Form 6-K EXFO INC. For: May 31

July 10, 2018 5:03 PM EDT

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549


FORM 6-K


Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
Under the Securities Exchange Act of 1934

For the month of July 2018

EXFO Inc.
(Translation of registrant's name into English)

400 Godin Avenue, Quebec, Quebec, Canada   G1M 2K2
(Address of principal executive offices)


Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.


Form 20-F
Form 40-F

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes
No


If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-______.
 


 
 
 
 
 
 
 
On July 10, 2018, EXFO Inc., a Canadian corporation, reported its results of operations for the third fiscal quarter ended May 31, 2018. This report on Form 6-K sets forth the news release relating to EXFO's announcement and certain information relating to EXFO's financial condition and results of operations as well as certifications of interim filings for the third fiscal quarter of the 2018 fiscal year. This press release and information relating to EXFO's financial condition and results of operations and certifications of interim filings for the third fiscal quarter of the 2018 fiscal year are hereby incorporated as a document by reference to Form F-3 (Registration Statement under the Securities Act of 1933) declared effective as of July 30, 2001 and to Form F‑3 (Registration Statement under the Securities Act of 1933) declared effective as of March 11, 2002 and to amend certain material information as set forth in these two Form F-3 documents.

 
Page 1 of 57

 
 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



 
EXFO INC.
 
 
 
By:       /s/ Philippe Morin
Name:  Philippe Morin
Title:    Chief Executive Officer
   


Date: July 10, 2018

 
Page 2 of 57

 
 
 
 
 
PRESS RELEASE
For immediate release

EXFO reports third quarter results for fiscal 2018
§
Sales increase 23.4% to US$72.2 million, including US$8.6 million from Astellia
§
Bookings improve 14.8% to US$73.1 million, including US$7.6 million from Astellia
§
Cash flows from operations total US$4.7 million

QUEBEC CITY, CANADA, July 10, 2018 — EXFO Inc. (NASDAQ: EXFO, TSX: EXF), the communications industry's test, monitoring and analytics experts, reported today financial results for the third quarter ended May 31, 2018.
 
IFRS sales, which included a US$8.6 million contribution from recently acquired Astellia, increased 23.4% to US$72.2 million in the third quarter of fiscal 2018 from US$58.5 million in the third quarter of 2017. Astellia's sales were reduced by US$0.9 million to account for acquisition-related fair value adjustment of deferred revenue.

Bookings, which included a US$7.6 million contribution from Astellia, improved 14.8% year-over-year to US$73.1 million in the third quarter of fiscal 2018 from US$63.7 million in the same period of 2017. The company's book-to-bill ratio was 1.01 in the third quarter of 2018.

Gross margin before depreciation and amortization* amounted to 59.9% of sales in the third quarter of fiscal 2018 compared to 58.0% in the third quarter of 2017.

IFRS net loss in the third quarter of fiscal 2018 totaled US$6.0 million, or US$0.11 per share, compared to US$4.3 million, or US$0.08 per share, in the third quarter of 2017. IFRS net loss in the third quarter of 2018 included US$4.1 million in after-tax amortization of intangible assets, US$0.4 million in stock-based compensation costs, US$0.9 million for acquisition-related fair value adjustment of deferred revenue and a foreign exchange gain of US$0.2 million.

Adjusted EBITDA* totaled US$2.5 million, or 3.5% of sales, in the third quarter of fiscal 2018 compared to US$2.3 million, or 3.9% of sales, in the third quarter of 2017.

"I am pleased our organic business and newly acquired Astellia delivered healthy growth in the third quarter and after nine months into fiscal 2018," said Philippe Morin, EXFO's Chief Executive Officer. "This solid execution across the combined organization demonstrates that EXFO is on the right path to profitable growth. Looking ahead, we are strategically transforming our monitoring and analytics business to offer a highly differentiated solution as the communications industry migrates to NFV and 5G architectures."

 

 
 

 
Page 3 of 57

 
 
 
 
Selected Financial Information
(In thousands of US dollars)
 
   
Three months
ended
May 31, 2018
   
Three months
ended
May 31, 2017
   
Nine months
ended
May 31, 2018
   
Nine months
ended
May 31, 2017
 
                         
  Physical-layer sales
 
$
43,760
   
$
41,007
   
$
129,734
   
$
121,061
 
  Protocol-layer sales
   
28,278
     
17,678
     
69,799
     
59,784
 
  Foreign exchange gains (losses) on forward exchange contracts
   
179
     
(180
)
   
797
     
(525
)
  Total sales
 
$
72,217
   
$
58,505
   
$
200,330
   
$
180,320
 
                                 
  Physical-layer bookings
 
$
44,796
   
$
47,157
   
$
134,579
   
$
125,278
 
  Protocol-layer bookings
   
28,115
     
16,691
     
69,179
     
60,692
 
  Foreign exchange gains (losses) on forward exchange contracts
   
179
     
(180
)
   
797
     
(525
)
  Total bookings
 
$
73,090
   
$
63,668
   
$
204,555
   
$
185,445
 
  Book-to-bill ratio (bookings/sales)
   
1.01
     
1.09
     
1.02
     
1.03
 
  Gross margin before depreciation and
amortization*
 
$
43,254
   
$
33,950
   
$
122,752
   
$
109,963
 
     
59.9
%
   
58.0
%
   
61.3
%
   
61.0
%
                                 
  Other selected information:
                               
  IFRS net earnings (loss) attributable to the parent interest
 
$
(5,970
)
 
$
(4,304
)
 
$
(7,951
)
 
$
7
 
  Amortization of intangible assets
 
$
4,210
   
$
1,046
   
$
8,385
   
$
2,241
 
  Stock-based compensation costs
 
$
440
   
$
372
   
$
1,280
   
$
983
 
  Restructuring charges
 
$
   
$
3,813
   
$
   
$
3,813
 
  Change in fair value of cash contingent consideration
 
$
   
$
   
$
(716
)
 
$
 
  Acquisition-related deferred revenue fair value adjustment
 
$
913
   
$
   
$
1,222
   
$
 
  Income tax expense for US tax reform
 
$
   
$
   
$
1,528
   
$
 
  Net income tax effect of the above items
 
$
(138
)
 
$
(357
)
 
$
(704
)
 
$
(583
)
  Foreign exchange gain
 
$
(160
)
 
$
(1,725
)
 
$
(1,386
)
 
$
(1,965
)
  Adjusted EBITDA*
 
$
2,549
   
$
2,300
   
$
11,100
   
$
13,496
 
 
 
Operating Expenses
Selling and administrative expenses totaled US$26.0 million, or 35.9% of sales in the third quarter of fiscal 2018 compared to US$22.6 million, or 38.6% of sales, in the third quarter of 2017.

Net R&D expenses totaled US$16.1 million, or 22.3% of sales, in the third quarter of fiscal 2018 compared to US$13.3 million, or 22.7% of sales, in the same period last year.
 
