Avigilon Q4 & Year End Fiscal 2016 Financial Reports1.q4cdn.com/094373169/files/doc_financials/2016/AVO-Q4YE-FY2016... · TSX: AVO Fourth Quarter & Year End Fiscal 2016 Financial

TSX: AVO

Fourth Quarter & Year End Fiscal 2016

Financial ReportFor the years ended December 31, 2016 and 2015

AVIGILON CORPORATION MANAGEMENT’S DISCUSSION AND ANALYSIS

INTRODUCTION

The following Management’s Discussion and Analysis (“MD&A”) provides a review of the financial conditionand results of operations of Avigilon Corporation (“Avigilon”, the “Company”, “we”, “us”, “its” or “our”), on aconsolidated basis, as at and for the year ended December 31, 2016. It should be read in conjunction withour audited consolidated financial statements and accompanying notes for the year ended December 31,2016 (the “Financial Statements”). All financial information presented in this MD&A was prepared inaccordance with International Financial Reporting Standards (“IFRS”), unless otherwise stated.

This MD&A has been prepared as of February 28, 2017. All amounts are expressed in thousands of UnitedStates (“US”) dollars (“USD”), except with respect to per share amounts, number of shares, and as otherwisestated.

Additional information relating to Avigilon, including Avigilon’s Annual Information Form dated February 28,2017 (the “AIF”), can be found under Avigilon’s profile on SEDAR at www.sedar.com.

FORWARD-LOOKING STATEMENTS

Certain information and statements contained in this MD&A, including all statements that are not historicalfacts, contain and constitute forward-looking information or forward-looking statements as defined underapplicable securities laws (collectively, “forward-looking statements”). Forward-looking statements normallycontain words like ‘believe’, ‘expect’, ‘anticipate’, ‘plan’, ‘intend’, ‘continue’, ‘estimate’, ‘may’, ‘will’, ‘should’,‘ongoing’, and similar expressions, and within this MD&A include, without limitation, any statements (expressor implied) respecting: Avigilon’s future plans, strategies, and objectives; projected revenues, and grossmargin percentage and profitability; future trends, opportunities, and growth in Avigilon’s industry; Avigilon’sability to maintain and enhance its competitive advantages within its industry and in certain markets; Avigilon’sproduct and research and development (“R&D”) plans; new product functionality and suitability; projectedoperating expenses, interest expenses, and capital expenditures; seasonality of future revenues andexpenses; the future availability of working capital and any required additional financing; the ongoing abilityof Avigilon to access funds under the Credit Facility (as defined under “Financial Position and Liquidity”,below); projected uses of the funds available under the Credit Facility; future fluctuations in applicable taxrates, foreign exchange rates, and interest rates; the future availability of tax credits; the addition and retentionof personnel; the maintenance and development of Avigilon’s reseller network; increases to brand awarenessand market penetration; strategies respecting intellectual property protection and licensing; changes andplanned changes to accounting policies and standards and their respective impact on our financial reporting;the continued effectiveness of our accounting policies and internal controls over financial reporting; theexpansion, development, and adequacy of Avigilon’s real property facilities; the pursuit of the ProposedTransaction (as defined under “Corporate Highlights”, below) and resulting effects, when and if completed;the impact and benefits of our new enterprise resource planning (“ERP”) system that was implemented in2016; the expected benefits of the Pricing Adjustment (as defined under “Overall Performance”, below); andAvigilon’s plans and intentions for the New Rights Plan (as defined under “Corporate Highlights”, below).Forward-looking statements are provided for the purpose of presenting information about management’scurrent expectations and plans relating to the future and allowing investors and others to get a betterunderstanding of our anticipated financial position, results of operations, and operating environment. Readersare cautioned that such information may not be appropriate for other purposes.

Forward-looking statements are not guarantees of future performance, actions, or developments and arebased on expectations, assumptions, and other factors that Avigilon’s management (“Management”) currentlybelieves are relevant, reasonable, and appropriate in the circumstances, including, without limitation,

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Avigilon Corporation - Management’s Discussion and Analysis for the year ended December 31, 2016Page 1

assumptions that: Avigilon will be able to successfully execute its plans, strategies, and objectives; Avigilonwill be able to leverage its past investments to support growth and focus on increasing profitability; Avigilonwill be able to successfully manage cash flow, operating expenses, interest expenses, capital expenditures,and working capital, and credit, liquidity, and market risks; Avigilon will, on an ongoing basis, remain in goodstanding under the terms of the Credit Facility; future financing will be available to Avigilon on favorable termswhen and if required; Avigilon will keep pace with or outpace the growth, direction, and technologicaladvancement in its industry; Avigilon will continue to increase its global market share; industry data andprojections obtained from external sources are accurate and reliable; Avigilon will be able to design, develop,and manufacture new products and enhance its existing product lines; Avigilon’s new products will functionas intended and will be suitable for the intended end users; Avigilon will be able to maintain and develop itsreseller network; Avigilon will be able to attract and retain qualified personnel; foreign jurisdictions will notimpose unexpected risks; products and parts will be available from suppliers on a timely basis and onfavorable terms; Avigilon will be able to enhance and expand its intellectual property portfolio; Avigilon willbe able to successfully integrate businesses, intellectual property, products, and technologies that it mayacquire, if any; Avigilon will be able to expand, manage, and develop its real property facilities; Avigilon willcontinue to pursue the Proposed Transaction; Avigilon will maintain or enhance its accounting policies andstandards and internal controls and procedures over financial reporting; fluctuations in applicable tax rates,foreign exchange rates and interest rates will not have a material impact on Avigilon; certain tax credits willremain or become available to Avigilon; Avigilon will not face any material unexpected costs related to productliability or warranties; Avigilon’s protection of its intellectual property is sufficient and its technology does notand will not materially infringe third party intellectual property rights; Avigilon will continue to generaterevenues from the Avigilon Patent License Program (the “License Program”) and will be able to operate theLicense Program on an economically viable basis; Avigilon will be able to obtain necessary third party licenseson favorable terms; Avigilon will not become involved in material litigation; Avigilon’s ERP system will operateand function as intended; the lower prices of Avigilon’s products under the Pricing Adjustment will continueto drive unit volume and revenues, expand addressable market and capture additional market share;Avigilon’s plans respecting the pricing of its products and services, including without limitation under thePricing Adjustment, will proceed in substantially their present form; Avigilon will be able to achieve greatereconomies of scale and cost savings from previous investments in infrastructure and in its global sales andmarketing teams; and Avigilon will maintain the New Rights Plan and the New Rights Plan will serve itsintended purpose. Avigilon has also assumed that no significant events will occur outside of Avigilon’s normalcourse of business.

Although Management believes that the forward-looking statements contained in this MD&A are reasonable,actual results could be substantially different due to the risks and uncertainties associated with and inherentto Avigilon's business, as more particularly described in the “Risk Factors” section of the AIF. Additionalmaterial risks and uncertainties applicable to the forward-looking statements set out herein include, but arenot limited to: fluctuations in Avigilon’s operating and capital expenses; fluctuations in foreign exchange ratesand interest rates that impact Avigilon; deficiencies in accounting policies or internal controls and proceduresover financial reporting; the unavailability of certain tax credits; and unforeseen events, developments, orfactors causing any of the aforesaid expectations, assumptions, and other factors ultimately being inaccurateor irrelevant. Although Avigilon has attempted to identify important factors that could cause actual actions,events, or results to differ materially from those contained in any forward-looking statement, there may beother factors that cause actions, events or results not to be as anticipated, predicted, estimated, or intended.Many of these factors are beyond the control of Avigilon. Accordingly, readers should not place undue relianceon forward-looking statements.

Avigilon undertakes no obligation to reissue or update any forward-looking statements as a result of newinformation or events after the date hereof except as may be required by law. All forward-looking statementscontained in this MD&A are qualified by this cautionary statement.

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INDUSTRY DATA

This MD&A includes content supplied by IHS Global Inc. (“IHS”); Copyright © IHS Global Inc. The use ofthis content was authorized in advance by IHS. Any further use or redistribution of this content is strictlyprohibited without written permission by IHS. All rights reserved. No representation or warranty, expressedor implied, is or will be made in relation to, and no responsibility or liability is or will be accepted by IHS asto or in relation to, the accuracy, reliability, or completeness of this information and IHS expressly disclaimsany and all responsibility or liability for the accuracy, reliability and completeness of such information. Suchinformation has been prepared as at a particular date and there is no obligation for IHS to update suchinformation.

TRADEMARKS

AVIGILON, the AVIGILON logo, AVIGILON CONTROL CENTER, ACC, AVIGILON APPEARANCE SEARCH,ACM, and ACCESS CONTROL MANAGER are trademarks of Avigilon. Other product names or logosmentioned herein may be the trademarks of their respective owners. The absence of the symbols ™ and ®in proximity to each trademark or at all in this MD&A is not a disclaimer of ownership of the related trademark.

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NON-IFRS AND ADDITIONAL IFRS FINANCIAL MEASURES

In addition to results reported in accordance with IFRS, the Company uses certain non-IFRS and additionalIFRS financial measures as supplemental indicators of its financial and operating performance. Non-IFRSfinancial measures include Adjusted EBITDA1, Adjusted EBITDA Margin, Adjusted Earnings and AdjustedEarnings per Share (“Adjusted EPS”). Additional IFRS financial measures include gross profit, gross marginpercentage and cash from operations before changes in non-cash working capital. The Company believesthat these supplementary financial measures reflect the Company’s ongoing business in a manner thatallows for meaningful period to period comparisons and analysis of trends in its business.

The Company defines Adjusted EBITDA and Adjusted EBITDA Margin as earnings and earnings as apercentage of revenue, respectively, before deducting interest, taxes, depreciation, amortization, foreignexchange gain or loss, business acquisition-related costs, restructuring costs, non-recurring legal costs,non-recurring lease termination costs, revaluation gain on contingent consideration receivable, and share-based payments. We believe that Adjusted EBITDA is a useful measure, as it provides an indication of theoperational results of the business prior to taking into consideration how those activities are financed andtaxed and also prior to taking into consideration asset amortization, foreign exchange gain or loss, businessacquisition-related costs, restructuring costs, non-recurring legal costs, non-recurring lease terminationcosts, revaluation gain on contingent consideration receivable, and share-based payments.

The Company defines Adjusted Earnings as earnings before share-based payments, foreign exchange gainor loss, business acquisition-related costs, financing costs, restructuring costs, non-recurring legal costs,non-recurring lease termination costs, amortization of acquired intangibles, revaluation gain on contingentconsideration receivable and related tax effects. Adjusted EPS is calculated using both the basic and dilutedweighted average shares outstanding and does not represent actual earnings per share attributable toshareholders. We believe that the disclosure of Adjusted Earnings and Adjusted EPS allows investors toevaluate the operational and financial performance of the Company’s ongoing business using the sameevaluation measures that its Management uses, and is therefore a useful indicator of the Company’sperformance or expected performance of recurring operations.

The Company defines gross profit as revenue less cost of sales, and gross margin percentage as grossprofit divided by revenue. The Company considers gross profit and gross margin percentage to be keymeasures as they demonstrate the Company’s profitability and its ability to cover its operating expensesfrom normal operations.

The Company defines cash from operations before changes in non-cash working capital as cash fromoperating activities excluding working capital adjustments, interest paid and received and amounts paidtowards income taxes. The Company considers cash from operations before changes in non-cash workingcapital to be a key measure as it demonstrates the Company’s ability to generate cash necessary to fundfuture capital investments and to repay debt, if applicable.

Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS, and othercompanies may calculate these measures differently. The presentation of non-IFRS and additional IFRSfinancial measures is intended to provide additional information and should not be considered in isolationor as a substitute for measures of performance prepared in accordance with IFRS.

1Earnings Before Interest, Tax, Depreciation and Amortization

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AVIGILON’S BUSINESS

Business Overview

Avigilon provides trusted security solutions to the global market (“Security Solutions”). Avigilon designs,develops and manufactures video analytics, network video management software and hardware, surveillancecameras, and access control solutions.

Management believes that Avigilon is well-positioned to take advantage of current market trends includingthe shift to high definition (“HD”) and internet protocol (“IP”) based systems, the convergence of videosurveillance and access control, and the increasing deployment of intelligence-delivering video analytics.Avigilon is expanding its geographic footprint, leveraging its investments in infrastructure, leveraging itsintellectual property portfolio, and focusing on continuous innovation across its product offerings.

Since our initial public offering in November 2011 (the “IPO”), we have made significant investments in theCompany to support growth and to help gain economies of scale; certain of these investments include thedevelopment of our US manufacturing facility, purchase and renovation of our new global headquarters,implementation of our ERP system, purchase and development of businesses and assets including ourintellectual property portfolio, investments in new technology, increasing global headcount, innovative R&Dwork, and acquisitions of property, plant, equipment and computer software. These and other investmentsenabled the Company to achieve CAD$500 million in annual revenue run rate in the third quarter of 2016,achieving the five-year goal we published at our IPO. The aforementioned revenue run rate is calculated byannualizing our third quarter 2016 revenue of $95.8 million, and converting the product to CAD using theBank of Canada third quarter 2016 average noon exchange rate of 1.3050. Management expects the amountof future investments to decrease over time compared with past quarters, as we leverage the investmentswe have made over the past five years to support continued growth while focusing on increasing profitability.

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Commercial sales of Avigilon’s products began in December 2007. Since 2008, Avigilon’s first full year ofsales, through December 31, 2016, Avigilon’s revenues have experienced a compound annual growth rate(“CAGR”) of approximately 71%.

Since 2009, the first year in which Avigilon generated positive Adjusted EBITDA, through December 31,2016, Avigilon’s Adjusted EBITDA has experienced a CAGR of approximately 106%.

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Avigilon’s Security Solutions

Avigilon’s Security Solutions are designed as easy-to-use software and hardware IP network products thatinclude image capture, analysis, storage, transfer and playback of high quality video surveillance footagewith visually lossless compression (no perceptible loss of visual detail), and electronic access controlmanagement. Avigilon’s Security Solutions may be configured into a customized, end-to-end, integratedintelligent security system that provides high quality video and data using relatively low bandwidth. Avigilon’sSecurity Solutions include features such as: electronic access control; automatic event detection; pattern-based analytics algorithms; teach-by-example self-learning capabilities; alarm monitoring; integrations withthird party platforms; video export; enterprise-level server and site management; extended video wall viewing;object search; appearance search; and remote viewing via mobile devices.

Sales and Distribution

Avigilon’s sales and distribution channels are based on a business-to-business model and not a business-to-consumer model, with Avigilon generally selling its products to a network of dealers and integrators(“Resellers”) and not directly to end-user customers. Avigilon’s staff work either directly with prospective end-user customers or in coordination with Resellers to promote and design security and surveillance solutionsthat are tailored to the specific needs of end-users. Management believes that Avigilon encourages Resellerloyalty through product differentiation, innovation, pricing, and loyalty programs to stimulate sales channelgrowth. Avigilon plans to continue increasing the number of its sales personnel, expand its Reseller base,and invest in activities that build brand awareness and drive sales lead generation. Management expectsfuture sales activities will continue to focus on priority geographic regions and key industry verticals.

Production

All Avigilon cameras, with the exception of the H4 Fisheye Series, are assembled and tested at Avigilon’stwo manufacturing facilities, located in Richmond, British Columbia, Canada and Plano, Texas, US. TheCanadian and US manufacturing facilities include surface mount technology, robotic component placementmachines and automated assembly lines for printed circuit board assembly, clean rooms for optical assembly,environmental chambers to simulate outdoor weather conditions, camera assembly lines, and equipment toperform functional and reliability testing. Avigilon’s assembly processes have been developed and refinedover several years and have been designed to allow the Company to exert control over production costsand quality as well as to react quickly to changes in demand and allow for new designs and rapid design-to-production of new products.

Research and Development

Avigilon continues to develop intellectual property and advancements in sensors, storage, video analytics,and data management technologies to further improve Avigilon’s products. The Company’s various R&Dteams are composed of engineers and scientists with expertise in a broad range of technical competencies,including: computer science; data science; machine learning; electrical engineering; mechanical engineering;and optical engineering. Avigilon’s R&D teams work to improve Avigilon’s Security Solutions and introducenew innovations, incorporating feedback from Resellers, end-users, and the latest advancements in cutting-edge technologies.

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CHANGE IN BASIS OF PREPARATION

Change in Functional Currency

Effective April 1, 2016, the Company changed its functional currency from Canadian dollars (“CAD”) to USD.The Company applied the change in functional currency on a prospective basis. This change reflects theCompany’s financing and operating activities, which are now primarily carried out in USD as a result ofincreased sales denominated in USD, the ramping up of the Company’s US manufacturing facility and USDdraws on the Credit Facility. As a result, the Company’s functional currency is now the same as its presentationcurrency.

RECENT CORPORATE EVENTS

Changes to the Leadership Team

On January 21, 2016, Pradeep Khosla, Chancellor of University of California, San Diego, was appointed tothe Company’s Board of Directors (the “Board”), increasing the number of Directors on the Board to eight.Chancellor Khosla previously served as Carnegie Mellon’s Dean of the College of Engineering. ChancellorKhosla has also managed advanced R&D projects for the Defense Advanced Research Projects Agency.

On November 2, 2016, the Company announced the promotion of James Henderson to Chief Sales andMarketing Officer. Mr. Henderson joined Avigilon in 2011, most recently serving as Senior Vice President,Global Sales. He has been instrumental in the development and growth of Avigilon’s sales organization. Mr.Henderson has a proven track record of identifying new markets, developing and executing successful salesstrategies, and driving sustainable growth.

