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


FORM 6-K


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

For the month of July 2019

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

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


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


Form 20-F ☑
Form 40-F □

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

Yes □
No ☑


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




Table of Contents

Signatures
Press Release
Condensed Unaudited Interim Consolidated Balance Sheets
Condensed Unaudited Interim Consolidated Statements of Earnings
Condensed Unaudited Interim Consolidated Statements of Comprehensive Loss
Condensed Unaudited Interim Consolidated Statements of Changes in Shareholders’ Equity
Condensed Unaudited Interim Consolidated Statements of Cash Flows
Notes to Condensed Unaudited Interim Consolidated Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Form 52-109F2 – Certification of Interim Filings – Full Certificate – CEO
Form 52-109F2 – Certification of Interim Filings – Full Certificate – CFO




On July 10, 2019, EXFO Inc., a Canadian corporation, reported its results of operations for the third fiscal quarter ended May 31, 2019. This report on Form 6-K sets forth the news release relating to EXFO’s announcement and certain information relating to EXFO’s financial condition and results of operations as well as certifications of interim filings for the third fiscal quarter of the 2019 fiscal year. This press release and information relating to EXFO’s financial condition and results of operations and certifications of interim filings for the third fiscal quarter of the 2019 fiscal year are hereby incorporated as a document by reference to Form F-3 (Registration Statement under the Securities Act of 1933) declared effective as of July 30, 2001 and to Form F‑3 (Registration Statement under the Securities Act of 1933) declared effective as of March 11, 2002 and to amend certain material information as set forth in these two Form F-3 documents.


Page 1 of 51



SIGNATURES

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



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


Date: July 10, 2019


Page 2 of 51





EXFO reports third quarter results for fiscal 2019
Sales reached US$73.6 million, above midpoint of guidance range
IFRS net earnings attained break-even mark, US$0.00 per share
Adjusted EBITDA totaled US$7.9 million, 10.7% of sales

QUEBEC CITY, CANADA, July 10, 2019 — EXFO Inc. (NASDAQ: EXFO; TSX: EXF), the communications industry's test, monitoring and analytics experts, reported today financial results for the third quarter ended May 31, 2019.

Sales increased 1.9% to US$73.6 million in the third quarter of fiscal 2019 from  US$72.2 million in the third quarter of 2018. After nine months in fiscal 2019, sales improved 8.2% year-over-year to US$216.7 million. Astellia contributed nine months to EXFO’s financial results in 2019 versus four months for the same period in 2018.

Bookings decreased 4.8% to US$69.6 million for a book-to-bill ratio of 0.95 in the third quarter of fiscal 2019 from US$73.1 million for the same period of 2018. After nine months in fiscal 2019, bookings increased 10.9% year-over-year to US$226.9 million for a book-to-bill ratio of 1.05.

Gross margin before depreciation and amortization* amounted to 58.6% of sales in the third quarter of fiscal 2019 compared to 59.9% in the third quarter of 2018.

IFRS net earnings in the third quarter of fiscal 2019 totaled US$21,000, or US$0.00 per share, compared to a net loss of US$6.0 million, or US$0.11 per share, in the third quarter of 2018. IFRS net earnings in the third quarter of 2019 included US$1.7 million in after-tax amortization of intangible assets, US$0.5 million in stock-based compensation costs and a foreign exchange gain of US$0.1 million. After nine months in fiscal 2019, IFRS net loss attributable to the parent interest1 amounted to US$2.3 million compared to US$8.0 million for the same period in 2018.

Adjusted EBITDA* totaled US$7.9 million, or 10.7% of sales, in the third quarter of fiscal 2019 compared to US$2.5 million, or 3.5% of sales, in the third quarter of 2018. After nine months in fiscal 2019, adjusted EBITDA surged 74.5% year-over-year to US$19.4 million.

“I am pleased with our execution so far in fiscal 2019 with significant year-over-year increases in sales, bookings and adjusted EBITDA, including third quarter revenue above the midpoint of guidance and an adjusted EBITDA margin greater than 10% for a second consecutive quarter,” said EXFO's CEO Philippe Morin. "This heightened level of consistency reflects a strong performance against our growth strategy, leveraging fiber buildouts, data center interconnects as well as 5G deployments and network virtualization, while maintaining a sound financial discipline. We are confident that we will at least achieve our adjusted EBITDA target of US$24 million for fiscal 2019.”

1Represents net loss excluding share of the net loss attributable to Astellia’s minority shareholders.





Page 3 of 51





Selected Financial Information
(In thousands of US dollars)
   
Three months
ended
May 31, 2019
   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2019
   
Nine months
ended
May 31, 2018
 
                         
Test and Measurement sales
 
$
54,359
   
$
49,864
   
$
154,530
   
$
149,934
 
Service Assurance, Systems and Services sales
   
19,469
     
22,174
     
62,586
     
49,599
 
Foreign exchange gains (losses) on forward exchange contracts
   
(241
)
   
179
     
(401
)
   
797
 
Total sales
 
$
73,587
   
$
72,217
   
$
216,715
   
$
200,330
 
                                 
Test and Measurement bookings
 
$
50,157
   
$
52,111
   
$
159,473
   
$
152,351
 
Service Assurance, Systems and Services bookings
   
19,648
     
20,800
     
67,822
     
51,407
 
Foreign exchange gains (losses) on forward exchange contracts
   
(241
)
   