 
 
 
 

 
Page 4 of 57

 
 
 
 
Third Quarter Highlights
·
Sales. IFRS sales increased 23.4% year-over-year to US$72.2 million due to a strong performance from the Protocol-layer product line, revenue contributions from the Astellia and Yenista Optics acquisitions, and the positive impact of the decrease in the average value of the US dollar versus other currencies. Physical-layer sales accounted for 61% of revenue in the third quarter of 2018, while Protocol-layer sales totaled 39%. Revenue breakdown among the three main selling regions amounted to 49% in the Americas, 35% in Europe, Middle East and Africa (EMEA) and 16% in Asia-Pacific EXFO's top customer accounted for 5.7% of sales, while the top three represented 15.2%.
 
·
Profitability. IFRS net loss totaled US$6.0 million in the third quarter of 2018, while adjusted EBITDA amounted to US$2.5 million. The company also generated US$4.7 million in cash flows from operations in the third quarter.

·
Innovation. EXFO held its inaugural Innovation Summit in early May with a focus on artificial intelligence and machine learning. More than 100 team members from four continents participated in the three-day event which featured a hackathon and presentations from distinguished speakers. EXFO launched two products during the third quarter, including an automated network troubleshooting solution that links performance measurements to network topology in order to deliver service degradation diagnosis in record time. The company also released the CTP10 Component Test Platform, with related modules, for measuring insertion loss and return loss on a wide range of passive optical components.

Business Outlook
EXFO forecasts IFRS sales between US$68.0 million and US$73.0 million for the fourth quarter of fiscal 2018; the company anticipates that IFRS sales will be reduced by US$0.9 million to account for the acquisition-related fair value adjustment of deferred revenue.

IFRS net loss is expected to range between US$0.05 and US$0.01 per share. IFRS net loss includes US$0.10 per share in after-tax amortization of intangible assets, stock-based compensation costs and acquisition-related fair value adjustment of deferred revenue.

This guidance, which is a forward-looking statement, was established by management based on existing backlog as of the date of this news release, seasonality, expected bookings for the remaining of the quarter, Astellia's preliminary purchase price allocation (PPA) as well as exchange rates as of the date of this news release.

 
 
 

 
Page 5 of 57

 
 
 
 
Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review third quarter results for fiscal 2018. To listen to the conference call and participate in the question period via telephone, dial 1-323-994-2093. Please take note the following participant passcode will be required: 7503033. Germain Lamonde, founder and Executive Chairman, Philippe Morin, Chief Executive Officer, and Pierre Plamondon, Vice-President of Finance and Chief Financial Officer, will participate in the call. An audio replay of the conference call will be available two hours after the event until 8:00 p.m. on July 17, 2018. The replay number is 1-719-457-0820 and the required participant passcode is 7503033. The audio Webcast and replay of the conference call will also be available on EXFO's Website at www.EXFO.com, under the Investors section.

About EXFO
EXFO (NASDAQ: EXFO) (TSX: EXF) develops smarter test, monitoring and analytics solutions for fixed and mobile network operators, webscale companies and equipment manufacturers in the global communications industry. Our customers count on us to deliver superior network performance, service reliability and subscriber insights. They count on our unique blend of equipment, software and services to accelerate digital transformations related to fiber, 4G/LTE and 5G deployments. They count on our expertise with automation, real-time troubleshooting and big data analytics, which are critical to their business performance. We've spent over 30 years earning this trust, and today more than 2,000 EXFO employees in over 25 countries work side by side with our customers in the lab, field, data center and beyond. For more information, visit EXFO.com and follow us on the EXFO Blog.
 
 
 
 
 
Page 6 of 57

 
 
 
 
Forward-Looking Statements
This news release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, expect, believe, plan, anticipate, intend, could, estimate, continue, or similar expressions or the negative of such expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty, including trade wars, as well as capital spending and network deployment levels in the telecommunications industry (including our ability to quickly adapt cost structures to anticipated levels of business and our ability to manage inventory levels with market demand); future economic, competitive, financial and market conditions; consolidation in the global telecommunications test, service assurance and analytics solutions markets and increased competition among vendors; our ability to successfully integrate businesses that we acquire; capacity to adapt our future product offering to future technological changes; limited visibility with regard to the timing and nature of customer orders; delay in revenue recognition due to longer sales cycles for complex systems involving customers' acceptance; fluctuating exchange rates; concentration of sales; timely release and market acceptance of our new products and other upcoming products; our ability to successfully expand international operations and to conduct business internationally; and the retention of key technical and management personnel. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report, on Form 20-F, and our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document. This discussion and analysis should be read in conjunction with the consolidated financial statements.

 
 
 
 
Page 7 of 57

 
 
 
 
*Non-IFRS Measures
EXFO provides non-IFRS measures (non-IFRS sales, gross margin before depreciation and amortization and adjusted EBITDA) as supplemental information regarding its operational performance. Non-IFRS sales represent total sales plus acquisition-related deferred revenue fair value adjustment. Gross margin before depreciation and amortization represents sales, less cost of sales, excluding depreciation and amortization. Adjusted EBITDA represent net earnings (loss) attributable to the parent interest before interest, income taxes, depreciation and amortization, stock-based compensation costs, change in fair value of cash contingent consideration, acquisition-related deferred revenue fair value adjustment, share in net loss of an associate, gain on the deemed disposal of the investment in an associate, and foreign exchange gain or loss.

These non-IFRS measures eliminate the effect on IFRS results of non-cash and/or non-operating statement of earnings elements, as well as elements subject to significant volatility such as foreign exchange gain or loss. EXFO uses these measures for evaluating historical and prospective financial performance, as well as its performance relative to competitors. These non-IFRS measures are also the financial measures used by financial analysts to evaluate and compare EXFO's performance against competitors and industry players in the company's sector. Finally, these measures help EXFO plan and forecast future periods as well as make operational and strategic decisions. EXFO believes that providing this information, in addition to the IFRS measures, allows investors to see the company's results through the eyes of management, and to better understand historical and future financial performance. More importantly, it enables the comparison of EXFO's performance on a relatively similar basis against other public and private companies in the industry worldwide.

The presentation of this additional information is not prepared in accordance with IFRS. Therefore, the information may not necessarily be comparable to that of other companies and should be considered as a supplement to, not a substitute for, the corresponding measures calculated in accordance with IFRS.

