Pivot Technology Solutions, Inc.

Transcription

1 Consolidated Financial Statements Pivot Technology Solutions, Inc.

2

3 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION [in thousands of U.S. dollars] As at December 31, ASSETS Current Cash and cash equivalents 8,153 7,978 Accounts receivable (note 6) 300, ,285 Inventories 49,215 83,321 Other current assets 33,706 34,151 Total current assets 391, ,735 Property, plant and equipment, net (note 7) 7,401 7,866 Goodwill (note 8) 31,111 29,733 Intangible assets (note 9) 35,701 43,955 Deferred income taxes (note 17) 18,268 15,982 Other non-current assets 12,375 11,379 Total assets 496, ,650 LIABILITIES AND SHAREHOLDERS EQUITY Current Bank overdraft 24,473 33,195 Accounts payable and accrued liabilities (note 10) 248, ,168 Income taxes payable Deferred revenue and customer deposits 38,673 38,434 Other financial liabilities (note 11) 139, ,373 Total current liabilities 451, ,670 Other financial liabilities (note 11) 2,228 - Other non-current liabilities 13,320 11,960 Total liabilities 467, ,630 Shareholders equity Share capital (note 13) 86,983 88,096 Warrants and options (note 13) - 2,015 Contributed surplus 2, Foreign exchange translation reserve 2 - Accumulated deficit (62,585) (52,853) Equity attributable to owners of the parent 26,816 37,361 Non-controlling interest (note 4) 2,275 1,659 Total shareholders equity 29,091 39,020 Total liabilities and shareholders equity 496, ,650 See accompanying notes On behalf of the Board: "John Anderson" John Anderson "Kevin Shank" Kevin Shank Director President, CEO and Director 1 Page

4 CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) [in thousands of U.S. dollars] For the years ended December 31, Revenue (note 19) 1,470,841 1,488,960 Cost of sales 1,294,887 1,318,553 Gross profit 175, ,407 Employee compensation and benefits (note 20) 117, ,727 Other selling, general and administrative expenses, net 33,259 26,232 Income (loss) before the following: 25,348 31,448 Depreciation and amortization 10,965 13,141 Finance expense 4,566 6,780 Change in fair value of liabilities (note 22) (265) 1,479 Other expense (note 21) 14,253 3,593 Income (loss) before income taxes (4,171) 6,455 Provision for income taxes (note 17) 150 3,286 Income (loss) for the period (4,321) 3,169 Income (loss) for the period attributable to non-controlling interests Income (loss) for the period attributable to shareholders (4,937) 2,996 Other Comprehensive income (loss) Items that may be reclassified subsequently to income (loss) for the period: Exchange gain on translation of foreign operations Total Comprehensive income (loss) attributable to shareholders (4,935) 2,996 Income (loss) per common share (note 13): Income (loss) available to shareholders: Income (loss) for the period attributable to shareholders (4,937) 2,996 Deduct preferred dividends declared - (461) Income (loss) available to common shareholders (4,937) 2,535 Basic $ (0.12) $ 0.06 Diluted $ (0.12) $ 0.06 See accompanying notes 2 Page

5 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY [in thousands of U.S. dollars] Foreign Non- Currency Share Capital Contributed Warrants Controlling Translation Accumulated Preferred Common Total Surplus /Options Interests Reserve Deficit Total Balance, December 31, ,080 38,045 86, ,082 1,486 - (53,476) 37,238 Options exercised - 1,971 1,971 - (985) Preferred share conversion to common shares (48,080) 48, Preferred share dividends declared (note 13) (461) (461) Common share dividends declared (note 13) (1,912) (1,912) Warrants expired and unexercised (note 13) (82) Income for the period ,996 3,169 Balance, December 31, ,096 88, ,015 1,659 - (52,853) 39,020 Options exercised (388) Share-based compensation Share repurchases - (1,892) (1,892) (1,892) Common share dividends declared (note 13) (4,795) (4,795) Warrants expired and unexercised (note 13) ,627 (1,627) Gain on translation of foreign operations Loss for the period (4,937) (4,321) Balance, December 31, ,983 86,983 2,416-2,275 2 (62,585) 29,091 See accompanying notes 3 Page