179
     
(401
)
   
797
 
Total bookings
 
$
69,564
   
$
73,090
   
$
226,894
   
$
204,555
 
Book-to-bill ratio (bookings/sales)
   
0.95
     
1.01
     
1.05
     
1.02
 
Gross margin before depreciation and amortization*
 
$
43,129
   
$
43,254
   
$
128,298
   
$
122,752
 
     
58.6
%
   
59.9
%
   
59.2
%
   
61.3
%
                                 
Other selected information:
                               
IFRS net earnings (loss) attributable to the parent interest
 
$
21
   
$
(5,970
)
 
$
(2,253
)
 
$
(7,951
)
Amortization of intangible assets
 
$
2,072
   
$
4,210
   
$
7,142
   
$
8,385
 
Stock-based compensation costs
 
$
475
   
$
440
   
$
1,354
   
$
1,280
 
Restructuring charges (reversals)
 
$
(13
)
 
$
   
$
3,305
   
$
 
Change in fair value of cash contingent consideration
 
$
   
$
   
$
   
$
(716
)
Acquisition-related deferred revenue fair value adjustment
 
$
   
$
913
   
$
1,435
   
$
1,222
 
Net income tax effect of the above items
 
$
(344
)
 
$
(138
)
 
$
(1,115
)
 
$
(704
)
Foreign exchange (gain) loss
 
$
(146
)
 
$
(160
)
 
$
55
   
$
(1,386
)
Adjusted EBITDA*
 
$
7,860
   
$
2,549
   
$
19,372
   
$
11,100
 

Operating Expenses
Selling and administrative expenses reached US$23.8 million, or 32.3% of sales in the third quarter of fiscal 2019 compared to US$26.0 million, or 35.9% of sales, in the same period last year.

Net R&D expenses attained US$12.0 million, or 16.3% of sales, in the third quarter of fiscal 2019 compared to US$16.1 million, or 22.3% of sales, in the third quarter of 2018.




Page 4 of 51





Third-Quarter Highlights
Growth. Sales increased 1.9% year-over-year despite a negative currency impact. The increase in sales can be attributed to heightened demand for EXFO’s Test and Measurement product line, especially 100G/200G/400G optical transport solutions for communications service providers and advanced equipment for the R&D labs and factories of network equipment manufacturers. Service Assurance, Systems and Services (SASS) sales were down year-over-year mainly due to a market slowdown to evaluate how to optimally transform network architectures into virtualized 5G infrastructures. Test and Measurement sales accounted for 74% of total revenue in the third quarter of 2019, while SASS sales totaled 26%. Revenue breakdown among the three main selling regions amounted to 51% in the Americas, 30% in Europe, Middle East and Africa (EMEA) and 19% in Asia-Pacific (APAC) EXFO’s top customer accounted for 6.9% of sales, while the top three represented 16.9%.

Profitability. IFRS net earnings attained the break-even mark in the third quarter of 2019, while adjusted EBITDA reached US$7.9 million, or 10.7% of sales. After nine months in fiscal 2019, IFRS net loss amounted to US$2.3 million while adjusted EBITDA totaled US$19.4 million.

Innovation. EXFO introduced a new category of fiber testing solutions with the launch of the industry’s first optical fiber multimeter (OFM) following the quarter-end. This revolutionary test instrument, branded Optical Xplorer™, greatly simplifies and accelerates the task of frontline technicians by automatically evaluating the quality of fiber links in a matter of seconds.

Business Outlook
EXFO forecasts sales between US$66.0 million and US$71.0 million for the fourth quarter of fiscal 2019.

IFRS net results are expected to range between a loss of US$0.02 per share and earnings of US$0.02 per share in the fourth quarter of 2019. IFRS net results include US$0.04 per share in after-tax amortization of intangible assets and stock-based compensation costs.

This guidance, which is a forward-looking statement, was established by management based on existing backlog as of the date of this news release, seasonality, expected bookings for the remaining of the quarter, as well as exchange rates as of the day of this news release.

Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review third quarter results for fiscal 2019. To listen to the conference call and participate in the question period via telephone, dial 1-323-794-2093. Please take note the following participant passcode will be required: 8949289. Germain Lamonde, founder and Executive Chairman, Philippe Morin, Chief Executive Officer, and Pierre Plamondon, Vice-President of Finance and Chief Financial Officer, will participate in the call. An audio replay of the conference call will be available two hours after the event until 8:00 p.m. on July 17, 2019. The replay number is 1-719-457-0820 and the required participant passcode is 8949289. The audio Webcast and replay of the conference call will also be available on EXFO’s Website at www.EXFO.com, under the Investors section.




Page 5 of 51





About EXFO
EXFO (NASDAQ: EXFO) (TSX: EXF) develops smarter test, monitoring and analytics solutions for fixed and mobile network operators, webscale companies and equipment manufacturers in the global communications industry. Our customers count on us to deliver superior network performance, service reliability and subscriber insights. They count on our unique blend of equipment, software and services to accelerate digital transformations related to fiber, 4G/LTE and 5G deployments. They count on our expertise with automation, real-time troubleshooting and big data analytics, which are critical to their business performance. We’ve spent over 30 years earning this trust, and today 1,900 EXFO employees in over 25 countries work side by side with our customers in the lab, field, data center and beyond.

