The Company adopted International Financial Reporting Standards ("IFRS") effective May 1, 2011. The accompanying interim financial statements represent the Company's second set of financial statements prepared in accordance with IFRS.
Q2 Fiscal 2012 Results
-- Q2 revenues of $20.2 million, compared with $20.0 million in Q2 fiscal
2011
-- Q2 adjusted net income of $6.4 million, compared with $9.8 million in Q2
fiscal 2011. Adjusted diluted EPS of $0.52, based on 12.2 million
diluted shares, compared to $0.82 per diluted share in Q2 fiscal 2011,
based on 11.9 million diluted shares
-- Q2 IFRS net loss of $4.9 million or $0.40 per share, compared to net
income of $6.3 million or $0.53 per share in Q2 fiscal 2011.
"The second quarter was marked by two landmark events: our acquisition of approximately 2,000 wireless patents and patent applications originally filed by Nokia, and the offer from an investment fund under the management of Sterling Fund Management, LLC (Sterling) to acquire all the outstanding common shares of MOSAID for $46.00 in cash per share," said John Lindgren, President and CEO, MOSAID. "We expect the Nokia patents to drive revenue growth for MOSAID and believe the acquisition affirms our position as one of the world's premiere licensing organizations. The transaction with Sterling resulted from an extensive review process of MOSAID's alternatives and, in the view of the Special Committee and the Board, represents the best sale alternative available for shareholders."
MOSAID had cash and marketable securities of $115.9 million at the end of the second quarter of fiscal 2012, compared to $122.9 million at the end of the first quarter of fiscal 2012. In Q2 fiscal 2012, MOSAID returned $3.0 million to shareholders in quarterly dividend payments. As part of MOSAID's arrangement agreement with Sterling Partners, which was announced on October 27, 2011, MOSAID agreed to suspend payment of its quarterly dividend.
A reconciliation of adjusted net income to IFRS net income is included in the adjusted consolidated financial statements accompanying this press release.
Arrangement Agreement with Sterling
On October 27, 2011, MOSAID announced that it had entered into an Arrangement Agreement with Sterling pursuant to which Sterling will acquire all the outstanding common shares of MOSAID for a cash payment of $46.00 per share.
The transaction will be carried out by way of a statutory Plan of Arrangement, the implementation of which will be subject to approval by at least 66 2/3% of the votes cast at the special meeting of MOSAID shareholders to be held on December 19, 2011. This arrangement transaction also requires the approval of the Ontario Superior Court of Justice.
Pursuant to the terms of the Arrangement Agreement between Sterling and MOSAID, the transaction is also subject to applicable regulatory approvals and the satisfaction of certain closing conditions customary in transactions of this nature. On November 17, 2011, MOSAID announced that an advance ruling certificate was received from the Commissioner of Competition confirming that the Commissioner does not intend to challenge the proposed arrangement under the provisions of the Canadian Competition Act. On November 21, 2011, the Company filed its Premerger Notification and Report Form (HSR Form) with the Bureau of Competition, Federal Trade Commission in the United States.
Assuming the required shareholder and Court approvals are received and all other conditions precedent to closing the transaction are satisfied or waived at the time, MOSAID expects that the arrangement will be effected on or about December 23, 2011.
The Arrangement Agreement provides for, among other things, Board support and non-solicitation covenants (subject to the fiduciary obligations of the MOSAID Board and a Sterling "right to match") as well as the payment to Sterling of a break fee equal to $22 million if the proposed transaction is not completed in certain specified circumstances.
Second Quarter Operational Highlights
Patent portfolio development: MOSAID announced the acquisition of Core Wireless S.a.r.l.(Core Wireless), a Luxembourg company, that held approximately 2,000 wireless patents and patent applications originally filed by Nokia. MOSAID believes that revenues from licensing, enforcing and monetizing this portfolio of wireless patents will surpass the Company's total revenues since its formation in 1975.
MOSAID had approximately 5,385 patents and applications at the end of Q2 fiscal 2012, up 88% from 2,869 at the end of Q2 fiscal 2012, and up 126% from 2,381 one year ago. The increase was driven by the 2,000 wireless patents and patent applications acquired from Core Wireless, and the 500 patents and patent applications acquired earlier in calendar 2011 from Hynix Semiconductor Inc., both of which were recorded during the second quarter.
MOSAID also announced the sale of five patent families for US$11.0 million to an unnamed buyer. MOSAID will collect payment for the patents over several quarters, with the revenue being recognized as amounts become due.
Wireless patent licensing: MOSAID signed a patent license and settlement agreement with Digi International Inc., ending the patent infringement litigation between the two companies. MOSAID granted Digi International a 10-year license to MOSAID's standards-essential Wi-Fi patents, with running royalty payments due on a quarterly basis. MOSAID initiated wireless patent infringement litigation against 17 companies, including Digi International, in March 2011 in the United States District Court for the Eastern District of Texas, Marshall Division.
Research and Development: MOSAID unveiled the industry's fastest Flash memory semiconductor device. The Company's 256Gb HLNAND™ (HyperLink NAND) device operates at up to 800MB/s per channel, twice the speed of any other NAND Flash device now on the market. Targeting mass storage applications, including enterprise data centers and high-performance computing applications, MOSAID's HLNAND2 technology enables product designers to build SSDs (Solid State Drives) with Gigabyte-per-second performance and Terabyte-class storage capacity.
Litigation update: on August 9, 2011, MOSAID filed suit against seven companies, including Adobe Systems, Inc., Alcatel-Lucent USA, Inc., IBM Corp. and Juniper Networks, Inc., for infringing certain of MOSAID's computer networking patents.
Also on August 9, 2011, MOSAID announced that ARM, Ltd. and ARM, Inc. filed a Complaint for Declaratory Judgment against the Company. On April 7, 2011, MOSAID filed suit against NVIDIA Corporation, Freescale Semiconductor, Inc. and Interphase Corp., alleging infringement of seven U.S. patents related primarily to power management techniques and microprocessor architecture. ARM, in its complaint, is seeking a declaration of non-infringement and invalidity with respect to the same seven U.S. patents at issue in MOSAID's suit against NVIDIA, Freescale and Interphase.
On August 12, 2011, MOSAID added a mobile DRAM (Dynamic Random Access Memory) patent to its infringement claims against Elpida Memory, Inc., Buffalo Inc., and Axiontech Technologies. The amended complaint now alleges infringement of seven of MOSAID's U.S. patents.
MOSAID's revenues result primarily from intellectual property agreements, which by their nature may actually close on dates other than those projected. MOSAID's priority and focus is on obtaining the best terms possible under its agreements, rather than on the particular timing of agreement closure. MOSAID's revenues depend upon, among other items, the continued ability of its licensees to pay amounts as they become due. The Company takes steps, including monitoring the creditworthiness of its licensees, in order to manage this risk.
Due to the nature of the expense, patent licensing and litigation expense can vary significantly quarter-to-quarter.
The complete financial statements and management's discussion and analysis for second quarter ended October 31, 2011 are available on MOSAID's website at www.mosaid.com or at www.sedar.com.
About MOSAID
MOSAID Technologies Inc. is one of the world's leading intellectual property management companies. MOSAID licenses patented intellectual property in the areas of semiconductors and communications and develops semiconductor memory technology. MOSAID counts many of the world's largest technology companies among its licensees. Founded in 1975, MOSAID has offices in Ottawa, Ontario and Plano, Texas. For more information, please visit www.mosaid.com and http://InvestorChannel.mosaid.com
Non-GAAP Measures and Definitions
Throughout this press release, we refer to a number of measures which we believe are meaningful in the assessment of the Company's performance. All these metrics are non-standard measures under IFRS, and are unlikely to be comparable to similarly titled measures reported by other companies. Readers are cautioned that the disclosure of these items is meant to add to, and not replace, the discussion of financial results or cash flows from operations as determined in accordance with IFRS. For a discussion of the purpose of these non-GAAP measures, please refer to the Company's Fiscal 2011 MD&A on SEDAR at www.sedar.com.
Adjusted net income, a non-IFRS measure, is IFRS net income adjusted for share-based compensation, patent amortization, imputed interest, foreign exchange gains and losses on "Other long-term liabilities," and any other non-recurring items. The Company uses adjusted measures internally to evaluate and manage operating performance, and to forecast and plan. Non-IFRS measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers.
MOSAID Technologies Incorporated
Unaudited Adjusted Consolidated Financial Statements
For the Quarter Ended October 31, 2011
The attached consolidated financial statements have been prepared by
Management of
MOSAID Technologies Incorporated and have not been reviewed by an auditor.
Adjusted net income, which is not an International Financial Reporting Standard (IFRS) measure, is IFRS net income adjusted for stock-based compensation, patent amortization, imputed interest, foreign exchange gains and losses on "other long-term liabilities," and non-recurring items as reconciled below. The Company uses adjusted measures internally to evaluate and manage operating performance as well as to forecast and plan. Non-IFRS measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers.