6 CONSOLIDATED STATEMENTS OF CASH FLOWS [in thousands of U.S. dollars] For the years ended December 31, OPERATING ACTIVITIES Income (loss) for the period (4,321) 3,169 Add (deduct) items not involving cash Depreciation and amortization 10,965 13,141 Share-based compensation (note 14) Impairment (note 5) 4,788 - Loss on disposal of property, plant and equipment Provision for receivables Deferred income taxes (note 17) (3,121) 2 Amortization of loan fees (note 11) Non cash loss on derecognition - 2,553 Non cash loss of control (note 15) 2,398 - Change in fair value of liabilities (note 22) (265) 1,479 Changes in non-cash working capital balances (note 23) 12,513 4,666 Cash provided by operating activities 24,741 26,061 INVESTING ACTIVITIES Business combinations (note 3) (2,908) - Payments made on contingent/fixed consideration - (5,500) Proceeds from sale of property, plant and equipment Capital expenditures (1,951) (4,681) Other intangible assets (227) (1,131) Cash used in investing activities (5,083) (11,184) FINANCING ACTIVITIES Net change in debt facilities 14,991 (4,210) Net change in flooring arrangements (19,435) 1,112 Net change in bank overdraft (8,722) (10,726) Issuance of common shares, net of cost Common share dividends paid (4,795) (1,912) Preferred share dividends paid - (676) Common share repurchases (1,892) - Cash used in financing activities (19,462) (15,426) Net increase (decrease) in cash and cash equivalents during the year 196 (549) Cash and cash equivalents, beginning of year 7,978 8,527 Effect of foreign exchange fluctuations on cash held (21) - Cash and cash equivalents, end of year 8,153 7,978 See accompanying notes 4 Page

7 1. CORPORATE INFORMATION Pivot Technology Solutions, Inc. ( Pivot or the Company ) is located in Ontario Canada, and is publicly listed on the TSX Exchange and trades under the symbol PTG. The Company has the following wholly owned subsidiaries: Pivot Acquisition Corporation ( PAC ), ACS Holdings (Canada) Inc., Pivot Technology Solutions, Ltd., formerly known as ACS Acquisition Holdings Inc., ( PTSL ), Pivot Research Ltd., Pivot Shared Services Ltd., Pivot of the Americas, ACS (US) Inc. ( ACS ), New ProSys Corp. ( ProSys ), Sigma Technology Solutions, Inc. ( Sigma ), ARC Acquisition (US), Inc. ( ARC ), Pivot Technology Solutions Hong Kong, Ltd., Pivot Technology Solutions Singapore PTE Ltd., TeraMach Technologies Inc., Ontario Inc., Infoptic Technology Inc., and TeraMach Systems Inc. The consolidated financial statements of the Company for the years ended December 31, 2016 and 2015 were authorized for issue in accordance with a resolution of the Company s Board of Directors on March 27, The Company seeks to create shareholder value by providing mission critical IT products and services to the world s leading companies. The Company s operating strategy is designed to help clients contain IT operations and maintenance costs, while maximizing the value of their IT assets. To fuel this strategy, the Company maintains multi-vendor hardware, software and cloud solutions that it resells, and then leverages its own resources and expertise to offer end-to-end services. By employing this strategy, the Company can provide a single point of contact and accountability, and a consistent delivery of customized and specialized IT services and lifecycle product support across any platform. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The annual consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ), as issued by the International Accounting Standards Board ( IASB ). The consolidated financial statements have been prepared on a going concern basis, under the historical cost convention, as modified by the revaluation of certain financial assets and financial liabilities at fair value. 5 Page

8 Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at. 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 financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-company balances, transactions, unrealized gains and losses resulting from intra-company transactions and dividends are eliminated on consolidation. Noncontrolling interests represent the portion of net earnings and net assets that are not held by the Company and are presented separately in the consolidated statements of income (loss) and comprehensive income (loss) and within equity in the consolidated statements of financial position. Change in presentation of financial statements In the fourth quarter of 2016, the Company changed the presentation of its consolidated statement of income (loss) and comprehensive income (loss) by condensing the revenue and expense categories on the face of the statement. Revenue is now broken out separately in the notes to the consolidated financial statements. Additional subtotals have been added to provide more relevant data with which to analyze the Company s performance. Finance expense relates to costs which were historically reported as interest expense. Transaction costs are now included in other expense. Previously, these costs were reported separately. Certain reclassifications have been made to the comparable 2015 financial information to conform to current year presentation. This change does not change previously reported net income. This change in presentation of financial statements was made in order better align the external financial presentation with both the manner in which management analyzes the business and with the Company's peers in the technology industry. Critical judgments and estimates The preparation of the Company s consolidated financial statements requires management to make judgments on how to apply the Company s accounting policies and make estimates about the future. Due to the inherent uncertainty in making these critical judgments and estimates, actual outcomes could be different. The more significant judgments and estimates, where a risk that a material adjustment to the carrying value of assets and liabilities in the next fiscal year could occur, relate to: 6 Page Revenue Recognition Multi-element or bundled contracts require an estimate of the relative fair value of separate elements. The Company has a limited number of these arrangements, and assesses the criteria for the recognition of revenue related to arrangements that have multiple components. These assessments require judgment by management to determine if there are separately identifiable

