxes The Company is subject to income taxes in various jurisdictions. Judgement is required in determining the worldwide provision for income taxes. There are many transactions for which the ultimate tax determination is uncertain. Where the final tax outcome is different from what is initially recorded, such differences may impact the income tax and deferred tax positions. FUTURE ACCOUNTING POLICY CHANGES The IASB published amendments to IAS 12, Income taxes ( Amendments to IAS 12 ), to clarify issues surrounding the recognition of deferred tax assets related to debt instruments measured at fair value. This standard will be effective for annual periods beginning after January 1, 2018, with early adoption permitted. In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers ( IFRS 15 ), a single comprehensive model to account for revenue arising from contracts with customers. The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. The core principle of the standard is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. The standard has a mandatory effective date for annual periods beginning on or after January 1, 2018, with earlier application permitted. The final version of IFRS 9, Financial Instruments ( IFRS 9 ) was issued by the IASB in July 2014 and will replace IAS 39. IFRS 9 addresses the classification and measurement of all financial assets and liabilities within the scope of the current IAS 39 and a new expected loss impairment model that will require more timely recognition of expected credit losses and a substantially reformed model for hedge accounting. Included also are the requirements to measure debt-based financial assets at either amortized cost or Q KEW MEDIA GROUP INC. 16

18 4. Significant Accounting Policies (continued) FVTPL and to measure equity-based financial assets either as held-for-trading or as Fair Value through Other Comprehensive Income ( FVTOCI ). No amounts are reclassified out of OCI if the FVTOCI option is elected. Additionally, embedded derivatives in financial assets would no longer be bifurcated and accounted for separately under IFRS 9. The standard has a mandatory effective date for annual periods beginning on or after January 1, 2018, with earlier application permitted. The IASB published amendments to IFRS 2, Classification and Measurement of Share-based Payment Transactions ( Amendments to IFRS 2 ). The amendments clarify the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; sharebased payment transactions with a net settlement feature for withholding tax obligations; and modifications to the terms and conditions of a share-based transaction that changes the classification of the transaction from cash-settled to equity-settled. This standard will be effective for annual periods beginning after January 1, 2018, with early adoption permitted. The IASB published IFRIC 22, Foreign Currency Transactions and Advance Considerations ( IFRIC 22 ), which clarifies that the exchange rate to use on initial recognition of transactions that involve advance consideration paid or received in a foreign currency should be the exchange rate for the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. This standard will be effective for annual periods beginning after January 1, 2018, with early adoption permitted. In January 2016, the IASB issued IFRS 16, Leases ( IFRS 16 ). The new standard requires that for most leases, lessees must initially recognize a lease liability for the obligation to make lease payments and a corresponding right-of-use asset for the right to use the underlying asset for the lease term. In addition, IFRS 16 also changes the definition of a lease, sets requirements on how to account for the asset and liability, including complexities such as non-lease elements, variable lease payments and option periods, provides exemptions for short-term leases and leases of low value assets, changes the accounting for sale and leaseback arrangements, and introduces new disclosure requirements. This standard will be effective for annual periods beginning after January 1, 2019, with early adoption permitted so long as IFRS 15 has been adopted. The Company is currently assessing the impact these new standards or amendments will have on its financial statements. 5. Business combinations and acquisition of non-controlling interest On March 20, 2017, the Company acquired all of the issued and outstanding shares of Content, Architect, BGM, Frantic, Media HQ and Our House (note 2). Each of the acquisitions is a business combination accounted for by using the acquisition method in accordance with IFRS 3, Business Combinations ( IFRS 3 ). The Company has elected to measure the non-controlling interests ( NCI ) in Content and Frantic at fair value. Due to the complexity associated with the valuation process and the short period of time between the acquisition date and the period end, the identification and measurement of the assets acquired and liabilities assumed as well as the measurement of contingent consideration is provisional and subject to Q KEW MEDIA GROUP INC. 17