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED ADJUSTED STATEMENTS OF INCOME
(In thousands of Canadian Dollars, except per share amounts)
(Unaudited)
Quarter Ended Six Months Ended
October 31, October 31,
2011 2010 2011 2010
----------------------------------------------------------------------------
Revenues $20,224 $19,962 $38,474 $38,450
Operating expenses
Patent portfolio management 2,622 2,248 4,753 4,434
Patent licensing and
litigation 7,180 2,328 11,732 4,821
Research and development 929 509 1,792 984
General and administration 1,264 961 2,470 2,016
Foreign exchange (gain) loss (249) 209 (308) 135
----------------------------------------------------------------------------
11,746 6,255 20,439 12,390
----------------------------------------------------------------------------
Adjusted income from
operations 8,478 13,707 18,035 26,060
Investment income 389 275 787 617
----------------------------------------------------------------------------
Adjusted income before income
tax expense 8,867 13,982 18,822 26,677
Income tax expense 2,483 4,195 5,270 8,003
----------------------------------------------------------------------------
Adjusted net income $ 6,384 $ 9,787 $13,552 $18,674
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted earnings per share
Basic $0.54 $0.83 $1.14 $1.59
Diluted $0.52 $0.82 $1.11 $1.57
Weighted average number of
shares
Basic 11,918,488 11,790,143 11,911,419 11,779,049
Diluted 12,246,825 11,898,957 12,191,297 11,860,073
Adjusted net income is reconciled to IFRS net income as follows:
(Dollar amounts in thousands)
Quarter ended Six Months Ended
October 31, October 31,
2011 2010 2011 2010
----------------------------------------------------------------------------
IFRS net (loss) income $(4,899) $6,310 $(2,323) $11,393
Add (deduct):
Share-based compensation 2,389 1,341 3,696 2,212
Patent amortization 4,467 3,380 8,308 6,760
Imputed interest 1,143 747 1,778 1,493
Special committee 4,195 - 4,195 -
Foreign exchange loss (gain) 2,392 (390) 2,589 228
Income tax expense - for the
above items (3,303) (1,601) (4,691) (3,412)
----------------------------------------------------------------------------
Adjusted net income $ 6,384 $9,787 $13,552 $18,674
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted foreign exchange (gain) loss is reconciled to IFRS foreign exchange
loss (gain) as follows:
(Dollar amounts in thousands)
Quarter ended Six Months ended
October 31, October 31,
2011 2010 2011 2010
----------------------------------------------------------------------------
IFRS foreign exchange loss
(gain) $2,143 $(181) $2,281 $363
Less: foreign exchange loss
(gain) on long-term debt 2,392 (390) 2,589 228
----------------------------------------------------------------------------
Adjusted foreign exchange
(gain) loss $ (249) $ 209 $ (308) $135
----------------------------------------------------------------------------
----------------------------------------------------------------------------
MOSAID Technologies Incorporated
Unaudited Consolidated Condensed Financial Statements
For the Period Ended October 31, 2011
The attached consolidated financial statements have been prepared by Management of MOSAID Technologies Incorporated and have not been reviewed by an auditor.
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands of Canadian Dollars)
(Unaudited)
----------------------------------------------------------------------------
October 31, April 30, May 1,
2011 2011 2010
----------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $106,999 $ 97,809 $ 70,732
Marketable securities (Note 11) 8,940 17,021 30,096
Accounts receivable 7,232 13,301 4,880
Prepaid expenses 867 542 698
Other asset (Note 11) - 1,136 2,053
----------------------------------------------------------------------------
124,038 129,809 108,459
Property and equipment 505 321 257
Acquired intangible assets (Note
5) 129,569 71,292 80,685
Deferred income tax asset 3,694 1,990 4,818
Investment tax credits receivable 16,380 16,118 15,748
----------------------------------------------------------------------------
$274,186 $219,530 $209,967
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued
liabilities $ 16,695 $ 12,893 $ 8,221
Deferred revenue - - 4,400
Other liability (Note 11) 724 - 992
Current portion of other long-
term liabilities 11,306 9,896 8,294
----------------------------------------------------------------------------
28,725 22,789 21,907
Other long-term liabilities 83,702 26,911 33,132
----------------------------------------------------------------------------
112,427 49,700 55,039
----------------------------------------------------------------------------
Shareholders' Equity
Share capital (Note 6) 130,846 129,021 126,573
Contributed surplus 4,300 4,526 4,153
Retained earnings 27,156 35,435 22,588
Accumulated other comprehensive
income (543) 848 1,614
----------------------------------------------------------------------------
161,759 169,830 154,928
----------------------------------------------------------------------------
$274,186 $219,530 $209,967
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands of Canadian Dollars, except per share amounts)
(Unaudited)
Quarter ended Six Months ended
October 31, October 31,
2011 2010 2011 2010
----------------------------------------------------------------------------
Revenues $20,224 $19,962 $38,474 $38,450
----------------------------------------------------------------------------
Operating expenses
Patent portfolio management 2,622 2,248 4,753 4,434
Patent licensing and
litigation 7,180 2,328 11,732 4,821
Research and development 929 509 1,792 984
General and administration 1,264 961 2,470 2,016
Foreign exchange loss 2,143 (181) 2,281 363
Share-based compensation
(Note 7) 2,389 1,341 3,696 2,212
Special committee 4,195 - 4,195 -
Patent amortization 4,467 3,380 8,308 6,760
Imputed interest 1,143 747 1,778 1,493
----------------------------------------------------------------------------
26,332 11,333 41,005 23,083
----------------------------------------------------------------------------
(Loss) income from operations (6,108) 8,629 (2,531) 15,367
Investment income 389 275 787 617
----------------------------------------------------------------------------
(Loss) income before income
tax expense (5,719) 8,904 (1,744) 15,984
Income tax (recovery) expense (820) 2,594 579 4,591
----------------------------------------------------------------------------
Net(loss) income $(4,899) $ 6,310 $(2,323) $11,393
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per share (Note 9)
Basic - net (loss) earnings $(0.41) $0.54 $(0.20) $0.97
Diluted - net (loss) earnings $(0.40) $0.53 $(0.19) $0.96
Weighted average number of
shares
Basic 11,918,488 11,790,143 11,911,419 11,779,049
Diluted 12,246,825 11,898,957 12,191,297 11,860,073
See accompanying Notes to the Condensed Consolidated Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of Canadian Dollars)
(Unaudited)
Quarter ended Six Months ended
October 31, October 31,
2011 2010 2011 2010
----------------------------------------------------------------------------
Net (loss) income $(4,899) $6,310 $(2,323) $11,393
----------------------------------------------------------------------------
Other comprehensive income,
net of tax:
Gains (losses) on
derivatives designated as
cash flow hedges (1,403) 240 (968) (127)
Gains (losses) on
derivatives designated as
cash flow hedges in prior
periods transferred to
earnings in the current
period 91 (303) (423) (809)
----------------------------------------------------------------------------
Other comprehensive (loss) (1,312) (63) (1,391) (936)
----------------------------------------------------------------------------
Comprehensive (loss) income $(6,211) $6,247 $(3,714) $10,457
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to the Consolidated Condensed Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of Canadian Dollars)
(Unaudited)
Accumu-
lated
Other
Contri- Compreh-
Common Common buted Retained ensive
Share Shares Surplus earnings Income Total
(Number) ($) ($) ($) ($) ($)
----------------------------------------------------------------------------
Balance at May
1, 2010 $11,763,626 $126,573 $4,153 $22,588 $1,614 $154,928
Net income - - - 11,393 - 11,393
Dividends - - - (5,887) - (5,887)
Employee and
Director Stock
Option Plan 77,040 2,164 (668) - - 1,496
Employee and
Director Stock
Purchase Plan 6,448 31 (23) - - 8
Restricted share
unit plan - (1,831) (238) - - (2,069)
Stock-based
compensation - - 1,034 - - 1,034
Dividend
reinvestment
plan - - - - - -
Other
comprehensive
income - - - - (936) (936)
----------------------------------------------------------------------------
Balance at
October 31,
2010 11,847,114 $126,937 $4,258 $28,094 $678 $159,967
----------------------------------------------------------------------------
Balance at April
30, 2011 $11,900,198 $129,021 $4,526 $35,435 $848 $169,830
Net (loss)
income - - - (2,323) - (2,323)
Dividends - - - (5,956) - (5,956)
Employee and
Director Stock
Option Plan 4,750 139 (50) - - 89
Employee and
Director Stock
Purchase Plan 3,503 132 (46) - - 86
Restricted share
unit plan - 1,180 (1,180) - - -
Stock-based
compensation - - 1050 - - 1,050
Dividend
reinvestment
plan 11,958 374 - - - 374
Other
comprehensive
income - - (1,391) (1,391)
----------------------------------------------------------------------------
Balance at
October 31,
2011 $11,920,409 $130,846 $4,300 $27,156 $(543)$161,759
----------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands of Canadian Dollars)
(unaudited)
Quarter ended Six Months ended
October 31, October 31,
2011 2010 2011 2010
----------------------------------------------------------------------------
Operating
Net (loss) income $ (4,899) $ 6,310 $ (2,323) $11,393
Items not affecting cash
Amortization and imputed
interest 5,213 3,417 9,264 6,828
Stock-based compensation 490 548 1,050 1,034
Loss on disposal of assets 34 - 34 -
Unrealized foreign exchange
loss on other long-term
liabilities 2,392 (390) 2,589 228
Deferred income taxes and
investment tax credits (1,807) 1,046 (1,497) 1,261
----------------------------------------------------------------------------
1,423 10,931 9,117 20,744
Change in non-cash working
capital items (Note 10) 6,043 (1,012) 9,546 (5,849)
----------------------------------------------------------------------------
7,466 9,919 18,663 14,895
----------------------------------------------------------------------------
Investing
Acquisition of property and
equipment and acquired