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Corporate Highlights

On February 16, 2016, the Company announced the launch of the Early Adopter Plan for the License Program.Under the Early Adopter Plan, the Company offered preferred license rates and terms to companies thatentered into a patent license agreement with the Company prior to April 30, 2016.

On May 26, 2016, the Company announced that it refreshed its shareholder rights plan (the “New RightsPlan”). The New Rights Plan replaces the Company’s prior shareholder rights plan dated January 12, 2016(the “Prior Rights Plan”). The New Shareholder Rights Plan Agreement was approved by the Toronto StockExchange, subject to the approval of Shareholders within six months of May 25, 2016, which Shareholderapproval was obtained by way of a shareholder resolution at the Annual General and Special Meeting ofShareholders on June 23, 2016. The Company adopted the New Rights Plan to help maximize shareholdervalue in the event of an unsolicited take-over bid by providing additional time for the Company’s shareholdersto consider the bid, and for the Board to explore, solicit, and consider strategic alternatives. The New RightsPlan is substantially similar to the Prior Rights Plan. The New Rights Plan was not adopted in response to,or in anticipation of, any offer or take-over bid.

On July 19, 2016, the Company announced that it had amended the Credit Facility to, among other things,extend its maturity date from April 7, 2018 to April 7, 2019.

On November 28, 2016, the Company announced it engaged CBRE Limited to market the Company’sproperty and 9-storey office tower located in downtown Vancouver, Canada (the “Building”) for a sale andleaseback (the “Proposed Transaction”). As contemplated, the Proposed Transaction would give Avigilonfull use of the Building while reducing its debt, providing cash for general working capital purposes, andenhancing shareholder value. Avigilon purchased the property and Building in November, 2015 for CAD$42M, and is currently renovating and upgrading the facilities.

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OUTLOOK

Industry Overview

The global markets for video surveillance and electronic access control are large and growing. For 2017,the size of the video surveillance market is estimated to be $17.1 billion and the size of the electronic accesscontrol market is estimated to be $4.1 billion, for a total aggregate market of $21.2 billion (Source: IHS 2016and 2017). By the end of 2020, the video surveillance market is forecasted to grow to approximately $20.2billion and the electronic access control market to approximately $5.2 billion, for a total aggregate market of$25.4 billion (Source: IHS 2016 and 2017).

Industry Trends

Avigilon believes that the three significant trends transforming the video surveillance and access controlindustry are the:

(1) continuing shift to HD and IP-based systems;(2) convergence of video surveillance and access control; and(3) increasing deployment of intelligence-delivering video analytics.

As the market continues moving towards IP video and access control systems, installation costs tend todecline, and systems are often more manageable, scalable, and resistant to obsolescence. Managementbelieves that higher quality video and information content also enables faster returns on investment for theend-user.

Customers deploying access control systems increasingly also deploy video surveillance solutions and viceversa. This trend is coupled with a natural preference to unify the management and monitoring of bothsystems. A unified system generally results in increased ease of use and functionality, potentially reducingits total cost of ownership.

Management believes that the future of the security industry is in gathering more information from video andaccess control data through video analytics that convert raw data into actionable intelligence and enableend-users to make more informed decisions. The shift from simply storing or viewing data to gaining real-time insights from such data allows end-users to consider ways in which these systems can improve andadvance their business beyond just security.

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SELECTED FINANCIAL INFORMATION

The following tables set out selected consolidated financial information for the years indicated, and havebeen derived from the Financial Statements and should be read in conjunction with the Financial Statements.

Financial Performance

Years ended December 31,2016 2015 2014

Revenue 353,622 287,561 245,195Cost of sales 169,652 122,485 106,359

Gross profit (1) 183,970 165,076 138,836Operating expenses 164,015 138,116 104,846

Operating income 19,955 26,960 33,990Net income 7,190 22,031 31,569

Basic earnings per share 0.17 0.49 0.69Diluted earnings per share 0.16 0.48 0.68Basic Adjusted EPS (1) 0.62 0.67 0.74Diluted Adjusted EPS (1) 0.61 0.66 0.72Adjusted EBITDA (1) 54,399 51,254 48,936

Financial Position

December 31, 2016 December 31, 2015

Total assets 395,543 347,076Total liabilities 158,261 132,948Total non-current financial liabilities(2) 82,453 74,262

(1) Basic and Diluted Adjusted EPS, and Adjusted EBITDA are not IFRS financial measures. Gross profit is an additional IFRS financialmeasure. Please see the “Non-IFRS and Additional IFRS Financial Measures” section for more information.

(2) Non-current financial liabilities represent the long-term portion of long-term debt, excluding deferred transaction costs.

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OVERALL PERFORMANCE

In the year ended December 31, 2016, Avigilon had record revenue of $353.6 million, which was a 23%increase over the same period in 2015. On a constant currency basis, revenue grew by 24% for the yearended December 31, 2016. Revenue growth continued to outpace the industry and reflects increased unitvolume as a result of the Pricing Adjustment (defined below), greater customer adoption in existing markets,further penetration of target regions, new product introductions, greater adoption of video analytics andincreased contributions from the License Program. In the second quarter of 2016, Management reducedprices on the H3 camera line and select Network Video Recorders (“NVRs”) to drive unit volume and revenue,expand addressable market, and capture additional market share (the “Pricing Adjustment”). As a result ofthe Pricing Adjustment, gross margin percentage was strategically exchanged for increased unit volume todrive greater revenue, gross profit, and cash flow from operations.

In the year ended December 31, 2016, Avigilon had record gross profit of $184.0 million, which was a 11%increase over the same period in 2015. The increase resulted primarily from the success of the H4 cameraplatform, the Pricing Adjustment, and the License Program.

Operating expenses increased by 19% in the year ended December 31, 2016 over the same period in 2015.The increase in operating expenses is driven by an increase in R&D expenditures, an increase in amortizationand depreciation, and increasing full-time personnel to support the Company’s global growth in alldepartments from 1,043 as at December 31, 2015 to 1,159 as at December 31, 2016. Historically, operatingexpenses have been seasonally affected by sales and marketing activities and overall hiring initiatives inthe first half of the year, benefiting operating leverage in the second half of the year.

In the year ended December 31, 2016, Avigilon had record Adjusted EBITDA of $54.4 million, which was a6% increase over the same period in 2015. The increase resulted primarily from the increased unit volumeas a result of the Pricing Adjustment, new product introductions, greater adoption of video analytics andincreased contributions from the License Program.

In 2016, Avigilon continued to expand its camera lines based on the H4 camera platform by introducingAvigilon’s H4A, H4 Edge Solution, H4 Fisheye, H4 PTZ and H4 SL camera series. These H4 cameras comebuilt-in with Avigilon’s latest generation self-learning video analytics. In support of the H4 camera platformand a number of other capabilities, Avigilon also released ACC versions 5.8 and 5.10 featuring searchcapabilities, integration with central monitoring station software and enhancements to scalability, fault-tolerance and cybersecurity. Avigilon also announced Avigilon Appearance Search, which leverages the H4camera platform’s video analytics capabilities to enable searching for an object based on how it appears. Insupport of new and advanced capabilities in ACC, Avigilon also released the third generation of NVRs andworkstations. At the highest end of the NVR offering released in 2016, Avigilon more than doubled channelcapacity and storage per server. The NVR servers now also support advanced graphics processing unitscapable of running deep neural networks such as the one used to power the Avigilon Appearance Searchfeature. As part of Avigilon’s access control solution, Access Control Manager (“ACM”) 5.8 featured newintegrations with biometric devices, intrusion panels and a host of wired and wireless locks and doorcontrollers.

At December 31, 2016, Avigilon held over 725 patent assets (inclusive of design rights) globally.

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SUMMARY OF QUARTERLY RESULTS

The following is a selected summary of quarterly results for the last eight quarters:

Selected Quarterly Results (unaudited)2015 2016

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Revenue 60,573 72,972 72,577 81,439 69,932 85,682 95,817 102,191Cost of sales 24,671 30,682 31,313 35,819 30,249 42,731 46,583 50,089

Gross profit (1) 35,902 42,290 41,264 45,620 39,683 42,951 49,234 52,102Operating expenses 32,228 36,189 32,731 36,968 37,834 43,690 42,982 39,509

Operating income (loss) 3,674 6,101 8,533 8,652 1,849 (739) 6,252 12,593Net income (loss) 8,948 1,837 7,039 4,207 1,355 (1,965) 3,432 4,368

Basic earnings (loss) per share 0.19 0.04 0.16 0.10 0.03 (0.05) 0.08 0.10Diluted earnings (loss) per share 0.19 0.04 0.15 0.09 0.03 (0.05) 0.08 0.10Basic Adjusted EPS (1) 0.13 0.13 0.21 0.21 0.09 0.06 0.21 0.26Diluted Adjusted EPS (1) 0.13 0.12 0.20 0.21 0.09 0.06 0.21 0.26Adjusted EBITDA(1) 8,916 12,487 14,389 15,462 8,896 8,003 16,688 20,812Total assets 280,262 335,150 337,891 347,076 354,303 371,405 391,203 395,543Total liabilities 25,301 104,012 109,305 132,948 128,715 146,217 159,754 158,261

Total non-current financial liabilities(2) — 59,579 55,621 74,262 79,872 85,483 91,842 82,453

(1) Basic and Diluted Adjusted EPS, and Adjusted EBITDA are not IFRS financial measures. Gross profit is an additional IFRS financialmeasure. Please see the “Non-IFRS and Additional IFRS Financial Measures” section for more information.

(2) Non-current financial liabilities represent the long-term portion of long-term debt, excluding deferred transaction costs.

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DISCUSSION OF OPERATIONS

Revenue

The Company operates in one segment in which it designs, develops, and manufactures video analytics,network video management software and hardware, surveillance cameras, and access control solutions.Avigilon’s solutions are promoted by Avigilon sales staff and sold to a global network of Resellers.

Revenue growth reflects increased unit volume as a result of the Pricing Adjustment, greater customeradoption in existing markets, further penetration of target regions, new product introductions, greater adoptionof video analytics and increased contributions from the License Program. This is consistent with our focuson revenue growth to establish Avigilon as a leading global technology provider.

Revenue by Geographic Region

Revenue is earned in five main regions: the US; Europe, Middle East and Africa; Asia Pacific; Canada; andLatin America.

Years ended December 31,2016 2015 % Change

United States 203,790 170,084 20%Europe, Middle East and Africa 91,276 75,800 20%Asia Pacific 25,175 15,269 65%Canada 20,727 16,480 26%Latin America 12,654 9,928 27%

Total revenues 353,622 287,561 23%

In the second quarter of 2016, Avigilon implemented the Pricing Adjustment which helped drive revenuegrowth in all geographic regions. Adding to revenue growth in 2016 was greater customer adoption with yearover year sales growth in all geographic regions, further penetration of new target regions such as AsiaPacific, sales of new products from our H4 camera platform, including the H4, H4A, H4 Fisheye, H4 SL, H4ES, and H4 PTZ camera lines, and increased contributions from the License Program.

For the year ended December 31, 2016, revenue was strong across all regions, with year over year revenuegrowth over the same period in 2015 of between 20% and 65%.

Quarterly revenues over the last eight quarters were as follows:

Selected Quarterly Results (unaudited)

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

United States 33,419 43,984 44,094 48,587 39,037 51,115 58,812 54,826Europe, Middle East and Africa 17,555 19,235 18,060 20,950 19,100 21,681 22,796 27,699Asia Pacific 3,231 4,505 3,488 4,045 5,508 5,293 4,744 9,630Canada 3,763 3,429 4,323 4,965 4,187 4,863 5,713 5,964Latin America 2,605 1,819 2,612 2,892 2,100 2,730 3,752 4,072

Total revenues 60,573 72,972 72,577 81,439 69,932 85,682 95,817 102,191

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For the three months ended December 31, 2016, the Company earned record quarterly revenue. Revenuewas strong across all regions, with year over year revenue growth in Asia Pacific of 138%, Latin America of41%, Europe, Middle East and Africa of 32%, Canada of 20%, and United States of 13%.

Revenues have historically experienced some seasonality, with the second and fourth quarters generallybeing the Company’s strongest quarters of the year for sequential revenue growth. The second quarterstrength generally coincides with the ramp up of building and development cycles for the year, while thefourth quarter typically benefits from increased spending as annual budget cycles come to a close.

Revenue also reflects the impact of foreign exchange. Other than USD, a portion of our revenue isdenominated in Euro (“EUR”), British Pound Sterling (“GBP”) or CAD, depending on the region, althoughour exposure to the Euro is the most significant.

Cost of Sales

Cost of sales consists of the cost of materials and components, manufacturing, depreciation, labor andoverhead costs, inventory obsolescence provisions and write-offs, warranty costs, product transportationcosts, and other supply chain management costs. To the extent that our sales volume increases, we expectcost of sales to also increase proportionately.

Years ended December 31,2016 2015

Cost of sales 169,652 122,485% of revenue 48% 43%

Cost of sales for the year ended December 31, 2016 increased by $47.2 million, or 39% compared to 2015,driven by the year over year increase in sales volume. As a percentage of revenue, cost of sales for the yearended December 31, 2016 increased by 5% compared to 2015, primarily due to overall increased unit volumeas a result of the Pricing Adjustment.

Quarterly cost of sales over the last eight quarters were as follows:

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Cost of sales 24,671 30,682 31,313 35,819 30,249 42,731 46,583 50,089% of revenue 41% 42% 43% 44% 43% 50% 49% 49%

Cost of sales as a percentage of revenue fluctuates quarterly due to changes in product mix, pricing, andforeign exchange rates.

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Gross Profit

Gross profit for the year ended December 31, 2016 increased by $18.9 million compared to 2015, primarilyfrom the success of the H4 camera platform, the Pricing Adjustment, and the License Program. Gross marginpercentage for the year ended December 31, 2016 decreased by 5% compared to 2015, primarily due tothe Pricing Adjustment. Over time, the Company expects gross margin percentage to increase due to growingcontributions from the License Program, greater economies of scale from leveraging our previous investmentsin our manufacturing facilities to support larger unit volumes, and increasing adoption of video analytics.


Gross profit 183,970 165,076% of revenue 52% 57%

Quarterly gross margin percentages over the last eight quarters were as follows:

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

% of revenue 59% 58% 57% 56% 57% 50% 51% 51%

Gross profit for the three months ended December 31, 2016 increased by $6.5 million over the same periodin 2015. Gross margin percentage for the three months ended December 31, 2015 decreased by 5%compared to 2015, primarily due to the Pricing Adjustment.

Gross margin percentages fluctuate quarterly due to changes in product mix, pricing, and foreign exchangerates. Management will continue to analyze pricing and gross margin percentage to maximizecompetitiveness and profitability.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and related expenses, advertising, trade showsand other promotional activities.

Sales and marketing expenses for the year ended December 31, 2016 increased by $6.0 million, or 8%,from 2015. The increase reflects investments to expand the Company’s global sales and marketing teamand initiatives. As a percentage of revenue, sales and marketing expenses for the year ended December31, 2016 decreased by 3% compared to 2015. Management believes that sales and marketing expensesas a percentage of revenue will continue to decrease year over year as the Company focuses on increasingprofitability, and benefits from efficiencies arising from the ERP system and economies of scale from itsprevious investments in global sales and marketing teams.


Sales and marketing 76,728 70,776% of revenue 22% 25%

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Quarterly sales and marketing expenses over the last eight quarters were as follows:

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Sales and marketing 16,814 17,911 17,316 18,735 17,938 20,519 19,488 18,783% of revenue 28% 25% 24% 23% 26% 24% 20% 18%

Sales and marketing expenses for the three months ended December 31, 2016 remained consistent withthe same prior year period. Benefiting from operating leverage, sales and marketing expenses decreasedfrom 23% of revenue for the three months ended December 31, 2015 to 18% of revenue for the three monthsended December 31, 2016. Sales and marketing expenses as a percentage of revenue will fluctuate fromquarter to quarter due to the timing of trade shows and other marketing initiatives.

Research and Development

R&D expenses consist primarily of salaries and related expenses for software, firmware and hardwareengineering and technical personnel, costs incurred on patent applications, prototypes and other materialsand consumables used in product development. The Company incurs most of its R&D expenses in Canadaand the US and receives Canadian Scientific Research and Experimental Development investment taxcredits and US investment tax credits (“ITCs”) for certain eligible expenditures. ITCs related to capitalizeddevelopment are recorded as a reduction of the cost of the associated asset. ITCs not related to capitalizeddevelopment are netted against the Company’s R&D expenses.

For the year ended December 31, 2016, gross R&D expenditures increased by $7.9 million compared to2015. Net R&D expenses for the year ended December 31, 2016 increased by $6.4 million compared to2015.

The year over year increase in gross R&D expense is consistent with the Company’s ongoing plan to furtherenhance and expand upon its product offerings and intellectual property portfolio. In 2016, the Companycontinued to expand its camera lines based on the H4 camera platform, and introduced new versions ofACC and ACM, Avigilon Appearance Search, and third generation NVRs and workstations.

Net R&D expenses are affected by capitalized development costs and ITCs, each of which fluctuate fromquarter to quarter depending on the stage and number of products in development. ITCs of $0.7 million wererecorded as reductions of the cost of capitalized development assets during the year ended December 31,2016.

Development costs are capitalized until such time as the related products are commercially launched, andare subsequently amortized over the respective expected product life.