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




Page 6 of 51





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

These non-IFRS measures eliminate the effect on IFRS results of non-cash and/or non-operating statement of earnings elements, as well as elements subject to significant volatility such as foreign exchange gain or loss. EXFO uses these measures for evaluating historical and prospective financial performance, as well as its performance relative to competitors. These non-IFRS measures are also the financial measures used by financial analysts to evaluate and compare EXFO’s performance against competitors and industry players in the company’s sector.

Finally, these measures help EXFO plan and forecast future periods as well as make operational and strategic decisions. EXFO believes that providing this information, in addition to the IFRS measures, allows investors to see the company’s results through the eyes of management, and to better understand historical and future financial performance. More importantly, it enables the comparison of EXFO’s performance on a relatively similar basis against other public and private companies in the industry worldwide.

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

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




Page 7 of 51





Adjusted EBITDA
   
Three months ended
May 31, 2019
   
Three months ended
May 31, 2018
   
Nine months ended
May 31, 2019
   
Nine months ended
May 31, 2018
 
                         
IFRS net earnings (loss) attributable to the parent interest for the period
 
$
21
   
$
(5,970
)
 
$
(2,253
)
 
$
(7,951
)
                                 
Add (deduct):
                               
                                 
Depreciation of property, plant and equipment
   
1,368
     
1,555
     
4,187
     
3,972
 
Amortization of intangible assets
   
2,072
     
4,210
     
7,142
     
8,385
 
Interest and other (income) expense
   
698
     
198
     
(439
)
   
870
 
Income taxes
   
3,385
     
1,363
     
4,586
     
5,424
 
Stock-based compensation costs
   
475
     
440
     
1,354
     
1,280
 
Restructuring charges (reversals)
   
(13
)
   
     
3,305
     
 
Change in fair value of cash contingent consideration
   
     
     
     
(716
)
Acquisition-related deferred revenue fair value adjustment
   
     
913
     
1,435
     
1,222
 
Foreign exchange (gain) loss
   
(146
)
   
(160
)
   
55
     
(1,386
)
Adjusted EBITDA for the period (1)
 
$
7,860
   
$
2,549
   
$
19,372
   
$
11,100
 
                                 
Adjusted EBITDA as a percentage of sales
   
10.7
%
   
3.5
%
   
8.9
%
   
5.5
%

(1)
Includes acquisition-related costs of US$2.1 million for the nine months ended May 31, 2018 (nil in fiscal 2019).


EXFO-F

-30-

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




Page 8 of 51


EXFO Inc.
Condensed Unaudited Interim Consolidated Balance Sheets

(in thousands of US dollars)


   
As at
May 31,
2019
   
As at
August 31,
2018
 
             
Assets
           
             
Current assets
           
Cash
 
$
13,623
   
$
12,758
 
Short-term investments
   
1,691
     
2,282
 
Accounts receivable
               
Trade
   
52,876
     
47,273
 
Other
   
3,384
     
4,137
 
Income taxes and tax credits recoverable
   
2,985
     
4,790
 
Inventories
   
37,859
     
38,589
 
Prepaid expenses
   
5,492
     
5,291
 
Other assets
   
2,945
     
2,279
 
     
120,855
     
117,399
 
                 
Tax credits recoverable
   
46,271
     
47,677
 
Property, plant and equipment
   
40,509
     
44,310
 
Intangible assets
   
22,875
     
29,866
 
Goodwill
   
38,517
     
39,892
 
Deferred income tax assets
   
5,229
     
4,714
 
Other assets
   
911
     
686
 
   
$
275,167
   
$
284,544
 
Liabilities
               
                 
Current liabilities
               
Bank loan
 
$
5,000
   
$
10,692
 
Accounts payable and accrued liabilities
   
48,903
     
47,898
 
Provisions
   
1,181
     
2,954
 
Income taxes payable
   
1,040
     
873
 
Deferred revenue
   
24,943
     
16,556
 
Other liabilities
   
1,624
     
3,197
 
Current portion of long-term debt (note 5)
   
2,579
     
2,921
 
     
85,270
     
85,091
 
                 
Provisions
   
2,830
     
2,347
 
Deferred revenue
   
9,086
     
6,947
 
Long-term debt (note 5)
   
3,876
     
5,907
 
Deferred income tax liabilities
   
3,638
     
5,910
 
Other liabilities
   
625
     
421
 
     
105,325
     
106,623
 
                 
Shareholders’ equity
               
Share capital (note 6)
   
92,889
     
91,937
 
Contributed surplus
   
18,734
     
18,428
 
Retained earnings
   
112,400
     
114,906
 
Accumulated other comprehensive loss
   
(54,181
)
   
(47,350
)
     
169,842
     
177,921
 
                 
   
$
275,167
   
$
284,544
 


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


Page 9 of 51


EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Earnings

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


   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
 
                         
Sales
 
$
73,587
   
$
216,715
   
$
72,217
   
$
200,330
 
                                 
Cost of sales (1)
   
30,458
     
88,417
     
28,963
     
77,578
 
Selling and administrative
   
23,761
     
75,610
     
25,957
     
74,066
 
Net research and development
   
11,970
     
39,410
     
16,101
     
40,440
 
Depreciation of property, plant and equipment
   
1,368
     
4,187
     
1,555
     
3,972
 
Amortization of intangible assets
   
2,072
     
7,142
     
4,210
     
8,385
 
Change in fair value of cash contingent consideration
 
   
   
