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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
| ¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THESECURITIES EXCHANGE ACT OF 1934 |
OR
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2012
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
OR
| ¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number 0-30148
PNI DIGITAL MEDIA INC
(Exact name of Registrant specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
BRITISH COLUMBIA, CANADA
(Jurisdiction of incorporation or organization)
590 – 425 Carrall Street
Vancouver, British Columbia, Canada V6B 6E3
(Address of principal executive offices)
Cameron Lawrence, 604 893 8955, clawrence@pnimedia.com
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of Each Class | Name of each exchange on which registered | |
| None | Not applicable |
Securities registered or to be registered pursuant to Section 12(g) of the Act
Common Shares without Par Value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
Number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of business of the period covered by the annual report.
34,257,922 Common Shares Without Par Value
(See item 3.A below)
Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes¨ Nox
If this report is an annual or transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934
Yes¨ Nox
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx No¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer¨ Accelerated Filer¨ Non Accelerated Filerx
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP¨ | International Financial Reporting Standards as issued by the International Accounting Standards Board x | Other¨ |
If “Other” has been checked in response to the previous question, Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17¨ Item 18¨
If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act):
Yes¨ Nox
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of theSecurities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Not applicable.
(End of Cover Page)
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We have made forward-looking statements in this annual report that are subject to risks and uncertainties. Forward-looking statements include information concerning our possible or assumed future results of operations. Also, when we use such words as “believe,” “expect,” “anticipate,” “plan,” “could,” “intend” or similar expressions, we are making forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks are discussed in Item 3.D “Risk Factors.” In particular, the statements contained in Item 4.B “Business Overview”, Item 5 “Operating and Financial Review and Prospects” and Item 11 “Quantitative and Qualitative Disclosures About Market Risk” are inherently subject to a variety of risks and uncertainties. Given these uncertainties, we caution readers not to place undue reliance on such forward-looking statements.
We expressly disclaim any obligation or undertaking to provide an update or revision to any forward looking statement contained herein to reflect any change in our expectations or any change in events, conditions or circumstances on any which any statement is based, except as required by applicable law. You should carefully review the cautionary statements and risk factors contained in this and other documents that we file from time to time with the Securities and Exchange Commission.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
A.Selected financial data
The following tables sets forth selected financial information for PNI Digital Media Inc. (the “Company”) for the fiscal years ended September 2011 and 2012 prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. This is the Company’s first set of annual financial statements prepared in accordance with IFRS. The information for the last two fiscal years ended September 30, 2012 and 2011 have been extracted from the Company’s audited consolidated financial statements and related notes included herein and should be read in conjunction with such financial statements appearing in Item 18 –Financial Statements and with the information appearing in Item 5—Operating and Financial Review and Prospects. As required by the Canadian Accounting Standards Board, the Company adopted IFRS on October 1, 2010 and the Company’s financial information for 2011 has been prepared on a retrospective basis to comply with IFRS. Information prior to the transition date has not been adjusted and is not comparable to
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financial information prepared in accordance with IFRS. The consolidated financial statements included in Item 18 in this Annual Report are prepared under IFRS.
The data is expressed in Canadian dollars (“CDN$”), unless otherwise described. We refer readers to “Currency and Exchange Rates” below for a history of exchange rates between the Canadian dollar and the U.S. dollar.
Reported under IFRS
| For the years ended September 30th | ||||||||
Item | 2012 | 2011 | ||||||
Revenue | $ | 22,712,805 | $ | 23,686,351 | ||||
Total comprehensive (loss) income for the period | $ | (4,293,609 | ) | $ | 1,073,208 | |||
Basic net profit (loss) per common share | $ | (0.12 | ) | $ | 0.03 | |||
Fully diluted net profit (loss) per common share | $ | (0.12 | ) | $ | 0.03 | |||
Total assets | $ | 19,964,896 | $ | 22,472,894 | ||||
Net assets (liabilities) | $ | 14,819,212 | $ | 18,904,362 | ||||
Share capital | $ | 66,817,352 | $ | 66,420,572 | ||||
Weighted average number of Common Shares—basic(1) | 34,178,165 | 33,927,659 | ||||||
Weighted average number of Common Shares—diluted(1) | 34,199,622 | 33,985,271 | ||||||
| (1) | See Item 3.A. |
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Currency and Exchange Rates
Unless otherwise indicated, all references to dollar amounts are to Canadian dollars. The rate of exchange for the U.S. dollar, expressed in Canadian dollars, as of December 1, 2012, was 0.9973, based on the daily noon rate as published by the Bank of Canada. Exchange rates published by the Bank of Canada are available on its website,www.bankofcanada.ca, are nominal quotations – not buying or selling rates – and are intended for statistical or analytical purposes.
The following table sets forth the high and low exchange rates for each month during the previous six months, based on the noon rate as published by the Bank of Canada:
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Previous Six Months
| June 2012 | July 2012 | August 2012 | September 2012 | October 2012 | November 2012 | |||||||||||||||||||
High Rate | 1.0418 | 1.0214 | 1.0062 | 0.9902 | 1.0004 | 1.0095 | ||||||||||||||||||
Low Rate | 1.0178 | 1.0014 | 0.9863 | 0.9710 | 0.9763 | 0.9943 | ||||||||||||||||||
The following table sets forth:
| • | The rates of exchange for the U.S. dollar, expressed in Canadian dollars, in effect at the end of each of the periods indicated; |
| • | The average of the exchange rates in effect on the last day of each month during such periods; and |
| • | The high and low exchange rate during such periods, in each case based on the noon rate as published by the Bank of Canada. |
Years ending September 30
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Rate at end of Period | 0.9837 | 1.0389 | 1.0298 | 1.0722 | 1.0599 | |||||||||||||||
Average Rate During Period | 1.0074 | 0.9866 | 1.0407 | 1.1804 | 1.0092 | |||||||||||||||
High Rate | 1.0604 | 1.0389 | 1.0845 | 1.3000 | 1.0796 | |||||||||||||||
Low Rate | 0.9710 | 0.9449 | 0.9961 | 1.0609 | 0.9170 | |||||||||||||||
B.Capitalization And Indebtedness
Not applicable.
C.Reasons for the offer and use of proceeds
Not applicable.
D.Risk Factors
Our business operations and our securities are subject to a number of substantial risks, including those described below. Any person who is not in a position to lose the entire amount of any investment should not invest in our securities. You should carefully consider the risks described below and the other information in this Annual Report on Form 20F before investing in our common shares. The risks and uncertainties described below are not the only ones we may face. Additional risks and uncertainties that we are unaware of, or that we currently deem to be immaterial, may also become important factors that affect us. If any of these or other risks actually occur, our business, financial condition and operating results, as well as the trading price or value of our securities could be materially and adversely affected.
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Risks Relating to the Business
The Following Risks Relate to Our Business Operations
If we are unable to respond to rapid technological change and improve our products, our business could be materially and adversely affected.
The market for our service is characterized by:
| • | rapidly changing technology; |
| • | evolving industry standards; and |
| • | frequent introduction of new services which may be comparable or superior to our services. |
Our success will depend upon acceptance by our retailer customers and their end users of our existing solution and our ability to enhance these solutions and introduce new solutions and features to meet changing customer demands. We cannot assure that we will be successful in identifying, developing and marketing new solutions or enhancing our existing solutions. We may introduce unsatisfactory solutions to the market, negatively impacting our ability to generate sales. We recognized impairment losses of $540,736 in fiscal 2012 (2011—$0) primarily due to underperforming revenues associated with previously capitalized internal use software associated with our social stationery product offering. We can provide no assurance that similar charges will not be recorded in the future. In addition, we cannot assure that solutions or technologies developed by others will not render our solutions or technologies non-competitive or obsolete.
To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our solutions and our network services. The Internet and the e-commerce industry are characterized by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render our existing online operations, network services and proprietary technology and systems obsolete. Our success will depend, in part, on our ability to license leading technologies useful in our business, enhance our existing services, develop new services and technology that address the varied needs of our existing and prospective customers and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of our solutions, the network services and other proprietary technology entails significant technical, financial and business risks. There can be no assurance that we will successfully implement or develop new technologies or adapt our solutions, network services, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards. If we are unable to adapt in a timely manner in response to changing market conditions or customer requirements for technical, legal, financial or other reasons, our business could be materially adversely affected.
In order to remain competitive, we must continually invest in improving our solutions, and adding new products and services. We may need to expend significant resources in order maintain our competitive position. The cost to improve our solutions and add new products and services may adversely affect our financial results.
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We are currently dependent on a limited number of key customers, the loss of which could materially and adversely affect our business.
We generate a significant portion of our revenue from a small number of customers. During fiscal 2012, we earned CDN$20,735,009 from four customer groups, representing 91% of our total revenue for the year. While we are working to expand our customer base, there can be no assurance we will be able to reduce our reliance on these key customers. If our existing customers do not elect to renew their contracts with us at the expiry of their current term, our recurring revenue base will be reduced, which could have a material adverse effect on our results of operations.
Our operating results are affected by consumer preferences for digital photography and their desire to create physical products from their digital images
As the Company’s operations predominantly relate to hosting retailers online photo centers, and our revenue model is principally based on the volume of orders placed through such photo centers, should consumer preferences for digital photography change, our revenues may be significantly affected.
Failure by our retail partners to market products that are sold over our platform for sale could impact future growth potential or cause our revenue to decline.
There can be no assurance that any increase in marketing and sales efforts will result in a larger market or increase in market acceptance for our services. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, or if our proposed services do not achieve or sustain market acceptance, our proposed business, results of operations and financial condition will be materially and adversely affected.
While we assist retailers with their marketing programs, we cannot be assured that retailers will continue to market our service or that their marketing efforts will be successful in attracting and retaining end user customers. The failure to attract and retain end user customers will adversely affect our business. In addition, if our service does not generate revenue for the retailer, we may lose retailers as customers, which would adversely affect our revenue.
We compete with others who provide products comparable to our products. If we are unable to compete with current and future competitors, our business could be materially and adversely affected.
Demand for our products and services are sensitive to price slow economic growth and consumer conservatism. Many external factors, including our production and personnel costs, consumer sentiment and our competitors’ pricing and marketing strategies, can significantly impact our pricing strategies. If we fail to meet our customers’ price expectations, we could lose customers, which would harm our business and results of operations. Changes in our pricing strategies have had, and may continue to have, a significant impact on our net revenues and net income.
Our success is dependent upon our ability to maintain our current customers and obtain additional customers. Digital imaging services are provided by a wide range of companies. Competitors in the market for the provision of digital print services for retailers include Snapfish (a Hewlett-Packard (“HP”) service), American Greetings’ Webshots brand, Vistaprint, SmugMug, LifePics and Storefront.com Online Inc. In addition, end users have a variety of ways in which to obtain their prints, including through kiosk services provided by our competitors at many retailers,
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online services such as Snapfish and Shutterfly, Internet portals and search engines such as Yahoo!, AOL and Google that offer digital photography solutions, and home printing solutions offered by Hewlett Packard, Epson, Canon and others. Many of our competitors have:
| • | longer operating histories; |
| • | significantly greater financial, technical and marketing resources; |
| • | greater name and product recognition; and |
| • | larger existing customer bases. |
As potential competitors introduce competing solutions we may encounter additional and more intense competition. We may experience delays or difficulties in introducing new functionalities into our services, allowing competitors to exploit opportunities in the market. We cannot be certain that we will be able to compete successfully against current and future competitors. If we are unable to do so it will have a material adverse effect on our business, results of operations and financial condition.
Certain competitors have the ability to offer discounted printing services. While in the majority of our agreements we are not directly affected by discounts in the price charged to consumers by our customers, consumers may determine not to print their photos through our retail customers’ services, resulting in fewer transactions through such retailers, and reduced revenue to us. However, under certain agreements we are directly affected by discounts in the price charged to consumers by the retailer where we are responsible for the fulfillment of print orders, the provision of certain consumer deliverables and other media to the retailer’s end consumer. Under this type of arrangement, we pay the retailer a commission for the use of their website and other services provided by the retailer.
As we increase the number of service offerings that we make available to retailers through areas such as business printing and social stationery, we may find ourselves operating in new segments of the retail market and encounter competition from entities that we have not been required to compete against before. These entities may have competitive advantage over the Company through longer operating history, an established market presence or superior financial resources.
If new products currently being developed by the Company are not accepted in the marketplace, our business could be adversely impacted.
A significant amount of time and effort has been focussed towards the development of new service offerings such as business printing and social stationery which will be offered across our platform to both existing and new customers. There can be no assurance that the market for our new services in these areas will emerge to a profitable level or be sustainable. Failure by the Company to sell these services to either new or existing customers may result in future internal growth targets not being achieved and the cost of developing these new services becoming unrecoverable.
The Company is reliant on a single service provider for its new custom social stationery; and have a contractual commitment which limits the use of a different service provider without consent. Should the relationship with the exclusive provider terminate, the Company may face restrictions on supplying the custom social stationery to any new customers.
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If our business does not continue to grow at previously seen rates, our business could be materially and adversely affected.
There can be no assurance that our services will continue to grow at the pace seen over the last ten years, or that our new services will receive widespread market acceptance. Even if our services continue to grow and attain widespread acceptance, there can be no assurance we will be able to meet the demands of our customers on an ongoing basis. Our operations may be delayed or halted as a result of failure to perform as described. Such delays or failure would seriously harm our reputation and future operations. If our product does not continue to be accepted in the market place, our business could be materially and adversely affected.
We rely on our ability to attract and retain customers. If we are unable to maintain reliability of our network and kiosk solutions we may lose both present and potential customers.
Our ability to attract and retain customers depends on the performance, reliability and availability of our network infrastructure and kiosk services. We may experience periodic service interruptions caused by temporary problems in our own systems or software or in the systems or software of third parties upon whom we rely to provide such services. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage these systems and interrupt our services. Computer viruses, electronic break-ins or other similar disruptive events also could disrupt our services. System disruptions could result in the unavailability or slower response times of the websites we host for our customers, which would lower the quality of the consumers’ experiences. Service disruptions could adversely affect our revenues and if they were prolonged, would seriously harm our business and reputation. We do not carry business interruption insurance to compensate for losses that may occur as a result of these interruptions. Our customers depend on Internet service providers and other website operators for access to our network. These entities have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems. Moreover, the Internet network infrastructure may not be able to support continued growth. Any of these problems could adversely affect our business.
The infrastructure relating to our services are vulnerable to unauthorized access, physical or electronic computer break-ins, computer viruses and other disruptive problems. Internet service providers have experienced, and may continue to experience, interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees and others. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. Security breaches relating to our activities or the activities of third-party contractors that involve the storage and transmission of proprietary information could damage our reputation and relationships with our customers and strategic partners. We could be liable to our customers for the damages caused by such breaches or we could incur substantial costs as a result of defending claims for those damages. We may need to expend significant capital and other resources to protect against such security breaches or to address problems caused by such breaches. Security measures taken by us may not prevent disruptions or security breaches.
We may divert our resources to develop new product lines, which may result in fluctuations in our expenditures.
In order to remain competitive, we must continually develop new product lines for our customers. We expect to continue developing new product lines, such as online printing of business and social stationery which were launched during fiscal 2012, and expand current product lines. The
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development of new product lines may result in increased expenditures during the development and implementation phase, which could negatively impact our results of operations. In addition, we are a small company with limited resources and diverting these resources to the development of new product lines may result in reduced customer service turn-around times and delays in deploying new customers. These delays could adversely affect our business and results of operations.
We may undertake acquisitions to expand our business, which may pose risks to our business and dilute the ownership of existing shareholders.
We may pursue acquisitions of businesses, technologies or services. Integrating newly acquired businesses, technologies or services may be expensive and time consuming. To finance any acquisitions, it may be necessary to raise additional funds through public or private financings. Additional funds may not be available on terms favourable to us and, in the case of equity financings, would result in additional dilution to our existing shareholders. If we do complete any acquisitions, we may be unable to operate the acquired businesses profitably. If we are unable to integrate any newly acquired entities, technologies or services effectively, our business and results of operations may suffer. The time and expense associated with finding suitable and compatible businesses, technologies or services could also disrupt our ongoing business and divert management’s attention. Future acquisitions by us could result in large and immediate write-offs or assumptions of debt and contingent liabilities, any of which could substantially harm our business and results of operations.
Our ability to realize the anticipated benefits of any acquisitions will depend on successfully integrating the acquired businesses.
The integration of acquired business operations could disrupt our business by causing unforeseen operating difficulties, diverting management’s attention from day-to-day operations and requiring significant financial resources that would otherwise be used for the ongoing development of our business. The difficulties of integration could be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. In addition, we could be unable to retain key employees or customers of any combined businesses. We could face integration issues pertaining to the internal controls and operational functions of any acquired companies and we also could fail to realize cost efficiencies or synergies that we anticipated when selecting our acquisition candidates. As a result of these and other risks, if we are unable to successfully integrate acquired businesses, we may not realize the anticipated benefits from any acquisitions. Any failure to achieve these benefits or failure to successfully integrate acquired businesses and technologies could seriously harm our business.
Our net revenues, operating results and cash requirements are affected by the seasonal nature of our business.
Our business is seasonal, with a significant proportion of our recurring revenues net income and operating cash flows generated during our first fiscal (fourth calendar) quarter. As a result, any stoppages or interruptions in the provision of our network to our customers during our first fiscal (fourth calendar) quarter could have an adverse effect on our operating results and our relationships with our customers. In addition, our growth in past years may have overshadowed seasonal or cyclical fluctuations in the economy which might have influenced our business to date; accordingly, our past performance may not reflect the true seasonal nature of our business, or the effect of general economic conditions on our business.
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Our quarterly results may fluctuate.
Our future revenues and operating results may vary significantly from quarter to quarter due to a number of factors, some of which are outside of our control. Factors that could cause results to vary include:
| • | demand for services, including seasonal and holiday demand, and reduction in demand as a result of general market or economic conditions; |
| • | the ability of our customers to attract and retain visitors to their websites; |
| • | the ability of our customers to encourage repeat purchases from their customers; |
| • | the pricing and marketing strategies of our customers; |
| • | the cost of expanding or enhancing the services we provide to our customers; |
| • | volatility in our stock price, which may lead to higher stock based compensation expense for future stock option grants; and |
| • | improvements in the quality, cost and convenience of desktop printing of digital pictures and products. |
Based upon the factors cited above, quarter to quarter comparisons of our operating results may not be a good indication of our future performance. It is possible that in one or more future quarters, our operating results may be below the expectations of public market analysts and investors, which may result in a decline in the market price of our common shares.
In the past we have relied on the proceeds of financings to fund our operations. In the past, we had negative cash flows from operations, including up to the year ended September 30, 2008. We achieved positive cash flows from operations for the years ended September 30, 2009, 2010, 2011, and 2012 and while we believe we will generate sufficient cash flow to meet our expected cash requirements for fiscal 2013, if we are unable to continue to generate positive cash flow from operations or continue to raise funds, we may be required to limit or curtail operations in the future.
Since inception and up to the year ended September 30, 2009 we have operated at a loss and, at September 30, 2012, had an accumulated deficit of CDN$71,135,021. The successful implementation of our business strategy depends on numerous factors including economic, competitive and other conditions and uncertainties, the ability to hire and retain qualified personnel, the ability to obtain financing for continued development and commercialization of our products. Adverse economic or competitive conditions or the failure to hire and retain qualified personnel or obtain financing if required could affect our operations in the future.
During the year ended September 30, 2012 we recorded a loss before income tax of CDN$2,308,432, and during the same period recorded cash inflows from operations of CDN$3,032,352. In addition, we are currently generating sufficient revenues to cover our operating expenses. However, if our revenue growth slows or declines and our expenses do not slow or decline at an equal or greater rate we may be unable to continue to generate positive cash flows. If we are unable to generate positive cash flow from operations or raise the funds necessary to continue existing operations, we may be required to either limit or curtail operations.
As of September 30, 2012, we had cash and cash equivalents of approximately CDN$4,611,824. The cash available, along with anticipated positive cash flow from operations are expected to meet our requirements for fiscal 2013. See “Item 5 – Operating and Financial Review and Prospects – B. Liquidity and Capital Resources”.
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We may have difficulty in managing our growth.
Expected rapid growth in all areas of our business may place a significant strain on our operational, technical and management resources. As a result of such growth, we expect that operating expenses and staffing levels may increase in the future. To manage our growth, we must expand our operational and technical capabilities and manage our employee base, while effectively administering multiple relationships with various third parties, including affiliates. We cannot assure that we will be able to effectively manage our growth. The failure to effectively manage our growth could result in an inability to meet our customer demands, leading to customer dissatisfaction and loss. Loss of customers could adversely affect our operating results. There is no guarantee that the expansion of our operations will result in an increase in revenue.
Our business is increasingly focussing on foreign markets and our results becoming subject to significant exposure to foreign exchange rates, which may adversely impact our business.
Until 2007 we had been focused on the Canadian marketplace. Since that time we have added a number of large new customers in the United States marketplace, including Costco USA, SAMS Clubs USA, Walgreen Co. and CVS/pharmacy. As a result of this we are now more concentrated in the United States marketplace. The United States marketplace for services the Company offers is approximately ten times the size of the Canadian marketplace and due to our recent success in the United States market, a substantial portion of our operations is based on sales and services rendered to customers in the United States. Further, with our acquisition of Pixology in July 2007 and our acquisition of WorksMedia in March 2009, we have expanded into the United Kingdom. Although Pixology has lost customers since this acquisition and may lose additional customers going forward, we continue to expect a significant portion of our sales and services will be rendered to customers in the United Kingdom. Finally, during the past two fiscal years we have begun expanding the delivery of our service to customers outside of Canada, the United States and the United Kingdom to countries such as Australia, South Africa and other parts of Europe; however our financial performance will not be materially affected by fluctuations in the value of the Canadian dollar against the currencies in the other jurisdictions as we currently bill customers in Canadian dollars, U.S. dollars, Euros or United Kingdom pounds. We record the financial results for the operations of our UK subsidiary in United Kingdom pounds and also undertake certain transactions with our United States customers in U.S. dollars. Sales to other jurisdictions around the world are conducted either in United Kingdom pounds, Canadian dollars or United States dollars. Our consolidated financial results are reported in Canadian dollars. As a result, our earnings and financial position are affected by foreign exchange rate fluctuations in a number of ways: Firstly, the Company is subject to translation risk. Translation risk is the risk that an entity’s financial statements for a particular period, or at a certain date, depend on the prevailing exchange rate of the local currencies in which its foreign subsidiaries operate against the Canadian dollar; secondly, the Company is subject to transaction risk. Transaction risk is the risk that the exchange rate at which a transaction is initially recorded will be different from the rate at which it is settled; and thirdly, as a significant amount of the Company’s revenue is now in either US dollars or British pounds, any weakening in these exchange rates relative to the Canadian dollar will impact the revenue that is recorded by the Company. In extreme cases, this could eliminate the impact of underlying growth being experienced within the industry and result in a situation where the Company’s revenue declines even though the level of activity taking place through its platform is increasing.
At the present time, we have no plan or policy to utilize forward contracts or currency options to minimize or hedge this exposure, and even if these measures are implemented there can be no assurance that such arrangements will be available, be cost effective or be able to fully offset such future currency risks.
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If we are not able to reliably meet our data storage and management requirements, customer satisfaction and our reputation could be harmed. Interruptions to our customers’ website, information technology systems, print production processes or customer service operations could damage our reputation and substantially harm our business and results of operations.
The satisfactory performance, reliability and availability of our customer’s websites, information technology systems, printing production processes and customer service operations are critical to our reputation, and our ability to attract and retain customers and maintain adequate customer satisfaction. Any interruptions that result in the unavailability of customer’s websites or reduced order fulfillment performance or customer service could result in negative publicity, damage our reputation and brands and cause our business and results of operations to suffer. This risk is heightened in our first quarter, as we experience significantly increased traffic to our customer’s website during the holiday season.
Our ability to provide our service depends on the uninterrupted operation of our computer and communications systems. If we are not able to reliably meet our data storage and management requirements, we could have disruptions in services which could impair customer satisfaction and our reputation and lead to reduced net revenues and increased expenses. Moreover, if the cost of meeting these data storage and management requirements exceeds our expectations, our results of operations would be harmed.
Our computer hardware necessary to operate our service is primarily located in two third party hosting facilities one is located in Vancouver, British Columbia and the other in Toronto, Ontario. Our systems and operations could suffer damage or interruption from human error, fire, flood, power loss, telecommunications failure, break-ins, terrorist attacks, acts of war and similar events. As the result of the two facilities we do have redundant systems in multiple locations, however, we do not have all customers hosted in each location and therefore if one facility failed it may take days to get customers resident on the failed system live in the other facility. Further, we do not have business interruption insurance to compensate us for losses that may occur in relation to a failed facility(ies). In addition, the impact of any of these disasters on our business may be exacerbated by the fact that we do not have a disaster recovery plan in place.
We may not be able to protect and enforce our intellectual property rights, which could result in the loss of our rights, loss of business or increased costs.
Our success and ability to compete depends, to a large degree, on our current technology and, in the future, technology that we might develop or license from third parties. To protect our technology, we have used the following:
| • | confidentiality agreements; |
| • | retention and safekeeping of source codes; and |
| • | duplication of such for backup. |
Despite these precautions, it may be possible for unauthorized third parties to copy or otherwise obtain and use our technology or proprietary information. In addition, effective proprietary information protection may be unavailable or limited in certain foreign countries. Litigation may be necessary in the future to:
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| • | enforce our intellectual property rights; |
| • | protect our trade secrets; or |
| • | determine the validity and scope of the proprietary rights of others. |
Such misappropriation or litigation could result in substantial costs and diversion of resources and the potential loss of intellectual property rights, which could impair our financial and business condition.
Third parties may sue us for infringing their intellectual property rights. Such claims may involve internally developed technology or technology and enhancements that we may license from third parties. Moreover, although we sometimes may be indemnified by third parties against such claims related to technology that we have licensed, such infringements against the proprietary rights of others and indemnity there from may be limited, unavailable, or, where the third party lacks sufficient assets or insurance, ineffectual. Any such claims could require us to spend time and money defending against them, and, if they were decided adversely to us, could cause us to:
| • | pay damages; |
| • | be subject to injunctions; or |
| • | halt deployment of our network and products while we re-engineer them or seek licenses to the necessary technology, which necessary licenses may increase our costs and might not be available on reasonable terms. |
Any of these factors could have a material and adverse effect on our financial condition and business.
If we are unable to adequately control the costs associated with operating our business, our results of operations will suffer.
The primary costs in operating our business are related to compensating our personnel, acquiring equipment and technology and leasing facilities. If we are unable to keep these costs aligned with the level of revenues that we generate, our results of operations would be harmed.
The loss of any of our executive officers, key personnel or contractors would likely have an adverse effect on our business.
We are dependent upon our management, employees and contractors for meeting our business objectives. In particular, members of the senior management team play key roles in our executive management and technical development. We do not carry key man insurance coverage to mitigate the financial effect of losing the services of any of these key individuals. Our loss of any of these key individuals most likely would have an adverse effect on our business.
In addition, we may require additional capabilities, we cannot assure that we will be successful in attracting personnel of the appropriate calibre.
We rely on third parties for the development and maintenance of the Internet and the availability of increased bandwidth to users.
The success of our business will rely on the continued improvement of the Internet as a convenient means of consumer interaction and commerce. Our business will depend on the ability of our customers’ consumers to use the network without significant delays or aggravation that may be associated with decreased availability of Internet bandwidth and access to our
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services. This will depend upon the maintenance of a reliable network with the necessary speed, data capacity and security, as well as timely development of complementary products such as high speed modems for providing reliable Internet access and services. The failure of the Internet to achieve these goals may reduce our ability to generate significant revenue.
Our penetration of a broader consumer market will depend, in part, on continued proliferation of high speed Internet access. The Internet has experienced, and is likely to continue to experience, significant growth in the number of users and amount of traffic. As the Internet continues to experience increased numbers of users, increased frequency of use and increased bandwidth requirements, the Internet infrastructure may be unable to support the demands placed on it. In addition, increased users or bandwidth requirements may harm the performance of the Internet. The Internet has experienced a variety of outages and other delays and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as the level of traffic, and could result in the Internet becoming an inconvenient or uneconomical source of products and services, which would cause our revenue to decrease. The infrastructure and complementary products or services necessary to make the Internet a viable commercial marketplace for the long term may not be developed successfully or in a timely manner.
Our technology may contain undetected errors that could result in limited capacity or an interruption in service.
Our technology may contain undetected errors or design faults which may cause our service to fail and result in the loss of, or delay in, acceptance of our services. If the design fault leads to an interruption in the provision of our services or a reduction in the capacity of our services, we would lose revenue. In future, we may encounter scalability limitations that could seriously harm our business. A failure of our services could lead to a loss of customers, the erosion of our reputation, and serious harm to our business.
In the past we have identified deficiencies with our internal controls and there remain areas of our internal and disclosure controls that require improvement. If we fail to maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our common shares may be adversely impacted.
We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in the company’s annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In the fiscal years ended September 30, 2007 and 2008, we concluded that our internal controls over our financial reporting were not effective. The deficiencies identified related to management’s application of certain complex accounting requirements. As a result of this, management concluded that our disclosure controls and procedures and internal controls over financial reporting were not effective as of September 30, 2008 and September 30, 2007. Following the identification of these deficiencies, we undertook remedial steps and plan to continue to take additional remedial steps to improve our internal and disclosure controls. There can be no guarantee that the measures taken will be sufficient to ensure accurate financial reporting in the future. A failure to provide accurate financial results may result in loss of investor confidence and may adversely impact the price of our common shares. In addition, our failure to maintain adequate internal and disclosure controls could lead to sanctions by the Securities and Exchange Commission and other regulatory bodies under the applicable legislation, including theForeign Corrupt Practices Act of 1977.
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The Following Risks Relate To The Market For Our Common Shares
There may not be an active, liquid market for our common shares.
There is no guarantee that an active trading market for our common shares will be maintained on the OTC Bulletin Board or the TSX. Shareholders may not be able to sell their shares quickly or at the latest market price if trading in our common shares is not active.
Our common shares may experience extreme price and volume volatility which may result in losses to our shareholders.
On September 30, 2012, our common shares closed at a price of CDN$0.43 on the TSX and US$0.44 on the OTC Bulletin Board. During the period from October 1, 2011 to September 30, 2012, the adjusted high and low trading prices of our common shares on the TSX were CDN$0.90 and CDN$0.42, respectively, with a total reported trading volume of 6,953,0000 shares. For the same period, the adjusted high and low trading prices of our common shares on the OTC Bulletin Board were US$0.89 and US$0.41, respectively, with a total reported trading volume of approximately 7,965,400 shares. The trading volume of our shares on the OTC Bulletin Board may not be representative of actual trading volume due to double ticketing of orders that may have occurred on one or more days of the period analyzed.
Daily trading volume on the TSX of our common shares for the period from October 1, 2011 to September 30, 2012 has fluctuated, with a high of 1,120,500 shares and a low of zero shares, averaging approximately 27,812 shares. Daily trading volume on the OTC Bulletin Board in our common shares for the period from October 1, 2011 to September 30, 2012 has fluctuated with a high of 997,700 and a low of zero, averaging approximately 31,735. Accordingly, the trading price of our common shares may be subject to wide fluctuations in response to a variety of factors including announcement of material events by us such as the status of required regulatory approvals for our products, competition by new products or new innovations, fluctuations in our operating results, general and industry-specific economic conditions and developments pertaining to patent and proprietary rights. The trading price of our common shares may be subject to wide fluctuations in response to a variety of factors and/or announcements concerning such factors, including:
| • | actual or anticipated period-to-period fluctuations in financial results; |
| • | litigation or threat of litigation; |
| • | failure to achieve, or changes in, financial estimates by securities analysts; |
| • | new or existing products or services or technological innovations by us or our competitors; |
| • | comments or opinions by securities analysts or major shareholders; |
| • | significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
| • | additions or departures of key personnel; |
| • | sales of our common shares, including by holders of the notes on conversion or repayment by us in common shares; |
| • | economic and other external factors or disasters or crises; |
| • | limited daily trading volume; and |
| • | developments regarding our patents or other intellectual property or that of our competitors. |
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In addition, the securities markets in the United States and Canada have recently experienced a high level of price and volume volatility, and the market price of securities of technology companies have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. It is expected that such fluctuations in price and limited liquidity will continue in the foreseeable future which may make it difficult for a shareholder to sell shares at a price equal to or above the price at which the shares were purchased.
At present, there is a limited market for our common shares in the United States. If a substantial and sustained market for our common shares does not develop in the United States, our US shareholders’ ability to sell their shares may be materially and adversely affected.
During the year ended September 30, 2011 our common shares traded in Canada on the TSX Venture Exchange (“TSX-V”). Subsequent to September 30, 2011 the Company’s application to the Toronto Stock Exchange (“TSX”) was approved and effective October 18, 2011 the Company’s shares were de-listed from the TSX-V and began trading on the TSX. In the United States the Company’s common shares are traded on the OTC Bulletin Board. Trading of these shares is presently concentrated in the United States marketplace, however, at present there is a limited trading market in the United States for our common shares and such is unlikely to develop further while we are quoted on the OTC Bulletin Board. Any trading is currently limited to the non-NASDAQ over-the-counter market. There can be no assurance that our securities will ever qualify for listing on any other stock market or stock exchange in the US or elsewhere. Accordingly, there can be no assurance that any US market for our securities will continue.
If there are substantial sales of our common shares, the market price of our common shares could decline.
Sales of substantial numbers of our common shares could cause a decline in the market price of our common shares. Any sales by existing shareholders or holders of options or warrants may have an adverse effect on the market price of our common shares.
Our common shares may be deemed to be a “penny stock” in the United States. As a result, trading of our shares may be subject to special requirements that could impede our shareholders’ ability to resell their shares in the United States.