Gross R&D expense 32,549 24,656Investment tax credits (3,641) (2,762)Capitalized development (11,986) (11,338)

R&D expense 16,922 10,556

Gross R&D expense % of revenue 9% 9%

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R&D expenses over the last eight quarters were as follows:

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Gross R&D expense 6,080 5,885 5,479 7,212 7,110 8,418 8,693 8,328Investment tax credits (930) (400) (543) (889) (861) (1,052) (1,084) (644)Capitalized development (3,706) (2,794) (2,721) (2,117) (2,255) (2,719) (3,762) (3,250)

R&D expense 1,444 2,691 2,215 4,206 3,994 4,647 3,847 4,434

Gross R&D expense % of revenue 10% 8% 8% 9% 10% 10% 9% 8%

For the three months ended December 31, 2016, gross R&D expenditures increased by $1.1 million overthe same period in 2015. Net R&D expenses for the three months ended December 31, 2016 increased by$0.2 million over the same period in 2015. These increases reflect the Company’s investment in expandingupon its product offerings and intellectual property portfolio. R&D expenses are incurred in advance of therelated revenue from new products. Gross R&D expense varies depending on the Company’s productdevelopment projects.

General and Administrative

General and administrative (“G&A”) expenses consist of costs relating to salaries, information systems,customer and technical support, legal and finance functions, professional fees, insurance, facilities, andother corporate expenses.

G&A expenses for the year ended December 31, 2016 increased by $6.9 million compared to 2015, primarilydue to additional headcount, share-based payments and non-recurring costs. As a percentage of revenue,G&A expenses for the year ended December 31, 2016 decreased by 1% compared to 2015.

The year over year decrease as a percentage of revenue is largely due to operating leverage on previousinvestments in personnel, infrastructure and our ERP system to support our business growth. Managementexpects the Company’s G&A expenses to increase at a slower rate over time as the Company focuses onincreasing profitability.


G&A 49,206 42,312% of revenue 14% 15%

Quarterly G&A expenses over the last eight quarters were as follows:

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

G&A 10,661 12,061 9,411 10,179 11,402 13,334 14,098 10,372% of revenue 18% 17% 13% 12% 16% 16% 15% 10%

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G&A expenses for the three months ended December 31, 2016 remained consistent with the same prioryear period. As a percentage of revenue, G&A for the three months ended December 31, 2016 decreasedfrom 12%, in the same prior year period, to 10%, as the Company benefited from operating leverage and areduction in corporate expenditures as the Company focuses on increasing profitability.

Management expects the Company’s G&A expenses as a percentage of revenue to decrease year overyear as the Company focuses on increasing profitability, and benefits from previous investments such asthe recently-implemented ERP system.

Amortization and Depreciation

Amortization and depreciation for the year ended December 31, 2016 increased by $6.7 million comparedto 2015.

Increases in amortization and depreciation in 2016 are primarily due to previous investments in, among otherthings, global sales offices, research and development, patent portfolio and the ERP system. As theseinvestments are now substantially completed, the Company plans to focus on increasing profitability.


Amortization and depreciation 21,159 14,472% of revenue 6% 5%

Amortization and depreciation for the three months ended December 31, 2016 increased by $2.1 millioncompared to the same period in 2015.

Quarterly amortization and depreciation over the last eight quarters were as follows:

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Amortization and depreciation 3,309 3,526 3,789 3,848 4,500 5,190 5,549 5,920% of revenue 5% 5% 5% 5% 6% 6% 6% 6%

Over the last eight quarters, amortization and depreciation expense has increased due to the additions ofproperty, plant, and equipment, computer software, and capitalized development costs in prior periods.

Interest on Long-Term Debt

For the year ended December 31, 2016, the Company paid $3.8 million in cash interest and amortized $0.5million of deferred financing costs. Interest of $1.3 million was capitalized during the period, resulting in netinterest expense of $2.9 million.


Cash interest paid 3,754 1,885Amortization of deferred financing costs 456 312Interest capitalized (1,311) (411)

Interest expense 2,899 1,786

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Quarterly interest expense over the last eight quarters was as follows:

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Cash interest paid — 567 625 693 897 876 970 1,011

Amortization of deferredfinancing costs — 122 77 113 111 141 93 111

Interest capitalized — — (295) (116) (359) (262) (314) (376)

Interest expense — 689 407 690 649 755 749 746

The increase in cash interest paid from the second quarter of 2015 to the fourth quarter of 2016 was incurredto finance previous investments to scale our business. Management expects cash interest paid to decreaseover time as we leverage these investments and focus on increasing profitability.

Foreign Exchange

The Company incurred a foreign exchange loss of $1.6 million for the year ended December 31, 2016,compared to a foreign exchange gain of $5.5 million for the year ended December 31, 2015, a change of$7.1 million. The change is primarily driven by our change in functional currency and is mostly unrealized.


Foreign exchange (loss) gain (1,593) 5,468

Quarterly foreign exchange gains and losses over the last eight quarters were as follows:

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Foreign exchange gain (loss) 7,280 (2,248) 1,916 (1,480) 885 (542) (423) (1,513)

Foreign exchange loss for the three months ended December 31, 2016 remained consistent with the sameprior year period.

The majority of the Company’s foreign exchange gain or loss amounts consists of unrealized foreign exchangeand is primarily driven by the Company’s foreign currency denominated monetary assets and liabilities. Thefluctuation of foreign exchange gain or loss is primarily driven by the USD’s appreciation or depreciation asmeasured against the CAD, EUR and GBP for each quarter.

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Income Taxes

Income tax expense for the year ended December 31, 2016 increased by $1.5 million compared to 2015.The Company’s worldwide effective income tax rate for the year ended December 31, 2016 is 59%, comparedto 29% for 2015, as a result of foreign exchange differences of $4.3 million relating to the recognition ofunrealized foreign exchange losses due to the translation of tax bases maintained in CAD into USD. Thereare a number of items that can significantly impact the Company’s worldwide effective income tax rate,including foreign currency exchange rate fluctuations, earnings subject to tax in jurisdictions where the taxrate is different than the Canadian statutory rate, granting of equity-based awards, and other permanentdifferences between the tax and accounting bases of the Company’s assets and liabilities. As a result, theCompany’s recorded tax provision can be significantly different from the expected tax provision calculatedbased on the Canadian statutory rate.


Current tax (recovery) expense (1,463) 7,756Deferred tax expense 11,768 1,028

Income tax expense 10,305 8,784

Quarterly income tax expense (recovery) over the last eight quarters was as follows:

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Current tax expense (recovery) 2,652 531 3,398 1,175 545 (2,475) (2,066) 2,533Deferred tax expense (recovery) (569) 827 (349) 1,119 254 2,392 3,748 5,374

Income tax expense (recovery) 2,083 1,358 3,049 2,294 799 (83) 1,682 7,907

Effective income tax rate 19% 43% 30% 35% 37% 4% 33% 64%

Due to the number of factors that can potentially impact the effective income tax rate and the sensitivity ofincome tax expense to these factors, it is expected that the Company’s effective income tax rate will fluctuatefrom quarter to quarter.

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Net Income and Adjusted EBITDA


Net income 7,190 22,031% of revenue 2% 8%

Adjusted EBITDA 54,399 51,254% of revenue 15% 18%

For the year ended December 31, 2016, net income decreased by $14.8 million over the same period in2015. Net income for the year ended December 31, 2016 was impacted by non-operational items, includingdeferred tax, a foreign exchange loss compared to a foreign exchange gain, non-recurring costs, and share-based payments.

For the year ended December 31, 2016, Adjusted EBITDA increased by $3.1 million, or 6%, over the sameperiod in 2015. The increase in Adjusted EBITDA was due primarily to increased unit volume as a result ofthe Pricing Adjustment, new product introductions, greater adoption of video analytics and increasedcontributions from the License Program. Over time, the Company expects Adjusted EBITDA Margin toimprove with new product introductions, economies of scale and reduced investments.

Below is a reconciliation of net income to Adjusted EBITDA:


Net income 7,190 22,031Share-based payments 6,579 5,425Foreign exchange loss (gain) 1,593 (5,468)Business acquisition-related and other non-recurring costs 4,802 3,205Amortization and depreciation 23,063 15,664Revaluation gain on contingent consideration receivable (1,924) —Interest on long-term debt 2,899 1,786Interest income (108) (173)Income tax expense 10,305 8,784

Adjusted EBITDA 54,399 51,254

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Quarterly net income (loss) and Adjusted EBITDA over the last eight quarters were as follows:

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Net income (loss) 8,948 1,837 7,039 4,207 1,355 (1,965) 3,432 4,368% of revenue 15% 3% 10% 5% 2% (2)% 4% 4%

Adjusted EBITDA 8,916 12,487 14,389 15,462 8,896 8,003 16,688 20,812% of revenue 15% 17% 20% 19% 13% 9 % 17% 20%

For the three months ended December 31, 2016, net income and Adjusted EBITDA increased by $0.2 millionand $5.4 million over the same period in 2015. These increases are primarily due to increased operatingleverage, a reduction in corporate expenditures, increased unit volume as a result of the Pricing Adjustment,new product introductions, greater adoption of video analytics, and increased contributions from the LicenseProgram.

The quarterly reconciliation of net income (loss) to Adjusted EBITDA is as follows:

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Net income (loss) 8,948 1,837 7,039 4,207 1,355 (1,965) 3,432 4,368Share-based payments 1,476 2,014 423 1,512 1,635 1,444 2,042 1,458Foreign exchange (gain) loss (7,280) 2,248 (1,916) 1,480 (885) 542 423 1,513Business acquisition-related and

other non-recurring costs 215 534 1,428 1,028 470 1,628 2,352 352Amortization and depreciation 3,551 3,838 4,005 4,270 4,942 5,670 6,042 6,409Revaluation gain on contingentconsideration receivable — — — — — — — (1,924)Interest on long-term debt — 689 407 690 649 755 749 746Interest (income) expense (77) (31) (46) (19) (69) 12 (34) (17)Income tax expense (recovery) 2,083 1,358 3,049 2,294 799 (83) 1,682 7,907

Adjusted EBITDA 8,916 12,487 14,389 15,462 8,896 8,003 16,688 20,812

We estimate that every $0.01 change in the exchange rate of CAD per USD will have a $0.7 million annualimpact on our Adjusted EBITDA.

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Adjusted Earnings and Adjusted EPS


Net income 7,190 22,031Share-based payments 6,579 5,425Foreign exchange loss (gain) 1,593 (5,468)Business acquisition-related and other non-recurring costs 5,112 3,328Amortization of acquired intangible assets 8,922 9,053Revaluation gain on contingent consideration receivable (1,924) —Related tax effects(1) (511) (3,953)

Adjusted Earnings 26,961 30,416

Basic weighted average number of shares outstanding (000's) 43,433 45,396Basic Adjusted EPS 0.62 0.67

Diluted weighted average number of shares outstanding (000's) 44,391 46,162Diluted Adjusted EPS 0.61 0.66

Adjusted Earnings and Diluted Adjusted EPS for the year ended December 31, 2016 decreased comparedto the year ended December 31, 2015, primarily due to increases in non-cash amortization, interest expenseand investments to expand the Company’s sales and marketing initiatives and product portfolio. In the secondhalf of the year, these items were offset by an increase in gross profit as a result of the Pricing Adjustmentand increased contributions from the License Program. Management expects the Company’s operatingexpenses as a percentage of revenue to decrease year over year as the Company focuses on increasingprofitability, and benefits from efficiencies arising from the ERP system and economies of scale.

(1) Includes $4.3 million relating to non-operational unrealized foreign exchange losses due to the translation of tax bases. As a resultof the change in the Company’s functional currency tax reporting, no further such adjustments are expected in 2017.

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The quarterly reconciliation of net income (loss) to Adjusted Earnings and calculation of basic and dilutedAdjusted EPS is as follows:

2015 2016Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Net income (loss) 8,948 1,837 7,039 4,207 1,355 (1,965) 3,432 4,368Share-based payments 1,476 2,014 423 1,512 1,635 1,444 2,042 1,458Foreign exchange (gain) loss (7,280) 2,248 (1,916) 1,480 (885) 542 423 1,513

Business acquisition-related andother non-recurring costs 215 534 1,502 1,077 517 1,727 2,425 443

Amortization of acquiredintangible assets 2,212 2,210 2,411 2,220 2,233 2,225 2,232 2,232

Revaluation gain on contingentconsideration — — — — — — — (1,924)Related tax effects(1) 604 (2,994) (194) (1,369) (1,041) (1,400) (1,433) 3,363

Adjusted Earnings 6,175 5,849 9,265 9,127 3,814 2,573 9,121 11,453

Basic weighted average number ofshares outstanding (000's) 46,616 46,474 44,738 43,792 43,285 43,372 43,477 43,596

Basic Adjusted EPS 0.13 0.13 0.21 0.21 0.09 0.06 0.21 0.26

Diluted weighted average numberof shares outstanding (000's) 47,628 47,371 45,463 44,462 44,032 44,133 44,343 44,516

Diluted Adjusted EPS 0.13 0.12 0.20 0.21 0.09 0.06 0.21 0.26

For the three months ended December 31, 2016, Adjusted Earnings and Diluted Adjusted EPS increasedby $2.3 million and 23.8% over the same period in 2015. These increases are primarily due to increasedoperating leverage, a reduction in corporate expenditures, increased unit volume as a result of the PricingAdjustment, new product introductions, greater adoption of video analytics, and increased contributions fromthe License Program.

(1) The fourth quarter of 2016 includes $4.3 million relating to non-operational unrealized foreign exchange losses due to the translationof tax bases. As a result of the change in the Company’s functional currency tax reporting, no further such adjustments are expectedin 2017.

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FINANCIAL POSITION AND LIQUIDITY

Cash and cash equivalents were $30.0 million at December 31, 2016, compared to $18.6 million atDecember 31, 2015. As at December 31, 2016, we had net working capital of $105.4 million, compared to$83.5 million as at December 31, 2015. The change in cash consists of:


Cash from (used in) operating activities 42,951 (1,784)Cash used in investing activities (36,853) (79,979)Cash from financing activities 5,883 41,300

Cash from operations before changes in non-cash working capital, an additional IFRS financial measure,was $49.3 million for the year ended December 31, 2016.


Net income 7,190 22,031Adjustments for:

Amortization 15,087 11,385Depreciation 7,976 4,279Leasehold incentives received, net of amortization 1,275 266Share-based payments 6,579 5,425Income tax expense 10,305 8,784Investment tax credits (2,458) (1,823)Interest on long-term debt 2,899 1,786Unrealized foreign exchange loss 2,452 33Revaluation gain on contingent consideration receivable (1,924) —Interest income (108) (173)

Cash from operations before changes in non-cash working capital 49,273 51,993

For the year ended December 31, 2016, the change in working capital of $3.4 million reflected the PricingAdjustment and the resultant impact of increased unit volume on inventory and accounts receivable of $13.2million, an increase in prepaids of $0.8 million, offset by an increase in trade and other payables of $10.6million. $3.0 million of cash was paid in income taxes.

For the year ended December 31, 2016, net cash from operating activities increased by $44.7 million overthe same period in 2015. The increase is the result of the Pricing Adjustment and the resultant record unitvolume, and increased contributions from the License Program.

Cash used in investing activities for the year ended December 31, 2016 was $36.9 million and comprisedthe following: additions of $17.4 million to intangible assets primarily related to additions to capitalizeddevelopment costs and costs related to implementing the ERP system; and additions of $19.5 million toproperty, plant and equipment primarily related to construction for our future global headquarters inVancouver, equipment related to the ERP system, sales and demonstration equipment, and worldwideleasehold improvements.

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Cash from financing activities for the year ended December 31, 2016 was $5.9 million and comprised thefollowing: proceeds of $30.0 million from long-term debt; proceeds of $1.0 million from the exercise of incentivestock options (“Options”); offset by repayment of $21.1 million of long-term debt; payment of $3.8 million ofinterest on long-term debt; and payment of $0.3 million of transaction costs on long-term debt.

In addition to available net working capital, at December 31, 2016 we had available the multi-tranche seniorsecured syndicated credit facility (the “Credit Facility”), which included a $100 million multi-currency revolvingacquisition facility (the “Acquisition Facility”), a $100 million multi-currency revolving line (the “Revolver”),and a $40 million real estate term loan (the “Real Estate Loan”). As at December 31, 2016, $52.2 millionwas drawn on the Acquisition Facility, $22.4 million was drawn on the Real Estate Loan, and $25.0 millionwas drawn on the Revolver, all of which bore interest at LIBOR plus a margin of between 2.25% and 2.50%for the period from January 1, 2016 to December 31, 2016. As at December 31, 2016, $140.4 million wasundrawn on the Credit Facility.

We expect our working capital needs to continue growing with our sales. We believe that our ongoingoperations and associated cash flows, in addition to our cash resources and the Credit Facility, will providesufficient liquidity to continue financing our planned growth in the near term, and that we will have accessto additional debt and equity capital as we grow to support further expansion.

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CAPITAL RESOURCES

We define capital as debt and shareholders’ equity. Our objective when managing capital is to providesufficient resources to meet day-to-day operating requirements, and to enhance and develop new productofferings and expand operations. In managing our capital structure, we take into consideration various factors,including the growth of our business and related infrastructure and the up-front cost of taking on newcustomers. Management is responsible for managing capital and do so through quarterly meetings andregular review of financial information. The Board is responsible for overseeing this process. We manageour resources while maximizing the return to shareholders through the optimization of debt and equitybalances.

The Credit Facility contains restrictive covenants that affect the manner in which the Company may structureor operate its business, including by limiting the Company’s ability to incur indebtedness, create liens, sellassets, make capital expenditures, and engage in acquisitions, mergers, or restructurings. The Credit Facilityalso requires the Company to maintain certain financial ratios. As at December 31, 2016, the Company wasin compliance with the financial covenants of the Credit Facility, which consist of a leverage ratio and fixedcharge coverage ratio as defined in the Credit Facility. Subject to the leverage ratio, the Company may berequired to make certain mandatory repayments. As at December 31, 2016, the Company was also incompliance with the restrictive covenants of the Credit Facility.