The following table summarizes the reconciliation of non-IFRS sales to IFRS sales, in thousands of US dollars:

Non-IFRS Sales

   
Three months
ended
May 31, 2018
   
Three months
ended
May 31, 2017
   
Nine months
ended
May 31, 2018
   
Nine months
ended
May 31, 2017
 
                         
IFRS sales
 
$
72,217
   
$
58,505
   
$
200,330
   
$
180,320
 
Acquisition-related deferred revenue fair value adjustment
   
913
     
     
1,222
     
 
Non-IFRS sales
 
$
73,130
   
$
58,505
   
$
201,552
   
$
180,320
 
 
 
 

 
Page 8 of 57

 
 
 
 
The following table summarizes the reconciliation of adjusted EBITDA to IFRS net earnings (loss) attributable to the parent interest, in thousands of US dollars:


Adjusted EBITDA

   
Three months
ended
May 31, 2018
   
Three months
ended
May 31, 2017
   
Nine months
ended
May 31, 2018
   
Nine months
ended
May 31, 2017
 
                         
IFRS net earnings (loss) attributable to the parent interest for the period
 
$
(5,970
)
 
$
(4,304
)
 
$
(7,951
)
 
$
7
 
                                 
Add (deduct):
                               
                                 
Depreciation of property, plant and equipment
   
1,555
     
1,029
     
3,972
     
2,894
 
Amortization of intangible assets
   
4,210
     
1,046
     
8,385
     
2,241
 
Interest and other expense
   
198
     
57
     
870
     
28
 
Income taxes
   
1,363
     
2,012
     
5,424
     
5,495
 
Stock-based compensation costs
   
440
     
372
     
1,280
     
983
 
Restructuring charges
   
     
3,813
     
     
3,813
 
Change in fair value of cash contingent consideration
   
     
     
(716
)
   
 
Acquisition-related deferred revenue fair value adjustment
   
913
     
     
1,222
     
 
Share in net loss of an associate
   
     
     
2,080
     
 
Gain on deemed disposal of the investment in an associate
   
     
     
(2,080
)
   
 
Foreign exchange gain
   
(160
)
   
(1,725
)
   
(1,386
)
   
(1,965
)
Adjusted EBITDA for the period (1)(2)
 
$
2,549
   
$
2,300
   
$
11,100
   
$
13,496
 
                                 
Adjusted EBITDA as a percentage of sales
   
3.5
%
   
3.9
%
   
5.5
%
   
7.5
%

(1)
Astellia negatively impacted adjusted EBITDA by $2.2 million and $3.4 million respectively for the three and nine months ended May 31, 2018 (nil in 2017).
(2)
Includes acquisition-related costs of $2.1 million for the nine months ended May 31, 2018 and $0.1 million and $0.8 million respectively for the three and nine months ended May 31, 2017.


EXFO-F


 

 
Page 9 of 57

 
 
-30-


For more information
Vance Oliver
Director, Investor Relations
(418) 683-0913, Ext. 23733
vance.oliver@exfo.com
 
 
 
 
 
 

 
Page 10 of 57

 
 
EXFO Inc.
Unaudited Condensed Interim Consolidated Balance Sheets

(in thousands of US dollars)
 

   
As at
May 31,
2018
   
As at
August 31,
2017
 
Assets
           
             
Current assets
           
Cash
 
$
18,489
   
$
38,435
 
Short-term investments
   
990
     
775
 
Accounts receivable
               
Trade
   
46,756
     
41,130
 
Other
   
4,997
     
3,907
 
Income taxes and tax credits recoverable
   
8,401
     
4,955
 
Inventories
   
37,883
     
33,832
 
Prepaid expenses
   
5,185
     
4,202
 
Other assets
   
1,776
   
 
     
124,477
     
127,236
 
                 
Tax credits recoverable
   
47,988
     
38,111
 
Property, plant and equipment
   
44,661
     
40,132
 
Intangible assets
   
27,775
     
11,183
 
Goodwill
   
41,021
     
35,077
 
Deferred income tax assets
   
4,615
     
6,555
 
Other assets
   
666
     
947
 
                 
   
$
291,203
   
$
259,241
 
Liabilities
               
                 
Current liabilities
               
Bank loan (note 6)
 
$
10,982
   
$
 
Accounts payable and accrued liabilities
   
50,702
     
36,776
 
Provisions
   
471
     
3,889
 
Income taxes payable
   
968
     
663
 
Deferred revenue
   
17,142
     
11,554
 
Other liabilities
   
4,651
   
 
Current portion of long-term debt (note 7)
   
2,938
   
 
     
87,854
     
52,882
 
                 
Provisions
   
1,510
   
 
Deferred revenue
   
6,235
     
6,257
 
Long-term debt (note 7)
   
6,579
   
 
Deferred income tax liabilities
   
5,074
     
3,116
 
Other liabilities
   
568
     
196
 
     
107,820
     
62,451
 
                 
Shareholders' equity
               
Share capital (note 8)
   
91,910
     
90,411
 
Contributed surplus
   
18,007
     
18,184
 
Retained earnings
   
118,857
     
127,160
 
Accumulated other comprehensive loss
   
(45,391
)
   
(38,965
)
     
183,383
     
196,790
 
                 
   
$
291,203
   
$
259,241
 
 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 
Page 11 of 57

 
 
EXFO Inc.
Unaudited Condensed Interim Consolidated Statements of Earnings

(in thousands of US dollars, except share and per share data)

 
   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
   
Three months
ended
May 31, 2017
   
Nine months
ended
May 31, 2017
 
                         
Sales
 
$
72,217
   
$
200,330
   
$
58,505
   
$
180,320
 
                                 
Cost of sales (1) (note 9)
   
28,963
     
77,578
     
24,555
     
70,357
 
Selling and administrative (note 9)
   
25,957
     
74,066
     
22,572
     
65,422
 
Net research and development (note 9)
   
16,101
     
40,440
     
13,263
     
35,841
 
Depreciation of property, plant and equipment (note 9)
   
1,555
     
3,972
     
1,029
     
2,894
 
Amortization of intangible assets (note 9)
   
4,210
     
8,385
     
1,046
     
2,241
 
Change in fair value of cash contingent consideration (note 5)
 
     
(716
)
 
   
 
Interest and other expense
   
198
     
870
     
57
     
28
 
Foreign exchange gain
   
(160
)
   
(1,386
)
   
(1,725
)
   
(1,965
)
Share in net loss of an associate (note 3)
 
     
2,080
   
   
 
Gain on deemed disposal of the investment in an associate (note 3)
 
     
(2,080
)
 
   
 
Earnings (loss) before income taxes
   
(4,607
)
   
(2,879
)
   
(2,292
)
   
5,502
 
                                 
Income taxes (note 10)
   
1,363
     
5,424
     
2,012
     
5,495
 
                                 
Net earnings (loss) for the period
   
(5,970
)
   
(8,303
)
   
(4,304
)
   
7
 
Net loss for the period attributable to non-controlling interest
 
     
(352
)
 
   
 
                                 
Net earnings (loss) for the period attributable to parent interest
 
$
(5,970
)
 
$
(7,951
)
 
$
(4,304
)
 
$
7
 
                                 
Basic and diluted net earnings (loss) attributable to parent interest per share
 
$
(0.11
)
 
$
(0.14
)
 
$
(0.08
)
 
$
0.00
 
                                 
Basic weighted average number of shares outstanding (000's)
   
