News release via CNW Telbec, Montreal 514-878-2520
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NEWS RELEASE
Attention Business/Financial Editors
Kangaroo Media Inc. announces
4th Quarter and Year-end Financial Results for Fiscal 2008
Montreal, Canada, April 29, 2009 - Kangaroo Media Inc. (TSX: KTV-V) announced today results for its 4th quarter and Fiscal 2008.
Q4 Highlights:
• Q4 2008 revenues of $1.1 million up 60.2% over Q4 2007
• Activations per event up 24.2% in NASCAR and 43.5% in F1
• Gross margin improved by $0.1 million to ($1.0 million)
• Net loss of $12.5 million, or $(0.35) per share, compared to $7.8 million, or $(0.22) per share in 2007
Fiscal 2008 Highlights
• Revenues totaled $5.8 million compared to $14.3 last year
• Total revenues from rental and activations up 54.0% over 2008
• Activations in NASCAR up an average of 21.5% per race and an average of 75.3% in F1
• Gross margin down by $4.1 million to ($3.1 million)
• Net loss totaled $24.1 million, or $(0.68) per share, compared to $16.0 , or $(0.51) per share in Fiscal 2007
• Liquidity and capital resources amount to $9.4 million
For the fourth quarter ended December 31, 2008, revenue increased by 60.2% to reach $1.1 million compared to $716,000 for corresponding quarter in 2007. Revenue from the rental and activation of KTV units increased 46.2% over the previous year fourth quarter and reached $895,000 in Q4 2008 as a result of higher volume in both F1 and NASCAR. Service revenue in Q4 2008 increased 97.1% to $205,000 compared to Q4 2007 due to higher professional services in NASCAR. The gross margin for Q4 2008 improved by $113,000, to ($1.0 million), compared to gross margin of ($1.1 million) in Q4 2007. The negative gross margin is the result of revenues in F1 and NFL not yet being sufficient to cover associated direct operating expenses.
For Fiscal 2008, operating revenues totaled $5.8 million, compared to $14.3 million for 2007 with the decline mainly attributable to a decline in the sale of units and accessories sold in NASCAR. Revenues from the rental and activation of KTV units increased 54.0% to $4.3 million, up from $2.8 million for the year 2007 as a result of the increase in volume in F1 while services revenues totaled $847,000, compared to $942,000 for the same period of 2007 due to a decrease in professional services to NASCAR. Gross margin for 2008 decreased by $4.1 million to ($3.1 million), compared to gross margin of $1.0 million in 2007. The higher 2007 gross margin was the result of the volume of KTV units sold to Sprint and the negative gross margin from the F1 and NFL operations.
As a result of market conditions and the decline in its share price, the Company recorded a $7.8 million non-cash asset impairment charge in its operating expenses.
As at December 31, 2008, the Company’s cash, cash equivalents and short-term investments totaled $9.4 million. However, as a result of new credit agreement signed by the Company on April 29, 2009, $575,000 of that amount will have to be placed in escrow and represent restricted cash.
"In Q4 of the past fiscal year the Company restructured and streamlined its operations to become more efficient and reduce expenses. This allowed us to reduce our operating expenses appreciably and use capital more effectively. Concurrently, we made some key business development choices to build a sustainable revenue generation base. Our recently announced partnership with Merchandising Media and agreement with PGA TOUR are examples of ways in which we will build our revenues and gross margins going forward. And from a technology perspective, our relationship with Front Row will ensure our fan experience offering remains the best in the business,” commented Robert Mimeault, President of Kangaroo Media. “Over the past months, we have made some significant progress in building efficiency and greater focus into our performance, now we are looking at driving sustainable and profitable growth and we are optimistic on that front,” he concluded.
An analyst conference call on the Q4 and Fiscal 2008 results will take place on April 30 2009 at 8:30 A.M (Eastern). To participate or listen to the conference call, dial 1 800 590 1817 approximately 10 minutes prior to the start of the call. A replay of the conference call will be available until end of day May 14, 2009, commencing at 10:30 A.M. the day of the call. The instant replay number is 1-877-289-8525, passcode 21304485 #.
About Kangaroo Media Inc.
Kangaroo Media Inc. is a market leader in enhancing the in-venue sports fan experience. The company develops and commercializes hand-held wireless audiovisual multi-functional entertainment systems that enable users to expand and tailor their on-site viewing experience of sporting events. Kangaroo Media’s technology delivers real-time video, audio and data content to each fan’s hand-held Kangaroo TV device. It gives fans the ability to create their own tailor-made live-action sporting event on-site. Kangaroo Media, headquartered near Montreal, Canada, is listed on the TSX Venture Exchange as KTV.V. For more information, visit .
Forward-looking statements
This news release may contain forward-looking information. These statements relate to future events or future performance and reflect management's current expectations and assumptions. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management of Kangaroo Media. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. These forward-looking statements are made as of the date hereof and Kangaroo Media does not assume any obligation to update or revise them to reflect new events or circumstances.
Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
For further information:
Rick Clements
Chief Financial Officer
450- 595 – 2004
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The purpose of the Management’s Discussion and Analysis (“MD&A”) is to help the reader better understand the dynamics behind the activities of Kangaroo Media Inc. (“Kangaroo Media” or the “Company”) and the key components of its financial performance. It explains the trends influencing the financial position, operating results and cash flows of Kangaroo Media for the three-month periods and years ended December 31, 2008 and 2007. The MD&A should be read in conjunction with the audited consolidated financial statements and related notes for the years ended December 31, 2008 and 2007. Unless otherwise indicated, the terms “Kangaroo Media”, “the Company”, “we” or “our” refer to Kangaroo Media Inc. and its subsidiaries.
All financial information contained in this MD&A and the financial statements were prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). Unless otherwise indicated, all amounts are in Canadian dollars
Management prepared this MD&A taking into account all available information as at April 29, 2009. The consolidated financial statements and the MD&A were reviewed by the Audit Committee and approved by the Board of Directors of Kangaroo Media.
Forward-looking statements
This MD&A contains certain forward-looking statements concerning the future performance of the Company’s business, its operations and its financial results and condition. When used in this document, the words “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. These forward-looking statements are based on current expectations. We caution that all forward-looking information is inherently uncertain and actual results may differ materially from the assumptions, estimates or expectations reflected or contained in the forward-looking information, and that actual future performance will be affected by a number of factors, including technological change, economic conditions, competitive factors and changes in accounting rules or standards, many of which are beyond the Company’s control (see section “Risk factors”). Therefore, future events and results may vary substantially from what we currently foresee. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under applicable securities regulations.
Company profile
Kangaroo develops and commercializes hand-held wireless audiovisual multi-functional entertainment systems that allow users to enhance their on-site/in venue viewing experience at sporting events. Kangaroo technology delivers real-time video, audio and data content to each fan’s hand-held Kangaroo TV device. It gives fans the ability to personalize their own live-action sporting event viewing.
Kangaroo’s business is built on two key components:
a) the development, production and broadcasting of live audio, video and data content that dramatically enhances the fans on-site or in-venue experience, and
b) long-term agreements with sports properties and other types of events, sponsors or promoters for on-site broadcasting rights.
To support its business and to allow at-venue delivery of its unique live content to spectators, Kangaroo developed an advanced wireless mobile broadband technology device and delivery system. Kangaroo’s suite of applications, technology, content and services is often referred to as TM (“KTV”). KTV is also branded as NASCAR Sprint FanViewTM or Sunday TicketTM In-Stadium. Prior to 2006, the Company’s activities focused primarily on motorsports. In 2006, the Company moved into in-stadium sports and launched the Sunday TicketTM In-Stadium service with the Washington Redskins and the Miami Dolphins, using DIRECTV’s Sunday TicketTM programming package. In 2007, the Company expanded into professional golf through initiatives with the PGA European Golf Tour and the Omega Mission Hills World Cup.
The Company’s service offering is comprised of a) content broadcast during the sporting events; b) KTV devices and accessories; c) specialized equipment, including the base transmission unit; and d) software and management firmware loaded into the KTV device together with software in the base transmission unit. The KTV device, its accessories and firmware are proprietary to the Company, and Kangaroo has expended significant resources over the last few years on their development. Kangaroo believes that these elements combined with the exclusive long-term broadcast agreements giving it privileged access to video, audio and data feeds to develop value-added content, provide it with a distinct advantage over its competitors who have not yet developed or found suppliers of comparable technologies or products.
Business Strategy
The Company has three strategic objectives - better execution, increased market penetration and top tier sports properties. These objectives underpin its operational performance, guide its business development and provide the required focus on building liquidity.
Taken individually, these objectives can be described as follows:
a) Better execution through improved operational performance and more impactful sales
b) Increased market penetration based on a broadening of its offer within current sports properties in order to drive additional revenue streams through corporate sponsors, branded programs and exclusive content offerings
c) New top tier sports properties where long-term agreements are structured to deliver profitable and sustainable returns on investment at the outset and to facilitate multiple sources of revenue from within the property
While the strategic objectives remain unchanged from 2008, the business model has changed fundamentally and it is now based on business agreements that are more likely to provide an immediate return on investment and profitable and multiple revenue streams for each of its sports properties over their duration. The Company is still in growth mode and its success hinges on sustainable revenue generation as a means of building short term and long term liquidity.
The Company’s financial results for Fiscal Year 2008 do not reflect the recent fundamental change in business model though the Company has made significant progress with respect to its objectives and building a solid foundation for Fiscal 2009.
Some of the key 2008 and early 2009 achievements with respect to the strategic objectives:
• Corporate restructuring in October 2008 to reduce operating costs and to become more operationally efficient resulted in a head-count reduction of 37% and annual cost savings of 44%
• Increased activations in 2008 over 2007 as an indicator of market penetration in NASCAR (21.5%) and Formula 1 (75.3%)
• Discontinued the NFL business model at the end of the 2008 season
• Settlement of Front Row intellectual property (IP) dispute. Settlement enhances IP protection and outsources its future development, provides for IP litigation services thereby preserving the Company’s cash reserves
• Concluded a F1 partnership with Merchandising Media to reach a larger audience, drive increased penetration, solidify revenue streams and reduce costs
Highlights of operations
National Association for Stock Car Auto Racing, Inc. (“NASCAR”)
In 2005, the Company entered into a five-year exclusivity agreement with Sprint Operations, Inc. (“Sprint”), a leading United States wireless carrier and title sponsor of the NASCAR Nextel Cup SeriesTM, for the commercialization, distribution and use of KTV’s technology and services at all NASCAR-sanctioned events.
Under the agreement, the Company granted Sprint a five-year license to its KTV intellectual property for all NASCAR-sanctioned events. The Company also provides technology and services to Sprint for on-site broadcasting of live audio-visual and data content at NASCAR events. The technology and services are sold and distributed under the “NASCAR FanViewTM” brand, a brand jointly owned by NASCAR and Sprint. Under this agreement, Kangaroo’s revenues consist of the following:
• One-time licensing fee
• Sales of handsets and related accessories
• Annual production services
• Annual maintenance and support services
• Activation fees based on the number of units in use at each NASCAR race
Since the launch of the NASCAR FanView service at the Daytona 500 race in February, 2006, demand for FanView devices has increased, despite declining race attendance.
Formula One (“F1”)
In 2006, Kangaroo signed a six-year exclusive rights agreement (the “F1 Agreement”) with Formula One Administration Limited (“FOA”) and Formula One Management Limited (“FOM”), for the commercialization and distribution of the KTV service, featuring original live F1 video, audio and data content at all F1 Grand Prix races around the world until the end of the 2011 race season. Through this agreement, Kangaroo became the first third-party company to be fully integrated within FOM’s on-site broadcasting facilities.