CONTRACTUAL OBLIGATIONS

In the normal course of business, we enter into contracts that give rise to commitments for future minimumpayments. The Company has such obligations under the Credit Facility and operating leases for its officeand manufacturing premises. As at December 31, 2016, in addition to the commitments related to thedevelopment of our new global headquarters discussed below, the contractual obligations, including futureminimum lease payments and operating costs under non-cancellable leases, were as follows:

Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years

Lease payments 22,521 4,558 6,353 5,543 6,067Trade accounts payable and other 44,097 44,097Debt 99,637 17,184 35,112 7,007 40,334Total contractual obligations 166,255 65,839 41,465 12,550 46,401

As of December 31, 2016, we have outstanding commitments of approximately $8.0 million (2015 - $nil)related to the development of our new global headquarters.

CAPITAL EXPENDITURES

During the year ended December 31, 2016, we incurred capital expenditures of $26.9 million, includingproperty, plant and equipment and computer software additions. In 2016, we made capital investments in,among other things, manufacturing facilities, global sales offices, R&D, and the ERP system. As theseinvestments are now substantially complete, Management expects to leverage these investments to supportbusiness growth and focus on increasing profitability.

CAPITAL STRUCTURE AND OUTSTANDING SHARE DATA

As at February 27, 2017, the Company has 43,680,338 common shares issued and outstanding.

We maintain an Incentive Security Plan (the “Incentive Plan”) that enables us to grant Options and RestrictedShare Units (“RSUs” and, collectively with Options, “Compensation Securities”) to Directors, officers,employees and consultants of the Company. The Incentive Plan permits the granting of CompensationSecurities up to an aggregate maximum of 10% of our issued and outstanding common shares from timeto time on a non-diluted basis, provided that the maximum number of RSUs that may be granted thereunderis further limited to 5% of our issued and outstanding common shares from time to time on a non-dilutedbasis.

During the year ended December 31, 2016, we granted 962,500 Options and 619,819 RSUs.

The common shares, Options and RSUs outstanding and exercisable as at the following dates are shownbelow:

December 31, 2016 February 27, 2017

Number

Weighted averageexercise price

(CAD) Number

Weighted averageexercise price

(CAD)

Common shares outstanding 43,597,364 43,680,338Options

Outstanding 3,005,100 $ 14.57 2,998,975 $ 14.58Exercisable 855,032 $ 12.64 869,007 $ 12.84

RSUsOutstanding 818,142 n/a 1,213,893 n/a

OFF-BALANCE SHEET ARRANGEMENTS

As at December 31, 2016, the Company had no off-balance sheet arrangements.

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TRANSACTIONS WITH RELATED PARTIES

Key Management Personnel

Key management personnel consists of the Company’s executive officers and its Directors. During the yearsended December 31, 2016 and 2015, compensation of key management personnel was as follows:


Short-term employee benefits 5,180 4,922Termination benefits — 58Share-based payments 5,123 2,989

10,303 7,969

In the event of termination without cause, the Company’s executive officers are each entitled to severanceequal to 12 months of annual salary and bonus, or 24 months if such termination is in connection with achange of control.

Other Related Party Transactions

Other related parties include a company owned by a Director of the Company. Transactions with such partiesare conducted on a normal commercial basis, including terms and prices. The aggregate value of transactionswith other related parties during the years ended December 31, 2016 and 2015 was as follows:


Sale of goods and services 685 623

At December 31, 2016, $0.1 million (December 31, 2015 - $0.1 million) of sales to a related party wereincluded in trade and other receivables.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The Company’s financial instruments consist of cash and cash equivalents, deposits, trade and otherreceivables, trade and other payables, and long-term debt. The carrying values of these financial instrumentsapproximate their fair values because of the short-term nature of these instruments or the indexed rate ofinterest on the bank debt.

The Company has exposure to the following risks arising from financial instruments:

• credit risk;

• liquidity risk; and

• market risk.

Risk management framework

The Board has overall responsibility for the establishment and oversight of the Company’s risk managementframework. The Company’s risk management policies are established to identify and analyze the risks facedby the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits.Risk management policies and systems are reviewed regularly to reflect changes in market conditions and

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the Company’s activities. The Company, through its training and management standards and procedures,aims to maintain a disciplined and constructive control environment in which all employees understand theirroles and obligations.

All transactions undertaken are to support the Company’s ongoing business. The Company does not acquireor issue derivative financial instruments for trading or speculative purposes.

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrumentfails to meet its contractual obligations, and arises principally from the Company’s receivables fromcustomers.

Trade and other receivables

The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer.The Company’s credit exposure through receivables relates to a diverse group of customers in multiplegeographic regions and is therefore mitigated by a reduced concentration risk.

Customers are assessed for credit risk based on a variety of factors, including, without limitation, the natureof their organization, financial health, and credit history with the Company and other parties. Purchase limitsare established for each customer and are regularly reviewed.

The aging of trade receivables net of allowance for doubtful accounts was as follows:


Trade receivablesCurrent 56,109 45,811Aged between 61 - 119 days 13,283 6,348Aged 120 days or more 5,155 2,246

Total gross trade receivables 74,547 54,405Allowance for doubtful accounts (868) (380)Total trade receivables 73,679 54,025

The Company regularly reviews the collectability of its accounts receivable and establishes an allowancefor doubtful accounts based on its best estimate of any potentially uncollectible accounts. The Company hasmanaged its credit tightly and has historically experienced minimal bad debts. Based on this past experienceand its detailed review of trade accounts receivable past due which were collectible, a reserve in respect ofdoubtful accounts of $0.9 million was recorded as at December 31, 2016 (December 31, 2015 - $0.4 million).

The movement in the allowance for doubtful accounts during the year was as follows:


Balance, beginning of the year 380 209Increase during the year 800 245Bad debts recovered during the year (312) (65)Bad debts written off during the year — (9)Balance, end of year 868 380

_________________________________________________________________________________________________________


Cash and cash equivalents

The Company limits its exposure to credit risk by only investing in liquid securities and only with counterpartiesthat have a high credit rating. As such, Management does not currently expect any such counterparty to failto meet its obligations.

Foreign exchange derivatives

The Company transacts with a number of Canadian chartered banks and other brokerages. Due to thecreditworthiness of its counterparties, the Company regards all changes in fair value of foreign exchangederivatives as arising only from changes in market factors, including foreign exchange rates. The Companymonitors the exposure to any single counterparty along with its financial position. If it is determined that acounterparty has become materially weaker, the Company will work to reduce its credit exposure to thatcounterparty.

Contingent consideration receivable

The Company received $1.2 million of the contingent consideration receivable on January 4, 2017 and theremaining amount of $0.8 million of the contingent consideration receivable is being held in escrow by athird party until January 1, 2018.

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated withits financial liabilities that are settled by delivering cash or another financial asset. The Company’s approachto managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilitieswhen they are due, under both normal and stressed conditions, without incurring unacceptable losses orrisking damage to the Company’s reputation.

Management ensures that working capital, defined as current assets less current liabilities, remains positiveand cash flows from operations are reasonable based on the Company’s operations. Management alsoensures that sufficient credit facilities are available to the Company should it be required to meet obligationswhen they come due or where appropriate. At December 31, 2016, the Company held cash and cashequivalents of $30.0 million (December 31, 2015 - $18.6 million). During the year ended December 31, 2016,the Company generated net cash flows from operations of $43.0 million (2015 - used net cash flows fromoperations of $1.8 million). As at December 31, 2016 the Company has $140.4 million undrawn on the CreditFacility.

In the normal course of business, the Company enters into contracts that give rise to commitments for futureminimum payments. All of the Company’s financial liabilities except for foreign exchange derivatives havecontractual maturities of 30 days or greater or are due on demand and are subject to normal trade terms.The Company’s commitments for future minimum payments beyond one year relate to lease agreementsand debt repayments which are disclosed in Notes 18 and 12. As at December 31, 2016, the Company hadoutstanding commitments of approximately $8.0 million related to the development of its new globalheadquarters. All of the Company’s foreign exchange derivatives outstanding at December 31, 2016 weredue to be settled within four months.

Market risk

Market risk is the risk that changes in market prices - such as foreign exchange rates, interest rates andequity prices - will affect the Company’s income or the value of its holdings of financial instruments. Theobjective of market risk management is to manage and control market risk exposures within acceptableparameters, while optimizing returns.

_________________________________________________________________________________________________________


Currency risk

The Company is exposed to currency risk to the extent that there is a mismatch between the currencies inwhich sales and purchases are denominated and the Company’s functional currency, which is the USD.

The Company enters into foreign exchange derivative contracts to minimize exposure to foreign currencies.During the year ended December 31, 2016, the Company incurred an unrealized gain on foreign exchangederivatives, presented within foreign exchange (loss) gain, of $0.1 million (2015 - an unrealized loss of $0.4million). At December 31, 2016, the fair value of the foreign exchange contracts was a net asset of $0.1million (December 31, 2015 - a net liability $0.4 million), presented within trade and other receivables(December 31, 2015 - presented within trade and other payables).

The fair values of the foreign exchange derivatives are recurring measurements and are determined wheneverpossible based on observable market data. If observable market data on the financial derivatives is notavailable, the Company uses observable spot and forward foreign exchange rates to estimate their fairvalues. In addition to market information, the Company incorporates transaction specific details that aretypically used by market participants in a fair value measurement.

The following table details the Company’s sensitivity to a 10% decrease in the value of the USD against therelative foreign currencies. This analysis is based on foreign currency exchange rate variances at the endof the reporting period. It includes only outstanding foreign currency denominated monetary items and adjuststheir translation at the year-end for a 10% change in foreign currency rates. A positive value below indicatesan increase in net income. A strengthening of the USD by the same amount would have a comparable(negative) effect on net income.

Year ended December 31,2016

Canadian dollars 629British Pound Sterling 647Euros 1,272

Interest rate risk

Interest rate risk is the risk that the fair values and future cash flows of the Company will fluctuate becauseof changes in market interest rates. The Company has exposure to changes in interest rates as a result offunds drawn on the floating rate available under the Credit Facility. If LIBOR were to have increased ordecreased by 25 basis points it is estimated that the Company’s net income before tax would change byapproximately $0.3 million for the year ended December 31, 2016 (2015 - $0.1 million)

Other market price risk

Other market price risk is the risk that the fair value or future cash flows of the Company’s financial instrumentswill fluctuate because of changes in market prices of component parts and supplies used in manufacturing.The Company does not enter into contracts to hedge against gains or losses from changes in prices ofcomponent parts and supplies. The Company manages its other market price risk through multiple,competitive supplier arrangements and by maintaining a sufficient stock of single-source and long lead timeitems to withstand any temporary supply disruptions.

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JUDGMENTS AND CRITICAL ACCOUNTING ESTIMATES

The preparation of the Financial Statements requires Management to make estimates, and assumptionsand judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and thedisclosure of contingent assets and liabilities. The application of these and other accounting policies aredescribed in Note 3 of the Financial Statements. These estimates are based upon Management’s historicalexperience and various other assumptions that are believed by Management to be reasonable under thecircumstances, and are reviewed on an ongoing basis. Actual results may differ from the estimates underdifferent assumptions and conditions, and may materially affect financial results of the Company reportedin future periods. Our critical accounting estimates and significant judgments are generally discussed withthe Audit Committee each quarter.

Examples of significant judgments, apart from those involving estimation, include the following:

Determination of functional currency

Transactions in foreign currencies are translated to the respective functional currencies of theCompany’s subsidiaries at exchange rates at the dates of the transactions. Management usesjudgment in determining the primary economic environment in which a subsidiary operates inassessing a subsidiary’s functional currency.

Capitalization of development costs

Expenditure on research activities and non-capitalized costs incurred on patent applications areexpensed in research and development expenses as incurred. Development expenditure iscapitalized only if the expenditure can be measured reliably, the product or process is technicallyand commercially feasible, future economic benefits are probable, and the Company intends to andhas sufficient resources to complete development and to use or sell the asset. Judgment is requiredin determining the technical and commercial feasibility and in assessing the probability of futureeconomic benefits. Amortization related to capitalized development costs is classified withinamortization and depreciation under operating expenses.

Capitalization of investment tax credits

The Company is entitled to certain Canadian federal and provincial tax incentives for qualifiedscientific research and development activities, US federal tax incentives for increasing researchactivities, and US state research and development tax credits. These ITCs are available to theCompany to reduce actual income taxes payable. Any credits that are not used in the year in whichthey are earned are recorded as a deferred income tax asset when it is probable that such creditswill be utilized. The utilization is dependent upon the generation of future taxable income.Management assesses the probability of usage based upon forecast results. ITCs that relate to thedevelopment of capitalized development assets are recorded as a reduction of the cost of the relatedasset. All other ITCs are recorded as a reduction of current period research and developmentexpenses. Management uses judgment in allocating ITCs between capitalized and non-capitalizeddevelopment projects.

Capitalization of borrowing costs

General and specific borrowing costs directly attributable to the acquisition, construction orproduction of qualifying assets, which are assets that necessarily take a substantial period of timeto get ready for their intended use or sale, are added to the cost of those assets, until such time asthe assets are substantially ready for their intended use or sale. Non-capitalized borrowing costsare expensed in net income in the period in which they are incurred.

_________________________________________________________________________________________________________


Our critical accounting estimates and assumptions are described below. In determining our critical accountingestimates, we consider trends, commitments, events or uncertainties that we reasonably expect materiallyto affect the methodology or assumptions, subject to the items identified in the Forward-looking Statementssection in this MD&A.

Goodwill impairment test

At each reporting date, the Company assesses its non-financial assets to determine whether thereare any indications of impairment. If any indication of impairment exists, an estimate of the asset’srecoverable amount is calculated. For impairment testing, non-financial assets that do not generateindependent cash flows are grouped together into a cash-generating unit (“CGU”), which representsthe lowest level at which largely independent cash flows are generated. Goodwill is allocated togroups of CGUs based on the level at which it is monitored for internal reporting purposes. Animpairment loss is recognized in net income to the extent that the carrying value of an asset, CGUor group of CGUs exceeds its estimated recoverable amount. The recoverable amount of an asset,CGU or group of CGUs is the greater of its value in use and its fair value less costs of disposal.Value in use is calculated as the present value of the estimated future cash flows discounted atappropriate discount rates.

There is a material degree of uncertainty with respect to the estimates of the recoverable amountsof the CGUs’ assets given the necessity of making key economic assumptions about the future. Thevalue-in-use calculation uses discounted cash flow projections that employ the following keyassumptions: future cash flows and growth projections, including economic risk assumptions andestimates of achieving key operating metrics and drivers; the future weighted average cost of capital;and earnings multiples. See Note 9 of the Financial Statements for further discussion of methodology.

Recognition of deferred tax assets

Deferred tax is recognized in respect of temporary differences between the carrying amounts ofassets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

Deferred tax assets are recognized for unused tax losses, unused tax credits and deductibletemporary differences, to the extent that it is probable that future taxable profits will be availableagainst which they can be used. Deferred tax assets are reviewed at each reporting date and arereduced to the extent that it is no longer probable that the related taxable benefit will be realized.Deferred tax is measured at the tax rates that are expected to apply to temporary differences whenthey reverse, using tax rates enacted or substantively enacted at the reporting date. To the extentthat future taxable income and the application of existing tax laws differ significantly from theCompany’s estimate, the ability of the Company to realize the deferred tax assets could be impacted.

Assumptions as to the timing of reversal of temporary differences include expectations about thefuture results of operations and cash flows. The composition of deferred tax assets and liabilities isreasonably likely to change from period to period because of changes in the estimation of thesesignificant uncertainties.

_________________________________________________________________________________________________________


Valuation of share-based payments

Compensation expense for Options is determined based on estimated fair values of all share-basedawards at the grant date, using the Black-Scholes option pricing model. The Black-Scholes optionpricing model utilizes subjective assumptions such as expected forfeiture rates, expected pricevolatility and the expected life of the Options. Changes in these input assumptions or in Management’sestimate of the number of awards which will ultimately vest may significantly affect the amount ofnon-cash share-based payments recorded. Compensation expense for RSUs is determined basedon the closing share price on the day prior to the RSU grant date. Total compensation expense foreach award is amortized over the vesting period, taking into consideration Management’s bestestimate of awards which are expected to vest. See Note 14 of the Financial Statements for furtherdiscussion of methodology.

Provisions

Warranties

A provision for warranties is recognized when the underlying products are sold. The amountrecognized is the best estimate of the costs to be incurred during the warranty period based onhistorical warranty data. Warranty expense is included in cost of sales.

Sales returns

The Company records an estimate of sales returns based on historical return information. Thehistorical estimate is reviewed and calculated throughout the year to ensure it reflects the mostrelevant data available. Sales returns are recorded as reductions of revenue.

NEW ACCOUNTING POLICIES

Change in inventory costing

Effective April 1, 2016, the Company changed is inventory costing methodology from first-in, first-out (“FIFO”)to weighted average cost (“WAC”). This change more accurately reflects the current value of inventory, whichprovides for a better matching of cost of sales to revenue. The effect on current and prior periods of changingthe inventory costing method from FIFO to WAC is not material.

Change in sales return provision

Effective April 1, 2016, the Company changed its sales return provision policy. Subsequent to that date, forall adjustments to revenue with respect to estimated future sales returns, the Company has made an offsettingadjustment to cost of sales to reflect the expected value of goods to be returned. The Company implementedthis change to more accurately reflect the impact on gross profit of estimated future sales returns. The changein the sales return provision policy does not have a material effect on current and prior periods.