55,099
     
54,959
     
54,593
     
54,328
 
                                 
Diluted weighted average number of shares outstanding (000's) (note 11)
   
55,099
     
54,959
     
54,593
     
55,479
 

(1)
The cost of sales is exclusive of depreciation and amortization, shown separately.
 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 
Page 12 of 57

 
 
EXFO Inc.
Unaudited Condensed Interim Consolidated Statements of Comprehensive Loss

(in thousands of US dollars)
 

   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
   
Three months
ended
May 31, 2017
   
Nine months
ended
May 31, 2017
 
                         
Net earnings (loss) for the period
 
$
(5,970
)
 
$
(8,303
)
 
$
(4,304
)
 
$
7
 
Other comprehensive income (loss), net of income taxes
                               
Items that may be reclassified subsequently to net earnings
                               
Foreign currency translation adjustment
   
(3,189
)
   
(5,033
)
   
(2,568
)
   
(4,766
)
Unrealized gains/losses on forward exchange contracts
   
(486
)
   
(971
)
   
(127
)
   
(362
)
Reclassification of realized gains/losses on forward exchange contracts in net earnings
   
(232
)
   
(840
)
   
39
     
359
 
Deferred income taxes on gains/losses on forward exchange contracts
   
155
     
418
     
39
     
31
 
Other comprehensive loss
   
(3,752
)
   
(6,426
)
   
(2,617
)
   
(4,738
)
                                 
Comprehensive loss for the period
   
(9,722
)
   
(14,729
)
   
(6,921
)
   
(4,731
)
                                 
Comprehensive loss for the period attributable to non-controlling interest
 
     
(352
)
 
   
 
                                 
Comprehensive loss for the period attributable to parent interest
 
$
(9,722
)
 
$
(14,377
)
 
$
(6,921
)
 
$
(4,731
)
                                 
 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 
Page 13 of 57

 
 
EXFO Inc.
Unaudited Condensed Interim Consolidated Statements of Changes in Shareholders' Equity

(in thousands of US dollars)


   
Nine months ended May 31, 2017
 
   
Share
capital
   
Contributed
surplus
   
Retained
earnings
   
Accumulated
other
comprehensive
loss
   
Total
shareholders'
equity
 
                               
Balance as at September 1, 2016
 
$
85,516
   
$
18,150
   
$
126,309
   
$
(48,574
)
 
$
181,401
 
Issuance of share capital (note 8)
   
3,490
     
     
     
     
3,490
 
Reclassification of stock-based compensation costs (note 8)
   
1,370
     
(1,370
)
   
     
     
 
Stock-based compensation costs
   
     
941
     
     
     
941
 
Net earnings for the period
   
     
     
7
     
     
7
 
Other comprehensive income (loss)
                                       
Foreign currency translation adjustment
   
     
     
     
(4,766
)
   
(4,766
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $31
   
     
     
     
28
     
28
 
                                         
Total comprehensive loss for the period
                                   
(4,731
)
                                         
Balance as at May 31, 2017
 
$
90,376
   
$
17,721
   
$
126,316
   
$
(53,312
)
 
$
181,101
 


   
Nine months ended May 31, 2018
 
   
Share
capital
   
Contributed surplus
   
Retained earnings
   
Accumulated other comprehensive loss
   
Non-controlling interest
   
Total
shareholders' equity
 
                                     
Balance as at September 1, 2017
 
$
90,411
   
$
18,184
   
$
127,160
   
$
(38,965
)
 
$
   
$
196,790
 
Reclassification of stock-based compensation costs (note 8)
   
1,499
     
(1,499
)
 
   
   
   
 
Stock-based compensation costs
 
     
1,322
   
   
   
     
1,322
 
Business combination (note 3)
 
   
   
   
     
(3,662
)
   
(3,662
)
Acquisition of non-controlling
interest (note 3)
 
   
     
(352
)
 
     
4,014
     
3,662
 
Net loss for the period
 
   
     
(7,951
)
 
     
(352
)
   
(8,303
)
Other comprehensive loss
                                               
Foreign currency translation adjustment
 
   
   
     
(5,033
)
 
     
(5,033
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $418
 
   
   
     
(1,393
)
 
     
(1,393
)
                                                 
Comprehensive loss for the period
                                           
(14,729
)
                                                 
Balance as at May 31, 2018
 
$
91,910
   
$
18,007
   
$
118,857
   
$
(45,391
)
 
$
   
$
183,383
 
 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
 
 
Page 14 of 57

 
 
EXFO Inc.
Unaudited Condensed Interim Consolidated Statements of Cash Flows

(in thousands of US dollars)
 

   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
   
Three months
ended
May 31, 2017
   
Nine months
ended
May 31, 2017
 
                         
Cash flows from operating activities
                       
Net earnings (loss) for the period
 
$
(5,970
)
 
$
(8,303
)
 
$
(4,304
)
 
$
7
 
Add (deduct) items not affecting cash
                               
Stock-based compensation costs
   
440
     
1,280
     
372
     
983
 
Depreciation and amortization
   
5,765
     
12,357
     
2,075
     
5,135
 
Write-off of capital assets
   
77
     
325
   
   
 
Change in fair value of cash contingent consideration
 
     
(716
)
 
   
 
Deferred revenue
   
(552
)
   
1,682
     
79
     
3,026
 
Deferred income taxes
   
389
     
2,533
     
704
     
1,163
 
Share in net loss of an associate
 
     
2,080
   
   
 
Gain on deemed disposal of the investment in an associate
 
     
(2,080
)
 
   
 
Changes in foreign exchange gain/loss
   
(603
)
   
(239
)
   
(524
)
   
(955
)
     
(454
)
   
8,919
     
(1,598
)
   
9,359
 
Changes in non-cash operating items
                               
Accounts receivable
   
2,353
     
7,693
     
(901
)
   
1,701
 
Income taxes and tax credits
   
172
     
(2,787
)
   
(842
)
   
(1,232
)
Inventories
   
1,162
     
(12
)
   
315
     
(9
)
Prepaid expenses
   
16
     
205
     
(863
)
   
(761
)
Other assets
   
(245
)
   
(769
)
   
(103
)
   
(127
)
Accounts payable, accrued liabilities and provisions
   
1,821
     
5
     
1,169
     
1,756
 
Other liabilities
   
(109
)
   
101
   
   
 
     
4,716
     
13,355
     
(2,823
)
   
10,687
 
Cash flows from investing activities
                               
Additions to short-term investments
 
     
(482
)
   
(2,571
)
   
(2,887
)
Proceeds from disposal and maturity of short-term investments
 
     
234
     
3,298
     
3,596
 
Purchases of capital assets
   
(3,431
)
   
(7,680
)
   
(2,555
)
   
(5,448
)
Investment in an associate (note 3)
 
     
(12,530
)
   
     
 
Business combinations, net of cash
acquired (note 3)
 
     
(19,120
)
   
(7,479
)
   
(12,479
)
     