At present our common shares are deemed to be a “penny stock” as that term is defined in Rule 3a51-1 of the Securities and Exchange Commission. Penny stocks are stocks:
| • | with a price of less than five US dollars per share; |
| • | that are not traded on a recognized national exchange; |
| • | whose prices are not quoted on the NASDAQ automated quotation system; |
| • | of issuers with net tangible assets less than |
| ¡ | $2,000,000 if the issuer has been in continuous operation for at least three years; or |
| ¡ | $5,000,000 if in continuous operation for less than three years; or |
| • | of issuers with average revenues of less than $6,000,000 for the last three years. |
Section 15(g) of the Exchange Act, and Rule 15g-2 of the Securities and Exchange Commission, require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of
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the document before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 of the Securities and Exchange Commission requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer:
| • | to obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; |
| • | to determine reasonably, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience so as to be reasonably capable of evaluating the risks of penny stock transactions; |
| • | to provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination above; and |
| • | to receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. |
Compliance with these requirements may make it more difficult for holders of our common shares to resell their shares to third parties or to otherwise dispose of them in the United States.
We have no history of paying dividends, do not intend to pay dividends in the foreseeable future and may never pay dividends.
Since incorporation, we have not paid any cash or other dividends on our common shares and do not expect to pay such dividends in the foreseeable future as all available funds will be invested to finance the growth of our business.
ITEM 4. INFORMATION ON THE COMPANY
Summary
We are a company incorporated under theBusiness Corporations Act (British Columbia). Our principal and registered offices are located at Suite 590, 425 Carrall Street, Vancouver, British Columbia, V6B 6E3. We also have an office in Southampton, England.
We provide software and technology to retailers, Internet portals and web sites, and telecommunication service providers (including mobile phone companies). Our principal service is the PNI Digital Media Platform. The PNI Digital Media Platform consists of digital imaging technology which we provide to retailers who provide, or wish to provide, photo print, photo gift stationery and business card print services, professional and commercial photo processing labs, image content owners, and targeted portal services (collectively, the “Retailer”). The PNI Digital Media Platform enables the Retailer to provide digital photo and personalized product services from desktops, kiosks, and mobile phones, through the Internet to end user customers. End user customers upload their digital images through the Internet via the Retailer’s website, or at a retail outlet through an in-store kiosk for printing and storage by the Retailer. The Retailer controls the process from image upload to final delivery of the end product. We act as a platform intermediary in the process, and as a “white label” solution are not visible to the end user customer unless the Retailer chooses to disclose us as the provider of their solution.
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A.History and development of the Company
We were incorporated on December 1, 1995 pursuant to the laws of British Columbia, Canada under the name InMedia Presentations Inc. We changed our name on July 14, 1999 to PhotoChannel Networks Inc., and on June 8, 2009 we changed our name to PNI Digital Media Inc.
On July 2nd, 2007, we acquired Pixology Plc (“Pixology”), a company with offices based in the United Kingdom and a sales office in the United States. On March 11th2009, we acquired WorksMedia Ltd. (“WorksMedia”), a United Kingdom-based software company with offices in Southampton, England.
As of September 30, 2012, we had 34,257,922 common shares outstanding.
Our principal executive office is located at 590-425 Carrall Street, Vancouver, British Columbia, Canada V6B 6E3, our telephone number is 604-893-8955 and our website can be accessed at www.pnimedia.com.
Important Events In the Development of Our Business
Important events in the development of our business are provided under Item 4.B., below, and in other sections of this filing.
Principal Capital Expenditures And Divestitures
We continue to develop, change and enhance our software and product offerings. Since October 1, 1999, the only capital divestiture has been the filing by our US operating subsidiary, PhotoChannel, Inc., under Chapter 7 of the United States Bankruptcy Code with the United States Bankruptcy Court, District of Connecticut, on November 1, 2001. The only capital expenditures have been for computer equipment, software and furniture and leaseholds, which occurred in the normal course of our operations. Our total capital expenditures were approximately $2,181,069 compared with $2,399,316 for the year ended September 30, 2011, and $1,468,825 for the year ended September 30, 2010. Prior to 2009 we financed capital expenditures primarily by issuing common shares. All expenditures subsequent to the year ended September 30, 2009 were financed through cash flows generated from operations. Further details applicable to our anticipated capital expenditures and funding sources are detailed in Liquidity and Capital Resources in Item 5.B.
Principal Capital Expenditures And Divestitures Currently in Process
As of December 1, 2012 there were no capital expenditures or divestitures in process outside of the normal course of business.
Public Takeover Offers
There have been no public takeover offers by third parties in respect of our shares.
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Acquisitions of subsidiaries
Acquisition of Pixology
The Company acquired Pixology on July 2, 2007. Pixology had two principal product offerings – in-store kiosk technology and an online digital printing solution called the Pixology Online Photo Center, which is similar to our PNI Digtial Media Platform offering. Pixology’s focus was in the delivery of software for in-store kiosks, which enable customers in retail stores to upload their pictures for printing within such retail store, and for ordering gift items for future delivery. We acquired all of the outstanding shares of Pixology pursuant to a take-over offer, for a total purchase price of approximately $17,650,000 before direct costs associated with the acquisition, based on exchange rates at the time of take-up. We completed the acquisition of all of the outstanding shares of Pixology, and converted Pixology to a non-public company under the laws of the United Kingdom on October 27, 2007.
Acquisition of WorksMedia
On February 25, 2009, the Company acquired 100% of the issued and outstanding share capital of WorksMedia Ltd., a company based in Southampton, England. Under the terms of the Agreement, we paid the shareholders of WorksMedia Ltd. the Sterling equivalent of $2.1 million based upon the exchange rate published by the Bank of England on February 25, 2009 in thirteen equal monthly instalments and issued to the shareholders of WorksMedia 750,000 common shares of PNI Digital Media Inc. which were released to the former WorksMedia Ltd. shareholders in three equal instalments of 250,000 common shares after 12, 24, and 36 months after closing of the purchase, for all the issued and outstanding shares of WorksMedia Ltd.
WorksMedia Ltd. was a provider of software for in-store kiosks, with an existing deployment of WorksMedia software to more than 3000 kiosks.
B.Business Overview
The Company operates the PNI Digital Media Platform, which provides transaction processing and order routing services for major retailers. The PNI Digital Media Platform connects consumer ordered digital content, whether from in-store kiosks, online sites, desktop software or mobile devices, with retailers that have on-demand manufacturing capabilities for the production of merchandise such as photos and business documents. The Company successfully generates and routes millions of transactions each year for a range of retailers enabling thousands of locations worldwide.
The Company’s customers include some of the largest retailers on a worldwide basis, including, Costco, SAM’s Club, Blacks, Walgreen Co., CVS/Pharmacy, Tesco, Rite Aid and Fujifilm among others.
The Company’s core value proposition is to provide an effective and dynamic technology platform to allow its customers to transact and transport photo and digital media orders from the consumer, whether via a website over the internet, from an in-store kiosk or from a mobile device, to the retailers’ production facilities. The technology that delivers this end to end service is generically known as the PNI Digital Media Platform (the “Platform” or “Network”). The Company earns revenue through multiple channels, including recording transaction fees for all such orders that pass through the Network.
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The Company’s goal is to provide leading retailers who have digital manufacturing facilities with the ability to produce merchandise on-demand from digital orders received via the internet or kiosk, including being able to support and enable one-hour photo operations.
The Company has built its current business around the conversion of photography from film-based to digital-based and has positioned itself to be one of the most significant providers of internet infrastructure that facilitates the delivery of digital imaging from order origination to fulfillment through our relationships with large retailers.
The Company has invested in, and focused on building a future towards, enabling e-commerce for all types of digital content for the retailers’ ‘Media Center’. Up to fiscal 2011, the PNI Digital Media Platform was limited to providing transaction processing and order routing services associated with photo print and photo related gift products. During fiscal 2012, the Company completed its platform development to enable the launch of its business printing and social stationery initiatives in November 2011 and February 2012 respectively.
Products
The PNI Digital Media Platform
On May 10, 2001 the first retail Platform members outfitted with their own branded Internet sites were activated onto our PNI Digital Media Platform. These retailers accept the upload of images that originate within digital cameras or mobile phones or have been uploaded from the in-store kiosk environment to sites we create and host. Our Platform is a transparent component to the consumer, existing solely as the technology backbone of the retailer’s digital imaging strategy. The service enables retailers to offer a variety of products to their customers, from standard 4x6 prints to various gift items as well as certain non-photographic based products such as business cards and stationery. The service is designed to prompt end users to purchase gift items in addition to their 4x6 prints, thus increasing sales for our customers and increasing our revenues.
Utilizing the capabilities of our Platform, we are Internet infrastructure company that owns retail relationships and manages a Platform environment that today is focused on delivering digital imaging and personalized product creation from order origination to fulfillment. We have developed a fully syndicated white branded site that allowed for orders to be placed online and then routed to a remote location for printing for ultimate pick up by the consumer at the store location of their choice.
Transactions being handled over our Platform has continued to increase significantly:
FY 2008 | FY 2009 | FY 2010 | FY 2011 | FY 2012 | ||||
7.6 million | 14.6 million | 17.1 million | 18.4 million | 19.1 million |
Our Platform is not restricted to the provision of digital imaging services. We can provide a range of personalized products that can be created, ordered and routed over the PNI Digital Media Platform to our customers. In 2008, we extended the PNI Digital Media Platform to include creation and on-demand ordering and routing of greeting cards from a website. This extension of the PNI Digital Media Platform has been populated across some of our existing retailers, and has also been used to acquire new retailer customers. The Company has recently directed a portion of its resources at investigating and developing other personalized products and services that can be offered over the Platform. After careful consideration of a number of options, the two areas
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chosen for development were small business printing and social stationery which were launched in the first and second quarter of fiscal 2012, respectively. Small business printing services will allow the Company’s customers to offer an online service allowing consumers to order business collateral such as business cards, copies, flyers, letterhead and bound reports from their home or office and pick up the finished products in as little as the same day or next day from the retailer’s store location. Social stationery services will allow the Company’s retailers to offer an online service providing personalised invitations and correspondence focused on life events such as weddings, birthdays, baby announcements etc.
Pixology Kiosk Technology
With the acquisition of Pixology on July 2, 2007, we added kiosk software to our product offering. Pixology was focused exclusively on the photo product market and had developed software and networks that enable equipment manufacturers and retailers of photo products to substitute the analogue film environment with new digital infrastructure. Pixology’s customers were principally companies located in the United States, Japan and the United Kingdom, and include Costco in the United States.
Pixology had two principal product offerings – in store kiosk technology and an online digital printing solution which is similar to our Network offering. Pixology’s focus was in the delivery of software for in store Kiosks, which enable customers in retail stores to upload their pictures for printing within such retail store, and for ordering gift items for future delivery. In some instances, Pixology would also take on the responsibility for fulfilling the customer orders through the use of third party suppliers. Pixology had been providing this service in the retail environment for four years prior to our acquisition. We have taken over this service and provide it to a number of retail customers including Tesco and Costco. During the year ended September 2008 Jessops gave notice that they would not renew their contract at the end of its term in August 2009.
WorksMedia Software Technology:
With the acquisition of WorksMedia Ltd on February 25th, 2009, we further extended the capabilities of the PNI Digital Media Platform by adding extensible rich-media software to kiosks, desktop software and online websites. The principal deployment of the WorksMedia software has been on in-store kiosks. This software differs from the solution acquired with Pixology, in that it is focused on rich-media experiences for the end user, and is highly portable across almost any medium, including mobile phones. Furthermore, the software, given the nature of its flexibility, can support the creation of personalized photo gifts or other personalized products beyond simple photo prints in a kiosk environment, thereby creating another “on ramp” to the PNI Digital Media Platform for personalized products.
WorksMedia provided the software solution to a range of retailers and resellers including Blacks Photography Corporation, Fujifilm UK, and others. On April 30th, 2009, we deployed the WorksMedia Software, now branded as the PNI Connected Kiosk(tm), with in-store kiosks in Fred Meyer grocery chains in the USA. On July 9th, 2009, we announced the addition of a series of resellers of the WorksMedia Software including Retail Imaging Management Group and Photo Gift World Ltd. The PNI Connected Kiosk is currently predominantly sold through distributor agreements in various countries around the world, including the United Kingdom, the United States, Canada, Australia, South Africa, Israel and Continental Europe.
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Summary of Gross Revenues
During the three years ended September 30, 2012, our revenue was generated as follows:
| Year Ended September 30, | ||||||||||||||||||||||||
| 2012 | 2011 | 2010 | ||||||||||||||||||||||
Canadian based operations | $ | 18,920,053 | 83 | % | $ | 18,742,467 | 79 | % | $ | 19,536,640 | 77 | % | ||||||||||||
United Kingdom based operations | 3,792,752 | 17 | % | 4,943,884 | 21 | % | 5,819,930 | 23 | % | |||||||||||||||
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Total Revenue | $ | 22,712,805 | $ | 23,686,351 | $ | 25,356,570 | ||||||||||||||||||
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Competition
The digital photography market is intensely competitive with a wide range of companies competing for market share through various avenues. PNI does not have a consumer facing business model, instead positioning itself behind the established brand names of major retail partners. By positioning itself in such a manner, the Company is able to reduce some of its business risk as it is able to reduce reliance on one particular market segment or geographic concentration and does not have to concentrate on building consumer brand awareness of its own.
Direct competitors in the market who also provide digital print services on behalf of retailers include Snapfish (a division of Hewlett Packard), LifePics, and Storefront.com Online Inc.
The competition for in-store kiosk software is provided by companies such as Hewlett Packard, Lucidiom, Storefront.com Online Inc., Kodak, DNP Photo Imaging and Fujifilm. Although there continues to be an increased trend of business being conducted over the internet and away from the traditional store environment, a significant portion of photo and photo related business is still conducted in-store through kiosk interfaces and the Company believes there remains significant business potential to increase market share and revenue by connecting kiosk-based interfaces to the PNI Digital Media platform.
Online photo print services
Internet photography service providers offer different services, some associated with photo products, personalized photo gifts, stationery and small business printing collateral, others with archiving and sharing, and some provide a comprehensive photo community service. The following are the common services provided:
| • | Content—the ability to offer uploading of digital images through various devices, as well as image enhancing options. Internet portals can charge for the uploading service or provide it free of charge. Some companies offer the content for online photography community sites, promoting photographic education via articles and photo-magazine subscriptions or via a chat platform and lectures with professional photographers. |
| • | Sharing/Albums—via the creation of albums and archives, many of the sites offer the ability to view and share photos. |
| • | Photofinishing—is generated through prints, reprints, enlargements, gift items and sales of photo hardware and supplies. |
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| • | Community—communities offer an interactive location where the user can find a one-stop-shop catering to photography. |
We offer all of these services, except community and related content/education, through our syndicated websites.
Printing of Digital Images
We provide an open, scalable and secure network for the retailers in the print-on-demand product industry. Some companies like Shutterfly and Snapfish provide both online consumer websites that compete with Retailers, while also providing technology services to Retailers. . Our kiosk business model going forward is one of connecting with our Platform to offer a online and in-store digital imaging solution. This solution will provide the same look and feel to the consumer whether they are ordering prints online or in-store from the kiosk. It will permit the consumer to access their online account from the in-store kiosk. This advantage will allow consumers to order prints and gifting products from their online albums while in the store or upload digital images from the kiosk into their online album(s) saving all in one step. We believe consumers, as with the automated banking machines, will continue to utilize the in-store kiosk even as the use of online becomes more common practice.
Our most significant online competitor is HP’s Snapfish. Prior to HP’s acquisition of Snapfish in 2005, Snapfish was focused on a pure business to consumer model, competing with Kodak’s Ofoto (at the time) and Shutterfly. During 2005, Snapfish entered the distributed printing model (as used by us) when it signed Costco USA. Immediately thereafter it was purchased by HP for an undisclosed amount. Although Snapfish now competes with us under a distributed printing model for retailers they continue to operate their business to consumer (“mail order”) model, which is in essence a competitor to the retailers that they aspire to contract with.
While Shutterfly’s direct to consumer model differs from ours, they do compete directly with our retailers for market share of the online photo print services market. Shutterfly also offers its products and services as an affiliate or vendor provider to our Retailers.
Our most significant kiosk competitor is Kodak with more kiosks in the marketplace today than any other manufacturer. We believe that going forward we will have an advantage over Kodak with an integrated online/kiosk solution, at which time our main competitor may become HP as it too has a kiosk technology similar to ours but still mandates that the retailer buy kiosk hardware to get the HP software experience. Other kiosk manufacturers are Fujifilm, Lucidiom, DaiNippon Print (DNP), HP and Beaufort.
Retailers offering photo products are our key customers, however, in some instances we provide services to the ultimate customer through an arrangement whereby we pay the retailer a fee for the use of their website and take on the responsibility for the fulfillment of print orders, the provision of certain consumer deliverables and other media through the use of third party suppliers. Organizations such as Kodak, Fujifilm, Hewlett Packard and DaiNippon also compete with our service in varying manners, but all also work with retailers in terms of providing equipment to scan silver halide images to digital, digital print equipment and some provide online storage and web site hosting. We believe that we can co-exist in many retail environments with these other industry players without directly competing with them, as our services are independent of the type of digital imaging hardware the retailer prefers to use. We also believe that we can deliver the secure network component and lab broker system of delivering print orders from outside parties without having to compete on the equipment, hosting and storage business. Some larger retailers have created internal networks, however, such networks are restricted to that retailer’s stores.
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One of our strengths is that we offer a complete solution that creates a secure and open network and kiosk software, both of which are agnostic to the brand of digital minilabs and kiosk hardware being utilized by the digital imaging retailer. This allows different retailers and web properties to do business together if they so desire. Our business model allows us to create a multi-dimensional digital image solution.
Our current customers, when given the alternative of “white labelling”, have gravitated quickly toward our solutions of technology coupled with our private label branding, service and flexibility. Retailers offering photo products need innovative digital imaging goods and services.
We believe that one of differentiating factors is the advantage of being a small and efficient organization to make speedy and informed decisions. This flexibility means the retailer or their customer does not have to go through levels of bureaucracy to get a decision, act upon it and have a solution implemented. We believe that the principal factors enabling us to compete, include: a complete solution service; strategic market positioning; channel distribution; and the functionality of our technologies. The relative importance of each of these factors depends upon the specific customer involved.
C.Organizational structure
We have six (6) wholly owned subsidiaries, PNI Digital Media Ltd (formerly Pixology Limited) and PNI Digital Media Europe Ltd. (formerly Pixology Software Limited), are all active and WorksMedia Limited, Pixology, Inc, PhotoChannel Capital Inc. and PhotoChannel Management Inc. are inactive. We acquired Pixology Limited, Pixology Software Limited and Pixology, Inc. in connection with the acquisition of Pixology Plc that was completed in July 2007. We acquired WorksMedia Limited as part of the acquisition of the WorksMedia business that was completed in March 2009. Our U.K. and kiosk operations are operated out of PNI Digital Media Europe Ltd. PhotoChannel Capital Inc. was incorporated on January 25, 2000 to undertake the sale and distribution of units of PhotoChannel.Com Limited Partnership and is the sole shareholder of PhotoChannel Management Inc. PhotoChannel Management Inc. was incorporated on January 25, 2000 and is the general partner of the PhotoChannel.Com Limited Partnership. The PhotoChannel.Com Limited Partnership is inactive and does not carry on any business.
D.Property, plant and equipment
Our executive offices are located at Suites 590, 550, 110 and 120 – 425 Carrall Street, Vancouver, British Columbia, Canada, V6B 6E3. The premises currently comprise approximately 20,477 square feet in an office building and are leased from an unaffiliated party. The company’s main lease expires in July 2014. The base monthly rent is approximately $29,976.
Our Platform equipment is located at two of TELUS Corporation’s co-located hosting facilities, which are located at 73 Laird Drive, East York, Ontario, Canada and 5 – 3777 Kingsway, Burnaby, British Columbia, Canada, V5H 3Z7. The premises are under contract from an unaffiliated party for a period of forty-seven months. The lease expires on November 20, 2015. The base monthly rent in Toronto, including prepaid monthly bandwidth usage of 400 Mbps, is approximately $118,050 and in Vancouver, including prepaid monthly bandwidth usage of 100 Mbps, is approximately $25,958.
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Our United Kingdom offices are located at Suite 4, Medina Chambers, Town Quay, Southampton, SO142AQ UK. The premises are shared with another company which is part owned by an officer of the company and comprise a total of 3,350 square feet in an office building. Our UK operations use approximately 50% of this space. The lease agreement for the premises is held by the related party directly with the owners of the building and we reimburse the related party for our share of the monthly rental costs in accordance with a services agreement that was put in place at the time of acquiring WorksMedia. The base monthly rent is approximately $4,800.
Our United Kingdom data base and network equipment is located in two data facilities: Redbus, Sovereign House – Interhouse, 227 Marsh Wall, London E14 9SD; and Telehouse Docklands, Coriander Avenue, London E14 2AA. The premises are under contract from unaffiliated parties for a period of thirty-six months expiring February 2009. Subsequent to the expiration of this three-year agreement, the Company is continuing to use the data facilities on a month-to-month basis. The base monthly rent is approximately $14,200.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
General
This section contains forward-looking statements involving risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under Item 3.D –Risk Factors. In this section, we explain our consolidated financial condition and results of operations for each of the years ended September 30, 2012, 2011 and 2010. As readers read this section, they may find it helpful to refer to our consolidated financial statements included in Item 18 of this annual report and the information contained in the section entitled “Selected Financial Data” in Item 3 of Part I of this annual report.
As required by the Canadian Accounting Standards Board, the Company adopted IFRS on October 1, 2010 and the Company’s financial information for 2011 has been prepared on a retrospective basis to comply with IFRS.
Critical Accounting Policies
The significant accounting policies used in the preparation of these consolidated financial statements are as follows:
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Intangible assets
| (i) | Identifiable intangible assets |
Intangible assets acquired in a business combination that meet the specified criteria for recognition, apart from goodwill, are initially recognized and measured at fair value. Intangible assets with finite useful lives, including acquired software, software developed for internal use and customer relationships, are amortized on a straight-line basis over their estimated useful lives as follows:
Acquired software | 3 years | |
Customer relationships | 3 years | |
Internal use software | 1-3 years | |
Amortization of intangible assets is included within cost of sales. The amortization methods and estimated useful lives of intangible assets are reviewed annually or earlier if events and circumstances change.
| (ii) | Goodwill |
Goodwill represents the excess of the purchase price of an acquired enterprise over the fair values assigned to the identifiable net assets of the acquired enterprise at the date of acquisition. Goodwill is allocated to each cash-generating unit (“CGU”) or group of CGUs that are expected to benefit from the related business combination. The allocation of goodwill to cash generating units reflects how goodwill is monitored for internal management purposes. A group of CGUs represents the lowest level within the entity at which the goodwill is monitored for internal management purposes, which is not higher than an operating segment. Goodwill is not amortized, and is carried at cost less accumulated impairment losses, if any. Management reviews the performance of its cash generating units based on geography at the operating segment level. Irrespective of any indication of impairment, the recoverable amount of the cash generating unit or group of cash generating units to which goodwill has been allocated is tested annually for impairment and when there is an indication that the goodwill may be impaired in accordance with “impairment of non-financial assets.” Any impairment is recognized in expense immediately. Any impairment of goodwill is not subsequently reversed.
Impairment of non-financial assets
Property and equipment and intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets that are not amortized are subject to an annual impairment test. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (CGUs). The recoverable amount is the higher of:
| • | An asset’s fair value less costs to sell; and |
| • | Value in use (being the present value of the expected future cash flows of the relevant asset or CGU). |
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The Company uses value in use when performing its impairment assessment. Value in use is determined as the present value of the future cash flows expected to be derived from an asset or cash generating unit. Estimated future cash flows are calculated using estimated future prices, operating and capital costs.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount.
The Company evaluates impairment losses, other than goodwill, for potential reversals when events or circumstances warrant such consideration.
It is possible that some of our tangible or intangible long-lived assets or goodwill could become impaired in the future and that any resulting write-downs could be material.
Current and Deferred Income taxes
Income tax comprises current and deferred tax. Income tax is recognized in the statement of operations and comprehensive loss (income) except to the extent that it relates to items recognized directly in other comprehensive income or directly in equity, in which case the income tax is also recognized directly in other comprehensive income (loss) or equity, respectively.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted, at the end of the reporting period, and any adjustment to tax payable in respect of previous years. As at September, 2012, the Company has not incurred any taxes payable (September 30, 2011: $nil).
Tax on income in interim periods accrued using the tax rate that would be applicable to expected total annual earnings.
Deferred tax is recognized, using the balance sheet liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for operating losses or tax credits. Deferred income tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset is realized or liability is settled. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized.
Deferred income tax assets and liabilities are presented as non-current.
Revenue
The Company provides online and in-store digital media solutions to retailers. These solutions are primarily provided through the PNI Digital Media Network services (Network Services). The Company also provides professional services and sells software products to retailers either directly or through license and distribution agreements. The products sold do not have any general rights of return except under arrangements whereby the Company provides the product to the ultimate customer.
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Through Network Services, the Company’s customers obtain access to the PNI Digital Media Platform (Platform) which provides the technology which delivers media transactions between retailers and content providers and their consumers. The Platform provides a transaction and order routing tier which delivers orders placed either through online sites or kiosks to the production facilities of the Company’s customers for production and delivery to end consumers. Through the Platform, customers are able to store, edit, archive, distribute and print photographs and other personalized products. The Company does not produce the content, but may act as an agent for certain retailers for some consumer deliverables. The Network Services provided by the Company may include the software, hosting, storage and archiving facilities, ongoing development up to a specified threshold of hours, initial integration of the software into the customer’s environment, technical support, maintenance services and hardware. Fees for these services are paid through fixed and variable fees. The variable fees are based on different factors and may be based on the number of physical locations connected to the Network, the number of transactions processed through the Platform, the number of images uploaded through the Platform, a percentage of revenue earned by its customers and the amount of storage capacity used in excess of minimums provided in the contract. The Company accounts for the Network Services as a single unit of accounting.
In some instances, the Company provides services to the ultimate customers who access the PNI Network through a retailer’s website. These services include taking on the responsibility for the fulfillment of print orders, the provision of certain consumer deliverables and other media. The Company pays the retailer a commission for the use of their website and other services provided by the retailer. The Company is responsible for fulfilling the ultimate customers’ orders and fulfills its obligations through the use of third party suppliers who ship the products directly to the customer. Revenue is recognized when the product is shipped, net of estimated returns, as the Company has transferred the significant risks and rewards of ownership to the customer at that time. The Company estimates the provision for returns based on historical experience and adjusts to actual returns when determinable.
The Company provides professional services in addition to the initial integration services to make changes to the customer’s website and branded environment and to provide email marketing programs to customers.
Revenue is considered realized or realizable and earned when all of the following criteria are met:
| (i) | Persuasive evidence of a sales arrangement exists; |
| (ii) | Delivery has occurred or services have been rendered; |
| (iii) | The price is fixed or determinable; and |
| (iv) | Collectability is reasonably assured. |
Cash received from customers prior to the related revenue being recognized is recorded as deferred revenue. In addition to this general policy:
• Fees earned for software licenses relate to the sale of software either directly to retailers or to distributors for resale to retailers for use in-store, allowing end users to edit and order prints and other photo-related items from digital images. Revenue from these arrangements that involve multiple elements are reviewed to determine whether a delivered item(s) has value to the customer on a stand-alone basis and whether there is objective and reliable evidence of the fair
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value of the undelivered item(s). If these criteria are met, the Company allocates revenue using the relative fair value of each element within the contract that has stand-alone value, such as software products, post contract customer support and maintenance. In instances, where the Company has evidence of the fair value of each element within a multiple deliverable arrangement, revenue is recognized upon the delivery or rendering of service(s) with respect to each element as there is no general right of return. Revenue for perpetual software licenses is recognized upon delivery, as the license holder is not obligated to pay maintenance for the ongoing use of the license. Maintenance fees are recognized on a straight line basis over the term of the maintenance service period. If the fair value of the delivered item is not obtainable, the Company allocates revenue using the residual method in instances where the fair value of the undelivered item is verifiable. The Company does not currently have any multiple deliverable arrangements which require the use of the residual approach.
• Installation fees are fixed upfront fees related to Network Services which are deferred and recognized on a straight-line basis over the life of the agreement, or where the agreement with the customer is on a month-to-month basis, over the estimated life of the customer relationship period. The customer relationship period is assessed annually, and has been estimated to be 24 to 36 months.
• Monthly fixed fees per connected location are recognized monthly and are included in membership fees.
• Fees for storing and archiving digital images for customers in excess of the minimums provided in the agreement are based upon our customers storage capacity needs, and are recognized as the storage is provided and are included in archive fees.
• Professional services are recognized when the services are completed and included in professional fees.
The Company offers volume and other rebates and discounts to certain customers which are recognized as a reduction of revenue at the date the related revenue is recognized or the date the offer is made for previously recognized revenue. The amount of rebates is based on estimates of the expected rebates to be paid based on historical and expected trends or on the maximum potential rebates that could be earned by a customer if the Company is unable to reasonably estimate the expected rebate. The Company accounts for cash consideration offered to customers, including annual volume discounts, as a reduction in sales revenue.
All revenues are reported net of sales and value added taxes.
Trade accounts receivable balances are shown net of allowances for doubtful accounts.
Software development costs
Software development costs includes the costs to customize aspects of the Company’s PNI Network software for specific customers as well as the cost of generating the Company’s software used in the PNI Network and software sold to customers. For costs incurred to generate software used in the PNI Network or sold to customers, the Company classifies costs into a research phase and a development phase. Costs incurred during the research phase are expensed when incurred as the Company is not able to demonstrate that the software will generate future economic benefits. Costs incurred during the development phase are recognized as intangible assets only if the Company can demonstrate all of the following:
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• The technical feasibility of completing the software so that it will be available for use or sale;
• Its intention to complete the software and use or sell it;
• Its ability to use or sell the software;
• How the software will generate probable future economic benefits;
• The availability of adequate technical, financial and other resources to complete the development and use or sell the software; and
• Its ability to reliably measure the expenditure attributable to the software during its development.
If these criteria are not met, the development costs are expensed when incurred for both costs of developing the Company’s software used directly in the PNI Network and the software which is sold to customers or customized for customers. During the year ended September 30, 2012, the Company had incurred software development costs of $9,678,638 (2011: $9,439,423). These costs principally consist of staff and consulting costs associated with the day to day operations of the Company including customizing aspects of the Company’s PNI Network software for specific customers, generating and maintaining the Company’s software used in the PNI Network and exploring new initiatives. During the year ended September 30, 2012 the Company capitalized $508,806 of development costs (2011: $186,426) as all of these costs met the capitalization criteria.
| g) | Cost of sales |
Cost of sales is comprised of costs associated with providing hosting services to our customers, customer support provided on behalf of our customers, and costs of products sold as it relates to instances where the Company is responsible for fulfillment of certain items sold. Hosting services include costs for renting our data centers, personnel costs associated with maintaining and monitoring the performance of our network, personnel and consulting costs associated with maintaining our customer’s sites and third party software licenses used in maintaining the performance of our network and platform. In addition, cost of sales includes amortization associated with property and equipment used in our data centers, amortization associated with acquired software, customer relationships and internal use software relating to generating revenue.
Share-based payment
The Company’s share-based awards may take the form of stock options, Performance Share Units (“PSU”), and Restricted Share Units (“RSU”) which are granted to directors and certain employees of the Company as an element of compensation. The cost of the service received as consideration is measured based on an estimate of fair value at the date of the grant. The grant-date fair value is recognized as compensation expense over the related service period with a corresponding increase in contributed surplus. If graded awards are granted, each vesting tranche is accounted for as a separate award. Compensation expense is recognized for awards expected to vest over the applicable vesting period with a corresponding increase in contributed surplus.
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On exercise of stock options, the Company issues common shares from treasury and the consideration received together with the compensation expense previously recorded to contributed surplus is credited to share capital. On vesting of PSUs and RSUs, the Company issues common shares from treasury and the compensation expense previously recorded to contributed surplus is credited to share capital. All awards are equity settled.
The Company uses the Black-Scholes option pricing model to estimate the fair value of each stock option. The Black-Scholes option pricing model requires the Company to estimate the expected term of the options granted, the volatility of the Company’s common shares, forfeitures, and an expected dividend yield. The Company estimates the expected term of the options granted by considering the Company’s historical experience involving stock option exercise; cancellations and expiries; volatility is estimated with reference to historical volatility data; forfeitures are estimated with reference to historical forfeiture data. The Company does not currently anticipate paying any cash dividends in the foreseeable future and therefore has used an expected dividend yield of zero as detailed in note 13b. The Black-Scholes model also requires the Company to input a risk-free interest rate and the Company uses the Bank of Canada marketable bond rates.
The fair value of each PSU and RSU awarded is based upon the quoted price of the Company’s stock on the date of grant. All PSU and RSU awards are equity settled. As it relates to PSUs and RSUs, the Company estimates the expected forfeiture rate and no value is attributed to awards that the employee is expected to forfeit as a result of not achieving the service or performance conditions. The expected forfeiture rate is adjusted for actual forfeitures when they occur.
Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expires.
At initial recognition, the Company classifies its financial instruments in the following categories:
(i) Financial assets and liabilities at fair value through profit or loss: A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term. Derivatives are also included in this category unless they are designated as hedges. The Company does not have any financial assets or liabilities classified within this category.
Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are expensed in the consolidated statement of operations and comprehensive income (loss).
(ii) Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company’s loans and receivables comprise trade and other accounts receivable and cash and cash equivalents, and are included in current assets due to their short-term nature.
Loans and receivables are initially recognized at the amount expected to be received less, when material, a discount to reduce the loans and receivables to fair value. Subsequently,
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loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment. Changes in the amortized cost are recorded in the consolidated statement of income and comprehensive income.