9 components as well as how to allocate the total price among the components. Deliverables are accounted for as separately identifiable components if they can be understood without reference to the series of transactions as a whole. In concluding whether components are separately identifiable, management considers the transaction from the customer s perspective. Among other factors, management assesses whether the service or product is sold separately by the Company in the normal course of business or whether the customer could purchase the service or product separately. Impairment Impairment exists when the carrying amount of a cash-generating unit ( CGU ) exceeds its recoverable amount, which is the higher of its fair value less costs to sell or its value in use. The key assumptions used to determine the recoverable amount for the different CGUs are further explained in note 5. Taxes Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable income will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable income together with future tax planning strategies. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be impacted. Additionally, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods. Goodwill Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company s CGUs that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. 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 values of the operation disposed of and the portion of the CGU retained. 7 Page

10 Intangible assets, other than goodwill Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses, if any. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditures are reflected in the consolidated statements of income (loss) and comprehensive income (loss) in the period in which the expenditure is incurred. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortized over their useful economic lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the remaining amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of income (loss) and comprehensive income (loss) in the expense category consistent with the function of the intangible assets. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statements of income (loss) and comprehensive income (loss) when the asset is derecognized. The Company has no indefinite lived intangible assets. A summary of the policies applied to the Company s intangible assets is as follows: Type Customer and vendor relationships Technology Other Amortization method Straight-line basis over 10 years Straight-line basis over 5 years Straight-line basis over 5 to 15 years 8 Page

11 Foreign currency Functional currency is the currency of the primary economic environment in which the reporting entity operates and is normally the currency in which the entity generates and expends cash. Each entity in the Company determines its own functional currency and items included in the consolidated financial statements of each entity are measured using that functional currency. The Company has determined that the functional currency of each entity in the consolidated group is U.S. dollars, with the exception of TeraMach Technologies Inc., Ontario Inc., Infoptic Technology Inc., and TeraMach Systems Inc. (collectively TeraMach ). The functional currency of TeraMach is the Canadian dollar. The Company translates the financial statement accounts using the methodology noted below. Transactions Foreign currency transactions are initially recorded at the functional currency rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate at the reporting date. All differences are recorded in the consolidated statements of income (loss) and comprehensive income (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 initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. Translation The assets and liabilities of foreign operations are translated into U.S. dollars at period-end exchange rates and their revenue and expense items are translated at exchange rates prevailing at the date of the transactions. The resulting exchange differences are recognized in other comprehensive income. Financial assets and liabilities Classification Financial assets within the scope of IAS 39, Financial instruments: recognition and measurement, ( IAS 39 ) are classified as financial assets at fair value through profit or loss, loans and receivables, or available-for-sale, as appropriate. The Company determines the classification of its financial assets at initial recognition. Financial instruments, classified at fair value through profit or loss, are recognized on the trade date, which is the date that the Company commits to purchase or sell the asset. Other financial liabilities include trade and other payables, secured borrowings and fixed consideration, and are measured at amortized cost using the effective interest rate method. Transaction costs related to the secured borrowings are netted against the carrying value of the liability and amortized using the effective interest rate method. 9 Page