Under the F1 business model, Kangaroo derives its revenue from multiple streams:
• Business-to-consumer (“B2C”) device rentals pre-booked on the Kangaroo website and through promoters, tour agencies and other websites, as well as rentals at the track site
• Business-to-business (“B2B”) rental revenue and custom content development revenue in grandstand programs
• Sale of Bespoke programs to F1 teams: programs consist of device sales, accessories sales, custom content development and activation fees at each of the races. Four teams or team sponsors have such programs (AT&T Williams, BMW, McLaren, Shell Ferrari)
National Football League (“NFL”)
In the Fall of 2005, Kangaroo entered into an initial agreement with DIRECTV Inc. (“DIRECTV”) to test the feasibility of providing the Sunday Ticket™ live content at football stadiums. The Sunday Ticket™ is an NFL property for which DIRECTV owns exclusive, long-term rebroadcast rights. .The Sunday Ticket In-Stadium as provided by Kangaroo, allowed fans attending football games to view any NFL game in real-time as broadcast in the Sunday Ticket™ package and to listen to local play-by-play commentaries, instant replays and live league-wide statistics, thus providing useful and timely information to those participating in “fantasy” leagues. The reception range included the stadium and “tailgate parties” taking place in the stadium parking lot. In July 2006, Kangaroo formalized a multi-year agreement with DIRECTV for the exclusive distribution rights of the Sunday Ticket™ content at all NFL-sanctioned stadiums.. DIRECTV became the principal sponsor of the new service.
In August 2006, Kangaroo conducted a season-long trial at two NFL team stadiums: The Miami Dolphins and Washington Redskins. In 2007, Kangaroo offered the service to two new NFL team stadiums, the Houston Texans and Seattle Seahawks and in 2008, to three NFL team stadiums: the Houston Texans, the Seattle Seahawks and the Washington Redskins. At the end of the 2008 season, Kangaroo discontinued its activities in the NFL market as a result of its revised business model.
Kangaroo derived revenue from:
• Rentals of the Kangaroo device and accessories
• Revenue from additional content and device sponsorships
24 Heures du Mans
In April 2007, Automobile Club de L’Ouest, the sanctioning body of the “24 Heures du Mans”, the world’s oldest and longest lasting car racing event signed an agreement with Kangaroo to test the KTV service at the 2007 edition of the race. The agreement also granted the Company exclusive rights to provide KTV service for 2008 and 2009, and incumbent rights to further extend the agreement to 2010 and beyond. The securing of the local rebroadcast rights of the 24 Heures du Mans events aligns with the Company’s strategy to expand its reach to top tier sports properties and further consolidate its relationship with world renowned motor racing events. In June 2008, Kangaroo rolled out the commercial version of its service.
Kangaroo derives its revenue from
• B2C pre-booked and onsite rentals through the Company’s website, tour agencies and promoters.
• B2B sponsored content.
PGA European Tour
The Company’s fan experience service was trial-tested throughout the four-day HSBC World Match Play Championship in Wentworth, England from October 11 to 14 in 2007. Kangaroo carried the BBC production of the HSBC World Match Play Championship, including exclusive live footage from different camera angles, vital up-to-the-minute Unisys scoring, and live tournament commentary.
PGA TOUR
In 2008, Kangaroo in cooperation with PGA TOUR, offered golf fans attending THE PLAYERS Championship at TPC Sawgrass in Florida the ‘ultimate’ fan experience. With a Kangaroo TV device, spectators at THE PLAYERS were able to enhance their on-site viewing with personalized content-rich video, audio, scoring and game statistics. In early 2009, Kangaroo signed a four-year agreement with PGA TOUR to provide the Kangaroo device and service at numerous events over the four-year period.
Restructuring Program
In October, 2008 the Company restructured and streamlined its operations to become more efficient and reduce expenses. Under the plan, the Company reduced headcount by 37% and reduced expenses by $44% on an annual basis. While some savings were realized in Q4 of FY 2008, the full impact of the program is expected to be felt beginning in Q1 2009.
Subsequent Events
From a sustainable and profitable business development perspective, the Company has made significant progress early in Fiscal 2009:
• In F1, the Company signed a partnership with Merchandising Media, a powerful marketing organization with the objective of driving better execution and increased market penetration at the F1 venues. The agreement includes guaranteed revenue streams as well as performance clauses.
• The Front Row technologies agreement which will facilitate better execution and enhanced access to new top tier sports properties
• In golf, a four-year agreement with the PGA TOUR that meets the revised business model conditions and will provide sponsorship and revenue sharing.. It is a springboard to greater golf market penetration as evidenced by Kangaroo’s sponsored participation in the USGA’s US Open Championship.
Outlook
The Company will continue to maintain focus on its three strategic objectives - better execution, increased market penetration and top-tier properties. It will do so on the basis of its redefined business model that requires sustainable and profitable revenue streams from each of its sports properties, with a particular focus on short-term liquidity and long-term growth.
The Company will continue to improve execution by delivering its fan enhancement service more efficiently and more effectively. It will do so by:
• Ensuring the Company’s human and financial resources are focused on properties that yield a better return on investment.
• Continuing to focus resources on the enhancement of the fan experience, with the ultimate goal of making it the ‘indispensable’ fan enhancement experience device for sports promoters and sponsors alike.
• Leveraging partners, such as Merchandising Media, to reduce operating costs, while at the same time driving additional penetration and revenue.
The Company will focus on market penetration, through:
• Awareness campaigns,
• Close cooperation with sports properties, teams, tour companies, promoters to extend the reach to a broader audience
• The selection of marketing partners, such as Merchandising Media, who have a track record of reach and effectiveness in markets where Kangaroo wants to be present in a cost-effective way.
The Company will expand beyond the current stable of top tier sports properties. However, this expansion will be made under terms and agreements
• that will deliver profitable and sustainable return on investment at the outset, and
• that will provide multiple sources of revenue from within the property.
Key financial data
The table below shows key financial data for the three-month periods and the years ended of the current and previous fiscal years.
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NOTE: Due to a new credit agreement signed on April 29, 2009 by the Company, $ 575 of cash and cash equivalents will be placed in escrow and therefore represents restricted cash.
Operating results
Operating revenues
Operating revenues for Q4 2008 increased by $431,000, or 60.2%, to $1.1 million, compared to operating revenues of $716,000 in Q4 2007. Revenue from the rental and activation of KTV units increased 46.2% to $895,000 in Q4 2008, up from $612,000 in Q4 2007 as a result of increase volume in both F1 and NASCAR. Service revenue in Q4 2008 increased 97.1% to $205,000 up from $104,000 in Q4 2007 due to higher professional services to NASCAR.
Operating revenues for the year 2008 were $5.8 million, compared to $14.3 million in the same period last year. The sale of units and accessories declined from $10.5 million for the year 2007 to $574,000 for the year 2008 due to a decline in the number of units and accessories sold in NASCAR. Revenues from the rental and activation of KTV units increased 54.0% to $4.3 million for the year 2008 up from $2.8 million for the year 2007 as a result of the increase in volume in F1. Services revenues for the year 2008 were $847,000, compared to $942,000 for the same period of 2007 due to a decrease in professional services to NASCAR.
While the company derives revenue from multiple sources, activations continue to be a key performance indicator. The company continued to expand the market within its properties with increased activations. Fanview activations at NASCAR races totaled 26,183 in Q4 2008 (8 races, 3,273 per race on average), up 24.2% on average per race compared to Q4 2007 (8 races 2,636 per race on average). For Q4 2008 4,577 units were rented at the 3 F1 races that took place during the quarter, an average of 1,526 units, up 43.5% on average per race compared to Q4 2007 (2 races 1,064 per race on average). For Q4 2008 3,341 units were rented at 16 NFL games that took place during the quarter, an average of 214 units, down 43.2% on average per game compared to Q4 2007 (16 games, 387 per game on average).
For the year 2008 Fanview activations at NASCAR races totaled 121,399 (38 races, 3,195 per race on average), up 21.5% on average per race compared to 2007 (39 races, 2,630 on average per race). For the same period 39,885 units were rented at the F1 races (18 races, 2,216 on average per race), up 75.3% on average per race compared to 2007.
During 2007, the company entered into a non-monetary contract whereby it provided units of its portable device to corporate customers in exchange for direct sales and marketing activities. The transactions were recorded at fair market value and in Q4 2008 amounted to $227,000 (Q4 2007 $145,000) in revenues and $341,000 (Q4 2007 $393,000) in cost of products and services. Non-monetary revenues are recognized over the number of sporting events, and non-monetary costs are recognized on a monthly straight-line basis. For the year 2008, non-monetary transactions amounted to $1.2 million ($1.2 million in 2007) and $1.2 million ($1.2 million in 2007) in revenues and cost of product and services respectively.
Gross margin
The gross margin for Q4 2008 increased by $113,000, to ($1,0 million), compared to gross margin of ($1.1 million) in Q4 2007. The negative gross margin is the result of revenues in F1 and NFL not yet being sufficient to cover associated direct operating expenses. For the year 2008, the gross margin decreased by $4.1 million to ($3.1 million), compared to gross margin of $1.0 million in 2007. The gross margin in 2007 is the net result of the positive gross margin from the volume of KTV units sold to Sprint and the negative gross margin from the F1 and NFL operations.
Operating expenses
General and administrative expenses: General and administrative expenses increased by $241,000, or 31.7%, to $1,0 million during Q4 2008, compared with $761,000 in Q4 2007. The increase in Q4 2008 is explained by higher professional fees due to the Front Row Technologies complaint and the increase in allowance for bad debt. For 2008, general and administrative expenses increased by $383,000, or 9.8%, to $4.3 million, compared with $3.9 million in 2007. The year-over-year increase over 2007 is explained mainly by higher salary costs and the development of a transactional website for online rental and purchase of KTV units.
Marketing and corporate development expenses: In Q4 2008, marketing and corporate development expenses decreased by $208,000, or 43.2%, to $274,000, compared with $482,000 in Q4 2007. For the year 2008, marketing and corporate development expenses decreased by $740,000, or 35.7%, to $1.3 million, compared with $2.1 million in 2007. The decrease for the three- and twelve-months period of 2008 is explained mainly by lower consulting fees and salary expenses as a result a cost saving program.
Research and development expenses (“R&D”): In Q4 2008, R&D expenses increased by $239,000 to $296,000, compared with $57,000 in Q4 2007. For 2008, R&D expenses increased by $111,000, or 11.6%, to $1.1 million, compared with $1.0 million in 2007. The increase for both periods is mainly due to a net adjustment of R&D tax credits of $61,000 following the completion of a tax audit for the years 2005 and 2006.
Amortization and depreciation: In Q4 2008, amortization and depreciation increased by $244,000, or 34.6%, to $950,000, compared with $706,000 in Q4 2007. For the year of 2008, amortization and depreciation increased by $343,000, or 9.5%, to $3.9 million, compared with $3.6 million in 2007. The increase for the three- and twelve-months periods is the result of depreciation on additional distribution, production and rental equipment, offset by lower broadcasting rights amortization.
Impairment of long-lived assets: As a result of the current market situation and the decline in its share price, the Company performed the required impairment test as of December 31, 2008. The Company tested it long-lived assets using a two-step methodology:
• Step 1 is to compare the carrying value of the long-lived assets to estimate the undiscounted cash flows from the use of the assets. Estimating the cash flows from the Company’s current and potential future sports properties is complex given the current economic conditions in the world and the fact that changes to the Company’s business model have only recently been implemented and the outcome cannot be determined with certainty. This methodology contains estimates and judgments that are subjective and uncertain, and thus may change over time. Based on the Company’s forecast taking into account the Company’s current portfolio of activities, the book value of the long-lived assets is greater than the expected undiscounted cash-flows from the use of the assets.
Step 2 is to be performed when the book value exceeds the expected undiscounted cash flows. Step 2 compares the carrying value of the long-lived assets to their fair value. Based on the current operations of Kangaroo, the book value on the long-lived assets exceeds their fair value by $7.8 million and, as such, impairment charges of $5.0 million to property and equipment and $2.8 million to intangible and other long-term assets were recorded
Stock-based compensation: In Q4 2008, stock-based compensation decreased by $82,000, or 24.0%, to $260,000, compared with $342,000 in Q4 2007. For the year 2008, stock-based compensation decreased by $333,000, or 24.2%, to $1.0 million, compared with $1.4 million in 2007. The decrease for Q4 2008 and the year 2008 is mainly due to some values of stock-based compensation that are now fully amortized.