(iii) Financial liabilities at amortized cost: Financial liabilities at amortized cost include trade payables and accrued liabilities, deferred revenue, and debt. Financial liabilities are initially recognized at the amount required to be paid less, when material, a discount to reduce the payables to fair value. Subsequently, financial liabilities are measured at amortized cost using the effective interest method. Changes in the amortized cost are recorded in the consolidated statement of income and comprehensive income.
Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities.
Provisions
Provisions are recognized where a legal or constructive obligation has been incurred as a result of past events, it is probable that an outflow of resources embodying economic benefit will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. If material, provisions are measured at the present value of the expenditures expected to be required to settle the obligation. The increase in any provision due to passage of time is recognized as accretion expense.
A.Operating results
As at September 30, 2012, the Corporation had cash and cash equivalents of $4,611,824 and a working capital of $4,779,791 compared with a working capital position of $5,397,594 as at September 30, 2011. Cash flows from operating activities in the period totalled $3,032,352 (September 30, 2011 – $1,921,057). Use of funding towards investing activities totaled $2,181,069 (2011 – $2,396,642). The loss for the year ended September 30, 2012 was $4,122,653 or $0.12 per share compared with a profit of $1,099,600 or $0.03 per share for the year ended September 30, 2011. A significant component of the current period’s loss was related to a $540,735 impairment charge on previously capitalized costs associated with the development of internal use software (2011 -$nil), a $77,382 impairment charge recorded with respect to Goodwill in the Company’s Canadian operating segment (2011—$0), and a $1,814,221 deferred income tax expense associated with the a change in assessment of the probability of futre cash flows related to the deferred tax asset held in the Company’s Canadian operating segment (2011 income tax recovery of $1,299,025).
Operations highlights for 2012 include:
| • | Processed a record number of transactions during the period, 19.1 million compared to 18.4 million during fiscal 2011 |
| • | Revenue for fiscal 2012 was $22.7 million compared to $23.7 million in the fiscal 2011 |
| • | Transactional revenue was $17.7 million, compared to $18.1 million in fiscal 2011 |
| • | Transaction fees represented 78% of total revenue vs. 76% during fiscal 2011 |
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| • | Generated loss before income taxes of $2.3 million compared to a loss of $0.2 million in fiscal 2011 and loss after income taxes of $4.1 million compared to a profit of $1.1 million in fiscal 2011 |
| • | Announced that the Company has agreed to terms of a new multi-year agreement with Tesco PLC. Under the terms of the new agreement, PNI will continue to provide online technologies on behalf of Tesco. PNI started operating under the financial terms of the agreement in July of this year. PNI will earn fees similar to those it earns from other like-sized global retailers, which the Company anticipates will result in lower fees booked as revenue going forward. |
| • | Announced that PNI is no longer providing online photo services for ASDA Stores Ltd, however PNI continues to provide in-store kiosk software to ASDA through its UK distributors. |
| • | Announced a new contract and launched a new photo website with Rite Aid Corporation |
| • | Announced a new contract and launched a new social stationery website with Walgreen Co. |
| • | Announced a new contract and launched a new business printing website with Costco Wholesale Canada Ltd. |
| • | Launched a series of new mobile apps with Tesco, Costco and CVS/pharmacy |
| • | Announced second generation of PNI Connected Kiosk™ software |
| • | The Company graduated from the TSX Venture Exchange to the Toronto Stock Exchange |
Selected Information
The following table sets forth selected consolidated annual financial information of the Corporation for, and as of the end of, each of the last three fiscal years. The selected consolidated financial information should be read in conjunction with the consolidated financial statements of the Corporation:
| September 30, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| IFRS | IFRS | Canadian GAAP | ||||||||||
| $ | $ | $ | ||||||||||
Net income (loss) | (4,122,653 | ) | 1,099,600 | 6,851,994 | ||||||||
Net loss per share | (0.12 | ) | 0.03 | 0.2 | ||||||||
Total cash and cash equivalents | 4,611,824 | 3,936,176 | 4,690,355 | |||||||||
Working capital | 4,779,791 | 5,397,594 | 5,450,020 | |||||||||
Total assets | 19,964,896 | 22,472,894 | 23,520,358 | |||||||||
Total liability | 5,145,684 | 3,568,532 | 3,625,039 | |||||||||
Shareholders’ equity | 14,819,212 | 18,904,362 | 17,129,478 | |||||||||
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Year Ended September 30, 2012
For the year ended September 30, 2012, the Corporation had a net loss of $4,122,653 or $0.12 per share compared to a net profit of $1,099,600 or $0.03 per share with the corresponding period in 2011.
Revenues
Revenues for the year ended September 30, 2012 were $22,712,805, as compared to $23,686,351 for the year ended September 30, 2011.
Transaction fees continue to be the largest element of our revenue base and totaled $17,730,786 for year ended September 30, 2012, accounting for 78% of total recorded revenue as compared to 76% during the same period of fiscal 2011. The decrease in transaction fees as compared to the prior year is the result in a change in product mix as a number of our retail partners experienced a decline in the number of photo prints sold as the popularity of non-print items such as photo books increased. Due to the structure of the majority of our contracts with photo retailers, this shift has led to a lower fee earned per transaction. Also impacting transaction fees was the renegotiation and extension of certain of our customer agreements, which in some instances has resulted in lower transaction fees for certain products.
Software license and installation fees decreased to $1,876,901 for the year ended September 30, 2012, from $2,572,673 for the year ended September 30, 2011. The $695,772 decline, or 27%, was principally due to performing less site installation and development work. While a portion of revenue from this source continues to track at consistent levels each month through recurring license fees earned from some of our UK based customers, other elements of this revenue are non-recurring and are earned either through developing and installing new sites for customers or by making sales of kiosk software licenses.
Membership fees increased to $1,780,775 for the year ended September 30, 2012, from $1,650,669 for the year ended September 30, 2011. Membership fees are earned either through monthly fixed fees based on the number of locations customers have connected to the PNI Platform or through annual recurring service and maintenance revenue from customers who have purchased our kiosk software. Revenue earned from this source is largely recurring in nature and remains relatively stable period to period.
Professional fees increased to $254,095 for the year ended September 30, 2012, from $76,423 for the year ended September 30, 2011. This is primarily due to a number of one-off projects completed on behalf of some of our customers this year compared to fewer such projects in the same period last year. Professional fee revenue is non-recurring in nature and dependent on both the demand from our customers and also the availability of internal resources to allocate to this kind of work. While we continue to expect projects to arise and be taken on in future periods this type of revenue stream is not seen as core to our business and may fluctuate considerably from period to period.
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Archive fees, which represent charges made to our customers after the volume of data held on their behalf reaches pre-determined limits, decreased 20% period-on-period to $1,070,248. The period-on-period decrease is principally due to the deletion of stored images as a result of our customers reducing the images stored for consumers whose accounts have been inactive over the previous twelve months. Our customers remain in charge of the business rules offered to their consumers around storage and therefore future revenue in this area could be curtailed should any of our customers stop providing their own customers with free storage solutions.
Total expenses for fiscal 2012 are 5% higher than fiscal 2011 due predominantly to the investment in new initiatives such as social stationery and business printing in order to meet its planned roll out of its new offerings with additional customers. Should the Company suffer the loss of significant customers or change certain aspects of its current operations requiring additional development expenditures to be incurred, this relationship between revenues and costs may alter.
Cost of sales and Gross Profit
Cost of sales is comprised of costs associated with providing hosting services to our customers, customer support provided on behalf of our customers, and costs of products sold as it relates to instances where the Company is responsible for fulfillment of certain items sold. Hosting services include costs for renting our data centers, personnel costs associated with maintaining and monitoring the performance of our network, personnel and consulting costs associated with maintaining our customer’s sites and third party software licenses used in maintaining the performance of our network and platform. In addition, the Company includes costs for amortization for property and equipment used in our data centers, intangible assets such as acquired software and customer relationships, and internal use software related to revenue generating activities.
Cost of sales increased to $10,458,022 for the year ended September 30, 2012, from $9,399,107 for the year ended September 30, 2011. The increase of 1,058,915, or 11%, was driven in part by an increase in personnel costs (staff and short-term contractors) as a result of an increase in headcount to support and maintain the PNI Network as a result of increased order volumes, with the remaining increase associated with an increase in licensing fees associated with the use of third party software within the PNI Platform. These increases were offset by decreases in our third party call center and data center costs and lower stock-based compensation expense. We also recognized a non-cash impairment losses of $540,736 in fiscal 2012 (2011—$0) primarily due to underperforming revenues associated with previously capitalized internal use software which were included in cost of sales, and an impairment loss of $77,382 relating to goodwill recording in our Canadian operating segment in fiscal 2012 (2011—$0).
As a result of these period-on-period changes, gross profit was 54% compared to 60% in the same period last year.
Operating expenses
Software development expenses increased to $9,678,638 for the year ended September 30, 2012, from $9,439,423 for the year ended September 30, 2011. The increase of $239,215, or 3%, was mainly driven by an increase in personnel costs (staff, short-term contractors, and outsourced development teams), offset by lower stock-based compensation expense and amortization expense related to our property and equipment and intangible assets. We also recognized a $168,466 write-down of previously capitalized internal use software.
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General and administration expenses decreased to $3,768,203 for the year ended September 30, 2012, as compared to $3,928,210 for the year ended September 30, 2011. The decrease of $160,007, or 4%, was due to lower stock based compensation expense and accounting and legal costs as compared to the prior year, which was offset by higher personnel costs (staff and short-term contractors), bad debt expense, travel costs, board member fees.
Sales and marketing expenses increased to $1,038,374 for the year ended September 30, 2012, from $988,289 for the year ended September 30, 2011. The increase of $50,085, or 5%, was due to higher personnel costs as the Company has expanded the sales team.
Other income and expenses
During the year ended September 30, 2012, the Company recorded a realized foreign exchange loss of $36,047 and unrealized losses of $46,601. The unrealized loss arose primarily as a result of the translation of inter-company balances between the UK subsidiaries and the Canadian parent company, while the realized loss was primarily the result of unfavorable changes in Canadian dollar exchange rates relative to the US dollar between the time sales invoices were raised and the receipt of funds.
Income Taxes
During the year ended September 30, 2012, the Company recorded an income tax expense in the amount of $1,814,221 compared to the recognition of an income tax recovery during the year ended September 30, 2011 of $1,299,025. The expense was due to management’s assessment that, based on current results, it is probable that the Company’s Canadian operating segment will utilize a lower portion of the losses available it. The Company’s net deferred tax asset as at September 30, 2012 is $5,222,603. The Company expects to utilize the net deferred tax asset through a combination of retaining existing customers and closely monitoring controllable cash costs. The Company expects to utilize the majority of the net future income tax asset over the next five to seven years.
Year Ended September 30, 2011
The Corporation was not required to retrospectively apply IFRS to its financial statements for years prior to fiscal 2011. Accordingly, the operating results for fiscal 2010 were not prepared on a retrospective basis under IFRS and the following information provides a comparison of the years ended September 30, 2011 and 2010 under previous Canadian GAAP.
For the year ended September 30, 2011, the Corporation had a net profit of 1,099,600 or $0.3 per share compared to a net profit of $6,851,994 or $0.20 per share with the corresponding period in 2010.
Revenues for the year ended September 30, 2011 were $23,686,351, as compared to $25,356,570. The decrease was due to lower transaction fees and software license and installations fees in 2011 as compared to the corresponding period in 2010.
Deferred income tax recoveries for the year ended September 30, 2011 were $1,299,025, which was lower than the $4,821,756 recognized in the corresponding period of 2010.
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Total operating expenses for the year ended September 30, 2011 were $23,755,029 as compared to $23,377,268 in the corresponding period of 2010. The increase was predominantly due to our continued investment in social stationery and business printing.
Critical Accounting Estimates
The Company prepares its financial statements in accordance with International Financial Reporting Standards (“IFRS”). The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are based upon historical experience and various other assumptions that are believed to be reasonable under the circumstances. These estimates are evaluated on an ongoing basis and form the basis for making judgments regarding the carrying values of assets and liabilities and the reported amount of revenues and expenses. Actual results may differ from these estimates under different assumptions.
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.
Share-based payments
The Company uses the Black-Scholes option pricing model to estimate the fair value of each stock option. The Black-Scholes option pricing model requires the Company to estimate the expected term of the options granted, the volatility of the Company’s common shares, forfeitures, and an expected dividend yield. The Company estimates the expected term of the options granted by considering the Company’s historical experience involving stock option exercise; cancellations and expiries; volatility is estimated with reference to historical volatility data; forfeitures are estimated with reference to historical forfeiture data. The Company does not currently anticipate paying any cash dividends in the foreseeable future and therefore has used an expected dividend yield of zero as detailed in note 13b. The Black-Scholes model also requires the Company to input a risk-free interest rate and the Company uses the Bank of Canada marketable bond rates.
The fair value of each PSU and RSU awarded is based upon the quoted price of the Company’s stock on the date of grant. All PSU and RSU awards are equity settled. As it relates to PSUs and RSUs, the Company estimates the expected forfeiture rate and no value is attributed to awards that the employee is expected to forfeit as a result of not achieving the service or performance conditions. The expected forfeiture rate is adjusted for actual forfeitures when they occur.
Goodwill and intangible assets
The process of determining the nature and amount of the individual intangible assets and for carrying out annual impairment tests, calls for considerable use of judgment, and requires all parties involved to make estimates and assumptions regarding future cash flow projections, future operating costs and appropriate discount rates to be used in the calculations. These determinations impact the amount that is initially recorded as goodwill or other intangible assets and the
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amortization expense to be recognized in future periods over the estimated useful lives of the intangible assets. Changes in estimates and assumptions can affect the reported value of goodwill and other intangible assets with indefinite useful lives.
The judgments that management has applied in the application of accounting policies, and the estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below:
| • | The assessment of the carrying values of long-lived assets; |
| ¡ | The impairment tests performed for both the Company’s Canadian operating segment and the Company’s European operating segment were based on their value in use and were determined by discounting the estimated future cash flows generated from the continuing use of these units. Unless indicated otherwise, value in use for 2012 was determined similarly as in 2011. The calculation of value in use was based on the following key assumptions: |
| ¡ | Cash flows were projected based on past experience, actual operating results and planned results for the near term. Terminal value calculations for each cash generating unit were extrapolated using a constant growth rate of 1.4% to 3%. |
| ¡ | Management has applied an internally determined pre-tax discount rate in determining the recoverable amount for these units. Risks specific to the assets of these units have not been included within the calculation of the discount rates used, but have been factored into the cash flow projections. |
The net present value of the future expected cash flows was compared to the carrying value of the Company’s investment in these units, including goodwill, at year-end.
Deferred Income taxes
The amount recognised as deferred tax is generally determining utilising undiscounted cash flows aligned with estimates used in assessing the impairment of goodwill. Management considers all factors that could affect the probability that future taxable profits will be available. The factors include profitability of operations, terminal value extrapolated using a growth rate of 1.4% to 3%, estimate of terminal value and customer renewal rates. The amount recognised is sensitive to the loss of certain key customers.
B. Liquidity and Capital Resources
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivery of cash or other financial assets. The Company’s approach to managing liquidity risk is to ensure it has sufficient cash available to manage the payment of its financial liabilities. The Company has the Revolving Demand Facility in place to help manage its liquidity position, thus its liquidity position is not solely dependent on its overall volume of business activity and its ability to manage the collection and payment of its accounts receivable and accounts payable through cash flow management techniques.
During the year ended September 30, 2012 the Company generated a positive cash flow from operations of $3,032,352, as compared to a cash inflow of $1,921,057 in the year ended September 30, 2011. During the same period its working capital decreased by $617,804 to
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$4,779,791. The Company’s liquidity position may fluctuate during the year due to a number of factors which could include unanticipated changes to its volume of business, credit losses and the extent of capital expenditure in the year. The Company’s liquidity position may also be adversely impacted by the seasonal nature of its business with the Company’s busiest period of activity typically during the first quarter of the fiscal year. As the Company has a concentration of business with select key customers, its liquidity position would be adversely impacted if one of its key customer relationships was discontinued.
The Company primarily monitors its liquidity position through forecasting expected cash flows based on the timing of expected receipts and payments. Management monitors its cash balances and projections on a weekly and monthly basis. The starting point for its analysis is based upon the contractual maturity date of its liabilities and its expected collection period for its receivables. The Company has a positive working capital position of $4,779,791 at September 30, 2012 and it manages the payment of its financial liabilities based on available cash and matching the settlement of its financial liabilities to realized financial assets. The Company also monitors its debtor collection as described in the credit risk note above. As the Company’s revenues are primarily collectible within 30 days of invoicing, which is performed weekly for some customers and monthly for others, the Company aims to be able to collect its accounts receivable more promptly than it settles its third party accounts payable. However, as certain of the Company’s operating expenses such as its payroll obligations are contractually due at least monthly, the Company’s working capital level could periodically change depending on the timing of the maturity of its accounts receivable and accounts payable and accrued liabilities.
The Company’s activities are being funded out of its operating cash flow. As a result of generating positive results during the year ending September 30, 2012 the Company has not encountered any difficulties doing so, however if positive results are not continued in future periods there is a risk that the Company would not be able to meet all of its contractual commitments when due. The Company has in place a revolving demand facility with its bank which, subject to certain criteria being met, could provide the Company with additional funds of up to $1,500,000.
C.Software development, patents and licenses, etc.
During the fiscal year ended September 30, 2012 we expended $9,678,638 (2011—$9,439,423) on software development related to our Network and kiosk software.
Proprietary Protection—Trademarks, Copyrights, Etc.
We rely on a combination of contractual rights, trade secrets, copyrights, non-disclosure agreements and technical measures to establish and protect our proprietary rights. There can be no assurance, however, that the steps taken by us will be adequate to prevent misappropriation of the technology or independent development by others of software products with features based upon, or otherwise similar to, those provided by us. In addition, although we believe that our technology has been independently developed, there can be no assurance that our technology does not, and will not, infringe proprietary rights of others or that third parties will not assert infringement claims against us in the future. In the case of infringement, we would, under certain circumstances, be required to modify our products or obtain a license and any failure to do so could have a material adverse effect on us. In addition, there can be no assurance that we will have the necessary resources to defend or pursue any infringement actions.
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During the year ended September 30, 2010, the Company received notice from a former customer that a possible patent infringement had been brought to their attention regarding software which in previous years had been sold by one of our subsidiaries and which is unrelated to the PNI Platform and to the Company’s kiosk software. During the year ended September 30, 2011, the Company received notice from its former customer that a settlement had been reached between it and the entity that had been making the claims of patent infringement. As a result, the Company’s former customer requested that the Company pay a portion of the settlement amount under an indemnification clause included in the contract that was in place during the previous relationship. After considering all of the available facts, including the expected legal costs of disputing the matter, the Company agreed to pay a contribution of the settlement charge, up to a maximum amount of US$100,000. The Company has now concluded negotiations over the final allocation of the settlement charge with the former customer and made a contribution of US$80,000 during the year ended September 30, 2011 in full and final settlement. Upon payment of this amount, the Company has been released from any future claims relating to this matter by the customer.
D.Trend Information
We continue to see significant organic increase in the usage from our existing customers’ connected to our PNI Digital Media Platform, however due to additional factors that have to be taken into account, including but not limited to currency fluctuations, and changes in product mix from prints to non-print merchandise such as photo books, photo cards, and the number of prints made from images uploaded through one of our retail customer’s sites, the Company’s results may not always mirror the overall transaction level growth seen within the wider industry.
In recent years, the shift in product mix away from traditional print items and towards more creative products has accelerated. As a result of the way in which some of our contracts with customers are set up we earn more money (represented as a % of the retail value of the sale) when print items are sold than when non-print products are sold. This move away from print items can therefore result in us recognizing lower revenue, even though the overall number of orders placed though our platform remains consistent or in some cases increases.
This trend in product mix continued in fiscal 2012. During the year ended September 30, 2012, our revenue declined by 4% period on period to $22,712,805. During the same period, our loss after tax was $4,122,653 compared to profit of $1,099,600 which was earned during fiscal 2011. Throughout this period, the overall volume of orders placed over our platform grew by 3.8% and totalled 19.1 million; however the continued popularity of non-print items significantly impacted our revenue.
In order to counter the continued market shift away from non-print items, the Company has continued developing its customized social stationery and business printing service offerings throughout fiscal 2012. The Company launched its first business printing offering through Costco Canada during the first quarter of fiscal 2012; and launched its first social stationery offering through Walgreens in the second quarter of fiscal 2012, although neither offering had a material impact on fiscal 2012 revenues. In fiscal 2012 the Company recognized an impairment loss of $540,736 in fiscal 2012 associated with previously capitalized internal use software used in our social stationery product offerings.
E.Off-Balance Sheet Arrangements
Not Applicable
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F.Tabular Disclosure of Contractual Obligations
| Payments due by period | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Property leases | 598,216 | 359,712 | 238,504 | — | — | |||||||||||||||
Other service agreements | 5,396,755 | 1,750,575 | 3,406,167 | 240,013 | — | |||||||||||||||
Purchase obligations | 147,585 | 147,585 | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| 6,142,556 | 2,257,872 | 3,644,671 | 240,013 | — | ||||||||||||||||
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.Directors and Senior Management
The names, residences, ages, positions with us, principal occupations and beneficial ownership of our securities of each of our directors and executive officers as at December 1, 2012 are as follows. All Directors serve until the next Annual General Meeting of our Shareholders.
Name and Residence (If a Director, period such position held) | Age | Positions with Company and Principal Occupations During the Last 5 Years | Securities Beneficially Owned, Directly or Indirectly(5)(6) | Percentage of Outstanding Shares(7) | ||||||||
Peter Fitzgerald (1) (2) (3) (4) * Herts, United Kingdom
Director (July 2001—present) | 64 | March 2005 to September 2008: President & CEO of the Company | 1,751,781 Common Shares(8) | 5.1 | % | |||||||
Peter Scarth (1) (3) West Vancouver, BC, Canada
Director (Oct 2000 to present) | 67 | August 2002 to October 2004: President & CEO of the Company March 2001 to February 2004: Chairman of the Company. | 672,792 Common Shares(9) | 2.0 | % | |||||||
Cory Kent Vancouver, BC, Canada
Director (March 1999 – Present) | 43 | February 2003 to Present: Lawyer at McMillan LLP | 136,108 Common Shares(10) | 0.4 | % | |||||||
Thomas Nielsen(1) (3) (4) Seattle, WA, USA
Director (June 2005 – present) | 42 | November 2011 to July 2012: President and CEO of RealNetworks
November 2009 to October 2011: VP Marketing, Product Management & Business Strategy, Digital Imaging Products, Adobe Systems;
October 2004 to November 2009: Director of Engineering, Adobe Systems; and | 119,442 Common Shares(11) | 0.3 | % | |||||||
Robert Chisholm(1) (2) (3) Vancouver, BC, Canada
Director (April 2009 to December 2012) | 50 | April 2009 to Present: Partner Emprise Capital Corp.;
Nov. 2001 to March 2009: Chief Financial Officer of PNI Digital Media Inc. | 116,108 Common Shares(12) | 0.3 | % | |||||||
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Name and Residence (If a Director, period such position held) | Age | Positions with Company and Principal Occupations During the Last 5 Years | Securities Beneficially Owned, Directly or Indirectly(5)(6) | Percentage of Outstanding Shares(7) | ||||||||
Cary Deacon(2) (3) (4) Minneapolis, Minnesota, USA
Director (December 13, 2011 to present) | 60 | January 2007 to April 2011: President and Chief Executive Officer of Navarre Corporation
August 2005 to December 2006: President and Chief Operating Officer of Navarre Corporation | 38,887 Common Shares(13) | 0.1 | % | |||||||
Lawrence Lerner Illinois, USA
Director (March 2010 to March 2012) | 48 | July 2001 to Present: President at LLBC, llc
November 2007 to March 2011: Glowbal Head – Consulting, BI/DW, Quality and Testing, Interactive Media at UST Global;
August 2007 to October 2007: Director Acquity Group;
December 2002 to August 2007: Senior Manager for Cognizant | 25,000 Common Shares | 0.1 | % | |||||||
Kyle Hall(4) Vancouver, BC, Canada
Director (March 2009 to present) | 47 | October 2008 to Present: Chief Executive Officer; March 13, 2003 – October 4, 2004: Corporate Secretary of the Company; June 5, 2002 to September 30, 2008: Executive Vice President, Business Development of the Company | 700,000 Common Shares | 2.0 | % | |||||||
Karl Oertel Surrey, UK | 45 | July 2007 to Present: VP UK Operations of the Company; August 2006 to July 2007: Pixology Ltd. VP UK Operations; July 1997 to August 2006: ITEBA Ltd. – Operations Manager | 4,734 Common Shares | 0.0 | % | |||||||
Chris Egan Vancouver, BC, Canada | 36 | December 2011 to Present: VP Business Services
January 2003 to December 2011: various roles, the last of which was as the Director of Business Technology and Integration | 2,633 Common Shares | 0.0 | % | |||||||
Cameron Lawrence Vancouver, BC | 33 | August 2012 to Present: CFO
October 2008 to June 2012: various roles the last of which was Senior Director of Finance and Principal Accounting Officer of OncoGenex Pharmaceuticals, Inc.
September 2003 to October 2008: Manager of PricewaterhouseCoopers LLP | Nil | 0.0 | % | |||||||
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Name and Residence (If a Director, period such position held) | Age | Positions with Company and Principal Occupations During the Last 5 Years | Securities Beneficially Owned, Directly or Indirectly(5)(6) | Percentage of Outstanding Shares(7) | ||||||||
Patrick Nangle | 53 | July 2012 to December 2012: COO;
2010 to 2012: President of Digital Dispatch Systems; 2009-2010: President of Tahua Consult LLC; 2002 – 2008: COO North America & Japan at Neopost | 20,000 Common Shares | 0.1 | % | |||||||
Kevin Jampole | 53 | November 2012 to Present: EVP Sales & Business Development
April 2012 to November 2012: Executive Leader – Social Stationary
2007-2011: Owner of Software Imaging | Nil | 0.0 | % | |||||||
Aaron Rallo Vancouver, BC, Canada | 40 | October 1, 2008 to December 31, 2011: President & COO; November 2004 to September 30, 2008: Chief Technology Officer of the Company; March 2003 to May 2004: Senior Program Manager of Digital Imaging Devices for Microsoft Corporation; | 84,680 Common Shares | 0.2 | % | |||||||
Simon Bodymore North Vancouver, BC | 37 | March 2009 to August 2012: CFO; December 2008 to March 2009 – VP of Finance of the Company; January 2008 to December 2008 – Director of Finance of the Company; November 2000 to December 2007 – Senior Manager of PricewaterhouseCoopers LLP | 9,583 Common Shares | 0.0 | % | |||||||
Patricia Spice Vancouver, BC, Canada | 65 | December 1995 to December 2011: Executive Assistant, PNI Digital Media Inc. October 2004 to December 2011: Corporate Secretary of the Company | 4,917 Common Shares | 0.0 | % | |||||||
Zachary Wickes Vancouver, BC, Canada | 41 | January 2011 to September 2012: Vice President of Technology
June 2008 to December 2011: Chief Executive Officer, and founder of 34F Technologies, Inc.
December 2009 to November 2010: Vice President Software Engineering of MMX Software Inc.
January 2005 to April 2008: Chief Technical Officer/Vice President Software Development of Yummy Interactive Inc. | Nil | 0.0 | % | |||||||
Harley Ware Vancouver, BC, Canada | 44 | November 2009 to November 2012: EVP In-Store Retail Systems
March 2009 – November 2009 - Managing Director Europe | 515,166 Common Shares | 1.2 | % | |||||||
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| (1) | Member of the Audit Committee. |
| (2) | Member of the Compensation Committee. |
| (3) | Member of the Corporate Governance Committee. |
| (4) | Executive Committee |
| (5) | Information regarding shares beneficially owned or controlled is as of December 1, 2012 and has been furnished by the respective individuals. As such, we assume no responsibility for its accuracy or completeness. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. We believe that the beneficial owners of shares of our common shares listed above have sole investment and voting power with respect to such shares, subject to community property laws where applicable. |
| (6) | On November 2, 2006, we implemented a consolidation of our common shares on a one-new-common-share-for-10-old-common-shares basis. The number of shares disclosed as being beneficially owned or controlled by the named persons are shown on a post-consolidation basis. |
| (7) | Based on 34,257,922 common shares issued and outstanding as of December 01, 2012. |
| (8) | Includes 5,556 common shares that may be issued pursuant to stock options exercisable within the next sixty days. |
| (9) | Includes 5,556 common shares that may be issued pursuant to stock options exercisable within the next sixty days. |
| (10) | Includes 5,556 common shares that may be issued pursuant to stock options exercisable within the next sixty days. |
| (11) | Includes 5,556 common shares that may be issued pursuant to stock options exercisable within the next sixty days. |
| (12) | Includes 5,556 common shares that may be issued pursuant to stock options exercisable within the next sixty days. |
| (13) | Includes 11,112 common shares that may be issued pursuant to stock options exercisable within the next sixty days. |
| * | Denotes beneficial ownership of less than 1% of the issued and outstanding common shares of our Company. |
B.Compensation
During the fiscal year ended September 30, 2012, the aggregate amount of compensation paid by us and our subsidiaries to all directors and officers as a group for services in all capacities was $1,700,470.
Our Company may grant, pursuant to the policies of the TSX, stock options to directors, officers and employees of, and consultants to, our Company or a subsidiary of our Company, or to employees of a company providing management services to our Company or any of our subsidiaries. We have adopted a stock option plan that is more fully described in Item 6.E of this annual report.
During the fiscal year ended September 30, 2012, neither us nor our subsidiaries set aside or accrued any amount to provide pension, retirement or similar benefits for directors and officers pursuant to any existing plan provided or contributed to by us or our subsidiaries. The term “plan” includes all plans, contracts, authorizations or arrangements, whether or not set forth in any formal document.
The following table sets out all compensation paid to our Chief Executive Officer and our three most highly compensated executive officers other than the Chief Executive Officer during the fiscal periods indicated.
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| Annual Compensation | Long Term Compensation | |||||||||||||||||||||||||||
Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Benefits ($) | Stock Options ($)(7) | Total | Common Shares Under-Lying Options and Performance Share Units Granted (Number) | |||||||||||||||||||||
Kyle Hall(1) | 2012 | 265,000 | Nil | 4,175 | 20,107 | 289,282 | 400,000 | |||||||||||||||||||||
CEO | 2011 | 265,000 | 51,675 | 1,881 | 73,743 | 340,624 | 103,150 | |||||||||||||||||||||
| 2010 | 256,250 | 125,000 | Nil | 381,250 | — | |||||||||||||||||||||||
Patrick Nangle COO(2) | 2012 | 46,875 | Nil | 369 | 6,365 | 53,609 | 200,000 | |||||||||||||||||||||
Cameron Lawrence CFO(3) | 2012 | 15,385 | Nil | 52 | Nil | 15,437 | — | |||||||||||||||||||||
Aaron Rallo | 2012 | 56,250 | Nil | 171,100 | (9,363 | ) | 217,987 | — | ||||||||||||||||||||
Former President(4) | 2011 | 225,000 | 43,875 | Nil | 50,490 | 319,365, | 70,000 | |||||||||||||||||||||
| 2010 | 225,082 | 112,500 | Nil | 337,582 | — | |||||||||||||||||||||||
Simon Bodymore(5) | 2012 | 174,167 | Nil | 2,759 | 2,625 | 179,551 | — | |||||||||||||||||||||
Former CFO | 2011 | 190,000 | 37,050 | Nil | 31,382 | 258,432 | 43,250 | |||||||||||||||||||||
| 2010 | 181,250 | 87,500 | Nil | 268,750 | 0 | |||||||||||||||||||||||
Harley Ware, | 2012 | 200,000 | Nil | 2,317 | 8,373 | 210,690 | 200,000 | |||||||||||||||||||||
Former EVP, In-Store Retail Systems(6) | 2011 | 200,000 | 39,000 | 1,881 | 43,062 | 244,943 | 59,500 | |||||||||||||||||||||
| 2010 | 194,693 | 50,000 | Nil | Nil | 194,693 | — | ||||||||||||||||||||||
| (1) | On March 9, 2001, Kyle Hall, formerly VP Sales and Business Development for our US subsidiary, PhotoChannel, Inc., became our President and Chief Operating Officer, as well as a director. On June 5, 2002, Mr. Hall resigned as a director and as President and Chief Operating Officer and assumed the role of Executive Vice President of Business Development. On March 13, 2003, Mr. Hall assumed the role of Corporate Secretary, a position he held until October 4, 2004. On October 1, 2008, Mr. Hall assumed the role of Chief Executive Officer. |
| (2) | On July 17, 2012 the Company announced the appointment of Patrick Nangle as Chief Operating Officer. Compensation shown relates to the period of July 17, 2012 to September 30, 2012. |
| (3) | On September 11, 2012 the Company announced the appointment of Cameron Lawrence as Interim Chief Financial Officer. Compensation shown relates to the period of September 11, 2012 to September 30, 2012. |
| (4) | On November 8, 2004, Aaron Rallo was appointed Chief Technical Officer. On July 2, 2007, Mr. Rallo also assumed the role of Chief Operating Officer and on October 1, 2008 Mr. Rallo assumed the role of President. Effective December 31, 2011 Mr. Rallo ceased being an employee and is no longer the President and Chief Operating Officer of the Company. |
| (5) | On December 17, 2008, Simon Bodymore, formerly Director of Finance became VP Finance. On March 26, 2009 Mr. Bodymore was appointed Chief Financial Officer. Effective August 9, 2012 Mr. Bodymore ceased being an employee and is no longer the Chief Financial Officer of the Company. |
| (6) | On March 11, 2009 upon the acquisition of WorksMedia Ltd., Harley Ware joined the PNI Digital Media group and was appointed Managing Director – Europe. On November 13, 2010, Mr. Ware took on the role of EVP In-Store Retail Systems. Effective October 31, 2012 Mr. Ware ceased being an employee and is no longer the EVP In-Store Retail Systems of the Company. |
| (7) | Compensation expense recorded in accordance with IFRS 2 Share Based Payment. |
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C.Board Practices
Our articles provide that our Board of Directors shall consist of a minimum of three directors. Directors can be either elected annually by the shareholders at the annual meeting of the shareholders or, subject to our articles and applicable law, be appointed by the Board of Directors between annual meetings. Each director holds office until the close of the next annual meeting of shareholders or until he or she ceases to be a director by operation of law or until his or her resignation becomes effective. None of the directors have a service contract with us to provide for benefits upon termination of his or her directorship.