_________________________________________________________________________________________________________


Change in presentation currency

Effective January 1, 2016, the Company changed its presentation currency from CAD to USD to better reflectthe Company’s business activities and to improve investors’ ability to compare the Company’s financialresults with other publicly traded industry participants.

In making the change in presentation currency, the Company followed the guidance set out in InternationalAccounting Standard (“IAS”) 21, The Effects of Changes in Foreign Exchange Rates. The cumulativetranslation reserves were set to nil at January 1, 2010, the date of transition to IFRS. The cumulative translationreserves and all comparative information have been restated to reflect the Company’s results as if they hadhistorically been reported in USD at that date.

New standards and interpretations not yet adopted

IFRS 9, Financial Instruments (“IFRS 9”)

IFRS 9 is effective for years commencing on or after January 1, 2018, and will replace IAS 39, FinancialInstruments: Recognition and Measurement. Under IFRS 9, financial assets and liabilities will be classifiedand measured based on the business model in which they are held and the characteristics of the associatedcontractual cash flows. IFRS 9 also includes a new general hedge accounting standard which will betteralign hedge accounting and risk management. The Company intends to adopt IFRS 9 in its FinancialStatements for the year commencing January 1, 2018. The extent of the impact of adopting IFRS 9 has notyet been determined.

IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)

IFRS 15 is effective for years commencing on or after January 1, 2018, and replaces IAS 11, ConstructionContracts; IAS 18, Revenue; International Financial Reporting Interpretations Committee (“IFRIC”) 13,Customer Loyalty Programmes; IFRIC 15, Agreements for the Construction of Real Estate; IFRIC 19, Transferof Assets from Customers; and Standing Interpretations Committee 31, Revenue-Barter TransactionsInvolving Advertising Services. The standard contains a single model that applies to contracts with customersand two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized.New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timingof revenue recognized. The Company intends to adopt IFRS 15 in its Financial Statements for the yearcommencing January 1, 2018. The extent of the impact of adopting IFRS 15 has not yet been determined.

IFRS 16, Leases (“IFRS 16”)

IFRS 16 is effective for years commencing on or after January 1, 2019, and replaces IAS 17, Leases. Thestandard provides a single lease accounting model, requiring lessees to recognize assets and liabilities foralmost all leases. The Company intends to adopt IFRS 16 in its Financial Statements for the year commencingJanuary 1, 2019. The extent of the impact of adopting IFRS 16 has not yet been determined.

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CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),Management evaluated the design and operation of the Company’s disclosure controls and procedures asat December 31, 2016. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosurecontrols and procedures as at December 31, 2016 were effective at providing reasonable assurance thatinformation required to be disclosed by the Company in reports filed under Canadian securities legislationis (i) recorded, processed, summarized and reported within the time periods specified in the Canadiansecurities legislation and (ii) accumulated and communicated to Management, including the CEO and CFO,as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reportingto provide reasonable assurance regarding the reliability of financial reporting and the preparation of FinancialStatements for external reporting purposes in accordance with IFRS.

Under the supervision of the CEO and CFO, Management evaluated the design and operation of theCompany’s internal control over financial reporting as at December 31, 2016 based on the Committee ofSponsoring Organizations of the Treadway Commission released Internal Control - Integrated Framework:2013. Based on that evaluation, the CEO and CFO concluded that the Company’s internal control overfinancial reporting was effective as at December 31, 2016. Because of the inherent limitations in a cost-effective control system, any control system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that it will prevent or detect all misstatements, due to error or fraud,from occurring in the Financial Statements.

Changes in Internal Controls over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the year endedDecember 31, 2016 that materially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

_________________________________________________________________________________________________________


MEASURING PERFORMANCE AGAINST 2016 GUIDANCE

On March 1, 2016, the Company issued guidance for the year ending December 31, 2016. A comparison ofthe Company’s actual results for the year ended December 31, 2016 against the guidance issued for suchyear is presented below:

Guidance issued on March 1, 2016Actual results for the year ended

December 31, 2016 Analysis

Revenue between $335 million and$365 million Revenue was $353.6 million Revenue was within guidance

Adjusted EBITDA Margin between 15%and 20% Adjusted EBITDA Margin was 15%

Adjusted EBITDA Margin was withinguidance

Diluted Adjusted EPS between $0.66and $0.88 Diluted Adjusted EPS was $0.61

Diluted Adjusted EPS was lower thanguidance as a result of the previouslydisclosed Pricing Adjustment

Effective tax rate between 28% and30%

Effective tax rate was 29% (to deriveAdjusted Earnings) Effective tax rate was within guidance

Capital expenditures between $30million and $35 million Capital expenditures were $26.9 million

Capital expenditures were lower thanguidance as a result of timingdifferences for capital costs incurredrelated to our new global headquarters

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Consolidated financial statements of

Avigilon CorporationFor the years ended December 31, 2016 and 2015

Table of contents

Independent auditor’s report ................................................................................................................................ 1

Consolidated statements of net income and comprehensive income (loss) ........................................................ 2

Consolidated statements of financial position...................................................................................................... 3

Consolidated statements of changes in equity .................................................................................................... 4

Consolidated statements of cash flows................................................................................................................ 5

Notes to the consolidated financial statements.................................................................................................... 6

Avigilon CorporationFor the years ended December 31, 2016 and 2015

February 28, 2017

Independent Auditor’s Report

To the Shareholders of Avigilon Corporation

We have audited the accompanying consolidated financial statements of Avigilon Corporation and itssubsidiaries, which comprise the consolidated statements of financial position as at December 31, 2016,December 31, 2015 and January 1, 2015 and the consolidated statements of net income and comprehensiveincome (loss), changes in equity, and cash flows for the years ended December 31, 2016 and December 31, 2015,and the related notes, which comprise a summary of significant accounting policies and other explanatoryinformation.

Management’s responsibility for the consolidated financial statementsManagement is responsible for the preparation and fair presentation of these consolidated financial statementsin accordance with International Financial Reporting Standards, and for such internal control as managementdetermines is necessary to enable the preparation of consolidated financial statements that are free from materialmisstatement, whether due to fraud or error.

Auditor’s responsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audits. Weconducted our audits in accordance with Canadian generally accepted auditing standards. Those standardsrequire that we comply with ethical requirements and plan and perform the audit to obtain reasonable assuranceabout whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in theconsolidated financial statements. The procedures selected depend on the auditor’s judgment, including theassessment of the risks of material misstatement of the consolidated financial statements, whether due to fraudor error. In making those risk assessments, the auditor considers internal control relevant to the entity’spreparation and fair presentation of the consolidated financial statements in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectivenessof the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies usedand the reasonableness of accounting estimates made by management, as well as evaluating the overallpresentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basisfor our audit opinion.

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the financial positionof Avigilon Corporation and its subsidiaries as at December 31, 2016, December 31, 2015 and January 1, 2015,and their financial performance and their cash flows for the years ended December 31, 2016 andDecember 31, 2015 in accordance with International Financial Reporting Standards.

signed “PricewaterhouseCoopers LLP”

Chartered Professional Accountants

PricewaterhouseCoopers LLP PricewaterhouseCoopers Place, 250 Howe Street, Suite 1400, Vancouver, British Columbia, Canada V6C 3S7T: +1 604 806 7000, F: +1 604 806 7806, www.pwc.com/ca

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

1

Years ended December 31,Note 2016 2015

Note 3(b)

Revenue 19(a) $ 353,622 $ 287,561Cost of sales 4 (169,652) (122,485)Gross profit 183,970 165,076Operating expenses 4

Sales and marketing 76,728 70,776Research and development 16,922 10,556General and administrative 49,206 42,312Amortization and depreciation 21,159 14,472

164,015 138,116

Operating income 19,955 26,960

Other (expense) incomeInterest on long-term debt (2,899) (1,786)Interest income 108 173Revaluation gain on contingent considerationreceivable 5(a) 1,924 —Foreign exchange (loss) gain (1,593) 5,468

(2,460) 3,855

Net income before income taxes 17,495 30,815

Income tax expense (recovery) 16Current (1,463) 7,756Deferred 11,768 1,028

10,305 8,784

Net income 7,190 22,031

Other comprehensive income (loss):Items that may subsequently be reclassified to

income (loss):Gain (loss) on translation 2(b) 8,345 (26,691)

Total comprehensive income (loss) $ 15,535 $ (4,660)

Earnings per share 15Basic $ 0.17 $ 0.49Diluted $ 0.16 $ 0.48

Weighted average number of common shares outstanding (000’s)Basic 43,433 45,396Diluted 44,391 46,162

The accompanying notes are an integral part of these consolidated financial statements.

Avigilon CorporationConsolidated statements of net income and comprehensive income (loss)(In thousands of United States dollars, except number of shares and per share amounts)

2

Note December 31, 2016 December 31, 2015 January 1, 2015Note 3(b) Note 3(b)

AssetsCurrent assets

Cash and cash equivalents $ 30,012 $ 18,608 $ 63,019Trade and other receivables 5 88,524 58,940 42,199Inventories 6 48,522 58,945 32,475Prepaid expenses 3,992 3,233 4,413

171,050 139,726 142,106Non-current assets

Property, plant and equipment 7 73,244 55,296 11,190Intangible assets 8 130,537 127,078 111,724Goodwill 9 14,682 14,682 14,682Deposits 754 566 644Deferred tax assets 16 5,276 9,728 7,972

Total assets $ 395,543 $ 347,076 $ 288,318

LiabilitiesCurrent liabilities

Trade and other payables 10 $ 45,842 $ 37,603 $ 26,426Provisions 11 2,576 2,398 1,429Short-term leasehold incentives 523 245 167Current portion of long-term debt 12 16,743 15,984 —

65,684 56,230 28,022Non-current liabilities

Deferred tax liabilities 16 9,019 2,465 324Long-term leasehold incentives 1,663 557 426Long-term debt 12 81,895 73,696 —

Total liabilities 158,261 132,948 28,772

EquityShare capital 13 214,384 210,926 222,204Equity compensation reserve 15,942 11,781 7,727Retained earnings 49,345 42,155 53,658Accumulated other comprehensive loss (42,389) (50,734) (24,043)Total equity 237,282 214,128 259,546Total equity and liabilities $ 395,543 $ 347,076 $ 288,318Commitments and contingencies - Note 18Subsequent event - Note 5


On behalf of the Board of Directors:

“Alexander Fernandes” “Fred Withers”Alexander Fernandes, Director Fred Withers, Director

Avigilon CorporationConsolidated statements of financial position(In thousands of United States dollars)

3

Share capitalEquity

compensationreserve

Retainedearnings

Accumulatedother

comprehensiveloss

Totalequity

Commonshares

outstanding Amount

Balance, January 1, 2015(Note 3(b)) 46,580,299 $ 222,204 $ 7,727 $ 53,658 $ (24,043) $ 259,546

Issuance of common shares fromexercise of stock options(Note 13) 418,645 3,425 (964) — — 2,461

Issuance of common shares fromvesting of restricted share units(Note 13) 22,409 407 (407) — — —

Share repurchases (Note 13) (3,789,700) (15,110) — (33,534) — (48,644)Share-based payments — — 5,425 — — 5,425Net income — — — 22,031 — 22,031Other comprehensive loss — — — — (26,691) (26,691)Balance, December 31, 2015

(Note 3(b)) 43,231,653 $ 210,926 $ 11,781 $ 42,155 $ (50,734) $ 214,128

Issuance of common shares fromexercise of stock options(Note 13) 220,000 1,420 (380) — — 1,040

Issuance of common shares fromvesting of restricted share units(Note 13) 145,711 2,038 (2,038) — — —

Share-based payments — — 6,579 — — 6,579Net income — — — 7,190 — 7,190Other comprehensive income — — — — 8,345 8,345

Balance, December 31, 2016 43,597,364 $ 214,384 $ 15,942 $ 49,345 $ (42,389) $ 237,282


Avigilon CorporationConsolidated statements of changes in equity(In thousands of United States dollars, except number of shares)

4

Years ended December 31,Note 2016 2015

Note 3(b)

Cash flows from (used in) operating activitiesNet income $ 7,190 $ 22,031Adjustments for:

Amortization 8 15,087 11,385Depreciation 7 7,976 4,279Leasehold incentives received, net of amortization 1,275 266Share-based payments 6,579 5,425Income tax expense 16 10,305 8,784Investment tax credits 16 (2,458) (1,823)Interest on long-term debt 2,899 1,786Unrealized foreign exchange loss 2,452 33Revaluation gain on contingent consideration receivable 5(a) (1,924) —Interest income (108) (173)

Cash from operations before changes in non-cash working capital 49,273 51,993Changes in non-cash working capital:

Trade and other receivables (28,758) (17,723)Inventories 15,517 (29,962)Prepaid expenses and deposits (753) 341Trade and other payables 10,568 (966)

Cash from operating activities 45,847 3,683Interest received 108 173Income taxes paid (3,004) (5,640)Net cash from (used in) operating activities 42,951 (1,784)

Cash flows used in investing activitiesAdditions to property, plant and equipment (19,486) (50,047)Additions to intangible assets (17,367) (29,932)

Net cash used in investing activities (36,853) (79,979)

Cash flows from (used in) financing activitiesProceeds from long-term debt 12 30,000 102,742Transaction costs on long-term debt 12 (343) (1,329)Interest paid on long-term debt 12 (3,754) (1,885)Repayment of long-term debt 12 (21,060) (12,045)Proceeds from stock options exercised 1,040 2,461Share repurchases 13 — (48,644)

Net cash from financing activities 5,883 41,300

Effect of foreign exchange rate changes on cash and cashequivalents (577) (3,948)

Net increase (decrease) in cash and cash equivalents 11,404 (44,411)Cash and cash equivalents, beginning of year 18,608 63,019Cash and cash equivalents, end of year $ 30,012 $ 18,608


Avigilon CorporationConsolidated statements of cash flows(In thousands of United States dollars)

5

1. Nature of operations

Avigilon Corporation (the “Company”) was incorporated under the Canada Business Corporations Act and providestrusted security solutions to the global market. The Company designs, develops, and manufactures video analytics,network video management software and hardware, surveillance cameras, and access control solutions. TheCompany’s solutions have been installed at thousands of customer sites, including banking centers, casinos, criticalinfrastructure, educational institutions, hospitals, government facilities, manufacturing facilities, petrochemical plants,ports of entry, public transport, retail shops, and stadiums.

The Company’s head office is located at 4th Floor - 858 Beatty Street, Vancouver, British Columbia, Canada V6B1C1. The Company’s registered office is located at Suite 2900 - 550 Burrard Street, Vancouver, British Columbia,Canada V6C 0A3.

Avigilon CorporationNotes to the consolidated financial statementsFor the years ended December 31, 2016 and 2015(In thousands of United States dollars, except with respect to per share amounts, number of shares, and as otherwise stated)

6

2. Basis of presentation

(a) Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial ReportingStandards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). They were authorized forissue by the Board of Directors on February 28, 2017. The consolidated financial statements have been preparedunder the historical cost convention, except for derivative contracts and contingent consideration receivable whichare measured at fair value.

(b) Change in functional currency

Effective April 1, 2016, the Company changed its functional currency from Canadian dollars (“CAD”) to United States(“US”) dollars (“USD”). The Company applied the change in functional currency on a prospective basis. This changereflects the Company’s financing and operating activities, which are now primarily carried out in USD as a result ofincreased sales denominated in USD, the ramping up of the Company’s US manufacturing facility and USD drawson the Credit Facility (as defined in Note 12). As a result, the Company’s functional currency is now the same as itspresentation currency, which is discussed in more detail under Note 3(b).

(c) Judgments and estimates

In preparing these consolidated financial statements, management has made judgments, estimates and assumptionsthat affect the application of the Company’s accounting policies and the reported amounts of assets, liabilities, incomeand expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewedon an ongoing basis. Revisions to estimates are made prospectively.

Judgments

Information about judgments made in applying accounting policies that have the most significant effects on theamounts recognized in the consolidated financial statements are included in the following notes:

• Note 3(b) - determination of functional currency

• Note 3(e) - capitalization of development costs

• Note 3(o) - capitalization of investment tax credits (“ITCs”)

• Note 3(u) - identification of qualifying assets for capitalization of borrowing costs

• Note 9 - goodwill impairment test: judgment used in identifying cash-generating units (“CGUs”)

2. Basis of presentation (continued)

(c) Judgments and estimates (continued)

Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a materialadjustment to the consolidated financial statements are included in the following notes:

• Notes 3(c) - fair values of assets and liabilities acquired in business combinations

• Notes 3(n) and 16 - recognition of deferred tax assets: availability of future taxable profit against which carry- forward tax losses can be used and application of income tax legislation when operating in multiple taxjurisdictions

• Notes 3(p) and 14 - share-based payment transactions

• Note 3(q) - provisions

• Note 3(r) - recognition of revenue allocable to post-sale technical support

• Note 9 - goodwill impairment test: key assumptions underlying recoverable amounts


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3. Significant accounting policies

(a) Basis of consolidation

The Company consolidates subsidiaries controlled by the Company. The Company controls an entity when theCompany is exposed to, or has rights to, variable returns through its power over the entity. All intercompany balancesand transactions have been eliminated on consolidation. The Company has the following seven material directly orindirectly wholly-owned subsidiaries:

Name Place of IncorporationAvigilon USA Corporation Delaware, United StatesAVO USA Holding 1 Corporation Delaware, United StatesAvigilon Technologies Corporation, formerly Avigilon Patent Licensing Corporation,and formerly “9051112 Canada Inc.” CanadaAvigilon Patent Holding 1 Corporation, formerly “9051147 Canada Inc.” CanadaAvigilon Fortress Corporation, formerly “9099590 Canada Inc.” CanadaAvigilon Analytics Corporation, formerly Avigilon Patent Holding 2 Corporation, andformerly “9423664 Canada Inc.” Canada555 Robson Operating Ltd. British Columbia, Canada

(b) Foreign currency

Effective January 1, 2016, the Company changed its presentation currency from CAD to USD to better reflect theCompany’s business activities and to improve investors’ ability to compare the Company’s financial results with otherpublicly traded industry participants.