(3,431
)
   
(39,578
)
   
(9,307
)
   
(17,218
)
Cash flows from financing activities
                               
Bank loan
   
9,184
     
11,250
     
     
 
Repayment of long-term debt
   
(757
)
   
(1,027
)
   
(1,480
)
   
(1,480
)
Acquisition of non-controlling interest (note 3)
   
(3,657
)
   
(3,657
)
   
     
 
     
4,770
     
6,566
     
(1,480
)
   
(1,480
)
                                 
Effect of foreign exchange rate changes on cash
   
(119
)
   
(289
)
   
(360
)
   
(824
)
                                 
Change in cash during the period
   
5,936
     
(19,946
)
   
(13,970
)
   
(8,835
)
Cash – Beginning of the period
   
12,553
     
38,435
     
48,343
     
43,208
 
Cash – End of the period
 
$
18,489
   
$
18,489
   
$
34,373
   
$
34,373
 
                                 
Supplementary information
                               
Income taxes paid
 
$
426
   
$
1,695
   
$
627
   
$
2,188
 
Additions to capital assets
 
$
3,371
   
$
8,959
   
$
1,779
   
$
5,441
 

As at May 31, 2017 and 2018, unpaid purchases of capital assets amounted to $492 and $1,801 respectively.
 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 
Page 15 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
1
Nature of Activities and Incorporation

EXFO Inc. and its subsidiaries (together, "EXFO" or the "company") develops, manufactures and markets next-generation test, monitoring and analytics solutions for fixed and mobile communications service providers (CSPs), web-scale operators as well as network equipment manufacturers in the global telecommunications industry.

EXFO is a company incorporated under the Canada Business Corporations Act and is domiciled in Canada. The address of its headquarters is 400 Godin Avenue, Québec City, Quebec, Canada, G1M 2K2.

These unaudited condensed interim consolidated financial statements were authorized for issue by the Board of Directors on July 10, 2018.


2
Basis of Presentation

These unaudited condensed interim consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including IAS 34, "Interim Financial Reporting", and using the same accounting policies and methods used in the preparation of the company's most recent annual consolidated financial statements, except as described in note 3. Consequently, these condensed unaudited interim consolidated financial statements should be read in conjunction with the company's most recent annual consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB.

New IFRS Pronouncements Not Yet Adopted

Financial Instruments

The final version of IFRS 9, "Financial Instruments", was issued in July 2014 and will replace IAS 39, "Financial Instruments: Recognition and Measurement". IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of its financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. Requirements relating to hedge accounting, representing a new hedge accounting model, have also been added to IFRS 9. The new standard is effective for annual periods beginning on or after January 1, 2018 and must be applied retrospectively. The company will adopt this new standard on September 1, 2018. The company is currently assessing the impact that the new standard will have on its consolidated financial statements.

 
Page 16 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

Revenue from Contracts with Customers

IFRS 15, "Revenue from Contracts with Customers", was issued in May 2014. The objective of this new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. This new standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This new standard is effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted. The company has performed an assessment to identify significant areas of impact, if any, between the company's current accounting treatment under IAS 18, "Revenue" and the new requirements of IFRS 15. Based on the assessments to date, the company anticipates that the main areas of impact will relate to the allocation of the transaction price to the various performance obligations under the contracts, the timing of revenue recognition for sales arrangements that contain customer acceptance clauses, whereby revenue could be recognized sooner, and the sale of licences that provides customers with the "right to use" the company's intellectual property, where revenue will be recognized at a point in time rather than over time. The company will adopt this new standard on September 1, 2018 using the modified retrospective method, with the cumulative effect of the initial application of the standard recognized as an adjustment to the opening balance of retained earnings as at the date of initial application. The company will apply this standard retrospectively only to contracts that are not completed at the date of initial application.

Leases

IFRS 16, "Leases", was issued in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e., the customer (lessee) and the supplier (lessor). IFRS 16 will supersede IAS 17, "Leases", and related interpretations. This new standard is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15, "Revenue from Contracts with Customers", is also applied. The company has not yet assessed the impact that the new standard will have on its consolidated financial statements.

Foreign Currency Transactions and Advance Consideration

IFRIC 22, "Foreign Currency Transactions and Advance Consideration", was issued in December 2016. IFRIC 22 addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted. The company will adopt this interpretation on September 1, 2018 and its adoption is not expected to have a material impact on the company's consolidated financial statements.

Uncertainty over Income Tax Treatments

IFRIC 23, "Uncertainty over Income Tax Treatments", was issued in June 2017. IFRIC 23 provides guidance on how to value uncertain income tax positions based on the probability of whether the relevant tax authorities will accept the company's tax treatments. A company is to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. IFRIC 23 is effective for annual periods beginning on or after January 1, 2019. The company will adopt this interpretation on September 1, 2019 and is currently assessing the impact that it will have on its consolidated financial statements.
 
 
Page 17 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
3
Business Combinations

Astellia S.A. (business combination achieved in stages)

On September 8, 2017, the company acquired a 33.1% interest in Astellia S.A. (Astellia), a publicly traded company on the NYSE Euronext Paris stock exchange. Astellia is a provider of network and subscriber intelligence-enabling mobile operators to drive service quality, maximize operational efficiency, reduce churn and increase revenue. Its vendor-independent, real-time monitoring and troubleshooting solution is used to optimize networks end-to-end from radio to core. The purchase price amounted to €10 per share for a total cash consideration of €8,567,500 (US$10,311,100).

On October 10, 2017, the company reached an agreement with Astellia to acquire Astellia's remaining shares, at a share price of €10, for a total consideration of €17,321,380 (US$21,357,500) by way of a public tender offer. The public offering opened on December 15, 2017 and closed on January 26, 2018.

On December 21 and 22, 2017, the company acquired additional interests of 6.0% and 1.2% respectively in Astellia at a purchase price of €10 per share for a total cash consideration of €1,878,610 (US$2,218,600), which brought the company's investment in Astellia to 40.3%.

On January 26, 2018, upon the closing of the public tender offer, the company acquired additional interest of 48.1% in Astellia at a purchase price of €10 per share for a total cash consideration of €12,452,090 (US$15,476,900), which brought the company's investment in Astellia to 88.4% and provided the company with control over Astellia.

The company re-opened the public tender offer to acquire the remaining shares of Astellia from February 9, 2018 to February 22, 2018. During that period, the company acquired an additional interest of 8.9% in Astellia at a purchase price of €10 per share for a total cash consideration of €2,318,530 (US$2,841,400), which brought the company's investment in Astellia to 97.3%.

Finally, on February 28, 2018, the company entered into a squeeze-out process to acquire the remaining 2.7% interest in Astellia at a share price of €10, for a total cash consideration of €672,150 (US$820,600). The binding terms of the squeeze-out process gave the company control over Astellia's remaining shares as at February 28, 2018 and consequently, as of that date the company controlled 100% of Astellia's shares.