Litigation: On February 13, 2007, a complaint was filed in the United States District Court Eastern District of Texas, Tyler Division by Immersion Entertainment, LLC (“Immersion”) against the Company, alleging infringement of Immersion’s United States patents no. 6,578,203 and 7,124,425 related to the KTV technology.
On February 4, 2008, the Company and Immersion jointly announced that they signed definitive licensing and settlement agreements. The Company, NASCAR and Sprint entered into a Settlement Agreement with Immersion. Additionally, the Company entered into a worldwide exclusive Patent License Agreement with Immersion concerning all issued patents and pending applications relating to Immersion’s intellectual property portfolio and technology.
Under the Patent License Agreement, Immersion grants Kangaroo exclusive worldwide rights to its intellectual property portfolio until December 31, 2010. Thereafter, at Kangaroo’s sole option, the exclusive worldwide rights may be extended until the expiration of the last Immersion issued patent.
The Patent License Agreement provided for a payment by Kangaroo to Immersion of US$2.0 million on February 1, 2008, in addition to payments of royalties on covered sales retroactive to January 1, 2008 based on a royalty schedule set forth in the Patent License Agreement. The Patent License Agreement is subject to minimum royalties of US$1.0 million for each of calendar 2008 and 2009, which will be applied against the royalty schedule.
The company judges that the US$ 2.0 million and minimum royalty payments are part of the costs of settling the Immersion complaint. Consequently, the Company recorded an expense of $3.6 million in fiscal 2007 representing the present value of the US$ 2.0 million payment settlement and the minimum royalties of US$ 1.0 million for each of 2008 and 2009 as well as an expense of $856,000 to account for legal and professional fees in connection with the litigation, for a total of $4.4 million.
Financial expenses (income): In Q4 2008, financial expenses increased by $1.1 million to $886,000 compared to ($188,000) in Q4 2007. The increase is due to a higher foreign exchange loss as result of a weaker Canadian dollar. For the year 2008, financial expenses increased by $1.0 million, to $1.6 million, compared with $558,000 in 2007. The increase in 2008 is mainly due to higher interest on long term debt.
Income taxes: Regarding the accounting approach for future income taxes, the Company concluded that a valuation allowance should be recorded for the total amount of the future income tax assets.
Net loss: We sustained a net loss of $12.5 million in Q4 2008, compared to a net loss of $7.8 million in the corresponding quarter of the previous year. For the year 2008, the net loss was $24.1 million compared with $16.0 million in 2007.
Quarterly operating results
Our operating results for each of the last eight fiscal quarters are presented in the table below. We are of the opinion that the information on each of these quarters was prepared in the same way as our audited consolidated financial statements for the year ended December 31, 2008. In our opinion, any adjustments needed to accurately reflect the results from these periods have been made. Results should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2008.
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Revenues in Q1 2007 were derived essentially from our agreement with Sprint. Fluctuation of revenues from one quarter to another was driven mainly by the number of KTV units sold to Sprint.
Liquidity and capital resources
As at December 31, 2008, the Company held $9.4 million in cash bearing interest varying from nil to 1.5%, cash equivalents and short-term investments. Cash and cash equivalents correspond to our bank account balances. Of this cash, $575,000 is required to be placed in escrow pursuant to a new credit agreement with National Bank of Canada signed on April 29, 2009. Short-term investments consist essentially of non asset backed commercial paper bearing interest varying from 2.15% to 2.75%. The Company believes that its available cash and short-term investments, expected interest income and revenue should be sufficient to finance its operations, ongoing capital expenditures and capital needs for the coming year. (refer to the liquidity risk note)
Operating activities: Net cash used by operating activities totaled $1.6 million in Q4 2008, compared to $2.9 million for the corresponding quarter in 2007. The decrease in net cash used in Q4 2008 is the result of a negative change in non-cash working capital items, namely the reduction in payables. For the year 2008, net cash used by operating activities totaled $10.2 million in 2008, compared to $3.9 million in 2007. The variation in cash flow for the year is due primarily to the conversion of inventories into cash following our deliveries to Sprint in Q1 2007.
Investing activities: During Q4 2008, net cash flow used for investing activities was $775,000, compared with net cash used of $20.4 million for the corresponding quarter in 2007. The net cash used in Q4 2007 is the result of higher purchase of short-term investments at the end of 2007. For the year 2008, net cash provided by investing activities totaled $17.3 million in 2008, compared with net cash used of $13.0 million in 2007. The positive cash flow generated from the investing activities for 2008 comes mainly from the proceeds on sale of short-term investments, net of acquisition of property and equipment.
Financing activities: In Q4 2008, net cash used by financing activities amounted to $134,000 compared to $93,000 for the same period in 2007. The variance comes directly from the repayment of long-term debt. For the year 2008, net cash used by financing activities amount to $1.9 million, compared with net cash provided of $16.7 million in 2007. The variance comes from the share offering on July 24, 2007 net of the repayment of long-term debt.
Contractual obligations
We have committed to making the minimum payments below under the various contractual obligations in force as at December 31, 2008:
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Guarantee
On October 2, 2007, the Company provided an irrevocable standby letter of credit of US$5.5 million. The value of the letter of credit will decrease each year upon payment and will expire on February 2011. This obligation has been booked as a long-term liability offset by a long-term asset (broadcasting rights) in an amount of US$4.4 million corresponding to the present value of the non-interest bearing annual installments of US$1.375 million.
Outstanding shares
The table below shows the number of outstanding shares as at December 31, 2008 and the total number of outstanding securities as at April 29, 2009.
|Description | |Total outstanding |
| | |shares |
| | | |
|As at December 31, 2008: | | |
| Shares issued and paid up | |35,261,147 |
| | | |
| | | |
|As at April 29, 2009: | | |
| Shares issued and paid up | |35,261,147 |
| | | |
| Warrants | |2,648,196 |
| | | |
| Outstanding stock options | |1,771,216 |
| | | |
| | |39,680,,559 |
1. Each warrant, expiring on August 22, 2010, entitles the holder to obtain one common share from the Company at a price of $2.64.
Related party transactions
In 2008, the Company paid a total amount of $110,000 (2007 – $10,000) in consulting fees to a member of the Board of Directors. This transaction is measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
In 2004, the Company signed a royalty agreement with two shareholders – one being a director and a former officer of the Company up to January 27, 20009– stipulating that we had committed to pay an annual amount equivalent to 10% of earnings before interest, tax, depreciation and amortization (EBITDA) realized from the marketing of products that had been launched under the “Kangaroo” brand name and of all products created from this technology, to a maximum of $3.96 million. No amounts have been paid out to date in connection with this agreement.
Contingency and subsequent events: On September 29, 2008, a complaint was filed in the United States District Court Eastern District of Texas, Tyler Division by Front Row Technologies, LLC (“Front Row”) against the Company, NASCAR, The DirecTV Group, Inc, The National Football League, NFL Enterprises LLC, NFL Productions, Inc., NFL properties LLC and Sprint Nextel alleging infringement of Front Row’s United States Patents 7,149,549 and 7,376,388 related to the KTV technology ( the “Complaint”).
On February 6, 2009, the Company announced that it had signed a term sheet (the “Agreement”) with Front Row to end the Complaint. Under this Agreement, the Company and Front Row will each transfer and aggregate their respective patent portfolios relative to the field of handheld/mobile sports video and/or data distribution and display systems into a newly-formed company (“Newco”) of which Front Row and its associates will be the sole shareholders. Newco will be responsible for the maintenance of existing patents, filing of new patent applications and enforcement of the aggregated patent portfolio for the benefit of Front Row and the Company. The Company will have the right to appoint one of the three directors of Newco.
Currently, Front Row’s patent portfolio includes two issued patents in the United States and eight pending applications filed in the United States. The Company’s patent portfolio includes fourteen pending applications filed in the United States, three pending applications filed in Canada, one patent application filed in Australia, two patent applications filed in the People’s Republic of China, two patent applications filed under the European Patent Convention and one patent application filed in Japan. Newco will fund all new patent application prosecution and patent maintenance fees worldwide and any proceeds resulting from the enforcement of the aggregated patent portfolio will be shared by the Company and Front Row. Newco shall grant the company a worldwide, royalty-free, non exclusive, assignable licence for its entire aggregated patent portfolio.
Under the terms of the Agreement, Newco will be granted an option to purchase 19.9% of the issued and outstanding common shares of the Company for US$400,000 exercisable on December 31, 2012.
The Agreement contemplates that for a period of four years starting February 14, 2009, Front Row and its associates shall, subject to certain conditions, defend the Company at no cost except for out-of-pocket expenses, from any lawsuits filed, to a maximum of 3 cases, against it based on intellectual property infringement. In addition this Agreement shall enable the Company to immediately benefit from increased intellectual property protection and will facilitate injunctive remedies and damages in situations where a competitor would infringe the aggregated patent portfolio.
On April 8, 2009, with the signing of the formal agreement reflecting the above, Front Row has dismissed without prejudice its Complaint against the Company and all other defendants. However, the Agreement also provides that Front Row reserves the right to initiate a new complaint against the Company should regulatory approval and shareholder approval, if required, are not obtained by July 15, 2009.
On April 29, 2009, the Company signed a new credit agreement with National Bank of Canada whereby it is required to place in escrow $575,000, which represents a restricted cash amount.. This agreement is subject to the finalization of certain legal formalities by the bank and the approval by the Company’s Board of Directors.
Financial instruments
Our main financial instruments consisted of cash and cash equivalents, short-term investments, accounts receivable, certain assets included in other short-term assets, bank loan, accounts payable and accrued liabilities, long-term debt financial instruments and other long-term liabilities. The fair value of short-term financial assets and liabilities approximates their book value given that they will mature shortly. The fair value of long-term debt is equivalent to their carrying values given that interest rates vary according to fluctuations in the market. The fair value of other long-term liabilities has been established by discounting the future cash flows at an interest rate corresponding to that which the Company would currently be able to obtain for loans with similar maturity dates and terms.
We did not purchase any derivative instruments to manage our interest rate and currency exposures. As at December 31, 2008, we had no forward exchange contracts.
Liquidity risk
The company incurred operating losses since its inception and financed its operations primarily through the issuance of shares. In 2008, management undertook various initiatives and developed a plan to manage its operating and liquidity risks in lights of prevailing economic conditions, including reducing its headcount and operating expenses. Although the accumulated deficit of the Company, as at December 31, 2008 exceeds $60.0 million and cash outflows from operations were in excess of $11.0 million for fiscal 2008, the Company finished the year with cash and cash equivalents amounting to approximately $9.3 million. The company has prepared budgets for 2009 and 2010 for which management believes the assumptions are reasonable. Successful achievement of these budgeted results, however, is dependent on improving the volume of revenues and overall operating margins levels. Based on its business plan management expects that the Company should have enough liquidity to fund operations to December 31, 2009 and to cover the large forecasted disbursements in the first quarter of fiscal 2010.
The company is faced with uncertainties that may have an impact on future operating results and liquidity. These uncertainties include reduced spending in the entertainment and sports industry reflecting the weakness in the economy, the finalization of the new bank agreement, fluctuations in foreign currency rates and achieving the Company’s business plan goals as mentioned in the previous paragraphs. There is no assurance that management will be able to achieve its business plan and maintain the necessary liquidity level if events or conditions develop that are not consistent with management’s expectations and planned courses of actions. The Company is unable to predict the possible effects, if any, of such uncertainties and the potential adjustments to the carrying values of assets and liabilities that could be needed should the Company have insufficient liquidity. Such adjustments could be material.
Bank loan agreement
On December 14, 2006, the Company signed an agreement for a revolving line of credit of up to US$4,0 million or its equivalent in Canadian dollars which is to be used to finance 90% of the Company’s pre-shipment direct costs associated with its export contract. This line of credit is repayable on demand and is subject to periodic reviews at the bank’s discretion. The line of credit is secured by the universality of property and present and future inventories, and bears interest at the US base rate of the bank plus 1.50%, or 4.75% at December 31, 2008.