intangibles (11,965) (67) (13,072) (141)
Acquisition of marketable
securities (2,500) (17,596) (8,198) (27,505)
Proceeds on disposal and
maturity of marketable
securities 4,997 14,210 16,279 24,702
----------------------------------------------------------------------------
(9,468) (3,453) (4,991) (2,944)
----------------------------------------------------------------------------
Financing
Increase in other long-term
liabilities 468 747 925 1,494
Dividends paid (2,959) (2,944) (5,582) (5,887)
Funding of restricted share
unit plan - (2,068) - (2,068)
Issuance of common shares 36 1,426 175 1,504
----------------------------------------------------------------------------
(2,455) (2,839) (4,482) (4,957)
----------------------------------------------------------------------------
Net cash (outflow) inflow (4,457) 3,627 9,190 6,994
Cash and cash equivalents,
beginning of period 111,456 74,099 97,809 70,732
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period $106,999 $77,726 $106,999 $77,726
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplementary Information:
Cash on hand and bank balances $106,999 $74,707 $106,999 $74,707
Short-term investments - 3,019 - 3,019
----------------------------------------------------------------------------
Total cash and cash equivalents $106,999 $77,726 $106,999 $77,726
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Periods ended October 31, 2011 and 2010 (tabular dollar amounts in thousands of Canadian Dollars, except per share amounts) (unaudited)1. Nature of Operations
MOSAID Technologies Incorporated (the "Company") was continued under the Canada Business Corporations Act. The Company monetizes patented intellectual property in the areas of semiconductors and communications systems and develops semiconductor memory technology. Founded in 1975, the Company has operations and is headquartered in Ottawa, Ontario, Canada. The Company also has operations in Plano, Texas, U.S.A.
These interim Consolidated Financial Statements were approved and authorized for issuance by the Board of Directors on November 22, 2011. On October 27, 2011, MOSAID announced that it had entered into an arrangement agreement with Sterling Partners. Sterling will acquire all the outstanding common shares of MOSAID for a cash payment of $46.00 per share as disclosed in Note 16.
2. Basis of Presentation
In conjunction with the Company's annual audited consolidated financial statements to be issued under International Financial Reporting Standard ("IFRS") for the year ended April 30, 2011, these interim consolidated financial statements present the Company's financial results of operations and financial position under IFRS, as at and for the three and six months ended October 31, 2011, including fiscal year 2011 comparative periods. As a result, they have been prepared in accordance with IFRS 1, "First-time Adoption of International Financial Reporting Standard" and with IAS 34, "Interim Financial Reporting." The consolidated interim financial statements do not include all of the information required for full annual financial statements. Previously the Company prepared its interim and annual consolidated Financial Statements in accordance with Canadian generally accepted accounting principles ("previous GAAP").
The preparation of these interim consolidated financial statements resulted in selected changes to the Company's accounting policies as compared to those disclosed in the Company's annual audited consolidated financial statements for the period ended April 30, 2011 issued under previous GAAP. A summary of significant changes to MOSAID's accounting policies is disclosed in Note 15 along with reconciliations presenting the impact of the transition to IFRS for comparative periods as at May 1, 2010, for the six months ended October 31, 2010, and for the twelve months ended April 30, 2011.
A summary of MOSAID's significant accounting policies under IFRS is presented in Note 3. These policies have been retrospectively and consistently applied except where specific exemptions permitted an alternative treatment upon transition to IFRS in accordance with IFRS 1 as disclosed in Note 15.
The consolidated interim financial statements have been prepared on the historical cost basis except for marketable securities, derivative financial instruments and share-based payment transactions that are measured at fair value.
These consolidated interim financial statements are presented in Canadian dollars, which is the functional currency of the Company and its subsidiaries.
3. Accounting Policies
Consolidation
These consolidated financial statements include the accounts of MOSAID Technologies Incorporated and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated.
Cash and cash equivalents
Cash and cash equivalents include all readily tradable instruments such as bonds, debentures and discount notes with an original maturity of three months or less.
Marketable securities
Marketable securities include readily tradable instruments such as bonds, debentures and discount notes with original maturities in excess of three months and are carried at their fair value as they are classified as held for trading.
Property and equipment
Property and equipment are recorded at cost. Amortization is provided over the estimated useful lives of the assets as follows:
Equipment 35% declining balance Furniture and fixtures 20% declining balance Leasehold improvement shorter of useful life or term of the leaseAmortization commences when an asset is available for use. Amortization methods and useful lives are reviewed at each annual reporting date and adjusted if appropriate.
Acquired intangible assets
Acquired intangible assets consist of patents, exclusive sub-licensing rights, and software. Acquired intangible assets are recorded at their fair value at the date of acquisition. Amortization is provided over the estimated useful lives of the assets as follows:
Patents and exclusive sub-licensing rights 1-14 years Software 35% declining balanceAmortization commences when an asset is available for use. Amortization methods and useful lives are reviewed at each annual reporting date and adjusted if appropriate.
Asset impairment
At each balance sheet date, the Company reviews the carrying amount of tangible and intangible assets to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash generating unit to which the asset belongs. An impairment loss is recorded if the recoverable amount, determined as the higher of its fair value less costs to sell and the value in use of the individual asset or the cash generating unit as appropriate, is less than its carrying value.
Research and development
Research costs are expensed as incurred. Development costs are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the Company intends to and has sufficient resources to complete development and to use or sell the asset. Such costs are amortized, commencing when the product is available for use, over the expected life of the product. To date, no development costs have met the criteria for deferral.
Government assistance and investment tax credits
Government assistance and investment tax credits are recorded as a reduction of the related expense or cost of the asset acquired. The benefits are not recognized until there is reasonable assurance that the Company has complied with the terms and conditions of the approved grant program or applicable tax legislation and the grants will be received.
Revenue recognition
The Company earns revenue from monetizing patented technology, primarily through licensing agreements. Revenue is measured at the fair value of the consideration received or receivable and is recognized on an accrual basis when it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably.
Revenue from fixed payments associated with long-term license agreements is recognized as payments become due from the licensee. Royalty revenue from long-term license agreements, which is typically based upon sale of product by the licensee, is recognized upon notification of the sale by the licensee. The Company from time to time may sell patents within its portfolio and revenue is recognized as payments become due.
Deferred revenue arises on license agreements where the payment is received in advance of being due, or where the earnings process is complete but there is not reasonable assurance of collectability at the time of billing.
Foreign currency translation
Transactions in foreign currencies are translated into Canadian dollars at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated at the rate of exchange in effect at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to Canadian dollars at the exchange rate at the date that the fair value was determined. Non-monetary items denominated in a foreign currency that are measured in terms of historical cost are translated at historical exchange rates. Revenues and expenses are translated at rates in effect during the year except for amortization, which is translated at the same rate as the asset to which it relates. The resulting translation adjustments are included in the determination of net income.
Income taxes
The Company follows the asset and liability method of accounting for income taxes. Under the asset and liability method, the change in the deferred income tax asset and liability is to be included in the determination of net income. Deferred tax assets and liabilities are measured using substantively enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The Company recognizes deferred income tax assets to the extent that it is probable that future taxable profits will be available against which they can be utilized.
Stock option plan
The Company has three equity settled compensation plans: an Employee and Director Stock Option Plan (ESOP), an Employee and Director Stock Purchase Plan (ESPP) and a Restricted Share Unit Plan (RSU) as described in Note 7 to these consolidated financial statements. The Company measures equity settled stock options based on their fair value at the grant date and recognizes compensation expense over the vesting period. Details regarding the determination of the fair value of equity settled share-based transactions are set out in Note 7. Expected forfeitures are estimated at the date of grant and subsequently adjusted if further information indicates actual forfeitures may vary from the original estimate. The impact of the revision to the original estimate is included in earnings.