Committees Of The Board
Our Board of Directors has formed four committees.
The Audit Committee consists of three directors. Subsequent to December 10, 2012, this committee consists of Peter Scarth, Thomas Nielsen, and Peter Fitzgerald (Chairman). From March 26, 2012 to December 10, 2012, the committee consisted of Robert Chisholm (Chairman), Peter Scarth, and Peter Fitzgerald. Prior to March 26, 2012, the committee consisted of Robert Chisholm (Chairman), Peter Scarth, and Lawrence Lerner. This committee is responsible for all relationships between our independent external auditor, including the approval of all work and related fees and for actively engaging in a dialog with that auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the auditor. This Committee also oversees and establishes procedures concerning our systems of internal accounting and auditing controls.
The Compensation Committee consists of three directors. Subsequent to March 26, 2012, the committee consists of Cary Deacon (Chairman), Robert Chisholm, and Peter Fitzgerald. Prior to March 26, 2012, the committee consisted of Peter Fitzgerald (Chairman), Peter Scarth, and Thomas Neilson. This committee is responsible for recommending salary levels and granting of options and deferred share units for our executive officers.
The Corporate Governance Committee consists of four directors. This committee is responsible for corporate governance. Subsequent to December 10, 2012, this committee consisted of Cary Deacon, Thomas Neilson, Peter Scarth and Peter Fitzgerald. From March 26, 2012 to December 10, 2012, this committee consisted of Cary Deacon, Thomas Neilson, Peter Scarth, Peter Fitzgerald, and Robert Chisholm. Prior to March 26, 2012, this committee consisted of Cory Kent (Chairman), Kyle Hall, and Lawrence Lerner.
The Executive Committee consists of four directors. This committee is responsible for assessing the Company’s strategic opportunities. Thomas Nielsen (Chair), Cary Deacon, Peter Fitzgerald, and Kyle Hall.
D.Employees
We currently have one hundred thirty-eight (158) permanent full-time employees, two (2) permanent part-time employees and eleven (11) consultants we retain for regular engagements. None of our staff are unionized.
We currently have the following staffing in our Vancouver office:
Executive Officers | 5 | |
Operations | 8 | |
Finance/Administration | 7, includes 2 executive officers. | |
Technology and Applications | 125, includes 2 executive officers. | |
Sales, and Business Development | 8, includes 1 executive officer. |
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We currently have the following staffing in our Southampton, UK office:
Executive Officers | 1 | |
Operations | 2 | |
Finance/Administration | 2 | |
Technology and Applications | 5, includes 1 executive officer. | |
Sales, and Business Development | 1 |
E.Share Ownership
As disclosed in Item 6.A, each of our current directors and executive officers has reported to us the number of common shares he or she beneficially owned in our Company as of December 1, 2012. To determine beneficial ownership for these purposes, each director or executive officer is deemed to be the beneficial owner of securities over which he or she exercises voting or investment power; and of securities that he or she has the right to acquire within sixty days, pursuant to such events as the exercise of a stock option, warrant or right, or through the conversion of a security, or through the power to revoke a trust or the automatic termination of a trust. Based on the information provided by our current and former directors and executive officers, they as a group beneficially owned a total of 4,201,831 common shares (including an aggregate of 38,892 common shares that are reserved for issuance pursuant to stock options that are all exercisable within sixty days).
As of December 1, 2012, options to purchase an aggregate of 2,215,000 common shares had been granted and were outstanding, as follows:
Number of | Exercise Price | Expiration Date | ||
184,500 | $3.35 | March 11, 2013 | ||
150,000 | $2.00 | March 10, 2014 | ||
275,000 | $1.48 | March 25, 2014 | ||
25,000 | $1.50 | August 6, 2014 | ||
280,500 | $1.55 | October 4, 2015 | ||
50,000 | $0.82 | July 12, 2017 | ||
800,000 | $0.46 | July 12, 2017 | ||
200,000 | $0.43 | July 16, 2017 | ||
250,000 | $0.44 | October 25, 2017 |
As of December 1, 2012 42,618 Restricted Share Units had been issued to members of staff, Officers and Directors with an expiry date of October 4, 2013.
As of December 1, 2012, a total of 1,575,000 common shares were subject to options held by our directors and executive officers as a group. The following table sets forth particulars of the options held by each of our directors and executive officers:
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Name | Grant Date | Exercise Price | Expiration Date | Total Number of Options | ||||||||||||
Peter Fitzgerald | 25-Mar-09 | $ | 1.48 | 25-Mar-14 | 50,000 | |||||||||||
Director, Chairman | 4-Oct-10 | $ | 1.55 | 4-Oct-15 | 25,000 | |||||||||||
| 12-Jul-12 | $ | 0.46 | 12-Jul-17 | 50,000 | ||||||||||||
Peter Scarth | 25-Mar-09 | $ | 1.48 | 25-Mar-14 | 50,000 | |||||||||||
Director | 4-Oct-10 | $ | 1.55 | 4-Oct-15 | 25,000 | |||||||||||
| 12-Jul-12 | $ | 0.46 | 12-Jul-17 | 50,000 | ||||||||||||
Cory Kent | 25-Mar-09 | $ | 1.48 | 25-Mar-14 | 50,000 | |||||||||||
Director | 4-Oct-10 | $ | 1.55 | 4-Oct-15 | 25,000 | |||||||||||
| 12-Jul-12 | $ | 0.46 | 12-Jul-17 | 50,000 | ||||||||||||
Thomas Nielsen | 25-Mar-09 | $ | 1.48 | 25-Mar-14 | 50,000 | |||||||||||
Director | 4-Oct-10 | $ | 1.55 | 4-Oct-15 | 25,000 | |||||||||||
| 12-Jul-12 | $ | 0.46 | 12-Jul-17 | 50,000 | ||||||||||||
Robert Chisholm | 11-Mar-08 | $ | 1.48 | 11-Mar-13 | 50,000 | (1) | ||||||||||
Director | 4-Oct-10 | $ | 1.55 | 4-Oct-15 | 25,000 | |||||||||||
| 12-Jul-12 | $ | 0.46 | 12-Jul-17 | 50,000 | ||||||||||||
Kyle Hall | 25-Mar-09 | $ | 1.48 | 25-Mar-14 | 50,000 | |||||||||||
Director & Chief Executive Officer | 4-Oct-10 | $ | 1.55 | 4-Oct-15 | 100,000 | |||||||||||
| 12-Jul-12 | $ | 0.46 | 12-Jul-17 | 400,000 | ||||||||||||
Cary Deacon | 12-Jul-12 | $ | 0.82 | 12-Dec-16 | 50,000 | |||||||||||
Director | 12-Jul-12 | $ | 0.46 | 12-Jul-17 | 50,000 | |||||||||||
Cameron Lawrence | 25-Oct-12 | $ | 0.44 | 25-Oct-17 | 100,000 | |||||||||||
Patrick Nangle | 16-Jul-12 | $ | 0.43 | 16-Jul-17 | 200,000 | |||||||||||
| (1) | – During the year ended September 30, 2009, the exercise price of 50,000 options previously granted to Robert Chisholm on March 11, 2008 was amended from $3.35 to $1.48 |
As of December 1, 2012, a total of 17,720 Restricted Share Units (“RSU’s”) were held by our non-executive directors and executive officers as a group. The following table sets forth particulars of the RSU’s held by each of our directors and executive officers:
Name | Grant Date | Grant Price | Settlement Date | Total Number of Restricted Shares Units | ||||||||||||
Peter Fitzgerald | Oct. 4, 2010 | $ | 1.55 | Oct. 4, 2013 | 3,334 | |||||||||||
Director | ||||||||||||||||
Peter Scarth | Oct. 4, 2010 | $ | 1.55 | Oct. 4, 2013 | 3,334 | |||||||||||
Director | ||||||||||||||||
Cory Kent | Oct. 4, 2010 | $ | 1.55 | Oct. 4, 2013 | 3,334 | |||||||||||
Director | ||||||||||||||||
Thomas Nielsen | Oct. 4, 2010 | $ | 1.55 | Oct. 4, 2013 | 3,334 | |||||||||||
Director | ||||||||||||||||
Robert Chisholm | Oct. 4, 2010 | $ | 1.55 | Oct. 4, 2013 | 3,334 | |||||||||||
Director | ||||||||||||||||
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As of December 1, 2012, a total of 1,050 Performance Share Units (“PSU’s”) were held by our executive officers as a group. The following table sets forth particulars of the PSU’s held by each of the executive officers:
Name | Grant Date | Grant Price | Settlement Date | Total Number of Performance Share Units | ||||||||||||
Kyle Hall | Oct. 4, 2010 | $ | 1.55 | Oct. 4, 2013 | 1,050 | |||||||||||
Chief Executive Officer | ||||||||||||||||
Stock Option Plan
Our Company initially adopted a stock option plan in 1997. At our Company’s annual general meeting held on March 10, 2004, our shareholders approved an increase in the number of common shares reserved for issuance under the plan to 18,000,000 common shares (as so amended, the “2004 Plan”).
At our Company’s annual general meeting held on March 6, 2006, our shareholders approved a stock option plan (the “2006 Plan”) which provides for a “rolling” number of underlying shares rather than a “fixed” number of shares. Specifically, the 2006 Plan provided that the maximum number of common shares reserved for issuance upon exercise of any options granted under the 2006 Plan shall be equal to 10% of the issued and outstanding common shares of our Company at the time the options are granted, less the number of shares reserved for issuance under any outstanding options. This will mean that there can never be more than 10% of our Company’s issued and outstanding common shares reserved for issuance under the 2006 Plan at any point in time. The 2006 Plan was amended by shareholders at the annual general meetings held on March 6, 2007, March 25, 2009 and March 10, 2010.
As the Company is now listed on the TSX the Board deems it to be in the best interests of the Company to adopt a new option plan to accommodate TSX policies concerning option plans. On February 22, 2012 the Board authorized the adoption of a new form of share option plan dated for reference February 22, 2012 (the “2012 Plan”). The 2012 Plan provides for a maximum of 10% of the issued and outstanding Common Shares of the Company at the time an option is granted, less Common Shares reserved for issuance under all other Share Compensation Arrangements of the Company, to be reserved for options to be granted at the discretion of the Board or the compensation committee of the Board, to eligible optionees (“Optionees”). Existing outstanding options will be rolled into and governed by the 2012 Plan.
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Eligible Optionees
Options to purchase Common Shares may be granted hereunder to Service Providers from time to time by the Board. Service Providers that are corporate entities will be required to undertake in writing not to effect or permit any transfer of ownership or option of any of its shares, nor issue more of its shares (so as to indirectly transfer the benefits of an Option), as long as such Option remains outstanding, unless the written permission of the TSX and the Company is obtained.
Material Terms of the 2012 Plan
The following is a summary of the material terms of the 2012 Plan:
| (a) | all options granted under the 2012 Plan are non-assignable and non-transferable and are exercisable for a period of up to 10 years from the date of grant; |
| (b) | if the expiry date for an option falls within a blackout period, or within nine (9) business days following the expiration of a blackout period, such expiry date will be automatically adjusted without any further act or formality to that day which is the 10th business day after the end of the blackout period, such 10th business day to be considered the expiry date for such option for all purposes under the 2012 Plan; |
| (c) | the minimum exercise price of an option granted under the 2012 Plan must not be less than the Market Price calculated the day before the grant being an exercise price which is no less than the five day volume weighted average trading price (“VWAP”) at the date of grant. VWAP is calculated by dividing the total value of the Common Shares traded for the relevant period on the TSX by the total volume of shares; |
| (d) | for stock options granted to employees or service providers (including directors, officers, management company employees and consultants), the Company must ensure that the proposed optionee is a bona fide employee or service provider (including directors, officers, management company employees and consultants), as the case may be, of the Company or any subsidiary; |
| (e) | if an Optionee ceases to be employed by the Company (other than as a result of termination with cause) or ceases to act as a director or officer of the Company or a subsidiary of the Company, any option held by such Optionee which has vested may be exercised within 90 days after the date such Optionee ceases to be employed or act as an officer or director, as the case may be, or for such other period as may be specified in any agreement with the Optionee or otherwise approved by the Board; |
| (f) | if an Optionee dies, any vested option held by him at the date of death will become exercisable by the Optionee’s lawful personal representatives, heirs or executors until the earlier of one year after the date of death of such Optionee and the date of expiration of the term otherwise applicable to such option; |
| (g) | in the case of an Optionee being dismissed from employment or service for cause, such Optionee’s options, whether or not vested at the date of dismissal, will immediately terminate without right to exercise same; |
| (h) | vesting of options shall be at the discretion of the Board; |
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| (i) | all options which have not then vested shall immediately vest upon a change of control; and |
| (j) | the Board reserves the right in its absolute discretion to terminate the 2012 Plan with respect to all 2012 Plan shares in respect of options which have not yet been granted hereunder. |
Restricted Share and Performance Share Unit Plan
At our Company’s Annual General Meeting held on March 10, 2010, the Shareholders approved a Restricted Share Unit Plan, with the purpose of the plan to attract and retain highly qualified officers, directors, key employees and consultants, to motivate such officers, directors, key employees and consultants to serve the Company and to encourage the continued employment and service of, and maximum efforts by, officers, key employees and directors of the Company by offering those persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company.
A restricted share unit (RSU) is a right granted to a unit holder to receive on common share of the Company. The RSU’s vest over a three (3) year period from the award grant date (1/3 upon the first anniversary of the grant, 1/3 upon the second anniversary of grant and 1/3 upon the third anniversary of grant). In addition, the RSU’s awarded to executive officers will be subject to performance requirements and will be earned only if performance goals over the performance periods established by or under the direction of the Compensation Committee are met (referred to as “PSU’s”). The RSU will be terminated to the extent the performance objectives are not met.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.Major Shareholders
To the knowledge of our directors and senior officers, as of December 1, 2012, no person or corporation beneficially owns, directly or indirectly, or exercises control or direction over 5% or more of our outstanding common shares, except as noted below. Our directors and officers, as a group, control us by reason of their positions with us and their ownership of common shares and common share options. As a group, they beneficially own, directly or indirectly, 4,201,831 common shares, representing about 12.3% of our presently issued and outstanding common shares (including an aggregate of 816,597 common shares that are reserved for issuance pursuant to stock options that are all exercisable within sixty days).
Pursuant to the policies of the TSX, where an issuance of securities may result in the creation of a new control person of an issuer (which is a person holding greater than 20% of the outstanding securities of an issuer is deemed to be), the issuance must be approved by the disinterested shareholders of the company. To the knowledge of our directors and senior officers, as of December 1, 2012 no person or corporation owned or had the intent of acquiring 20% or greater of our securities.
Peter Fitzgerald is our Chairman and is a significant shareholder and investor in us. Currently, Mr. Fitzgerald owns 1,657,339 of our common shares or 5% of our outstanding common shares. Mr. Fitzgerald also holds 94,442 common share options that are all exercisable within sixty days and if he were to exercise all of these options and assuming no other common shares of us are issued prior to such exercise, Mr. Fitzgerald could own 1,751,781 of our common shares, representing 5% of our then outstanding securities, as of December 1, 2012.
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Invesco Canada Ltd. (previously Invesco Trimark Ltd.) is an institutional investor that currently has control or direction over 5,630,000 of our common shares or 16.4% of our outstanding common shares.
Nicusa Capital is an institutional investor that currently has control or direction over 4,619,235 of our common shares or 13.5% of our outstanding common shares.
As of December 1, 2012, our shareholders’ register listed approximately 104 registered shareholders holding an aggregate of 34,299,472 common shares. A total of 60 of these registered shareholders were shown to be residents of Canada, owning 26,214,253 shares representing 76.4% of our issued and outstanding common shares. A total of 28 of these registered shareholders were shown to be residents of the United States, owning 7,362,489 shares representing 21.5% of our issued and outstanding common shares.
B.Related Party Transactions
During the year ended September 30, 2012, the Company incurred legal fees of $156,204 (2011: $133,242), respectively, for services provided by McMillan LLP, a law firm of which a director of the Company is a partner. Accounts payable and accrued liabilities at September 30, 2012 included $41,245 (September 30, 2011: $23,955) related to these services.
During the year ended September 30, 2012, the Company incurred consulting fees of $59,678 (2011: $60,722) for services provided by Digital Photoworks, a company of which a Director of the Company controls. The Company does not have any outstanding accounts payable or accrued liabilities as at September 30, 2012 related to this company (September 30, 2011: $5,072).
During the year ended September 30, 2012, the Company did not incur expenses relating to setting up e-mail marketing campaigns on behalf of any of our retail customers (September 30, 2011: $8,449) and website services (September 30, 2011: $3,000), and software development services (September 30, 2011: $3,500) with Photoblaster, a company of which a director of the Company is Chairman and Chief Executive Officer.
The Company shares its UK premises with another company, Works Unit Ltd., of which an Officer is a director. During the year ended September 30, 2012, the Company was recharged its proportional share of office running costs totalling $209,850 (2011: $200,592) by this related party. In addition, during the year ended September 30, 2012, the Company used the software development services of this company, incurring costs of $105,560 (2011: $58,941). The Company does not have any outstanding accounts payable as at September 30, 2012 (September 30, 2011: $21,578) related to these services and cost recharges.
During the year ended September 30, 2012, the Company incurred consulting fees of $15,188 (2011: $nil) for services provided by Altona Consulting, LLC., a company of which a Director of the Company controls. The Company does not have any outstanding accounts payable as at September 30, 2012 related to this company.
During the year ended September 30, 2012, the Company incurred consulting fees of $15,213 (2011: $nil) for services provided by LLBC, LLC., a company of which a previous Director of the Company controls. The Company does not have any outstanding accounts payable as at September 30, 2012 related to this company.
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During the year ended September 30, 2012, the Company generated revenue of $7,683 (2011: $5,880) relating to transaction fees, software license and installation fees, and membership fees from a customer, Extrafilm, of which a Director of the Company controls. Accounts receivable at September 30, 2012 included $2,581 (September 30, 2011: $2,102) related to these services.
All amounts charged were recorded at their exchange amount, which is the amount of consideration established and agreed to by the related parties and having normal trade terms.
C.Interests of Experts and Counsel
Not Applicable.
A.Consolidated Statements and Other Financial Information
The consolidated financial statements of the Company for the years ended September 30, 2012 and 2011 have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board, or IASB, and are included under Item 18 of this annual report. The consolidated financial statements including related notes are accompanied by the report of the Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP.
Legal Proceedings.
As of the date of this Annual Report, in the opinion of our management, we are not currently a party to any litigation or legal proceedings which are material, either individually or in the aggregate, and, to our knowledge, no legal proceedings of a material nature involving us currently are contemplated by any individuals, entities or governmental authorities. We may become involved in claims litigation arising in the ordinary course of business. In the opinion of management, the outcome of such claims litigation, if decided adversely, could have an effect on the operating results or cash flows when resolved in a future period. However, in the opinion of management, these matters would not materially affect our consolidated financial position.
During the year ended September 30, 2010, the Company received notice from a former customer that a possible patent infringement had been brought to their attention regarding software which in previous years had been sold by one of our subsidiaries and which is unrelated to the PNI Platform and to the Company’s kiosk software. During the year ended September 30, 2011, the Company received notice from its former customer that a settlement had been reached between it and the entity that had been making the claims of patent infringement. As a result, the Company’s former customer requested that the Company pay a portion of the settlement amount under an indemnification clause included in the contract that was in place during the previous relationship. After considering all of the available facts, including the expected legal costs of disputing the matter, the Company agreed to pay a contribution of the settlement charge, up to a maximum amount of US$100,000. The Company has now concluded negotiations over the final allocation of the settlement charge with the former customer and made a contribution of US$80,000 during the year ended September 30, 2011.
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B.Significant Changes
Since the date of the audited consolidated financial statements, there have been no significant changes other than as detailed, if applicable, in Liquidity and Capital Resources in Item 5.B and in Business Overview in Item 4.B.
Not applicable except for Item 9A(4) and Item 9C.
A. (4).Price History
Market and Trading Prices
During the year ended September 30, 2012 the Company’s application to the TSX was approved, and effective October 18, 2011 the Company’s shares were de-listed from the TSX-V and began trading on the TSX under the trading symbol “PN”. Our shares were first listing for trading on the Montreal Exchange (“ME”), in Montreal, Quebec, Canada, which merged with the Canadian Venture Exchange (“CDNX”) in September 2001 and effective October 1, 2001 we began trading on the CDNX. Subsequently the CDNX was acquired by the TSX in 2002 and on April 1, 2002 we were listed for trading on the TSX-V. The following table sets forth the reported high and low sale prices of our common shares as reported by the TSX-V, and where applicable the TSX for the periods indicated.
| Sales Prices (CDN$) | ||||||||||
Common Shares | High | Low | ||||||||
Annual Data | 2012 | 0.98 | 0.40 | |||||||
| 2011 | 1.80 | 0.80 | ||||||||
| 2010 | 1.95 | 1.30 | ||||||||
| 2009 | 2.29 | 1.00 | ||||||||
| 2008 | 4.50 | 1.90 | ||||||||
| 2007 | 5.77 | 2.31 | ||||||||
Quarterly data | 2012 | 0.73 | 0.34 | |||||||
| September 30, 2012 | 0.74 | 0.40 | ||||||||
| June 30, 2012 | 0.60 | 0.48 | ||||||||
| March 31, 2012 | 0.72 | 0.52 | ||||||||
| December 31 2011 | 0.98 | 0.65 | ||||||||
| September 30 2011 | 1.25 | 0.80 | ||||||||
| June 30 2011 | 1.60 | 1.12 | ||||||||
| March 31 2011 | 1.66 | 1.45 | ||||||||
| December 31, 2010 | 1.77 | 1.50 | ||||||||
| September 30 2011 | 1.25 | 0.80 | ||||||||
Monthly data | November 2012 | 0.44 | 0.34 | |||||||
| October 2012 | 0.48 | 0.41 | ||||||||
| September 2012 | 0.74 | 0.43 | ||||||||
| August 2012 | 0.72 | 0.43 | ||||||||
| July 2012 | 0.54 | 0.40 | ||||||||
| June 2012 | 0.57 | 0.48 | ||||||||
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Our common shares are also listed on the OTC Bulletin Board in the United States under the trading symbol PNDMF, however, we do not presently have an active market maker in the United States. The following table sets forth the high and low sales prices for the common shares on the OTC BB the periods indicated.
| Sales Prices (US$) | ||||||||||
Common Shares | High | Low | ||||||||
Annual Data | 2012 | 0.98 | 0.40 | |||||||
| 2011 | 1.77 | 0.80 | ||||||||
| 2010 | 1.87 | 1.28 | ||||||||
| 2009 | 2.05 | 0.89 | ||||||||
| 2008 | 4.65 | 1.84 | ||||||||
| 2007 | 4.88 | 2.52 | ||||||||
Quarterly Data | 2012 | |||||||||
| September 30, 2012 | 0.73 | 0.40 | ||||||||
| June 30, 2012 | 0.59 | 0.40 | ||||||||
| March 31, 2012 | 0.70 | 0.51 | ||||||||
| December 31 2011 | 0.98 | 0.61 | ||||||||
| 2011 | 0.74 | 0.35 | ||||||||
| September 30 2011 | 1.25 | 0.80 | ||||||||
| June 30 2011 | 1.60 | 1.12 | ||||||||
| March 31 2011 | 1.66 | 1.45 | ||||||||
| December 31, 2010 | 1.77 | 1.50 | ||||||||
Monthly data | November 2012 | 0.44 | 0.35 | |||||||
| October 2012 | 0.48 | 0.41 | ||||||||
| September 2012 | 0.65 | 0.44 | ||||||||
| August 2012 | 0.73 | 0.42 | ||||||||
| July 2012 | 0.54 | 0.40 | ||||||||
| June 2012 | 0.58 | 0.40 | ||||||||
Our common share register indicates that 28 of our registered shareholders are residents of the United States, owning 7,362,489 shares representing 21.5% of our issued and outstanding common shares. We have no information and express no opinion regarding the identities, addresses or holdings of the beneficial owners of these securities.
B.Plan of Distribution
Not Applicable.
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C.Markets
See Item 9.A(4) above.
D.Selling Shareholders
Not Applicable.
E.Dilution
Not Applicable.
F.Expenses of the Issue
Not Applicable.
ITEM 10. ADDITIONAL INFORMATION
A.Share Capital
Not Applicable.
B.Memorandum and Articles of Association
Our charter documents consist of our Notice of Articles and our Articles. Our corporation number, as assigned by the British Columbia Ministry of Consumer and Commercial relations, is 509287.
In March 2004, theCompany Act (British Columbia) (the “BCCA”) was replaced by theBusiness Corporations Act (British Columbia) (the “BCA”). All companies incorporated under the BCCA were required complete a transition application under the BCA by March 29, 2006. We have been successfully transitioned under the BCA. We filed a Notice of Articles in June 2005. At our annual general meeting held on March 24, 2005, our shareholders adopted a new set of Articles which is intended to take advantage of the increased flexibility afforded by the BCA with respect to certain provisions of our Charter Documents. Details of our Notice of Articles and Articles were disclosed in our annual report on Form 20-F for the fiscal year ended September 30, 2005, as filed with the Securities and Exchange Commission. A copy of our Articles was filed as an exhibit to our annual report on Form 20-F for the fiscal year ended September 30, 2005. There have been no changes to the Notice of Articles or Articles since that time.
C.Material Contracts
The following summary of our material agreements, some of which have been previously filed with the SEC, does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of those agreements. There are no material contracts, other than those contracts entered into in the ordinary course of business, currently in place or to which we or any member of our group is a party, from the two years immediately preceding the publication of this annual report, except as follows:
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| 1. | The Toronto and Vancouver Co-Located Hosting Agreement with TELUS Communications Inc., dated December 20, 2011. This agreement is for a 47 month period commencing December 20, 2011. |
| 2. | The Services Agreement between Pixology and ASDA Stores Limited is dated 28 September 2005 and continues in full force and effect until terminated by either party giving no less than three calendar month’s notice in writing to the other, such notice to expire at any time on or after the first anniversary of the commencement date. |
| 3. | The Services Agreement with Sam’s West Inc., dated January 23, 2008. This Agreement is for a period of two years, expiring January 23, 2010 (the “Term”) and automatically renews for one year periods unless written notice is provided by one party to the other prior to the end of the Term or the then current renewal term. |
| 4. | The Amended and Restated Services Agreement with Wal-Mart Canada Corp., dated January 31, 2008. This Agreement is for a period of two years, expiring January 31, 2010 (the “Term”) and automatically renews for one year periods unless written notice is provided by one party to the other not less than thirty (30) days prior to the end of the Term or the then current renewal term. |
| 5. | The Internet Photo Services Agreement with Costco Wholesale Corporation, dated April 29, 2008, including the First Amendment Internet Photo Services Agreement dated February 16, 2011. This Agreement is for a period of approximately five years, expiring June 4, 2016 (the “Term”) and may be extended by Costco for one year periods if written notice is provided by Costco at least ninety (90) days prior to the end of the Term or the then current renewal term. |
| 6. | The Internet Photo Services Agreement with Costco Wholesale Canada Ltd., dated November 1, 2010, including the First Amendment Internet Photo Services Agreement dated April 29, 2011. This agreement is for a period of approximately five years, expiring June 4, 2016 (the “Term”) and may be extended by Costco for one year periods if written notice is provided by Costco at least ninety (90) days prior to the end of the Term or the then current renewal term. |
| 7. | The Services and Software Agreement with CVS Pharmacy, Inc. (“CVS”), dated April 1, 2011. This Agreement is for a period of three years, expiring March 31, 2014 (the “Term”) and automatically renews for a perpetual rolling Term, cancellable at any time upon at least ninety (90) days prior written notice by either party. |
| 8. | The lease renewal and modification agreement for our executive offices located at Suites 580 & 590, 425 Carrall Street, Vancouver, British Columbia, Canada, dated June 11, 2009 and covers 6,602 square feet. The amendment comprises an extension to the original lease for the period August 1, 2009 to July 31, 2014. We lease the premises from a third party corporation. The monthly base rent is approximately $6,877.08. |
| 9. | The lease agreement for our support offices located at Suite 100, 425 Carrall Street, Vancouver, British Columbia, Canada dated July 26, 2010. The lease comprises 4,705 square feet in an office building owned by a third party corporation. The lease term is from September 1, 2010 to July 31, 2014. The monthly base rent is approximately $5,195.10 |
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| 10. | The Share Purchase Agreement amongst PhotoChannel Networks Inc., as Purchaser and Vendors in relation to the sale and purchase of the whole of the issued share capital of WorksMedia Limited, dated February 25, 2009. |
| 11. | An Amended and Restated Master Development and Services Agreement with Bloom Stationers LLC (“Bloom”), a New York based designer of social stationery products, dated March 11, 2011. Under this Agreement, we agreed to develop and host an online software solution for Bloom to permit end users to purchase Bloom’s suite of business and personal stationery products Bloom’s website, co-branded websites and through retail partners. The agreement is for a five year term from the date the Bloom system is launched with a national retailer, and automatically renews for additional five year terms. Pursuant to this agreement, we are obligated to develop and host the Bloom solution, provide all services necessary to connect the Bloom solution to retailers and co-branded sites who contract for the Bloom solution, and provide Bloom with a mirror site in the event of a termination of this agreement, in consideration for which we are to receive a share of revenue generated from the sale of Bloom products through the such co-branded sites and retail partners. The agreement provides that all work product created by PNI for Bloom will be owned by Bloom. We have covenanted to use our best efforts to enter into agreements with our retailer partners to make the Bloom products available through our retailer partners, and have agreed that we will not during the term of the agreement and for a period of 60 months after its termination, provide services which compete with the Bloom solution, other than (i) non-customizable services for retailers for which we provided services as of the date of the agreement with Bloom (“Pre-existing Retailers”), and (ii) after the expiry of twelve months from the date the Bloom system is launched, customizable services for Pre-existing Retailers. The agreement may be terminated by either party in the event of a material default by the other party or upon the bankruptcy or insolvency of the other party. The agreement may also be terminated by PNI in the event of a change of control of Bloom, which includes an an event where certain officers of Bloom cease to be officers of Bloom. Bloom may also terminate the agreement in the event of a change of control of PNI, which includes any event where Kyle Hall ceases to be the Chief Executive Officer of PNI, or if PNI becomes a provider of services materially similar to or competing with the Bloom products in violation of the agreement, or if PNI fails to defend a claim that either the Bloom solution infringes any intellectual property rights, or that the intellectual property rights in the Bloom solution are being infringed. |
D.Exchange Controls
We incorporated pursuant to the laws of the Province of British Columbia, Canada. There is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to a non-resident holder of Common Shares, other than withholding tax requirements. Any such remittances to United States residents are generally subject to withholding tax, however no such remittances are likely in the foreseeable future. See “Taxation”, below.
There is no limitation imposed by the laws of Canada or by our charter on the right of a non-resident to hold or vote our shares, other than as provided in theInvestment Canada Act (Canada) (the “Investment Act”). The following discussion summarizes the material features of the Investment Act for a non-resident who proposes to acquire a controlling number of Great our common shares. It is general only, it is not a substitute for independent advice from an investor’s own advisor, and it does not anticipate statutory or regulatory amendments. We do not believe the Investment Act will have any affect on us or on our non-Canadian shareholders due to a number of factors including the nature of our operations and our relatively small size.
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The Investment Act generally prohibits implementation of a “reviewable” investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture (each an “entity”) that is not a “Canadian” as defined in the Investment Act (i.e. a “non-Canadian”), unless after review the Minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. An investment in our common shares by a non-Canadian (other than a “WTO Investor” as that term is defined in the Investment Act and which term includes entities which are nationals of or are controlled by nationals of member states of the World Trade Organization) when we were not controlled by a WTO Investor, would be reviewable under the Investment Act if it was an investment to acquire control of the Company and the value of our assets, as determined in accordance with the regulations promulgated under the Investment Act, was over $5 million, or if an order for review was made by the federal cabinet on the grounds that the investment related to Canada’s cultural heritage or national identity, regardless of the value of our assets. An investment in our common shares by a WTO Investor, or by a non-Canadian when the Company was controlled by a WTO Investor, would be reviewable under the Investment Act if it was an investment to acquire control of the Company and the value of our assets, as determined in accordance with the regulations promulgated under the Investment Act, was not less than a specified amount, which for 2005 exceeds $265 million. A non-Canadian would acquire control of the Company for the purposes of the Investment Act if the non-Canadian acquired a majority of the common shares. The acquisition of less than a majority but one-thirds or more of the common shares would be presumed to be an acquisition of control unless it could be established that, on the acquisition, we were not controlled in fact by the acquiror through the ownership of the common shares.
Certain transactions relating to the common shares would be exempt from the Investment Act, including
| (a) | an acquisition of the common shares by a person in the ordinary course of that person’s business as a trader or dealer in securities, |
| (b) | an acquisition of control in connection with the realization of security granted for a loan or other financial assistance and not for a purpose related to the provisions of the Investment Act, and |
| (c) | an acquisition of control by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of the Company, through the ownership of the common shares, remained unchanged. |
E.Taxation
The following summary is not exhaustive, but is materially complete.