Under the terms of the agreement, the bank has agreed to provide a currency conversion risk facility for a principal amount of CA$300,000 which may be used to issue forward foreign exchange contracts on the sale or purchase of foreign currencies. As at December 31, 2008, the Company had no forward foreign exchange contracts outstanding to hedge against potential gains and losses.
Under the terms of the agreement, the bank has also agreed to provide a term loan sponsored by Export and Development Canada for a principal amount of up to CA$1,2 million, or equivalent US dollars, to be used to finance the cost of acquisition of new equipment .
Pursuant to the credit agreement, the Company must comply with certain financial covenants. As at December 31, 2008, the Company did not comply with three required financial ratios.
This agreement has been modified on January 9, 2009 and on April 29, 2009, the Company accepted a new credit agreement, subject to finalization of certain legal formalities by the bank and the approval by the Company’s Board of Directors. Under the term of the revised agreement, the line of credit of US$4,0 million and the CA$300,000 currency conversion risk facility have been withdrawn. The Company is also required to place amounts totalling CA$575,000 under escrow as restricted cash to secure the required payments under the term loan sponsored by Export and Development Canada (“EDC”) and to secure certain letters of credit and business cards facilities. Under the terms of the new credit agreement, the bank waived its rights relating to the breaches of covenants under the previous agreements and the Company is now subject to a single covenant which requires the Company to maintain a minimum current ratio.
Critical accounting policies and estimates
The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities as at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the evaluation of warrants and stock options, non-monetary transactions, long-term debt and other long-term liabilities, intangible assets as well as the valuation allowance with respect to future income taxes. Actual results may differ from estimated amounts.
Kangaroo Media’s critical accounting policies are those that it believes are the most important in determining its financial condition and results and requires significant subjective judgment by management. The Company considers an accounting estimate to be critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made, if different estimates could have reasonably been used or it changes in the estimate that would have a material impact on Kangaroo Media’s financial condition or results of operation are likely to occur from period to period.
Intangible assets
Intangible assets consist of patent and trademark costs and broadcasting rights. Patent and trademark costs are amortized using the straight-line method over their estimated useful lives of 10 years. Broadcasting rights are amortized using the straight-line method over the number of events to which they relate, which spreads over an 18-month period for broadcasting rights acquired in July 2006 and a 48-month period for those acquired in October 2007.
Revenue recognition
Certain contracts include multiple element or deliverables. The accounting policies for contracts including multiple elements require the Company to allocate the value of the contract among the various elements of the contract based on the fair value of each element and recongnize the revenue for each element when revenue recognition criteria are met. To determine the fair value of each element, the Company used a variety of factors such as the price charged for an element when it is sold separately, the price established by management with the proper authority, and any other information considered to be relevant by management.
Revenues from the sale of portable audiovisual entertainment systems are recognized when the systems are delivered and accepted by the customer. Revenues from the sale of licences are deferred and recognized proportionnally over the number of units sold on the minimal contractual quantity order for the term of the exclusivity period. Revenues from after-sales technical support and support services for the use of the audioviual entertainment systems are recognized on a straight-line basis over the term of the contract. This may involve estimates from management to determine the term of such obligations. Amount received in advance of recognition of revenue are included in deferred revenue.
Impairment of long-lived assets
Property and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment is assessed by comparing the carrying amount of an asset to be held and used with the sum of the undiscounted cash flows expected from its use and disposal, and as such requires us to make significant estimates on expected revenues from the commercialization of our products and services and the related expenses. If such assets are considered impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceeds its fair value generally determined on a discounted cash flow basis. Any impairment results in a write-down of the asset and a charge to income during the year.
Valuation allowance on future tax assets
We recorded a valuation allowance on future tax assets primarily related to operating losses carry forwards. We have assumed that the related tax benefits are not more likely than not going to be not realized based on our historical results and estimated future taxable income and tax planning strategies in the related jurisdictions. The implementation of tax planning strategies or the generation of future taxable income in these jurisdictions could result in the recognition of some portion or all of these carry forwards, which could result in a material increase in our results of operations through the recovery of future income taxes.
Stock-Based Compensation
The Company accounts for its stock option plan for directors, executives and employees, for stock option awards granted during the year. The fair value of stock options at the grant date is determined using the Black-Scholes option pricing model and expensed over the vesting period of the options. Assumptions that affect our application of the fair value method include the determination of volatility factors and the expected life of the options issued.
Non-monetary transactions
The Company records its non-monetary transactions at the more reliable measure of the faire value of the service given and the fair value of the service received. Management estimates fair value based on comparable historical transactions involving cash if any, or on evaluating the commercial value of the services rendered.
Change in accounting policies
The CICA has issued the following new Handbook Sections which were effective for interim and annual periods relating to fiscal years beginning on or after October 1, 2007:
• Section 3862, “Financial Instruments – Disclosures”, describes the required disclosure for the assessment of the significance of financial instruments for an entity’s financial position and performance and of the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks.
• Section 3863, “Financial Instruments – Presentation”, establishes standards for presentation of the financial instruments and the non-financial derivatives. It carries forward the presentation-related requirement of section 3861, “Financial Instruments – Disclosure and Presentation”.
• Section 1535, “Capital Disclosures”, establishes standards for disclosing information about an entity’s capital and how it is managed. It describes the disclosure of the entity’s objectives, policies and processes for managing capital, the quantitative data about what the entity regards as capital, whether the entity has complied with any capital requirements, and, if it has not complied, the consequences of such non-compliance.
The additional disclosures required as a result of the adoption of these standards have been included in note 11 Financial instruments in the Consolidated Financial Statements for the year ended December 31, 2008.
On January 1, 2008, the company also adopted the following new CICA Handbook sections:
• Section 3031, “Inventories”, replaces section 3030 of the same title and prescribes the basis and method for measuring inventories. It allows for the reversal of any previous write down of inventories as a result of an increase in value. Finally, the Section prescribes new requirements on the disclosure of the accounting policies adopted, carrying amounts, amounts recognized as an expense, the amount of any write-down and the amount of any reversal of a write-down. The difference in the measurement of opening inventory may be applied to the opening inventory for the period and opening retained earnings adjusted without restatements of prior periods, or applied retrospectively with restatement of prior periods.
• In May 2007, the CICA amended Section 1400,” General Standards of Financial Statement Presentation”, to change the guidance related to management’s responsibility to assess the ability of the entity to continue as a going concern. Management is required to make assessment of an entity’s ability to continue as a going concern and should take into account all available information about the future, which is at least, but not limited to, 12 months from the balance sheet date. Disclosure is required of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. The Company performed the required analysis at December 31,2008
Future changes to accounting standards
• Section 3064 “Goodwill and Intangible Assets”, replaces section 3062, “Goodwill and Other Intangible Assets”, and section 3450, “Research and Development Costs”. Various changes have been made to other sections of the CICA Handbook for consistency purposes. The new section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 20008. Accordingly, the Company will adopt the new standards for its fiscal year beginning January 1, 2009. It establishes standards for recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The Company does not expect the adoption of this new Section to have any significant impact on its consolidated financial statements.
In January 2009, the CICA issued the following new Handbook sections:
• Section 1582, “Business Combinations”, which replaces Section 1581, “Business Combinations”. The Section establishes standards for the accounting for a business combination. It provides the Canadian equivalent to the IFRS standard, IFRS 3 (Revised), “Business Combinations”. The Section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. Earlier application is permitted. The Company is currently evaluating the impact of the adoption of this new Section on its consolidated financial statements.
• Section 1601, “Consolidated Financial Statements”, and Section 1602, “Non-controlling Interests”, which together replace Section 1600, “Consolidated Financial Statements”. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of IFRS standard, IAS 27 (Revised), “Consolidated and Separate Financial Statements”. The sections apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier adoption is permitted as of the beginning of a fiscal year. The Company is currently evaluating the impact of the adoption of these new sections on its consolidated financial
• In February 2008, the Accounting Standards Board (“AcSB”) confirmed that the use of International Financial Reporting Standards (“IFRS”) will replace Canadian GAAP in 2011 for publicly accountable profit-oriented enterprises. The transition from current Canadian GAAP to IFRS will be applicable for the Company for the fiscal year beginning on January 1, 2011. While IFRS use a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy which must be addressed. The Company will convert to these new standards according to the timetable set for these new rules. The Company is currently establishing its transition plan.
Risk Factors
An investment in our common shares is subject to a number of risks. You should carefully consider the following risk factors in addition to the other information contained in this Annual Information Form. The risks and uncertainties below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations and cause the price of our common shares to decline. If any of the following risks actually occur, our business may be harmed and our financial condition and results of operations may suffer significantly. In that event, the trading price of our common shares could decline, and you may lose all or part of your investment.
Liquidity Risk
Cash liquidity is key to the Company’s ability to maintain and expand operations. Given its current ongoing business commitments, the Company’s operating costs exceed its operating revenues and this situation can pose a risk to its longer term viability and its ability to raise or to borrow additional cash should it be needed.
The Company is currently dependent on a limited number of sport properties and the loss of any one sport property could impact the Company’s operating results
For the year 2008, the Company’s consolidated revenue were essentially derived from three customers which represented 22%, 21% and 18% . In the future, the Company’s consolidated revenue may continue to depend on a limited number of sports properties and could vary significantly from one quarter to the next. If any such sports properties should reduce, postpone or discontinue current or expected purchases for Kangaroo’s devices and services, its business, revenue, financial condition and results of operations could be materially adversely affected.
Kangaroo may face competition from larger companies, new technologies and new entrants
Kangaroo currently has a two year agreement with Sprint in respect of NASCAR and a four year agreement with FOA and FOM in respect of F1 permitting the promotion and commercialization of its KTV service. Competition may come from larger, more financially capable companies, such as Sony’s recent attempt at live streaming highlights and replays on a PSP device of soccer games to stadium fans. Although Kangaroo believes that new technological advances such as WiMAX may represent a market development opportunity, Kangaroo’s competitive technological advantage may be adversely affected by such advances which could bring new entrants and competitors to Kangaroo’s market. Kangaroo may also face competition for sporting event rebroadcasting from new entrants. Such competition may precipitate a bidding war for on-site broadcasting distribution rights and prevent Kangaroo from renewing its existing agreements with Sprint FOA/FOM and DirectTV or impede Kangaroo’s ability to access new venues or events.
Failure to manage the Corporation’s growth successfully may adversely impact its operating results
The growth of Kangaroo’s business places a strain on managerial, financial and human resources. Kangaroo’s ability to manage future growth will depend in large part upon a number of factors, including the ability to rapidly build and train operating staff to coordinate Kangaroo’s activities; attract and retain qualified technical personnel; develop customer support capacity as sales increase; expand Kangaroo’s internal management and financial controls commensurate with internal growth; and expand and develop Kangaroo’s marketing and distribution process.
If Kangaroo is unable to address any of these factors, it could materially adversely affect its business, revenue, financial condition and results of operations.
Kangaroo’s success depends on its ability to enhance its existing products, obtain new patents, and develop new markets and partnerships
If Kangaroo is unable to successfully develop new markets and partnerships or enhance and improve its existing device and potentially develop new patents, or if Kangaroo fails to position and/or price its devices to meet market demand, its business, revenue, financial condition and results of operations could be materially adversely affected.
Competing in an environment of accelerating product introductions and shortening product life cycles may require high levels of expenditures for research and development that could adversely affect Kangaroo’s financial condition and operating results. Furthermore, any new sporting event for which Kangaroo enters into an agreement could require long development and testing periods and consequently, its service may not be introduced in a timely manner or may not achieve the broad market acceptance necessary to generate significant revenue and as such, may result in Kangaroo not being able to recover its development and operating costs and generate a profit.