     
(716
)
Interest and other (income) expense (note 3)
   
698
     
(439
)
   
198
     
870
 
Foreign exchange (gain) loss
   
(146
)
   
55
     
(160
)
   
(1,386
)
Share in net loss of an associate
 
   
   
     
2,080
 
Gain on the deemed disposal of the investment in an associate
 
   
   
     
(2,080
)
Earnings (loss) before income taxes
   
3,406
     
2,333
     
(4,607
)
   
(2,879
)
                                 
Income taxes (notes 3 and 8)
   
3,385
     
4,586
     
1,363
     
5,424
 
                                 
Net earnings (loss) for the period
   
21
     
(2,253
)
   
(5,970
)
   
(8,303
)
Net loss for the period attributable to non-controlling interest
 
   
   
     
(352
)
                                 
Net earnings (loss) for the period attributable to parent interest
 
$
21
   
$
(2,253
)
 
$
(5,970
)
 
$
(7,951
)
                                 
Basic and diluted net earnings (loss) attributable to parent interest per share
 
$
0.00
   
$
(0.04
)
 
$
(0.11
)
 
$
(0.14
)
                                 
Basic weighted average number of shares outstanding (000’s)
   
55,392
     
55,306
     
55,099
     
54,959
 
                                 
Diluted weighted average number of shares outstanding (000’s) (note 9)
   
56,437
     
55,306
     
55,099
     
54,959
 

(1)
The cost of sales is exclusive of depreciation and amortization, shown separately.


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


Page 10 of 51


EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Comprehensive Loss

(in thousands of US dollars)


   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
 
                         
Net earnings (loss) for the period
 
$
21
   
$
(2,253
)
 
$
(5,970
)
 
$
(8,303
)
Other comprehensive income (loss), net of income taxes
                               
Items that may be reclassified subsequently to net earnings
                               
Foreign currency translation adjustment
   
(4,611
)
   
(6,160
)
   
(3,189
)
   
(5,033
)
Unrealized gains/losses on forward exchange contracts
   
(1,046
)
   
(1,237
)
   
(486
)
   
(971
)
Reclassification of realized gains/losses on forward exchange contracts in net earnings
   
(91
)
   
210
     
(232
)
   
(840
)
Deferred income taxes on gains/losses on forward exchange contracts
   
314
     
356
     
155
     
418
 
Other comprehensive loss
   
(5,434
)
   
(6,831
)
   
(3,752
)
   
(6,426
)
                                 
Comprehensive loss for the period
   
(5,413
)
   
(9,084
)
   
(9,722
)
   
(14,729
)
                                 
Comprehensive loss for the period attributable to non-controlling interest
 
   
   
     
(352
)
                                 
Comprehensive loss for the period attributable to parent interest
 
$
(5,413
)
 
$
(9,084
)
 
$
(9,722
)
 
$
(14,377
)


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


Page 11 of 51


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

(in thousands of US dollars)


   
Nine months ended May 31, 2018
 
   
Share
capital
   
Contributed surplus
   
Retained earnings
   
Accumulated other comprehensive loss
   
Non-controlling interest
   
Total
shareholders’ equity
 
                                     
Balance as at September 1, 2017
 
$
90,411
   
$
18,184
   
$
127,160
   
$
(38,965
)
 
$
   
$
196,790
 
Reclassification of stock-based compensation costs (note 6)
   
1,499
     
(1,499
)
 
   
   
   
 
Stock-based compensation costs
 
     
1,322
   
   
   
     
1,322
 
Business combination
 
   
   
   
     
(3,662
)
   
(3,662
)
Acquisition of non-controlling interest
 
   
     
(352
)
 
     
4,014
     
3,662
 
Net loss for the period
 
   
     
(7,951
)
 
     
(352
)
   
(8,303
)
Other comprehensive loss
                                               
Foreign currency translation adjustment
 
   
   
     
(5,033
)
 
     
(5,033
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $418
 
   
   
     
(1,393
)
 
     
(1,393
)
                                                 
Comprehensive loss for the period
                                           
(14,729
)
                                                 
Balance as at May 31, 2018
 
$
91,910
   
$
18,007
   
$
118,857
   
$
(45,391
)
 
$
   
$
183,383
 


   
Nine months ended May 31, 2019
 
   
Share
capital
   
Contributed surplus
   
Retained earnings
   
Accumulated other comprehensive loss
   
Total
shareholders’ equity
 
                               
Balance as at September 1, 2018
 
$
91,937
   
$
18,428
   
$
114,906
   
$
(47,350
)
 
$
177,921
 
Adoption of IFRS 9 (note 2)
 
   
     
(253
)
 
     
(253
)
Adjusted balance as at September 1, 2018
   
91,937
     
18,428
     
114,653
     
(47,350
)
   
177,668
 
Reclassification of stock-based compensation costs (note 6)
   
1,078
     
(1,078
)
 
   
   
 
Redemption of share capital (note 6)
   
(126
)
   
21
   
   
     
(105
)
Stock-based compensation costs
 
     
1,363
   
   
     
1,363
 
Net loss for the period
 
   
     
(2,253
)
 
     
(2,253
)
Other comprehensive loss
                                       
Foreign currency translation adjustment
 
   
   
     
(6,160
)
   
(6,160
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $356
 
   
   
     
(671
)
   
(671
)
                                         
Total comprehensive loss for the period
                                   
(9,084
)
                                         