A brief description of certain provisions of the tax treaty between Canada and the United States is included below, together with a brief outline of certain taxes, including withholding tax provisions, to which United States security holders are subject under existing laws and regulations of Canada. The consequences, if any, of provincial, state and local taxes are not considered.
The following information is general and security holders are advised to seek the advice of their own tax advisors, tax counsel or accountants with respect to the applicability or effect on their own individual circumstances of the matters referred to herein and of any provincial, state, or local taxes.
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Certain Canadian Federal Income Tax Consequences
The discussion under this heading summarizes the principal Canadian federal income tax consequences of acquiring, holding and disposing of shares of our common stock for any of our shareholders who is not a resident of Canada but is a resident of the United States and who will acquire and hold shares of our common stock as capital property for the purposes of theIncome Tax Act (Canada) (the “Canadian Tax Act”). This summary does not apply to a shareholder who carries on business in Canada through a “permanent establishment” situated in Canada or performs independent personal services in Canada through a fixed base in Canada if the shareholder’s holding in our stock is effectively connected with such permanent establishment or fixed base. This summary is based upon the provisions of the Canadian Tax Act including the regulations thereunder (the “Regulations”) in force as of the date hereof and Counsels’ understanding of the current published administrative and assessing practices and policies of the Canada Revenue Agency (the “CRA”). Except for specifically proposed amendments (the “Proposed Amendments”) to the Tax Act and the Regulations that have been publicly announced by or on behalf of the federal Minister of Finance prior to the date hereof, this summary does not take into account or anticipate changes in the income tax law, whether by legislative, governmental or judicial action, nor any changes in the administrative practices and policies of the CRA. There can be no assurance that the Proposed Amendments will be enacted in their present form, or at all. This summary is not exhaustive of all Canadian federal income tax considerations nor does it take into account any provincial, territorial or foreign tax considerations arising from the acquisition, ownership or disposition of the Securities. This discussion is general only and is not a substitute for independent advice from a shareholder’s own Canadian and U.S. tax advisors.
The provisions of the Canadian Tax Act are subject to income tax treaties to which Canada is a party, including the Canada-United States Income Tax Convention (1980), as amended (the “Convention”).
Dividends on Common Shares and Other Income
Under the Canadian Tax Act, a non-resident of Canada is generally subject to Canadian withholding tax at the rate of 25 percent on dividends paid or deemed to have been paid to him or her by a corporation resident in Canada. The Convention limits the rate to 15 percent if the shareholder is a resident of the United States and the dividends are beneficially owned by and paid to such shareholder, and to 5 percent if the shareholder is also a corporation that beneficially owns at least 10 percent of the voting stock of the payor corporation.
The amount of a stock dividend (for tax purposes) would generally be equal to the amount by which our paid up or stated capital had increased by reason of the payment of such dividend. We will furnish additional tax information to shareholders in the event of such a dividend. Interest paid or deemed to be paid on the Corporation’s debt securities held by non-Canadian residents may also be subject to Canadian withholding tax, depending upon the terms and provisions of such securities and any applicable tax treaty.
The Convention generally exempts from Canadian income tax dividends paid to a religious, scientific, literary, educational or charitable organization or to an organization constituted and operated exclusively to administer or provide a pension, retirement or employee benefit fund or plan, if it is a resident of the United States and is exempt from income tax under the laws of the United States.
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Dispositions of Common Shares
Under the Canadian Tax Act, a taxpayer’s capital gain or capital loss from a disposition of a share of our common stock is the amount, if any, by which his or her proceeds of disposition exceed (or are exceeded by, respectively) the aggregate of his or her adjusted cost base of the share and reasonable expenses of disposition. The capital gain or loss must be computed in Canadian currency using a weighted average adjusted cost base for identical properties. The capital gains net of losses realized and included in income are at 50%. There are special transitional rules to apply capital losses against capital gains that arose in different periods. The amount by which a shareholder’s capital loss exceeds the capital gain in a year may be deducted from a capital gain realized by the shareholder in the three previous years or any subsequent year, subject to certain restrictions in the case of a corporate shareholder.
Under the Canadian Tax Act, a non-resident of Canada is subject to Canadian tax on taxable capital gains, and may deduct allowable capital losses, realized on a disposition of “taxable Canadian property.” Shares of our common stock will constitute taxable Canadian property of a shareholder at a particular time if the shareholder used the shares in carrying on business in Canada, or if at any time in the five years immediately preceding the disposition 25% or more of the issued shares of any class or series in our capital stock belonged to one or more persons in a group comprising the shareholder and persons with whom the shareholder did not deal at arm’s length and in certain other circumstances.
The Convention relieves United States residents from liability for Canadian tax on capital gains derived on a disposition of shares unless:
| (a) | the value of the shares is derived principally from “real property” in Canada, including the right to explore for or exploit natural resources and rights to amounts computed by reference to production, |
| (b) | the shareholder was resident in Canada for 120 months during any period of 20 consecutive years preceding the disposition, or was a resident in Canada at any time during the 10 years immediately preceding, and the shares were owned by the shareholder when they ceased to be resident in Canada, or |
| (c) | the shares formed part of the business property of a “permanent establishment” that the holder has or had in Canada within the 12 months preceding the disposition. |
F.Dividends and Paying Agents
Not Applicable.
G.Statements by Experts
Not Applicable.
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H.Documents on Display
The documents concerning us which are referred to in this annual report may be inspected at our offices located at 590 – 425 Carrall Street, Vancouver, British Columbia V6B 6E3.
We are required to file reports and other information with the securities commission in British Columbia, Alberta, Ontario and Quebec. Readers are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with the provincial securities commission. These filings are also electronically available for the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) (www.sedar.com), the Canadian equivalent of the SEC’s electronic document gathering and retrieval system (EDGAR).
I.Subsidiary Information
For information about our subsidiaries, please see “Item 4. Information On The Company; Organizational Structure.”
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a number of risks related to changes in foreign currency exchange rates, interest rates, collection of accounts receivable, settlement of liabilities and management of cash and cash equivalents. We manage these risks through internal risk management policies.
Many of our strategies are based on historical trading patterns and correlations and our management’s expectations of future events. However, these strategies may not be fully effective in all market environments or against all types of risks. Unexpected market developments may affect our risk management strategies during this time, and unanticipated developments could impact our risk management strategies in the future. If any of the variety of instruments and strategies we utilize are not effective, we may incur losses.
Credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company aims to protect its cash and cash equivalents from undue risk by holding them with various high credit quality financial institutions located in Canada and the United Kingdom which generally have an investment grade rating of a minimum of A- and does not invest any significant deposits in any financial institutions with a rating below that investment grade. In circumstances in which a bank in which the Company holds a deposit has any significant decline in its credit rating, the Company carefully monitors the extent of any credit risk net of government deposit guarantees and, where appropriate, would take remedial action to minimise the risk of any potential credit loss. Of the amounts held with financial institutions on deposit, $180,710 is covered by either the Financial Services Compensation Scheme in the United Kingdom or the Canada Deposit Insurance Corporation, leaving $4,431,779 risk should the financial institutions with which the deposits are held cease trading.
The Company’s accounts receivable are all from large, well-known retailers located primarily in Canada, the United States and the United Kingdom. Credit risk from accounts receivable encompasses the default risk of retail customers. The Company manages its exposure to credit risk by only working with larger, reputable companies and prior to accepting new customers; the
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Company assesses the risk of default associated with a particular company. In addition, on an ongoing basis, management monitor the level of accounts receivable attributable to each customer and the length of time taken for amounts to be settled and where necessary, takes appropriate action to follow up on those balances considered overdue.
Management does not believe that there is significant credit risk arising from any of the Company’s customers; however, should one of the Company’s main customers be unable to settle amounts due, the impact on the Company could be significant. The maximum exposure to loss arising from accounts receivable is equal to their total carrying amounts. At September 30, 2012, three customers each account for 10% or more of total trade accounts receivable (2011 – five customers).
Financial assets past due
At September 30, 2012, the Company has a provision of $130,023 against trade accounts receivable, the collection of which is considered doubtful.
The following table provides information regarding the ageing of financial assets that are past due but which are not impaired.
At September 30, 2012
| Financial assets that are past due but not impaired | ||||||||||||||||||||
| Neither past due nor impaired | 31 – 60 days | 61 – 90 days | 91 days + | Carrying value on the balance sheet | ||||||||||||||||
Trade accounts receivable | $ | 2,334,240 | $ | 328,844 | $ | 358,600 | $ | 1,201,717 | $ | 4,223,401 | ||||||||||
Commodity taxes recoverable | 30,140 | 30,140 | ||||||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
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Total | $ | 2,364,380 | $ | 328,844 | $ | 358,600 | $ | 1,201,717 | $ | 4,253,541 | ||||||||||
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The definition of items that are past due is determined by reference to terms agreed with individual customers. Of the 91 days+ balance outstanding at September 30, 2012, 78% has been subsequently collected as at December 1, 2012. None of the amounts outstanding have been challenged by the respective customer(s) and the Company continues to conduct business with them on an ongoing basis. Accordingly, management has no reason to believe that this balance is not fully collectable in the future.
The Company reviews financial assets past due on an ongoing basis with the objective of identifying potential matters which could delay the collection of funds at an early stage. Once items are identified as being past due, contact is made with the respective company to determine the reason for the delay in payment and to establish an agreement to rectify the breach of contractual terms. At September 30, 2012, the Company had a provision for doubtful accounts of $130,023 which was made against trade accounts receivable in excess of twelve months old or where collection efforts to date have been unsuccessful. All amounts neither past due nor impaired are collectible from large, well-known retailers located in Canada, the United States and the United Kingdom. The Company is not aware of any information suggesting that the collectability of these amounts is in doubt.
Market risk
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Market risk is the risk to the Company that the fair value or future cash flows of financial instruments will fluctuate due to changes in interest rates and foreign currency exchange rates. Market risk arises as a result of the Company generating revenues and incurring expenses in foreign currencies, holding cash and cash equivalents which earn interest and having operations based in the United Kingdom in the form of its wholly owned subsidiaries.
Interest rate risk
The only financial instruments that expose the Company to interest rate risk are its cash and cash equivalents. The Company’s objectives of managing its cash and cash equivalents are to ensure sufficient funds are maintained on hand at all times to meet day-to-day requirements and to place any amounts which are considered in excess of day-to-day requirements on short-term deposit with the Company’s banks so that they earn interest. When placing amounts of cash and cash equivalents on short-term deposit, the Company only uses high quality commercial banks and ensures that access to the amounts placed can be obtained on short-notice. As at September 30, 2012 the weighted average interest rate of all cash equivalent investments was nil (2011: nil).
Currency risk
The Company generates revenues and incurs expenses and expenditures primarily in Canada, the United States and the United Kingdom and is exposed to risk from changes in foreign currency rates. In addition, the Company holds financial assets and liabilities in foreign currencies that expose the Company to foreign exchange risks. The Company does not utilise any financial instruments or cash management policies to mitigate the risks arising from changes in foreign currency rates.
At September 30, 2012, through its wholly owned subsidiaries, the Company had cash and cash equivalents of $4,127,963, accounts receivable of $1,596,565 and accounts payable of $1,095,573 which were denominated in UK £. In addition, at September 30, 2012, the Company had cash and cash equivalents of $421,081, accounts receivable of $2,099,764 and accounts payable of $699,185 which were denominated in US$.
Sensitivity analysis
The Company has completed a sensitivity analysis to estimate the impact on net earnings for the year which a change in foreign exchange rates or interest rates during the Year ended September 30, 2012 would have had.
This sensitivity analysis includes the following assumptions:
| • | Changes in individual foreign exchange rates do not cause foreign exchange rates in other countries to alter |
| • | Changes in market interest rates do not cause a change in foreign exchange rates |
The results of the foreign exchange rate sensitivity analysis can be seen in the following table:
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| Impact on net profit $ | ||||
Change of +/- 10% in US$ foreign exchange rate | +/-321,300 | |||
Change of +/- 10% in UK£ foreign exchange rate | +/-412,796 | |||
The above results arise primarily as a result of the Company having US$ denominated trade accounts receivable balances, trade accounts payable balances and bank account balances.
Limitations of sensitivity analysis
The above table demonstrates the effect of either a change in foreign exchange rates or interest rates in isolation. In reality, there is a correlation between the two factors.
Additionally, the financial position of the Company may vary at the time that a change in either of these factors occurs, causing the impact on the Company’s results to differ from that shown above.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There have not been any defaults with respect to dividends, arrearages or delinquencies since September 30, 2009.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
There have been no material modifications to the rights of our security holders or use of proceeds since September 30, 2009.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls And Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under theSecurities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under theSecurities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report, being September 30, 2012. This evaluation was
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carried out by the Company’s Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2012.
Management’s Annual Report On Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and the Chief Financial Officer and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. It includes those policies and procedures that:
| • | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are made only in accordance with authorizations of management and the directors of the Company; and |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
Management has assessed the effectiveness of our internal control over financial reporting as at September 30, 2012 using criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, management has concluded that the Company maintained effective internal control over financial reporting as at September 30, 2012.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) being signed into law in the United States. Section 989G of the Dodd-Frank Act permanently exempts non-accelerated filers from filing auditor attestation reports over the effectiveness of the Company’s internal controls in accordance with Section 404(b) of the Sarbanes Oxley Act of 2002. For the year ended September 30, 2012, the Company continues to meet the definition of a non-accelerated filer.
Changes In Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the Company’s year ending September 30, 2012 that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations Of Controls And Procedures
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The Company’s management, including the Chief Executive Officer and Chief Financial Officer, believe that any disclosure controls and procedures or internal controls over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgements in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Composition of the Audit Committee
As of September 30, 2012, the Audit Committee of the Corporation’s Board of Directors was comprised of Mr. Peter Fitzgerald, Mr. Robert Chisholm, Mr. Peter Scarth and Mr. Thomas Nielsen. Mr. Robert Chisholm subsequently resigned on December 10, 2012. The Board of Directors has determined that Mr. Peter Fitzgerald fulfills the role of a Financial Expert on the Corporation’s audit committee. All members of the Audit Committee are “independent” as the term is defined under the rules of the New York Stock Exchange. Mr. Fitzgerald is a professional accountant with extensive experience and knowledge. The other members of the audit committee have significant financial experience and all members are considered to be financially literate and independent.
A copy of the Corporation’s audit committee charter is attached as Exhibit 15.1 to this Form 20-F.
A member of the audit committee is consideredfinancially literate if he or she has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Company.
Relevant Education and Experience
Peter Scarth obtained his Professional Engineering designation, in Chemical Engineering in 1969 from Queens University. Mr Scarth is a retired businessman, but in his previous employment he was President & CEO of the Company from March 2001 to October 2004 and was Vice President and Business Manager, Consumer Imaging and Vice President of the Motion Picture division within Kodak Canada.
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Thomas Neilsen obtained his Bachelor of Computer Science in 1990 from the Tietgenskolen, EDB-skolen, Denmark. Mr. Nielsen is currently the President for Altona Consulting, LLC, a boutique consulting firm specializing in advising public and private Boards and C-level executives around strategy, M&A activities and financing. Nielsen most recently served as President & CEO for RealNetworks, a pioneer in digital media solutions. Prior to RealNetworks, Mr. Neilsen was Vice President Marketing & Business Strategy, Digital Imaging Products at Adobe Systems Incorporated Creative Professional Business Unit. Prior to Adobe, Mr. Neilsen led the Windows Printing and Imaging and Windows Digital Document teams at Microsoft.
Peter Fitzgerald obtained his M.S.C. from the Massachusetts Institute of Technology in 1989; a PMD from the Harvard Business School in 1983; and an FCCA from the Chartered Association of Certified Accountants in 1973. Mr. Fitzgerald joined PNI’s Board of Directors in August 2001 and became Chairman of the Board in 2004. Prior to PNI, Mr. Fitzgerald was CEO of Gretag Imaging where he built the company into one of the world’s leading manufacturers of imaging equipment and systems before leaving to pursue personal interests. Previous to Gretag, Mr. Fitzgerald was CEO of Qualex, the Kodak photo-processing subsidiary, which he led very successfully for over seven years. While he was CEO of Qualex, Mr. Fitzgerald retained his active role as Vice President within Eastman Kodak where among other titles he carried the role of General Manager, Worldwide Consumer Imaging Services.
All of the above have had extensive experience reviewing financial statements.
Our policy is to conduct our business in accordance with the highest ethical and legal standards. To assist us in achieving this policy, the Board of Directors has adopted a Code of Ethics and Trading Restrictions Policy on December 11, 2006. The Code is designed to deter wrongdoing and to promote:
| (1) | Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
| (2) | Full, fair, accurate, timely and understandable disclosure in reports and documents that we submit to regulatory authorities and communicate to the public; |
| (3) | Compliance with applicable governmental laws and regulations; |
| (4) | Prompt internal reporting of violations of the Code to appropriate persons identified in the Code; and |
| (5) | Accountability for adherence to the Code. |
The Code applies to all of our employees, officers, and directors, including those of our subsidiaries. Depending on the circumstances, it may also apply to agents and other representatives of us.
The Company undertakes to provide to any person without charge, upon request, a copy of our Code. Such requests can be made to the Company in writing (our principal executive office is located at 590-425 Carrall Street, Vancouver, British Columbia, Canada V6B 6E3) or by telephone (our telephone number is 604-893-8955).
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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
| A. | Audit Fees |
The aggregate fees billed by our auditors were CDN$303,750 and CDN$275,000 for the fiscal years ended 2012 and 2011, respectively.
| B. | Audit-Related Fees |
The aggregate fees billed by our auditors for audit-related fees were CDN$1,480 and CDN$nil for the fiscal years ended 2012 and 2011, respectively.
| C. | Tax Fees |
The aggregate fees billed by our auditors for tax fees were CDNnil and CDN$15,560 for the fiscal years ended 2012 and 2011, respectively. The work performed related to US tax compliance.
| D. | All Other Fees |
The aggregate fees billed by our auditors for other services were CDN$59,500 and CDN$227,188 for the fiscal years ended 2012 and 2011, respectively.
Pre-Approval Policies and Procedures
It is within the mandate of the Corporation’s Audit Committee to approve all audit and non-audit related fees. The Audit Committee has pre-approved specifically identified non-audit related services, including tax compliance and review of tax returns as submitted to the Audit Committee from time to time. The auditors also present the estimate for the annual audit related services to the Audit Committee for approval prior to undertaking the annual audit of the financial statements. The Audit Committee has not adopted any specific pre-approval policies or procedures for the approval of non-audit services.
Audit Committee Oversight
The Audit Committee has not made any recommendations to the Board of Directors to nominate or compensate any external auditor which have not been accepted by the Board of Directors.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
The Corporation is not listed on any National Securities Exchange in the United States and is therefore not relying on any exemption from the independence standards contained in Exchange Act Rule 10A-3(a)(3), (b)(1)(iv) or (c)(3).
Reliance on Certain Exemptions under CSA National Instrument 52-110
At no time since the commencement of the Corporation’s most recently completed financial year has the Corporation relied on the exemptions in section 2.4 (De Minimis Non-audit Services), section 3.2 (Initial Public Offerings), section 3.4 (Events Outside Control of Member), section 3.5 (Death, Disability or Resignation of Audit Committee Member) or Part 8 (Exemptions) of the Canadian Securities Administrators National Instrument 52-110 - Audit Committees (“NI 52- 110”).
Reliance on the Exemption in Subsection 3.3(2) or Section 3.6
At no time since the commencement of the Corporation’s most recently completed financial year has the Corporation relied on the exemption in subsection 3.3(2) (Controlled Companies) or section 3.6 (Temporary Exemption for Limited and Exceptional Circumstances) of NI 52-110.
Reliance on Section 3.8
At no time since the commencement of the Corporation’s most recently completed financial year has the Corporation relied on section 3.8 (Acquisition of Financial Literacy) of NI 52-110.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On April 15, 2010, the Company received approval from the TSX-V for a Normal Course Issuer Bid (the “Bid”) that enables the Company to purchase and cancel up to 340,000, or approximately 1% of its outstanding common shares between May 1, 2010 and April 30, 2011. During the three month period ended December 31, 2010 the Company received approval from the TSX-V to revise the authorized purchase amount from 340,000 common shares to 1,714,943 million common shares, or 5% of the outstanding common shares of the Company. On May 27, 2011, the Company received approval from the TSX-V to extend the Bid authorizing the purchase of 1,714,943 common shares from May 27, 2011 to May 26, 2012. The Company’s Bid expired on May 26, 2012 and no further applications have been made to extend it.
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Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||
May 1, 2010 to May 31, 2010 | 10,000 | $1.70 | 10,000 | Nil | ||||
June 1, 2010 to June 30, 2010 | 30,000 | $1.59 | 30,000 | Nil | ||||
July 1, 2010 to July 31, 2010 | 20,000 | $1.45 | 20,000 | Nil | ||||
August 1, 2010 to August 31, 2010 | 10,000 | $1.50 | 10,000 | Nil | ||||
September 1, 2010 to September 30, 2010 | 30,000 | $1.39 | 30,000 | Nil | ||||
October 1, 2010 to October 31, 2010 | 22,300 | $1.56 | 22,300 | Nil | ||||
November 1, 2010 to November 30, 2010 | 52,900 | $1.68 | 52,900 | Nil | ||||
December 1, 2010 to December 31, 2010 | 23,100 | $1.62 | 23,100 | Nil | ||||
January 1, 2011 to January 31, 2011 | 75,400 | $1.58 | 75,400 | Nil | ||||
February 1, 2011 to February 28, 2011 | Nil | Nil | Nil | Nil | ||||
March 1, 2011 to March 31, 2011 | Nil | Nil | Nil | Nil | ||||
April 1, 2011 to April 30, 2011 | Nil | Nil | Nil | Nil |
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Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||
May 1, 2011 to May 31, 2011 | 1,300 | $1.38 | 1,300 | 1,713,643 | ||||
June 1, 2011 to June 30, 2011 | 58,100 | $1.20 | 58,100 | 1,655,543 | ||||
July 1, 2011 to July 31, 2011 | Nil | Nil | Nil | 1,655,543 | ||||
August 1, 2011 to August 31, 2011 | 50,000 | $1.06 | 50,000 | 1,605,543 | ||||
September 1, 2011 to September 30, 2011 | Nil | Nil | Nil | 1,605,543 | ||||
October 1, 2011 to October 31, 2011 | Nil | Nil | Nil | 1,605,543 | ||||
November 1, 2011 to November 30, 2011 | Nil | Nil | Nil | 1,605,543 | ||||
December 1, 2011 to December 31, 2011 | Nil | Nil | Nil | 1,605,543 | ||||
January 1, 2012 to January 31, 2012 | Nil | Nil | Nil | 1,605,543 | ||||
February 1, 2012 to February 29, 2012 | Nil | Nil | Nil | 1,605,543 | ||||
March 1, 2012 to March 31, 2012 | Nil | Nil | Nil | 1,605,543 | ||||
April 1, 2012 to April 30, 2012 | Nil | Nil | Nil | 1,605,543 | ||||
May 1, 2012 to May 31, 2012 | Nil | Nil | Nil | Nil | ||||
Total | 383,100 | $1.45 | 383,100 | Nil |
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ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.
Not Applicable
ITEM 16G. CORPORATE GOVERNANCE.
Not Applicable
ITEM 16H. MINE SAFETY DISCLOSURE
NOT APPLICABLE
We are providing financial statements pursuant to Item 18.
Our consolidated financial statements were prepared in accordance with IFRS, as issued by the IASB, and are presented in Canadian dollars.
The consolidated financial statements are in the following order:
| 1. | Report of Independent Registered Public Accounting Firm; |
| 2. | Consolidated Balance Sheets as at September 30, 2012. 2011 and October 1, 2010; |
| 3. | Consolidated Statement of Operations and Comprehensive Income (Loss) for the years ended September 30, 2012 and 2011; |
| 4. | Consolidated Statements of Changes in Equity for the years ended September 30, 2012 and 2011; |
| 6. | Consolidated Statements of Cash Flows for the years ended September 30, 2012 and 2011; and |
| 7. | Notes to Consolidated Financial Statements. |
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PNI Digital Media Inc.
Consolidated Financial Statements
September 30, 2012
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for the integrity and fair presentation of the financial information contained in this annual report. Where appropriate, the financial information, including financial statements, reflects amounts based on the best estimates and judgments of management. The financial statements have been prepared in accordance with accounting principles generally accepted in Canada. Financial information presented elsewhere in the annual report is consistent with that disclosed in the financial statements.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The system of controls is also supported by a professional staff of internal auditors who conduct periodic audits of many aspects of our operations and report their findings to management and the Audit Committee.
Management has a process in place to evaluate internal control over financial reporting based on the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.
The Board of Directors oversees management’s responsibility for financial reporting and internal control systems through an Audit Committee, which is composed entirely of independent directors. The Audit Committee meets periodically with management, our internal auditors and independent auditors to review the scope and results of the annual audit and to review the financial statements and related financial reporting and internal control matters before the financial statements are approved by the Board of Directors and submitted to the shareholders. PricewaterhouseCoopers LLP, an independent registered public accounting firm, appointed by the shareholders, have audited our financial statements in accordance with Canadian generally accepted auditing standards and have expressed their opinion in the auditor’s report.
| Kyle Hall | Cameron Lawrence | |
Chief Executive Officer Vancouver, Canada | Chief Financial Officer |
January 7, 2013
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To the Shareholders of PNI Digital Media Inc.
We have audited the accompanying consolidated financial statements of PNI Digital Media Inc. and its subsidiaries, which comprise the consolidated balance sheets as at September 30, 2012, September 30 2011 and October 1, 2010 and the consolidated statements of operations and comprehensive income (loss), statements of changes in equity and cash flows for the years ended September 30, 2012 and September 30, 2011 and the related notes, which comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board; and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. Canadian generally accepted auditing standards also require that we comply with ethical requirements.
An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. We were not engaged to perform an audit of the company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting principles and policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of PNI Digital Media Inc. and its subsidiaries as at September 30, 2012, September 30, 2011 and October 1, 2010 and their financial performance and their cash flows for the years ended September 30, 2012 and September 30, 2011 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Chartered Accountants
Vancouver, B.C
January 7, 2013
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PNI Digital Media Inc.
Consolidated Balance Sheets
(expressed in Canadian dollars)
| September 30, 2012 | September 30, 2011 | October 1, 2010 | ||||||||||
Assets | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | $ | 4,611,824 | $ | 3,936,176 | $ | 4.690,355 | ||||||
Accounts receivable (note 7) | 4,253,541 | 4,535,912 | 5,302,865 | |||||||||
Prepaid expenses and other current assets | 622,970 | 460,140 | 541,026 | |||||||||
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| 9,488,335 | 8,932,228 | 10,534,246 | ||||||||||
Property and equipment (note 8) | 4,683,355 | 5,140,150 | 5,230,829 | |||||||||
Deferred income tax asset | 5,222,603 | 7,065,857 | 5,861,504 | |||||||||
Intangible assets (note 10) | 2,124 | 680,437 | 1,115,794 | |||||||||
Goodwill (note 11) | 568,479 | 654,222 | 658,904 | |||||||||
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| $ | 19,964,896 | $ | 22,472,894 | $ | 23,401,277 | |||||||
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Liabilities | ||||||||||||
Current liabilities | ||||||||||||
Accounts payable and accrued liabilities (note 12) | $ | 4,390,437 | $ | 3,284,311 | $ | 5,471,878 | ||||||
Current portion of deferred revenue | 318,107 | 250,323 | 613,081 | |||||||||
Current portion of finance lease obligations | — | — | 107,964 | |||||||||
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| 4,708,544 | 3,534,634 | 6,192,923 | ||||||||||
Deferred revenue | 437,140 | 33,898 | 78,876 | |||||||||
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| 5,145,684 | 3,568,532 | 6,271,799 | ||||||||||
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Shareholders’ Equity (note 13) | ||||||||||||
Share capital | $ | 66,817,352 | $ | 66,420,572 | $ | 66,307,826 | ||||||
Contributed surplus | 19,334,098 | 19,522,420 | 18,933,619 | |||||||||
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| 86,151,450 | 85,942,992 | 85,241,445 | ||||||||||
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Deficit | (71,135,021 | ) | (67,012,367 | ) | (68,111,967 | ) | ||||||
Accumulated other comprehensive loss | (197,217 | ) | (26,263 | ) | — | |||||||
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| (71,332,238 | ) | (67,038,630 | ) | (68,111,967 | ) | |||||||
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| 14,819,212 | 18,904,362 | 17,129,478 | ||||||||||
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| $ | 19,964,896 | $ | 22,472,894 | $ | 23,401,277 | |||||||
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Approved by the Board of Directors
“Kyle Hall” Director | “Peter Fitzgerald ” Director | |||
The Accompanying notes are an integral part of these consolidated financial statements.
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PNI Digital Media Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
Years Ended September 30, 2012 and 2011
(expressed in Canadian dollars)
| September 30, 2012 | September 30, 2011 | |||||||
Revenue (note 15) | $ | 22,712,805 | $ | 23,686,351 | ||||
Cost of sales (note 6, note 18) | 10,458,022 | 9,399,107 | ||||||
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Gross Profit | 12,254,783 | 14,287,244 | ||||||
Expenses | ||||||||
Software development | 9,678,638 | 9,439,423 | ||||||
General and administration | 3,768,203 | 3,928,210 | ||||||
Sales and marketing | 1,038,374 | 988,289 | ||||||
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| 14,485,215 | 14,355,922 | |||||||
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Loss from operations | (2,230,432 | ) | (68,678 | ) | ||||
Foreign exchange loss | (82,647 | ) | (125,148 | ) | ||||
Finance income | 4,647 | — | ||||||
Finance costs | — | (5,599 | ) | |||||
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| (78,000 | ) | (130,747 | ) | |||||
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Loss before income tax | (2,308,432 | ) | (199,425 | ) | ||||
Deferred income tax (expense) recovery | (1,814,221 | ) | 1,299,025 | |||||
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Income tax recovery (expense) | (1,814,221 | ) | 1,299,025 | |||||
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(Loss) profit for the period | (4,122,653 | ) | 1,099,600 | |||||
Other comprehensive gain (loss): | ||||||||
Exchange difference on translation of foreign operations | (170,956 | ) | (26,263 | ) | ||||
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Total comprehensive (loss) income for the period | $ | (4,293,609 | ) | $ | 1,073,337 | |||
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Loss per share (note 13g) | ||||||||
Basic | $ | (0.12 | ) | $ | 0.03 | |||
Fully diluted | $ | (0.12 | ) | $ | 0.03 | |||
Weighted Average Number of Shares Outstanding - Basic | 34,178,165 | 33,927,659 | ||||||
Weighted Average Number of Shares Outstanding - Diluted | 34,199,622 | 33,985,271 | ||||||
The Accompanying notes are an integral part of these consolidated financial statements.
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PNI Digital Media Inc.
Consolidated Statements of Changes in Equity
(expressed in Canadian dollars)
| Share | ||||||||||||||||||||||||||||
| Share capital | capital | Accumulated | ||||||||||||||||||||||||||
| Number of Common Shares | Amount | purchased for cancellation | Contributed surplus | Deficit | other comprehensive loss | Total Shareholders’ equity | ||||||||||||||||||||||
Balance October 1, 2010 | 33,853,782 | $ | 66,349,735 | $ | (41,909 | ) | $ | 18,933,619 | $ | (68,111,967 | ) | $ | $ | 17,129,478 | ||||||||||||||
Issuance of shares on exercise of options | 291,776 | 498,937 | (134,217 | ) | 364,720 | |||||||||||||||||||||||
Issuance of shares held in escrow | 178,500 | 290,952 | (290,952 | ) | — | |||||||||||||||||||||||
Cancellation of shares repurchased | (313,100 | ) | (612,229 | ) | 446,503 | 165,726 | — | |||||||||||||||||||||
Purchase of share capital for cancellation (283,100 shares) | (404,594 | ) | (404,594 | ) | ||||||||||||||||||||||||
Share-based compensation recorded in net profit | 549,142 | 549,142 | ||||||||||||||||||||||||||
Compensation expense in connection with acquisition of WorksMedia Limited | 299,102 | 299,102 | ||||||||||||||||||||||||||
Earnings for the period | 1,099,600 | 1,099,600 | ||||||||||||||||||||||||||
Adjustment relating to the realization of tax benefits associated with share issues costs | (106,823 | ) | (106,823 | ) | ||||||||||||||||||||||||
Other comprehensive loss | (26,263 | ) | (26,263 | ) | ||||||||||||||||||||||||
Balance September 30, 2011 | 34,010,958 | $ | 66,420,572 | $ | — | $ | 19,522,420 | $ | (67,012,367 | ) | $ | (26,263 | ) | $ | 18,904,362 | |||||||||||||
Issuance of shares on vesting of RSUs and PSUs | 68,464 | 106,119 | (106,119 | ) | — | |||||||||||||||||||||||
Issuance of shares held in escrow | 178,500 | 290,952 | (290,952 | ) | — | |||||||||||||||||||||||
Share-based compensation recorded in net profit | 95,669 | 95,669 | ||||||||||||||||||||||||||
Compensation expense re. acquisition of WorksMedia Limited | 113,080 | 113,080 | ||||||||||||||||||||||||||
Net loss | (4,122,654 | ) | (4,122,654 | ) | ||||||||||||||||||||||||
Other comprehensive income | (170,954 | ) | (170,954 | ) | ||||||||||||||||||||||||
Reduction in share capital as a result of realizing the deferred tax expense associated with a portion of deductible share issue costs for nil | (291 | ) | (291 | ) | ||||||||||||||||||||||||
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Balance September 30, 2012 | 34,257,922 | $ | 66,817,352 | $ | — | $ | 19,334,098 | $ | (71,135,021 | ) | $ | (197,217 | ) | $ | 14,819,212 | |||||||||||||
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The Accompanying notes are an integral part of these consolidated financial statements.
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PNI Digital Media Inc.