12 The Company has classified its financial instruments as follows: Fair value through profit or loss Loans and receivables Other financial liabilities Cash and cash equivalents Contingent consideration Interest rate swap Accounts receivable Accounts payable and accrued liabilities Secured borrowings Fixed consideration Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value through profit or loss are carried at fair value. Changes in fair value are recognized in the consolidated statements of income (loss) and comprehensive income (loss). Loans and receivables Loans and receivables are initially recognized at fair value plus transaction costs. They are subsequently measured at amortized cost using the effective interest method less any impairment. Receivables are reduced by provisions for estimated bad debts which are determined by reference to past experience and expectations. Other financial liabilities All other financial liabilities within the scope of IAS 39 are classified as other financial liabilities. Other financial liabilities are measured at amortized cost using the effective interest rate method. Debt instruments are initially measured at fair value, which is the consideration received, net of transaction costs incurred. Transaction costs related to the long-term debt instruments are included in the value of the instruments and amortized using the effective interest rate method. Derecognition A financial asset is derecognized when the rights to receive cash flows from the asset have expired, or when the Company transfers its rights to receive cash flows from the asset and the associated risks and rewards to a third party. A financial liability is derecognized when the obligation under the liability is discharged, canceled or expires. Determination of fair value Fair value is defined as the price at which an asset or liability could be exchanged in a current transaction between knowledgeable, willing parties, other than in a forced or liquidation sale. The fair value of instruments that are quoted in active markets is determined using the quoted prices. The Company uses valuation techniques to establish the fair value of instruments where prices quoted in active markets are not available. Therefore, where possible, parameter inputs to the valuation 10 Page

13 techniques are based on observable data derived from prices of relevant instruments traded in an active market. These valuation techniques involve some level of management estimation and judgment, the degree of which will depend on the price transparency for the instrument or market and the instrument s complexity. The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows: Level 1 Unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets. Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 Significant unobservable inputs which are supported by little or no market activity. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. Cash and cash equivalents Cash and cash equivalents in the consolidated statements of financial position comprise cash at banks and on hand and short-term deposits with original maturities of three months or less. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. 11 Page

14 Inventories Inventories are valued at the lower of cost or net realizable value. Cost of inventories, which consist primarily of finished goods, is generally determined by the purchase cost on a first-in, first-out basis. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. Property, plant and equipment Property, plant and equipment are stated at cost, net of accumulated depreciation and/or accumulated impairment losses, if any. Such cost includes the cost of replacing part of the property, plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of property, plant and equipment are required to be replaced at intervals, the Company recognizes such parts as individual assets with specific useful lives and depreciation. Repair and maintenance costs are recognized in the consolidated statements of income (loss) and comprehensive income (loss) as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows: Computer equipment Furniture and fixtures Leasehold improvements 3 to 5 years 5 to 7 years Shorter of the estimated life of the asset or the lease term An item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statements of income (loss) and comprehensive income (loss) when the asset is derecognized. The assets residual values, useful lives and methods of depreciation are reviewed at each financial year end and adjusted prospectively, if appropriate. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. 12 Page

15 Revenue The Company generates revenue from distributing storage devices and systems as well as computer products and peripherals. The Company also provides value-added services such as design, integration, installation, maintenance and other consulting services, consolidated with a variety of storage and computer hardware and software products. Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding sales tax, estimated discounts, rebates and estimated returns. The Company assesses its revenue arrangements in order to determine if it is acting as a principal or agent. In arrangements where the Company is acting as agent, revenue is recorded net of the related costs. The following specific recognition criteria must also be met before revenue is recognized: Product sales Revenue is recognized when the significant risks and rewards of ownership of the goods has passed to the buyer, usually on delivery to the customer. Service revenue Revenue is recognized when receivable under a contract following delivery of a service or in line with the stage of the work completed. Stage of completion is measured by reference to labour hours incurred to date as a percentage of total estimated hours for each contract. Where the Company is not the primary obligor for the maintenance contracts performed by third parties, these arrangements do not meet the criteria for gross revenue presentation and, accordingly, are recorded on a net basis. At the time the Company enters into contracts with third-party service providers or vendors, the Company determines whether it acts as a principal in the transaction and assumes the risks and rewards of the rendering of the service or if it is simply acting as an agent or broker. Revenue on maintenance contracts performed by internal resources is recognized on a gross basis rateably over the term of the maintenance period. When a single sales transaction requires the delivery of more than one product or service (multiple components), the revenue recognition criteria are applied to the separately identifiable components. A component is considered to be separately identifiable if the product or service delivered has standalone value to that customer and the fair value associated with the product or service can be measured reliably. The amount recognized as revenue for each component is the fair value of the element in relation to the fair value of the arrangement as a whole. 13 Page