Balance as at May 31, 2019
 
$
92,889
   
$
18,734
   
$
112,400
   
$
(54,181
)
 
$
169,842
 


The accompanying notes are an integral part of these condensed unaudited interim consolidated financial statements


Page 12 of 51


EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Cash Flows

(in thousands of US dollars)


   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
 
                         
Cash flows from operating activities
                       
Net earnings (loss) for the period
 
$
21
   
$
(2,253
)
 
$
(5,970
)
 
$
(8,303
)
Add (deduct) items not affecting cash
                               
Stock-based compensation costs
   
475
     
1,354
     
440
     
1,280
 
Depreciation and amortization
   
3,440
     
11,329
     
5,765
     
12,357
 
Gain on disposal of capital assets (note 3)
 
     
(1,732
)
 
   
 
Write-off of capital assets
 
     
261
     
77
     
325
 
Change in fair value of cash contingent consideration
 
   
   
     
(716
)
Deferred revenue
   
1,676
     
11,619
     
(552
)
   
1,682
 
Deferred income taxes
   
(142
)
   
(2,295
)
   
389
     
2,533
 
Share in net loss of an associate
 
   
   
     
2,080
 
Gain on deemed disposal of the investment in an associate
 
   
   
     
(2,080
)
Changes in foreign exchange gain/loss
   
143
     
(310
)
   
(603
)
   
(239
)
     
5,613
     
17,973
     
(454
)
   
8,919
 
Changes in non-cash operating items
                               
Accounts receivable
   
(12,857
)
   
(7,038
)
   
2,353
     
7,693
 
Income taxes and tax credits
   
1,596
     
1,629
     
172
     
(2,787
)
Inventories
   
(306
)
   
(668
)
   
1,162
     
(12
)
Prepaid expenses
   
(585
)
   
(380
)
   
16
     
205
 
Other assets
   
(664
)
   
(1,003
)
   
(245
)
   
(769
)
Accounts payable, accrued liabilities and provisions
   
1,995
     
2,013
     
1,821
     
5
 
Other liabilities
   
(6
)
   
(1,527
)
   
(109
)
   
101
 
     
(5,214
)
   
10,999
     
4,716
     
13,355
 
Cash flows from investing activities
                               
Additions to short-term investments
   
(286
)
   
(578
)
 
     
(482
)
Proceeds from disposal of short-term investments
   
826
     
1,168
   
     
234
 
Purchases of capital assets
   
(1,639
)
   
(6,318
)
   
(3,431
)
   
(7,680
)
Proceeds from disposal of capital assets (note 3)
 
     
3,318
   
   
 
Investment in an associate
 
   
   
     
(12,530
)
Business combinations, net of cash acquired
 
   
   
     
(19,120
)
     
(1,099
)
   
(2,410
)
   
(3,431
)
   
(39,578
)
Cash flows from financing activities
                               
Bank loan
   
(3,808
)
   
(5,052
)
   
9,184
     
11,250
 
Repayment of long-term debt
   
(713
)
   
(2,165
)
   
(757
)
   
(1,027
)
Redemption of share capital (note 6)
 
     
(105
)
 
   
 
Acquisition of non-controlling interest
 
   
     
(3,657
)
   
(3,657
)
     
(4,521
)
   
(7,322
)
   
4,770
     
6,566
 
Effect of foreign exchange rate changes on cash
   
(306
)
   
(402
)
   
(119
)
   
(289
)
                                 
Change in cash during the period
   
(11,140
)
   
865
     
5,936
     
(19,946
)
Cash – Beginning of the period
   
24,763
     
12,758
     
12,553
     
38,435
 
Cash – End of the period
 
$
13,623
   
$
13,623
   
$
18,489
   
$
18,489
 
                                 
Supplementary information
                               
Income taxes paid
 
$
391
   
$
1,877
   
$
426
   
$
1,695
 
Additions to capital assets
 
$
1,898
   
$
5,269
   
$
3,371
   
$
8,959
 


As at May 31, 2018 and 2019, unpaid purchases of capital assets amounted to $1,801 and $739 respectively.


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


Page 13 of 51



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

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


1
Nature of Activities and Incorporation

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

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

These condensed unaudited interim consolidated financial statements were authorized for issue by the Board of Directors on July 10, 2019.


2
Basis of Presentation

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

Recently Issued IFRS Pronouncements

Recently issued IFRS Pronouncements Adopted in Fiscal 2019

Financial instruments

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

   
As reported
as at August 31, 2018
   
Adjustments
   
As adjusted
as at September 1, 2018
 
                   
Accounts receivable – Trade
 
$
47,273
   
$
(303
)
 
$
46,970
 
Income taxes recoverable
 
$
4,790
   
$
50
   
$
4,840
 
Total assets
 
$
284,544
   
$
(253
)
 
$
284,291
 
                         
Retained earnings
 
$
114,906
   
$
(253
)
 
$
114,653
 
Shareholders’ equity
 
$
177,921
   
$
(253
)
 
$
177,668
 


Page 14 of 51



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

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


In addition, the company’s financial instruments are accounted for as follows under IFRS 9 as compared to the company’s previous accounting policy with IAS 39:

 Financial assets
Classification – IAS 39
Classification – IFRS 9
     
 Cash
Loans and receivables
Amortized cost
 Short-term investments
Available for sale
Fair value through other comprehensive income
 Accounts receivable
Loans and receivables
Amortized cost
 Other assets
Loans and receivables
Amortized cost
 Forward exchange contracts
Derivatives used for hedging
Derivatives used for hedging

Financial liabilities

 Bank loan
Other financial liabilities
Amortized cost
 Accounts payable and accrued liabilities
Other financial liabilities
Amortized cost
 Other liabilities
Other financial liabilities
Amortized cost
 Long-term debt
Other financial liabilities
Amortized cost
 Forward exchange contracts
Derivatives used for hedging
Derivatives used for hedging

Hedge accounting

All existing hedge relationships that were designated as effective hedging relationships under IAS 39, were re-designated, and continue to qualify for hedge accounting under IFRS 9. The adoption of IFRS 9 did not change the application of hedge accounting for the company’s effective hedges.