19 5. Business combinations and acquisition of non-controlling interest (continued) adjustment on completion of the valuation process and analysis of resulting tax effects. Assets acquired and liabilities assumed in the acquisitions have been recorded at their previous carrying values in the financial statements of the acquirees at March 20, The excess of consideration transferred over the carrying value of assets acquired and liabilities assumed has been provisionally included in goodwill. Management will finalize the accounting for the acquisitions no later than one year from the date of the respective acquisition dates and will reflect these adjustments retrospectively, as required under IFRS 3. Differences between these provisional estimates and the final acquisition accounting may occur and these differences could have a material impact on Kew s future financial position and results of operations. Total acquisition-related transaction costs incurred by Kew in connection with the acquisitions was approximately $ million. A preliminary estimate of the fair values of the assets to be acquired and the liabilities to be assumed by Kew in connection with the acquisitions is as follows: Content Our House BGM Architect Frantic Media HQ Total Assets Acquired Cash and cash equivalents 8,764 1,101 2, , ,573 Accounts receivable 77,242 1, ,000 1, ,878 Tax credits receivable - 4,393 6,264 4,949 5,634-21,240 Prepaid expenses Accrued production costs - 1,048 2,625 1, ,112 Property, plant and 2, ,659 equipment Film and television rights 29, ,263 Deferred income tax asset 3, ,388 Total assets acquired 121,158 8,020 12,618 9,067 9,410 1, ,383 Liabilities Assumed Accounts payable and 73, , ,237 accrued liabilities Interim production - 4,533 5,918 4,418 5,660-20,529 financing Deferred revenue ,726 1, ,802 Income taxes payable Long term borrowings 57, ,468 Deferred income tax Total liabilities assumed 131,024 6,460 10,223 6,769 6, ,162 Goodwill and intangible 43,203 8,000 5,490 3,542 3,876 2,748 66,859 assets Total consideration 29,572 9,560 7,885 5,840 6,909 3,513 63,279 transferred Fair Value NCI 3, ,801 33,337 9,560 7,885 5,840 6,945 3,513 67,080 Q KEW MEDIA GROUP INC. 18

20 5. Business combinations and acquisition of non-controlling interest (continued) Each of the acquisitions is subject to specific terms relating to satisfaction of the purchase price by Kew and incorporates payments in cash and shares as well as certain contingent consideration. Contingent consideration has been classified as either a financial liability or equity based on the principles of IAS 32, Financial Instruments: Presentation. In particular, where a variable number of shares is to be issued to satisfy the contingent consideration, the estimated fair value has been classified as a financial liability. The total consideration transferred for the acquisitions is summarized as follows and is detailed for each acquisition in the notes that follow: Contingent Consideration Payable Working Long-term Capital Share Capital Total Cash Current Payable Total Consideration 14,322 4,586 11,296 2,734 30,341 63,279 CONTENT ACQUISITION A Cash Contingent Consideration Payable Share Capital Total Cash Shares 1, ,988 19,988 Contingent consideration Deferred purchase price 3-6,389-6,389 Distribution adjustment 4-1,597-1,597 Purchase price adjustment 5-1,597-1,597 Net debt payment ,583 19,988 29,571 Kew will satisfy the purchase price for Content through the assumption of debt and the following: 1. $ million (US$12.2 million) of the Content Purchase Price was paid in the form of share consideration (the Share Consideration ), the fair value of which was based on the trading value of the shares as at March 20, $3.781 million (US$2.8 million) of the Content Purchase Price is paid as an Escrowed Consideration which is contingent on Content achieving certain performance targets for the fiscal year ending March 2017 (the Content Escrowed Consideration ). Management has classified this contingent consideration as an equity instrument and included in share capital and has estimated that the Content Escrowed Consideration will be earned in full. 3. Up to $ million (US$8.0 million) of the Content Purchase Price is to be paid as a Deferred Purchase Price which is contingent on Content achieving certain performance targets for the fiscal years ending March 2017 and 2018 (the Content Deferred Purchase Price ). Management has estimated the fair value of the Content Deferred Purchase Price at $6.389 million representing the discounted probability adjusted value of shares to be issued. Q KEW MEDIA GROUP INC. 19