16 Vendor rebates The Company receives funds from vendors for price protection, product rebates, marketing, promotions and other competitive pricing programs. The Company accounts for these rebates and other incentives received from its vendors, relating to the purchase of inventories, as a reduction of cost of sales and inventories. Accounts receivable and allowance for doubtful accounts Accounts receivable are recognized and carried at their original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Balances are written off when the probability of recovery is assessed as being remote. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date, whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Finance leases which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in finance costs in the consolidated statements of income (loss) and comprehensive income (loss). A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset or the lease term. Operating lease payments are recognized as an operating expense in the consolidated statements of income (loss) and comprehensive income (loss) on a straight-line basis over the lease term. Income taxes Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the consolidated statements of financial position date. Deferred tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. 14 Page

17 Deferred tax liabilities are recognized for all taxable temporary differences, except: Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carryforward of unused tax credits and unused tax losses can be utilized, except: Where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profits will be available against which the temporary differences can be utilized. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. 15 Page

18 Segment reporting Operating segments are reported in a manner consistent with internal reporting provided to the chief operating decision maker. The chief operating decision maker is responsible for allocating resources and assessing the performance of the operating segments. Pension plan The Company operates a defined contribution pension plan for certain of its employees. Contributions are recognized as an expense in the consolidated statements of income (loss) and comprehensive income (loss) as they become payable in accordance with the terms of the plan. Share-based payments The Company has a share-based payment plan under which the Company issues stock options. Employee stock options generally vest over a two-year vesting period with either 33% or 50% of the options vested and exercisable immediately and the remainder vested and exercisable in equal annual installments over the remaining two years. Consultant stock options vest over a one year vesting period with 50% of the options vested and exercisable immediately and the remainder vested and exercisable in equal quarterly installments over the remaining year. The Company applies a fair value method of accounting to each installment of stock options granted to directors, officers, employees and consultants. The grant date fair value of stock options granted to directors, officers, employees and consultants is recognized as share-based compensation expense, with a corresponding increase to contributed capital, over the period that the directors, officers, employees and consultants become unconditionally entitled to the stock options. The expense is adjusted to reflect the estimated number of options expected to vest at the end of the vesting period. Compensation cost is recognized so that each tranche in an award with graded vesting is considered a separate grant with a different vesting date and fair value. No compensation expense is recognized for options that are forfeited and have not met the service requirement for vesting. When options are exercised, the proceeds, as well as the related amount in contributed capital, are credited to share capital. The Company uses the Black- Scholes option pricing model to determine fair value of stock options at the grant date. Measurement inputs include the price of shares on the measurement date, exercise price of the option, expected volatility, expected life of the option, expected dividends and the risk-free interest rate. Weighted average volatility and the forfeiture rates used are based on historical information. Impairment The Company s tangible and intangible assets are reviewed for indications of impairment at each date of the consolidated statements of financial position. If indication of impairment exists, the asset s recoverable amount is estimated. In addition, goodwill and other indefinite-lived intangibles are tested for impairment annually on October Page

19 An impairment loss is recognized when the carrying amount of an asset, or its CGU, exceeds its recoverable amount. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Impairment losses are recognized in profit or loss for the period. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to CGUs and then to reduce the carrying amount of the other assets in the CGU on a pro-rata basis. The recoverable amount is the greater of the asset s fair value less costs to sell or value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the CGU to which the asset belongs. Standards issued but not yet effective Standards issued but not yet effective up to the date of the issuance of the Company s consolidated financial statements are listed below. This listing is of standards issued which the Company reasonably expects to be applicable at a future date. The Company intends to adopt those standards when they become effective. 17 Page IFRS 9 Financial Instruments: Classification and Measurement International Financial Reporting Standard 9, Financial Instruments ( IFRS 9 ), as issued in 2014, introduces new requirements for the classification and measurement of financial instruments, a new expected-loss impairment model that will require more timely recognition of expected credit losses and a substantially-reformed model for hedge accounting, with enhanced disclosures about risk management activity. IFRS 9 also removes the volatility in profit or loss that was caused by changes in an entity s own credit risk for liabilities elected to be measured at fair value. IFRS 9 is effective for annual periods beginning on or after January 1, Earlier application is permitted. The Company is in the process of reviewing the standard to determine the impact on the consolidated financial statements. IFRS 15 Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15, which covers principles for reporting about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. IFRS 15 is effective for annual periods beginning on or after January 1, The Company is in the process of reviewing the standard to determine the impact on the consolidated financial statements. IFRS 16, Leases On January 13, 2016, the IASB published a new standard, IFRS 16, Leases. The new standard will eliminate the distinction between operating and finance leases and will bring most leases on the