Consolidated Statements of Cash Flows
(expressed in Canadian dollars)
| September 30, 2012 | September 30, 2011 | |||||||
Cash flows from operating activities | ||||||||
Net profit (loss) for the period | $ | (4,122,653 | ) | $ | 1,099,600 | |||
Items not affecting cash | ||||||||
Amortization of property and equipment | 1,808,725 | 2,036,953 | ||||||
Amortization of intangible assets | 1,091,024 | 858,354 | ||||||
Share-based compensation expense | 208,749 | 848,244 | ||||||
Unrealized foreign exchange loss | 46,601 | 71,930 | ||||||
Allowance for doubtful accounts | 132,012 | 33,102 | ||||||
Loss on disposal of property and equipment | — | 117,306 | ||||||
Impairment of intangible asset | 540,735 | — | ||||||
Impairment of goodwill | 77,382 | — | ||||||
Deferred income tax expense (recovery) | 1,814,221 | (1,299,025 | ) | |||||
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| 1,596,796 | 3,766,464 | |||||||
Net change in non-cash working capital items (note 21) | 1,435,556 | (1,845,407 | ) | |||||
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| 3,032,352 | 1,921,057 | |||||||
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Cash flows from investing activities | ||||||||
Purchase of property and equipment | (1,180,356 | ) | (2,076,900 | ) | ||||
Purchase of intangible assets | (1,000,713 | ) | (322,416 | ) | ||||
Proceeds on disposal of property and equipment | — | 2,674 | ||||||
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| (2,181,069 | ) | (2,396,642 | ) | |||||
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Cash flows from financing activities | ||||||||
Proceeds on exercise of options | — | 364,720 | ||||||
Repurchase of common shares | — | (404,594 | ) | |||||
Repayment of capital lease obligations | — | (107,964 | ) | |||||
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Effect of changes in foreign exchange rates on cash and cash equivalents | (175,635 | ) | (130,756 | ) | ||||
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Increase (decrease) in cash and cash equivalents during the year | 675,648 | (754,179 | ) | |||||
Cash and cash equivalents - beginning of year | 3,936,176 | 4,690,355 | ||||||
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Cash and cash equivalents - end of year | $ | 4,611,824 | $ | 3,936,176 | ||||
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The Accompanying notes are an integral part of these consolidated financial statements.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| 1. | Nature of operations |
PNI Digital Media Inc. is incorporated under the laws of the Province of British Columbia, Canada and is listed on the Toronto Stock Exchange (“TSX”) under the symbol PN and the OTC Bulletin Board under the symbol PNDMF. The address of the Company’s registered office is Suite 590, 425 Carrall Street, Vancouver, B.C. Canada, V6B 6E3. During the year ended September 30, 2011 our common shares traded in Canada on the TSX Venture Exchange (“TSX-V”). Effective October 18, 2011 the Company’s application to the Toronto Stock Exchange was approved and the Company’s shares were de-listed from the TSX-V and began trading on the TSX.
PNI Digital Media Inc. and its subsidiaries (together “the Company”) provide retailers transaction processing and order routing services through the operation of the PNI Digital Media Platform. The PNI Digital Media Platform connects consumer-ordered digital content, whether from online, in-store kiosks, desktop software or mobile phones, with retailers that have on-demand manufacturing capabilities for the production of personalized products such as photo prints, gifting products such as photo books and photo calendars, business cards and stationery. The Company’s online platform electronically connects the retailer and its customers through the internet and provides digital image delivery, hosting, transaction processing and storage. In addition, the Company provides the retailer with kiosk software which allows consumers to offload digital images from their digital media and order prints and gifting products within the retailer’s locations. The kiosk software is also connected to the Company’s online platform permitting customers in-store to order gifting products from the kiosk, which are then transmitted from the kiosk to a remote fulfillment facility via the online platform.
| 2. | Basis of preparation and adoption of IFRS |
The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles as defined in the Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) and to require publicly accountable enterprises to apply these standards effective for years beginning on or after January 1, 2011. Accordingly, these are the Company’s first consolidated annual financial statements prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”). In these financial statements, the term “Canadian GAAP” refers to Canadian GAAP before the adoption of IFRS. The first date at which IFRS was applied was October 1, 2010 (“Transition Date”).
These consolidated financial statements have been prepared in accordance with IFRS applicable to the preparation of financial statements, including International Financial Reporting Standard 1,First-time Adoption of International Financial Reporting Standards (“IFRS 1”). Subject to certain transition elections and mandatory exemptions from retrospective application disclosed in note 22, the Company has consistently applied the same accounting policies in its opening IFRS balance sheet as at October 1, 2010 and throughout all periods presented, as if these policies had always been in effect. Note 22 discloses the impact of the transition to IFRS on the Company’s reported balance sheets, statements of operations and cash flows for the periods presented.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
The accounting policies applied in these consolidated financial statements are based on IFRS effective for the year ended September 30, 2012, as issued and effective.
These financial statements were approved by the Board of Directors for issue on January 4, 2013.
| 3. | Summary of significant accounting policies |
The significant accounting policies used in the preparation of these consolidated financial statements are as follows:
| a) | Basis of measurement |
The consolidated financial statements have been prepared under the historical cost convention.
| b) | Basis of consolidation |
These consolidated financial statements include the accounts of the Company and each of its wholly-owned subsidiaries. Wholly owned subsidiaries are entities in which the Company has control, directly or indirectly, where control is defined as the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The Company’s wholly-owned subsidiaries are PhotoChannel Capital Inc., PhotoChannel Management Inc., PNI Digital Media Ltd., PNI Digital Media Europe Ltd., Pixology Incorporated and WorksMedia Limited.
All material intercompany balances and transactions are eliminated upon consolidation.
| c) | Business combinations |
The Company accounts for business combinations using the acquisition method of accounting. The cost of an acquisition is measured as the cash paid and the fair value of other assets given, equity instruments issued and liabilities incurred or assumed at the acquisition date. All acquired identifiable assets, liabilities and contingent liabilities are recognized at fair value at the acquisition date. Any excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired is recognized as goodwill. If the cost of an acquisition is less than the fair value of the net assets of the acquired entity, the difference is recognized directly in the statement of comprehensive income. Acquisition related costs are expensed as incurred.
| d) | Segment reporting |
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments and has been identified as the Chief Executive Officer of the Company.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| e) | Foreign currency translation |
| (i) | Function and presentation currency |
Items included in the financial statements of each consolidated entity in the PNI Digital Media Inc. group are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The functional currency of PNI Digital Media Inc. is the Canadian dollar.
The financial statements of entities that have a functional currency different from that of PNI Digital Media Inc. (“foreign operations”) are translated into Canadian dollars as follows: assets and liabilities – at the closing rate at the balance sheet date, and income and expenses – at the average rate of the period (as this is considered a reasonable approximation of the actual rates prevailing at the transaction dates). All resulting changes are recognized in other comprehensive income as cumulative translation adjustments.
Should a foreign operation be sold, the cumulative exchange differences recognized in accumulated other comprehensive income (loss) since October 1, 2010 would be recognized in the income statements as part of the profit or loss on sale.
| (ii) | Transactions and balances |
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at exchange rates of monetary assets and liabilities denominated in currencies other than an entities’ functional currency are recognized in the statement of comprehensive income in “realized foreign exchange (loss) gain” and “unrealized foreign exchange (loss) gain” respectively.
| f) | Cash and cash equivalents |
Cash and cash equivalents consist of cash on hand, deposits held with banks, and other short-term highly liquid investments with original maturities of three months or less. As at September 30, 2012, September 30, 2011, and October 1, 2010, the Company had no investments with original terms to maturity of greater than three months.
| g) | Property and equipment |
Property and equipment are recorded at cost less accumulated amortization and accumulated impairment losses (if any). Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs, if any, are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. Repairs and maintenance costs are charged to the statement of income during the period in which they are incurred.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
The major categories of property and equipment are amortized over their estimated useful lives at the following rates:
| Computer equipment | 30% declining balance | |
| Furniture and office equipment | 20% declining balance | |
| Leasehold improvements | Life of the lease | |
| Equipment held under capital lease | Life of the lease |
Residual values, method of amortization and useful lives of the assets are reviewed annually and adjusted if appropriate.
Gains and losses on disposals of property and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included in the appropriate expense category including cost of sales, software development, general and administration and sales and marketing.
| h) | Intangible assets |
| (i) | Identifiable intangible assets |
Intangible assets acquired in a business combination that meet the specified criteria for recognition, apart from goodwill, are initially recognized and measured at fair value. Intangible assets with finite useful lives, including acquired software, software developed for internal use and customer relationships, are amortized on a straight-line basis over their estimated useful lives as follows:
| Acquired software | 3 years | |
| Customer relationships | 3 years | |
| Internal use software | 1-3 years |
Amortization of intangible assets is included within cost of sales. The amortization methods and estimated useful lives of intangible assets are reviewed annually or earlier if events and circumstances change.
(ii) Goodwill
Goodwill represents the excess of the purchase price of an acquired enterprise over the fair values assigned to the identifiable net assets of the acquired enterprise at the date of acquisition. Goodwill is allocated to each cash-generating unit (“CGU”) or group of CGUs that are expected to benefit from the related business combination. The allocation of goodwill to cash generating units reflects how goodwill is monitored for internal management purposes. A group of CGUs represents the lowest level within the entity at which the goodwill is monitored for internal management purposes, which is not higher than an operating segment. Goodwill is not amortized, and is carried at cost less accumulated
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
impairment losses, if any. Management reviews the performance of its cash generating units based on geography at the operating segment level. Irrespective of any indication of impairment, the recoverable amount of the cash generating unit or group of cash generating units to which goodwill has been allocated is tested annually for impairment and when there is an indication that the goodwill may be impaired in accordance with “impairment of non-financial assets.” Any impairment is recognized in expense immediately. Any impairment of goodwill is not subsequently reversed.
| i) | Impairment of non-financial assets |
Property and equipment and intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets that are not amortized are subject to an annual impairment test. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (CGUs). The recoverable amount is the higher of:
| • | An asset’s fair value less costs to sell; and |
| • | Value in use (being the present value of the expected future cash flows of the relevant asset or CGU). |
The Company uses value in use when performing its impairment assessment or in instances where the value in use is less than the carrying amount the Company assesses the fair value of the CGU. Value in use is determined as the present value of the future cash flows expected to be derived from an asset or cash generating unit. Estimated future cash flows are calculated using estimated future prices, operating and capital costs.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount.
The Company evaluates impairment losses, other than goodwill, for potential reversals when events or circumstances warrant such consideration.
It is possible that some of our tangible or intangible long-lived assets or goodwill could become impaired in the future and that any resulting write-downs could be material.
| j) | Current and Deferred Income taxes |
Income tax comprises current and deferred tax. Income tax is recognized in the statement of operations and comprehensive loss (income) except to the extent that it relates to items recognized directly in other comprehensive income or directly in equity, in which case the income tax is also recognized directly in other comprehensive income (loss) or equity, respectively.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted, at the end of the reporting period, and any adjustment to tax payable in respect of previous years. As at September, 2012, the Company has not incurred any taxes payable (September 30, 2011: $nil).
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
Tax on income in interim periods accrued using the tax rate that would be applicable to expected total annual earnings.
Deferred tax is recognized, using the balance sheet liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for operating losses or tax credits. Deferred income tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset is realized or liability is settled. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized.
Deferred income tax assets and liabilities are presented as non-current.
| k) | Share capital |
Direct costs associated with the issue of capital stock or warrants are deducted from the related proceeds at the time of the issue.
| l) | Revenue |
The Company provides online and in-store digital media solutions to retailers. These solutions are primarily provided through the PNI Digital Media Network services (Network Services). The Company also provides professional services and sells software products to retailers either directly or through license and distribution agreements. The products sold do not have any general rights of return except under arrangements whereby the Company provides the product to the ultimate customer.
Through Network Services, the Company’s customers obtain access to the PNI Digital Media Platform (Platform) which provides the technology which delivers media transactions between retailers and content providers and their consumers. The Platform provides a transaction and order routing tier which delivers orders placed either through online sites or kiosks to the production facilities of the Company’s customers for production and delivery to end consumers. Through the Platform, customers are able to store, edit, archive, distribute and print photographs and other personalized products. The Company does not produce the content, but may act as an agent for certain retailers for some consumer deliverables. The Network Services provided by the Company may include the software, hosting, storage and archiving facilities, ongoing development up to a specified threshold of hours, initial integration of the software into the customer’s environment, technical support, maintenance services and hardware. Fees for these services are paid through fixed and variable fees. The variable fees are based on different factors and may be based on the number of physical locations connected to the Network, the number of transactions processed through the Platform, the number of images uploaded through the Platform, a percentage of revenue earned by its customers and the amount of storage capacity used in excess of minimums provided in the contract. The Company accounts for the Network Services as a single unit of accounting.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
In some instances, the Company provides services to the ultimate customers who access the PNI Network through a retailer’s website. These services include taking on the responsibility for the fulfillment of print orders, the provision of certain consumer deliverables and other media. The Company pays the retailer a commission for the use of their website and other services provided by the retailer. The Company is responsible for fulfilling the ultimate customers’ orders and fulfills its obligations through the use of third party suppliers who ship the products directly to the customer. Revenue is recognized when the product is shipped, net of estimated returns, as the Company has transferred the significant risks and rewards of ownership to the customer at that time. The Company estimates the provision for returns based on historical experience and adjusts to actual returns when determinable.
The Company provides professional services in addition to the initial integration services to make changes to the customer’s website and branded environment and to provide email marketing programs to customers.
Revenue is considered realized or realizable and earned when all of the following criteria are met:
| (i) | Persuasive evidence of a sales arrangement exists; |
| (ii) | Delivery has occurred or services have been rendered; |
| (iii) | The price is fixed or determinable; and |
| (iv) | Collectability is reasonably assured. |
Cash received from customers prior to the related revenue being recognized is recorded as deferred revenue. In addition to this general policy:
| • | Fees earned for software licenses relate to the sale of software either directly to retailers or to distributors for resale to retailers for use in-store, allowing end users to edit and order prints and other photo-related items from digital images. Revenue from these arrangements that involve multiple elements are reviewed to determine whether a delivered item(s) has value to the customer on a stand-alone basis and whether there is objective and reliable evidence of the fair value of the undelivered item(s). If these criteria are met, the Company allocates revenue using the relative fair value of each element within the contract that has stand-alone value, such as software products, post contract customer support and maintenance. In instances, where the Company has evidence of the fair value of each element within a multiple deliverable arrangement, revenue is recognized upon the delivery or rendering of service(s) with respect to each element as there is no general right of return. Revenue for perpetual software licenses is recognized upon delivery, as the license holder is not obligated to pay maintenance for the ongoing use of the license. Maintenance fees are recognized on a straight line basis over the term of the maintenance service period. If the fair value of the delivered item is not obtainable, the Company allocates revenue using the residual method in instances where the fair value of the undelivered item is verifiable. The Company does not currently have any multiple deliverable arrangements which require the use of the residual approach. |
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| • | Installation fees are fixed upfront fees related to Network Services which are deferred and recognized on a straight-line basis over the life of the agreement, or where the agreement with the customer is on a month-to-month basis, over the estimated life of the customer relationship period. The customer relationship period is assessed annually, and has been estimated to be 24 to 48 months. |
| • | Monthly fixed fees per connected location are recognized monthly and are included in membership fees. |
| • | Fees for storing and archiving digital images for customers in excess of the minimums provided in the agreement are based upon our customers storage capacity needs, and are recognized as the storage is provided and are included in archive fees. |
| • | Professional services are recognized when the services are completed and included in professional fees. |
The Company offers volume and other rebates and discounts to certain customers which are recognized as a reduction of revenue at the date the related revenue is recognized or the date the offer is made for previously recognized revenue. The amount of rebates is based on estimates of the expected rebates to be paid based on historical and expected trends or on the maximum potential rebates that could be earned by a customer if the Company is unable to reasonably estimate the expected rebate. The Company accounts for cash consideration offered to customers, including annual volume discounts, as a reduction in sales revenue.
All revenues are reported net of sales and value added taxes.
Trade accounts receivable balances are shown net of allowances for doubtful accounts.
| m) | Software development costs |
Software development costs includes the costs to customize aspects of the Company’s PNI Network software for specific customers as well as the cost of generating the Company’s software used in the PNI Network and software sold to customers. For costs incurred to generate software used in the PNI Network or sold to customers, the Company classifies costs into a research phase and a development phase. Costs incurred during the research phase are expensed when incurred as the Company is not able to demonstrate that the software will generate future economic benefits. Costs incurred during the development phase are recognized as intangible assets only if the Company can demonstrate all of the following:
| • | The technical feasibility of completing the software so that it will be available for use or sale; |
| • | Its intention to complete the software and use or sell it; |
| • | Its ability to use or sell the software; |
| • | How the software will generate probable future economic benefits; |
| • | The availability of adequate technical, financial and other resources to complete the development and use or sell the software; and |
| • | Its ability to reliably measure the expenditure attributable to the software during its development. |
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
If these criteria are not met, the development costs are expensed when incurred for both costs of developing the Company’s software used directly in the PNI Network and the software which is sold to customers or customized for customers. During the year ended September 30, 2012, the Company had incurred software development costs of $9,678,638 (2011: $9,439,423). These costs principally consist of staff and consulting costs associated with the day to day operations of the Company including customizing aspects of the Company’s PNI Network software for specific customers, generating and maintaining the Company’s software used in the PNI Network and exploring new initiatives. During the year ended September 30, 2012 the Company capitalized $508,806 of development costs (2011: $186,426) as all of these costs met the capitalization criteria.
| n) | Cost of sales |
Cost of sales is comprised of costs associated with providing hosting services to our customers, customer support provided on behalf of our customers, and costs of products sold as it relates to instances where the Company is responsible for fulfillment of certain items sold. Hosting services include costs for renting our data centers, personnel costs associated with maintaining and monitoring the performance of our network, personnel and consulting costs associated with maintaining our customer’s sites and third party software licenses used in maintaining the performance of our network and platform. In addition, cost of sales includes amortization associated with property and equipment used in our data centers, amortization associated with acquired software, customer relationships and internal use software relating to generating revenue.
| o) | Share-based payment |
The Company’s share-based awards may take the form of stock options, Performance Share Units (“PSU”), and Restricted Share Units (“RSU”) which are granted to directors and certain employees of the Company as an element of compensation. The cost of the service received as consideration is measured based on an estimate of fair value at the date of the grant. The grant-date fair value is recognized as compensation expense over the related service period with a corresponding increase in contributed surplus. If graded awards are granted, each vesting tranche is accounted for as a separate award. Compensation expense is recognized for awards expected to vest over the applicable vesting period with a corresponding increase in contributed surplus.
On exercise of stock options, the Company issues common shares from treasury and the consideration received together with the compensation expense previously recorded to contributed surplus is credited to share capital. On vesting of PSUs and RSUs, the Company issues common shares from treasury and the compensation expense previously recorded to contributed surplus is credited to share capital. All awards are equity settled.
The Company uses the Black-Scholes option pricing model to estimate the fair value of each stock option. The Black-Scholes option pricing model requires the Company to estimate the expected term of the options granted, the volatility of the Company’s common shares, forfeitures, and an expected dividend yield. The Company estimates the expected term of the options granted by considering the Company’s historical experience involving
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
stock option exercise; cancellations and expiries; volatility is estimated with reference to historical volatility data; forfeitures are estimated with reference to historical forfeiture data. The Company does not currently anticipate paying any cash dividends in the foreseeable future and therefore has used an expected dividend yield of zero as detailed in note 13b. The Black-Scholes model also requires the Company to input a risk-free interest rate and the Company uses the Bank of Canada marketable bond rates.
The fair value of each PSU and RSU awarded is based upon the quoted price of the Company’s stock on the date of grant. All PSU and RSU awards are equity settled. As it relates to PSUs and RSUs, the Company estimates the expected forfeiture rate and no value is attributed to awards that the employee is expected to forfeit as a result of not achieving the service or performance conditions. The expected forfeiture rate is adjusted for actual forfeitures when they occur.
| p) | Leases |
Leases entered into are classified as either finance or operating leases. Leases that transfer substantially all of the benefits and risks of ownership of property to the Company are accounted for as finance leases. Property acquired under finance leases is recorded as an asset on the balance sheet with a corresponding increase to the finance lease obligation and depreciated over the life of the lease.
Leases in which a significant portion of the risk and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to operations on a straight-line basis over the term of the lease. The benefits of lease inducements provided to the Company are recognized on a straight-line basis over the term of the lease agreement.
| q) | Financial instruments |
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expires.
At initial recognition, the Company classifies its financial instruments in the following categories:
| (i) | Financial assets and liabilities at fair value through profit or loss: A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term. Derivatives are also included in this category unless they are designated as hedges. The Company does not have any financial assets or liabilities classified within this category. |
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are expensed in the consolidated statement of operations and comprehensive income (loss).
| (ii) | Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company’s loans and receivables comprise trade and other accounts receivable and cash and cash equivalents, and are included in current assets due to their short-term nature. |
Loans and receivables are initially recognized at the amount expected to be received less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment. Changes in the amortized cost are recorded in the consolidated statement of income and comprehensive income.
| (iii) | Financial liabilities at amortized cost: Financial liabilities at amortized cost include trade payables, deferred revenue, debt and finance lease obligations. Financial liabilities are initially recognized at the amount required to be paid less, when material, a discount to reduce the payables to fair value. Subsequently, financial liabilities are measured at amortized cost using the effective interest method. Changes in the amortized cost are recorded in the consolidated statement of income and comprehensive income. |
Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities.
| r) | Provisions |
Provisions are recognized where a legal or constructive obligation has been incurred as a result of past events, it is probable that an outflow of resources embodying economic benefit will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. If material, provisions are measured at the present value of the expenditures expected to be required to settle the obligation. The increase in any provision due to passage of time is recognized as accretion expense.
| s) | Earnings per share |
Basic earnings per share (“EPS”) is calculated by dividing the net income (loss) for the period attributable to equity owners of PNI Digital Media Inc. by the weighted average number of common shares outstanding during the period.
Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. Under the treasury stock method, the weighted average number of common shares outstanding for the calculation of diluted net earnings per share assumes that the proceeds to be received on the exercise of dilutive stock options and warrants and the unrecognized portion of the fair value of stock options are applied to repurchase common shares at the average market price for the period. Stock options and warrants are dilutive when the average market price of the common shares during the period exceeds the exercise price of the options and warrants.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| 4. | Recent Accounting Pronouncements |
Certain new standards, interpretations, amendments and improvements to existing standards were issued by the International Accounting Standards Board (“IASB”) or International Financial Reporting Interpretations Committee (“IFRIC”). The Standards impacted that are applicable to the Company are as follows:
| a) | IFRS 9, Financial Instruments (“IFRS 9”) was issued by IASB in November 2009. This standard addresses classification and measurement of financial assets and replaces the multiple category and measurement models in International Accounting Standard (“IAS”) 39 for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments with recognition at fair value through profit or loss or at fair value through other comprehensive earnings. IFRS 9 is effective for annual years beginning on or after January 1, 2015. The Company is currently assessing the impact of this standard on the financial statements. |
| b) | IFRS 10, Consolidated Financial Statements (“IFRS 10”), was issued in May 2011 and will supersede the consolidation requirements in SIC-12, Consolidation – Special Purpose Entities (“SIC-12”), and IAS 27, Consolidated and Separate Financial Statements (“IAS 27”), effective for annual periods beginning on or after January 1, 2013, with early application permitted. IFRS 10 builds on existing principles by identifying the concept of control as a determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard also provides additional guidance to assist in the determination of control where this is difficult to assess. The company has not yet determined the impact this new standard may have on its consolidated financial statements. |
| c) | IFRS 12, Disclosure of Interests in Other Entities (“IFRS 12”), was issued in May 2011 and is a new and comprehensive standard on disclosure requirements for all forms of interest in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The company has not yet determined the impact this new standard may have on its consolidated financial statements. |
| d) | IFRS 13, Fair Value Measurements (“IFRS 13”) was issued in May 2011 and sets out, in a single IFRS, a framework for measuring fair value. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This definition of fair value emphasizes that fair value is a market-based measurement, not an entity specific measurement. In addition, IFRS 13 also requires specific disclosures about fair value measurement. IFRS 13 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. The Company is currently assessing the impact of this Standard. |
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| e) | IAS 1, Presentation of Items of Other Comprehensive Income (“OCI”) (“IAS 1”), was revised in June 2011 to change the disclosure of items presented in OCI, including a requirement to separate items presented in OCI into two groups based on whether or not they may be recycled to profit or loss in the future. The revision is effective for annual periods beginning on or after July 1, 2012 with early application permitted. The standard is not expected to have an impact on the Company in its current form. |
| 5. | Significant accounting estimate uncertainties |
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the reporting date, and the reported amounts of revenues and expenses during the reporting period. The determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience.
Actual results could differ from those estimates.
The estimates and underlying assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable in the circumstances. 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 judgments that management has applied in the application of accounting policies, and the estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below:
| • | The assessment of the carrying values of long-lived assets; The impairment tests performed for both the Company’s Canadian operating segment and the Company’s European operating segment were based on their value in use or fair value as applicable. The value in use was determined by discounting the estimated future cash flows generated from the continuing use of these units. Estimates used to determine value in use are reviewed annually and updated based on facts and circumstances. The calculation of value in use was based on the following key assumptions: |
| • | Cash flows were projected based on past experience, actual operating results and planned results for the near term. Terminal value calculations for each cash generating unit were extrapolated using a constant growth rate of 1.4% to 3%. |
| • | Management has applied an internally determined pre-tax discount rate in determining the recoverable amount for these units. Risks specific to the assets of these units have not been included within the calculation of the discount rates used, but have been factored into the cash flow projections. |
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| • | The net present value of the future expected cash flows was compared to the carrying value of the Company’s investment in these units, including goodwill, at year-end. |
| • | The inputs used in accounting for share-based compensation. See note 13 for a discussion of the key estimates used; and |
| • | The amount recognised as deferred tax is generally determining utilising undiscounted cash flows aligned with estimates used in assessing the impairment of goodwill. Management considers all factors that could affect the probability that future taxable profits will be available. The factors include profitability of operations, estimate of terminal value, which is calculated consistently with the terminal value used to assess the carrying value of long-term assets, and customer renewal rates. The amounts recognised is sensitive to the loss of certain key customers. |
| 6. | Cost of sales and operating expenses: |
Within cost of sales and operating expenses, the Company includes charges relating to amortization of plant and equipment, amortization of intangible assets and share-based compensation. These costs are identified below in their relevant statement operations caption.
| For the year ended September 30, 2012 | ||||||||||||||||||||||||||||||||
| Per statement of operations | Amortization of property and equipment | Amortization of intangible assets | Loss on disposal of property and equipment | Impairment intangible assets | Impairment goodwill | Share-based compensation | Excluding amortization and share-based compensation | |||||||||||||||||||||||||
Cost of sales | $ | 10,458,022 | 1,529,978 | 922,558 | — | 540,735 | 77,382 | (698 | ) | $ | 7,388,067 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||
Software development | 9,678,638 | 230,343 | 168,466 | — | — | — | 41,364 | 9,238,465 | ||||||||||||||||||||||||
General and administration | 3,768,203 | 26,873 | — | — | — | — | 168,636 | 3,572,694 | ||||||||||||||||||||||||
Sales and marketing | 1,038,374 | 21,531 | — | — | — | — | (553 | ) | 1,017,396 | |||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total operating expenses | $ | 14,485,215 | 278,747 | 168,466 | — | — | — | 209,447 | $ | 13,828,555 | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
| $ | 24,943,237 | 1,808,725 | 1,091,024 | — | 540,735 | 77,382 | 208,749 | $ | 21,216,622 | |||||||||||||||||||||||
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|
| |||||||||||||||||
| For the year ended September 30, 2011 | ||||||||||||||||||||||||||||||||
| Per statement of operations | Amortization of property and equipment | Amortization of intangible assets | Loss on disposal of property and equipment | Impairment intangible assets | Impairment goodwill | Share-based compensation | Excluding amortization and share-based compensation | |||||||||||||||||||||||||
Cost of sales | $ | 9,399,107 | 1,689,790 | 858,354 | 36,294 | — | — | 43,156 | $ | 6,771,513 | ||||||||||||||||||||||
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| |||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||
Software development | 9,439,423 | 294,063 | — | 69,622 | — | — | 262,225 | 8,813,513 | ||||||||||||||||||||||||
General and administration | 3,928,210 | 30,135 | — | 6,075 | — | — | 482,129 | 3,409,871 | ||||||||||||||||||||||||
Sales and marketing | 988,289 | 22,966 | — | 5,315 | — | — | 60,733 | 899,275 | ||||||||||||||||||||||||
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|
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| |||||||||||||||||
Total operating expenses | $ | 14,355,922 | 347,164 | — | 81,012 | — | — | 805,087 | $ | 13,122,659 | ||||||||||||||||||||||
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| |||||||||||||||||
| $ | 23,755,029 | 2,036,954 | 858,354 | 117,306 | — | — | 848,243 | $ | 19,894,172 | |||||||||||||||||||||||
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| 7. | Accounts receivable |
| September 30, 2012 | September 30, 2011 | October 1, 2010 | ||||||||||
Trade accounts receivable | $ | 4,353,424 | $ | 4,540,075 | $ | 5,425,805 | ||||||
Allowance for doubtful accounts | (130,023 | ) | (145,000 | ) | (176,531 | ) | ||||||
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|
|
|
|
| |||||||
| 4,223,401 | 4,395,075 | 5,249,274 | ||||||||||
Commodity taxes recoverable | 30,140 | 135,655 | 53,591 | |||||||||
Other | — | 5,182 | — | |||||||||
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|
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| |||||||
Total | $ | 4,253,541 | $ | 4,535,912 | $ | 5,302,865 | ||||||
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|
|
| |||||||
Reconciliation of changes in allowance for doubtful accounts:
| September 30, 2012 | September 30, 2011 | October 1, 2010 | ||||||||||
Balance, beginning of period | $ | 145,000 | $ | 176,531 | $ | 154,945 | ||||||
Increase in allowance for doubtful accounts | 132,092 | 33,102 | 33,781 | |||||||||
Application of existing provision to write-off the amount receivable | (147,069 | ) | (63,710 | ) | (9,945 | ) | ||||||
Impact of foreign currency translation | — | (923 | ) | (2,250 | ) | |||||||
|
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| |||||||
Balance, end of period | $ | 130,023 | $ | 145,000 | $ | 176,531 | ||||||
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|
|
| |||||||
During the year ended September 30, 2012 the Company incurred bad debt expenses of $132,012 (2011: $31,693).
As at September 30, 2012
| Financial assets that are past due but not impaired | ||||||||||||||||||||
| Neither past due nor impaired | 31 – 60 days | 61 – 90 days | 91 days + | Carrying value on the balance sheet | ||||||||||||||||
Trade accounts receivable | $ | 2,334,240 | $ | 328,844 | $ | 358,600 | $ | 1,201,717 | $ | 4,223,401 | ||||||||||
Commodity taxes recoverable | 30,140 | 30,140 | ||||||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
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|
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|
|
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| |||||||||||
Total | $ | 2,364,380 | $ | 328,844 | $ | 358,600 | $ | 1,201,717 | $ | 4,253,541 | ||||||||||
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As at September 30, 2011
| ||||||||||||||||||||
| Financial assets that are past due but not impaired | ||||||||||||||||||||
| Neither past due nor impaired | 31 – 60 days | 61 – 90 days | 91 days + | Carrying value on the balance sheet | ||||||||||||||||
Trade accounts receivable | $ | 3,127,511 | $ | 36,942 | $ | 443,565 | $ | 787,057 | $ | 4,395,075 | ||||||||||
Commodity taxes recoverable | 135,655 | — | — | — | 135,655 | |||||||||||||||
Other | 5,182 | — | — | — | 5,182 | |||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 3,268,348 | $ | 36,942 | $ | 443,565 | $ | 787,057 | $ | 4,535,912 | ||||||||||
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
As at October 1, 2010
| Financial assets that are past due but not impaired | ||||||||||||||||||||
| Neither past due nor impaired | 31 – 60 days | 61 – 90 days | 91 days + | Carrying value on the balance sheet | ||||||||||||||||
Trade accounts receivable | $ | 3,520,349 | $ | 136,997 | $ | 982,557 | $ | 609,371 | $ | 5,249,274 | ||||||||||
Commodity taxes recoverable | 53,591 | 53,591 | ||||||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
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|
|
|
|
|
|
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|
| |||||||||||
Total | $ | 3,573,940 | $ | 136,997 | $ | 982,557 | $ | 609,371 | $ | 5,302,865 | ||||||||||
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At September 30, 2012, three customers each account for 10% or more of total trade accounts receivable (September 30, 2011 – five customers, October 1, 2010 – three customers).
| 8. | Property and equipment |
October 1, 2011 to September, 2012
| Computer equipment | Furniture and office equipment | Leasehold improvements | Total | |||||||||||||
Cost | ||||||||||||||||
As at October 1, 2011 | $ | 15,878,073 | $ | 401,750 | $ | 181,718 | $ | 16,461,541 | ||||||||
Additions | 1,284,842 | 4,883 | 62,244 | 1,351,969 | ||||||||||||
Disposals / write-offs | — | — | — | — | ||||||||||||
Impairments | — | — | — | — | ||||||||||||
Currency translation adjustments | (3,467 | ) | (56 | ) | — | (3,523 | ) | |||||||||
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As at September 30, 2012 | $ | 17,159,448 | $ | 406,577 | $ | 243,962 | $ | 17,809,987 | ||||||||
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| |||||||||
Accumulated Amortization | ||||||||||||||||
As at October 1, 2011 | $ | 10,903,337 | $ | 278,779 | $ | 139,275 | $ | 11,321,391 | ||||||||
Amortization | 1,757,099 | 25,082 | 26,544 | 1,808,725 | ||||||||||||
Disposals / write-offs | — | — | — | — | ||||||||||||
Impairments | — | — | — | — | ||||||||||||
Currency translation adjustments | (3,431 | ) | (53 | ) | — | (3,484 | ) | |||||||||
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| |||||||||
As at September 30, 2012 | $ | 12,657,005 | $ | 303,808 | $ | 165,819 | $ | 13,126,632 | ||||||||
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Carrying value – October 1, 2011 | $ | 4,974,736 | $ | 122,971 | $ | 42,443 | $ | 5,140,150 | ||||||||
Carrying value – September 30, 2012 | $ | 4,502,443 | $ | 102,769 | $ | 78,143 | $ | 4,683,355 | ||||||||
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
October 1, 2010 to September 30, 2011
| Computer equipment | Furniture and office equipment | Leasehold improvements | Total | |||||||||||||
Cost | ||||||||||||||||
As at October 1, 2010 | $ | 14,844,050 | $ | 416,077 | $ | 144,986 | $ | 15,405,113 | ||||||||
Additions | 2,013,296 | 16,537 | 36,735 | 2,066,568 | ||||||||||||
Disposals / write-offs | (969,895 | ) | (34,447 | ) | — | (1,004,342 | ) | |||||||||
Impairments | — | — | — | — | ||||||||||||
Currency translation adjustments | (9,378 | ) | 3,583 | (3 | ) | (5,798 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
As at September 30, 2011 | $ | 15,878,073 | $ | 401,750 | $ | 181,718 | $ | 16,461,541 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Accumulated Amortization | ||||||||||||||||
As at October 1, 2010 | $ | 9,763,684 | $ | 279,531 | $ | 131,069 | $ | 10,174,284 | ||||||||
Amortization | 1,998,672 | 30,075 | 8,206 | 2,036,953 | ||||||||||||
Disposals / write-offs | (849,915 | ) | (34,447 | ) | — | (884,362 | ) | |||||||||
Impairments | — | — | — | — | ||||||||||||
Currency translation adjustments | (9,104 | ) | 3,620 | — | (5,484 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
As at September 30, 2011 | $ | 10,903,337 | $ | 278,779 | $ | 139,275 | $ | 11,321,391 | ||||||||
|
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|
|
|
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| |||||||||
Carrying value – October 1, 2010 | $ | 5,080,366 | $ | 136,546 | $ | 13,917 | $ | 5,230,829 | ||||||||
Carrying value – September 30, 2011 | $ | 4,974,736 | $ | 122,971 | $ | 42,443 | $ | 5,140,150 | ||||||||
The carrying value of computer equipment under lease was $0 at September 30, 2012 (September 30, 2011 - $0, October 1, 2010 - $201,155).
| 9. | Current and Deferred Income taxes |
For the year ended September 30, 2012 the Company recorded $1,814,221 of deferred income tax expense (2011 - $1,299,025 of deferred income tax recovery). Non-capital losses were used to offset taxable income where applicable resulting in nil current income tax. The deferred income tax expense in the year primarily arose from a $3,146,687 reversal of previously recognized Canadian income tax assets due to uncertainty surrounding their recovery. The reversal was offset by the partial recognition of previously unrecognized UK income tax assets. The prior year income tax recovery was primarily also a result of recognition of previously unrecognized UK income tax assets.