The fair value of the total consideration paid for all shares of Astellia amounted to €25,888,880 (US$32,137,800) and consisted of €21,102,880 (US$26,241,000) in cash, net of Astellia's cash of €4,786,000 (US$5,896,800) at the date of acquisition of control.

From September 8, 2017 to January 25, 2018, the investment in Astellia provided the company with significant influence over Astellia, and it was therefore accounted for under the equity method as required by IAS 28, "Investments in Associates and Joint Ventures". Under this method, on initial recognition this investment was recognized at cost, and the carrying amount increased or decreased to recognize the company's share of the profit or loss of Astellia after the acquisition date. Included in the statements of earnings for the nine months ended May 31, 2018 is an equity loss pick-up of $2,079,800.

 
Page 18 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
Since January 26, 2018, the acquisition of Astellia has been considered a business combination, and the acquisition was accounted for by applying the acquisition method as required by IFRS 3, "Business Combinations", and the requirements of IFRS 10, "Consolidated Financial Statements"; consequently, the fair value of the total consideration was allocated to the assets acquired and liabilities assumed based on management's preliminary estimate of their fair value as at the acquisition date. The results of operations of the acquired business were included in the consolidated financial statements of the company since January 26, 2018, being the acquisition date. The company recognized the non-controlling interest in Astellia at fair value. At the acquisition date, the carrying value of the 40.3% interest in Astellia held prior to the business combination was re-measured at fair value, that is €10 per share, and was deemed to have been disposed of on that date. This acquisition-date re-measurement and deemed disposal resulted in a gain of $2,079,800 that was accounted for in the statements of earnings for the nine months ended May 31, 2018.

In addition, upon the successive acquisitions of the non-controlling interest in February 2018, the company recorded a gain in the amount of $352,000 in shareholders' equity, representing the excess of the carrying value of the non-controlling interest and the purchase price paid.

The following table summarizes Astellia's sales and net loss attributable to the parent interest for the three months and the nine months ended May 31, 2018:

   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
 
             
  Sales (1)
 
$
8,595
   
$
10,427
 
  Net loss attributable to the parent interest (1,2)
 
$
6,336
   
$
8,987
 

Sales and net loss of the combined entities for the nine months ended May 31, 2018 as if the acquisition had occurred on September 1, 2017 amounted to $222,900,000 and $13,997,000 respectively.

(1)
Include acquisition-related deferred revenue fair value adjustment of $913,000 and $1,222,000 respectively for the three months and the nine months ended May 31, 2018.
(2)
Includes amortization of acquired intangible assets of $3,104,000 and $4,154,000 respectively for the three months and the nine months ended May 31, 2018.

 
Page 19 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
The fair value of the total consideration was allocated based on a preliminary estimate of fair value of acquired net assets at the date of acquisition as follows:

Assets acquired
     
Accounts receivable
 
$
15,877
 
Income taxes and tax credits recoverable
   
11,259
 
Inventories
   
3,045
 
Prepaid expenses
   
1,229
 
Property, plant and equipment
   
1,944
 
Intangible assets
   
19,150
 
Other assets
   
1,402
 
     
53,906
 
Liabilities assumed
       
Accounts payable and accrued liabilities
   
10,571
 
Deferred revenue
   
4,748
 
Long-term debt (note 7)
   
8,888
 
Other liabilities
   
6,715
 
Net identifiable assets acquired
   
22,984
 
         
Goodwill
   
3,257
 
Fair value of the total consideration, net of cash acquired
 
$
26,241
 

The fair value of the total consideration, net of cash acquired, consisted of the following at the acquisition date:

Cash paid net of cash acquired
 
$
9,580
 
Fair value of shares held
   
12,967
 
Non-controlling interest (purchased in February 2018)
   
3,694
 
   
$
26,241
 

The estimated fair value of accounts receivable amounted to $15,877,000 as at January 26, 2018. The gross contractual amount of accounts receivable amounted to $18,261,000 as at January 26, 2018. The estimate at the acquisition date of the gross contractual cash flows not expected to be collected amounted to $2,384,000.

Acquired intangible assets, which mainly comprise customer relationships and core technologies, are amortized on a straight-line basis over their estimated useful lives of one to five years.

Acquired goodwill mainly represents synergies with the company's products as well as Astellia's acquired workforce. Acquired goodwill is not deductible for tax purposes. Goodwill is allocated to the Astellia cash-generating unit.

The allocation of the fair value of the total consideration is preliminary because certain information required to complete the final allocation remains outstanding. The company expects to complete the final allocation for this acquisition in the fourth quarter of fiscal 2018. Assets acquired and liabilities assumed that are likely to change upon completing a more detailed valuation and the finalization of the allocation comprise accounts receivable, intangible assets, goodwill, deferred revenue and related deferred income taxes.

The functional currency of Astellia is the euro and as such it is considered a foreign operation. The financial statements of Astellia were translated into Canadian dollars as follows: assets and liabilities were translated at the exchange rate in effect on the date of the balance sheet; revenue and expenses were translated at the monthly average exchange rate. The foreign currency translation adjustment arising from such translation was included in accumulated other comprehensive loss in shareholders' equity.

 
Page 20 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
Yenista Optics S.A.S. (renamed EXFO Optics Inc.)

On October 2, 2017, the company acquired all issued and outstanding shares of Yenista Optics S.A.S. (EXFO Optics), a privately held company located in France and a supplier of advanced optical test equipment for the research and development and manufacturing markets. The acquisition-date fair value of the total consideration amounted to €9,400,000 (US$11,052,000) and consisted of €8,114,000 (US$9,540,000) in cash, net of EXFO Optics' cash of €1,286,000 (US$1,512,000) at the acquisition date.

This acquisition was accounted for by applying the acquisition method as required by IFRS 3, "Business Combinations", and the requirements of IFRS 10, "Consolidated Financial Statements"; consequently, the fair value of the total consideration was allocated to the assets acquired and liabilities assumed based on management's preliminary estimate of their fair value as at the acquisition date. The results of operations of the acquired business were included in the consolidated financial statements of the company since October 2, 2017, being the acquisition date.

The fair value of the total consideration was allocated based on the fair value of acquired net assets at the date of acquisition as follows:

Assets acquired
     
Accounts receivable
 
$
1,889
 
Inventories
   
2,384
 
Property, plant and equipment
   
1,424
 
Core technologies
   
3,686
 
Customer relationships
   
811
 
In-process research and development
   
305
 
Other intangible assets
   
132
 
Prepaid expenses
   
171
 
     
10,802
 
Liabilities assumed
       
Accounts payable and accrued liabilities
   
1,035
 
Long-term debt (note 7)
   
2,143
 
Deferred income taxes
   
1,510
 
Net identifiable assets acquired
   
6,114
 
Goodwill
   
3,426
 
Fair value of the total consideration, net of cash acquired
 
$
9,540
 

Acquired intangible assets are amortized on a straight-line basis over their estimated useful life of two to five years for core technologies and six months for customer relationships. In-process research and development is an indefinite-lived intangible asset until the underlying research and development project is completed. It will be amortized on a straight-line basis over its estimated useful life when the project will be completed.