20 balance sheet for lessees. This standard is effective for annual reporting periods beginning on or after January 1, 2019 and is to be applied retrospectively. The Company has not yet determined the impact on its consolidated financial statements. 3. BUSINESS COMBINATIONS TeraMach On October 1, 2016, the Company acquired all of the issued and outstanding share capital of TeraMach, a value-added reseller incorporated and domiciled in Canada, for consideration of $7,346 (C$9,639). The purpose of the acquisition was to enhance Pivot s buying power, provide a new platform to grow in Canada and add local expertise in Toronto and Ottawa that can be used to further the Company s services strategy The allocation of fair value to the identifiable assets acquired and liabilities assumed as at the date of acquisition were as follows: Fair value recognized on acquisition Cash and cash equivalents 908 Accounts receivable 10,702 Inventories 256 Other current assets 219 Property, plant and equipment 727 Intangible assets (customer and vendor relationships) 3,277 16,089 Accounts payable and accrued liabilities 10,275 Deferred revenue 373 Deferred tax liability 854 Taxes payable 20 11,522 Total identifiable net assets at fair value 4,567 Goodwill arising on acquisition 2,779 Purchase consideration transferred 7,346 Purchase consideration transferred on acquisition consists of: Cash 4,022 Contingent consideration 3,324 7, Page

21 Cash consideration of $4,022 consists of $3,816 paid on the acquisition date and $206 for working capital adjustments accrued as at December 31, 2016 and paid in February None of the accounts receivable has been impaired and it is expected that the full contractual amounts will be collected. The operations from the acquisition have been included in the results of Pivot commencing October 1, From the date of acquisition, the acquired business contributed revenue of $18,053 and net loss of $72 to the loss before taxes of the Company in Acquired intangible assets of $3,277 relate to existing customer and vendor relationships from which future cash flows and cost savings are expected to be derived. The estimated goodwill of $2,779 comprises the expected value of efficiencies to be achieved subsequent to the acquisition. This goodwill is not deductible for tax purposes. Transaction costs of $290 have been expensed in 2016 in relation to this acquisition. These transaction costs consist primarily of payments made for advisory services related to the acquisition of the TeraMach assets. A contingent liability has been determined at the acquisition date resulting from additional cash amounts payable to TeraMach of up to $6,703 (C$9,000) over the four years following the date of acquisition. The payments are dependent on the business achieving certain performance targets over the four-year period. The fair value of the contingent consideration was $3,324 as at the date of acquisition. The fair value of the contingent consideration was $3,427 as at December 31, 2016 (see note 11). 19 Page

22 4. INTERESTS IN OTHER ENTITIES The following table includes the significant subsidiaries and affiliates of the Company: 20 Page Equity Interest Name Jurisdiction ACS Holdings (Canada) Inc. Canada 100% 100% Pivot Acquisition Corporation Canada 100% 100% Ontario Inc. Canada 100% 100% Infoptic Technology Inc. Canada 100% 100% TeraMach Systems Inc. Canada 100% 100% TeraMach Technologies Inc. Canada 100% 100% Pivot of the Americas S.A. de C.V. Mexico 100% 100% Pivot Research Ltd. Jersey 100% 100% Pivot Shared Services Ltd. Ireland 100% 100% Pivot Technology Solutions Hong Kong Limited Hong Kong 100% 100% Pivot Technology Solutions Singapore PTE. LTD. Singapore 100% 100% Pivot Technology Solutions, Ltd. United States 100% 100% ACS (US) Inc. United States 100% 100% New ProSys Corp. United States 100% 100% ProSys Information Systems Inc. United States 45% 45% ARC Acquisition (US) Inc. United States 100% 100% Austin Ribbon and Computer Supplies Inc. United States 0% 0% Sigma Technology Solutions Inc. United States 100% 100% ProSys Information Systems, Inc. ( Old ProSys ) Old ProSys is a 45% owned affiliate of the Company, whose principal office is located in Norcross, Georgia, United States of America. Despite not owning a majority of the voting rights, management has determined that the Company controls this entity, based on the following facts and circumstances: Pivot has the right to acquire, at any time, the remaining shares of Old ProSys they do not already own. Any significant decision made at Old ProSys requires Pivot s agreement, including board changes, payment of dividends, merger or acquisition, material changes to compensation, incurring debt in excess of $100, causing any material change in the business, and assigning or termination of any material agreement. Pivot receives the majority of the benefits from Old ProSys activities (95%+ of net income historically from Old ProSys). The Company has certain contractual arrangements with Old Prosys, whose activities and results are consolidated with the Company. The Company is deemed to have primary exposure for the significant