Kangaroo’s reliance on a single manufacturer may jeopardize its deliveries of devices to sport events in a timely manner
Kangaroo currently obtains its device from a single manufacturer in China, VTech. Kangaroo depends on this manufacturer to meet its service agreements and to deliver devices to customers at sport events in a timely manner. Moreover, Kangaroo depends on the quality and reliability of this manufacturer over which it has limited control. If the manufacturer discontinues or restricts production of Kangaroo’s products, Kangaroo’s business, revenue, financial condition and results of operations could be materially adversely affected if Kangaroo cannot rapidly find a substituting manufacturer.
Defects in Kangaroo’s products could result in significant costs to it and could impair its ability to sell its products
Kangaroo’s devices may contain interface errors or manufacturing defects, which could be detected at any point in their life cycle. Defects in its products could materially and adversely affect Kangaroo’s reputation, result in significant costs to it, delay planned release dates, impair its ability to sell its devices in the future and, generally, materially adversely affect Kangaroo’s business, revenue, financial condition and results of operations.
If a successful product liability claim were made against Kangaroo, its business could be seriously harmed
While Kangaroo carries product liability insurance, a successful product liability claim could result in monetary liability in excess of Kangaroo’s insurance coverage or may not be covered under its insurance policy and could materially adversely affect its business, revenue, financial condition and results of operations.
If Kangaroo’s intellectual property is not adequately protected, it may lose its competitive advantage
Kangaroo relies on various intellectual property protections, including patents, copyright, trademark and trade secret laws, to preserve and protect its intellectual property rights. Kangaroo does not generally conduct freedom-to-operate verifications (for patents, patent applications or prior art) prior to developing new products or services and has not conducted such verifications in respect of its existing KTV services. Kangaroo may become involved in litigation to protect its intellectual property which could result in substantial expenses, divert the attention of its management, cause significant delays, materially disrupt the conduct of its business or materially adversely affect its revenue, financial condition and results of operations.
Infringement claims from third parties may have a material and adverse effect on Kangaroo’s business, operations or financial condition
Kangaroo has received and settled the Immersion lawsuit and may receive in the future, assertions and claims from third parties that its products infringe on their patents or other intellectual property rights. Kangaroo cannot determine with certainty whether any existing third-party trademarks or patents or the issuance of any third-party trademarks or patents would require Kangaroo to alter its product names or technology, obtain licenses or cease certain activities. In certain cases, litigation may be necessary to determine the scope, enforceability and validity of such third-party proprietary rights or to establish Kangaroo’s proprietary rights. Regardless of their merit, any such claims could result in injunctive relief, punitive damages, substantial expenses, divert the attention of Kangaroo’s management, cause significant delays, materially disrupt the conduct of Kangaroo’s business or materially adversely affect Kangaroo’s revenue, financial condition and results of operation.
Kangaroo’s ability to recruit and retain management and other qualified personnel is crucial to its ability to develop, market and support its products and services
Kangaroo depends on the services of its key technical and management personnel to operate and manage its business. The loss of such services could have a material adverse effect on Kangaroo’s business, revenue, financial condition and results of operation. Kangaroo’s inability to attract and retain the necessary management, technical, sales and marketing personnel may adversely affect its future growth and profitability. It may be necessary for Kangaroo to increase the level of compensation paid to existing or new employees to a degree such that its operating expenses could be materially increased.
Currency fluctuations may adversely affect the Corporation
A substantial portion of the Corporation’s consolidated revenue is earned in United States dollars, but a substantial portion of its operating expenses is incurred in Canadian dollars. Fluctuations in the exchange rates between the United States dollar and other currencies, such as the Canadian dollar, may have a material adverse effect on Kangaroo’s business, revenue, financial condition and results of operations. Currently, Kangaroo does not hedge the exposure related to any one foreign currency.
Additional information
For further information on the Company, visit the System for Electronic Document Analysis and Retrieval (SEDAR) Web site at .
Kangaroo Media Inc. Consolidated Financial Statements December 31, 2008 and 2007
April 29, 2009
Auditors’ Report
To the Shareholders of
Kangaroo Media Inc.
PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l. Chartered Accountants
1250 René-Lévesque Boulevard West
Suite 2800
Montréal, Quebec
Canada H3B 2G4
Telephone +1 514 205 5000
Facsimile +1 514 876 1502
We have audited the consolidated balance sheets of Kangaroo Media Inc. as at December 31, 2008 and 2007 and the consolidated statements of loss and deficit, comprehensive loss, contributed surplus and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
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1 Chartered accountant auditor permit No. 15492
“PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.
Kangaroo Media Inc.
Consolidated Balance Sheets
As at December 31, 2008 and 2007
(in thousands of dollars)
Assets
2008
$
2007
$
Current assets
Cash and cash equivalents (note 8) 9,266 4,130
Short-term investments (note 3) 160 19,940
Accounts receivable (note 4) 897 1,592
Inventories 128 995
Prepaid expenses 128 520
10,579 27,177
Property and equipment (note 6) 607 5,616
Intangible and other long-term assets (note 7) 573 4,823
11,759 37,616
Liabilities
Current liabilities
Accounts payable and accrued liabilities 1,993 4,830
Deferred revenue 211 283
Current portion of long-term debt and other long-term liabilities (note 9) 3,199 1,700
5,403 6,813
Deferred revenue 852 852
Long-term debt and other long-term liabilities (note 9) 3,624 4,955
Shareholders’ Equity
9,879 12,620
Capital stock and warrants (note 10) 58,446 58,446
Contributed surplus 6,312 5,269
Deficit (62,878) (38,769)
Accumulated other comprehensive income (note 16) - 50
1,880 24,996
11,759 37,616
Commitments (note 19)
Contingency and subsequent events (note 22)
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
_________________________________ Pierre Boivin _________________________________ Robert Mimeault
Kangaroo Media Inc.
Consolidated Statements of Loss and Deficit
For the years ended December 31, 2008 and 2007
(in thousands of dollars, except per share amounts)
2008
$
2007
$
Revenues 5,755 14,267
Cost of products and services 8,83 7 13,261
Gross margin (3,082) 1,006
Operating expenses
General and administrative expenses 4,290 3,907
Marketing and corporate development expenses 1,335 2,075
Research and development expenses (note 14) 1,068 957
Depreciation and amortization (notes 6 and 7) 3,936 3,593
Impairment of property and equipment (note 5) 4,966 - Impairment of intangible assets and other long-term assets (note 5) 2,818 - Stock-based compensation 1,043 1,376
New series start-up expenses - 120
Litigation (note 21) - 4,392
19,4 56 16,420
Loss before financial expenses (22,538) (15,414)
Financial expenses (note 14) 1,571 558
Net loss for the year (24,109) (15,972)
Deficit – Beginning of year (38,76 9) (22,797)
Deficit – End of year (62,878) (38,769)
Basic and diluted loss per share (0.68) (0.51)
Weighted average number of shares outstanding (note 10) 35,261,147 31,410,416
The accompanying notes are an integral part of these consolidated financial statements.
Kangaroo Media Inc.
Consolidated Statements of Comprehensive Loss
For the years ended December 31, 2008 and 2007
(in thousands of dollars)
2008
$
2007
$
Net loss for the year (24,109) (15,972)
Other comprehensive income
Net change in unrealized gain on short-term investments - 50
Comprehensive loss (24,109) (15,922)
Consolidated Statements of Contributed Surplus
For the years ended December 31, 2008 and 2007
(in thousands of dollars)
2008
$
2007
$
Balance – Beginning of year 5,269 4,298
Stock-based compensation 1,043 1,376
Exercise of stock options - (405)
Balance – End of year 6,31 2 5,269
The accompanying notes are an integral part of these consolidated financial statements.
Kangaroo Media Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2008 and 2007
(in thousands of dollars)
Cash flows from
2008
$
2007
$
Operating activities
Net loss for the year (24,109) (15,972) Adjustments for
Imputed interest on other long-term liabilities 808 - Unrealized foreign exchange loss 1,246 - Impairment of property and equipment and intangible
and other long-term assets (note 5) 7,784 - Depreciation and amortization 3,936 3,593
Stock-based compensation 1,043 1,376
Deferred revenue (72) (148) Changes in non-cash working capital items (note 17(a)) (883) 7,215
(10,247) (3,936)
Investing activities
Purchase of short-term investments (3) (19,855) Proceeds on sale of short-term investments 19,733 9,306
Acquisition of property and equipment (2,420) (2,308) Acquisition of intangible and other long-term assets (41) (103)
17,269 (12,960)
Financing activities
Proceeds from issuance of bank loan - 983
Repayment of bank loan - (2,731) Repayment of long-term debt (1,886) (535) Issuance of capital stock and warrants - 20,000
Exercise of warrants - 18
Exercise of stock options - 391
Issuance costs of shareholders’ equity instruments - (1,384)
(1,886) 16,742
Net increase (decrease) in cash and cash equivalents
for the year 5,136 (154)
Cash and cash equivalents – Beginning of year 4,13 0 4,284
Cash and cash equivalents – End of year 9,266 4,130
The accompanying notes are an integral part of these consolidated financial statements.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
1 Incorporation, nature of activities and liquidity risk
a) Incorporation and nature of acitivities
The Company was incorporated under the Canada Business Corporations Act on September 22, 2003. It develops, manufactures, commercializes, sells and rents hand-held wireless audiovisual multi-functional entertainment systems that enable users to create and tailor their on-site viewing experience of sporting events. The Company’s technology delivers real-time video, audio and data content to each fan’s hand-held Kangaroo TV device.
b) Liquidity risk
The Company has incurred operating losses since its inception and has been financing its operations primarily through the issuance of shares. In 2008, management undertook various initiatives and developed a plan to manage its operating and liquidity risks in light of prevailing economic conditions, including reducing its headcount and operating expenses. Although the accumulated deficit of the Company as at December 31, 2008 exceeds $62,000 and cash outflows from operations were in excess of $10,000 for fiscal 2008, the Company finished the year with cash and cash equivalents amounting to approximately
$9,266. The Company has prepared budgets for 2009 and 2010 for which management believes the assumptions are reasonable. Successful achievement of these budgeted results, however, is dependent on improving the volume of revenues and overall operating margin levels. Based on its business plan, management expects that the Company should have enough liquidity to fund operations to December 31,
2009 and to cover the large forecasted disbursements in the first quarter of fiscal 2010.
The Company is faced with uncertainties that may have an impact on future operating results and liquidity. These uncertainties include reduced spending in the entertainment and sports industries reflecting the weaknesses in the economy, the finalization of the new bank agreement described in note 8, fluctuations in foreign currency rates and achieving the Company’s business plan goals as mentioned in the previous paragraph. There is no assurance that management will be able to achieve its business plan and maintain the necessary liquidity level if events or conditions develop that are not consistent with management’s expectations and planned courses of actions. The Company is unable to predict the possible effects, if any, of such uncertainties and the potential adjustments to the carrying values of assets and liabilities that could be needed should the Company have insufficient liquidity. Such adjustments could be material.
2 Accounting policies
Principles of consolidation
On January 1, 2007, Kangaroo Media Inc. merged with its wholly owned subsidiaries 3721477 Canada Inc.,
4121856 Canada Inc. and Inc.
On March 9, 2007, Kangaroo TV Management Ltd. was incorporated under the laws of England and Wales to provide services to its parent company, Kangaroo TV Europe Ltd.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
On January 15, 2008, Kangaroo TV Europe SA was incorporated under the laws of Switzerland, Geneva
Canton.
These consolidated financial statements include the accounts of Kangaroo Media Inc. and its subsidiaries, Kangaroo TV USA Inc., Kangaroo TV Europe Ltd., Kangaroo TV Europe SA and Kangaroo TV Management Ltd.
Use of estimates
The preparation of financial statements in accordance with Canadian generally accepted accounting principles
(“Canadian GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the presentation of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the evaluation of warrants and stock options, non-monetary transactions, long-term debt and other long-term liabilities, intangible assets, impairment of long-lived assets as well as the valuation allowance with respect to future income taxes. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less from the acquisition date. As at December 31, 2007 and 2008, cash and cash equivalents consisted only of cash on hand.