Revenue from contracts with customers

IFRS 15, “Revenue from Contracts with Customers”, was issued in May 2014. The objective of this new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. This new standard contains principles that an entity must apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity recognizes revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This new standard is effective for annual periods beginning on or after January 1, 2018. The company adopted this new standard on September 1, 2018 using the modified retrospective method. The company applied this standard retrospectively only to contracts that were not completed at the date of initial application.

The company concluded that the main areas of impact relate to the allocation of the transaction price to the various performance obligations under the contracts, the timing of revenue recognition for sales arrangement that contain customer acceptance clauses, and the sale of licenses that provide customers with the “right to use” the company’s intellectual property. The adoption of the new standard had no material impact on the company’s consolidated financial statements.

Foreign Currency Transactions and Advance Consideration

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


Page 15 of 51



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

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


Recently issued IFRS Pronouncements Not Yet Adopted

Leases

IFRS 16, Leases”, was issued in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e., the customer (lessee) and the supplier (lessor). IFRS 16 will supersede IAS 17, “Leases”, and related interpretations. Under IFRS 16, lessees will recognize a right-of-use asset and a lease liability measured at the present value of lease payments for virtually all of their leases. Short-term leases with a term of 12 months or less are not required to be recognized. This new standard is effective for annual periods beginning on or after January 1, 2019.

The company will adopt this new standard on September 1, 2019, using the modified retrospective method, which does not require adjustments to comparative periods. The company will apply IFRS 16 at the adoption date and recognize right-of-use assets and lease liabilities in the period of adoption. The new standard provides a number of optional practical expedients in transition. Upon implementation of the new standard, the company intends to elect the practical expedients to combine lease and non-lease components, and to not recognize right-of-use assets and lease liabilities for short-term leases. The company is in the process of identifying appropriate changes to its accounting policies, information technology systems, business processes, and related internal controls to support recognition and disclosure requirements under IFRS 16. While the company is not yet able to assess the full impact of the application of this new standard, the company expects that its adoption will materially increase the assets and liabilities recorded on its consolidated balance sheets. However, the company does not expect the adoption of this standard to have a significant impact on the net earnings. The lease expense, previously recorded under cost of sales, selling and administrative expenses and net research and development expenses will be recorded as depreciation and amortization expenses of the right-of-use asset and as interest expenses on the lease liability in the consolidated statements of earnings. In addition, lease payments for the right-of-use asset, previously reported in cash flow from operating activities will be reported in cash flow from financing activities in the consolidated statements of cash flows.

Uncertainty over Income Tax Treatments

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

New Accounting Policy upon Adoption of Recently Issued IFRS

Revenue Recognition under IFRS 15

The company exercises judgment and use estimates in connection with determining the amounts of product and services revenues to be recognized in each accounting period.

The company accounts for revenue once a legally enforceable contract with a customer has been approved by the parties and the related promises to transfer products or services have been identified. A contract is defined by the company as an arrangement with commercial substance identifying payment terms, each party’s rights and obligations regarding the products or services to be transferred and collection is probable. The company’s contracts usually take form of a customer purchase order.


Page 16 of 51



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

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


Customer contracts may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one single performance obligation may require significant judgment. The company assesses whether each promised good or service is distinct for the purpose of identifying the various performance obligations in each contract. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer; and (ii) the company's promise to transfer the good or service to the customer is separately identifiable or distinct from other promises in the contract. The company derives revenues from goods and services. Sales of goods, which represent the majority of the sales of the company, consist of standalone hardware products, hardware products with embedded software that are essential to providing customers the intended functionality of the solutions, stand-alone software licenses, as well as hardware products bundled with a software license. Sales of services mainly consist of professional services, consulting, stand-ready software-as-a-service (SAAS), maintenance contracts, extended warranties, installation, integration and training. The company’s performance obligations consist of a variety of products and services.

Revenue is recognized when control of the products or services are transferred to the customers in an amount that reflects the consideration the company expects to be entitled to in exchange for products and services. Revenue is recognized at the point in time control is transferred to the customer. For hardware sales, transfer of control to the customer typically occurs at the point the product is shipped or delivered to the customer’s designated location. For ‘’right of use’’ software license sales, transfer of control to the customer typically occurs upon shipment, electronic delivery, or when the software is available for download by the customer. For instances where software is sold along with essential services, such as integration or installation, transfer of control occurs, and revenue is typically recognized upon customer acceptance. In certain instances, acceptance is deemed to have occurred if all acceptance provisions lapse, or if the company has evidence that all acceptance provisions will be, or have been, satisfied. Revenue from software and hardware support is recognized ratably over the support period. Support services generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates, bug fixes and hardware repair and replacement. SAAS services are recognized ratably over the contract term.

If the contract contains a single performance obligation, the entire transaction price is attributed to that performance obligation. Some of the company’s contracts include multiple distinct performance obligations with a combination of products and services, maintenance and support, professional services and/or training. The company allocates the transaction price among the performance obligations in an amount that depicts the relative standalone selling prices (SSP) of each obligation. Judgment is required to determine the SSP for each distinct performance obligation. The company assesses SSP based on historical pricing for products and services, whether sold alone or as part of a multiple element transaction. The company reviews sales of the product and services elements on a regular basis and updates, when appropriate, its SSP for such elements to ensure that it reflects recent pricing experience.

Financial Instruments

Financial assets are measured at amortized cost if they are held within a business model whose objective is to hold assets to collect contractual cash flows, and their contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Otherwise, they are designated at fair value through profit or loss.

Financial liabilities are measured at amortized cost unless they must be measured at fair value through profit or loss or if the company elects to measure them at fair value through profit or loss.


Page 17 of 51



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

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


3
Restructuring Charges

In August 2018, the company implemented a restructuring plan to accelerate the integration of its newly acquired monitoring and analytics technologies from EXFO Solutions S.A.S., (formerly Astellia S.A.) and simplify its cost structure and optimize resources as the company converges toward fewer sites and reduces its workforce.

The following table summarizes changes in restructuring charges payable during the three months and nine months ended May 31, 2019:

   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
 
             
 Balance – Beginning of the period
 
$
1,795
   
$
3,167
 
 Additions and reversals (note 7)
   
(13
)
   
3,305
 
 Payments
   
(357
)
   
(5,047
)
                 
 Balance – End of the period
 
$
1,425
   
$
1,425
 

On September 9, 2018, as part of its fiscal 2018 restructuring plan and the shutdown of its facilities in Toronto, Canada, the company entered into a binding agreement to sell one of its buildings for net proceeds of $3,318,000. The transfer of ownership occurred in the second quarter of fiscal 2019, as the company continued to use the facility to finalize projects until then. The transaction resulted in a pre-tax gain of $1,732,000 that was recorded in the condensed unaudited interim consolidated statements of earnings for the three months ended February 28, 2019 and the nine months ended May 31, 2019.

In addition, during the three months ended February 28, 2019, as part of its fiscal 2018 restructuring plan and the shutdown of some of its facilities in the United States, the company transferred the ownership of certain intellectual properties held in the United States to Canada. This created a deductible tax asset in Canada and resulted in the recognition of a deferred income tax recovery of $2,383,000 during the three months ended February 28, 2019 as the recovery of this asset is probable. This deferred income tax recovery was recorded in the condensed unaudited interim consolidated statements of earnings for the three months ended February 28, 2019 and the nine months ended May 31, 2019.


4
Financial Instruments

Fair Value of Financial Instruments

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


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


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


Level 3:
Unobservable inputs for the asset or liability


Page 18 of 51



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

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


The company’s short-term investments and forward exchange contracts are measured at fair value at each balance sheet date. The company’s short-term investments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. The company’s forward exchange contracts are classified within Level 2 of the fair value hierarchy because they are valued using quoted prices and forward exchange rates at the balance sheet dates.

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

The fair value of derivative and non-derivative financial assets and liabilities measured at fair value by level of fair value hierarchy, is as follows:

   
As at May 31, 2019
   
As at August 31, 2018
 
   
Level 1
   
Level 2
   
Level 1
   
Level 2
 
 Financial assets
                       
 Short-term investments
 
$
1,691
   
$
   
$
2,282
   
$
 
 Forward exchange contracts
 
$
   
$
33
   
$
   
$
318
 
                                 
 Financial liabilities
                               
 Forward exchange contracts
 
$
   
$
1,837
   
$
   
$
807
 


Derivative Financial Instruments

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

As at May 31, 2019, the company held contracts to sell US dollars for Canadian dollars and Indian rupees at various forward rates, which are summarized below:

US dollars – Canadian dollars

 
Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
               
 
June 2019 to August 2019
 
$
8,700
     
1.2984
 
 
September 2019 to August 2020
   
33,600
     
1.3001
 
 
September 2020 to August 2021
   
15,300
     
1.3067
 
 
September 2021 to April 2022
   
4,500
     
1.3208
 
 
Total
 
$
62,100
     
1.3030
 


Page 19 of 51



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

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


US dollars – Indian rupees

 
Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
               
 
June 2019 to August 2019
   
600
     
74.31
 
 
September 2019 to May 2020
   
1,200
     
72.00
 
 
Total
 
$
1,800
     
72.77
 

The carrying amount of forward exchange contracts is equal to their fair value, which is based on the amount at which they could be settled based on estimated current market rates. The fair value of forward exchange contracts amounted to net losses of $489,000 as at August 31, 2018, and $1,804,000 as at May 31, 2019.

As at May 31, 2019, forward exchange contracts in the amount of $33,000 are presented as current assets in other accounts receivable, forward exchange contracts in the amount of $1,347,000 are presented as current liabilities in accounts payable and accrued liabilities, and forward exchange contracts in the amount of $490,000 are presented as long-term liabilities in other long-term liabilities in the consolidated balance sheet. Forward exchange contracts of $224,000 included in accounts payable and accrued liabilities, for which related hedged sales are recognized, are recorded in the consolidated statement of earnings; otherwise, other forward exchange contracts are not yet recorded in the consolidated statement of earnings and are recorded in other comprehensive income.

Based on its portfolio of forward exchange contracts as at May 31, 2019, the company estimates that the portion of the net unrealized losses on these contracts as of that date, which will be realized and reclassified from accumulated other comprehensive loss to net earnings (sales) over the next 12 months, amounts to $1,090,000.

For the three and nine months ended May 31, 2018 and 2019, the company recognized within its sales the following foreign exchange gains or losses on forward exchange contracts:

   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
 
                         
Gains (losses) on forward exchange contracts
 
$
(241
)
 
$
(401
)
 
$
179
   
$
797
 


Page 20 of 51



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

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


5
Long-term Debt

   
As at
May 31,
2019
   
As at
August 31,
2018
 
             
Unsecured, non-interest-bearing loans, denominated in euros, repayable in quarterly instalments, maturing in March 2024 and March 2025
 
$
895
   
$
883
 
Unsecured loans, denominated in euros, repayable in monthly, quarterly
or bi-annual instalments, bearing interest at annual rates of nil to 5.0%, maturing at different dates between March 2020 and September 2023
   
3,471
     
4,853
 
Loans, secured by the universality of the assets of a subsidiary, denominated in euros, repayable in monthly instalments, bearing interest at annual rates of 0.7% to 2.0%, maturing at different dates between June 2019 and August 2022
   
533
     
828
 
Loans, secured by the universality of the assets of a subsidiary, denominated in euros, repayable in monthly or quarterly instalments, bearing interest at annual rates of 1.1% to 2.9%, maturing at different dates between March 2020 and July 2022
   
1,556
     
2,264
 
     
6,455
     
8,828
 
Current portion of long-term debt
   
2,579
     
2,921
 
   
$
3,876
   
$
5,907
 

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

   
As at
May 31,
2019
   
As at
August 31,
2018
 
             
No later than one year
 
$
2,579
   
$
2,921
 
Later than one year and no later than five years
   
3,774
     
5,745
 
Later than five years
   
102
     
162
 
   
$
6,455
   
$
8,828
 


Page 21 of 51



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

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


6
Share Capital

The following tables summarize changes in share capital for the nine months ended May 31, 2018 and 2019.

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

   
Nine months ended May 31, 2019
 
   
Multiple voting shares
   
Subordinate voting shares
       
   
Number
   
Amount
   
Number
   
Amount
   
Total
amount
 
                               
Balance as at September 1, 2018
   
31,643,000
   
$
1
     
23,472,995
   
$
91,936
   
$
91,937
 
Redemption of restricted share units
   
     
     
176,729
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
643
     
643
 
Balance as at November 30, 2018
   
31,643,000
     
1
     
23,649,724
     
92,579
     
92,580
 
Redemption of restricted share units
   
     
     
129,571
     
     
 
Redemption of share capital
   
     
     
(32,232
)
   
(126
)
   
(126
)
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
424
     
424
 
Balance as at February 28, 2019
   
31,643,000
     
1
     
23,747,063
     
92,877
     
92,878
 
Redemption of restricted share units
   
     
     
2,856
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
11
     
11
 
Balance as at May 31, 2019
   
31,643,000
   
$
1
     
23,749,919
   
$
92,888
   
$
92,889
 


Page 22 of 51



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

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


On January 8, 2019, the company announced that its Board of Directors had approved a share repurchase program, by way of a normal course issued bid on the open market of up to 6.3% of the issued and outstanding subordinate voting shares, representing 1,200,000 subordinate voting shares at the prevailing market price. The normal course issuer bid started on January 14, 2019 and will end on January 13, 2020 or earlier if the company repurchases the maximum number of shares permitted. All shares repurchased under the bid will be cancelled.


7
Statements of Earnings

Sales are as follows:

   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
 
                         
Test and measurement
 
$
54,359
   
$
154,530
   
$
49,864
   
$
149,934
 
Service assurance, systems and services
   
19,469
     
62,586
     
22,174
     
49,599
 
Foreign exchange gains (losses) on forward exchange contracts
   
(241
)
   
(401
)
   
179
     
797
 
                                 
Total sales for the period
 
$
73,587
   
$
216,715
   
$
72,217
   
$
200,330
 

Net research and development expenses comprise the following:

   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
 
                         
Gross research and development expenses
 
$
13,901
   
$
45,283
   
$
18,393
   
$
46,636
 
Research and development tax credits
   
(1,931
)
   
(5,873
)
   
(2,292
)
   
(6,196
)
                                 
Net research and development expenses for the period
 
$
11,970
   
$
39,410
   
$
16,101
   
$
40,440
 

Inventory write-down is as follows:

     
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
 
                   
Inventory write-down for the period
 
$
390
 
$
2,338
 
$
681
 
$
1,950
 


Page 23 of 51



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

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


Depreciation and amortization expenses by functional area are as follows:

   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
   
Three months
ended
May 31, 2018
   
Nine months
ended
May 31, 2018
 
                         
Cost of sales
                       
Depreciation of property, plant and equipment
 
$
462
   
$
1,422
   
$
583
   
$
1,521
 
Amortization of intangible assets
   
1,665
     
5,710
     
3,879
     
7,606
 
     
2,127
     
7,132
     
4,462
     
9,127