23 risks and rewards associated with sales by Old Prosys to its third-party customers. Total sales attributable to the activities of Old Prosys were approximately $289,631 and $274,691 for the years ended, respectively. Amounts due from Old Prosys were $62,360 and $29,671 as at, respectively. The following table summarizes the financial information of Old ProSys, as included in its own financial statements: 12/31/ /31/2015 Current Assets 68,068 34,905 Non-current Assets - - Current Liabilities 62,360 29,671 Non-current Liabilities - - Revenue 289, ,691 Total Comprehensive Income % interest held 45% 45% Cash (used in) provided by operating activities (32,689) 37,132 Cash (used in) investing activities - - Cash provided by (used in) financing activities 32,689 (37,132) Net increase (decrease) in cash and cash equivalents - - Austin Ribbon and Computer Supplies, Inc. ( GTS ) The Company has no ownership interests in GTS. Based on the terms under certain contractual arrangements in place with GTS, which recently terminated on August 30, 2016, the Company had a right to variable returns based on GTS performance. The Company also provided financing and certain financial guarantees for the benefit of GTS during the course of the relationship. ARC had certain contractual arrangements with GTS, whose activities were consolidated with those of the Company. ARC received notification from GTS that it wished to terminate the existing arrangement effective August 30, During June of 2016, ARC and GTS began the process of separation, and on July 1st, 2016, the Company was deemed to have effectively lost control over GTS for accounting purposes. Total sales attributable to the activities of GTS were approximately $47,225 for the six months ending June 30, Total sales attributable to the activities of GTS were approximately $120,201 for the twelve month period ended December 31, Amounts due from GTS were $5,978 as at December 31, The Company established a reserve for the $5,978 during Q3 2016, which remained in place as at December 31, Page

24 5. GOODWILL IMPAIRMENT On June 1, 2016, the Company was informed by GTS that it intended to terminate its distribution, licensing and administrative services agreements with Pivot. The termination of the agreements indicates the Company will experience significant decreases in expected future revenues and gross profit, due to a lower volume of sales. As such, the Company reviewed its business forecast, and performed an interim impairment test on the ARC cash generating unit ( ARC CGU ). The Company concluded that the recoverable amount based on a value in use impairment test was less than the carrying amount of the ARC CGU and accordingly, recorded an impairment charge of $4,788, consisting of a write off of goodwill of $1,338, and a reduction to other intangibles of $3,450 during the year ended December 31, The impact of the impairment charges net of tax was $3,095 for the year ended December 31, The recoverable amount was determined based on the value in use approach using a discounted cash flow model. The significant key assumptions include forecasted cash flows based on financial plans prepared by management covering a three year period taking into consideration the minimum liquidity requirements of the Company. The discounted cash flow model was established using a discount rate of 11%, a pre-tax discount rate of 34%, and a terminal growth rate of 3%. The Company also performed its annual test for goodwill impairment in the fourth quarters of 2016 and 2015 in accordance with its policy described in note 2. The recoverable amount exceeded the carrying value for both 2016 and The valuation techniques, significant assumptions and sensitivities applied in the goodwill impairment test are described below. The selection and application of valuation techniques and the determination of significant assumptions requires judgment. The recoverable amount for each CGU was determined using a fair value less costs to sell ( market ) approach. The market approach assumes that companies operating in the same industry will share similar characteristics and that Company values will correlate to those characteristics. Therefore, a comparison of a CGU to similar companies whose financial information is publicly available may provide a reasonable basis to estimate fair value. Under the market approach, fair value is calculated based on earnings multiples of benchmark companies comparable to the businesses in each CGU. Data for the benchmark companies was obtained from publicly available information, and ranged between 5.9 and 7.9 times earnings. The revenue and operating margin assumptions used were based on the individual CGU s internal forecast for the next fiscal year. In arriving at the forecast, the Company considered past experience and inflation as well as industry and market trends. The forecast also took into account the expected impact from new product initiatives, customer retention and efficiency initiatives. The Company has used earnings multiples for its CGUs similar to the range for benchmark companies. 22 Page