The Company has a cash settled Deferred Share Unit (DSU) Plan as described in Note 7 to these consolidated financial statements. The Company accounts for DSUs by estimating the fair value of the units at the grant date and recording the expense on a straight-line basis over the vesting period of the DSUs. Expected forfeitures are estimated at the date of grant and subsequently adjusted if further information indicates actual forfeitures may vary from the original estimate. The impact of the revision to the original estimate is included in earnings. Since this award will be settled in cash, at the end of the reporting period until the liability is settled, and at the date of settlement, the fair value of the liability is re-measured, with any changes in fair value recognized in profit or loss for the year.
Financial instruments
Financial instruments are measured at fair value on initial recognition of the instrument. Measurement in subsequent periods depends on the classification of the financial instrument.
The Company classifies its financial instruments as fair value through profit and loss, loans and receivables, or other liabilities. The classification depends on the purpose for which the financial instruments were acquired, their characteristics and management's intent. Management determines the classification of financial assets and liabilities at initial recognition and, except in very limited circumstances, the classification is not changed subsequent to initial recognition. Financial assets and liabilities at fair value through profit or loss include financial assets and liabilities held-for-trading and financial assets and liabilities designated upon initial recognition at fair value through profit or loss. Financial assets and liabilities are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. The company does not hold any financial instruments that have been designated upon initial recognition as at fair value through profit and loss. The Company classifies its cash and cash equivalents and marketable securities as fair value through profit and loss, which are measured at fair value, with changes in fair value being recorded in net earnings. Accounts receivable have been classified as loans and receivables, which are measured at amortized cost using the effective interest rate method. Accounts payables and accrued liabilities and long-term liabilities have been classified as other financial liabilities, which are measured at amortized cost using the effective interest rate method.
The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.
Financial assets, other than those classified as fair value through profit and loss, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.
Hedging relationships and derivative financial instruments
The Company utilizes derivative financial instruments in the management of its foreign currency exposures. The Company's policy is not to utilize derivative financial instruments for trading or speculative purposes. The Company applies hedge accounting when appropriate documentation and effectiveness criteria are met.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific contractually related firm commitments on projects.
The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
Derivatives are recorded on the balance sheet as other assets or liabilities at fair value, with changes in fair value recorded in net income unless the derivative is designated as a cash flow hedge. Fair value of the forward exchange contracts reflects the cash flows due to or from the Company if settlement had taken place at the end of the period. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is recorded in other comprehensive income and is recognized in net income when the hedged item affects net income.
Derivatives embedded in non-derivative host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts, and the host contracts are not measured at fair value through profit and loss.
Critical accounting judgments and accounting estimates
The preparation of financial statements in conformity with IFRS requires the Company's management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results could differ from those estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The determination of functional currency and level of impairment testing and cash generating units are matters of judgment.
Estimation uncertainty
Significant estimates and assumptions included in these financial statements relate to the useful lives of acquired intangible assets, measurement of deferred taxes and investment tax credits, valuation of equity instruments granted under share based payment transactions and allowance for doubtful accounts.
4. Recent Pronouncements Issued Not Yet Adopted
The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective and determined that the following may have an impact on the Company.
IAS 12 Income Taxes ("IAS 12")
IAS 12 was amended in December 2010 to remove subjectivity in determining on which basis an entity measures the deferred tax relating to an asset. The amendment introduces a presumption that an entity will assess whether the carrying value of an asset will be recovered through the sale of the asset. The amendment to IAS 12 is effective for reporting periods beginning on or after January 1, 2012. The Company is currently evaluating the impact of this amendment to IAS 12 on its consolidated financial statements.
IAS 27 Separate Financial Statements ("IAS 27")
IAS 27 replaced the existing IAS 27 "Consolidated and Separate Financial Statements". IAS 27 contains accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. IAS 27 requires an entity preparing separate financial statements to account for those investments at cost or in accordance with IFRS 9 Financial Instruments. IAS 27 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
IAS 28 Investments in Associates and Joint Ventures ("IAS 28")
IAS 28 was amended in 2011 which prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. IAS 28 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this amendment to IAS 28 on its consolidated financial statements.
IFRS 7 Financial Instruments: Disclosures ("IFRS 7")
IFRS 7 was amended in October 2010 to provide additional disclosure on the transfer of financial assets including the possible effects of any residual risks that the transferring entity retains. These amendments are effective as of July 1, 2011. The Company is currently evaluating the impact of these amendments to IFRS 7 on its consolidated financial statements.
IFRS 9 Financial Instruments ("IFRS 9")
IFRS 9 was issued in November 2009 and is the first step to replace current IAS 39, "Financial Instruments: Recognition and Measurement." IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2013. The Company is currently evaluating the impact of IFRS 9 on its consolidated financial statements.
IFRS 10 Consolidated Financial Statements ("IFRS 10")
IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 supersedes IAS 27 "Consolidated and Separate Financial Statements" and SIC-12 "Consolidation-Special Purpose Entities" and is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
IFRS 11 Joint Arrangements ("IFRS 11")
IFRS 11 establishes principles for financial reporting by parties to a joint arrangement. IFRS 11 supersedes current IAS 31 "Interests in Joint Ventures and SIC-13 Jointly Controlled Entities-Non-Monetary Contributions by Venturers" and is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
IFRS 12 Disclosure of Interests in Other Entities ("IFRS 12")
IFRS 12 applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. IFRS 12 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
IFRS 13 Fair Value Measurements ("IFRS 13")
IFRS 13 defines fair value, sets out in a single IFRS framework for measuring fair value and requires disclosures about fair value measurements. The IFRS 13 applies to IFRSs that require or permit fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except in specified circumstances. IFRS 13 is to be applied for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
5. Acquired intangible assets
Cost
----------------------------------------------------------------------------
Patents and Total
Exclusive Intangible
Patent Rights Software Assets
----------------------------------------------------------------------------
May 1, 2010 $114,936 $964 $115,900
Additions 4,123 104 4,227
Disposals - (283) (283)
----------------------------------------------------------------------------
April 30, 2011 $119,059 $785 $119,844
Additions 66,619 29 66,648
Disposals (58) - (58)
----------------------------------------------------------------------------
October 31, 2011 $185,620 $814 $186,434
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Amortization
----------------------------------------------------------------------------
Patents and Total
Exclusive Intangible
Patent Rights Software Assets
----------------------------------------------------------------------------
May 1, 2010 $34,380 $835 $35,215
Amortization 13,549 59 13,608
Disposals - (271) (271)
----------------------------------------------------------------------------
April 30, 2011 $47,929 $623 $48,552
Amortization 8,308 29 8,337
Disposals (24) - (24)
----------------------------------------------------------------------------
October 31, 2011 $56,213 $652 $56,865
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Carrying Amount
----------------------------------------------------------------------------
Patents and Total
Exclusive Intangible
Patent Rights Software Assets
----------------------------------------------------------------------------
May 1, 2010 $80,556 $129 $80,685
April 30, 2011 $71,130 $162 $71,292
October 31, 2011 $129,407 $162 $129,569
----------------------------------------------------------------------------
Acquisition Core Wireless
On September 1, 2011, MOSAID announced that it had acquired Core Wireless S.a.r.l., a Luxembourg company, which owns approximately 2,000 wireless patents and patent applications originally filed by Nokia in 49 different countries, 1,215 of which had been declared to be essential to 2G, 3G, and 4G standards (the "Core Wireless Patents"). The average remaining life of the issued patents in the portfolio exceeds 10 years. In MOSAID's view, these acquired patents constitute one of the strongest standards-essential wireless portfolios available on the market and will drive significant revenue growth and significant value for Shareholders over the next decade. This acquisition firmly positions MOSAID to be a world leader in wireless patent licensing. This acquisition is made at a time when there is an increasing market awareness of the significant value of patents and their licensing. Based on its extensive experience in the industry, MOSAID conservatively estimates that revenues from licensing, enforcing and monetizing this wireless portfolio will surpass MOSAID's total revenue of approximately $1 billion since its formation in 1975. MOSAID bases this revenue estimate in part on the anticipated worldwide sales by unlicensed wireless device manufacturers of US$500 billion of mobile handsets and smartphones over the next five years, and an extrapolation of sales of such devices for the remainder of the lives of the patents. Based on quantity alone, MOSAID acquired in this portfolio more than twice as many wireless patents declared to be standards-essential than were contained in the Nortel patent portfolio in June 2011, when Nortel's portfolio of 6,000 patents and patent applications was sold for US$4.5 billion.
6. Share Capital
Authorized
Unlimited number of common shares.
During the quarter ended October 31, 2011 the Company paid dividends of $0.25 per common share totaling $3.0 million (October 31, 2010 - $0.25 per common share totaling $2.9 million).
7. Stock-based Compensation Plans
a) Employee and Director Stock Option Plan (ESOP)
Pursuant the Company's ESOP, the maximum number of common shares which may currently be issued upon the exercise of stock options granted under the ESOP cannot exceed 1,560,177, of which 738,242 are issued and outstanding at October 31, 2011. The exercise price is to be fixed by the Human Resources Committee of the Board of Directors, but shall not be lower than the closing price of the common shares on the TSX on the day prior to the date of grant. Options granted under the ESOP currently expire within a period of six years of granting, with vesting periods determined by the Human Resources Committee. All options outstanding at October 31, 2011 have been granted with equal annual vesting over a four year vesting period.
A summary of the status of the ESOP as of October 31, 2011 and October 31, 2010 and changes during the periods ending on those dates are presented below:
October 31, 2011 October 31, 2010
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
----------------------------------------------------------------------------
Outstanding at start of
the year 742,992 $19.92 636,145 $17.64
Granted - - 215,050 $26.42
Exercised (4,750) $18.81 (77,040) $19.42
Forfeited - - - -
----------------------------------------------------------------------------
Outstanding at end of
period 738,242 $19.93 774,155 $19.91
----------------------------------------------------------------------------
Options exercisable at
period-end 379,372 $18.52 225,287 $17.91
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Period ended October 31, 2011
Options
Options Outstanding Exercisable
----------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
----------------------------------------------------------------------------
$10.50 - $11.66 171,889 2.92 $11.65 123,480 $11.65
$14.87 - $18.88 188,275 4.07 $18.86 44,225 $18.81
$20.22 - $21.61 153,028 1.61 $20.93 150,778 $20.93
$24.50 - $29.96 225,050 4.79 $26.47 60,889 $26.26
----------------------------------------------------------------------------
$10.50 - $29.96 738,242 3.51 $19.93 379,372 $18.52
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Period ended October 31, 2010
Options
Options Outstanding Exercisable
----------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
----------------------------------------------------------------------------
$10.50 - $11.66 175,014 3.92 $11.65 78,571 $11.65
$14.87 - $18.88 196,150 5.00 $18.83 3,750 $17.28
$20.22 - $21.61 174,441 2.53 $20.97 127,966 $21.02
$23.15 - $26.49 228,550 5.63 $26.34 15,000 $24.37
----------------------------------------------------------------------------
$10.50 - $26.49 774,155 4.39 $19.91 225,287 $17.91
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The weighted average fair value of options granted during the period was calculated using the Black-Scholes option pricing model with the following assumptions:
Period ended October 31, 2011 October 31, 2010 ---------------------------------------------------------------------------- Risk free interest rate 1.35% 1.93% Expected life in years 4.1 4.8 Expected dividend yield 2.20% 3.78% Volatility 37.72% 37.17%b) Restricted share unit plan (RSUs)
The Company has a stock-based compensation plan whereby employees are granted RSUs. An RSU is a conditional right to receive a common share in accordance with the terms of the RSU plan and grant agreement at no additional cost to the employee. The RSUs vest over three years.
Activity in the RSU plan for the period ended October 31, 2011 and October 31, 2010 is summarized below:
Quarter ended Six Months Ended
October 31, October 31,
Period ended 2011 2010 2011 2010
----------------------------------------------------------------------------
Outstanding, beginning of period 126,660 141,413 126,660 141,413
Granted - 39,758 - 39,758
Settled (33,969) (20,730) (33,969) (20,730)
Forfeited - - - -
----------------------------------------------------------------------------
Outstanding, end of period 92,691 160,441 92,691 160,441
----------------------------------------------------------------------------
The Company funds an independent trustee to purchase the required shares and to provide custodial services.
c) Employee and Director Stock Purchase Plan (ESPP)
For two six-month periods commencing on the second business day after the Company's second period or fiscal year-end financial results are publicly announced (each an "Offering Period"), eligible employees are given an opportunity to request that a percentage of their salary be deducted each pay period for the purpose of acquiring common shares of the Company. Directors may elect to put a maximum lump sum payment of 50% of their annual compensation per offering. Employees may elect to designate up to 5% of their annual salary. The purchase price under the ESPP is the lesser of 90% of the fair market value of the common shares, as determined by calculating the weighted average sale price for board lots as posted on the TSX the ten trading days immediately preceding: (i) the first day of the Offering Period in which the purchase date falls or (ii) the purchase date. The common shares are not considered to be issued by the Company until the end of the six month period. The Company measures compensation expense based on the fair value of the stock using the Black-Scholes option pricing model.
As at October 31, 2011, $90,136 (2010 - $108,292) was committed under the ESPP but the common shares were unissued. This amount is presented as part of cash and cash equivalents on the Consolidated Balance Sheets.
d) Deferred share unit plan (DSU)
The Company has a share-based compensation plan whereby directors and officers are granted DSUs. DSUs vest evenly over a four-year period except for DSUs which are issued to directors who elect to receive quarterly retainer amounts in the form of DSUs, which vest immediately. To the extent the Company pays normal cash dividends, participants receive dividend equivalents in the form of additional fully vested DSUs in respect of DSUs which are fully vested. DSUs do not have an exercise price and can only be settled using cash consideration after the individual has retired from all positions with the Company.
Activity in the DSU plan for the period ended October 31, 2011 and October 31, 2010 is summarized below:
Quarter ended Six Months Ended
October 31, October 31,
Period ended 2011 2010 2011 2010
----------------------------------------------------------------------------
Outstanding, beginning of year 164,371 154,903 163,112 165,311
Granted in lieu of options - 17,556 - 17,556
Granted in lieu of retainers 1,181 585 2,539 1,287
Dividend equivalents 776 897 1,730 1,880
Settled (3,312) (506) (4,365) (8,251)
Forfeited - - - (4,348)
----------------------------------------------------------------------------
Outstanding, end of period 163,016 173,435 163,016 173,435
----------------------------------------------------------------------------
The DSU liability at October 31, 2011 is $6.8 million (2010 - $3.2 million).
Share based compensation expense
During the period ended October 31, 2011, the Company recorded share-based compensation expense relating to equity settled awards of $490,000 (2010 - $548,000) with the offsetting charge to contributed surplus. Share-based compensation was comprised of $225,000, $255,000 and $10,000 relating to the ESOP, RSU and ESPP Plans respectively (2010 - $202,000, $332,000, $14,000). Share-based compensation expense relating to the cash settled DSUs of $1,899,000 (2010 - $793,000) was recorded during the period.
8. Employee Benefits Expense
The following table presents the employee benefits earned by the employees during the periods noted below:
Quarter ended Six Months Ended
October 31, October 31,
Period ended 2011 2010 2011 2010
----------------------------------------------------------------------------
Salaries including bonuses $2,573 $1,777 $4,555 $3,543
Benefits 313 205 598 425
Other labour costs 66 76 139 152
Share-based payments 2,389 1,341 3,696 2,212
----------------------------------------------------------------------------
$5,341 $3,399 $8,988 $6,332
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Earnings Per Share
The following is a reconciliation of the numerator and denominator of the basic and diluted per share computations:
Quarter ended Six Months Ended
October 31, October 31,
Period ended 2011 2010 2011 2010
----------------------------------------------------------------------------
Net (loss) income $(4,899) $6,310 $(2,323) $11,393
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average number of
common shares outstanding 11,918,488 11,790,143 11,911,419 11,779,049
Effect of dilutive stock
options(1) 328,337 108,814 279,878 81,024
----------------------------------------------------------------------------
Weighted average number of
common shares outstanding
- dilutive(2) 12,246,825 11,898,957 12,191,297 11,860,073
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Period ended 2011 2010 2011 2010
----------------------------------------------------------------------------
Basic - net (loss)
earnings $(0.41) $0.54 $(0.20) $0.97
Diluted - net (loss)
earnings $(0.40) $0.53 $(0.19) $0.96
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) For quarter ended October 31, 2011, excludes the effect of nil options
(2010 - 222,550) as the exercise price exceeded the average fair market
value of the common stock during the period and hence are anti-dilutive. For
six months ended October 31, 2011, excludes the effect of nil options (2010
- 228,550).
(2) The calculation of the weighted average number of common shares excludes
any issued DSUs as the DSUs will be settled with cash, and any unissued
shares related to the ESPP.
10. Changes in Non-Cash Working Capital Items
Quarter ended Six Months Ended
October 31, October 31,
Period ended 2011 2010 2011 2010
----------------------------------------------------------------------------
Decrease (increase) in current
assets
Accounts receivable $ 225 $ (926) $6,069 $(1,783)
Prepaid expenses (318) (13) (325) 91
----------------------------------------------------------------------------
(93) (939) 5,744 (1,692)
Increase (decrease) in current
liabilities
Accounts payable and accrued
liabilities 6,136 1,130 3,802 243
Deferred revenue - (1,203) - (4,400)
----------------------------------------------------------------------------
$6,043 $(1,012) $9,546 $(5,849)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At October 31, 2011, cash and cash equivalents includes foreign denominated currency, primarily U.S. dollars, in the amount of $4.9 million (October 31, 2010 - $4.1 million).
11. Financial Instruments
The Company has exposure to the following risks from its use of financial instruments: credit risk, market and liquidity risk.
Credit Risk
Credit risk is the risk of financial loss to the Company if a licensee or counter-party to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's accounts receivable and its foreign exchange contracts.
The Company provides credit to certain licensees in the normal course of its operations. The Company's credit risk review includes performing periodic credit evaluations of its most significant licensees. In certain circumstances, the Company may utilize letters of guarantee or credit insurance to mitigate certain credit risks. Many of the Company's licensees are large national and international public companies. Due to the nature of the Company's operations, provisions for doubtful accounts are made on a licensee-by-licensee basis, based upon on-going review of licensees' financial status.
Many of the Company's current licensees' operations are focused in the semiconductor industry. The semiconductor industry, particularly the dynamic random access memory (DRAM) segment, can suffer from economic difficulties due to pricing pressure as a result of oversupply of memory devices.
Due to the long-term nature of the Company's licensing arrangements, in certain circumstances, the Company may not be able to obtain, at reasonable cost, credit insurance or other forms of credit risk mitigation instruments. A default of the remaining payments by one of the Company's major licensees could have a materially adverse impact on the Company's future revenues, earnings, cash flow and financial position.
The Company limits its exposure to counter-party credit risk with respect to derivative instruments by dealing only with major financial institutions. Management does not expect any counter-parties to fail to meet their obligations.
The Company invests its excess cash in investment grade securities with a maturity date not exceeding twelve months. The Company relies upon the credit rating of the counter-party to limit its credit risk. The Company does not invest in asset-backed commercial paper.
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
October 31, 2011 April 30, 2011 May 1, 2010
----------------------------------------------------------------------------
Cash and cash
equivalents $106,999 $97,809 $70,732
Marketable securities 8,940 17,021 30,096
Accounts receivable 7,232 13,301 4,880
Other asset - 1,136 2,053
Other liability (724) - (992)
----------------------------------------------------------------------------
$122,447 $129,267 $106,769
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The aging of accounts receivable at the reporting date was:
October 31, 2011 April 30, 2011 May 1, 2010
----------------------------------------------------------------------------
Current $4,459 $10,661 $1,367
Past due 0-30 days 221 190 204
Over 31 days past due 2,592 2,450 3,382
Less: allowance for
doubtful accounts (40) - (73)
----------------------------------------------------------------------------
$7,232 $13,301 $4,880
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Of the amount past due, the Company expects to collect a portion of the amount under a credit insurance policy.
Marketable securities comprise the following:
October 31, 2011 April 30, 2011 May 1, 2010
----------------------------------------------------------------------------
Bonds and debentures $3,221 $ 720 $27,087
Discount notes 5,719 16,301 3,009
----------------------------------------------------------------------------
$8,940 $17,021 $30,096
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The carrying values of bonds and debentures and discount notes include accrued interest and approximate market value. Investments in bonds and debentures and discount notes represent holdings in corporate and government short-term marketable securities as at October 31, 2011 and April 30, 2011 and have a maturity date of one year or less.
Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company's income or the value of its holding of financial instruments.
Foreign Exchange Risk
The Company's revenues are denominated primarily in U.S. dollars, giving rise to exposure to market risks from changes in foreign exchange rates. The Company is exposed to foreign currency fluctuations on its accounts receivable and future cash flows related to licensing arrangements denominated in U.S. dollars, as well as certain operating expenses and its other long-term liabilities obligations.
The Company's foreign exchange risk management includes the use of foreign exchange forward contracts to fix the exchange rates on certain foreign currency exposures. The Company's objective is to manage and control exposures and secure the Company's profitability on existing contracts and anticipated future cash flows. The Company does not utilize derivative instruments for trading or speculative purposes. The Company formally documents all relationships between derivative instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments or anticipated transactions.
The Company also formally assesses, both at the inception and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in off-setting changes in fair values or cash flows of hedged items. Hedge ineffectiveness is insignificant.
The forward foreign exchange contracts primarily require the Company to sell U.S. dollars for Canadian dollars at contractual rates. The Company had the following forward exchange contracts:
October 31, 2011
----------------------------------------------------------------------------
Equivalent to
Type Notional Currency Maturity CDN dollars Fair Value
----------------------------------------------------------------------------
less than 3
Sell $10,165 USD months $ 9,908 $(233)
Sell $22,080 USD 3-12 months $21,587 $(491)
----------------------------------------------------------------------------
$(724)
----------------------------------------------------------------------------
April 30, 2011
----------------------------------------------------------------------------
Equivalent to
Type Notional Currency Maturity CDN dollars Fair Value
----------------------------------------------------------------------------
less than 3
Sell $8,350 USD months $8,626 $716
Sell $5,600 USD 3-12 months $5,737 $420
----------------------------------------------------------------------------
$1,136
----------------------------------------------------------------------------
May 1, 2010
----------------------------------------------------------------------------
Equivalent to
Type Notional Currency Maturity CDN dollars Fair Value
----------------------------------------------------------------------------
less than 3
Sell $12,875 USD months $13,836 $ 759
Sell $21,225 USD 3-12 months $22,890 $1,294
----------------------------------------------------------------------------
$2,053
----------------------------------------------------------------------------
Buy $(5,000) USD 3-12 months $(6,093) $(992)
----------------------------------------------------------------------------
Accounting for the impact of hedges, a one cent strengthening (weakening) of the U.S. dollar against the Canadian dollar would have decreased (increased) other comprehensive income by approximately $660,000 for the first period of fiscal 2012.
Interest Rate Risk
The Company is exposed to interest rate risk due to its holdings of interest-bearing marketable securities. It is the Company's policy to invest in securities with a maturity date of twelve months or less and Company practice is to hold such securities, when possible, until maturity. A 1% increase (decrease) to the interest rate would result in an approximate $48,000 (2010 - $120,000) decrease (increase) in the fair value of the investments held as at the reporting date.
The Company is also exposed to interest rate risk due to its imputed interest on other long-term liabilities.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. At October 31, 2011, the Company had $115.9 million of cash and marketable securities and has a secured bank credit facility of $10.0 million, less off balance sheet arrangements as described in Note 13 to meet liabilities when due. The credit facility is collateralized by a general security agreement and contains no covenants.
All of the Company's financial liabilities, except for its "other long-term liabilities" and operating lease for its premise have contractual maturities of less than thirty days.
The following chart indicates the contractual obligations to which the Company is bound over the following five years.
Payments Due by Period
(in thousands of dollars)
----------------------------------------------------------------------------
Contractual Less than After 5
Obligations Total 1 year 1-3 years 4-5 years years
----------------------------------------------------------------------------
Operating leases $ 1,488 $ 459 $ 894 $ 135 -
Other long-term
obligations 113,259 11,922 21,112 80,225 -
----------------------------------------------------------------------------
Total contractual
obligations $114,747 $12,381 $22,006 $80,360 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair Value
The fair values of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued liabilities approximates their carrying values due to their short-term maturity.
The fair value of long-term obligations is determined using the present value of future cash flows under current financing agreements, based on the Company's current estimated borrowing rate for loans with similar terms and conditions.
The fair value of the forward exchange contracts reflects the cash flow due to or from the Company if settlement had taken place on the reporting date.
The fair value of employee and director DSUs is determined in relation to the market price of the Company's common stock on the reporting date taking into account the terms and conditions under which the units were granted.
Financial instruments recorded at fair value on the Consolidated Balance Sheet are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.
The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value.
The following table presents the financial instruments recorded at fair value in the Consolidated Balance Sheet, classified using the fair value hierarchy described above:
October 31, 2011
----------------------------------------------------------------------------
Total Financial
Assets and
Financial
Liabilities
Level 1 Level 2 Level 3 at Fair Value
----------------------------------------------------------------------------
Cash and cash
equivalents $106,999 $- - $106,999
Marketable securities 8,940 - - 8,940
Other asset - (724) - (724)
----------------------------------------------------------------------------
$115,939 $(724) - $115,215
----------------------------------------------------------------------------
----------------------------------------------------------------------------
April 30, 2011
----------------------------------------------------------------------------
Total Financial
Assets and
Financial
Liabilities
Level 1 Level 2 Level 3 at Fair Value
----------------------------------------------------------------------------
Cash and cash
equivalents $97,809 $- - $97,809
Marketable securities 17,021 - - 17,021
Other liability - 1,136 - 1,136
----------------------------------------------------------------------------
$114,830 $1,136 - $115,966
May 1, 2010
----------------------------------------------------------------------------
Total Financial
Assets and
Financial
Liabilities
Level 1 Level 2 Level 3 at Fair Value
----------------------------------------------------------------------------
Cash and cash
equivalents $70,732 $- - $70,732
Marketable securities 30,096 - - 30,096
Other asset - 2,053 - 2,053
Other liability - (992) - (992)
----------------------------------------------------------------------------
$100,828 $1,061 - $101,889
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. Business Segment Information
The Company operates in one operating segment: monetizing patented intellectual property in the areas of semiconductors and communications and developing semiconductor memory technology.
In Q2 of fiscal 2012, four of the Company's licensees each amounted to more than 10% of consolidated revenue from operations. Revenue from one licensee was 23%; revenues from the other three licensees were 19%, 17% and 15%, respectively.
In Q2 of fiscal 2011, four of the Company's licensees each amounted to more than 10% of consolidated revenue from operations. Revenue from one licensee was 25%; revenues from the other three customers were 18%, 16% and 10%, respectively.
13. Contingency and Commitments
As at October 31, 2011, the Company had outstanding letters of guarantee totaling $200,000 (2010 - $200,000). The Company enters into patent licensing agreements in the ordinary course of business. Although the Company does not provide price protection to most of its customers, there are times when it is a necessary means of doing business. Price protection may be offered to earlier licensees in order to ensure that they enjoy more favoured pricing relative to later licensees for comparable license terms. Such protections are not retroactive. At October 31, 2011, the Company estimates the fair value of this obligation as $nil (2010 - $nil) based upon the licenses executed to date.
Contractual obligations:
Operating Lease
The Company has operating leases for office space. The future minimum lease payments over the next four years are as follows:
--------------------------------------------------
2012 $299
2013 $461
2014 $465
2015 $332
--------------------------------------------------
14. Capital Management
The Company's objective is to maintain a strong capital base in order to maintain investor, creditor and market confidence and to sustain future development of the business. Management defines capital as the Company's shareholders' equity excluding accumulated other comprehensive income.
The Company has certain credit facilities with a Canadian chartered bank, which consist of an operating line, a foreign exchange forward contract facility and standby letters of credit. The Board of Directors does not establish quantitative return on capital criteria for management, but rather promotes year-over-year sustainable profitable growth. The Board of Directors also reviews on a quarterly basis the level of dividends paid to the Company's shareholders and monitors the share repurchase program activities. There were no changes in the Company's approach to capital management during the period. Neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements.
15. Transition to IFRS
As disclosed in Note 2, these interim Consolidated Financial Statements represent the Company's presentation of the financial results of operations and financial position under IFRS for the period ended October 31, 2011 in conjunction with the Company's annual audited Consolidated Financial Statements to be issued under IFRS as at and for the year ended April 30, 2012. As a result, these interim Consolidated Financial Statements have been prepared in accordance with IFRS 1, "First-time Adoption of International Financial Reporting Standards" and with IAS 34, "Interim Financial Reporting," as issued by the IASB. Previously, the Company prepared its interim and annual Consolidated Financial Statements in accordance with Canadian GAAP.
IFRS 1 requires the presentation of comparative information as at the May 1, 2010 transition date and subsequent comparative periods as well as the consistent and retrospective application of IFRS accounting policies. To assist with the transition, IFRS 1 provides mandatory and optional exemptions for first-time adopters to alleviate the retrospective application of all IFRS.
The following reconciliations present the adjustments made to the Company's previous GAAP financial results of operations and financial position to comply with IFRS 1. A summary of the significant accounting policy changes and applicable exemptions are discussed following the reconciliations. Reconciliations include the Company's Consolidated Balance Sheet as at May 1, 2010, Equity as of October 31, 2010 and April 30, 2011 and Statement of Income and Statement of Comprehensive Income for the period ended October 31, 2010 and for the year ended April 30, 2011.
IFRS Opening Consolidated Balance Sheet
As at May 1, 2010
(In thousands of Canadian Dollars)
IFRS Adjustments
-----------------------------------
Deferred Deferred
gain on Share-based tax
sale- compen- reclassi-
Previous leaseback sation fication
GAAP (Note (a)) (Note (b)) (Note (c)) IFRS
----------------------------------------------------------------------------
Current Assets
Cash and cash
equivalents $70,732 $- $- $- $70,732
Marketable
securities 30,096 30,096
Accounts
receivable 4,880 4,880
Prepaid expenses 698 698
Other asset 2,053 2,053
Deferred income
tax asset 10,930 (10,930) -
----------------------------------------------------------------------------
119,389 (10,930) 108,459
Property and
equipment 257 257
Acquired
intangible assets 80,685 80,685
Deferred income
tax asset - (263) 298 4,783 4,818
Investment tax
credits
receivable 15,748 15,748
----------------------------------------------------------------------------
$216,079 $(263) $298 $(6,147) $209,967
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current
Liabilities
Accounts payable
and accrued
liabilities $7,734 $- $487 $- $8,221
Deferred revenue 4,611 (211) 4,400
Other liability 992 992
Current portion
of other long-
term
liabilities 8,294 8,294
----------------------------------------------------------------------------
21,631 (211) 487 21,907
Deferred gain on
sale-leaseback 828 (828) -
Other long-term
liabilities 33,132 33,132
Deferred income
tax liability 6,147 (6,147) -
----------------------------------------------------------------------------
61,738 (1,039) 487 (6,147) 55,039
----------------------------------------------------------------------------
Shareholders'
Equity
Share capital 126,573 126,573
Contributed
surplus 3,452 701 4,153
Retained
earnings 22,702 776 (890) 22,588
Accumulated
other
comprehensive
income 1,614 1,614
----------------------------------------------------------------------------
154,341 776 (189) 154,928
----------------------------------------------------------------------------
$216,079 $(263) $298 $(6,147) $209,967
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of Shareholders' Equity
As at October 31, 2010
(In thousands of Canadian Dollars)
IFRS Adjustments
----------------------------
Deferred
gain on Share-based
sale- compen-
Previous leaseback sation
GAAP (Note (a)) (Note (b)) IFRS
Shareholders'
Equity
Share capital $126,937 $126,937
Contributed
surplus 3,366 892 4,258
Retained earnings 28,587 696 (1,189) 28,094
Accumulated other
comprehensive
income 678 678
----------------------------------------------------------------------------
$159,568 696 (297) $159,967
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at April 30, 2011
(In thousands of Canadian Dollars)
IFRS Adjustments
----------------------------
Deferred
gain on Share-based
sale- compen-
Previous leaseback sation
GAAP (Note (a)) (Note (b)) IFRS
----------------------------------------------------------------------------
Shareholders'
Equity
Share capital $129,021 $129,021
Contributed
surplus 3,592 934 4,526
Retained earnings 35,905 618 (1,088) 35,435
Accumulated other
comprehensive
income 848 848
----------------------------------------------------------------------------
$169,366 618 (154) $169,830
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Statement of Income
Period ended October 31, 2010
(In thousands of Canadian Dollars)
IFRS Adjustments
-----------------------------------
Deferred Income
gain on Share-based Statement
sale- compen- Reclassi-
Previous leaseback sation fications
GAAP (Note (a)) (Note (b)) (Note (d)) IFRS
----------------------------------------------------------------------------
Revenues $19,962 $- $- $- $19,962
----------------------------------------------------------------------------
Operating
expenses
Patent
portfolio
management 2,248 2,248
Patent
licensing and
litigation 2,435 (107) 2,328
Research and
development 625 (116) 509
General and
administration 1,393 (422) (10) 961
Foreign
exchange
(gain) (181) (181)
Share-based
compensation 445 896 1,341
Patent
amortization 3,380 3,380
Imputed
interest 747 747
----------------------------------------------------------------------------
11,092 251 (10) 11,333
----------------------------------------------------------------------------
Income from
operations 8,870 (251) 10 8,629
Investment
income 275 275
----------------------------------------------------------------------------
Income before
income tax
expense and
discontinued
operations 9,145 (251) 10 8,904
Income tax
expense 2,631 (37) 2,594
----------------------------------------------------------------------------
Income before
discontinued
operations 6,514 (214) 10 6,310
Discontinued
operations
income
(net of tax) 50 (40) (10) -
----------------------------------------------------------------------------
Net Income $ 6,564 $(40) $(214) $- $ 6,310
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per
share
Basic - net
earnings $0.56 $0.54
Diluted - net
earnings $0.55 $0.53
Consolidated Statement of Comprehensive Income
Period ended October 31, 2010
(In thousands of Canadian Dollars)
IFRS Adjustments
---------------------------
Deferred
gain on Share-based
sale- compen-
Previous leaseback sation
GAAP (Note (a)) (Note (b)) IFRS
----------------------------------------------------------------------------
Net Income $6,564 $(40) $(214) $6,310
Other comprehensive
income, net tax
Gains (losses) on
derivatives
designated as cash
flow hedges 240 240
Gains (losses) on
derivatives
designated as cash
flow hedges in
prior periods
transferred to
earnings in the
current period (303) (303)
----------------------------------------------------------------------------
Other comprehensive
income (loss) (63) (63)
----------------------------------------------------------------------------
Comprehensive income $6,501 $(40) $(214) $6,247
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Statement of Income
Year ended April 30, 2011
(In thousands of Canadian Dollars)
IFRS Adjustments
-----------------------------------
Deferred Income
gain on Share-based Statement
sale- compen- Reclassi-
Previous leaseback sation fications
GAAP (Note (a)) (Note (b)) (Note (d)) IFRS
----------------------------------------------------------------------------
Revenues $80,537 $ - $ - $- $80,537
----------------------------------------------------------------------------
Operating
expenses
Patent
portfolio
management 9,570 9,570
Patent
licensing and
litigation 13,082 (298) 12,784
Research and
development 2,974 (306) 2,668
General and
administratio
n 5,798 (1,460) (87) 4,251
Foreign
exchange
(gain) (1,450) (1,450)
Share-based
compensation 1,989 2,179 4,168
Patent
Amortization 13,551 13,551
Imputed
interest 2,906 2,906
----------------------------------------------------------------------------
48,420 115 (87) 48,448
----------------------------------------------------------------------------
Income from
operations 32,117 (115) 87 32,089
Investment
income 1,345 1,345
----------------------------------------------------------------------------
Income before
income tax
expense and
discontinued
operations 33,462 (115) 87 33,434
Income tax
expense 8,679 (81) 8,760
----------------------------------------------------------------------------
Income before
discontinued
operations 24,783 (196) 87 24,674
Discontinued
operations
income
(net of tax) 247 (160) (87) -
----------------------------------------------------------------------------
Net Income $25,030 $(160) $(196) $- $24,674
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per
share
Basic - net
earnings $2.12 $2.09
Diluted - net
earnings $2.09 $2.06
Consolidated Statement of Comprehensive Income
Year ended April 30, 2011
(In thousands of Canadian Dollars)
IFRS Adjustments
-----------------------
Deferred
gain on Share-based
sale- compen-
Previous leaseback sation
GAAP (Note (a)) (Note (b)) IFRS
----------------------------------------------------------------------------
Net Income $25,030 $(160) $(196) $24,674
Other comprehensive income,
net tax
Gains (losses) on
derivatives designated as
cash flow hedges 754 754
Gains (losses) on
derivatives designated as
cash flow hedges in prior
periods transferred to
earnings in the current
period (1,520) (1,520)
----------------------------------------------------------------------------
Other comprehensive income
(loss) (766) (766)
----------------------------------------------------------------------------
Comprehensive income $24,264 $(160) $(196) $23,908
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following discussion explains the significant differences between the Company's previous GAAP accounting policies and those applied by the Company under IFRS. IFRS policies have been retrospectively and consistently applied except where specific IFRS 1 optional and mandatory exemptions permitted an alternative treatment upon transition to IFRS for first-time adopters. The descriptive note captions below correspond to the adjustments presented in the preceding reconciliations.
(a) Deferred gain on sale-leaseback
During fiscal 2008 the Company entered into a sale of its corporate headquarters and then entered into an operating lease for a portion of the office space. Under previous GAAP, the gain on sale has been deferred and was being amortized over the term of the lease. Under IAS 17, "Leases," the gain is recognized immediately because it meets the criteria for immediate recognition. Therefore, the Company transferred the unamortized amount of the gain, previously included in deferred revenue, to retained earnings at the transition date (May 1, 2010). The unamortized amount at May 1, 2010 is $1,039,000 of which $211,000 is current deferred revenue, and $828,000 was long-term, resulting in a $776,000 after tax increase to retained earnings on transition.
For fiscal year end 2011, the amount of the gain transferred from discontinued operations to retained earnings was $160,000.
(b) Share-based payments
Under previous GAAP, the fair value of share-based awards with graded vesting and service conditions was treated as one grant by the Company and the expense was recognized on a straight-line basis over the vesting period. Under IFRS, each tranche of a share-based award with graded vesting is considered a separate grant for the calculation of fair value, and the related expense is recognized on a straight line basis over the vesting period of each tranche of the award.
Under previous GAAP the Company had elected to account for forfeitures as they occurred. Under IFRS, the Company is required to estimate forfeitures as of the date of grant and revise this estimate if subsequent information indicates that actual forfeitures are likely to differ from the estimate.
Under previous GAAP shares granted to employees under the DSU plan were measured using the intrinsic method. Under IFRS the obligations for cash-settled plans are accounted for using the fair value method.
The Company has elected to take the IFRS 1 exemption and not apply IFRS 2 to equity settled awards that were granted on or before November 7, 2002 or those granted after this date that had vested before the date of transition. The Company also did not apply IFRS 2 to cash settled awards that were settled before the date of transition to IFRS.
These differences resulted in a $890,000 after tax decrease in retained earnings, a $701,000 increase in contributed surplus, a $487,000 increase in the DSU liability and a $298,000 increase in deferred income tax asset on May 1, 2010, the date of transition.
For fiscal year end 2011, these differences resulted in a share-based compensation increase of $115,000. As well, DSU expense has also been reclassified from patent licensing and litigation, research and development and general and administration to share-based compensation. For fiscal year end 2011, $298,000 was transferred from patent licensing and litigation, $306,000 was transferred from research and development and $1,359,000 was transferred from general and administration to share-based compensation.
(c) Income tax
Deferred income taxes have been adjusted to reflect the tax effect arising from the differences between IFRS and previous GAAP identified in (a) and (b) above. In addition, IFRS prohibits classifying deferred tax assets and liabilities as current, whereas previous GAAP requires they are classified based on the assets or liabilities to which they relate. Accordingly, on transition to IFRS, all deferred tax assets that had been classified as current under previous GAAP were reclassified to non-current assets.
(d) Income statement reclassifications
Under previous GAAP, the Company recorded income from discontinued operations (net of tax). Under IFRS this amount has been reclassified to general and administration, $87,000 for the year ended April 30, 2011.
Imputed interest has been separated out of the patent amortization and imputed interest line on the income statement.
(e) Other exemptions
Other significant IFRS 1 exemptions taken by the Company at May 1, 2010 include the following:
-- Business combinations entered into prior to May 1, 2010 were not
retrospectively restated under IFRS.
-- Borrowing costs directly attributable to the acquisition or construction
of qualifying assets were not retrospectively restated prior to May 1,
2010.
-- Leases were assessed to determine whether an arrangement contained a
lease under IFRIC 4 based on facts and circumstances existing at the
date of transition. Contracts that were already assessed under previous
GAAP were not reassessed.
(f) Hedge effectiveness
On transition to IFRS the Company changed its method of evaluating hedge effectiveness to the hypothetical derivative method. The Company will use a simulations-based approach in order to demonstrate that reasonably possible changes to the fair value of the hedged item arising from changes in the USD/CAD forward rates will be offset by the changes in the fair value of the hedging instrument. Testing under the new method was performed as of the date of transition, and no adjustments were required.
(g) Reconciliation of cash flows as reported under Previous GAAP and IFRS
There were no significant changes to cash flows for the period ended October 31, 2010. The net earnings, share-based payments, future income tax and investment tax credit and change in non-cash working capital items were modified due to differences between previous GAAP and IFRS identified above.
16. Arrangement Agreement with Sterling Partners
On October 27, 2011, MOSAID announced that it had entered into an Arrangement Agreement with Sterling Partners pursuant to which Sterling will acquire all the outstanding common shares of MOSAID for a cash payment of $46.00 per share.
The transaction will be carried out by way of a statutory Plan of Arrangement, the implementation of which will be subject to approval by at least 66 2/3% of the votes cast at the special meeting of MOSAID shareholders to be held on December 19, 2011. This arrangement transaction also requires the approval of the Ontario Superior Court of Justice.
Pursuant to the terms of the Arrangement Agreement between Sterling and MOSAID, the transaction is also subject to applicable regulatory approvals and the satisfaction of certain closing conditions customary in transactions of this nature. On November 17, 2011, MOSAID announced that an advance ruling certificate was received from the Commissioner of Competition confirming that the Commissioner does not intend to challenge the proposed arrangement under the provisions of the Canadian Competition Act. On November 21, 2011, the Company filed its Premerger Notification and Report Form (HSR Form) with the Bureau of Competition, Federal Trade Commission in the United States.
Assuming the required shareholder and Court approvals are received and all other conditions precedent to closing the transaction are satisfied or waived at the time, MOSAID expects that the arrangement will be effected on or about December 23, 2011.
The Arrangement Agreement provides for, among other things, board support and non-solicitation covenants (subject to the fiduciary obligations of the MOSAID Board and a Sterling "right to match") as well as the payment to Sterling of a break fee equal to $22 million if the proposed transaction is not completed in certain specified circumstances. MOSAID has also agreed to suspend the payment of its quarterly dividend.
The terms and conditions of the transaction are summarized in MOSAID's management information circular, dated November 18, 2011, which is available on SEDAR at www.sedar.com.
Contacts: Michael Salter Senior Director, Investor Relations and Corporate Communications 613-599-9539 x1205 Email Contact