Short-term investments
Short-term investments include money market instruments and commercial paper with maturities greater than three months from the acquisition date. Short-term investments are accounted for at fair value. Unrealized gains and losses are recognized in comprehensive income. Upon the disposal or impairment of these investments, these gains or losses are reclassified in the consolidated statement of loss.
Inventories
Inventories consist of raw materials and finished goods valued at the lower of cost and net realizable value, where cost is determined using the weighted average cost method. The cost of finished goods includes the cost of raw materials and subcontracting fees.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
Property and equipment
Property and equipment and assets acquired under capital lease are recorded at cost less related depreciation. Depreciation of property and equipment and assets acquired under capital lease are calculated over their estimated useful lives using the following methods and rates or periods:
Method Rate/Period
Vehicles Diminishing balance 30% Distribution and production equipment, research and
development equipment, and furniture and fixtures Straight-line 3 to 5 years Rental equipment, computer equipment and molds Straight-line 2 to 3 years Leasehold improvements Straight-line Lease term
Intangible assets
Intangible assets consist of patent and trademark costs and broadcasting rights. Patent and trademark costs are amortized using the straight-line method over their estimated useful lives of 10 years. Broadcasting rights are amortized using the straight-line method over the number of events to which they relate, which spreads over an
18-month period for broadcasting rights acquired in July 2006 and a 48-month period for those acquired in
October 2007.
Impairment of long-lived assets
The Company recognizes an impairment loss for long-lived assets to be held and used when events or changes in circumstances cause their carrying amount to exceed the total undiscounted future cash flows expected from their use and eventual disposition. In this case, the impairment loss of the asset is the amount by which its carrying amount exceeds its fair value.
Share issue costs
Share issue costs are accounted for as a reduction of shareholders’ equity instruments.
Stock-based compensation
The Company has a stock-based compensation plan for which it uses the fair value method. Under this method, the stock-based compensation expense is measured at the fair value at the date of grant using an option pricing model and is recognized over the vesting period of the options.
The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The Black-Scholes model was developed to estimate the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, this model usually requires the input of assumptions, including expected stock price volatility.
All considerations paid for stock options and the amount previously included for these stock options in contributed surplus are credited to capital stock, when they are exercised.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
Revenue recognition
Certain contracts include multiple elements or deliverables. The accounting policies for contracts including multiple elements require the Company to allocate the value of the contract among the various elements of the contract based on the fair value of each element and recognize the revenue for each element when revenue recognition criteria are met. To determine the fair value of each element, the Company uses a variety of factors such as the requested price for an element when it is sold separately, the price established by management with the proper authority, and any other information considered to be relevant by management.
Revenues from the sale of portable audiovisual entertainment systems are recognized when the systems are delivered and accepted by the customer.
Revenues from the sale of licences are recognized proportionally according to the number of units sold on the minimal contractual quantity order for the term of the exclusivity period.
Revenues from the services of after-sales technical support and support services for the use of the portable audiovisual entertainment systems are recognized on a straight-line basis over the term of the contract.
Rental revenues are recognized at the time of the use of the portable audiovisual entertainment systems. Amounts received before the delivery of products or services are classified in deferred revenue. Warranty provisions are recorded at the time revenue is recognized, on a predetermined basis.
Non-monetary transactions
The Company records its non-monetary transactions at the more reliable measure of the fair value of the service given and the fair value of the service received. Management estimates fair value based on comparable historical transactions involving cash, if any, or on evaluating the commercial value of the services rendered.
New series start-up expenses
New series start-up expenses comprise costs incurred to develop the new series and include travel expenses incurred to attend the events, salaries of the individuals attending the events, and production and subcontracting costs directly related to the events. New series start-up expenses are charged to consolidated income as incurred, net of revenue received. These expenses are presented on a separate line in the statement of loss until the service provided by the Company is performed on a fully commercial basis.
Research and development costs and income tax credits
Research expenses are charged to expenses as incurred. Development expenses are charged to expenses as incurred unless they meet generally accepted accounting criteria for deferral and amortization. To date, no development expenses have been deferred.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
Research and development tax credits receivable have been estimated by management based on tax rules in effect at the date of preparation of the financial statements. These credits are subject to a subsequent revision by the tax authorities. The difference between the credits granted and the credits recorded, if any, will be recorded in the consolidated statement of loss in the year in which the difference arises.
Foreign currency translation
The Company’s foreign subsidiaries are considered to be integrated foreign entities and are accounted for in accordance with the temporal method, as are transactions in foreign currencies entered into by the Company. Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the year-end exchange rate, non-monetary assets and liabilities are translated at the historical exchange rate, and revenue and expense items are translated into Canadian dollars at the rate of exchange in effect on the related transaction dates. Exchange gains and losses arising from these transactions are included as a charge or credit to income during the year.
Income taxes
The Company uses the liability method to account for income taxes. Under this method, future income tax assets and liabilities are determined according to differences between the carrying amounts and the tax bases of assets and liabilities. They are measured using enacted or substantively enacted tax rates and laws expected to apply in the years in which the temporary differences are expected to reverse.
The Company establishes a valuation allowance against future income tax assets if, according to the available information, it is not more likely than not that a part of or all future income tax assets will be realized.
Loss per share
The loss per common share is calculated on the weighted average number of shares outstanding during the year. All of the warrants and stock options described in notes 10 and 11 were not included in the calculation of diluted loss per share because of their anti-dilutive effect in the years disclosed.
Changes in accounting policies
The Canadian Institute of Chartered Accountants (“CICA”) has issued the following new Handbook sections which are effective for interim and annual periods relating to fiscal years beginning on or after October 1, 2007. The additional disclosures required as a result of the adoption of these standards have been included in note 18, Financial instruments:
a) Section 3862, “Financial Instruments – Disclosures”, describes the required disclosure for the assessment of the significance of financial instruments for an entity’s financial position and performance and of the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks.
b) Section 3863, “Financial Instruments – Presentation”, establishes standards for presentation of the financial instruments and non-financial derivatives. It carries forward the presentation-related requirement of Section 3861, “Financial Instruments – Disclosure and Presentation”.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
c) Section 1535, “Capital Disclosures”, establishes standards for disclosing information about an entity’s capital and how it is managed. It describes the disclosure of the entity’s objectives, policies and processes for managing capital, the quantitative data about what the entity regards as capital, whether the entity has complied with any capital requirements, and, if it has not complied, the consequences of such non-compliance.
On January 1, 2008, the Company also adopted the following new CICA Handbook sections:
d) Section 3031, “Inventories”, replaces Section 3030 of the same title and prescribes the basis and method for measuring inventories. It allows for the reversal of any previous writedown of inventories as a result of an increase in value. Finally, the Section prescribes new requirements on the disclosure of the accounting policies adopted, carrying amounts, amounts recognized as an expense, the amount of any writedown and the amount of any reversal of a writedown. The difference in the measurement of opening inventories may be applied to the opening inventories for the period and opening retained earnings adjusted without restatement of prior periods, or applied retrospectively with restatement of prior periods. The adoption of this standard had no impact on the Company’s consolidated
financial statements.
e) In May 2007, the CICA amended Section 1400, “General Standards of Financial Statement
Presentation”, to change the guidance related to management’s responsibility to assess the ability of
the entity to continue as a going concern. Management is required to make an assessment of an entity’s ability to continue as a going concern and should take into account all available information about the future, which is at least, but not limited to, 12 months from the balance sheet date. Disclosure is required of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. The Company performed the required analysis at December 31, 2008.
Future accounting changes
f) The CICA has issued new Handbook Section 3064, “Goodwill and Intangible Assets”, which replaces Section 3062, “Goodwill and Other Intangible Assets”, and Section 3450, “Research and Development Costs”. Various changes have been made to other sections of the CICA Handbook for consistency purposes. The new Section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will adopt the new standards for its fiscal year beginning January 1, 2009. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the superseded Section 3062. The Company does not expect the adoption of this new Section to have any significant impact on its consolidated financial statements.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
g) In January 2009, the CICA issued the following new Handbook sections:
i. Section 1582, “Business Combinations”, which replaces Section 1581, “Business Combinations”. The Section establishes standards for the accounting for a business combination. It provides the Canadian equivalent to the IFRS standard, IFRS 3 (Revised), “Business Combinations”. The Section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. Earlier application is permitted. The Company is currently evaluating the impact of the adoption of this new Section on its consolidated financial statements.
ii. Section 1601, “Consolidated Financial Statements”, and Section 1602, “Non-controlling
Interests”, which together replace Section 1600, “Consolidated Financial Statements”. Section
1601 establishes standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of IFRS standard, IAS 27 (Revised), “Consolidated and Separate Financial Statements”. The sections apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier adoption is permitted as of the beginning of a fiscal year. The Company is currently evaluating the impact of the adoption of these new sections on its consolidated financial statements.
h) The Accounting Standards Board announced that accounting standards in Canada are to converge with International Financial Reporting Standards (“IFRS”). The changeover date from current Canadian GAAP to IFRS has been established as January 1, 2011. While IFRS use a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy which must be addressed. The Company is currently assessing the future impact of these new standards on its financial statements.
3 Short-term investments
2008
$
2007
$
Commercial paper, bearing interest at rates varying from 3% to 3.95%,
matured from March 2008 to June 2008 - 19,940
Deposit certificates, bearing interest at rates varying from 2.15% to
2.75%, maturing at various dates from March 2009 to June 2009 160 -
160 19,940
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
4 Accounts receivable
2008
$
2007
$
Trade 635 956
Sales taxes receivable 181 130
Refundable research and development income tax credits - 442
Other receivables 81 64
897 1,592
Allowance for doubtful accounts totalled $217 at December 31, 2008 (2007 – nil).
5 Impairment of long-lived assets
As a result of current market conditions and the decline in its share price, the Company performed the required impairment test as of December 31, 2008. It tested its long-lived assets using a two-step methodology:
• Step 1 is to compare the carrying value of the long-lived assets to estimated undiscounted cash flows from the use of the assets. Estimating the cash flows from the Company’s current and potential future sports properties is complex given the current economic conditions in the world and the fact that changes to the Company’s business model have only recently been implemented and the outcome cannot be determined with certainty. This methodology contains estimates and judgments that are subjective and uncertain and thus, may change over time. Based on the Company’s forecast taking into account the Company’s current portfolio of activities, the book value of the long-lived assets is greater than the expected undiscounted cash flows from the use of the assets.
• Step 2 is to be performed when the book value exceeds the expected undiscounted cash flows. This step compares the carrying value of the long-lived assets to their fair value determined by reference to recognized valuation methods, including discounted cash flows. Based on the Company’s current operations, the book value of the long-lived assets exceeds their fair value by $7,784 and, as such, impairment charges of $4,966 to property and equipment and $2,818 to intangible and other long-term assets were recorded.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
6 Property and equipment
2008
Cost
$
Accumulated depreciation
$
Impairment
(note 5)
$
Undepreciated cost
$
Vehicles 377 217 160 - Distribution and production
equipment 3,732 1,708 1,701 323
Rental equipment 4,444 1,883 2,277 284
Research and development
equipment 314 168 146 - Computer equipment 377 301 76 - Molds 235 190 45 - Furniture and fixtures 209 115 94 - Leasehold improvements 1,064 597 467 - Distribution and production
equipment under a capital lease 42 42 - -
10,794 5,221 4,966 607
2007
Cost
$
Accumulated depreciation
$
Undepreciated cost
$
Vehicles 372 150 222
Distribution and production equipment 3,504 983 2,521
Rental equipment 2,701 965 1,736
Research and development equipment 288 109 179
Computer equipment 312 224 88
Molds 233 157 76
Furniture and fixtures 209 73 136
Leasehold improvements 1,064 406 658
Distribution and production equipment
under a capital lease 42 42 -
8,725 3,109 5,616
The depreciation expense for the year ended December 31, 2008, before impairment charge, was $2,463
(2007 – $1,629).