The gross movement of the deferred income tax account is as follows:
| 2012 | 2011 | |||||||
As at October 1 | $ | 7,065,857 | $ | 5,861,504 | ||||
Income tax recovery (expense) | (1,814,221 | ) | 1,299,025 | |||||
Tax charge relating to components of other comprehensive income | (29,033 | ) | (94,672 | ) | ||||
|
|
|
| |||||
As at September 30 | $ | 5,222,603 | $ | 7,065,857 | ||||
|
|
|
| |||||
| a) | Rate changes |
During 2012, the United Kingdom government enacted tax reform which included a 1% rate reduction to the main corporate tax rate from 25% to 24% effective April 1, 2012 to March 31, 2013 and a further rate reduction to 23% applicable from April 1, 2013.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| b) | Rate reconciliation |
The Company is subject to income taxes in Canada and the United Kingdom. The income tax expense (recovery) differs from the amount obtained by applying the applicable statutory income tax rate to the loss before income taxes as follows:
| 2012 | 2011 | |||||||
Canadian statutory income tax rate | 25.38 | % | 27.00 | % | ||||
Income tax recovery based on statutory income tax rate | $ | (585,765 | ) | $ | (53,851 | ) | ||
Non-deductible expenses | 72,021 | 243,052 | ||||||
Impact of change in tax rates | 257,786 | 415,662 | ||||||
Adjustments in respect of prior year returns | (11,468 | ) | (63,394 | ) | ||||
Share issue costs charged to share capital | (397 | ) | (106,823 | ) | ||||
De-recognition (recognition) of previously recognized (unrecognized) deferred tax assets | 2,082,044 | (1,733,671 | ) | |||||
|
|
|
| |||||
Income tax expense (recovery) | $ | 1,814,221 | $ | (1,299,025 | ) | |||
|
|
|
| |||||
The Company’s loss before tax includes a loss of $3,940,457 (2011 – $1,672,143) from domestic operations and earnings of $1,632,022 (2011 – $1,472,718) from foreign operations.
| c) | Deferred tax assets and liabilities |
Deferred income tax assets are recognized for tax loss carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable. This assumption is based on management’s best estimate of future circumstances and events. If these estimates and assumptions changed in the future, the value of the deferred tax assets could increase or decrease, resulting in an income tax recovery or expense.
The composition of the Company’s deferred income tax assets and liabilities are as follows:
| September 30, 2012 | September 30, 2011 | October 1, 2010 | ||||||||||
Deferred income tax assets | ||||||||||||
Non-capital losses | $ | 2,224,440 | $ | 4,392,401 | $ | 3,400,993 | ||||||
Property and equipment | 2,907,983 | 2,827,589 | 2,722,745 | |||||||||
Share issue costs | 396 | 787 | 107,611 | |||||||||
Other | 172,155 | 36,662 | 71,190 | |||||||||
|
|
|
|
|
| |||||||
| 5,324,974 | 7,257,439 | 6,302,539 | ||||||||||
Deferred income tax liabilities | ||||||||||||
Intangible assets | — | (87,895 | ) | (335,819 | ) | |||||||
Related party interest accrued | (102,371 | ) | (103,687 | ) | (105,216 | ) | ||||||
|
|
|
|
|
| |||||||
| (102,371 | ) | (191,582 | ) | (441,035 | ) | |||||||
|
|
|
|
|
| |||||||
Deferred income tax assets, net | $ | 5,222,603 | $ | 7,065,857 | $ | 5,861,504 | ||||||
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Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
Deferred income tax assets | ||||||||||||
Deferred tax assets to be recovered within 12 months | $ | 197,409 | $ | 108,933 | $ | 1,026,651 | ||||||
Deferred tax assets to be recovered after more than 12 months | 5,127,565 | 7,148,506 | 5,275,888 | |||||||||
|
|
|
|
|
| |||||||
| 5,324,974 | 7,257,439 | 6,302,539 | ||||||||||
Deferred income tax liabilities | ||||||||||||
Deferred tax assets to be recovered within12 months | — | (56,507 | ) | (119,081 | ) | |||||||
Deferred tax assets to be recovered after more than 12 months | (102,371 | ) | (135,075 | ) | (321,954 | ) | ||||||
|
|
|
|
|
| |||||||
| (102,371 | ) | (191,582 | ) | (441,035 | ) | |||||||
|
|
|
|
|
| |||||||
Deferred income tax assets, net | $ | 5,222,603 | $ | 7,065,857 | $ | 5,861,504 |
The Company does not recognize certain tax assets of the Canadian parent, and it’s UK subsidiaries, PNI Digital Media Ltd. and PNI Digital Media Europe Ltd., that do not meet the more likely than not threshold. Due to this unlikelihood, deductible temporary differences and unusued tax losses for which no deferred tax asset have been recognized have been attributed as following:
| September 30, 2012 | September 30, 2011 | October 1, 2010 | ||||||||||
Non-capital losses | $ | 2,919,449 | $ | 1,749,314 | $ | 3,543,479 | ||||||
Property and equipment | 887,928 | 2,809 | 2,832 | |||||||||
|
|
|
|
|
| |||||||
Deferred income tax assets, net | $ | 3,807,377 | $ | 1,752,123 | $ | 3,546,311 | ||||||
|
|
|
|
|
| |||||||
| d) | Non-capital losses |
As at September 30, 2012, the Company had $9,046,442 (2011 - $9,123,237) of non-capital losses in Canada available to reduce future taxable income which were not recorded in these financial statements because of the uncertainty of their recovery. These unrecognized income tax losses expire as follows:
2015 | $ | 1,060,543 | ||
2026 | 2,248,406 | |||
2027 | 3,121,223 | |||
2028 | 2,616,270 | |||
|
| |||
| $ | 9,046,442 | |||
|
|
As at September 30, 2012, The Company also had $12,619,851 (£7,933,022) of non-capital losses for tax purposes in the United Kingdom that do not have an expiry date and which are available to reduce taxable trading income in future periods. Of these $3,424,975 (£1,799,067) have not been recorded in these financial statements because of the uncertainty of their recovery.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| 10. | Intangible assets |
October 1, 2011 to September 30, 2012
| Acquired software | Customer relationships | Internal use software | Total | |||||||||||||
Cost | ||||||||||||||||
As at October 1, 2011 | $ | 3,856,324 | $ | 6,818,688 | $ | 446,126 | $ | 11,121,138 | ||||||||
Additions | — | — | 958,464 | 958,464 | ||||||||||||
Disposals / write-offs | — | — | (168,466 | ) | (168,466 | ) | ||||||||||
Impairments | — | — | (540,737 | ) | (540,737 | ) | ||||||||||
Currency translation adjustments | (55,903 | ) | (22,885 | ) | — | (78,788 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
As at September 30, 2012 | $ | 3,800,421 | $ | 6,795,803 | $ | 695,387 | $ | 11,291,611 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Accumulated Amortization | ||||||||||||||||
As at October 1, 2011 | $ | 3,750,048 | $ | 6,599,419 | $ | 91,234 | $ | 10,440,701 | ||||||||
Amortization | 104,638 | 215,891 | 602,029 | 922,558 | ||||||||||||
Disposals / write-offs | — | — | — | — | ||||||||||||
Impairments | — | — | — | — | ||||||||||||
Currency translation adjustments | (54,265 | ) | (19,507 | ) | — | (73,772 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
As at September 30, 2012 | $ | 3,800,421 | $ | 6,795,803 | $ | 693,263 | $ | 11,289,487 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Carrying value – October 1, 2011 | $ | 106,276 | $ | 219,269 | $ | 354,892 | $ | 680,437 | ||||||||
Carrying value – September 30, 2012 | $ | — | $ | — | $ | 2,124 | $ | 2,124 | ||||||||
October 1, 2010 to September 30, 2011
| Acquired software | Customer relationships | Internal use software | Total | |||||||||||||
Cost | ||||||||||||||||
As at October 1, 2010 | $ | 3,887,620 | $ | 6,831,499 | $ | — | $ | 10,719,119 | ||||||||
Additions | — | — | 446,126 | 446,126 | ||||||||||||
Disposals / write-offs | — | — | — | — | ||||||||||||
Impairments | — | — | — | — | ||||||||||||
Currency translation adjustments | (31,296 | ) | (12,811 | ) | — | (44,107 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
As at September 30, 2011 | $ | 3,856,324 | $ | 6,818,688 | $ | 446,126 | $ | 11,121,138 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Accumulated Amortization | ||||||||||||||||
As at October 1, 2010 | $ | 3,523,372 | $ | 6,079,953 | $ | — | $ | 9,603,325 | ||||||||
Amortization | 250,422 | 516,698 | 91,234 | 858,354 | ||||||||||||
Disposals / write-offs | ||||||||||||||||
Impairments | ||||||||||||||||
Currency translation adjustments | (23,746 | ) | 2,768 | — | (20,978 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
As at September 30, 2011 | $ | 3,750,048 | $ | 6,599,419 | $ | 91,234 | $ | 10,440,701 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Carrying value – October 1, 2010 | $ | 364,248 | $ | 751,546 | $ | — | $ | 1,115,794 | ||||||||
Carrying value – September 30, 2011 | $ | 106,276 | $ | 219,269 | $ | 354,892 | $ | 680,437 | ||||||||
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
During the year ended September 30, 2012 the Company wrote-off previously capitalized costs associated with the development of internal use software in the amount of $168,466 (2011: $nil). This amount was written off as the Company is no longer using this software. The cost associated with this write-off is included within software development in the Canadian operating segment, which is one of the Company’s two cash generating units.
The Company recognized an impairment loss of $540,736 in fiscal 2012 (2011 - $0) primarily due to underperforming revenues associated with previously capitalized internal use software used in our social stationery product offerings. This amount was recorded in cost of sales on the consolidated statements of operations and comprehensive income (loss) in the Canadian operating segment, which is one of the Company’s two cash generating units. Refer to note 5 for disclosure of the impairment analysis performed in relation to the Company’s Canadian operating segment and the Company’s European operating segment, the cash-generating units to which these assets primarily relate.
As at September 30, 2012, intangible assets of $2,124 (2011 - $325,545) was allocated to the Company’s European operating segment, while $0 (2011 - $354,892) was allocated to the Company’s Canadian operating segment.
| 11. | Goodwill |
Goodwill arose as a result of the acquisitions of Pixology Ltd. and WorksMedia Ltd. in fiscal 2007 and fiscal 2009 respectively. Goodwill consists of the following amounts:
| Amount | ||||
Balance, October 1, 2010 | $ | 658,904 | ||
Currency translation adjustments | (4,682 | ) | ||
|
| |||
Balance, September 30, 2011 | $ | 654,222 | ||
Currency translation adjustments | (8,361 | ) | ||
Impairment of goodwill | (77,382 | ) | ||
|
| |||
Balance, September 30, 2012 | $ | 568,479 | ||
|
| |||
Based on management’s analysis, the Company recognized an impairment loss of $77,382 in fiscal 2012 (2011 - $0). This amount was recorded in cost of sales on the consolidated statements of operations and comprehensive income (loss) in the Canadian operating segment, which is one of the Company’s two cash generating units.
As at September 30, 2012, goodwill of $568,479 (2011 - $576,841) was allocated to the Company’s European operating segment, while $0 (2011 - $77,382) was allocated to the Company’s Canadian operating segment.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| 12. | Accounts payable and accrued liabilities |
| September 30, 2012 | September 30, 2011 | October 1, 2010 | ||||||||||
Trade payables | $ | 2,134,010 | $ | 949,162 | $ | 1,012,246 | ||||||
Amounts due to customers | 1,283,077 | 1,149,553 | 3,190,355 | |||||||||
Trade accruals | 326,519 | 337,353 | 314,022 | |||||||||
Accrued payroll and other taxes | 240,896 | 320,034 | 417,240 | |||||||||
Due to employees and consultants | 405,935 | 528,209 | 538,015 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 4,390,437 | $ | 3,284,311 | $ | 5,471,878 | ||||||
|
|
|
|
|
| |||||||
| 13. | Share capital and stock options |
| a) | Authorized |
Unlimited number of preferred shares without par value
As at September 30, 2012, the Company had 34,257,922 common shares issued (September 30, 2011: 34,189,458) and 34,257,922 outstanding (September 30, 2011: 34,010,958). There are no preferred shares issued or outstanding at September 30, 2012 (September 30, 2011: nil).
| b) | Options |
The Company provides stock options to directors and certain employees of the Company pursuant to a stock option plan (the “Plan”). The Plan authorizes a maximum of 10% (3,425,792) of the Company’s issued and outstanding common shares to be reserved for issuance. The term of the options granted under the plan is five years and options are subject to various vesting requirements.
The following table summarizes activity under the Company’s stock option plan since October 1, 2010:
| Number of options | Average exercise price | |||||||
Balance, October 1, 2010 (2,770,201 options exercisable) | 2,775,769 | $ | 2.48 | |||||
Granted | 500,000 | 1.55 | ||||||
Exercised | (291,776 | ) | 1.25 | |||||
Expired | (10,000 | ) | 1.25 | |||||
Forfeited | (205,770 | ) | 2.45 | |||||
Cancelled | (880,000 | ) | 3.35 | |||||
|
|
|
| |||||
Balance, September 30, 2011 (1,712,647 options exercisable) | 1,888,223 | $ | 2.02 | |||||
Granted | 1,350,000 | 0.47 | ||||||
Exercised | — | — | ||||||
Expired | (649,723 | ) | 2.32 | |||||
Forfeited | (356,500 | ) | 1.54 | |||||
Cancelled | — | — | ||||||
|
|
|
| |||||
Balance, September 30, 2012 (1,032,000 options exercisable) | 2,232,000 | $ | 1.77 | |||||
|
|
|
| |||||
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
During October 2010, the Company cancelled 880,000 options; the cancellation was considered a modification for accounting purposes, with the incremental costs being recognized over the term of the new awards. The terms of the new awards are described below.
The following table summarizes information about stock options outstanding and exercisable at September 30, 2012:
| Options outstanding | Options exercisable | |||||||||||||||||||
Exercise price | Number outstanding | Weighted average remaining contractual life (years) | Weighted average exercise price | Number exercisable | Weighted average exercise price | |||||||||||||||
$0.43 | 200,000 | 4.79 | $ | 0.43 | 0 | $ | 0.43 | |||||||||||||
$0.46 | 1,000,000 | 4.78 | $ | 0.46 | 49,986 | $ | 0.46 | |||||||||||||
$0.82 | 50,000 | 4.20 | $ | 0.82 | 8,333 | $ | 0.82 | |||||||||||||
$1.48 | 350,000 | 1.34 | $ | 1.48 | 350,000 | $ | 1.48 | |||||||||||||
$1.50 | 25,000 | 1.85 | $ | 1.50 | 25,000 | $ | 1.50 | |||||||||||||
$1.55 | 320,500 | 3.01 | $ | 1.55 | 320,500 | $ | 1.55 | |||||||||||||
$2.00 | 150,000 | 1.44 | $ | 2.00 | 150,000 | $ | 2.00 | |||||||||||||
$3.35 | 136,500 | 0.44 | $ | 3.35 | 136,500 | $ | 3.35 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
$ 0.43-$3.35 | 2,232,000 | 3.45 | $ | 0.43-$3.35 | 1,040,319 | $ | 0.43-$3.35 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. The following table provides the weighted average grant-date fair value and the weighted average assumptions used in applying the Black-Scholes option pricing model for grants made between October 1, 2010 and September 30, 2012:
| Description | September 30, 2012 | September 30, 2011 | ||||||
Exercise price | $ | 0.47 | $ | 1.55 | ||||
Market price on date of grant | 0.44 | 1.55 | ||||||
Expected forfeiture rate | 2.7 | % | 2.7 | % | ||||
Expected volatility | 59.14% - 61.85 | % | 58.42% - 62.51 | % | ||||
Risk-free interest rate | 1.18 | % | 1.79 | % | ||||
Expected life (years) | 4.46 | 4.5 | ||||||
Expected dividend yield | 0 | % | 0 | % | ||||
|
|
|
| |||||
Weighted average grant-date fair value | $ | 0.21 | $ | 0.77 | ||||
|
|
|
| |||||
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
The total fair value of stock options granted during the year ended September 30, 2012 was $280,230 (2011: $383,050).
During the year ended September 30, 2012, the Company recognized compensation expense of $68,907 (2011: $253,649).
| c) | Performance Share Unit Awards |
A Performance Share Unit (“PSU”) is a right granted to an executive level employee to receive one common share of the Company. The PSUs will be earned only if performance goals (non-market conditions) over the performance periods established by or under the direction of the Compensation Committee are met. PSUs vest over three years in equal annual instalments on each anniversary of the date of grant and will be delivered in common stock at the end of each vesting period, based on the recipient’s actual performance compared to the target performance and may equal from zero percent (0%) to one hundred percent (100%) of the target award. The fair value of each PSU awarded is based upon the quoted price of the Company’s stock on the date of grant, as the Company does not expect to pay dividends such an amount has not been included in the fair value of PSUs. The Company recognizes the expense based on an estimate at the end of each reporting period of the degree to which the performance goals are being met, incorporating an expected forfeiture rate of 2.7%, and adjusts the estimate at the conclusion of the performance period. The expense is recognized on a graded-vesting basis over the vesting period.
| Number of PSUs | Weighted average fair value | |||||||
Balance, October 1, 2010 | — | $ | — | |||||
Granted | 100,000 | 1.55 | ||||||
Forfeited | (26,000 | ) | 1.55 | |||||
PSUs issued as common shares upon vesting | — | — | ||||||
|
|
|
| |||||
Balance, September 30, 2011 | 74,000 | 1.55 | ||||||
Granted | — | — | ||||||
Forfeited | (64,434 | ) | 1.55 | |||||
PSUs issued as common shares upon vesting | (4,799 | ) | 1.55 | |||||
|
|
|
| |||||
Balance, September 30, 2012 | 4,767 | $ | 1.55 | |||||
|
|
|
| |||||
During the year ended September 30, 2012 the Company issued 4,799 common shares as it related to vested PSUs at a value of $7,438, which represents the fair value at the date of grant, and recorded this amount as an adjustment to contributed surplus and common shares.
During the year ended September 30, 2012, the Company recognized compensation expense on PSUs of $1,277 (2011: $7,440).
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| d) | Restricted Share Unit Awards |
A Restricted Share Unit (“RSU”) is a right granted to a non-executive director or key employee to receive one common share of the Company on a time vested basis. The fair value of the restricted share awards is determined based upon the number of shares granted and the quoted price of the Company’s stock on the date of grant. Restricted shares vest over three years in equal annual instalments on each anniversary of the date of grant and will be delivered in common stock at the end of each vesting period. The expense is recognized on a graded-vesting basis over the vesting period.
| Number of RSUs | Weighted average fair value | |||||||
Balance, October 1, 2010 | — | $ | — | |||||
Granted | 206,600 | 1.55 | ||||||
Forfeited | (8,400 | ) | 1.55 | |||||
RSUs issued as common shares upon vesting | — | — | ||||||
|
|
|
| |||||
Balance, September 30, 2011 | 198,200 | 1.55 | ||||||
Granted | — | — | ||||||
Forfeited | (51,401 | ) | 1.55 | |||||
RSUs issued as common shares upon vesting | (63,665 | ) | 1.55 | |||||
|
|
|
| |||||
Balance, September 30, 2012 | 83,134 | $ | 1.55 | |||||
|
|
|
| |||||
During the year ended September 30, 2012 the Company issued 63,665 common shares as it related to vested RSUs at a value of $98,681, which represents the fair value at the date of grant, and recorded this amount as an adjustment to contributed surplus and common shares.
During the year ended September 30, 2012, the Company recognized compensation expense of $26,233 (2011: $102,401).
| e) | Shares held in escrow |
In connection with the acquisition of WorksMedia Limited, which was completed in March 2009, 750,000 common shares of the Company were issued. 214,500 of these common shares have been included as part of the purchase consideration, while the remaining 535,500 common shares are only being released from escrow upon the continued employment of the Principle Vendors over a three year period.
On March 10, 2012, the Company released the final installment of 250,000 common shares consisting of 71,500 common shares included as part of the purchase consideration while the remaining 178,500 common shares released related to the continued employment of the Principle Vendors. During the year ended September 30, 2012, the Company recognized compensation expense of $ 113,080 (2011: $ 299,102) in connection with the acquisition of WorksMedia Limited.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| f) | Normal course issuer bid |
On April 15, 2010, the Company received approval from the TSX Venture Exchange (“TSX-V”) for a Normal Course Issuer Bid (the “Bid”) that enables the Company to purchase and cancel up to 340,000, or approximately 1%, of its outstanding common shares between May 1, 2010 and April 30, 2011. During the three month period ended December 31, 2010 the Company received approval from the TSX-V to revise the authorized purchase amount from 340,000 shares to approximately 1.7 million shares, or 5% of the outstanding common shares of the Company. On May 27, 2011, the Company received approval from the TSX-V to extend the Bid authorizing the purchase of approximately 1.7 million shares, or 5% of the outstanding common shares between May 27, 2011 and May 26, 2012.
As at October 1, 2010, the Company held 30,000 shares that had been purchased for cancellation. During the year ended September 30, 2011, the Company purchased a further 283,100 shares under the Bid for a total purchase price of $404,594. As at September 30, 2011, all 313,100 of these shares have been cancelled.
On cancellation of these 313,100 shares, $165,726, representing the difference between the purchase price and the average book value of the common shares was recorded as an adjustment to contributed surplus.
Since inception of the Bid, the Company has purchased 383,100 shares for a purchase price of $555,197.
The Company’s Bid expired on May 26, 2012 and no further applications have been made to extend it.
| g) | Earnings per share |
The following is a reconciliation of the numerator and the denominators used for the computation of basic and diluted earnings per share amounts:
| September 30, 2012 | September 30, 2011 | |||||||
Net (loss) earnings for the period (numerator) | $ | (4,122,653 | ) | $ | 1,099,600 | |||
|
|
|
| |||||
Weighted average number of shares outstanding (denominator) | ||||||||
Basic | 34,178,165 | 33,927,659 | ||||||
Effect of dilutive securities: | ||||||||
Stock options | — | 11,045 | ||||||
RSUs | 16,304 | 40,908 | ||||||
PSUs | 1,745 | 5,659 | ||||||
|
|
|
| |||||
Total | 34,199,622 | 33,985,271 | ||||||
|
|
|
| |||||
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| 14. | Segment information |
The Company has two operating segments that have similar economic characteristics which are aggregated into a single reportable segment based on the manner in which the Company has organized its operations and provision of financial information to senior management.
The Company’s sales by geographical area are as:
| Year Ended | ||||||||
| Description | September 30, 2012 | September 30, 2011 | ||||||
Canada | $ | 4,349,099 | $ | 4,767,164 | ||||
United States | 14,348,137 | 14,359,639 | ||||||
United Kingdom | 3,792,752 | 4,319,187 | ||||||
Other | 222,817 | 240,361 | ||||||
|
|
|
| |||||
Total | $ | 22,712,805 | $ | 23,686,351 | ||||
|
|
|
| |||||
Revenue is attributed to the geographic location of the Company’s customer.
As at September 30, 2012 and September 30, 2011, the Company’s assets and liabilities by geographical location are as follows:
| Canada | United Kingdom | Total | ||||||||||
September 30, 2012 | ||||||||||||
Assets | ||||||||||||
Property and equipment | $ | 4,675,595 | $ | 7,760 | $ | 4,683,355 | ||||||
Goodwill and intangible assets | $ | — | $ | 570,603 | $ | 570,603 | ||||||
Liabilities | ||||||||||||
Accounts payable and accrued liabilities | $ | 3,294,864 | $ | 1,095,573 | $ | 4,390,437 | ||||||
Deferred revenue | $ | 614,242 | $ | 141,005 | $ | 755,247 | ||||||
September 30, 2011 | ||||||||||||
Assets | ||||||||||||
Property and equipment | $ | 5,137,362 | $ | 2,788 | $ | 5,140,150 | ||||||
Goodwill and intangible assets | $ | 432,273 | $ | 902,386 | $ | 1,334,659 | ||||||
Liabilities | ||||||||||||
Accounts payable and accrued liabilities | $ | 2,270,532 | $ | 1,013,779 | $ | 3,284,311 | ||||||
Deferred revenue | $ | 80,201 | $ | 204,020 | $ | 284,221 | ||||||
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Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
Major customers representing 10% or more of the Company’s sales for the period are as follows:
| Year Ended | ||||||||
| Description | September 30, 2012 | September 30, 2011 | ||||||
Customer A | $ | 5,812,890 | $ | 5,886,556 | ||||
Customer B | 2,928,033 | 3,286,226 | ||||||
Customer C | 2,500,214 | 2,366,838 | ||||||
Customer D | 9,493,873 | 9,566,825 | ||||||
| 15. | Revenue |
| Year Ended | ||||||||
| Description | September 30, 2012 | September 30, 2011 | ||||||
Transaction fees | $ | 17,730,786 | $ | 18,050,068 | ||||
Software licenses and installation fees | 1,876,901 | 2,572,673 | ||||||
Membership fees | 1,780,775 | 1,650,669 | ||||||
Archive fees | 1,070,248 | 1,336,518 | ||||||
Professional fees | 254,095 | 76,423 | ||||||
|
|
|
| |||||
Total | $ | 22,712,805 | $ | 23,686,351 | ||||
|
|
|
| |||||
Product revenue is presented below:
| Year Ended | ||||||||
| Description | September 30, 2012 | September 30, 2011 | ||||||
Service revenue | $ | 22,232,780 | $ | 23,118,350 | ||||
Product revenue | 480,025 | 568,001 | ||||||
|
|
|
| |||||
Total | $ | 22,712,805 | $ | 23,686,351 | ||||
|
|
|
| |||||
| 16. | Related Party Transactions |
During the year ended September 30, 2012, the Company incurred legal fees of $156,204 (2011: $133,242), respectively, for services provided by McMillan LLP, a law firm of which a director of the Company is a partner. Accounts payable and accrued liabilities at September 30, 2012 included $41,245 (September 30, 2011: $23,955) related to these services.
During the year ended September 30, 2012, the Company incurred consulting fees of $59,678 (2011: $60,722) for services provided by Digital Photoworks, a company of which a Director of the Company controls. The Company does not have any outstanding accounts payable or accrued liabilities as at September 30, 2012 related to this company (September 30, 2011: $5,072).
During the year ended September 30, 2012, the Company did not incur expenses relating to setting up e-mail marketing campaigns on behalf of any of our retail customers (September 30, 2011: $8,449) and website services (September 30, 2011: $3,000), and software development services (September 30, 2011: $3,500) with Photoblaster, a company of which a director of the Company is Chairman and Chief Executive Officer.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
The Company shares its UK premises with another company, Works Unit Ltd., of which an Officer is a director. During the year ended September 30, 2012, the Company was recharged its proportional share of office running costs totalling $209,850 (2011: $200,592) by this related party. In addition, during the year ended September 30, 2012, the Company used the software development services of this company, incurring costs of $105,560 (2011: $58,941). The Company does not have any outstanding accounts payable as at September 30, 2012 (September 30, 2011: $21,578) related to these services and cost recharges.
During the year ended September 30, 2012, the Company incurred consulting fees of $15,188 (2011: $nil) for services provided by Altona Consulting, LLC., a company of which a Director of the Company controls. The Company does not have any outstanding accounts payable as at September 30, 2012 related to this company.
During the year ended September 30, 2012, the Company incurred consulting fees of $15,213 (2011: $nil) for services provided by LLBC, LLC., which is a company of which a previous Director of the Company has control over. The Company does not have any outstanding accounts payable as at September 30, 2012 related to this company.
During the year ended September 30, 2012, the Company generated revenue of $7,683 (2011: $5,880) relating to transaction fees, software license and installation fees, and membership fees from a customer, Extrafilm, of which a Director of the Company controls. Accounts receivable at September 30, 2012 included $2,581 (September 30, 2011: $2,102) related to these services.
All amounts charged were recorded at their exchange amount, which is the amount of consideration established and agreed to by the related parties and having normal trade terms.
| 17. | Compensation of key management |
Key management includes the Company’s directors, and members of the executive team. Compensation awarded to key management included:
| Year Ended | ||||||||
| Description | September 30, 2012 | September 30, 2011 | ||||||
Salaries, director fees and short-term employee benefits | $ | 1,462,547 | $ | 1,587,219 | ||||
Share-based payments | 93,723 | 434,149 | ||||||
Compensation expense in connection with acquisition of WorksMedia Limited | 53,826 | 142,373 | ||||||
Termination benefits | 168,750 | 87,500 | ||||||
|
|
|
| |||||
Total | $ | 1,778,846 | $ | 2,251,241 | ||||
|
|
|
| |||||
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| 18. | Expenses by nature |
| Year Ended | ||||||||
| Description | September 30, 2012 | September 30, 2011 | ||||||
Cost of Sales | ||||||||
Salary and Wages | $ | 2,854,816 | $ | 2,445,465 | ||||
Outsourced consultants and third party contractors | 256,615 | 179,687 | ||||||
Direct costs | 557,293 | 664,486 | ||||||
Third party call center | 1,470,197 | 1,302,985 | ||||||
Data center fees | 1,608,695 | 1,730,101 | ||||||
Amortization of property and equipment | 1,529,978 | 1,689,790 | ||||||
Amortization of intangible assets | 922,558 | 858,354 | ||||||
Impairment of intangible assets | 542,860 | — | ||||||
Impairment of goodwill | 77,382 | — | ||||||
Share-based payments | (698 | ) | 43,156 | |||||
Travel | 37,726 | 15,748 | ||||||
Dues, subscriptions & books and licenses | 310,591 | 266,872 | ||||||
(Gain) Loss on Disposal of Property and Equipment | 36,294 | |||||||
Rent and other office costs | 95,676 | 79,548 | ||||||
Other expenses | 194,333 | 86,621 | ||||||
|
|
|
| |||||
Total | $ | 10,458,022 | $ | 9,399,107 | ||||
Expenses | ||||||||
Salary and Wages | $ | 8,530,388 | $ | 8,488,837 | ||||
Outsourced consultants and third party contractors | 2,370,419 | 1,849,335 | ||||||
Amortization of property and equipment | 278,747 | 347,164 | ||||||
Write-off of intangible assets | 168,466 | — | ||||||
Share-based payments | 209,441 | 805,088 | ||||||
Accounting and Legal fees | 653,698 | 719,010 | ||||||
Rent and other office costs | 625,033 | 683,591 | ||||||
Travel, meals & entertainment | 712,789 | 664,525 | ||||||
Dues, subscriptions & books and licenses | 164,551 | 190,559 | ||||||
(Gain) Loss on Disposal of Property and Equipment | — | 81,012 | ||||||
Board member fees | 248,267 | 217,000 | ||||||
Bad debt expense | 132,012 | 31,693 | ||||||
Investor relations and other public company charges | 188,306 | 157,840 | ||||||
Other expenses | 203,098 | 120,268 | ||||||
|
|
|
| |||||
| $ | 14,485,215 | $ | 14,355,922 | |||||
|
|
|
| |||||
Total | $ | 24,943,237 | $ | 23,755,029 | ||||
|
|
|
| |||||
| 19. | Commitments and Contingencies |
| a) | Commitments |
At September 30, 2012, the Company did not have any commitments to purchase items of equipment and internal use software (2011: $63,755).