3. Significant accounting policies (continued)

(b) Foreign currency (continued)

In making the change in presentation currency, the Company followed the guidance set out in International AccountingStandard (“IAS”) 21, The Effects of Changes in Foreign Exchange Rates. The cumulative translation reserves wereset to nil at January 1, 2010, the date of transition to IFRS. The cumulative translation reserves and all comparativeinformation have been restated to reflect the Company’s results as if they had been historically reported in USD atthat date.

Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of the Company’s subsidiariesat exchange rates at the dates of the transactions. Management uses judgment in determining the primary economicenvironment in which a subsidiary operates in assessing a subsidiary’s functional currency.

Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at theexchange rates in effect at the reporting date. Non-monetary assets and liabilities that are measured at fair valuein a foreign currency are translated to the functional currency at the exchange rate in effect when the fair value wasdetermined. Foreign currency differences are generally recognized in net income. Non-monetary items that aremeasured based on historical cost in a foreign currency are translated to the functional currency using the exchangerate in effect at the date of the transaction giving rise to the item.

Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition,are translated into USD at the exchange rates at the reporting date. The income and expenses of foreign operationsare translated into USD at the monthly average exchange rates.

Foreign currency differences are recognized in other comprehensive income and accumulated in the translationreserve. When a foreign operation is disposed of in its entirety or partially, such that control, significant influence orjoint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassifiedto net income as part of the gain or loss on disposal.

The Company used the following exchange rates:

Year-end exchange rate as at Average for the years endedDecember 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015

Canadian dollars 1.34 1.39 1.33 1.28British Pound Sterling 0.81 0.67 0.74 0.65Euros 0.95 0.91 0.90 0.90

(c) Business combinations

The Company accounts for business combinations using the acquisition method when control is transferred to theCompany. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiablenet assets acquired. The fair value of net assets acquired is determined using valuation techniques that requireestimation of replacement costs, future net cash flows and discount rates. Any goodwill that arises is tested annuallyfor impairment. Transaction costs are expensed as incurred, except if related to the issuance of debt or equitysecurities.


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(d) Property, plant and equipment

Items of property, plant and equipment are measured at cost less accumulated depreciation. Depreciation is generallycalculated on a straight-line basis to amortize the cost of property, plant and equipment less their estimated residualvalues over their useful lives. Assets under construction are not amortized until they are ready for their intendeduse.

The estimated useful lives of property, plant and equipment are as follows:

Building 40 yearsManufacturing & tooling equipment 3 to 8 yearsLeasehold improvements Term of the leaseFurniture & equipment 8 yearsSales & demonstration equipment 3 yearsComputer equipment 3 years

Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted ifappropriate.

(e) Intangible assets

Intangible assets with finite lives consist of acquired and internally developed computer software, technology,capitalized development, and intellectual property. Intangible assets with finite lives are amortized on a straight-linebasis over their estimated useful lives and are measured at cost less accumulated amortization. Intangible assetswith finite lives are amortized over the following periods:

Computer software 2 to 10 yearsTechnology 10 yearsCapitalized development 3 to 5 yearsIntellectual property 12 to 16 years

Amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted ifappropriate.

Capitalization of development costs

Expenditures on research activities and non-capitalized patent-related costs are expensed in research anddevelopment expenses as incurred. Development expenditure is capitalized only if the expenditure can be measuredreliably, the product or process is technically and commercially feasible, future economic benefits are probable, andthe Company intends to and has sufficient resources to complete development and to use or sell the asset. Judgmentis required in determining the technical and commercial feasibility and in assessing the probability of future economicbenefits. Amortization related to capitalized development costs is classified within amortization and depreciationunder operating expenses.

Costs associated with certain patent applications are capitalized within capitalized development and amortized overthe respective legal life of each patent.


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(f) Goodwill

Goodwill is not amortized and is tested for impairment annually or whenever there is an indication of impairment.Goodwill is measured at cost less accumulated impairment losses.

(g) Impairment of non-financial assets

At each reporting date, the Company assesses its non-financial assets to determine whether there are any indicationsof impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated.

For impairment testing, non-financial assets that do not generate independent cash flows are grouped together intoa CGU, which represents the lowest level at which largely independent cash flows are generated. Goodwill is allocatedto groups of CGUs based on the level at which it is monitored for internal reporting purposes.

An impairment loss is recognized in net income to the extent that the carrying value of an asset, CGU or group ofCGUs exceeds its estimated recoverable amount. The recoverable amount of an asset, CGU or group of CGUs isthe greater of its value in use and its fair value less costs of disposal. Value in use is calculated as the present valueof the estimated future cash flows discounted at appropriate discount rates.

(h) Financial instruments

Financial instruments comprise cash and cash equivalents, deposits, trade and other receivables, trade and otherpayables (with the exception of deferred revenue) and long-term debt. Financial instruments are recognized whenthe Company becomes a party to the contractual provision of the instrument. Financial assets and liabilities arederecognized when rights to receive or obligations to pay cash flows from assets or liabilities have expired or aretransferred and the Company has transferred substantially all risks and rewards of ownership.

Cash and cash equivalents, deposits, and trade and other receivables are designated as loans and receivables andare initially measured at fair value and subsequently at amortized cost using the effective interest rate method. Long-term debt and trade and other payables (with the exception of deferred revenue) are designated as financial liabilitiesat amortized cost and are recognized initially at fair value and subsequently at amortized cost using the effectiveinterest rate method. Transaction costs are netted against the carrying value of the long-term debt and subsequentlyamortized over the expected life of the long-term debt. Interest expense on borrowings and standby fees are includedin interest on long-term debt and expensed in net income in the period in which they are incurred.

Derivative contracts are categorized as financial assets and liabilities carried at fair value through net income, andhave not been designated in hedge accounting relationships. Derivative contracts are included in current assetsand current liabilities, except for those with maturities greater than 12 months after the end of the reporting period,which are classified as non-current assets and liabilities.

There are no financial instruments classified as available-for-sale or held-to-maturity.

(i) Impairment of financial assets

Financial assets not classified at fair value through net income are assessed at each reporting date to determinewhether there is objective evidence of impairment.


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(i) Impairment of financial assets (continued)

Financial assets measured at amortized cost

The Company considers evidence of impairment for these assets at both an individual asset and a collective level.All individually significant assets are individually assessed for impairment. Those found not to be impaired are thencollectively assessed for any impairment that has been incurred but not yet individually identified. Assets that arenot individually significant are collectively assessed for impairment. Collective assessment is carried out by groupingtogether assets with similar risk characteristics.

In assessing collective impairment, the Company uses historical information on the timing of recoveries and theamount of losses incurred, and makes an adjustment if current economic and credit conditions are such that theactual losses are likely to be greater or less than suggested by historical trends.

An impairment loss is calculated as the difference between an asset’s carrying amount and the present value of theestimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in netincome and reflected in an allowance account. When the Company considers that there are no realistic prospectsof recovery of the asset, the relevant amounts are written off. If the amount of impairment loss subsequently decreasesand the decrease can be related objectively to an event occurring after the impairment was recognized, then thepreviously recognized impairment loss is reversed through net income.

(j) Inventories

Effective April 1, 2016, the Company changed its inventory costing methodology from first-in, first-out (“FIFO”) toweighted average cost (“WAC”). This change more accurately reflects the current value of inventory, which providesfor a better matching of cost of sales to revenue. The effect on current and prior periods of changing the inventorycosting method from FIFO to WAC is not material.

Inventories are valued at the lower of cost and net realizable value. Cost is determined on a WAC basis and includesall costs of purchase, costs of conversion (direct costs and an appropriate share of production overheads, basedon normal operating capacity) and other costs incurred in bringing the inventory to its present location and condition.

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs to completethe sale for finished goods and replacement cost for raw materials. The amount of any write-down of inventories tonet realizable value and all losses of inventories are recognized as an expense in the period the write-down or lossoccurs.

(k) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and deposits in banks with maturities of three months or lessfrom the acquisition date.

(l) Share capital

Incremental costs directly attributable to the issue of common shares, net of any tax effects, are recognized as adeduction from equity.


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(m) Earnings per share

Basic earnings per share is computed by dividing net income by the weighted average number of common sharesoutstanding during the period. Diluted earnings per share is determined by adjusting the weighted average numberof common shares outstanding for the effects of all potential dilutive ordinary common shares, which compriseincentive stock options (“Options”) and restricted share units (“RSUs”) granted to employees and Directors of theCompany.

(n) Income tax

Income tax expense comprises current and deferred tax. It is recognized in net income except to the extent that itrelates to a business combination, or items recognized directly in equity or in other comprehensive income.

Current tax

Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and anyadjustment to tax payable or receivable in respect of previous years. It is measured using tax rates enacted orsubstantively enacted at the reporting date.

Deferred tax

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for taxation purposes.

Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences,to the extent that it is probable that future taxable profits will be available against which they can be used. Deferredtax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that therelated taxable benefit will be realized. Deferred tax is measured at the tax rates that are expected to apply totemporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. Tothe extent that future taxable income and the application of existing tax laws differ significantly from the Company’sestimate, the ability of the Company to realize the deferred tax assets could be impacted.

With operations in various countries, the Company is subject to income taxes in multiple jurisdictions around theworld. Judgment is required in the application of income tax legislation. These estimates and judgments are subjectto risk and uncertainty, and could result in an adjustment to the current and/or deferred tax provision with acorresponding credit or charge to net income.

(o) Investment tax credits

The Company is entitled to certain Canadian federal and provincial tax incentives for qualified scientific researchand experimental development activities (“SRED”), US federal tax incentives for increasing research activities, andUS state research and development tax credits. These ITCs are available to the Company to reduce actual incometaxes payable. Any credits that are not used in the year in which they are earned are recorded as a deferred incometax asset when it is probable that such credits will be utilized. The utilization is dependent upon the generation offuture taxable income. Management assesses the probability of usage based upon forecast results.

ITCs that relate to the development of capitalized development assets are recorded as a reduction of the cost ofthe related asset. All other ITCs are recorded as a reduction of current period research and development expenses.Management uses judgment in allocating ITCs between capitalized and non-capitalized development projects.


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(p) Employee benefits

Share-based payment transactions

The grant date fair value of equity-settled share-based payment awards granted to employees is generally recognizedas an expense, with a corresponding increase in equity, over the vesting period of the awards. The amount recognizedas an expense is adjusted to reflect the number of awards for which the related service and non-market performanceconditions are expected to be met, such that the amount ultimately recognized is based on the number of awardsthat meet the related service and non-market performance conditions at the vesting date.

Compensation expense for Options is determined based on estimated fair values of all share-based awards at thegrant date, using the Black-Scholes option pricing model. The Black-Scholes option pricing model utilizes subjectiveassumptions such as expected forfeiture rates, expected price volatility and the expected life of the Options. Changesin these input assumptions or in management’s estimate of the number of awards which will ultimately vest maysignificantly affect the amount of non-cash share-based payments recorded. Compensation expense for RSUs isdetermined based on the closing share price on the day prior to the RSU grant date. Total compensation expensefor each award is amortized over the vesting period, taking into consideration management’s best estimate of awardswhich are expected to vest.

Termination benefits

Termination benefits are expensed at the earlier of when the Company can no longer withdraw the offer of thosebenefits and when the Company recognizes costs for a restructuring. If benefits are not expected to be settled whollywithin 12 months of the end of the reporting period, then they are discounted.

(q) Provisions

Warranties

A provision for warranties is recognized when the underlying products are sold. The amount recognized is the bestestimate of the costs to be incurred during the warranty period based on historical warranty data. Warranty expenseis included in cost of sales.

Sales returns

The Company records an estimate of sales returns based on historical return information. The historical estimateis reviewed and calculated throughout the year to ensure it reflects the most relevant data available. Sales returnsare recorded as reductions of revenue.

Effective April 1, 2016, for all adjustments to revenue with respect to estimated future sales returns, the Companyhas made an offsetting adjustment to cost of sales to reflect the expected value of goods to be returned. The Companyimplemented this change to more accurately reflect the impact on gross profit of estimated future sales returns. Thechange in the sales return provision policy does not have a material effect on current and prior periods.

(r) Revenue recognition

Sale of goods

Revenue is recognized when the significant risks and rewards of ownership have been transferred to the customer,recovery of consideration is probable, the associated costs and possible return of goods can be estimated reliably,there is no continuing managerial involvement with the goods, and the amount of revenue can be measured reliably.Revenue is measured net of returns and trade discounts.


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(r) Revenue recognition (continued)

The timing of the transfer of risks and rewards varies depending on the individual terms of the sales agreement. Forsales of hardware, the transfer occurs upon shipment of hardware to the customer. Software license revenues arerecognized upon delivery of the software product key to the customer, as the software product key allows the customerto activate the software.

License revenue

License revenue is earned from licensing certain patents from the Company’s patent portfolio to other video cameramanufacturers and software companies. License revenue is recognized based on the nature of the agreement.License agreements may contain one or more of the following elements: i) fixed, non-refundable fee allowing thelicensee to utilize the patent over the term of the agreement (“Fixed Fee License Revenue”); (ii) license fee basedon the number of products sold by the licensee (“Per Product License Revenue”). Revenue from Fixed Fee LicenseRevenue is recognized when the patent license agreement establishing the Fixed Fee License Revenue has beensigned and the consideration is collected. Revenue from Per Product License Revenue is recognized on an accrualbasis based on sales reports for licensed products received from the licensee.

Multiple-element arrangements

Arrangements may comprise multiple product and service elements. The Company's multiple-element salesarrangements include arrangements where hardware with embedded software licenses is sold and post-saletechnical support is provided.

The hardware and software function together to deliver the tangible product’s functionality and revenue is recognizedwhen the criteria above are met. Revenue allocable to post-sale technical support is recognized over management’sbest estimate of the period during which services are performed. Deferred revenue associated with post-sale technicalsupport is presented within trade and other payables.

(s) Cost of sales

Cost of sales includes personnel and material costs related to the sale of goods as described in Note 3(r). In addition,cost of sales includes a portion of depreciation expense relating to manufacturing property, plant and equipmentcalculated based on standard manufacturing overhead rates.

(t) Leases

Leases are classified as either finance or operating leases based on the risks and rewards of ownership of theunderlying assets. Where the contracts are classified as operating leases, payments for operating leases arerecognized in net income in the period they are incurred. A lease is classified as a finance lease if it transferssubstantially all of the risks and rewards of ownership of the leased asset. The asset and liability associated with afinance lease are recorded at the lower of fair value and the present value of the minimum lease payments. Leasepayments are apportioned between interest expense and repayments of the liability.

(u) Borrowing costs

General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifyingassets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale,are added to the cost of those assets, until such time as the assets are substantially ready for their intended use orsale.


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(u) Borrowing costs (continued)

Non-capitalized borrowing costs are expensed in net income in the period in which they are incurred.

(v) Adoption of new accounting standards

New standards and interpretations not yet adopted

IFRS 9, Financial Instruments (“IFRS 9”)

IFRS 9 is effective for years commencing on or after January 1, 2018, and will replace IAS 39, Financial Instruments:Recognition and Measurement. Under IFRS 9, financial assets and liabilities will be classified and measured basedon the business model in which they are held and the characteristics of the associated contractual cash flows. IFRS9 also includes a new general hedge accounting standard which will better align hedge accounting and riskmanagement. The Company intends to adopt IFRS 9 in its consolidated financial statements for the year commencingJanuary 1, 2018. The extent of the impact of adopting IFRS 9 has not yet been determined.

IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)

IFRS 15 is effective for years commencing on or after January 1, 2018, and replaces IAS 11, Construction Contracts;IAS 18, Revenue; International Financial Reporting Interpretations Committee (“IFRIC”) 13, Customer LoyaltyProgrammes; IFRIC 15, Agreements for the Construction of Real Estate; IFRIC 18, Transfer of Assets fromCustomers; and Standing Interpretations Committee 31, Revenue - Barter Transactions Involving AdvertisingServices. The standard contains a single model that applies to contracts with customers and two approaches torecognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis oftransactions to determine whether, how much and when revenue is recognized. New estimates and judgmentalthresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The Companyintends to adopt IFRS 15 in its consolidated financial statements for the year commencing January 1, 2018. Theextent of the impact of adopting IFRS 15 has not yet been determined.

IFRS 16, Leases (“IFRS 16”)

IFRS 16 is effective for years commencing on or after January 1, 2019, and replaces IAS 17, Leases. The standardprovides a single lease accounting model, requiring lessees to recognize assets and liabilities for almost all leases.The Company intends to adopt IFRS 16 in its consolidated financial statements for the year commencing January1, 2019. The extent of the impact of adopting IFRS 16 has not yet been determined.


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4. Expenses by nature

The expenses presented below represent total cost of sales, sales and marketing, research and development,general and administrative expenses, and amortization and depreciation.


Materials consumed $ 136,585 $ 94,988Salaries and benefits 111,829 95,986Amortization and depreciation 23,063 15,664Professional services, insurance and filing costs 14,890 11,863Office, administrative and other costs 15,368 10,927Travel and related costs 13,436 13,333Rent, telecommunication, IT and related costs 12,942 10,281Marketing, advertising and related costs 5,554 7,559

$ 333,667 $ 260,601


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5. Trade and other receivables


Trade receivables $ 73,679 $ 54,025Taxes receivable 12,086 4,590Contingent consideration receivable (a) 1,924 —Other receivables 835 325

$ 88,524 $ 58,940

(a) Contingent consideration receivable

Pursuant to the acquisition by the Company of ObjectVideo, Inc.’s (“ObjectVideo”) patent portfolio and licensingprogram on December 17, 2014 (the “Acquisition”), the shareholders of ObjectVideo agreed to pay the Company50% of the proceeds, net of transaction costs, on any sale of any portion of the remainder of ObjectVideo’s business,if such a sale were to take place within five years of the date of the Acquisition. This contingent considerationreceivable was accounted for as a financial asset at fair value through net income. At the date of the Acquisition,the Company determined that the probability that a sale of ObjectVideo’s remaining business would take place waslow and therefore no value was assigned to the contingent consideration receivable.

On December 29, 2016, ObjectVideo agreed to pay $1,924 to the Company, subject to adjustment for certaintransaction costs and escrow claims, pursuant to the contingent consideration requirement of the Acquisitionagreement, and therefore the Company recorded a corresponding revaluation gain on the contingent considerationreceivable.

The fair value of the contingent consideration receivable is estimated as the discounted future cash flows thatObjectVideo has agreed to pay to the Company. The Company received $1,174 of the contingent considerationreceivable on January 4, 2017 and the remaining amount of $750 of the contingent consideration receivable is beingheld in escrow by a third party until January 1, 2018. Management estimates that the full amount agreed to byObjectVideo will be received. However, the final amount due to the Company is subject to change based on certaintransaction costs and escrow claims.

6. Inventories


Raw materials, work in progress $ 32,256 $ 42,037Finished goods 16,266 16,908

$ 48,522 $ 58,945

During the year ended December 31, 2016, raw materials, changes in work in progress and finished goods includedin cost of sales amounted to $162,836 (2015 - $115,580).

During the year ended December 31, 2016, the write-down of inventories to net realizable value amounted to $932(2015 - $225). There were no reversals of previously recorded write-downs in 2016 or 2015. Write-downs andreversals are included in cost of sales.


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7. Property, plant and equipment

The Company’s property, plant and equipment gross carrying amounts and accumulated depreciation were asfollows:

Land Building

Manufacturing& tooling

equipmentLeasehold

improvementsFurniture &equipment

Sales &demonstration

equipmentComputer

equipment TotalCost

Balance, January 1, 2015 $ — $ 570 $ 3,653 $ 3,652 $ 2,463 $ 4,067 $ 3,049 $ 17,454

Additions 13,466 — 3,644 4,049 919 2,553 2,692 27,323

Construction in progress — 19,687 529 3,559 2 — 78 23,855Effect of movements in

exchange rates (503) (830) (617) (562) (382) (373) (616) (3,883)

Balance, December 31, 2015 12,963 19,427 7,209 10,698 3,002 6,247 5,203 64,749

Additions — — 544 1,341 729 2,424 2,944 7,982Construction in progress — 14,271 71 — 193 — 430 14,965Effect of movements in

exchange rates 891 1,357 260 313 141 139 399 3,500

Balance, December 31, 2016 $ 13,854 $ 35,055 $ 8,084 $ 12,352 $ 4,065 $ 8,810 $ 8,976 $ 91,196

Accumulated depreciation

Balance, January 1, 2015 $ — $ — $ (1,147) $ (1,431) $ (736) $ (1,662) $ (1,288) $ (6,264)

Depreciation expense — — (711) (539) (326) (1,607) (1,096) (4,279)Effect of movements in

exchange rates — — 220 224 125 244 277 1,090

Balance, December 31, 2015 — — (1,638) (1,746) (937) (3,025) (2,107) (9,453)

Depreciation expense — — (1,106) (1,578) (798) (2,251) (2,243) (7,976)Effect of movements in

exchange rates — — (100) (96) (68) (108) (151) (523)

Balance, December 31, 2016 $ — $ — $ (2,844) $ (3,420) $ (1,803) $ (5,384) $ (4,501) $ (17,952)

Carrying amounts

December 31, 2015 $ 12,963 $ 19,427 $ 5,571 $ 8,952 $ 2,065 $ 3,222 $ 3,096 $ 55,296

December 31, 2016 13,854 35,055 5,240 8,932 2,262 3,426 4,475 73,244

During the year ended December 31, 2016, depreciation allocated to cost of sales was $1,904 (2015 - $1,192).During the year ended December 31, 2016, the Company capitalized $939 (2015 - $110) of interest associated withcosts incurred on qualifying property, plant and equipment. The Company used an annualized capitalization rate of4.45% (2015 - 3.55%) for the capitalization of general borrowing costs.


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8. Intangible assets

The Company’s intangible asset gross carrying amounts and accumulated amortization were as follows:

Computersoftware Technology

Capitalizeddevelopment

Intellectualproperty Total

Cost

Balance, January 1, 2015 $ 1,739 $ 27,894 $ 6,392 $ 80,547 $ 116,572

Additions 8,944 — 11,338 10,693 30,975

Effect of movements in exchange rates (889) — (2,038) (1,737) (4,664)

Balance, December 31, 2015 9,794 27,894 15,692 89,503 142,883

Additions 3,936 — 11,986 — 15,922Effect of movements in exchange rates 834 192 1,231 883 3,140

Balance, December 31, 2016 $ 14,564 $ 28,086 $ 28,909 $ 90,386 $ 161,945

Accumulated amortization

Balance, January 1, 2015 $ (800) $ (3,717) $ (331) $ — $ (4,848)

Amortization expense (569) (2,798) (1,765) (6,253) (11,385)

Effect of movements in exchange rates 165 9 177 77 428

Balance, December 31, 2015 (1,204) (6,506) (1,919) (6,176) (15,805)

Amortization expense (1,521) (2,833) (4,645) (6,088) (15,087)Effect of movements in exchange rates (83) (184) (176) (73) (516)

Balance, December 31, 2016 $ (2,808) $ (9,523) $ (6,740) $ (12,337) $ (31,408)

Carrying amounts

December 31, 2015 $ 8,590 $ 21,388 $ 13,773 $ 83,327 $ 127,078

December 31, 2016 11,756 18,563 22,169 78,049 130,537

During the year ended December 31, 2016, the Company capitalized $372 (2015 - $302) of interest associated withcosts incurred on qualifying computer software and capitalized development, using an annualized capitalization rateof 4.45% (2015 - 3.55%) of eligible expenditures.


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9. Goodwill

The Company performs a goodwill impairment test annually and when circumstances indicate that the carrying valuemay not be recoverable.

For the purposes of impairment testing, goodwill acquired through business combinations has been allocated to asingle CGU. The recoverable amount of the CGU was based on value in use, determined by discounting the futurecash flows to be generated from the continuing use of the CGU. The cash flows were projected over a 5-year periodbased on past experience and actual operating results.

The Company performed its annual goodwill impairment test on November 30, 2016 and no impairment was indicatedfor the period tested. Based on management’s assessments of events during the 31-day period subsequent toNovember 30, 2016, there were no indications of goodwill impairment as at December 31, 2016.

The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to thekey assumptions represented management’s assessment of future trends in the relevant industries, and were basedon historical data from both internal and external sources.

2016 2015

Weighted average cost of capital 10.0% 10.0%Terminal value growth rate 2.0% 2.0%

The terminal value growth rate was determined based on management’s estimates of future inflation and economicgrowth, consistent with assumptions made by market participants.


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10. Trade and other payables


Trade payables $ 24,355 $ 21,038Accrued expenses 11,763 8,835Employee related payables 7,979 6,794Deferred revenue 554 463Foreign exchange contracts — 370Taxes payable 1,191 103

$ 45,842 $ 37,603

Information about the Company’s exposure to currency and liquidity risk is included in Note 21.


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11. Provisions

Warranties Sales returns TotalNote 3(q)

Balance, January 1, 2015 $ 1,159 $ 270 $ 1,429Provisions made during the year 1,662 5,822 7,484Provisions used during the year (1,475) (5,040) (6,515)

Balance, December 31, 2015 1,346 1,052 2,398

Provisions made during the year 1,858 4,165 6,023Provisions used during the year (1,525) (4,320) (5,845)

Balance, December 31, 2016 $ 1,679 $ 897 $ 2,576

Current $ 1,679 $ 897 $ 2,576Non-current — — —

$ 1,679 $ 897 $ 2,576

(a) Warranties

The provision for warranties relates to products sold during the past three years. The provision has been estimatedbased on historical warranty data associated with similar products. The Company expects to settle the majority ofthe liability within the next year.

(b) Sales returns

The provision for sales returns relates to products sold during the year. The provision has been estimated based onhistorical returns. The Company expects to settle the majority of the liability within the next year.

12. Long-term debt

Prior to April 7, 2015, the Company had available a credit facility (the “Previous Credit Facility”) from a Canadianchartered bank, which was secured by a general security agreement providing a first charge over all of the Company’sassets. The Previous Credit Facility included a CAD$12,000 revolving demand loan (the “Operating Loan”) that boreinterest at the bank’s prime rate plus 0.5% per annum for CAD funds and US Base Rate plus 0.5% per annum forUSD funds. The Previous Credit Facility also included a CAD$10,000 demand revolving line (the “Foreign ExchangeLoan”) to allow the Company to purchase foreign exchange contracts up to an aggregate notional value of CAD$31,250 with a maximum maturity of 12 months, in order to hedge against currency fluctuations in the Company’soperations. As at April 7, 2015, no amount was drawn on either the Operating Loan or the Foreign Exchange Loan.

On April 7, 2015, the Company entered into a new multi-tranche $200,000 senior secured syndicated credit facility(the “Credit Facility”). On November 13, 2015, the Company increased the funds available under the revolving lineof the Credit Facility (the “Revolver”) by $40,000, thereby increasing the total amount of the Credit Facility to $240,000.On July 18, 2016, the Company amended the Credit Facility to, among other things, extend the maturity date of theCredit Facility from April 7, 2018 to April 7, 2019. At December 31, 2016, the funds available under the Credit Facility,prior to any draws, consisted of the following:

Revolving acquisition facility (“Acquisition Facility”) $ 100,000Revolver 100,000Real estate term loan (“Real Estate Loan”) 40,000

Under the Credit Facility, advances under the Acquisition Facility and the Revolver are available in USD as US BaseRate advances or LIBOR advances, or in the CAD equivalent as Canadian Prime Rate advances or Bankers’Acceptances. Advances under the Real Estate Loan are available in USD as US Base Rate advances or LIBORadvances. An additional margin of 0.75% - 3.25% is applied to the interest rate based on the Company’s leverageratio as defined in the Credit Facility.

For the year ended December 31, 2016, advances under the Acquisition Facility, Real Estate Loan, and Revolverbore interest at LIBOR plus a margin of between 2.25% and 2.50% (2015 - between 2.25% and 2.50%).


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12. Long-term debt (continued)


Acquisition FacilityCurrent portion $ 16,060 $ 16,060Non-current portion 36,135 52,195

Total Acquisition Facility 52,195 68,255

Real Estate LoanCurrent portion $ 1,124 $ 375Non-current portion 21,318 22,067

Total Real Estate Loan 22,442 22,442

RevolverNon-current portion $ 25,000 $ —

Total Revolver 25,000 —

Unamortized deferred transaction costsCurrent portion $ 441 $ 451Non-current portion 558 566

Total unamortized deferred transaction costs 999 1,017

Long-term debt, net of unamortized deferred transaction costsCurrent portion $ 16,743 $ 15,984Non-current portion 81,895 73,696

Total long-term debt $ 98,638 $ 89,680

The obligations of the Company under the Credit Facility are guaranteed by certain of the Company’s subsidiaries.All debts, liabilities and obligations of the Company under the Credit Facility are being secured by a first-rankingsecurity interest over all present and future assets, property and undertakings of the Company and its subsidiaries.

As at December 31, 2016, the Company was in compliance with the financial covenants of the Credit Facility, whichconsist of a leverage ratio and fixed charge coverage ratio as defined in the Credit Facility. Subject to the leverageratio, the Company may be required to make certain mandatory repayments in the future. As at December 31, 2016,the Company was also in compliance with the restrictive covenants of the Credit Facility.

Aggregate minimum payments for each of the next five years ending December 31 for the Acquisition Facility areas follows:

2017 $ 16,0602018 16,0602019 16,0602020 4,0152021 —

The Company is required to make quarterly principal installments on the Acquisition Facility equal to 5% of theprincipal amount of each draw.


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12. Long-term debt (continued)

Aggregate minimum payments for each of the next five years ending December 31 for the Real Estate Loan are asfollows:

2017 $ 1,1242018 1,4962019 1,4962020 1,4962021 1,496Thereafter 15,334

The Company is required to make quarterly principal installments on the Real Estate Loan equal to 1.67% of theprincipal amount of each draw.

There are no minimum payments for the Revolver. The full amount of the Revolver is due on maturity.

The Company may also make optional repayments on the Acquisition Facility, the Real Estate Loan, and the Revolverat any time without penalty. As of December 31, 2016, the Credit Facility maturity date was April 7, 2019 and theamount undrawn on the Credit Facility was $140,363.


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13. Share capital

(a) Authorized share capital

The Company’s authorized share capital consists of an unlimited number of common shares with no par value.

(b) Issued share capital

As at December 31, 2016, issued share capital comprised 43,597,364 common shares (December 31, 2015 -43,231,653).

During the year ended December 31, 2016, 220,000 (2015 - 418,645) Options were exercised at a weighted averageprice of CAD$6.24 (2015 - CAD$7.50) per Option, which resulted in the issuance of 220,000 (2015 - 418,645)common shares and the transfer of $380 (2015 - $964) from the equity compensation reserve to share capital.

During the year ended December 31, 2016, 145,711 (2015 - 22,409) RSUs vested, which resulted in the issuanceof 145,711 (2015 - 22,409) common shares and the transfer of $2,038 (2015 - $407) from the equity compensationreserve to share capital.

On May 8, 2015, the Company announced a normal course issuer bid (the “NCIB”), under which the Company wasauthorized to purchase up to 3,789,740 of its outstanding common shares on the open market, representingapproximately 10% of the Company’s public float as of May 5, 2015. Purchases of common shares under the NCIBcommenced on May 12, 2015 and concluded on November 2, 2015, at which time the Company had completed thepurchase of 3,789,700 common shares for an aggregate price of $48,644 (CAD$61,048) (which equals an averageprice of $12.84 (CAD$16.11) per common share). All such 3,789,700 common shares were returned to treasury andcancelled during the year ended December 31, 2015.


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14. Share-based payment transactions

The Company has adopted an incentive security plan (the “Incentive Plan”) which was approved by the Company’sshareholders on June 26, 2014. The Incentive Plan permits the granting of equity-based awards, including Optionsand RSUs, to Directors, officers, employees and consultants of the Company. The maximum number of commonshares reserved for issuance on redemption of all equity-based awards under the Incentive Plan is limited to 10%of the issued and outstanding common shares from time to time on a non-diluted basis, provided that the maximumnumber of common shares reserved for issuance on redemption of RSUs is limited to 5% of the issued and outstandingcommon shares from time to time on a non-diluted basis.

(a) Options

The terms and conditions for acquiring and exercising Options are set by the Board of Directors, including the numberof Options granted, the exercise price, the term and the vesting conditions of the Options. The Options generallyvest between 0 and 60 months from the date of grant and have a maximum term of 10 years. The fair value ofservices received in return for Options granted is based on the fair value of Options granted, measured using theBlack-Scholes option pricing model.

The changes in Options during the years ended December 31, 2016 and 2015 were as follows:

December 31, 2016 December 31, 2015Number of

OptionsWeighted average

exercise priceNumber of

OptionsWeighted average

exercise price(CAD) (CAD)

Outstanding, beginning of year 2,927,100 $ 16.20 2,346,995 $ 14.88Options granted 962,500 11.78 1,396,000 16.59Options exercised (220,000) 6.24 (418,645) 7.50Options forfeited or cancelled (664,500) 20.48 (397,250) 18.96Outstanding, end of year 3,005,100 $ 14.57 2,927,100 $ 16.20Exercisable, end of year 855,032 $ 12.64 899,848 $ 10.40

The weighted average share price at the date of exercise for Options exercised during the year ended December31, 2016 was CAD$11.48 (2015 - CAD$16.29).

Details of Options outstanding under the Incentive Plan as at December 31, 2016 are as follows:

Range of exercise prices Number of OptionsWeighted average

remaining unit life (years)

$6.60 - $9.00 359,850 1.26$9.01 - $16.00 1,712,000 7.29$16.01 - $22.00 694,750 7.61$22.01 - $33.05 238,500 4.17$6.60 - $33.05 3,005,100 6.39


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14. Share-based payment transactions (continued)

(a) Options (continued)

The weighted average grant date fair value of an Option granted during the year ended December 31, 2016 wasCAD$5.75 (2015 - CAD$8.19) per share. The fair value of the Options has been measured using the Black-Scholesoption pricing model. The weighted average fair value assumptions for Option grants made were as follows:


Forfeiture rate 10% 10%Weighted average share price at grant date (CAD) $ 11.78 $ 16.59Average risk-free interest rate 0.86% 1.35%Expected life 7 years 7 yearsAnnualized volatility 47% 47%Dividend yield 0% 0%

Expected volatility has been based on an evaluation of the Company’s share price, particularly over the historicalperiod commensurate with the expected life. The expected life of the instruments has been based on historicalexperience and general option holder behavior.

Share-based payment expense related to Options for the year ended December 31, 2016 was $3,635 (2015 -$3,077).

(b) Restricted share units

The maximum number of common shares reserved for issuance on redemption of RSUs is limited to 5% of theissued and outstanding common shares from time to time on a non-diluted basis. The terms and conditions foracquiring and releasing RSUs are set by the Board of Directors, including the number of RSUs granted and thevesting conditions of the RSUs. For each RSU vested, a share is issued from the treasury of the Company and itsvalue is reclassified to share capital.