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
7 Intangible and other long-term assets
2008
Cost
$
Accumulated amortization
$
Impairment
(note 5)
$
Unamortized cost
$
Broadcasting rights 4,412 1,470 2,471 471
Patents and trademarks 360 13 347 - Long-term deposit 102 - - 102
4,874 1,483 2,818 573
2007
Cost
$
Accumulated amortization
$
Unamortized cost
$
Broadcasting rights 7,413 3,001 4,412
Patents and trademarks 319 10 309
Long-term deposit 102 - 102
7,834 3,011 4,823
The amortization expense for the year ended December 31, 2008, before impairment charge, was $1,473
(2007 – $1,964).
8 Bank loan
On December 14, 2006, the Company signed an agreement for a revolving line of credit of up to US$4,000 or its equivalent in Canadian dollars which is to be used to finance 90% of the Company’s pre-shipment direct costs associated with its export contract. This line of credit is repayable on demand and is subject to periodic reviews at the bank’s discretion. The line of credit is secured by the universality of property and present and future inventories, and bears interest at the US base rate of the bank plus 1.50%, or 4.75% at
December 31, 2008. There was no amount drawn on the line of credit at December 31, 2008.
Under the terms of the agreement, the bank has agreed to provide a currency conversion risk facility for a principal amount of CA$300 which may be used to issue forward foreign exchange contracts on the sale or purchase of foreign currencies. As at December 31, 2008, the Company had no forward foreign exchange contracts outstanding to hedge against potential gains and losses.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
Under the terms of the agreement, the bank has also agreed to provide a term loan sponsored by Export and Development Canada for a principal amount of up to CA$1,200, or equivalent US dollars, to be used to finance the cost of acquisition of new equipment (note 9).
Pursuant to the credit agreement, the Company must comply with certain financial covenants. As at
December 31, 2008, the Company did not comply with three required financial ratios, namely the current ratio
(1.96 versus 2 required), minimum shareholders’ equity and the total debt to shareholders’ equity for which the shareholders’ equity as defined per the agreement is less than 0.
This agreement has been modified on January 9, 2009 and on April 29, 2009, the Company accepted a new credit agreement, subject to finalization of certain legal formalities by the bank and the approval by the Company’s Board of Directors. Under the term of the revised agreement, the line of credit of US$4,000 and the CA$300 currency conversion risk facility have been withdrawn. The Company is also required to place amounts totalling CA$575 under escrow as restricted cash to secure the required payments under the term loan sponsored by Export and Development Canada (“EDC”) and to secure certain letters of credit and business cards facilities. Under the terms of the new credit agreement, the bank waived its rights relating to the breaches of covenants under the previous agreements and the Company is now subject to a single covenant which requires the Company to maintain a minimum current ratio.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
9 Long-term debt and other long-term liabilities
Long-term debt includes:
2008
$
2007
$
Loan of US$1,042 (CA$1,214), secured by the universality of property, bearing interest at the US base rate of the bank plus 2%, or 5.25% at December 31, 2008, principal redeemable by monthly installments of US$29, maturing
in December 2009 423 690
Other long-term liabilities include the following:
Present value of non-interest-bearing long-term service agreement for broadcasting rights, payable in annual
installments of US$1,375, maturing in January 2011 4,362 4,412
Present value of non-interest-bearing patent licence agreement, payable in quarterly installments in fiscal 2008 and based on the level of sales of the Company in certain countries and for which there is a guaranteed minimum annual amount of US$1,000 to be paid. The shortfall between
the amount actually paid through installments and the guaranteed amount must be paid in February of the following year. Accordingly, the Company has accounted for this loan on the basis of paying the guaranteed
minimum amount in February 2009 and 2010 2,038 1,553
6,40 0 5,965
6,823 6,655
Less: Current portion 3,199 1,700
3,624 4,955
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
As at December 31, 2008, the installments on long-term debt for the next three years are as follows:
Long-term service agreement
$
Patent licence agreement
$
Loan
$
Total
$
2009 1,675 1,101 423 3,199
2010 1,675 1,157 - 2,832
2011 1,675 - - 1,675
5,025 2,258 423 7,706
Less: Imputed interest 663 220 - 883
4,362 2,038 423 6,823
Less: Current portion 1,675 1,101 423 3,199
2,687 937 - 3,624
10 Capital stock and warrants
Capital stock
Authorized – unlimited number of common shares without par value
The following table sets forth a reconciliation of information on the Company’s issued and outstanding common shares:
Number Amount
$
Balance as at December 31, 2006 28,268,112 37,528
Shares issued for cash (note 10(b)) 6,557,377 18,616
Shares issued on exercise of warrants 6,825 22
Shares issued on exercise of stock options 428,833 796
Balance as at December 31, 2007 and December 31, 2008 35,261,147 56,962
a. The Company was trading on the Toronto Stock Exchange up until December 30, 2008 and began trading on the TSX Venture Exchange on December 31, 2008 under the symbol “KTV”.
b. On July 24, 2007, the Company concluded a share offering for 6,557,377 of its common shares at a price of
$3.05 per share, for gross proceeds of $20,000. Net proceeds from the issuance after underwriting fees and offering expenses amounted to $18,616.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
Warrants
The following table sets forth a reconciliation of outstanding warrants:
Number Amount
$
Balance as at December 31, 2006 2,655,021 1,488
Exercised during the year (6,825) (4)
Balance as at December 31, 2007 and December 31, 2008(1) 2,648,196 1,484
(1) Outstanding warrants at the end of 2008 are exercisable at a price of $2.64 each and their weighted average remaining contractual life is estimated at 1.64 years.
Weighted average number of shares outstanding
The following table outlines the weighted average number of shares used in the calculation of the basic and diluted loss per share:
2008
$
2007
$
Weighted average number of shares outstanding –
Basic and diluted 35,261,147 31,410,416
Options to acquire 2,377,216 common shares (2007 – 2,430,216) and warrants to acquire 2,648,196 common shares (2007 – 2,648,196) have been excluded from the calculation of the diluted weighted average number of common shares outstanding since their inclusion would have an anti-dilutive effect.
11 Stock option plan
On April 8, 2004, the Company introduced a stock-based compensation plan (the “Plan”), as amended on September 10, 2004, August 11, 2005, April 24, 2006 and March 16, 2009 for its directors, officers, employees and consultants.
The Plan provides that the options granted will not exceed a ten-year term, will be granted at a price which must not be less than the closing market price on the last trading day of the listed shares before the date of the stock option grant, according to the terms set by the Company’s directors, the whole in accordance with the applicable regulatory policies.
The number of options that can be granted cannot exceed 10% of the issued and outstanding common shares of the Company at the date of issuance. Options granted usually have a minimum 12-month vesting period, with a gradual and equal vesting period on at least a quarterly basis.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
The following table summarizes stock option activities under the Plan for the year ended December 31:
2008 2007
Number of stock options
Weighted average exercise price
$
Number of stock options
Weighted average exercise price
$
Balance – Beginning of year 2,430,216 1.95 2,533,049 1.85
Granted 302,500 0.18 415,000 1.57
Exercised - - (428,833) 0.91
Forfeited (355,500) 2.43 (89,000) 2.52
Balance – End of year 2,377,216 1.65 2,430,216 1.95
Options eligible to be exercised 1,870,216 1.86 1,683,716 1.85
Options
Options
outstanding exercisable
Exercise price
$
Number
Weighted average remaining
life (years) Number
0.18 302,500 9.62 37,500
0.80 500,000 0.27 500,000
1.10 95,000 8.87 23,750
1.14 85,000 0.54 85,000
1.23 200,000 8.83 110,000
1.40 8,216 0.62 8,216
2.20 212,500 0.83 212,500
2.52 75,000 7.87 37,500
2.60 812,500 1.61 812,500
2.75 86 ,500 7.95 43 ,250
1.86 2,377,216 3.56 1,870,216
On August 14, 2008, the Company granted 302,500 stock options at a price of $0.18 per common share to its newly appointed director and employees. The fair value of these stock options was estimated at $36 using the Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate 2.81% and 3.22% Estimated life 5 and 6.25 years Expected volatility 70% Expected dividend yield nil
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
On October 30, 2007 and November 12, 2007, the Company granted 315,000 stock options at prices varying from $1.10 to $1.23 per common share to its directors and employees. The fair value of these stock options was estimated at $133 and $84, respectively, using the Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate 4.14% Estimated life 3.75 and 6.5 years Expected volatility 70% Expected dividend yield nil
On March 22, 2007, the Company granted an employee a total of 100,000 stock options at a price of $2.78 per common share. The total fair value of these stock options was estimated at $188 using the Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate 4.03% Estimated life 6.5 years Expected volatility 70% Expected dividend yield nil
12 Related party transactions
During the year, the Company paid a total of $110 (2007 – $10) in consulting fees to a director. These transactions occurred in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
On October 27, 2004, following an amendment to the agreement signed February 4, 2004, the Company committed to pay, starting January 1, 2004, an annual amount equal to 10% of the earnings before interest, income taxes, depreciation and amortization resulting from any products marketed under the “Kangaroo” trademark and any products using the same technology, to certain shareholders, one of whom is a director and up to January 27, 2009 was an officer of the Company, until these persons receive a total cumulative amount of
$3,957. To date, no amount has been paid under the terms of this agreement.
13 Non-monetary transactions
During the year, the Company entered into non-monetary transactions whereby it provided units of its portable device to corporate customers in exchange for direct sales and marketing activities. These transactions were recorded at fair value, resulting in an amount of $1,200 (2007 – $1,205) being recognized in revenues and cost of products and services.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
14 Information on consolidated statements of loss and deficit
Financial expenses
2008
$
2007
$
Interest on long-term debt 953 516
Interest income (453) (799) Foreign exchange loss 1,071 841
1,571 558
Research and development expenses
Research and development expenses were $1,068 and $957 during the years ended December 31, 2008 and
2007 respectively.
Research and development income tax credits in the amounts of $(61) for December 31, 2008 and $351 for
December 31, 2007 were recorded against the related research and development expenses.
Cost of sales
The amount of inventories recognized as an expense was $194 as at December 31, 2008 (2007 – $5,496).
15 Income taxes
a) As at December 31, 2008, the Company had unused research and development expenses of $925 and
$2,012 at the federal and provincial levels, respectively, that may be carried forward indefinitely to reduce future taxable income. The Company had available research and development income tax credits at the federal level in an amount of $243 to reduce income taxes payable. These credits expire at various dates between 2010 and 2028.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
In addition, as at December 31, 2008, the Company had non-capital losses at the federal and provincial levels for which no income tax benefits have been recorded in the financial statements. These non-capital losses may be used to reduce taxable income in future years as follows:
Federal
$
Provincial
$
2009 354 310
2010 1,010 1,010
2014 2,911 2,714
2015 3,961 3,856
2026 6,054 5,823
2027 4,580 4,580
2028 11,1 40 11,140
30,010 29,433
The Company has non-capital losses carried forward in its foreign subsidiaries which are available to reduce taxable income of future years for which no income tax benefits have been recorded in the financial statements. As at December 31, 2008, the Company’s US subsidiary has non-capital losses carried forward totalling approximately $1,140 which may be claimed no later than the fiscal year ending 2028 and as at December 31, 2008, the Company’s Irish subsidiary has non-capital losses carried forward totalling
$12,839, which may be claimed indefinitely.
b) The difference between the effective income tax rate and the statutory income tax rate is explained as follows:
2008
%
2007
%
Statutory income tax rate (30.9) (32.0) Increase (decrease) attributable to the following items
Non-deductible stock-based compensation 1.3 2.8
Tax rate impact for foreign subsidiaries 4.7 6.3
Valuation allowance 19.3 17.4
Investment tax credits - 3.3
Non-deductible items 4.6
Exchange translation items (1.1)
Other 2.1 2.2
- -
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
c) Future income taxes consist of the following items:
2008
$
2007
$
Non-capital loss carryforwards 10,015 7,108
Research and development expenses and tax credits 555 642
Excess of tax value for tax purposes over the carrying
value of property and equipment and intangible assets 2,412 732
Amounts not currently deductible 417 - Share issuance costs 401 621
Warranty provision 90 129
13,890 9,232
Valuation allowance (13,890) (9,232)
- -
16 Accumulated other comprehensive income
Unrealized gain on short-term investments
$
Balance as at December 31, 2007 50
Net change incurred during the year (50)
Balance as at December 31, 2008 -
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
17 Additional information on cash flows
a. Cash flows related to the changes in non-cash working capital items were as follows:
2008
$
2007
$
Accounts receivable 695 (685) Inventories 867 4,610
Prepaid expenses 392 (143) Accounts payable and accrued liabilities (2,837) 3,433
(883) 7,215
b. Additional information
Interest paid 45 180
Acquisition of intangible and other long-term assets
included in other long-term liabilities - 4,412
18 Financial instruments
Derivative financial instruments
As at December 31, 2008, the Company did not have derivative financial instruments outstanding to hedge forecasted cash flows or contractual cash flows in currencies other than its functional currency.
Risk management disclosures
The Company is exposed to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth. The main objectives of its risk management process are to ensure that risks are properly identified and that the capital base is adequate in relation to these risks. The principal financial risks to which the Company is exposed are described below.
Capital risk management
The Company manages its capital to ensure that there are adequate capital resources to support its development. Capital is defined as long-term debt and other long-term liabilities, bank loans and advances net of cash equivalents and shareholders’ equity which includes capital stock.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
The Company’s objectives when managing capital are to:
• ensure its ability to support its development and continue as a going concern;
• maintain an optimal capital structure and reduce the cost of capital; and
• make capital investments providing adequate returns and ensure the Company remains competitive. When managing its capital structure, the Company may issue new shares and contract bank loans and advances and long-term debt. The basis for the Company’s capital structure is dependent on the Company’s expected business growth and changes in the business environment.
The Company is subject to certain covenants on its credit facilities. The covenants include maintaining minimum shareholders’ equity, working capital ratio and debt leverage ratio. The Company monitors the ratios on a quarterly basis. Other than the covenants required for the credit facilities, the Company is not subject to any externally imposed capital requirements.
Market risk
Market risk incorporates a range of risks. Movements in risk factors such as interest rate risk affect the fair values of financial assets and financial liabilities.
Interest rate risk
The Company is exposed to interest rate risk on its long-term debt and does not currently hold any financial instruments that mitigate this risk. Management does not believe that the impact of interest rate fluctuations on the current level of borrowings will be significant and, therefore, has not provided a sensitivity analysis of the impact of fluctuations on net loss and comprehensive loss.
Cash and cash equivalents Nil to 1.5% Short-term investments As indicated in note 3
Accounts receivable No interest
Bank loan As indicated in note 8
Accounts payable and accrued liabilities No interest
Long-term debt and other long-term liabilities As indicated in note 9
The following are the contractual obligations of financial liabilities as at December 31, 2008:
Carrying amount
$
Contractual cash flows
$
Less than
1 year
$
Between
1 and 2
years
$
Between
3 and 5
years
$
Account payable
and accrued liabilities 1,993 1,993 1,993 - - Long-term debt 6,823 7,706 3,199 2,832 1,675
8,816 9,699 5,192 2,832 1,675
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
Liquidity risk
Liquidity risk is the risk that the Company is not able to meet its financial obligations as they fall due. The Company’s development is financed through a combination of borrowing under the existing credit facilities and the issuance of debt and equity. One of management’s primary goals is to maintain an optimal level of liquidity through the active management of its assets, liabilities and cash flows. The Company believes that its available cash and cash equivalents, short-term investments, expected interest income and revenues should be sufficient to finance its operations, ongoing capital expenditures and other capital needs for the coming year (note 1(b)).
Fair value
Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are financial instruments whose fair value approximates their carrying value due to their short-term maturity.
The fair value of long-term debt is equivalent to its carrying value given that the interest rate varies according to fluctuations in the market. The fair value of other long-term liabilities has been established by discounting the future cash flows at an interest rate corresponding to that which the Company would currently be able to obtain for loans with similar terms and maturity dates.
Credit risk
The financial instruments that subject the Company to potential credit risk consist of cash and cash equivalents, short-term investments and trade accounts receivable. The Company’s cash and cash equivalents are
maintained at major financial institutions and its short-term investments consist of commercial paper issued by large creditworthy corporations; therefore, the Company considers the risk of non-performance on these instruments to be remote. To date, the Company has not incurred any losses related to these instruments.
The Company allows relatively short payment terms and does not require guarantees. The Company carries out assessments of its trade accounts receivable on a continuing basis and maintains provisions for contingent losses on these accounts. Management believes that the credit risks associated with these financial instruments are minimal.
The Company is exposed to the credit risk that a client will be unable to pay amounts in full when due. Although two of the Company’s clients each represent 40% of its accounts receivable as at December 31, 2008, the Company believes it is not subject to significant credit risk in view of the creditworthiness of these
two clients.
As at December 31, 2008, approximately 52% of trade accounts receivable are outstanding for more than
90 days from the date of the invoice, while approximately 25% are current (less than 30 days).
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
Foreign exchange risk
The Company realizes the majority of its revenue in foreign currencies, mainly in US dollars. Its foreign currency risk is partially offset by purchases of property and equipment and expenditures carried out in the same currency.
The Company maintains cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities in foreign currencies and is therefore exposed to currency risk on these funds. The balances in foreign currencies at December 31 are as follows:
US Dollars Euros British Pounds
2008
$
2007
$
2008
€
2007
€
2008
£
2007
£
Cash and cash
equivalents 338 1,534 57 113 37 33
Accounts receivable 297 875 110 16 53 26
Accounts payable and accrued
liabilities (296) (3,057) (111) (23) (35) (54)
339 (648) 56 106 55 5
Foreign currency sensitivity analysis
The Company is exposed to fluctuations mainly in the US dollar. The following table details the Company’s sensitivity to a 10% strengthening of the US dollar on net loss and comprehensive loss against the Canadian dollar. The sensitivity analysis includes foreign currency-denominated monetary items and adjusts their translation at period-end for a 10% change in foreign currency exchange rates. For a 10% weakening of
the US dollar against the Canadian dollar, there would be an equal and opposite impact on net loss and comprehensive loss.
US dollar impact
$
Net loss and comprehensive loss 635
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
19 Commitments
As at December 31, 2008, the Company is committed under the terms of operating leases with various expiration dates, primarily for the rental of premises and office equipment. Minimum lease payments due in the next years are as follows:
$
2009 183
2010 177
2011 120
480
The Company entered into service agreements to provide assistance in business development and market positioning. Remaining minimum payments under these agreements total $18 and are due in 2009.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
20 Segmented information
The Company is organized and managed as a single reportable business segment. Its operations are related to the development, manufacture, sale and rental of its portable wireless audiovisual device.
Selected financial information is as follows:
For the year ended
December 31
2008
$
2007
$
Revenue based on customers’ locations
USA 1,351 11,917
UK 1,752 1,314
Others 2,65 2 1,036
5,755 14,267
Revenue mix
Sale of devices, licences and accessories 574 10,537
Rental and activation 4,334 2,788
Services 847 942
5,755 14,267
As at December 31
Property and equipment
2008
$
2007
$
Canada 471 4,556
Ireland 136 1,060
607 5,616
Intangible and other long-term assets
Canada 102 411
Ireland 471 4,412
573 4,823
The Company’s revenues for the year ended December 31, 2008 were essentially derived from three customers which represented 22%, 21% and 18% of sales (2007 – one customer represented 81.5%).
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
21 Litigation
Immersion Entertainment, LLC
On February 13, 2007, a complaint was filed in the United States District Court, Eastern District of Texas, Tyler Division, by Immersion Entertainment, LLC (“Immersion”) against the Company, NASCAR and Sprint Nextel alleging infringement of Immersion’s United States patents related to the KTV technology.
On February 4, 2008, the Company and Immersion jointly announced that they signed definitive licensing and settlement agreements. The Company and the other defendants entered into a settlement agreement with Immersion.
Additionally, the Company entered into a worldwide exclusive patent licence agreement with Immersion concerning all issued patents and pending applications relating to Immersion’s intellectual property portfolio and technology. Under the patent licence agreement, Immersion grants the Company exclusive worldwide rights to its intellectual property portfolio until December 31, 2010. Thereafter, at the Company’s sole option, the exclusive worldwide rights may be extended until the expiration of Immersion’s last issued patent. The patent licence agreement provided for a payment by the Company to Immersion of US$2,000 on February 1,
2008, in addition to payments of royalties on covered sales retroactive to January 1, 2008 with minimum royalties of US$1,000 for each of 2008 and 2009.
The Company judges that the US$2,000 payment and the minimum royalty payments were part of the costs of settling the Immersion complaint. Consequently, the Company recorded an expense of $3,536 in fiscal 2007 representing the present value of the US$2,000 settlement payment and the minimum royalties of US$1,000 for each of 2008 and 2009 as well as an expense of $856 to account for legal and professional fees in connection with the litigation, for a total of $4,392.
22 Contingency and subsequent events
Front Row Technologies, LLC
On September 29, 2008, a complaint was filed in the United States District Court, Eastern District of Texas, by Front Row Technologies, LLC (“Front Row”) against the Company, NASCAR, The DirecTV Group, Inc., The National Football League, NFL Enterprises LLC, NFL Productions, Inc., NFL Properties LLC and Sprint Nextel alleging infringement of Front Row’s United States patents Nos. 7,149,549 and 7,376,388 related to the KTV technology (the “Complaint”).
On February 6, 2009, the Company announced that it had signed a term sheet (the “Agreement”) with Front Row to settle the Complaint. Under this Agreement, the Company and Front Row will each transfer and aggregate their respective patent porfolios relative to the field of handheld/mobile sports video and/or data distribution and display systems into a newly formed company (“Newco”) of which Front Row and its associates will be the sole shareholders. Newco will be responsible for the maintenance of existing patents, filing of new patent applications and enforcement of the aggregate patent portfolio for the benefit of Front Row and the Company. The Company will have the right to appoint one of the three directors of Newco.
Kangaroo Media Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(in thousands of dollars, except share and per share amounts)
Currently, Front Row’s patent portfolio includes two issued patents and eight pending applications filed in the United States. The Company’s patent portfolio includes fourteen pending applications filed in the United States, three pending applications filed in Canada, one patent application filed in Australia, two patent applications filed in the People’s Republic of China, two patent applications filed under the European Patent Convention and one patent application filed in Japan. Newco will fund all new patent application prosecution and patent maintenance fees worldwide and any proceeds resulting from the enforcement of the aggregate patent portfolio will be shared by the Company and Front Row. Newco shall grant the Company a worldwide, royalty-free, non-exclusive, assignable licence for its entire aggregated patent portfolio.
Under the terms of the Agreement, Newco will be granted an option to purchase 19.9% of the issued and outstanding common shares of the Company for US$400 exercisable on December 31, 2012.
The Agreement contemplates that for a period of four years starting February 14, 2009, Front Row and its associates shall, subject to certain conditions, defend the Company at no cost, except for out-of-pocket expenses, from any lawsuits filed, to a maximum of 3 cases, against it based on intellectual property infringement. In addition, this Agreement shall enable the Company to immediately benefit from increased intellectual property protection and will faciliate injunctive remedies and damages in situations where a competitor would infringe the aggregated patent portfolio.
On April 8, 2009, with the signing of the formal agreement reflecting the above, Front Row has dismissed without prejudice its Complaint against the Company and all other defendants. However, the Agreement also provides that Front Row reserves the right to initiate a new complaint against the Company should regulatory approval and shareholder approval, if required, not be obtained by July 15, 2009.
New banking agreement
On April 29, 2009, the Company signed a new agreement with National Bank of Canada, the details of which are provided in note 8.
23 Comparative figures
Certain comparative figures have been reclassified to conform with the presentation adopted in 2008.
-----------------------
Management’s Discussion & Analysis
for the fourth quarter and
year ended
December 31, 2008
................
................
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