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
The contractual obligations and payments due as at September 30, 2012 are as follows:
| Payments due by period | ||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | |||||||||||||
Property leases | $ | 598,216 | 359,712 | 238,504 | $ | — | ||||||||||
Other service agreements | 5,396,755 | 1,750,575 | 3,406,167 | 240,013 | ||||||||||||
Purchase obligations | 147,585 | 147,585 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | 6,142,556 | 2,257,872 | 3,644,671 | $ | 240,013 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
| b) | Contingencies |
From time to time the Company may be involved in various litigation matters, and also has contractual performance as a result of binding legal arrangements as a result losses may arise (if any), are not anticipated and can be material to the consolidated financial statements.
During the year ended September 30, 2011, the Company received notice from a former customer that a settlement had been reached between it and the entity that had been making the claims of patent infringement. As a result, the Company’s former customer requested that the Company pay a portion of the settlement amount under an indemnification clause included in the contract that was in place during the previous relationship. After considering all of the available facts, including the expected legal costs of disputing the matter, the Company agreed to pay a contribution of the settlement charge, up to a maximum amount of US$100,000. The Company concluded negotiations in fiscal 2011 and made a contribution of US$80,000 during September 30, 2011 as full and final settlement. Upon payment of this amount, the Company has been released from any future claims relating to this matter by the customer.
| 20. | Bank Facility |
The Company has a Credit Agreement with its bank (the “Bank”) which provides the Company with two separate credit facilities, being a revolving demand facility of up to $1,500,000 (“Revolving Demand Facility”) and a $750,000 reducing facility by way of Leases (“Lease Facility”). The two credit facilities and all other obligations of the Company to the Bank are secured by way of a General Security Agreement between the Bank and the Company, constituting a first ranking security interest in all personal property of the Company.
The Revolving Demand Facility bears interest at a rate of Bank prime + 1.50% and contains a financial covenant requiring us not to exceed a borrowing limit of 67% of good Canadian and US Accounts receivable less potential prior-ranking claims which include items such as sales and excise taxes, payroll liabilities, and overdue rent, property and business taxes. The Company has not drawn any amount with respect to the Revolving Demand Facility.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
The Lease Facility will be subject to separate agreements between the Bank and the Company, and as at September 30, 2012 no amount has been drawn on this facility.
| 21. | Supplementary cash flow information |
Net change in non-cash working capital items
| Description | September 30, 2012 | September 30, 2011 | ||||||
Accounts receivable | $ | 133,778 | $ | 704,723 | ||||
Prepaid expenses and other current assets | (163,634 | ) | (13,625 | ) | ||||
Accounts payable and accrued liabilities | 991,373 | (2,138,156 | ) | |||||
Changes in deferred revenue | 474,039 | (398,349 | ) | |||||
|
|
|
| |||||
Total | $ | 1,435,556 | $ | (1,845,407 | ) | |||
|
|
|
| |||||
| 22. | Transition to IFRS |
These consolidated financial statements have been prepared in accordance with IFRS applicable to the preparation of financial statements, including IFRS 1.
The effect of the Company’s transition to IFRS is summarized in this note as follows:
| (i) | Transition elections |
| (ii) | Reconciliation of equity and comprehensive income as previously reported under Canadian GAAP to IFRS |
| (iii) | Adjustments to the statement cash flows |
| (iv) | Notes to the reconciliations |
| i) | Transition Elections |
Set forth below are the transition exemptions and exceptions to full retrospective application of IFRS applied by the Company on transition:
IFRS Voluntary Exemptions
Share-based payments – IFRS 1 permits the application of IFRS 2Share Based Payments only to equity instruments granted after November 7, 2002 that had not vested by the date of transition to IFRS. The Company has applied this exemption and will apply IFRS 2 for equity instruments granted after November 7, 2002 that had not vested by October 1, 2010.
Business Combinations – The Company has elected to apply IFRS 3,Business Combinations, prospectively to business combinations that occur after the date of transition. The Company has elected this exemption under IFRS 1, which removes the requirement to retrospectively restate all business combinations prior to the date of transition to IFRS.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
Cumulative translation differences – The Company has elected to apply the IFRS 1 exemption whereby cumulative translation differences included in accumulated other comprehensive loss are reset to zero at the transition date.
IFRS Mandatory Exceptions
Estimates – In accordance with the requirements of IFRS 1, hindsight is not used to create or revise estimates. The estimates previously made by the Company under Canadian GAAP were not revised on transition to IFRS except where necessary to reflect any differences in accounting policies.
| ii) | Reconciliation of equity and comprehensive income as previously reported under Canadian GAAP to IFRS |
| Previous Canadian | Effect of transition | |||||||||||||||
| GAAP | to IFRSs | IFRSs | ||||||||||||||
| Note | October 1, 2010 | |||||||||||||||
Assets | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 4,690,355 | $ | 4,690,355 | ||||||||||||
Accounts receivable | 5,302,865 | 5,302,865 | ||||||||||||||
Prepaid expenses and other current assets | 541,026 | 541,026 | ||||||||||||||
Current portion of deferred income tax asset | a | ) | 1,026,651 | (1,026,651 | ) | — | ||||||||||
|
|
|
|
|
| |||||||||||
| 11,560,897 | (1,026,651 | ) | 10,534,246 | |||||||||||||
Property and equipment | 5,230,829 | 5,230,829 | ||||||||||||||
Deferred income tax asset | a | ) | 4,953,934 | 907,570 | 5,861,504 | |||||||||||
Intangible assets | b | ) | 1,115,794 | 1,115,794 | ||||||||||||
Goodwill | 658,904 | — | 658,904 | |||||||||||||
|
|
|
|
|
| |||||||||||
| $ | 23,520,358 | $ | (119,081 | ) | $ | 23,401,277 | ||||||||||
|
|
|
|
|
| |||||||||||
Liabilities | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 5,471,878 | $ | 5,471,878 | ||||||||||||
Current portion of deferred revenue | 613,081 | 613,081 | ||||||||||||||
Current portion of capital lease obligations | 107,964 | 107,964 | ||||||||||||||
Deferred income tax liability | a | ) | 119,081 | (119,081 | ) | — | ||||||||||
|
|
|
|
|
| |||||||||||
| 6,312,004 | (119,081 | ) | 6,192,923 | |||||||||||||
Deferred revenue | 78,876 | 78,876 | ||||||||||||||
|
|
|
|
|
| |||||||||||
| 6,390,880 | (119,081 | ) | 6,271,799 | |||||||||||||
|
|
|
|
|
| |||||||||||
Shareholders’ Equity | ||||||||||||||||
Share capital | c | ) | $ | 66,200,215 | 107,611 | $ | 66,307,826 | |||||||||
Contributed surplus | 18,933,619 | 18,933,619 | ||||||||||||||
|
|
|
|
|
| |||||||||||
| 85,133,834 | 107,611 | 85,241,445 | ||||||||||||||
|
|
|
|
|
| |||||||||||
Deficit | b | ), c) | (65,684,820 | ) | (2,427,147 | ) | (68,111,967 | ) | ||||||||
Accumulated other comprehensive loss | b | ), d) | (2,319,536 | ) | 2,319,536 | — | ||||||||||
|
|
|
|
|
| |||||||||||
| (68,004,356 | ) | (107,611 | ) | (68,111,967 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
| 17,129,478 | 17,129,478 | |||||||||||||||
|
|
|
|
|
| |||||||||||
| $ | 23,520,358 | $ | (119,081 | ) | $ | 23,401,277 | ||||||||||
|
|
|
|
|
| |||||||||||
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| Previous Canadian | Effect of transition | |||||||||||||||
| GAAP | to IFRSs | IFRSs | ||||||||||||||
| Note | September 30, 2011 | |||||||||||||||
Assets | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 3,936,176 | $ | 3,936,176 | ||||||||||||
Accounts receivable | 4,535,912 | 4,535,912 | ||||||||||||||
Prepaid expenses and other current assets | 460,140 | 460,140 | ||||||||||||||
Current portion of deferred income tax asset | a | ) | 108,933 | (108,933 | ) | — | ||||||||||
|
|
|
|
|
| |||||||||||
| 9,041,161 | (108,933 | ) | 8,932,228 | |||||||||||||
Property and equipment | 5,140,150 | 5,140,150 | ||||||||||||||
Deferred income tax asset | a | ) | 7,013,431 | 52,426 | 7,065,857 | |||||||||||
Intangible assets | 680,437 | 680,437 | ||||||||||||||
Goodwill | b | ) | 576,840 | 77,382 | 654,222 | |||||||||||
|
|
|
|
|
| |||||||||||
| $ | 22,452,019 | 20,875 | $ | 22,472,894 | ||||||||||||
|
|
|
|
|
| |||||||||||
Liabilities | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 3,284,311 | $ | 3,284,311 | ||||||||||||
Current portion of deferred revenue | 250,323 | 250,323 | ||||||||||||||
Current portion of capital lease obligations | — | — | ||||||||||||||
Deferred income tax liability | a | ) | 56,507 | (56,507 | ) | — | ||||||||||
|
|
|
|
|
| |||||||||||
| 3,591,141 | (56,507 | ) | 3,534,634 | |||||||||||||
Deferred revenue | 33,898 | 33,898 | ||||||||||||||
|
|
|
|
|
| |||||||||||
| 3,625,039 | (56,507 | ) | 3,568,532 | |||||||||||||
|
|
|
|
|
| |||||||||||
Shareholders’ Equity | ||||||||||||||||
Share capital | c | ) | $ | 66,419,784 | 788 | $ | 66,420,572 | |||||||||
Contributed surplus | e | ) | 19,336,768 | 185,652 | 19,522,420 | |||||||||||
|
|
|
|
|
| |||||||||||
| 85,756,552 | 186,440 | 85,942,992 | ||||||||||||||
|
|
|
|
|
| |||||||||||
Deficit | b | ), c), e) | (64,583,644 | ) | (2,428,723 | ) | (67,012,367 | ) | ||||||||
Accumulated other comprehensive loss | b | ), d) | (2,345,928 | ) | 2,319,665 | (26,263 | ) | |||||||||
|
|
|
|
|
| |||||||||||
| (66,929,572 | ) | (109,058 | ) | (67,038,630 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
| 18,826,980 | 77,382 | 18,904,362 | ||||||||||||||
|
|
|
|
|
| |||||||||||
| $ | 22,452,019 | 20,875 | $ | 22,472,894 | ||||||||||||
|
|
|
|
|
| |||||||||||
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Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| ii) | Reconciliation of comprehensive income as previously reported under Canadian GAAP to IFRS for the year ended September 30, 2011 |
| Note | Canadian GAAP | Effect of transition to IFRSs | IFRSs | |||||||||||||
Revenue | $ | 23,686,351 | $ | 23,686,351 | ||||||||||||
Cost of sales | e | ), f) | 9,399,107 | 9,399,107 | ||||||||||||
|
|
|
|
|
| |||||||||||
Gross Profit | (9,399,107 | ) | 14,287,244 | |||||||||||||
Expenses | ||||||||||||||||
Network delivery | f | ) | 4,313,913 | (4,313,913 | ) | — | ||||||||||
Software development | e | ), f) | 11,218,227 | (1,778,804 | ) | 9,439,423 | ||||||||||
General and administration | e | ), f) | 4,096,764 | (168,554 | ) | 3,928,210 | ||||||||||
Sales and marketing | e | ), f) | 927,860 | 60,429 | 988,289 | |||||||||||
Amortization of intangible assets | f | ) | 858,354 | (858,354 | ) | — | ||||||||||
Amortization of property and equipment | f | ) | 2,036,953 | (2,036,953 | ) | — | ||||||||||
|
|
|
|
|
| |||||||||||
| 23,452,071 | (9,096,149 | ) | 14,355,922 | |||||||||||||
Profit (loss) from operations | 234,280 | (302,958 | ) | (68,678 | ) | |||||||||||
Foreign exchange (loss) | (125,148 | ) | (125,148 | ) | ||||||||||||
Finance income | — | — | ||||||||||||||
Finance costs | (5,599 | ) | (5,599 | ) | ||||||||||||
Loss on disposal of property and equipment | f | ) | (117,306 | ) | 117,306 | — | ||||||||||
|
|
|
|
|
| |||||||||||
| (248,053 | ) | 117,306 | (130,747 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||
Profit (loss) before income tax | (13,773 | ) | (185,652 | ) | (199,425 | ) | ||||||||||
Current income tax (expense) | — | — | ||||||||||||||
Deferred income tax recovery (expense) | b | ), c) | 1,114,949 | 184,076 | 1,299,025 | |||||||||||
|
|
|
|
|
| |||||||||||
Income tax recovery (expense) | 1,114,949 | 184,076 | 1,299,025 | |||||||||||||
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Profit (loss) for the period | 1,101,176 | (1,576 | ) | 1,099,600 | ||||||||||||
Other comprehensive loss: | ||||||||||||||||
Cumulative translation adjustment | b | ) | (26,392 | ) | 129 | (26,263 | ) | |||||||||
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Total comprehensive income (loss) for the period | $ | 1,074,784 | $ | (1,447 | ) | $ | 1,073,337 | |||||||||
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Earnings (loss) per share | ||||||||||||||||
Basic | $ | 0.03 | $ | 0.03 | ||||||||||||
Fully diluted | $ | 0.03 | $ | 0.03 | ||||||||||||
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| ii) | Material adjustments to the statement of cash flows for September 30, 2011 |
There were no material differences between the statements of cash flows presented under IFRSs and the statement of cash flows presented under previous Canadian GAAP and thus no reconciliation of the statements of cash flows between Canadian GAAP and IFRS have been presented.
| iv) | Notes to the reconciliations |
In addition to the exemptions and exceptions discussed above, the following narratives explain the differences between the previous historical Canadian GAAP accounting policies and the current IFRS accounting policies applied by the Company. Only the differences having an impact on the Company are described below. The following is not a complete summary of all of the differences between Canadian GAAP and IFRS. The descriptive caption next to each lettered item below corresponds to the same lettered and descriptive caption in the tables above, which reflect the quantitative impacts from each change. Unless a quantitative impact was noted below, the impact from the change was not material to the Company.
| a) | Income taxes - tax reclassification |
In accordance with Canadian GAAP, deferred taxes are split between current and non-current components on the basis of either: (1) the underlying asset or liability, or (2) the expected reversal of items not related to an asset or liability.
In accordance with IFRS, all deferred tax assets and liabilities are classified as non-current. As a result current deferred tax assets and liabilities recognized under Canadian GAAP have been reclassified as non-current.
| b) | Income taxes – Pixology loss carry-forwards |
During the years ended September 30, 2009, 2010 and 2011; the Company determined that a portion of the previously unrecognized Pixology loss carry forwards should be recognized as the likelihood of realization of the tax asset was estimated to be more likely than not. Canadian GAAP requires that a future income tax asset acquired in a business combination that was not recognized at the time of acquisition as an identifiable asset but is subsequently recognized by the acquirer should be applied to reduce goodwill and intangibles to zero, with any remaining amount recognized as a reduction to income tax expense. Accordingly, the following amounts were credited against goodwill and intangible assets arising from the Pixology acquisition as follows:
| September 30, 2011 | September 30, 2010 | |||||||
Decrease in intangible assets | $ | — | $ | 89,266 | ||||
Decrease in Goodwill | 77,382 | 949,152 | ||||||
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Total | $ | 77,382 | $ | 1,038,418 | ||||
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
IFRS requires the recognition of a deferred tax asset related to acquired losses and deductible temporary differences to be recognized as a deferred tax recovery in the Statement of Earnings (Loss) and Comprehensive Gain (Loss).
However, as the Company has elected to apply IFRS 3,Business Combinations, prospectively to business combinations that occur after the date of transition; the Company is not permitted to reverse adjustments to goodwill that IFRS 3 would not permit hence no reversal was made to the application of Pixology loss carry-forwards to goodwill prior to October 1, 2010. The Company has reversed the application of Pixology loss carry-forwards made during the year ended September 30, 2011.
While the application of IFRS 3 prospectively does not permit adjustments to goodwill prior to the transition date, the Company is required to reverse the application of Pixology loss carry-forwards to intangible assets. This change in accounting policy does not have an impact on the October 1, 2010 intangible asset balance as all Pixology related intangible assets would have been fully amortized by the year ended September 30, 2010 as the increase in amortization expense would be offset by the decrease in income tax expense.
This change in accounting policy has impacted the following accounts as follows:
| Year ended September 30, 2011 | ||||
Consolidated statement of income and comprehensive income | ||||
Increase in deferred income tax recovery | $ | 77,253 | ||
Increase in accumulated other comprehensive gain | 129 | |||
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Increase in comprehensive income | $ | 77,382 | ||
| September 30, 2011 | October 1, 2010 | |||||||
Consolidated balance sheet | ||||||||
Increase in goodwill | $ | 77,382 | $ | — | ||||
Decrease/(increase) in accumulated other comprehensive income | (129 | ) | — | |||||
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Increase/(decrease) in retained earnings | $ | 77,253 | $ | — | ||||
| c) | Income taxes – share issue costs |
During the year ended September 30, 2010, the Company determined that it was more likely than not to realize the loss carry forwards and other deductible temporary differences arising in Canada. As a result the Company recorded a deferred tax asset relating to these items and recorded a deferred tax benefit. A portion of the deferred tax asset recognized, in the amount of $107,611, related to share issue costs that are deductible for tax purposes. In accordance with Canadian GAAP, the portion of the deferred tax asset of $107,611 related to share issue costs was recorded as a deferred tax benefit within the Company’s Statement of Earnings (Loss) and Comprehensive Gain (Loss). IFRS, however, requires temporary differences related to equity items be recognized as an increase or decrease to share capital.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
This change in accounting policy has impacted the following accounts as follows:
| Year ended September 30, 2011 | ||||
Consolidated statement of income and comprehensive income | ||||
Increase in deferred income tax recovery | $ | 106,823 | ||
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Increase in comprehensive income | $ | 106,823 | ||
| September 30, 2011 | ||||
Consolidated statement of financial position | ||||
(Decrease)/increase in share capital | $ | 788 | ||
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Increase/(decrease) in retained earnings | $ | (788 | ) | |
| d) | Cumulative translation adjustment |
As the Company has elected to apply the IFRS 1 exemption for cumulative translation differences, the Company has recorded an adjusting entry to reset the cumulative translation differences to zero at the transition date. Application of this accounting policy choice results in a decrease of $2,319,536 in accumulated other comprehensive loss and a corresponding increase in deficit as of October 1, 2010.
| e) | Share-based payments |
There are two changes on transition regarding the accounting for share-based payments. Under Canadian GAAP, the Company treated its stock option, PSU and RSU tranches as single pools and determined fair value using an average life of the grant as a whole, and then recognized compensation expense on a straight-line basis. IFRS requires each tranche to be valued separately and recognized as compensation over its individual vesting period; this results in earlier recognition of the compensation expense as compared to Canadian GAAP. With respect to forfeitures, the Company recognized forfeitures as they occurred under Canadian GAAP; under IFRS, companies are required to estimate forfeitures at the time of grant with resulting effects on the compensation expense recognized.
This change in accounting policy has impacted the following accounts as follows:
| September 30, 2011 | ||||
Consolidated statement of income and comprehensive income | ||||
Share-based payment expense | ||||
Increase – Options | $ | 99,196 | ||
Increase – RSUs | 80,255 | |||
Increase – PSUs | 6,201 | |||
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(Decrease)/increase in comprehensive income | $ | (185,652 | ) | |
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
| September 30, 2011 | October 1, 2010 | |||||||
Consolidated statement of financial position | ||||||||
Increase in contributed surplus | $ | 185,652 | $ | — | ||||
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Increase/(decrease) in retained earnings | $ | (185,652 | ) | $ | — | |||
| f) | Other Reclassifications |
Certain other balances and financial statement captions have been reclassified from Canadian GAAP to conform with the presentation requirements of IFRS. The reclassification of these balances had no impact on net equity as at transition to IFRS.
| 22. | Financial instruments |
The Company is exposed to a number of risks related to changes in foreign currency exchange rates, interest rates, collection of accounts receivable, settlement of liabilities and management of cash and cash equivalents.
The carrying value of cash and cash equivalents, accounts payable and leases, approximates the fair value due to the immediate or short-term maturity of these financial instruments. The carrying value of accounts receivable approximates the fair value due to their short-term nature and historical collectability. These values represent the estimated amount the Company would receive or pay to terminate agreements taking into consideration current interest rates and the creditworthiness of the counterparties.
| Liquidity | risk |
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivery of cash or other financial assets. The Company’s approach to managing liquidity risk is to ensure it has sufficient cash available to manage the payment of its financial liabilities. As described in note 20, the Company has a $1,500,000 revolving demand facility and a $750,000 reducing facility by way of leases in place to help manage its liquidity position and therefore its liquidity is dependent on the availability of these facilities as well as its overall volume of business activity and ability to manage the collection and payment of its accounts receivable and accounts payable through cash flow management techniques.
The following table discloses the maturities of the Company’s financial liabilities as at September 30, 2012:
| Payments due by period | ||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | |||||||||||||
Accounts payable and accrued liabilities | 4,390,437 | 4,390,437 | — | — | ||||||||||||
Other short-term debt obligations | — | — | — | — | ||||||||||||
Property leases | 598,216 | 359,712 | 238,504 | |||||||||||||
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| 4,988,653 | 4,750,149 | 238,504 | — | |||||||||||||
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
During the year ended September 30, 2012, the Company generated positive cash flow from operations of $3,032,352. During the same period the Company’s working capital has decreased by $617,804 from $5,397,594 to $4,779,790. The Company’s liquidity position may, however, fluctuate during the year due to a number of factors which could include unanticipated changes to its volume of business, credit losses and the extent of capital expenditure in the year. The Company’s liquidity position may also be adversely impacted by the seasonal nature of its business with the Company’s busiest period of activity typically during the first quarter of the fiscal year. As the Company has a concentration of business with select key customers, its liquidity position would be adversely impacted if one of its key customer relationships was discontinued.
The Company primarily monitors its liquidity position through forecasting expected cash flows based on the timing of expected receipts and payments. Management monitors its cash balances and projections on a weekly and monthly basis. The starting point for its analysis is based upon the contractual maturity date of its liabilities and its expected collection period for its receivables. The Company has a positive working capital position of $4,779,790 at September 30, 2012 and it manages the payment of its financial liabilities based on available cash and matching the settlement of its financial liabilities to realized financial assets. The Company also monitors its debtor collection as described in the credit risk note above. As the Company’s revenues are primarily collectible within 30 days of invoicing, which is performed weekly for some customers and monthly for others, the Company aims to be able to collect its accounts receivable more promptly than it settles its third party accounts payable. However, as certain of the Company’s operating expenses such as its payroll obligations are contractually due at least monthly, the Company’s working capital position could periodically alter depending on the timing of the maturity of its accounts receivable and accounts payable and accrued liabilities.
In prior years the Company purchased a number of items of property and equipment using a finance lease. At September 30, 2010, the Company had an outstanding obligation under this lease of $107,964, all of which has been settled during the year ended September 30, 2011.
The Company’s activities are being funded out of its operating cash flow and cash reserves and to date, the Company has not utilized its credit facilities. As a result of generating positive cash flows from operatings during the year ended September 30, 2012 the Company has not encountered any difficulties operating in this manner; however, if positive results are not continued in future periods there is a risk that the Company would be required to use its credit facilities.
Credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company aims to protect its cash and cash equivalents from undue risk by holding them with various high credit quality financial institutions located in Canada and the United Kingdom. In circumstances in which a bank in which the Company holds a deposit has any significant decline in its credit rating, the Company carefully monitors the extent of any credit risk net of government deposit guarantees and, where appropriate, would take remedial action to minimise the risk of any potential credit loss. Of the amounts held with financial institutions on deposit, $180,045 is covered by either the Financial Services Compensation Scheme in the United Kingdom or the Canada Deposit Insurance Corporation, leaving $4,431,779 at risk should the financial institutions with which the deposits are held cease trading.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
The Company’s accounts receivable are all from large, well-known retailers located primarily in Canada, the United States and the United Kingdom. Credit risk from accounts receivable encompasses the default risk of retail customers. The Company manages its exposure to credit risk by only working with larger, reputable companies and prior to accepting new customers; the Company assesses the risk of default associated with a particular company. In addition, on an ongoing basis, management monitor the level of accounts receivable attributable to each customer and the length of time taken for amounts to be settled and where necessary, takes appropriate action to follow up on those balances considered overdue.
Management does not believe that there is significant credit risk arising from any of the Company’s customers; however, should one of the Company’s main customers be unable to settle amounts due, the impact on the Company could be significant. The maximum exposure to loss arising from accounts receivable is equal to their total carrying amounts. At September 30, 2012, three customers each account for 10% or more of total trade accounts receivable (September 30, 2011 – five customers).
Financial assets past due
At September 30, 2012, the Company has a provision of $130,023 against trade accounts receivable, the collection of which is considered doubtful.
The following table provides information regarding the ageing of financial assets that are past due but which are not impaired.
At September 30, 2012
| Financial assets that are past due but not impaired | ||||||||||||||||||||
| Neither past due nor impaired | 31 – 60 days | 61 – 90 days | 91 days + | Carrying value on the balance sheet | ||||||||||||||||
Trade accounts receivable | $ | 2,334,240 | $ | 328,844 | $ | 358,600 | $ | 1,201,717 | $ | 4,223,401 | ||||||||||
Commodity taxes recoverable | 30,140 | 30,140 | ||||||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
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Total | $ | 2,364,380 | $ | 328,844 | $ | 358,600 | $ | 1,201,717 | $ | 4,253,541 | ||||||||||
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The definition of items that are past due is determined by reference to terms agreed with individual customers. Of the 91 days+ balance outstanding at September 30, 2012, 78% has been subsequently collected as at January 7, 2013. None of the amounts outstanding have been challenged by the respective customer(s) and the Company continues to conduct business with them on an ongoing basis. Accordingly, management has no reason to believe that this balance is not fully collectable in the future.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
The Company reviews financial assets past due on an ongoing basis with the objective of identifying potential matters which could delay the collection of funds at an early stage. Once items are identified as being past due, contact is made with the respective company to determine the reason for the delay in payment and to establish an agreement to rectify the breach of contractual terms. At September 30, 2012, the Company had a provision for doubtful accounts of $130,023 which was made against trade accounts receivable in excess of twelve months old or where collection efforts to date have been unsuccessful. All amounts neither past due nor impaired are collectible from large, well-known retailers located in Canada, the United States and the United Kingdom. The Company is not aware of any information suggesting that the collectability of these amounts is in doubt.
Market risk
Market risk is the risk to the Company that the fair value or future cash flows of financial instruments will fluctuate due to changes in interest rates and foreign currency exchange rates. Market risk arises as a result of the Company generating revenues and incurring expenses in foreign currencies, holding cash and cash equivalents which earn interest and having operations based in the United Kingdom in the form of its wholly owned subsidiary, PNI Digital Media Europe Ltd.
Interest rate risk
The only financial instruments that expose the Company to interest rate risk are its cash and cash equivalents. The Company’s objectives of managing its cash and cash equivalents are to ensure sufficient funds are maintained on hand at all times to meet day-to-day requirements and to place any amounts which are considered in excess of day-to-day requirements on short-term deposit with the Company’s banks so that they earn interest. When placing amounts of cash and cash equivalents on short-term deposit, the Company only uses high quality commercial banks and ensures that access to the amounts placed can be obtained on short-notice.
Currency risk
The Company generates revenues and incurs expenses and expenditures primarily in Canada, the United States and the United Kingdom and is exposed to risk from changes in foreign currency rates. In addition, the Company holds financial assets and liabilities in foreign currencies that expose the Company to foreign exchange risks. The Company does not utilise any financial instruments or cash management policies to mitigate the risks arising from changes in foreign currency rates.
At September 30, 2012, through its wholly owned subsidiaries, the Company had cash and cash equivalents of $4,127,963, accounts receivable of $1,596,565 and accounts payable of $1,095,573 which were denominated in UK £. In addition, at September 30, 2012, the Company had cash and cash equivalents of $421,081, accounts receivable of $2,099,764 and accounts payable of $699,185 which were denominated in US$.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
Sensitivity analysis
The Company has completed a sensitivity analysis to estimate the impact on net earnings for the year which a change in foreign exchange rates or interest rates during the Year ended September 30, 2012 would have had.
This sensitivity analysis includes the following assumptions:
| • | Changes in individual foreign exchange rates do not cause foreign exchange rates in other countries to alter |
| • | Changes in market interest rates do not cause a change in foreign exchange rates |
The results of the foreign exchange rate sensitivity analysis can be seen in the following table:
| Impact on net profit $ | ||||
Change of +/- 10% in US$ foreign exchange rate | +/-321,300 | |||
Change of +/- 10% in UK£ foreign exchange rate | +/-412,796 | |||
The above results arise primarily as a result of the Company having US$ denominated trade accounts receivable balances, trade accounts payable balances and bank account balances.
Limitations of sensitivity analysis
The above table demonstrates the effect of either a change in foreign exchange rates or interest rates in isolation. In reality, there is a correlation between the two factors.
Additionally, the financial position of the Company may vary at the time that a change in either of these factors occurs, causing the impact on the Company’s results to differ from that shown above.
Capital Management
The Company considers its share capital, share capital purchased for cancellation, and contributed surplus, as capital, which at September 30, 2012 totalled $86,151,450.
The Company manages its capital structure in order to ensure sufficient resources are available to meet day to day operating requirements; to allow it to enhance existing product offerings as well as develop new ones and to have the financial ability to expand the size of its operations by taking on new customers. In managing its capital structure, the Company takes into consideration various factors, including the seasonality of the market in which it operates the growth of its business and related infrastructure and the upfront cost of taking on new clients.
The Company’s Officers and senior management take full responsibility for managing the Company’s capital and do so through quarterly meetings and regular review of financial information. The Company’s Board of Directors are responsible for overseeing this process.
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PNI Digital Media Inc.
Notes to Consolidated Financial Statements
(expressed in Canadian dollars)
Methods used by the Company in previous periods to manage its capital include the issuance of new share capital and warrants which has historically been done through private placements primarily with institutional investors.
The Company is not subject to any externally imposed capital requirements.
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The following exhibits are filed as part of this annual report:
Exhibit | Description | |
| 1.1 | Articles, as amended (5) | |
| 1.2 | Notice of Articles, dated December 2, 2009 (5) | |
| 1.3 | Notice of Change of Name, dated June 4, 2009 (5) | |
| 4.1 | The Services Agreement between Pixology and ASDA Stores Limited is dated 28 September 2005 and continues in full force and effect until terminated by either party giving no less than three calendar month’s notice in writing to the other, such notice to expire at any time on or after the first anniversary of the commencement date.(3) | |
| 4.2 | The Services Agreement with Sam’s West Inc., dated January 23, 2008.(4) | |
| 4.3 | The Amended and Restated Services Agreement with Wal-Mart Canada Corp., dated January 31, 2008.(4) | |
| 4.4 | The Internet Photo Services Agreement with Costco Wholesale Corporation, dated April 29, 2008.(4) | |
| 4.5 | The lease renewal and modification agreement for our executive offices in Canada with The Old BC Electric Building Corp., dated June 11, 2009.(5) | |
| 4.6 | The lease agreement for our support offices in Canada with The Old BC Electric Building Corp., dated July 26, 2010. (6) | |
| 4.7 | The share purchase agreement amongst PhotoChannel Networks Inc., as Purchaser and Vendors in relation to the sale and purchase of the whole of the issued share capital of WorksMedia Limited. (5) | |
| 4.8 | The First Amendment to the Internet Photo Services Agreement with Costco Wholesale Corporation dated February 16, 2011. (7) (*) | |
| 12.1 | Section 302(a) Certification of CEO.(1) | |
| 12.2 | Section 302(a) Certification of CFO.(1) | |
| 13.1 | Section 906 Certifications of CEO and CFO.(1) | |
| 15.1 | Audit Committee Charter.(1) | |
| (1) | Filed herewith. |
| (2) | Filed as an exhibit to our Annual Report on Form 20-F for our fiscal year ended September 30, 2006, as filed with the SEC on April 2, 2007. |
| (3) | Filed as an exhibit to our Annual Report on Form 20-F for our fiscal year ended September 30, 2007, as filed with the SEC on April 4, 2008. |
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| (4) | Filed as an exhibit to our Annual Report on Form 20-F for our fiscal year ended September 30, 2008, as filed with the SEC on January 20, 2009. |
| (5) | Filed as an exhibit to our Annual Report on Form 20-F for our fiscal year ended September 30, 2009, as filed with the SEC on March 17, 2010. |
| (6) | Filed as an exhibit to our Annual Report on Form 20-F for our fiscal year ended September 30, 2010, as filed with the SEC on March 29, 2011. |
| (7) | Filed as an exhibit to our Annual Report on Form 10-F for our fiscal year ended September 30, 2011, as filed with the SEC on March 21, 2012. |
| (*) | Portions of this exhibit have been omitted pursuant to a request for confidential treatment. |
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SIGNATURES
The registrant certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
PNI DIGITAL MEDIA INC. (Registrant) | ||||||
| Date: January 7, 2013 | By: | /s/ Thomas Kyle Hall | ||||
| Thomas Kyle Hall | ||||||
| Chief Executive Officer | ||||||
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