The changes in RSUs during the years ended December 31, 2016 and 2015 were as follows:

December 31, 2016 December 31, 2015Number of

RSUsWeighted average

grant date fair valueNumber of

RSUsWeighted average

grant date fair value(CAD) (CAD)

Outstanding, beginning of year 430,138 $ 17.91 67,237 $ 23.87RSUs granted 619,819 10.21 435,303 17.46RSUs vested (145,711) 18.29 (22,409) 23.87RSUs forfeited (86,104) 16.12 (49,993) 19.29Outstanding, end of year 818,142 $ 12.20 430,138 $ 17.91

Each of the RSUs granted during the year ended December 31, 2016 has a total vesting period of three yearspursuant to which a third of the RSUs will vest each year on the anniversary of the grant date. Share-based paymentexpense related to RSUs for the year ended December 31, 2016 was $2,944 (2015 - $2,346).


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15. Earnings per share

The calculation of diluted earnings per share has been based on the following weighted average number of commonshares outstanding after adjustment for the effects of all potential dilutive ordinary common shares:

Years ended December 31,(in 000’s) 2016 2015

Weighted average number of common shares (basic) 43,433 45,396Effect of Options and RSUs on issue 958 766Weighted average number of common shares (diluted) 44,391 46,162

At December 31, 2016, 1,302,000 Options (2015 - 1,422,000) were excluded from the diluted weighted averagenumber of common shares calculation because their effect would have been anti-dilutive.

The average market value of the Company’s common shares for the purpose of calculating the dilutive effect ofOptions was based on quoted market prices for the year during which the Options were outstanding.


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16. Income taxes

(a) Amounts recognized in net income


Current tax expense (recovery)Current year $ (1,512) $ 7,607Adjustment for prior years 49 149

(1,463) 7,756

Deferred tax expense (recovery)Current year 11,835 1,139Adjustment for prior years (67) (111)

11,768 1,028Tax expense $ 10,305 $ 8,784

(b) Reconciliation of effective tax rate


Net income before income taxes $ 17,495 $ 30,815Company’s domestic tax rate 26.00% 26.00%

4,549 8,012

Permanent differences 307 312Effect of share-based payments 1,427 1,091Effect of tax rates in foreign jurisdictions 589 (293)Difference in tax rates 32 —Foreign exchange differences 3,419 (371)Change in estimates related to prior years (18) 33Tax expense $ 10,305 $ 8,784

Foreign exchange differences include a cumulative adjustment of $4,318 relating to the recognition of unrealizedforeign exchange losses due to the translation of tax bases maintained in CAD into USD.


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16. Income taxes (continued)

(c) Movement in deferred tax balances

A summary of the deferred tax assets/(liabilities) presented in the consolidated statements of financial position isas follows:

December 31, 2015Openingbalance

Recognizedin net

income

Reductionin R&D

expenseRecognized

in equity

Foreignexchangetranslation

Closingbalance

Deductible temporary differences $ 5,231 $ (3,209) $ — $ — $ (48) $ 1,974Tax loss carry-forwards 9,577 4,441 — 374 30 14,422Research and development (“R&D”)

activities 1,514 (106) 381 — (47) 1,742Inventory 918 910 — — (183) 1,645Share issuance costs 1,787 (454) — — (276) 1,057Intangible assets (9,723) (1,486) — — 181 (11,028)Investment tax credits (476) 211 — — 70 (195)

Property, plant and equipment (841) (1,760) — — 121 (2,480)

Unrealized foreign exchange on long-termloan to subsidiary (339) 425 — — 40 126

Deferred tax asset (liability) $ 7,648 $ (1,028) $ 381 $ 374 $ (112) $ 7,263

December 31, 2016Openingbalance

Recognizedin net

income

Reductionin R&D

expenseRecognized

in equity

Foreignexchangetranslation

Closingbalance

Deductible temporary differences $ 1,974 $ 823 $ — $ — $ 44 $ 2,841Tax loss carry-forwards 14,422 (2,916) — — 38 11,544

SRED expenditures carry-forward — 1,666 — — (12) 1,654

R&D activities 1,742 (71) 716 — 16 2,403Inventory 1,645 (2,188) — — 145 (398)Share issuance costs 1,057 (528) — — 64 593Intangible assets (11,028) (6,489) — — (199) (17,716)Investment tax credits (195) 30 — — (25) (190)

Property, plant and equipment (2,480) (1,631) — — (15) (4,126)

Unrealized foreign exchange on long-termloan to subsidiary 126 (464) — — (10) (348)

Deferred tax asset (liability) $ 7,263 $ (11,768) $ 716 $ — $ 46 $ (3,743)


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16. Income taxes (continued)

(c) Movement in deferred tax balances (continued)

Of the above components of deferred income taxes, $10,038 (2015 - $5,736) of the deferred tax assets and $3,181(2015 - $1,847) of the deferred tax liabilities are expected to be recovered within 12 months. Taxable temporarydifferences of $7,420 (2015 - $4,515) have not been recognized in the unremitted earnings of controlled subsidiariesas the timing of remittance for these earnings is in the Company’s control and it is probable that these earnings willnot be repatriated for the foreseeable future.

Deferred income tax assets of $11,376 have been recognized for non-capital loss carry-forwards of $37,970 thatexpire in various amounts from 2028 to 2036.

(d) Investment tax credits

The Company’s scientific research and development expenditures during the year ended December 31, 2016resulted in ITCs of $3,641 (2015 - $2,762), of which $2,925 (2015 - $2,381) has been recorded as a reduction incurrent taxes payable and $716 (2015 - $381) has been recorded as a deferred tax asset.


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17. Related parties

(a) Key management personnel

Key management personnel consists of the Company’s executive officers and its Directors. During the years endedDecember 31, 2016 and 2015, compensation of key management personnel was as follows:


Short-term employee benefits $ 5,180 $ 4,922Termination benefits — 58Share-based payments 5,123 2,989

$ 10,303 $ 7,969

In the event of termination without cause, the Company’s executive officers are each entitled to severance equal to12 months of annual salary and bonus, or 24 months if such termination is in connection with a change of control.

(b) Other related party transactions

Other related parties include a company owned by a Director of the Company. Transactions with such parties areconducted on a normal commercial basis, including terms and prices. The aggregate value of transactions with otherrelated parties during the years ended December 31, 2016 and 2015 was as follows:


Sale of goods and services $ 685 $ 623

At December 31, 2016, $151 (December 31, 2015 - $105) of sales to a related party were included in trade andother receivables.

18. Commitments and contingencies

(a) Operating leases

The Company has obligations under operating leases for its office and manufacturing premises. At December 31,2016, the future minimum lease payments, including operating costs, under non-cancellable leases were as follows:

Total

Within one year $ 4,558Between one and five years 11,896Greater than five years 6,067

$ 22,521

The Company expensed $4,940 related to leases in the year ended December 31, 2016 (2015 - $3,477).

(b) Global headquarters

As of December 31, 2016, the Company has outstanding commitments of approximately $8,000 (2015 - $nil) relatedto the development of our new global headquarters.

(c) Contingencies

The Company is engaged in certain legal actions in the ordinary course of business and believes that the ultimateoutcome of these actions will not have a material adverse effect on its operating results, liquidity or financial position.


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19. Segment information

The Company operates in one segment in which it designs, develops, and manufactures video analytics, networkvideo management software and hardware, surveillance cameras, and access control solutions.

The geographic information below analyzes the Company’s revenue and non-current assets by the Company’scountry of domicile and other geographic regions. In presenting the following information, segment revenue hasbeen based on the geographic location of customers and non-current assets have been based on the geographiclocation of the assets.

(a) Revenue


United States $ 203,790 $ 170,084Europe, Middle East and Africa 91,276 75,800Asia Pacific 25,175 15,269Canada 20,727 16,480Latin America 12,654 9,928Total revenues $ 353,622 $ 287,561

19. Segment information (continued)

(b) Non-current assets

Property, plantand equipment Intangible assets Goodwill Deposits

Total non-current assets

Canada $ 41,658 $ 105,512 $ 2,664 $ 394 $ 150,228United States 13,638 21,566 12,018 172 47,394December 31, 2015 $ 55,296 $ 127,078 $ 14,682 $ 566 $ 197,622

Canada $ 58,969 $ 120,982 $ 2,664 $ 595 $ 183,210United States 14,275 9,555 12,018 159 36,007December 31, 2016 $ 73,244 $ 130,537 $ 14,682 $ 754 $ 219,217


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20. Capital management

The Company’s primary capital management objective is to deploy an efficient capital structure in order to maximizelong-term shareholder value. In addition, the Company aims to ensure sufficient liquidity to support its operationaland strategic plans and to maintain adequate liquidity reserves to allow the Company to manage any unforeseenrisks, and act on opportunities. The Company’s capital comprises debt and equity, the book value of which was$335,920 at December 31, 2016 (December 31, 2015 - $303,808).

The Company’s senior management is responsible for managing the Company’s capital, and does so throughquarterly meetings and regular review of relevant financial information. The Company’s Board of Directors isresponsible for overseeing this process.

The Credit Facility contains restrictive covenants that affect the manner in which the Company may structure oroperate its business, including by limiting the Company’s ability to incur indebtedness, create liens, sell assets, makecapital expenditures, and engage in acquisitions, mergers, or restructuring. The Credit Facility also requires theCompany to maintain certain financial ratios.

21. Financial instruments

(a) Measurement of fair values

A number of the Company’s accounting policies and disclosures require the measurement of fair values, for bothfinancial and non-financial assets and liabilities. When measuring the fair value of an asset or liability, the Companyuses market observable data as far as possible. Fair values are categorized into different levels in a fair valuehierarchy, based on the inputs used in the valuation techniques, as follows:

• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

• Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, eitherdirectly (i.e. as prices) or indirectly (i.e. derived from prices).

• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

21. Financial instruments (continued)

(a) Measurement of fair values (continued)

The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting periodduring which the change has occurred.

If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of thefair value hierarchy, then the fair value assessment is categorized in its entirety in the same level of the fair valuehierarchy as the lowest level input that is significant to the entire measurement.

The Company’s financial instruments consist of cash and cash equivalents, deposits, trade and other receivables,trade and other payables, and long-term debt. The carrying values of these financial instruments approximate theirfair values because of the short-term nature of these instruments or the indexed rate of interest plus the applicablemargin of the bank debt. The fair value measurements of the foreign exchange derivatives and of the contingentconsideration receivable are classified within Level 2 of the fair value hierarchy. The fair values of foreign exchangederivatives and of the contingent consideration receivable are recurring measurements and are determined usingtransaction specific details that are typically used by market participants in a fair value measurement.

(b) Financial risk management

The Company has exposure to the following risks arising from financial instruments:

• credit risk;

• liquidity risk; and

• market risk.

Risk management framework

The Company’s Board of Directors has overall responsibility for the establishment and oversight of the Company’srisk management framework. The Company’s risk management policies are established to identify and analyze therisks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits.Risk management policies and systems are reviewed regularly to reflect changes in market conditions and theCompany’s activities. The Company, through its training, and management standards and procedures, aims tomaintain a disciplined and constructive control environment in which all employees understand their roles andobligations.

All transactions undertaken are to support the Company’s ongoing business. The Company does not acquire orissue derivative financial instruments for trading or speculative purposes.


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(c) Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails tomeet its contractual obligations, and arises principally from the Company’s receivables from customers.

Trade and other receivables

The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. TheCompany’s credit exposure through receivables relates to a diverse group of customers in multiple geographicregions and is therefore mitigated by a reduced concentration risk.

Customers are assessed for credit risk based on a variety of factors, including, without limitation, the nature of theirorganization, financial health, and credit history with the Company and other parties. Purchase limits are establishedfor each customer and are regularly reviewed.

The aging of trade receivables net of allowance for doubtful accounts was as follows:


Trade receivablesCurrent $ 56,109 $ 45,811Aged between 61 - 119 days 13,283 6,348Aged 120 days or more 5,155 2,246

Total gross trade receivables 74,547 54,405Allowance for doubtful accounts (868) (380)Total trade receivables $ 73,679 $ 54,025

The Company regularly reviews the collectability of its accounts receivable and establishes an allowance for doubtfulaccounts based on its best estimate of any potentially uncollectible accounts. The Company has managed its credittightly and has historically experienced minimal bad debts. Based on this past experience and its detailed review oftrade accounts receivable past due which were collectible, a reserve in respect of doubtful accounts of $868 wasrecorded at December 31, 2016 (2015 - $380).

The movement in the allowance for doubtful accounts during the year was as follows:


Balance, beginning of the year $ 380 $ 209Increase during the year 800 245Bad debts recovered during the year (312) (65)Bad debts written off during the year — (9)Balance, end of year $ 868 $ 380

Cash and cash equivalents

The Company limits its exposure to credit risk by only investing in liquid securities and only with counterparties thathave a high credit rating. As such, management does not expect any counterparty to fail to meet its obligations.


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(c) Credit risk (continued)

Foreign exchange derivatives

The Company transacts with a number of Canadian chartered banks and other brokerages. Due to thecreditworthiness of its counterparties, the Company regards all changes in fair value of foreign exchange derivativesas arising only from changes in market factors, including foreign exchange rates. The Company monitors the exposureto any single counterparty along with its financial position. If it is determined that a counterparty has become materiallyweaker, the Company will work to reduce its credit exposure to that counterparty.

Contingent consideration receivable

The Company received $1,174 of the contingent consideration receivable on January 4, 2017 and the remainingamount of $750 of the contingent consideration receivable is being held in escrow by a third party until January 1,2018.

(d) Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with itsfinancial liabilities that are settled by delivering cash or another financial asset. The Company’s approach to managingliquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due,under both normal and stressed conditions, without incurring unacceptable losses or risking damage to theCompany’s reputation.

Management ensures that working capital, defined as current assets less current liabilities, remains positive andcash flows from operations are reasonable based on the Company’s operations. Management also ensures thatsufficient credit facilities are available to the Company should it be required to meet obligations when they comedue or where appropriate. At December 31, 2016, the Company held cash and cash equivalents of $30,012(December 31, 2015 - $18,608). During the year ended December 31, 2016, the Company generated net cash flowsfrom operations of $42,951 (2015 - used net cash flows from operations of $1,784). As at December 31, 2016, theCompany has $140,363 undrawn on the Credit Facility.

In the normal course of business, the Company enters into contracts that give rise to commitments for future minimumpayments. All of the Company’s financial liabilities have contractual maturities of 30 days or are due on demand andare subject to normal trade terms. The Company’s commitments for future minimum payments beyond one yearrelate to lease agreements and debt repayments which are disclosed in Note 18 and Note 12, respectively. As atDecember 31, 2016, the Company had outstanding commitments of approximately $8,000 related to the developmentof its new global headquarters. All of the Company’s foreign exchange derivatives outstanding at December 31,2016 were due to be settled within four months.

(e) Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices,will affect the Company’s income or the value of its holdings of financial instruments. The objective of market riskmanagement is to manage and control market risk exposures within acceptable parameters, while optimizing thereturn.


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(e) Market risk (continued)

(i) Currency risk

The Company is exposed to currency risk to the extent that there is a mismatch between the currencies in whichsales and purchases are denominated and the Company’s functional currency, which is the USD.

The Company enters into foreign exchange derivative contracts to minimize exposure to foreign currencies. Duringthe year ended December 31, 2016, the Company incurred an unrealized gain on foreign exchange derivatives,included within foreign exchange (loss) gain, of $25 (2015 - a loss of $370). At December 31, 2016, the fair valueof the foreign exchange contracts was a net asset of $25 (December 31, 2015 - a net liability of $370), presentedwithin trade and other receivables (2015 - presented within trade and other payables).

The fair values of the foreign exchange derivatives are recurring measurements and are determined wheneverpossible based on observable market data. If observable market data on the financial derivatives is not available,the Company uses observable spot and forward foreign exchange rates to estimate their fair values. In addition tomarket information, the Company incorporates transaction specific details that are typically used by marketparticipants in a fair value measurement.

The following table details the Company’s sensitivity to a 10% decrease in the value of the USD against the relativeforeign currencies. This analysis is based on foreign currency exchange rate variances at the end of the reportingperiod. It includes only outstanding foreign currency denominated monetary items and adjusts their translation atyear-end for a 10% change in foreign currency rates. A positive value below indicates an increase in net income. Astrengthening of the USD by the same amount would have a comparable (negative) effect on net income.

Year ended December 31,2016

Canadian dollars $ 629British Pound Sterling 647Euros 1,272

(ii) Interest rate risk

Interest rate risk is the risk that the fair values and future cash flows of the Company will fluctuate because of changesin market interest rates. The Company has exposure to changes in interest rates as a result of funds drawn on thefloating rate Credit Facility. If LIBOR were to have increased or decreased by 25 basis points, it is estimated thatthe Company’s net income before tax would change by approximately $250 for the year ended December 31, 2016(2015 - $145).

(iii) Other market price risk

Other market price risk is the risk that the fair value or future cash flows of the Company’s financial instruments willfluctuate because of changes in market prices of component parts and supplies used in manufacturing. The Companydoes not enter into contracts to hedge against gains or losses from changes in prices of component parts andsupplies. The Company manages its other market price risk through multiple, competitive supplier arrangementsand by maintaining a sufficient stock of single-source and long lead time items to withstand any temporary supplydisruptions.


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Avigilon Q4 & Year End Fiscal 2016 Financial Reports1.q4cdn.com/094373169/files/doc_financials/2016/AVO-Q4YE-FY2016... · TSX: AVO Fourth Quarter & Year End Fiscal 2016 Financial