Acquired goodwill mainly represents synergies with the company's products as well as EXFO Optics' acquired workforce. Acquired goodwill is not deductible for tax purposes. Goodwill is allocated to the EXFO Optics cash-generating unit.

The functional currency of EXFO Optics is the euro, and, as such, it is considered a foreign operation. The financial statements of EXFO Optics were translated into Canadian dollars as follows: assets and liabilities were translated at the exchange rate in effect on the date of the balance sheet; revenue and expenses were translated at the monthly average exchange rate. The foreign currency translation adjustment arising from such translation was included in accumulated other comprehensive loss in shareholders' equity.
 
 
Page 21 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

The following table summarizes changes in goodwill during the three months and nine months ended May 31, 2018:

   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
 
             
  Balance – Beginning of the period
 
$
41,725
   
$
35,077
 
  Business combinations
 
     
6,683
 
  Foreign currency translation adjustment
   
(704
)
   
(739
)
                 
  Balance – End of the period
 
$
41,021
   
$
41,021
 


4
Restructuring Charges

In fiscal 2017, the company implemented a restructuring plan to streamline its passive monitoring solutions portfolio.

The following table summarizes changes in restructuring charges payable during the three months and nine months ended May 31, 2018:

   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
 
             
  Balance – Beginning of the period
 
$
190
   
$
2,477
 
  Payments
   
(58
)
   
(1,970
)
  Reversal
   
(92
)
   
(467
)
                 
  Balance – End of the period
 
$
40
   
$
40
 


5
Financial Instruments

Fair Value of Financial Instruments

The company classifies its derivative and non-derivative financial assets and liabilities measured at fair value using the fair value hierarchy as follows:

Level 1:
Quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2:
Inputs other than quoted prices included within Level 1 that are observable for the asset and liability, either directly or indirectly

Level 3:
Unobservable inputs for the asset or liability

The company's short-term investments, forward exchange contracts and contingent liability are measured at fair value at each balance sheet date. The company's short-term investments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. The company's forward exchange contracts are classified within Level 2 of the fair value hierarchy because they are valued using quoted prices and forward exchange rates at the balance sheet dates. The company's contingent liability is classified within Level 3 of the fair value hierarchy because it is valued using unobservable inputs such as expected future sales of Ontology Partners Limited.
 
Page 22 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
The fair value of forward exchange contracts represents the amount at which they could be settled based on estimated current market rates.

The fair value of derivative and non-derivative financial assets and liabilities measured at fair value by level of fair value hierarchy, is as follows:
 
 
   
As at May 31, 2018
   
As at August 31, 2017
 
   
Level 1
   
Level 2
   
Level 3
   
Level 1
   
Level 2
   
Level 3
 
  Financial assets
                                   
  Short-term investments
 
$
990
   
$
   
$
   
$
775
   
$
   
$
 
  Forward exchange contracts
 
$
   
$
667
   
$
   
$
   
$
2,258
   
$
 
                                                 
  Financial liabilities
                                               
  Contingent liability
 
$
   
$
   
$
437
   
$
   
$
   
$
1,092
 
  Forward exchange contracts
 
$
   
$
432
   
$
   
$
   
$
   
$
 
 
During the nine months ended May 31, 2018, the fair value of the contingent liability decreased by $716,000, which was recorded in the consolidated statement of earnings for this period.

Derivative Financial Instruments

The functional currency of the company is the Canadian dollar. The company is exposed to currency risk because of its export sales of products manufactured in Canada, China, France and Finland, the majority of which are denominated in US dollars and euros. This risk is partially hedged by forward exchange contracts and certain cost of sales and operating expenses (US dollars and euros). In addition, the company is exposed to currency risk because of its research and development activities in India (Indian rupees). This risk is partially hedged by forward exchange contracts. The company's forward exchange contracts, which are designated as cash flow hedging instruments, qualify for hedge accounting.

As at May 31, 2018, the company held contracts to sell US dollars for Canadian dollars and Indian rupees at various forward rates, which are summarized below:

US dollars – Canadian dollars

 
Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
               
 
June 2018 to August 2018
 
$
7,500
     
1.3160
 
 
September 2018 to August 2019
   
24,000
     
1.3026
 
 
September 2019 to August 2020
   
12,100
     
1.2707
 
 
September 2020 to January 2021
   
1,700
     
1.2584
 
 
Total
 
$
45,300
     
1.2946
 

US dollars – Indian rupees

 
Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
               
 
June 2018 to August 2018
 
$
600
     
68.04
 
 
September 2018 to August 2019
   
4,600
     
67.68
 
 
Total
 
$
5,200
     
67.72
 
 
 
Page 23 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
The carrying amount of forward exchange contracts is equal to their fair value, which is based on the amount at which they could be settled based on estimated current market rates. The fair value of forward exchange contracts amounted to net gains of $2,258,000 as at August 31, 2017, and $235,000 as at May 31, 2018.

As at May 31, 2018, forward exchange contracts in the amount of $667,000 are presented as current assets in other accounts receivable; forward exchange contracts in the amount of $294,000 are presented as current liabilities in accounts payable and accrued liabilities; and forward exchange contracts in the amount of $138,000 are presented as long-term liabilities in other liabilities in the consolidated balance sheet. Forward exchange contracts of $88,000 included in accounts receivable, for which related hedged sales are recognized, are recorded in the consolidated statements of earnings; otherwise, other forward exchange contracts are not yet recorded in the consolidated statements of earnings and are recorded in other comprehensive loss.

Based on its portfolio of forward exchange contracts as at May 31, 2018, the company estimates that the portion of the net unrealized gains on these contracts as of that date, which will be realized and reclassified from accumulated other comprehensive loss to net earnings (sales) over the next 12 months, amounts to $285,000.

For the three and nine months ended May 31, 2018 and 2017, the company recognized within its sales the following foreign exchange gains or losses on forward exchange contracts:

   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
   
Three months
ended
May 31, 2017
   
Nine months
ended
May 31, 2017
 
                         
Gains (losses) on forward exchange contracts
 
$
179
   
$
797
   
$
(180
)
 
$
(525
)


6
Credit Facilities

On October 25, 2017, the company modified certain credit facilities whereby existing lines of credit that provided advances up to CA$4,800,000 (US$3,724,000) and up to US$6,000,000 for operating purposes were cancelled and replaced with a credit facility of CA$28,929,000 (US$22,445,000) mainly for the acquisition of the remaining shares of Astellia under the public tender offer.

