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EPIC DATA INTERNATIONAL INC.
Quarterly Report
For the nine months ended June 30, 2012
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Letter to Shareholders
Dear Shareholders We have made great progress during the first nine months of this fiscal year towards the first year objectives in of our three year strategic plan. Although traditional revenues from our long-term customers have been declining, our recent product development efforts are now delivering revenue from new customers. Since the start of this fiscal year, we have increased our headcount from 36 staff to over 140, inclusive of staff members in our majority controlled joint venture in China. This dramatic rise in our staffing level has allowed us to accelerate our product development initiatives and our readiness to serve the Chinese market with local resources. We continue to make good progress in two MES projects in China for major automotive companies, which should be completed by the end of the 2012 calendar year. We also expect to complete the first phase of an MES project this calendar year with our first aerospace customer in China. In our western operations we recently completed an MES project with a UK aerospace company. We also expect to complete a project later this year with a major US aerospace customer where we will deploy our newly released UniView smart terminal and the latest generation of our IntegraNet manufacturing platform for the customer’s multiple manufacturing facilities in the United States. Finally, we are excited to have completed the $2.4 million financing this quarter. The participation of several members of management in the financing, including myself, marks a key milestone in our company’s strategy to be a global leader in the Manufacturing Execution Systems market. Sincerely yours, “Robert Nygren” Robert Nygren President & Chief Executive Officer
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Company Profile
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Epic Data develops manufacturing operations management systems for aerospace, defense, automotive
and heavy equipment manufacturers in North America, Western Europe and China. Since 1976 our
technology solutions have helped businesses control and improve material, labour and production
processes. These types of systems are generally known in the manufacturing industry as Manufacturing
Execution Systems (MES).
Manufacturers face never-ending productivity and profitability pressures, due to expanding global competition, changing customer requirements and increased reliance on supply chains. Manufacturers are challenged to optimize the number of units produced per person and balance the “time to value” of turning inventory into finished products. Discrete manufacturers, in contrast to process manufacturers, encounter greater challenges in optimizing their operations, without high-volume, highly automated production processes. The implementation of lean manufacturing practices for discrete manufacturers, based on Kaizen and Six Sigma principles, can be significantly enhanced by access to real-time production information relating to the workforce, warehouse and materials movement in a plant and within the supply chain.
For Chinese manufacturers, additional pressure comes from the need to increase the quality of their products and to become innovative organizations. As part of quality improvement initiatives, many Chinese manufacturers are adopting world-class manufacturing practices, including the use of modern technology systems such as MES. They are also seeking innovative technologies that can provide them with competitive advantages. Our Integra suite of MES solutions help discrete manufacturers increase efficiencies and production quality in multi-site manufacturing operations which have a high labour component, product variability, part complexity and unpredictable production cycles.. The systems are designed with a modular architecture in order to allow easier integration into existing customer environments and to lower initial project costs for the manufacturer. IntegraNet represents our 8
th generation data collection platform and forms the foundation underlying our
newly developed MES software applications. The web-enabled, network-centric IntegraNet platform is a high volume, high integrity data capture transaction engine that gathers data from a wide variety of devices and provides information to other manufacturing systems, ensuring data delivery, synchronization and validation. It uses a Services Oriented Architecture and incorporates multiple 4
th generation tools,
industry standard database offerings, standard ERP connectors and business process management functionality. The incorporation of an industry standard data model (ISA-95) for complex, discrete manufacturing ensures IntegraNet brings together the diverse activities of a manufacturing enterprise for real-time operational visibility and optimization.
Our core business applications developed on or to work alongside the IntegraNet platform include:
IntegraProduction™ – This Production Execution module allows production planners and managers to enforce standard processes, optimize schedules, improve productivity and product quality resulting in reduced costs while achieving a higher rate of on time deliveries.
IntegraTrak™ – This Material Tracking module helps operations management and supervisors synchronize material availability against work orders; locate critical items by tracking parts and asset movement on the shop floor. Providing real-time item location visibility avoids costly delays, eliminating safety stock, improving production efficiency.
IntegraTLC™ – This Labor Management module enables management and control of labor resources. Capturing and measuring labor productivity, in real-time, by workcell, line and plant allows manufacturers to respond quickly to changing requirements and improve accuracy for job costing and payroll.
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Company Profile
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IntegraUID™ – integrates and manages UID data collection, and registration as well as managing serialization, audit trails and genealogy reporting. Also validates UID markings for compliance. MMS™ – This Material Management System application manages the flow of parts through a manufacturer’s receiving, warehouse and production facilities. IntegraPCT™ – This Manufacturing Intelligence reporting tool is being developed to provide management and operational staff a constant and consistent global, real-time view of a plant’s performance. UniMax™ – Offered in China by our joint venture entity, this full MES solution is being developed for manufacturers in the automotive and aerospace sectors. Typical MES implementations require both hardware and software solutions, and we provide customization and integration services around these components to deliver complete solutions that meet the customer’s particular requirements. We also provide post implementation support for our installed solutions. Hardware products include fixed and mobile devices to capture, store and forward information in real-time through the use of automated identification technologies, such as bar codes and RFID. We market a proprietary hardware product called UniView, which is designed in-house and manufactured in contract facilities in Asia and North America. We also market and support hardware products manufactured by leading device manufacturers, including Motorola, Intermec, Zebra and others.
Our strategy is to grow our business by developing innovative technology solutions and delivering exceptional service to our target market customers through a broad range of technologies and services that improve the efficiency and quality of manufacturing and warehouse operations. Our growth strategy includes entry into the world-leading Chinese manufacturing sector. In late 2011 we established a wholly owned subsidiary with offices in Shanghai and Wuhan. The operations in Shanghai target the sale of MES and related solutions to manufacturers in specific regions in China. The operations in Wuhan are for product development. In March 2012 we established a 51% owned joint venture company in Wuhan with Huazhong University of Science & Technology. The Epic-HUST JV targets the sale of MES and related solutions to manufacturers.
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Management Discussion and Analysis
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The following Management Discussion and Analysis (“MD&A”) is prepared as of May 30, 2012 and is
intended to assist in understanding the results of operations and financial condition of Epic Data
International Inc. (“Epic Data” and or the “Company”). Throughout the MD&A reference to Epic Data or
the Company is on a consolidated basis. This MD&A should be read in conjunction with the unaudited
interim condensed consolidated financial statements and accompanying notes for the nine months ended
June 30, 2012, which are prepared in Canadian dollars in accordance with International Financial
Reporting Standards (“IFRS”). Certain comparative figures in the MD&A have been reclassified to
conform to the presentation adopted in the current period.
Forward-Looking Statements
This MD&A may contain forward-looking statements concerning the future performance of the Company’s
business, its operations and its financial results and condition all of which are subject to risks and
uncertainties. A number of factors could cause actual results to differ materially from those expressed in
the forward looking statements, including but not limited to general economic conditions, technological
changes, fluctuations in foreign currencies, regulatory change, competitive factors, changes in accounting
rules or standards, many of which are beyond the Company’s control. Forward looking statements are
made based on current information when the statement is made We caution readers that forward looking
information is inherently uncertain and that actual results may differ materially from those expressed in
the forward looking statements. The Company does not assume responsibility for the accuracy and
completeness of forward looking statements and does not undertake any obligation to publicly revise
these forward looking statements to reflect new information, subsequent events or changes in
circumstances.
Overall Performance The Company achieved significant progress with its growth and expansion strategy over the first nine months of the year. Key new hires included a vice-president of sales to oversee global sales and marketing activities and a director of product development to spearhead the global development of our manufacturing execution systems (“MES”) products from development centres in China and Canada. We established a wholly-owned subsidiary in China, with a research and development centre in Wuhan and a sales and marketing office in Shanghai. We completed the registration of a joint venture company (the “Epic-HUST JV”) with Huazhong University of Science & Technology based in Wuhan, China. We have a 51% interest in the Epic-HUST JV, which currently has a staff of over 60. The Epic-HUST JV is working on its first two major MES contracts for automotive companies, which are expected to be completed by the end of the 2012 calendar year.
Revenue for the year to date was down slightly as the increase in revenues in China have mostly offset
lower maintenance revenues from current customers. Corresponding gross profits have decreased as
margins on hardware sales have been reduced as compared with the prior year. Total expenses for the
year to date have increased by over 70% due to the formation of two business entities in China,
increased product development for the IntegraMES software and UniView smart terminal and increased
sales and marketing and general and administration as the company executes on its growth strategy.
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Management Discussion and Analysis
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Selected Financial Information
Below is selected financial information derived from the unaudited interim condensed consolidated
financial statements, which have been prepared in accordance with IFRS.
2012 2011 2012 2011
Revenue 1,194,395$ 1,024,998$ 3,257,244$ 3,267,105$
Cost of sales 637,767 490,908 1,724,957 1,624,173
47% 52% 47% 50%
Gross Margin 556,628 534,090 1,532,287 1,642,932
Expenses
General and administration 738,243 457,808 1,797,064 1,313,971
Sales and marketing 416,083 259,013 1,324,877 703,053
Product development 540,956 150,484 1,204,711 449,662
Net finance charges 34,569 29,442 74,771 58,159
Foreign exchange loss 16,785 11,023 46,997 77,193
Interest accretion 2,128 2,127 6,384 3,546
1,748,764 909,897 4,454,804 2,605,584
Net loss for the period (1,192,136) (375,807) (2,922,517) (962,652)
Loss per share - Basic and diluted (0.04)$ (0.02)$ (0.09)$ (0.04)$
Nine months ended June 30,Three months ended June 30,
June 30, September 30,
2012 2011
Total assets 1,365,623$ 3,020,515$
Total long term liabilities 2,169,501$ 1,963,117$
Results of Operations for the Three and Nine months ended June 30, 2012
Revenue
Revenue for the three months ended June 30, 2012 increased $169,397 or 17% to $1,194,395 compared
with $1,024,998 in the same period last year. The increase was due to revenue of $159,732 in the start-
up operations in China. Revenue for the nine months ended June 30, 2012 decreased $9,861 or 0.3% to
$3,257,244 compared with $3,267,105 in the same period last year. The slight decrease in revenue for
the nine months ended June 30, 2012 was primarily due to lower maintenance revenue not being fully
offset by revenues of $176,910 from the start operations in China.
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Management Discussion and Analysis
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Gross Margin
The gross margin for the three months ended June 30, 2012 increased $22,538 or 4% to $556,628 as
compared with $534,090 in the same period last year due to higher revenue. The gross margin for the
nine months ended June 30, 2012 decreased $110,645 thousand or 7% to $1,532,287 as compared with
$1,642,932 in the same period last year. The decrease in gross margin for the nine months ended June
30, 2012 was due to higher costs for hardware sales.
The gross margin as a percentage of revenue for the three months ended June 30, 2012 decreased to
47% compared with 52% in the same period last year, while for the nine months ended June 30, 2012
decreased to 47% compared with 50% in the same period last year. The decreases were due mainly to
lower productivity, especially in professional services, with fixed costs and lower revenue and lower
margins for hardware sales.
General and administration
General and administration expenses for the three months ended June 30, 2012 increased $280,435 or
61% to $738,243 compared with $457,808 in the same period last year. General and administration
expenses for the nine months ended June 30, 2012 increased $483,093 or 37% to $1,797,064 compared
with $1,313,971 in the same period last year. The increase in both periods is due primarily to the
operations in China, which includes the opening and staffing offices in Shanghai and Wuhan, China plus
a severance provision of approximately $90,000.
Sales and marketing
Sales and marketing expenses for the three months ended June 30, 2012 increased $157,070 or 61% to
$416,083 compared with $259,013 in the same period last year. Sales and marketing expenses for the
nine months ended June 30, 2012 increased $621,824 or 88% to $1,324,877 compared with $703,053 in
the same period last year. The increase in both periods is due primarily to the operations in China, which
in includes the opening and staffing of sales personnel in the offices in Shanghai and Wuhan, China. In
addition, new sales staff were added in the United Kingdom and Canada.
Product development
We maintain development teams in both Richmond, British Columbia, Canada and Wuhan, China. The
expenses consist primarily of employee compensation costs as well as sub-contracted design and
development services.
Product development expenses for the three months ended June 30, 2012 increased $390,472 or 260%
to $540,956 compared with $150,484 in the same period last year. Product development expenses for
the nine months ended June 30, 2012 increased $735,049 or 168% to $1,204,711 compared with
$449,662 in the same period last year. The increase in both periods is due primarily to the development
of the Integra MES suite of software applications, the development of the UniView smart terminal and the
establishment of a new development team in Wuhan.
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Management Discussion and Analysis
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Net Finance Charges
Net finance charges for the three months ended June 30, 2012 increased $5,127 or 17% to $34,569
compared with $29,442 in the same period last year. The decrease is due to the partial repayment of the
term loan in November 2011. Net finance charges for the nine months ended June 30, 2012 increased
$16,612 or 27% to $74,771 compared with $58,159 in the same period last year. The increase is due to
the term loan received January 31, 2011.
Net loss
Net loss for the three months ended June 30, 2012 increased $816,329 or 217% to $1,192,136 compared
with $375,807 in the same period last year. Net loss for the nine months ended June 30, 2012 increased
$1,959,865 or 204% to $2,922,517 compared with $962,652 in the same period last year.
Summary of Quarterly Results All amounts in 000's, except per share figures
Sep 30 Dec 31 Mar 31 Jun 30 Trailing Sep 30 Dec 31 Mar 31 Jun 30 Trailing
2010 2010 2011 2011 four 2011 2011 2012 2012 four
Q4 Q1 Q2 Q3 quarters Q4 Q1 Q2 Q3 quarters
Revenue 1,121$ 1,281$ 961$ 1,025$ 4,388$ 936$ 870$ 1,193$ 1,194$ 4,193$
Net loss (142)$ (175)$ (412)$ (376)$ (1,105)$ (526)$ (723)$ (912)$ (1,192)$ (3,353)$
Basic and diluted
loss per share (0.01)$ (0.01)$ (0.01)$ (0.02)$ (0.05)$ (0.02)$ (0.02)$ (0.03)$ (0.04)$ (0.11)$
Note: The quarterly results for the periods prior to December 31, 2010 are reported in accordance with Canadian
generally accepted accepted principles. All other quarterly results in the above table have been restated under
International Finacial Reporting Standards.
The quarterly information is unaudited, but reflects all adjustments of a normal recurring nature, which
are, in the opinion of management, necessary to present a fair statement of results of operations for the
periods presented. Our revenues and earnings may fluctuate from quarter to quarter. A number of
factors could cause such fluctuations, including the timing of releases of our new products, the timing of
substantial orders, and possible delays in the manufacture or shipment of current or new hardware
products. Because our operating expenses are determined based on anticipated sales, are generally
fixed and are incurred throughout each fiscal quarter, any of the factors listed above could cause
significant variations in our revenues and earnings in any given quarter.
Quarter to quarter comparisons in the financial results is not necessarily meaningful and should not be
relied upon as an indication of future performance.
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Management Discussion and Analysis
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Liquidity and Capital Resources
At June 30, 2012, the Company had cash of $234,401, a working capital deficiency of $1,283,415 and a
deficiency in assets of $3,236,432.
The principal source of cash is from operations, however in this period of expansion and product
development cash from operations has not been sufficient to meet all the Company’s operations. In the
past two years the Company has also generated cash through the issue of shares and loans from
insiders.
Subsequent to June 30, 2012, the Company closed a non-brokered private placement (the “Private Placement”) and raised total proceeds of $2,400,000 through the issuance of 3,750,000 common shares at a price of $0.20 per share for gross proceeds of $750,000 and secured subordinated convertible redeemable debentures in the principal amount of $1,650,000, which are convertible into common shares of the Company at $0.20 per share. A majority of the proceeds were raised directly and indirectly from current management and directors of the Company.
To the extent that the Company does not achieve positive cash flows from operations in the future or
financing is not available or not available on reasonable terms, reductions in expenditures will be required
or the Company may not be able to continue as a going concern. Certain conditions discussed above
raise significant doubt about the ability of the Company to continue as a going concern.
The Company’s primary uses of cash are operating expenses, including product development, interest
and principal payments on loans.
Cash flow from operations
During the nine months ended June 30, 2012, cash flow used in operations, before changes in non-cash
operating working capital, was $2,849,587 as compared with $902,488 in the same period of the prior
year. The increase in cash flow used operations in the current period resulted from the significant loss in
operations for the current year, primarily due to the expansion of operations into China.
Capital expenditures
During the nine months ended June 30, 2012 the Company incurred capital expenditures of $93,706
(2011 - $38,804).
Contractual obligations
Less than 1 to 3 4 to 5
Total 1 year years years
Operating leases 1,594,837$ 425,191$ 881,701$ 287,945$
Loan payable 1,900,000 - - 1,900,000
3,494,837$ 425,191$ 881,701$ 2,187,945$
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Management Discussion and Analysis
- 8 -
Related Party Transactions
During the three and nine months ended June 30, 2012, the Company incurred consulting fees of
$12,500 (2011 - $15,000) and $17,500 (2011 - $45,000), interest expense of $17,932 (2011 - $14,247)
and $31,644 (2011 - $14,247) and charged office rent of $4,000 (2011 - $6,000) and $10,000 (2011 -
$12,000) to companies controlled by directors.
As at June 30, 2012, accounts payable includes $89,451 (September 30, 2011 - $32,560) to directors for
short term operating loans.
The above transactions are in the normal course of operations and are measured at the exchange
amount of consideration established and agreed to by the related parties.
Critical Accounting Policies and Estimates
The unaudited interim consolidated financial statements have been prepared in accordance with IFRS. A
summary of the significant accounting policies used in the preparation of our financial statements is
included in note 3 of the unaudited interim consolidated financial statements for the nine months ended
June 30, 2012. The measurement of certain assets and liabilities is dependent upon future events whose
outcome will not be fully known until future reporting periods. Therefore, the preparation of the
consolidated financial statements requires management to make certain estimates, judgments and
assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results
will vary from those estimated. Certain accounting policies are critical to understanding our reported
financial results. These critical policies, which affect the reported amounts of revenue and the more
significant areas involving management estimates, are described here.
Amortization of property, plant and equipment
Amortization and depreciation is charged to operations over the estimated useful life of property, plant
and equipment. Management reviews its property, plant and equipment for evidence of impairment
whenever events or circumstances indicate that the carrying value of an asset may exceed its estimated
recoverable amount.
Stock based compensation and other stock based payments
The Company has a stock option plan for employees, directors, officers and consultants. Stock-based
compensation plans are measured at fair value using the Black-Scholes option pricing model and the fair
value is expensed on a straight line basis over the vesting period with an offsetting credit to contributed
surplus. Consideration paid on the exercise of stock options, together with the fair value of the award
previously recorded in contributed surplus is recorded as share capital. Management uses judgment to
determine the inputs to the Black-Scholes option pricing model including expected life of the option, share
price volatility and forfeiture rates. Changes in these assumptions may impact the calculation of fair value
and the amount of compensation expense recorded in earnings.
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Management Discussion and Analysis
- 9 -
Revenue recognition
Our arrangements with customers include the sale of automated data capture systems, which includes
hardware, software license fees, implementation and modification of new and existing software, and
subsequent support and maintenance of those systems. The revenue is evaluated based on the terms of
each agreement with respect to multiple element arrangements.
Revenue associated with multiple element arrangements is attributed to the various elements based on
its relative fair value or residual fair value of the undelivered elements and is recognized on an accrual
basis in accordance with the contractual arrangements provided that collectibility is reasonably assured.
The individual elements are recognized as revenue as described below:
Revenue from the sale of goods is measured at the fair value of consideration received or
receivable, net of discounts. Revenue is recognized when persuasive evidence exists, usually in
the form of executed sales documents, that the significant risks and rewards of ownership have
been transferred to the customer, recovery of the consideration is probable, there is no continuing
management involvement in the goods and the amount of revenue can be reliably measured.
Revenue for the sale of goods is generally recognized upon shipment.
Software includes both unmodified standardized software products as well as software products
which are modified to the customer’s specifications on a project by project basis.
Revenue for unmodified standard software products is recognized upon completion of any
services which are not separable and are essential to the functionality of the software. In
general, recognition occurs when the installation of the standard software is complete.
Services related to the modification of our software are not separable and are essential to the
functionality for the customer. As a result, we account for the software and customization
services using the percentage of completion method of contract accounting. We determine
percentage of completion on fixed fee contracts using hours incurred to date compared to
total estimated hours to complete the project. If the total cost estimate exceeds revenue, the
estimated project loss would be recognized immediately.
Maintenance support contracts, which require our ongoing involvement are billed in advance and
recorded as deferred revenue and amortized over the period of the ongoing involvement, typically
one year.
We provide separate professional integration services consisting of consulting, system design, project
management, software customization services, software and hardware installation, system integration,
bar code labeling and customer training. These services are charged on a time and materials or fixed
price basis. We recognize revenue as the services are performed. Revenue is estimated by comparing
the forecasted total effort required to complete the specific deliverable to the actual effort expended to
date. These determinations are re-evaluated on a monthly basis and are typically based on a number of
factors, including past experience with similar deliverables; the complexity of the solution; the skill level,
knowledge and experience of the personnel assigned to the project and the maturity and applicability of
the underlying standard software being utilized. If the total cost estimate exceeds revenue, the estimated
project loss is recognized immediately.
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Management Discussion and Analysis
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Allowance for doubtful accounts
The Company provides an offset to the gross value of trade accounts receivable, which represents
management’s estimate of the net realizable value of those receivables after eliminating uncollectible
amounts. In estimating this provision, consideration is given to the age of the receivable, the credit
worthiness of the customer, historical experience, and specific communications with the customer as well
as many other relevant factors. Changes in any of these circumstances may necessitate an adjustment
to the estimated provision, which would in turn impact the Company’s financial results.
Changes in Accounting Policies including Initial Adoption
The Canadian Institute of Chartered Accountants (“CICA”) has issued and or revised a number of
sections of the CICA Handbook which are applicable for the Company in the current period and future
periods.
International financial reporting standards (“IFRS”) The Canadian Accounting Standards Board requires Canadian publicly accountable enterprises to adopt IFRS in 2011 to replace Canadian Generally Accepted Accounting Principles (“GAAP”). Accordingly, the unaudited interim condensed consolidated financial statements have been prepared in accordance with IFRS, with a transition date of October 1, 2010 to allow for comparative financial information. Financial information disclosed in this MD&A for periods ending prior to October 1, 2010 has not been restated. The Company’s IFRS conversion plan was comprehensive and addressed matters including staff training, changes in accounting policies, restatement of comparative periods, internal controls and procedures, disclosure controls, and business activities in general. The changeover to IFRS did not result in a material impact to the Company’s business functions and activities. Although IFRS employs a conceptual framework that is similar to Canadian GAAP, there are differences in recognition, measurement and disclosure. Note 15 of the unaudited interim condensed consolidated financial statements provides a summary of the transitional exemptions and elections taken by the Company, as well as relevant differences in accounting policies between Canadian GAAP and IFRS. The note also provides reconciliations of assets, liabilities, shareholders’ equity and net earnings for specified periods previously prepared under Canadian GAAP to that under IFRS. The information provided in this MD&A and in the interim financial statements with respect to the transition to IFRS reflects current views, assumptions and expectations. Circumstances may arise such as changes in IFRS standards or interpretation of existing IFRS standards before the audited consolidated financial statements as at September 30, 2012 are prepared. Consequently, final accounting policy decisions for all standards and exemptions in effect at the date of transition will be made during the preparation of the annual consolidated financial statements as at September 30, 2012.
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Management Discussion and Analysis
- 11 -
Business Risks
The Company is subject to numerous business risks. We prudently manage our operations to minimize
the impact of areas involving risk.
Foreign exchange risk
Our sales are principally outside of Canada and are generally conducted in currencies other than the
Canadian dollar while a majority of our product research and development expenses, integration services,
customer support costs and administrative expenses are in Canadian dollars. Fluctuations in the value of
foreign currencies relative to the Canadian dollar could negatively impact our financial results.
Sales risk
Our sales efforts target medium sized and large corporations that require sophisticated to collect and
analyze data relating to various operational activities. We spend significant time and resources educating
prospective customers about the features and benefits of our solutions. Our sales cycle usually ranges
from 3 to 12 months and sales delays could cause our operating results to vary. The Company balances
this risk by continuously assessing the condition of our sales “pipeline” and making the appropriate
adjustments as far in advance as possible. Our strategy also includes a comprehensive program to build
and improve relationships with our long-standing customers to better understand needs and proactively
manage incoming business levels effectively.
Product acceptance risk
Our revenue and profit potential depends substantially upon market acceptance of both our new products and enhanced existing products. To mitigate the risk of non-acceptance by the market, our strategy involves ongoing significant investments in product development to enhance our product line and to develop new applications and features to satisfy the increasingly sophisticated demands of our customers. We also ensure our investments in this area are based on a thorough understanding of market and customer demands through a comprehensive program of market research and customer interaction. Our success depends on the ability of our products to interface with host computer systems and to respond to changes in these systems. In many cases the needs of our customers require us to make significant custom modifications to our products. Our success will depend upon our ability to efficiently undertake and complete such customization, in most cases, under a fixed price arrangement. To minimize the risk of cost overruns, we have implemented stringent pre-contract approval processes as well as industry-leading quality control standards during implementation.
Outsourcing risk
We outsource the manufacture of our proprietary hardware products to third parties. If they do not
manufacture our products properly or cannot meet our needs in a timely manner, we may be unable to
fulfill our product delivery obligations and our costs may increase, and our revenue and margins could be
negatively impacted. Our reliance on third party manufacturers subjects us to a number of risks, including
the absence of guaranteed manufacturing capacity and the inability to control the amount of time and
resources devoted to the manufacture of our products. To mitigate this dependency, we have established
relationships with multiple manufacturing service providers and maintain contact with additional
alternative suppliers in case our primary manufacturing sources should be disrupted.
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Management Discussion and Analysis
- 12 -
Customer concentration risk
We derive a significant portion of our revenue from the sale of our solutions to a relatively limited number
of customers. If any of our more significant prospective customers fail to purchase our solutions or our
existing customers discontinue their relationship with us for any reason, our revenue may be substantially
reduced. To mitigate this risk, we have implemented customer retention programs to emphasize both
quality of product and superior customer service. Our sales programs also address a large base of
potential customers and at any given time, we are pursuing a significant number of sales opportunities.
Foreign operations risks Substantially all of the Company’s operations are conducted in foreign jurisdictions and as such the Company’s operations will be exposed to various levels of political, economic and other risks and uncertainties. These risks and uncertainties include, but are not limited to, terrorism; hostage taking; military repression; expropriation; extreme fluctuations in currency exchange rates; high rates of inflation; labour unrest; the risks of war or civil unrest; renegotiation or nullification of existing contracts, licenses and permits; changes in taxation policies; restrictions on foreign exchange and repatriation; and changing political conditions, currency controls and governmental regulations that favour or require the awarding of contracts to local companies or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. Changes, if any, in investment policies or shifts in political attitude in any foreign jurisdiction may adversely affect the Company’s operations or profitability. Operations may be affected in varying degrees by government regulations with respect to, but not limited to, restrictions on production, price controls, export controls, currency remittance, income taxes, foreign investment and environmental legislation. In particular, the Company is developing its business in the People’s Republic of China (“PRC”). The PRC economy differs from the economies of most other developed countries in many respects, including structure, government involvement, level of development, economic growth rate, government control of foreign exchange, allocation of resources and balance of payment position. The PRC economy has been transitioning from a planned economy to a more market-oriented economy and as a key market in the global economy is also influenced by worldwide economic conditions. For the past two decades the PRC government has implemented economic reform measures emphasizing utilization of market forces in the development of the PRC economy. Some of these measures will benefit the overall PRC economy, but may have a negative effect on the Company. As the Company’s business in PRC advances its financial condition and results of operations may be adversely affected by:
changes in PRC political, economic and social conditions;
changes in policies of the PRC government, including without limitation, changes in policies affecting private business, foreign investment and regulation of the wind power industry;
changes in laws and regulations or the interpretation of laws and regulations;
measures which may be introduced to control inflation or deflation;
changes in the rate or method of taxation; and
imposition of additional restrictions on currency conversion and remittances abroad. The PRC government has previously taken actions to stabilize the country’s economy and any possible social unrest. It has implemented various measures intended to strengthen and improve macroeconomic regulation and is slowly pushing forward reform programs to create stable momentum and growth. The Company cannot assure that such growth will be sustained in the future. Nor can the Company assure
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Management Discussion and Analysis
- 13 -
that any initiatives from the PRC government are necessarily applied or complied with at a local level. Macroeconomic initiatives that are beneficial to the region in which the Company’s projects are located may not be complied with at a local level. In addition to any adverse effect this could have, the Company may be challenged in deciding whether to follow central or local interpretations of applicable laws and regulations. Following local interpretations of applicable laws and regulations may prove to be necessary in practice but could be inconsistent with PRC government interpretations and applications of the same laws and regulations, exposing the Company to potential future liability.
Going concern risk
These financial statements have been prepared on a going concern basis which assumes the Company
will continue in operation into the foreseeable future and will be able to realize its assets and discharge its
liabilities and commitments in the normal course of business. During the nine months ended June 30,
2012 and the year ended September 30, 2011, the Company incurred a net loss of operations of
$2,922,517 and $1,488,462, respectively, and negative cash flow from operations, before net changes in
non-cash operating working capital items, of $2,849,587 and $1,414,067, respectively. The Company is
incurring significant costs as it expands into the China market and continues its product development,
although significant revenues may not be generated for several quarters. The Company anticipates that it
will incur further losses in the development of its business. To date the Company has funded the losses
with a combination of equity from several new investors and debt from related parties.
To the extent that the Company does not achieve positive cash flows from operations in the future or
financing is not available or not available on reasonable terms, reductions in expenditures will be required
or the Company may not be able to continue as a going concern. Certain conditions discussed above
raise significant doubt about the ability of the Company to continue as a going concern. If the Company
is unable to continue as a going concern, then the carrying value of certain assets and liabilities would
require restatement to a liquidation basis, which could differ materially from the values presented in these
interim consolidated financial statements.
Other
As of the date of this MD&A, the Company has 34,768,913 common shares issued and outstanding. In
addition there are stock options and warrants granted to allow for the purchase of an additional 2,230,000
and 500,000 common shares, respectively. Finally, there are debentures outstanding which are
convertible into 8,250,000 common shares.
Additional information and other publicly filed documents relating to the Company are available through
the internet on the Canadian Securities Administrators’ System for Electronic Document Analysis and
Retrieval (“SEDAR”), which can be accessed at www.sedar.com.
EPIC DATA INTERNATIONAL INC. 2012 Q3 Quarterly Report
Notice of No Auditor Review
- 14 -
Under National Instrument 51-102, Part 4, subsection 4.3 (3)(a), if an auditor has not performed a review
of the interim financial statements, they must be accompanied by a notice indicating that the financial
statements have not been reviewed by an auditor.
The accompanying unaudited interim condensed consolidated financial statements of the Company have
been prepared by management and approved by the Audit Committee and the Board of Directors of the
Company.
The Company’s independent auditors have not performed a review of these unaudited interim condensed
consolidated financial statements in accordance with the standards established by the Canadian Institute
of Chartered Accountants for a review of interim financial statements by an entity’s auditors.
- 15 -
EPIC DATA INTERNATIONAL INC. Condensed Consolidated Statement of Financial Position Prepared in Canadian dollars Unaudited
June 30, September 30, October 1,
Assets 2012 2011 2010
Current assets
Cash 234,401$ 2,142,990$ 114,500$
Accounts receivable 715,740 466,784 767,054
Inventory 79,775 126,255 179,778
Prepaid expenses 119,223 116,922 134,276
1,149,139 2,852,951 1,195,608
Non-current aseets
Property, plant and equipment 168,858 106,608 35,859
Deposits 47,626 60,956 36,000
1,365,623$ 3,020,515$ 1,267,467$
LiabilitiesCurrent liabilities
Accounts payable and accrued liabilities 1,337,802$ 750,067$ 553,347$
Deferred revenue 1,011,537 772,366 720,688
Current portion of loans payable (Note 5) 83,215 32,560 270,000
2,432,554 1,554,993 1,544,035
Non-current liabilities
Loans payable (Note 5) 1,869,501 1,963,117 -
Share subscriptions payable (Note 6) 300,000 - -
4,602,055 3,518,110 1,544,035
Shareholders' EquityShare capital (Note 6) 61,370,611 61,370,611 60,180,160
Contributed surplus (Note 7) 611,045 575,955 498,971
Accumulated other comprehensive income (10,388) - -
Non-controlling interest 88,280 - -
Deficit (65,295,980) (62,444,161) (60,955,699)
(3,236,432) (497,595) (276,568)
1,365,623$ 3,020,515$ 1,267,467$
Going concern (Note 1) Commitments and contingencies (Note 12) Subsequent events (Note 16)
See accompanying notes to consolidated financial statements.
On behalf of the Board: “Robert Nygren” “James Topham”
Robert Nygren James Topham Director, President & Chief Executive Officer Director, Chairman
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EPIC DATA INTERNATIONAL INC. Condensed Consolidated Statements of Comprehensive Income
For the three and nine months ended June 30,
Prepared in Canadian dollars
Unaudited
2012 2011 2012 2011
Revenue 1,194,395$ 1,024,998$ 3,257,244$ 3,267,105$
Cost of sales 637,767 490,908 1,724,957 1,624,173
Gross Margin 556,628 534,090 1,532,287 1,642,932
Expenses
General and administration 738,243 457,808 1,797,064 1,313,971
Sales and marketing 416,083 259,013 1,324,877 703,053
Product development 540,956 150,484 1,204,711 449,662
Net finance charges 34,569 29,442 74,771 58,159
Foreign exchange loss 16,785 11,023 46,997 77,193
Interest accretion 2,128 2,127 6,384 3,546
1,748,764 909,897 4,454,804 2,605,584
Net loss (1,192,136) (375,807) (2,922,517) (962,652)
Foreign currency translation (7,980) - (10,388) -
Comprehensive loss (1,200,116)$ (375,807)$ (2,932,905)$ (962,652)$
Net loss attributable to:
Epic Data International Inc (1,150,448)$ (375,807)$ (2,851,819)$ (962,652)$
Epic-Hust non-controlling interest (41,688) - (70,698) -
(1,192,136)$ (375,807)$ (2,922,517)$ (962,652)$
Comprehensive loss attributable to:
Epic Data International Inc (1,158,428)$ (375,807)$ (2,862,207)$ (962,652)$
Epic-Hust non-controlling interest (41,688) - (70,698) -
(1,200,116)$ (375,807)$ (2,932,905)$ (962,652)$
Weighted average shares outstanding
Basic and diluted 31,018,913 25,018,913 31,018,913 25,018,913
Comprehensive loss per share
Basic and diluted (0.04)$ (0.02)$ (0.09)$ (0.04)$
Nine months ended June 30,Three months ended June 30,
See accompanying notes to consolidated financial statements
- 17 -
EPIC DATA INTERNATIONAL INC. Condensed Consolidated Statements of Changes in Shareholders’ Equity
Prepared in Canadian dollars
Unaudited
Accumulated
Non- other
Share Contributed Accumulated controlling comprehensive
capital surplus deficit interest income Total
Balance - October 1, 2011 61,370,611$ 575,955$ (62,444,161)$ -$ -$ (497,595)$
Comprehensive loss
for the period - - (1,605,999) (29,010) (2,408) (1,637,417)
Compensation costs relating
to stock options - 25,205 - - 25,205
Acquisition of Epic-Hust - - - 155,428 - 155,428
Balance - June 30, 2012 61,370,611$ 601,160$ (64,050,160)$ 126,418$ (2,408)$ (1,954,379)$
Accumulated
Non- other
Share Contributed Accumulated controlling comprehensive
capital surplus deficit interest income Total
Balance - October 1, 2010 60,180,160$ 498,971$ (60,955,699)$ -$ -$ (276,568)$
Comprehensive loss
for the period - - (962,652) - - (962,652)
Compensation costs relating
to stock options - 25,241 - - - 25,241
Compensation costs relating
to warrants issued on
loan financing - 42,558 - - - 42,558
Balance - June 30, 2011 60,180,160$ 566,770$ (61,918,351)$ -$ -$ (1,171,421)$
See accompanying notes to consolidated financial statements
- 18 -
EPIC DATA INTERNATIONAL INC. Condensed Consolidated Statements of Cash Flows For the nine months ended June 30, Prepared in Canadian dollars Unaudited
2012 2011
Operating activities
Net loss for the period (2,922,517)$ (962,652)$
Items not involving cash
Amortization of property, plant and equipment 31,456 31,377
Stock-based compensation expense 35,090 25,241
Interest accretion 6,384 3,546
(2,849,587) (902,488)
Change in non-cash operating working capital items (Note 8) 635,459 871,290
(2,214,128) (31,198)
Investing activities
Purchase of property, plant and equipment (93,706) (38,804)
Financing activities
Repayment (proceeds) of loan (49,345) 1,767,150
Proceeds of share subscriptions 300,000 60,000
Proceeds on issue of subsidiary share capital
to non-controlling interest 158,978 -
409,633 1,827,150
Decrease in cash for the period (1,898,201) 1,757,148
Effect of foreign currency translation (10,388) -
Cash at beginning of period 2,142,990 114,500
Cash (overdraft) at end of period 234,401$ 1,871,648$
Supplemental cash flow information
Interest paid 39,315$ 8,939$
See accompanying notes to consolidated financial statements
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
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1. Corporate information and going concern
Epic Data International Inc. (the “Company”) is incorporated under the laws of the Province of British
Columbia and its common shares are listed on the Toronto Venture Exchange under the symbol
“EKD”. Our head office is located at 6500 River Road, Suite 300, Richmond, British Columbia,
Canada, V6X 1X5. The principal business activity of the Company, together with its subsidiaries, is
the development of transaction software and hardware interfaces between custom and enterprise
resource planning systems and electronic data capture systems.
Basis of presentation
These consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries as follows:
Equity
Subsidiary Ownership Jurisdiction
Epic Data Corporation 100% USA
Epic Data Limited 100% United Kingdom
Epic Data Systems (Shanghai) Co., Ltd 100% People’s Republic of China
Epic-Hust Technology (Wuhan) Co., Ltd 51% People’s Republic of China
All material inter-company balances and transactions have been eliminated.
Going concern
These financial statements have been prepared on a going concern basis which assumes the
Company will continue in operation into the foreseeable future and will be able to realize its assets
and discharge its liabilities and commitments in the normal course of business. During the nine
months ended June 30, 2012 and the year ended September 30, 2011, the Company incurred a net
loss of operations of $2,922,517 and $1,488,462, respectively, and negative cash flow from
operations, before net changes in non-cash operating working capital items, of $2,849,587 and
$1,414,067, respectively. The Company is incurring significant costs as it expands into the China
market and continues its product development, although significant revenues may not be generated
for several quarters. The Company anticipates that it will incur further losses in the development of
its business. To date the Company has funded the losses with a combination of equity from several
new investors and debt from related parties (Note 5).
To the extent that the Company does not achieve positive cash flows from operations in the future or
financing is not available or not available on reasonable terms, reductions in expenditures will be
required or the Company may not be able to continue as a going concern. Certain conditions
discussed above raise significant doubt about the ability of the Company to continue as a going
concern. If the Company is unable to continue as a going concern, then the carrying value of certain
assets and liabilities would require restatement to a liquidation basis, which could differ materially
from the values presented in these interim consolidated financial statements.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 20 -
2. Basis of preparation Statement of Compliance The annual consolidated financial statements of the Company for the year ending September 30, 2012, will be prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. As these interim consolidated financial statements represent the Company’s initial presentation of its results and financial position under IFRS, they were prepared in accordance with IFRS 1 – First-Time Adoption of International Financial Reporting Standards. The Company has adopted IFRS with a transition date of October 1, 2010 (the “Transition Date”). These interim consolidated financial statements use the accounting policies which the Company expects to adopt in its annual consolidated financial statements for the year ending September 30, 2012 based on standards currently in effect. These interim consolidated financial statements may differ from those presented in the Company’s first annual consolidated financial statements for the year ending September 30, 2012 prepared under IFRS due to changes to the IFRS standards, if any, subsequent to the preparation of these interim consolidated financial statements. The Company's interim consolidated financial statements were previously prepared in accordance with Canadian Generally Accepted Accounting Principles (“Canadian GAAP”). Canadian GAAP differs in some areas from IFRS. Reconciliations and descriptions on the transition from Canadian GAAP to IFRS and the impact on the condensed consolidated statements of financial position, comprehensive income, changes in shareholders’ equity and cash flows are provided in note 15. These interim condensed consolidated financial statements have been prepared in accordance with IAS 34 – Interim Financial Reporting (“IAS 34”). As these are the Company’s first set of interim consolidated financial statements in accordance with IFRS, the Company’s disclosures exceed the minimum requirements under IAS 34. The Company has elected to exceed the minimum requirements in order to present the Company’s accounting policies in accordance with IFRS and certain additional disclosures required under IFRS, which also highlight the changes from the Company’s 2011 annual consolidated financial statements prepared in accordance with Canadian GAAP. These interim condensed consolidated financial statements do not include all of the information required for full annual consolidated financial statements. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the Company’s audited annual consolidated financial statements for the year ended September 30, 2011. The results for any interim period are not necessarily indicative of the results of operations for any other interim period or for the full fiscal year. The interim condensed consolidated financial statements for the three and nine months ended June 30, 2012 (including comparatives) were approved and authorized for issue by the Board of Directors on August 22, 2012. Functional currency These condensed consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 21 -
2. Basis of preparation (continued)
Use of estimates and judgment
The preparation of consolidated financial statements requires management to make estimates,
judgments and assumptions that affect the application of accounting principles and the reported
amounts of assets and liabilities and the reported amounts of revenues and expenses during the
reporting periods. Actual results may ultimately differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognized in the period in which the estimates are revised and in any future periods
affected. Significant areas requiring the use of management estimates relate to the determination of percentage of completion and estimated project costs and revenues for implementation and modification contracts, the recoverability of inventory and property, plant and equipment useful lives for amortization purposes, provisions for doubtful accounts, stock based compensation, contingencies and liability provisions.
3. Significant accounting policies These unaudited interim condensed consolidated financial statements have been prepared in accordance with IFRS. The policies set out below in note 3 were consistently applied to all the periods presented unless otherwise noted. Subsidiaries Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Control is defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Company. Transactions eliminated on consolidation Inter-company balances and transactions, and any unrealized income and expenses arising from inter-company transactions, are eliminated in preparing the consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 22 -
3. Significant accounting policies (continued)
Foreign currency The consolidated financial statements of the Company are presented in Canadian dollars. (i) Transactions in foreign currency Each entity within the consolidated group records transactions using its functional currency, being the currency of the primary economic environment in which it operates. Foreign currency transactions are translated into the respective functional currency of each entity using the foreign currency rates prevailing at the date of the transaction. Period end balances of monetary assets and liabilities in foreign currency are translated to the respective functional currencies using foreign currency rates at the period end. Foreign currency gains and losses arising from settlement of foreign currency transactions are recognized in operations. (ii) Translation of foreign operations The assets and liabilities of foreign operations are translated into Canadian dollars at foreign currency rates in effect at the period end. The results of foreign operations are translated into Canadian dollars at average rates for the period. Foreign currency translation gains and losses are recognized in other comprehensive income. The relevant amount in cumulative foreign currency translation adjustment is reclassified into earnings upon disposition or partial disposition of a foreign operation.
Property, plant and equipment
Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Depreciation is calculated over the depreciable amount, which is the cost of the asset less its residual value. Depreciation is recognized in net income on a straight-line basis over the estimated useful lives of each item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the economic benefits embodied in the asset. The estimated useful lives are as follows:
Equipment 3 to 5 years
Software 2 to 3 years
Furniture and fixtures 5 to 10 years
Leasehold improvements Initial term of the lease
Estimated useful lives and residual values of property, plant and equipment are reviewed at least annually and adjusted if appropriate. Any changes are accounted for prospectively.
Product development costs
Product development costs are expensed as incurred as they do not meet the criteria for deferral and
amortization.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 23 -
3. Significant accounting policies (continued) Impairment of long-lived assets The Company reviews long-term assets or asset groups held and used including property, plant and equipment for recoverability whenever events or change in circumstances indicate that their carrying amount may not be recoverable. Asset groups, which refer to Cash Generating Units (“CGUs”), are reviewed at the lowest level for which identifiable cash inflows are largely independent of cash inflows of other assets or groups of assets. The recoverable amount is the greater of its value in use and its fair market value less cost to sell. Value in use is based on estimates of discounted cash flows expected to be recovered from a CGU through their use. Management develops its cash flow projections based on past performance and its expectations of future market and business developments. Once calculated, the estimated future pre-tax 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 or asset group. Fair value less cost to sell is the amount obtainable from the sale of an asset or CGU in an arm’s length transaction between knowledgeable willing parties, less the costs of disposal, which are incremental costs directly attributable to the disposal of an asset or CGU, excluding finance costs and income taxes. An impairment loss is recognized in the statement of net income and comprehensive income when the carrying amount of any asset or CGU exceeds its estimated recoverable amount. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the amount of the other assets in the CGU on a pro rata basis.
Impairment losses related to long-lived assets recognized in prior periods are assessed at each
reporting date for any indications that the loss has decreased or no longer exists. An impairment loss
is reversed if there has been a change in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed
the carrying amount that would have been determined, net of depreciation, if no previous impairment
loss had been recognized.
Inventory
Inventory consists of electronic components and finished goods and is valued at the lower of cost,
determined by first in first out, and estimated net realizable value. Costs include the purchase price
of materials and the cost directly related to the conversion of materials to finished goods, such as
direct labour and a systematic allocation of fixed and variable overheads, based on a normal capacity
of the production facility.
Warranty provision
A provision for the estimated warranty expense is established by a charge against operations at the
time hardware products are sold. Subsequent costs incurred for warranty claims reduce this liability.
Revisions to the warranty provision are charged to operations as determinable.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 24 -
3. Significant accounting policies (continued)
Deferred revenue
The Company offers and sells post implementation maintenance and support contracts for its
products. The revenue for such contracts is deferred and recognized over the life of the contract on a
straight-line basis. Additionally, the Company defers revenue on projects where cash received
exceeds revenue recognized.
Stock-based compensation
The Company has a stock option plan for employees, directors, officers and consultants. Stock-
based compensation plans are measured at fair value using the Black-Scholes option pricing model
and the fair value is expensed on a straight line basis over the vesting period with an offsetting credit
to contributed surplus. Awards with graded vesting are valued and recognized as compensation cost
based on the respective vesting tranche. The amount of compensation cost recognized is adjusted to
reflect the number of awards expected to vest based on continued employment vesting conditions,
such that the amount ultimately recognized as compensation cost is based on the number of awards
that vest. Consideration paid on the exercise of stock options or warrants, together with the fair value
of the award previously recorded in contributed surplus is recorded as share capital. Management
uses judgment to determine the inputs to the Black-Scholes option pricing model including expected
life of the option, share price volatility and forfeiture rates. Changes in these assumptions may impact
the calculation of fair value and the amount of compensation expense recorded in earnings.
Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under the asset
and liability method, future tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases (temporary differences) and tax losses carried forward.
Changes in the net future tax assets or liabilities are generally included in earnings. Future tax assets
and liabilities are measured using substantively enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled.
The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the date of substantive enactment. Future income tax amounts are evaluated
and if realization is not considered “more likely than not”, a valuation allowance is provided.
Comprehensive income or loss
Comprehensive income or loss is the change in the Company’s net assets during the period that results from transactions and other events and circumstances except those resulting from investments by shareholders and dividends to shareholders. The Company’s other comprehensive income includes only the unrealized gain or loss on the translation of financial statements of foreign operations with a different functional currency than the Company.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 25 -
3. Significant accounting policies (continued)
Revenue recognition
The Company’s arrangements with customers include the sale of automated data capture systems,
which include hardware, software license fees, implementation and modification of new and existing
software, and subsequent support and maintenance of those systems. Revenue from the sale of goods is measured at the fair value of consideration received or receivable, net of discounts. Revenue is recognized when persuasive evidence exists, usually in the form of executed sales documents, that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, there is no continuing management involvement in the goods and the amount of revenue can be reliably measured. Revenue for the sale of goods is generally recognized upon shipment.
Each arrangement is evaluated with respect to multiple element arrangements. Revenue associated
with multiple element arrangements is attributed to the various elements based on its relative fair
value or residual fair value of the undelivered elements and is recognized on an accrual basis in
accordance with the contractual arrangements, provided that collectibility is reasonably assured. The
individual elements are recognized as revenue as described below:
Revenues from the sales of hardware for which objective evidence of fair value exists, is
recognized on delivery of the products as the Company has fulfilled its obligations in accordance
with the contractual arrangements. The Company does not generally sell hardware as an
integrated unpriced required element of a system implementation.
Software includes both unmodified standardized software products as well as software products
which are modified to the customer’s specifications on a project by project basis. Revenue
recognition for unmodified and modified software products is as follows:
Revenue for unmodified standard software products is recognized upon completion of any
services which are not separable and are essential to the functionality of the software. In
general, recognition occurs when the installation of the standard software is complete; and
Services related to the modification of our software are not separable and are essential to the
functionality for the customer. Accordingly, the Company accounts for the modification of
software and customization services using the percentage of completion method. The
Company determines percentage of completion on fixed fee contracts using hours incurred to
date compared to total estimated hours to complete the project. When the total cost estimate
exceeds revenue, the estimated project loss is recognized immediately.
Support contracts, which require the ongoing involvement of the Company, are billed in advance
and recorded as deferred revenue and amortized over the term of the contract, typically one year.
The Company provides separate professional services consisting of consulting, system design,
project management, software and hardware installation, system integration, bar code labeling
and customer training. These services are charged on a time and materials or fixed price basis.
The Company recognizes revenue for the services as the services are performed.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 26 -
3. Significant accounting policies (continued)
Government assistance
The Company periodically receives financial assistance under available government incentive
programs. Government assistance relating to capital expenditures is recorded as a reduction of the
cost of such assets. Government assistance relating to research and development expenditures is
recorded as a reduction of current year expenses when the related expenditures are incurred. The
liability to repay government assistance is recognized in the period in which conditions arise that will
cause the assistance to be repayable.
Per share amounts
Basic per share amounts are calculated using the weighted average number of common shares
outstanding during the year. Diluted per share amounts are calculated using the weighted average
number of common and common equivalent shares outstanding during the period using the “treasury
stock” method. This method assumes the proceeds from the exercise of dilutive options and warrants
are used to purchase common shares at the weighted average market price during the period.
Common equivalent shares consist of the incremental common shares issued upon the exercise of in
the money stock options and warrants unless their effect is anti-dilutive. All common equivalent
shares were anti-dilutive for all periods presented.
Financial Instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument to another. Upon initial recognition all financial instruments, including
derivatives, are recognized on the balance sheet at fair value. Subsequent measurement is then
based on financial instruments being classified into one of the following five categories: 1) loans and
receivables, 2) held-to-maturity investments, 3) assets available-for-sale, 4) other financial liabilities
and 5) fair value through profit or loss assets and liabilities. Financial instruments classified as fair
value through profit or loss or available-for-sale items are measured at fair value. Gains or losses on
subsequent measurement of held-for-trading items are recognized in net income (loss), while gains
and losses on subsequent measurement of available-for-sale items are recognized as an adjustment
to other comprehensive income.
At June 30, 2012, the Company’s financial instruments include cash, accounts receivable, accounts
payable and accrued liabilities, loans payable and share subscriptions payable. Cash and accounts
receivable are measured at amortized cost consistent with the “loans and receivables” classification.
Loans and receivables are subsequently measured at their amortized cost, using the effective interest
method. Under this method, estimated future cash receipts are discounted over the asset’s expected
life, or other appropriate period, to its net carrying value. Accounts payable and accrued liabilities
and the loan payable are measured at amortized cost using the effective interest method, consistent
with the “other financial liabilities” classification.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 27 -
4. New and future accounting policies Recent Accounting Pronouncements The following new standards and amendments or interpretations to existing standards have been published and are mandatory for periods beginning on or after January 1, 2011, or later: IFRS 9, Financial Instruments In November 2009, the IASB issued guidance relating to the classification and measurement of financial assets. Under IFRS 9, financial assets will generally be measured initially at fair value plus particular transaction costs, and subsequently at either amortized cost or fair value. In October 2010, the IASB issued additions to IFRS 9 relating to accounting for financial liabilities. Under the new requirements, an entity choosing to measure a financial liability at fair value will present the portion of any change in its fair value due to changes in the entity’s own credit risk in other comprehensive income (“OCI”), rather than within profit or loss. The standard is to be applied retrospectively and will be effective for periods commencing on or after January 1, 2013. The company is currently reviewing the standard to determine the potential impact, if any, on its consolidated financial statements. Amendments to IFRS 7, Financial Instruments: Disclosures In May 2010, the IASB issued amendments to IFRS 7 as part of its annual improvements process. The amendments addressed various requirements relating to the disclosure of financial instruments and are effective for annual periods commencing on or after January 1, 2011. Amendments to IFRS 7, Disclosures — Transfers of Financial Assets In October 2010, the IASB issued amendments to IFRS 7, “Financial Instruments: Disclosures”. The amendments require entities to provide additional disclosures to assist users of financial statements in evaluating the risk exposures relating to transfers of financial assets that are not derecognized or for which the entity has a continuing involvement in the transferred asset. The amendments became effective for annual periods beginning on or after July 1, 2011. The company does not typically retain any continuing involvement in financial assets once transferred. It has applied these amendments, which had no effect on these unaudited interim condensed consolidated financial statements. IFRS 10, Consolidated Financial Statements In May 2011, the IASB issued guidance establishing principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 (which supersedes IAS 27 and Standing Interpretations Committee (“SIC”) 12) builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The standard is to be applied retrospectively, in most circumstances, and will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is currently reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
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4. New and future accounting policies (continued) IFRS 11, Joint Arrangements In May 2011, the IASB issued guidance establishing principles for financial reporting by parties to a joint arrangement. IFRS 11 (which supersedes IAS 31 and SIC 13) requires a party to a joint arrangement to determine the type of joint arrangement in which it is involved, either a joint operation or a joint venture, by assessing its rights and obligations arising from the arrangement. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated and under IFRS 11, equity accounting is mandatory for participants in joint ventures. The standard is to be applied prospectively and will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is currently reviewing the standard to determine the potential impact, if any, on its consolidated financial statements. IFRS 12, Disclosure of Interest in Other Entities In May 2011, the IASB issued guidance relating to the disclosure requirements of interests in other entities. IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms of interest in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. The standard is to be applied prospectively and is effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is currently reviewing the standard to determine the potential impact, if any, on its consolidated financial statements. IFRS 13, Fair Value Measurement In May 2011, the IASB issued guidance establishing a single source for fair value measurement. IFRS 13 defines fair value, sets out a framework for measuring fair value and introduces consistent requirements for disclosures on fair value measurements. It does not determine when an asset, a liability or an entity’s own equity instrument is measured at fair value. Rather, the measurement and disclosure requirements of IFRS 13 apply when another IFRS requires or permits the item to be measured at fair value, with limited exceptions. The standard is to be applied prospectively and will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is currently reviewing the standard to determine the potential impact, if any, on its consolidated financial statements. Amendments to IAS 1, Presentation of Financial Statements In June 2011, the IASB issued amendments to IAS 1 requiring items within other comprehensive income that may be reclassified to the profit or loss section of the income statement to be grouped together. The amendments are to be applied retrospectively and will be effective for annual periods commencing on or after July 1, 2012, with earlier application permitted. The company is currently reviewing these amendments to determine the potential impact on its consolidated financial statements.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 29 -
5. Loans payable
June 30, September 30, October 1,
2012 2011 2010
Term Loan, from a company controlled by a director, 1,069,501$ 1,963,117$ -$
secured by a first charge over all assets of the
Company, with interest at 5% payable semi-annually
The principal amount is due January 30, 2016.
Term loan, from a director, secured by a second 400,000 - -
charge over all assets of the Company, with interest
at prime plus 2% payable monthly. The principal
amount is due August 9, 2016 and is convertible
into common shares at the option of the lender at
$0.20 per share.
Term loan, secured by a second charge over all 400,000 - -
assets of the Company, with interest at prime plus
2% payable monthly. The principal amount is due
August 9, 2016 and is convertible into common
shares at the option of the lender at $0.20 per share
Term loan, from a director, unsecured, denominated 83,215 32,560 -
in Renminbi, with interest at 12% per annum. The
principal and interest are due December 8, 2012
Term loan, from a company controlled by a former - - 270,000
director, with interest at 7% per annum.
1,952,716 1,995,677 270,000
Current portion (83,215) (32,560) (270,000)
1,869,501$ 1,963,117$ -$
During the year ended September 30, 2011, the Company received a loan of $2,000,000 from a
company controlled by a director. In November 2011, the Company repaid $900,000 of the loan. As
the loan arrangement included the granting of warrants (Note 6) the loan payable was discounted by
$42,558, which is the estimated fair value of these warrants to reflect the equity component of the
loan. The fair value of the warrants was determined using the Black-Scholes option pricing model
and will be amortized over the expected life of the warrants resulting in the loan payable being
accreted to its principal amount of $1,100,000 due at maturity and a corresponding interest accretion
expense being charged to operations.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 30 -
6. Share capital
Authorized
The authorized capital of the Company consists of an unlimited number of common shares with no
par value and an unlimited number of preferred shares with no par value.
Issued and outstanding
Number Number
of shares Amount of shares Amount
Balance at beginning of period 31,018,913 61,370,611$ 25,018,913 60,180,160$
Issued on private placements,
net of costs of $9,549 - - 6,000,000 1,190,451
Balance at end of period 31,018,913 61,370,611$ 31,018,913 61,370,611$
Nine months ended Year ended
June 30, 2012 September 30, 2011
Share Subscriptions payable
As at June 2012, the Company had received $300,000 pursuant to common share subscription
agreements for the purchase of 1,500,000 common shares pursuant to a private placement which
was completed subsequent to June 30, 2012 (Note 16a).
Warrants
As at June 30, 2012 warrants to purchase 500,000 common shares at a price of $0.09 per share were
outstanding. The warrants expire on the earlier of the date the loan is repaid in full or January 30,
2016 (Note 5).
Stock options
During the three and nine months ended June 30, 2012, the Company recorded stock-based
compensation expense of $10,055 and $25,205, respectively (2011 - $5,229 and $15,212). The
compensation expense was based on the fair value of each stock option on the date of the grant
using the Black-Scholes option pricing model. The assumptions used to determine fair value of stock
options in the nine months ended June 30, 2012 were as follows:
Expected life 7 years
Expected volatility in market price of shares 161%
Expected dividend rate 0%
Risk-free interest rate 2.5%
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 31 -
6. Share capital (continued)
Stock options
The Company offers an incentive stock option plan that provides for the granting of options up to 10%
of its issued and outstanding shares to directors, officers, employees and consultants. The exercise
price of each option is equal to the quoted market price of the Company’s common shares on the
trading day immediately preceding the date of grant and the maximum term is ten years.
The stock option activity is as follow:
Weighted Weighted
average average
Number exercise Number exercise
of options price of options price
Balance at beginning of period 1,980,000 0.12$ 1,164,792 0.14$
Granted 600,000 0.10 880,000 0.10
Cancelled, expired, forfeited (250,000) 0.12 (64,792) 0.305
Balance at end of period 2,330,000 0.11$ 1,980,000 0.12$
Balance exercisable at end of period 1,222,500 0.13$ 969,063 0.13$
June 30, 2012 September 30, 2011
Nine months ended Year ended
Details of the outstanding stock options are as follows:
Number Weighted Weighted Number Weighted
of options average average of options average
Exercise outstanding at remaining exercise exercisable at exercise
price 30-Jun-12 life (months) price 30-Jun-12 price
$0.21 105,000 1.0 0.21$ 105,000 0.21$
$0.12 15,000 4.0 0.12$ 15,000 0.12$
$0.17 45,000 10.0 0.17$ 45,000 0.17$
$0.13 375,000 12.0 0.13$ 375,000 0.21$
$0.10 255,000 44.0 0.10$ 210,000 0.10$
$0.10 50,000 54.0 0.10$ 25,000 0.10$
$0.17 105,000 56.0 0.17$ 67,500 0.17$
$0.13 30,000 59.0 0.13$ 30,000 0.13$
$0.10 600,000 68.0 0.10$ 250,000 0.10$
$0.10 150,000 71.0 0.10$ - 0.10$
$0.10 225,000 75.0 0.10$ - 0.10$
$0.10 275,000 80.0 0.10$ 100,000 0.10$
$0.10 100,000 83.0 0.10$ - 0.10$
$0.10 - $0.21 2,330,000 54.0 0.11$ 1,222,500 0.13$
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 32 -
7. Contributed surplus
Nine months ended Year ended
June 30, September 30,
2012 2011
Balance at beginning of period 575,955$ 498,971$
Stock based compensation 35,090 34,426
Fair value of warants issued in connection with
term loan financing (Note 5) - 42,558
Balance at end of period 611,045$ 575,955$
8. Change in non-cash operating working capital
2012 2011
Accounts receivable (248,956)$ 247,732$
Inventory 46,480 43,230
Prepaid expenses and deposits 11,029 7,008
Accounts payable and accrued liabilities 587,735 157,859
Deferred revenue 239,171 415,461
635,459$ 871,290$
Nine months ended June 30,
9. Related party transactions
During the three months ended June 30, 2012, the Company incurred consulting fees of $17,290
(2011 - $15,000) and interest expense of $17,408 (2011 - $24,932) with directors and companies
controlled by directors and charged office rent of $Nil (2011 - $6,000) to a company controlled by a
director.
During the nine months ended June 30, 2012, the Company incurred consulting fees of $47,290
(2011 - $60,000) and interest expense of $49,686 (2011 - $39,179) with directors and companies
controlled by directors and charged office rent of $10,000 (2011 - $18,000) to a company controlled
by a director.
The above transactions are in the normal course of operations and are measured at the exchange
amount of consideration established and agreed to by the related parties.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 33 -
10. Segment information
The Company operates in a single operating industry segment, the development and implementation
of manufacturing operations management systems.
Revenue by geographic location
2012 2011 2012 2011
United States 759,378$ 749,209$ 2,275,646$ 2,241,693$
United Kingdom 228,133 214,828 631,059 734,542
Canada 47,153 60,961 173,630 290,870
China 159,732 - 176,910 -
1,194,396$ 1,024,998$ 3,257,245$ 3,267,105$
Three months ended June 30, Nine months ended June 30,
Assets by geographic location
June 30, September 30,
2012 2011
United States 495,695$ 490,115$
United Kingdom 223,942 171,087
Canada 150,649 2,264,174
China 495,337 95,139
1,365,623$ 3,020,515$
Significant customers
During the nine months ended June 30, 2012, a single customer accounted for 18% (2011 – 19%) of
revenue and a second customer accounted for 16% (2011 – 10%) of revenue.
11. Financial instruments
Fair value of financial instruments
At June 30, 2012, the Company’s financial instruments include cash, accounts receivable, accounts
payable and accrued liabilities, loans payable and share subscriptions payable. The Company has
classified cash and accounts receivable as loans and receivables, which are measured at amortized
cost. Accounts payable and accrued liabilities, loans payable and share subscriptions payable are
classified as other financial liabilities, which are measured at amortized cost. At June 30, 2012 the
fair value of the Company’s financial instruments equals the carrying value due to the relatively short
periods to maturity of the instruments.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 34 -
11. Financial instruments (continued)
Liquidity risk
Liquidity risk is the risk that the Company cannot meet a demand for cash or meet its obligations as
they become due. To manage its liquidity risk the Company prepares annual budgets and strategic
plans along with detailed cash forecasts. The Company regularly assesses its cash position and
cash flows to and from operations and evaluates financing opportunities. The Company’s liquidity risk
is primarily as a result of accounts payable and accrued liabilities, all of which are due within the next
12 months.
Foreign currency risk
Foreign currency exchange rate risk is the risk that the fair value of future cash flows of a financial
instrument will fluctuate because of changes in foreign exchange rates. The Company is exposed to
currency risks primarily due to its business conducted in US dollars and British Pounds. A significant
change in the currency rates between the Canadian dollar relative to the other currencies could have
an effect on the Company’s results of operations, financial position or cash flows. The Company
manages foreign currency risk by holding cash and cash equivalents in foreign currencies to match
foreign forecasted cash outflows. The Company has not entered into any forward foreign exchange
contracts.
As at June 30, 2012, the Company is exposed to foreign currency risk through assets and liabilities
denominated in US dollars, British Pounds, Euros and Chinese Renminbi as follows:
British Chinese
US dollars Pounds Euros Renminbi
Cash 90,617$ 34,914£ 12,097€ 205¥
Accounts receivable 613,665 32,112 18,066 -
Accounts payable and accrued liabilities (436,104) (63,925) (1,810) (420,000)
268,178$ 3,101£ 28,353€ -419,795¥
As at June 30, 2012, with other variables unchanged, a 5% change in the exchange rates for the US
dollar, British Pound, Euro and Chinese Renminbi would impact earnings by approximately $13,000,
$1,000, $2,000 and $3,000, respectively.
The Company generates a significant amount of its revenue in foreign currencies. For the nine
months ended June 30, 2012, 74% (2011 – 67%) of revenue was denominated in US dollars, 13%
(2011 – 17%) was denominated in British Pounds, 6% (2011 – 6%) was denominated in Euros and
1% (2011 – Nil) was denominated in Chinese Renminbi.
For the nine months ended June 30, 2012, with other variables unchanged, a 5% change in the
exchange rates of the US dollar, British Pound, Euro and Renminbi would impact earnings by
approximately $77,000 (2011 - $75,000), $22,000 (2011 - $30,000), $9,000 (2011 - $9,000) and $Nil
(2011 – $Nil), respectively.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 35 -
11. Financial instruments (continued)
Interest rate risk
The Company’s exposure to interest rate risk is limited as it does not have any variable rate financial
liabilities. The Company receives interest on its cash balances at floating rates of interest, however
the impact of rate variations are not material to the Company.
Credit risk
The Company’s credit risk is principally related to its accounts receivable. The amount disclosed on
the consolidated balance sheet is net of allowances for doubtful accounts, estimated by management
based on an assessment of its clients. The Company relies on a small number of customers for a
significant portion of revenue, however the majority of these customers are long term customers and
are large well established companies. The Company employs established credit approval practices
to mitigate this risk. The carrying value of accounts receivable reflects the maximum credit exposure.
Components of accounts receivable are as follows:
June 30, September 30,
2012 2011
Trade receivables 741,653$ 369,168$
Accrued receivables for work done not yet billed 37,504 7,278
Refundable tax recovery - 45,348
Other 18,661 30,294
797,818$ 452,088$
The Company’s credit terms range between 30 and 60 days. As at June 30, 2012 the aging of the
trade receivables is as follows:
June 30, September 30,
2012 2011
Up to 30 days 553,882$ 240,653$
31 to 60 days 175,194 128,096
61 to 90 days 4,250 419
0ver 90 days 8,327 -
741,653$ 369,168$
In addition the Company is exposed to credit risk on its cash balances, however, they are held in high
credit quality institutions and the Company believes the credit risk is minimal.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 36 -
12. Commitments and contingencies
Operating lease commitments
The Company is committed to various operating leases for office premises with remaining terms up to
June 30, 2016. Future minimum lease payments under these operating leases are as follows:
2012 111,169$
2013 415,246
2014 401,828
2015 378,649
Thereafter 287,945
1,594,837$
Epic-HUST JV Capital contributions
The Company is committed to contribute capital to the Epic-HUST JV in the amount of RMB
5,100,000, of which RMB 1,038,579 ($164,802) has been contributed to June 30, 2012 and the
balance of RMB 4,061,421 ($651,452) is due by March 1, 2014.
Government assistance
In prior years, the Company received research and development assistance from the Government of
Canada’s National Research Council under its Industrial Research Assistance Program (“IRAP”)
totaling $497,000, which was applied to reduce related research and development costs.
Repayments are based on a royalty arrangement of 0.12% of sales. . Royalties accrued for the three
and nine months ended June 30, 2012 were $1,434 (2011 - $1,230) and $3,910 (2011 - $3,899),
respectively and now aggregate to $286,849 since the commencement of repayments. Royalty
payments will continue to the earlier of June 30, 2015 or until a total of $497,000 has been repaid.
Indemnification The Company is party to a variety of agreements in the ordinary course of business under which it may be obligated to indemnify a third party with respect to certain matters. Typically, these obligations arise as a result of contracts for sale of the Company’s products to customers where the Company provides indemnification against losses arising from matters such as potential intellectual property infringements and product liabilities. The impact on the Company’s future financial results is not subject to reasonable estimation because considerable uncertainty exists as to whether claims will be made and the final outcome of potential claims. To date, the Company has not incurred material costs related to these types of indemnifications.
Legal contingencies
From time to time the Company is engaged in certain legal claims in the ordinary course of business
and believes the outcome of these claims will not have a material adverse impact on the operations,
liquidity or financial position of the Company.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 37 -
13. Capital disclosures
The Company’s objectives when managing capital are to safeguard assets, maintain a competitive
cost structure, continue as a going concern and provide a return to its shareholders in the form of
capital appreciation.
The Company’s capital is as follows:
June 30, September 30, October 1,
2012 2011 2010
Loans payable 1,952,716$ 1,995,677$ 270,000$
Cash (234,401) (2,142,990) (114,500)
Net debt (cash) 1,718,315 (147,313) 155,500
Total deficiency in assets (3,236,432) (497,595) (276,568)
(1,518,117)$ (644,908)$ (121,068)$
The Company has in place a planning and budgeting process to help determine the funds required to
ensure the Company has the appropriate liquidity to meet its operating objectives. The Company
manages the capital structure and makes adjustments to it depending on economic conditions.
The Company is not exposed to externally imposed capital requirements and expects its current
capital resources will be sufficient to carry out operations beyond its current reporting period.
14. Transition to IFRS – IFRS 1 Elections
The Company’s financial statements for the year ending September 30, 2012 will be the first annual
consolidated financial statements that comply with IFRS and these interim consolidated financial
statements were prepared as described in Note 2, including the application of IFRS 1.
IFRS 1 requires that comparative financial information be provided as of the first date at which the
Company has applied IFRS. For the Company, this transition date was October 1, 2010.
IFRS 1 First-time Adoption of International Financial Reporting Standards sets forth guidelines for the
initial adoption of IFRS. Certain operational exemptions and mandatory exceptions were utilized in
preparing the opening IFRS Balance Sheet. The optional exemptions and mandatory exceptions
which have been applied to the opening Balance Sheet dated October 1, 2010 are outlined below.
Initial elections upon adoption of IFRS
Business combinations – IFRS 1 provides the option to apply IFRS 3 (2008) Business Combinations,
retrospectively or prospectively from the Transition Date. If applying retrospectively, an entity may
elect to restate business combinations from any date prior to the Transition Date. The Company has
elected to apply IFRS 3 (2008) prospectively from October 1, 2010.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 38 -
14. Transition to IFRS – IFRS 1 Elections (continued)
Share-based payments – Under IFRS 1, an entity can elect to apply IFRS 2, Share based payments
only to equity instruments granted after November 7, 2002 that had not vested by the Transition Date.
The Company has chosen to apply this election and only apply IFRS 2, to share based payments that
are unvested at the Transition Date. Under IFRS 2, the valuation of stock options requires individual
“tranche based” valuations for those options with graded vesting. Each installment of an option
award will be treated as a separate option and the fair value of each installment will be amortized
over the installments vesting period.
Leases – Under IFRS 1, the Company may elect to use IFRIC 4 instead of doing a full retrospective
application as required by IAS 17. The Company has chosen to apply this election and where
application will apply IFRIC 4 to any contracts which may contain lease implications.
Fair value or revaluation as deemed cost of property, plant and equipment – Under IFRS 1, an entity
can elect to use fair value or the revaluation method as deemed cost for property, plant and
equipment, investment property and certain intangible assets. An entity may elect to use a previous
Canadian GAAP revaluation of an item of property, plant and equipment at, or before, the Transition
Date to IFRS as deemed cost at the date of revaluation, if the revaluation was, at the date of
revaluation, broadly comparable to: (i) fair value; or (ii) cost or depreciated cost in accordance with
IFRS. The Company has chosen not to apply this election and use previous Canadian GAAP
revaluations of fixed assets as deemed cost for fixed assets acquired through business combinations.
The Company will use historical cost as deemed cost for all other property.
All remaining optional exemptions available under IFRS 1 are not applicable to the Company.
IFRS mandatory exemptions
Estimates – Hindsight cannot be used to create or revise estimates. The estimates previously made
by the Company under Canadian GAAP were not revised for the application of IFRS except where
necessary to reflect any differences in accounting policies.
All other mandatory exceptions in IFRS 1 were not applicable because there were no significant
differences in management’s application of Canadian GAAP in those areas.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 39 -
15. Reconciliation of Canadian GAAP to IFRS
Although IFRS employs a conceptual framework that is similar to Canadian GAAP, significant
differences exist in certain matters of recognition, measurement and disclosure. Reconciliations of
the Company’s Balance Sheet and Statement of Shareholders’ Equity at October 1, 2010, June 30,
2011 and September 30, 2011 and the Statement of Operations and Comprehensive Loss and
Statement of Cash Flows for the three and nine months ending June 30, 2011 and the year ended
September 30, 2011 have been provided.
Reconciliation of Consolidated Balance Sheet as of October 1, 2010
Canadian Note (a) & (b) Restated
GAAP Adjustments for IFRS
Assets
Current assets 1,195,608$ -$ 1,195,608$
Property, plant and equipment 35,859 - 35,859
Deposits 36,000 - 36,000
1,267,467$ -$ 1,267,467$
Liabilities
Current liabilities 1,544,035$ -$ 1,544,035$
Loan payable - - -
1,544,035 - 1,544,035
Deficiency in assets
Share capital 60,180,160 - 60,180,160
Contributed surplus 498,971 - 498,971
Deficit (60,955,699) - (60,955,699)
(276,568) - (276,568)
1,267,467$ -$ 1,267,467$
Note (a) Under IFRS 2 the valuation of stock options requires individual “tranche based” valuations for those options with
graded vesting, while Canadian GAAP allows a single valuation for all tranches. Therefore under IFRS each
installment of an option award is treated as a separate option and the fair value of each installment is amortized
over each installment’s vesting period. The application of IFRS 2 did not result in a material adjustment to the
amounts reported under Canadian GAAP.
Note (b) Under IAS 21 foreign subsidiaries are translated to the reporting currency based on the functional currency of the
subsidiary, while under Canadian GAAP foreign currency translation is based on whether the subsidiaries are
classified as “integrated” or “self-sustaining”. The Company has determined that its subsidiaries in the United
Kingdom and China have a functional currency other than the Canadian dollar which requires translation of the
assets and liabilities at the period end rate and income and expenses at the transaction date rate. The application
of IAS 21 did not result in a material adjustment to the amounts reported under Canadian GAAP.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 40 -
15. Reconciliation of Canadian GAAP to IFRS (continued)
Reconciliation of Consolidated Balance Sheet as of June 30, 2011
Canadian Note (a) & (b) Restated
GAAP Adjustments for IFRS
Assets
Current assets 2,654,786$ -$ 2,654,786$
Property, plant and equipment 43,286 - 43,286
Deposits 36,000 - 36,000
2,734,072$ -$ 2,734,072$
Liabilities
Current liabilities 1,884,504$ -$ 1,884,504$
Subscriptions payable 60,000 - 60,000
Loans payable 1,960,989 - 1,960,989
3,905,493 - 3,905,493
Deficiency in assets
Share capital 60,180,160 - 60,180,160
Contributed surplus 566,770 - 566,770
Deficit (61,918,351) - (61,918,351)
(1,171,421) - (1,171,421)
2,734,072$ -$ 2,734,072$ Note (a) Under IFRS 2 the valuation of stock options requires individual “tranche based” valuations for those options with
graded vesting, while Canadian GAAP allows a single valuation for all tranches. Therefore under IFRS each
installment of an option award is treated as a separate option and the fair value of each installment is amortized
over each installment’s vesting period. The application of IFRS 2 did not result in a material adjustment to the
amounts reported under Canadian GAAP.
Note (b) Under IAS 21 foreign subsidiaries are translated to the reporting currency based on the functional currency of the
subsidiary, while under Canadian GAAP foreign currency translation is based on whether the subsidiaries are
classified as “integrated” or “self-sustaining”. The Company has determined that its subsidiaries in the United
Kingdom and China have a functional currency other than the Canadian dollar which requires translation of the
assets and liabilities at the period end rate and income and expenses at the transaction date rate. The application
of IAS 21 did not result in a material adjustment to the amounts reported under Canadian GAAP.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 41 -
15. Reconciliation of Canadian GAAP to IFRS (continued)
Reconciliation of Consolidated Balance Sheet as of September 30, 2011
Canadian Note (a) & (b) Restated
GAAP Adjustments for IFRS
Assets
Current assets 2,852,951$ 2,852,951$
Property, plant and equipment 106,608 106,608
Deposits 60,956 60,956
3,020,515$ -$ 3,020,515$
Liabilities
Current liabilities 1,554,993$ 1,554,993$
Loan payable 1,963,117 - 1,963,117
3,518,110 - 3,518,110
Deficiency in assets
Share capital 61,370,611 61,370,611
Contributed surplus 575,955 575,955
Deficit (62,444,161) (62,444,161)
(497,595) - (497,595)
3,020,515$ -$ 3,020,515$
Note (a) Under IFRS 2 the valuation of stock options requires individual “tranche based” valuations for those options with
graded vesting, while Canadian GAAP allows a single valuation for all tranches. Therefore under IFRS each
installment of an option award is treated as a separate option and the fair value of each installment is amortized
over each installment’s vesting period. The application of IFRS 2 did not result in a material adjustment to the
amounts reported under Canadian GAAP.
Note (b) Under IAS 21 foreign subsidiaries are translated to the reporting currency based on the functional currency of the
subsidiary, while under Canadian GAAP foreign currency translation is based on whether the subsidiaries are
classified as “integrated” or “self-sustaining”. The Company has determined that its subsidiaries in the United
Kingdom and China have a functional currency other than the Canadian dollar which requires translation of the
assets and liabilities at the period end rate and income and expenses at the transaction date rate. The application
of IAS 21 did not result in a material adjustment to the amounts reported under Canadian GAAP.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 42 -
15. Reconciliation of Canadian GAAP to IFRS (continued)
Reconciliation of Consolidated Statement of Comprehensive loss for the three months ended June
30, 2011
Canadian Note (a) & (b) Restated
GAAP Adjustments for IFRS
Revenue 1,024,998$ -$ 1,024,998$
Cost of sales 490,908 - 490,908
Gross Margin 534,090 - 534,090
Expenses 909,897 909,897
Net loss and comprehensive loss for the period (375,807)$ -$ (375,807)$
Weighted average number of shares outstanding
Basic and diluted 25,018,913 25,018,913
Loss per share
Basic and diluted (0.02)$ (0.02)$
Note (a) Under IFRS 2 the valuation of stock options requires individual “tranche based” valuations for those options with
graded vesting, while Canadian GAAP allows a single valuation for all tranches. Therefore under IFRS each
installment of an option award is treated as a separate option and the fair value of each installment is amortized
over each installment’s vesting period. The application of IFRS 2 did not result in a material adjustment to the
amounts reported under Canadian GAAP.
Note (b) Under IAS 21 foreign subsidiaries are translated to the reporting currency based on the functional currency of the
subsidiary, while under Canadian GAAP foreign currency translation is based on whether the subsidiaries are
classified as “integrated” or “self-sustaining”. The Company has determined that its subsidiaries in the United
Kingdom and China have a functional currency other than the Canadian dollar which requires translation of the
assets and liabilities at the period end rate and income and expenses at the transaction date rate. The application
of IAS 21 did not result in a material adjustment to the amounts reported under Canadian GAAP.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 43 -
15. Reconciliation of Canadian GAAP to IFRS (continued)
Reconciliation of Consolidated Statement of Comprehensive loss for the nine months ended June 30,
2011
Canadian Note (a) & (b) Restated
GAAP Adjustments for IFRS
Revenue 3,267,105$ -$ 3,267,105$
Cost of sales 1,624,173 - 1,624,173
Gross Margin 1,642,932 - 1,642,932
Expenses 2,605,584 2,605,584
Net loss and comprehensive loss for the period (962,652)$ -$ (962,652)$
Weighted average number of shares outstanding
Basic and diluted 25,018,913 25,018,913
Loss per share
Basic and diluted (0.04)$ (0.04)$
Note (a) Under IFRS 2 the valuation of stock options requires individual “tranche based” valuations for those options with
graded vesting, while Canadian GAAP allows a single valuation for all tranches. Therefore under IFRS each
installment of an option award is treated as a separate option and the fair value of each installment is amortized
over each installment’s vesting period. The application of IFRS 2 did not result in a material adjustment to the
amounts reported under Canadian GAAP.
Note (b) Under IAS 21 foreign subsidiaries are translated to the reporting currency based on the functional currency of the
subsidiary, while under Canadian GAAP foreign currency translation is based on whether the subsidiaries are
classified as “integrated” or “self-sustaining”. The Company has determined that its subsidiaries in the United
Kingdom and China have a functional currency other than the Canadian dollar which requires translation of the
assets and liabilities at the period end rate and income and expenses at the transaction date rate. The application
of IAS 21 did not result in a material adjustment to the amounts reported under Canadian GAAP.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 44 -
15. Reconciliation of Canadian GAAP to IFRS (continued)
Reconciliation of Consolidated Statement of Comprehensive loss for the year ended September 30,
2011
Canadian Note (a) & (b) Restated
GAAP Adjustments for IFRS
Revenue 4,202,974$ -$ 4,202,974$
Cost of sales 2,082,498 - 2,082,498
Gross Margin 2,120,476 - 2,120,476
Expenses 3,608,938 3,608,938
Net loss and comprehensive loss for the period (1,488,462)$ -$ (1,488,462)$
Weighted average number of shares outstanding
Basic and diluted 26,018,913 26,018,913
Loss per share
Basic and diluted (0.06)$ (0.06)$
Note (a) Under IFRS 2 the valuation of stock options requires individual “tranche based” valuations for those options with
graded vesting, while Canadian GAAP allows a single valuation for all tranches. Therefore under IFRS each
installment of an option award is treated as a separate option and the fair value of each installment is amortized
over each installment’s vesting period. The application of IFRS 2 did not result in a material adjustment to the
amounts reported under Canadian GAAP.
Note (b) Under IAS 21 foreign subsidiaries are translated to the reporting currency based on the functional currency of the
subsidiary, while under Canadian GAAP foreign currency translation is based on whether the subsidiaries are
classified as “integrated” or “self-sustaining”. The Company has determined that its subsidiaries in the United
Kingdom and China have a functional currency other than the Canadian dollar which requires translation of the
assets and liabilities at the period end rate and income and expenses at the transaction date rate. The application
of IAS 21 did not result in a material adjustment to the amounts reported under Canadian GAAP.
EPIC DATA INTERNATIONAL INC. Notes to Condensed Consolidated Financial Statements For the nine months ended June 30, 2012 Prepared in Canadian dollars Unaudited
- 45 -
15. Reconciliation of Canadian GAAP to IFRS (continued)
Reconciliation of Consolidated Statement of Cash Flows for the nine months ended June 30, 2011
Cash flows from operating, investing and financing activities for the nine months ended June 30, 2011
were not affected by the transition to IFRS.
Reconciliation of Consolidated Statement of Cash Flows for the year ended September 30, 2011
Cash flows from operating, investing and financing activities for the year ended September 30, 2011
were not affected by the transition to IFRS,
16. Subsequent events
Subsequent to June 30, 2012, the Company:
(a) Issued 3,750,000 common shares for cash of $750,000, of which $300,000 was received
prior to June 30, 2012, pursuant to a private placement;
(b) Issued debentures in the principle amount of $1,650,000, of which $800,000 was received
prior to June 30, 2012 (Note 5), pursuant to a private placement. The debentures are
secured by a second charge over all the assets of the Company, bear interest at prime plus
2%, payable monthly, are due August 9, 2016 and are convertible at the option of the holder
into 8,250,000 common share of the Company at $0.20 per share; and
(c) Had stock options for the purchase of 60,000 common shares forfeited unexercised.