In addition, on December 21, 2017, the company cancelled and replaced this renewed credit facility (that provided advances up to CA$28,929,000 (US$22,445,000)), with new revolving credit facilities of up to CA$70,000,000 (approximately US$54,300,000) and US$9,000,000. These modified credit facilities were used to finance a portion of the acquisition of Astellia's remaining shares and are used to finance working capital and for other general corporate purposes. The Canadian dollar revolving credit facility bears interest at the Canadian prime rate or LIBOR, plus a margin, and the US dollar revolving credit facility bears interest at the US prime rate or LIBOR plus a margin. These revolving credit facilities are secured by a movable mortgage over the universality of the company's Canadian movable assets, present and future, as well as over the universality of movable assets, present and future, of certain US and UK subsidiaries. The company is subject to covenants under this credit facility that were met as at May 31, 2018. As at May 31, 2018, an amount of $10,982,000 was drawn from these credit facilities.

 
Page 24 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

7
Long-term Debt

As part of the acquisitions of EXFO Optics and Astellia, the company assumed long-term debt (note 3). Long-term debt represents a non-derivative financial liability and is classified in other financial liabilities; it is initially measured at fair value plus transaction costs and is subsequently carried at amortized cost using the effective interest rate method.
 
   
As at
May 31,
2018
   
As at
August 31,
2017
 
             
Unsecured, non-interest-bearing loans, denominated in euros, repayable in quarterly instalments, maturing in March 2024 and March 2025
 
$
872
   
$
 
Unsecured loans, denominated in euros, repayable in monthly, quarterly or bi-annual instalments, bearing interest at annual rates of nil to 5.0%, maturing at different dates between December 2018 and September 2023
   
5,196
   
 
Loans, secured by the universality of the assets of a subsidiary, denominated in euros, repayable in monthly instalments, bearing interest at annual rates of 0.7% to 2.0%, maturing at different dates between June 2019 and August 2022
   
909
   
 
Loans, secured by the universality of the assets of a subsidiary, denominated in euros, repayable in monthly or quarterly instalments, bearing interest at annual rates of 1.1% to 2.9%, maturing at different dates between March 2020 and July 2022
   
2,491
   
 
                 
Other long-term debt
   
49
   
 
     
9,517
   
 
Current portion of long-term debt
   
2,938
   
 
   
$
6,579
   
$
 
 
The company is subject to certain covenants under its long-term debt that were met as at May 31, 2018.

Principal repayments of long-term debt over the forthcoming years are as follows:

   
As at
May 31, 2018
 
       
No later than one year
 
$
2,938
 
Later than one year and no later than five years
   
6,262
 
Later than five years
   
317
 
   
$
9,517
 

 
Page 25 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

8
Share Capital

The following tables summarize changes in share capital for the nine months ended May 31, 2017 and 2018.
 
   
Nine months ended May 31, 2017
 
   
Multiple voting shares
   
Subordinate voting shares
       
   
Number
   
Amount
   
Number
   
Amount
   
Total
amount
 
                               
Balance as at September 1, 2016
   
31,643,000
   
$
1
     
21,917,942
   
$
85,515
   
$
85,516
 
Issuance of share capital
   
     
     
793,070
     
3,490
     
3,490
 
Redemption of restricted share units
   
     
     
88,371
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
346
     
346
 
Balance as at November 30, 2016
   
31,643,000
     
1
     
22,799,383
     
89,351
     
89,352
 
Redemption of restricted share units
   
     
     
97,900
     
     
 
Redemption of deferred share units
   
     
     
29,456
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
489
     
489
 
Balance as at February 28, 2017
   
31,643,000
     
1
     
22,926,739
     
89,840
     
89,841
 
Redemption of restricted share units
   
     
     
132,422
     
     
 
Redemption of deferred share units
   
     
     
450
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
535
     
535
 
                                         
Balance as at May 31, 2017
   
31,643,000
   
$
1
     
23,059,611
   
$
90,375
   
$
90,376
 

 
Page 26 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

   
Nine months ended May 31, 2018
 
   
Multiple voting shares
   
Subordinate voting shares
       
   
Number
   
Amount
   
Number
   
Amount
   
Total
amount
 
                               
Balance as at September 1, 2017
   
31,643,000
   
$
1
     
23,068,777
   
$
90,410
   
$
90,411
 
Redemption of restricted share units
   
     
     
155,619
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
598
     
598
 
Balance as at November 30, 2017
   
31,643,000
     
1
     
23,224,396
     
91,008
     
91,009
 
Redemption of restricted share units
   
     
     
182,725
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
675
     
675
 
Balance as at February 28, 2018
   
31,643,000
     
1
     
23,407,121
     
91,683
     
91,684
 
Redemption of deferred share units
   
     
     
58,335
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
226
     
226
 
                                         
Balance as at May 31, 2018
   
31,643,000
   
$
1
     
23,465,456
   
$
91,909
   
$
91,910
 


9
Statements of Earnings

Net research and development expenses comprise the following:

   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
   
Three months
ended
May 31, 2017
   
Nine months
ended
May 31, 2017
 
                         
Gross research and development expenses
 
$
18,393
   
$
46,636
   
$
14,710
   
$
40,067
 
Research and development tax credits and grants
   
(2,292
)
   
(6,196
)
   
(1,447
)
   
(4,226
)
Net research and development expenses for the period
 
$
16,101
   
$
40,440
   
$
13,263
   
$
35,841
 

Inventory write-down is as follows:

   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
   
Three months
ended
May 31, 2017
   
Nine months
ended
May 31, 2017
 
                         
Inventory write-down for the period
 
$
681
   
$
1,950
   
$
1,464
   
$
2,440
 
 
 
Page 27 of 57

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

Depreciation and amortization expenses by functional area are as follows:

   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
   
Three months
ended
May 31, 2017
   
Nine months
ended
May 31, 2017
 
                         
Cost of sales
                       
Depreciation of property, plant and equipment
 
$
583
   
$
1,521
   
$
374
   
$
1,104
 
Amortization of intangible assets
   
3,879
     
7,606
     
927
     
1,896
 
     
4,462
     
9,127
     
1,301
     
3,000
 
                                 
Selling and administrative expenses
                               
Depreciation of property, plant and equipment
   
280
     
647
     
130
     
387
 
Amortization of intangible assets
   
174
     
421
     
23
     
59
 
     
454
     
1,068
     
153
     
446
 
                                 
Net research and development expenses
                               
Depreciation of property, plant and equipment
   
692
     
1,804
     
525
     
1,403
 
Amortization of intangible assets
   
157
     
358
     
96
     
286
 
     
849
     
2,162
     
621
     
1,689
 
                                 
   
$
5,765
   
$
12,357
   
$
2,075
   
$
5,135
 
                                 
Depreciation of property, plant and equipment
 
$
1,555
   
$
3,972
   
$
1,029
   
$
2,894
 
Amortization of intangible assets
   
4,210
     
8,385
     
1,046
     
2,241
 
                                 
Total depreciation and amortization expenses for the period
 
$
5,765
   
$
12,357
   
$
2,075
   
$
5,135
 

Employee compensation comprises the following: