6-K 1 form6k_20200229.htm FORM 6-K 2020-02-29 Q2-2020



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 April 2020

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

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


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


Form 20-F ☑
Form 40-F □

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

Yes □
No ☑


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








On April 7, 2020, EXFO Inc., a Canadian corporation, reported its results of operations for the second fiscal quarter ended February 29, 2020. 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 second fiscal quarter of the 2020 fiscal year. This press release and information relating to EXFO’s financial condition and results of operations and certifications of interim filings for the second fiscal quarter of the 2020 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 47


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: April 7, 2020


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PRESS RELEASE
For immediate release

EXFO reports second quarter results for fiscal 2020

◾
Sales reached US$55.3 million
◾
Bookings attained US$72.9 million
◾
IFRS net loss amounted to US$9.0 million
◾
Adjusted EBITDA totaled -US$4.9 million
◾
Key supplier to essential telecommunications industry

QUEBEC CITY, CANADA, April 7, 2020 — EXFO Inc. (NASDAQ: EXFO; TSX: EXF), the communications industry's test, monitoring and analytics experts, reported today financial results for the second quarter ended February 29, 2020.
“Despite the temporary shutdown of our manufacturing operations in China, which negatively impacted our revenues, EXFO delivered solid bookings in the second quarter of 2020 with double-digit growth for our Test and Measurement business,” said EXFO’s CEO Philippe Morin. “Throughout the coronavirus pandemic, the safety of our employees, communities and customers remains at the center of all our actions. All EXFO sites are fully operational and committed to helping global network operators and webscale companies thrive during this challenging period. More than ever, the telecom industry is mission-critical in which network capacity, reliability, and scalability will play a growing role in creating real opportunities for EXFO’s innovative solutions.”

Second Quarter Highlights

•
Sales. Sales totaled US$55.3 million in the second quarter of fiscal 2020 mainly due to the negative impact of the coronavirus outbreak that forced EXFO to temporarily shut down its manufacturing operations in China. Test and Measurement (T&M) sales accounted for 68% of revenue in the second quarter of 2020, while Service Assurance, Systems and Services (SASS) sales represented 32%. Revenue distribution among the three main selling regions amounted to 48% in the Americas, 31% in Europe, Middle East and Africa (EMEA) and 21% in Asia-Pacific. EXFO’s top customer accounted for 8.2% of sales, while the top three totaled 19.5%.

•
Profitability. IFRS net loss amounted to US$9.0 million, or -US$0.16 per share, in the second quarter of fiscal 2020, while adjusted EBITDA totaled -US$4.9 million, or -8.9% of sales. The company generated US$7.1 million in cash flows from operations.

•
Key Supplier.  As the coronavirus outbreak has evolved into a global pandemic, EXFO has become a key supplier to the essential telecommunications industry. Several well-funded network operators and webscale companies have increased capital spending to meet the global trend of telecommuting from home. EXFO, with its wealth of test and service assurance solutions, enables the deployment of such bandwidth-intensive applications and required virtualized, cloud-based networks. Key EXFO solutions to help customers maintain peak performance under disruptive conditions include geolocation analytics, virtual VPN remote monitoring, and active monitoring of network and subscriber anomalies.




Page 3 of 47




•
Innovation. EXFO launched the first intelligent automation platform, Nova A/SA, enabling mobile network operators (MNOs) to deliver ultra-reliable and high-quality service experience in a 5G environment. At the heart of Nova A/SA is a real-time, AI-based automated assurance solution, Nova SensAI, acting as the central nervous system for the platform. These combined solutions leverage machine learning to provide MNOs with heightened visibility into subscriber experience and network performance.

Business Outlook
Due to the uncertainty surrounding the breadth and duration of the coronavirus pandemic, EXFO has suspended issuing quarterly and annual guidance.

Selected Financial Information
(In thousands of US dollars)
     
Q2 2020
      
Q2 2019
      
H1 2020
      
H1 2019
  
                                 
  Test and Measurement sales
  
$
37,477
    
$
50,407
    
$
93,424
    
$
100,171
  
  Service Assurance, Systems and Services sales
    
17,935
      
23,701
      
35,684
      
43,117
  
  Foreign exchange losses on forward exchange contracts
    
(99
)
    
(181
)
    
(244
)
    
(160
)
  Total sales
  
$
55,313
    
$
73,927
    
$
128,864
    
$
143,128
  
                                 
  Test and Measurement bookings
  
$
52,003
    
$
45,320
    
$
107,012
    
$
109,316
  
  Service Assurance, Systems and Services bookings
    
20,963
      
30,953
      
36,012
      
48,174
  
  Foreign exchange gains (losses) on forward exchange contracts
    
(99
)
    
(181
)
    
(244
)
    
(160
)
  Total bookings
  
$
72,867
    
$
76,092
    
$
142,780
    
$
157,330
  
  Book-to-bill ratio (bookings/sales)
    
1.32
      
1.03
      
1.11
      
1.10
  
  Gross margin before depreciation and amortization*
  
$
31,517
    
$
44,865
    
$
74,827
    
$
85,169
  
     
57.0
%
    
60.7
%
    
58.1
%
    
59.5
%
                                 
  Other selected information:
                                
  IFRS net earnings (loss)
  
$
(9,021
)
  
$
5,193
    
$
(9,084
)
  
$
(2,274
)
  Amortization of intangible assets
  
$
1,695
    
$
2,130
    
$
3,327
    
$
5,070
  
  Stock-based compensation costs
  
$
436
    
$
461
    
$
923
    
$
879
  
  Restructuring charges
  
$
–
    
$
577
    
$
–
    
$
3,318
  
  Acquisition-related deferred revenue fair value adjustment
  
$
–
    
$
571
    
$
–
    
$
1,435
  
  Gain on disposal of capital assets
  
$
–
    
$
(1,732
)
  
$
–
    
$
(1,732
)
  Deferred income tax recovery
  
$
–
    
$
(2,383
)
  
$
–
    
$
(2,383
)
  Net income tax effect of the above items
  
$
(254
)
  
$
(348
)
  
$
(503
)
  
$
(771
)
  Foreign exchange loss
  
$
382
    
$
416
    
$
508
    
$
201
  
  Adjusted EBITDA*
  
$
(4,916
)
  
$
8,784
    
$
2,628
    
$
11,512
  

Quarterly Overview
Sales reached US$55.3 million in the second quarter of fiscal 2020 compared to US$73.9 million in the second quarter of 2019.

Bookings attained US$72.9 million in the second quarter of fiscal 2020 compared to US$76.1 million for the same period in 2019 in which the company had received a multi-million-dollar SASS-related order. The company's book-to-bill ratio was 1.32 in the second quarter of 2020.

Gross margin before depreciation and amortization* amounted to 57.0% of sales in the second quarter of fiscal 2020 compared to 60.7% in the second quarter of 2019.




Page 4 of 47




Selling and administrative expenses totaled US$24.3 million, or 44.0% of sales in the second quarter of fiscal 2020 compared to US$25.5 million, or 34.4% of sales, in the second quarter of 2019.

Net R&D expenses attained US$12.6 million, or 22.7% of sales, in the second quarter of fiscal 2020 compared to US$12.2 million, or 16.5% of sales, in the same period last year.

IFRS net loss totaled US$9.0 million, or -US$0.16 per share, in the second quarter of fiscal 2020 compared to net earnings of US$5.2 million, or US$0.09 per share, in the second quarter of 2019. IFRS net loss in the second quarter of 2020 included US$1.5 million in after-tax amortization of intangible assets, US$0.4 million in stock-based compensation costs and US$0.4 million in foreign exchange loss.

Adjusted EBITDA* amounted to -US$4.9 million, or -8.9% of sales, in the second quarter of fiscal 2020 compared to US$8.8 million, or 11.9% of sales, in the second quarter of 2019.

Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review second-quarter results for fiscal 2020. 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: 4132437. Executive Chairman Germain Lamonde, CEO Philippe Morin and Pierre Plamondon, CPA, Chief Financial Officer and Vice-President of Finance, will participate in the call. An audio replay of the conference call will be available two hours after the event until 8 p.m. on April 14, 2020. The replay number is 1-719-457-0820 and the participant passcode is 4132437. The audio Webcast and replay of the conference call will also be available on EXFO’s Website at www.EXFO.com, under the Investors section.

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




Page 5 of 47




Forward-Looking Statements
This news release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, expect, believe, plan, anticipate, intend, could, estimate, continue, or similar expressions or the negative of such expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty, namely the impact of the coronavirus pandemic on our employees, customers and global operations, including the ability of our suppliers to fulfil raw material requirements and services and our ability to manufacture and deliver our products and services to our customers; the effects of emergency measures related to isolation periods for individuals in affected areas, lockdown restrictions imposed by national governments on businesses in countries where we operate and have employees, and limitations on travel to attract new customers and serve existing ones; deteriorating financial and market conditions as well as a potential recession; trade wars, and our ability to successfully integrate businesses that we acquire; capital spending and network deployment levels in the communications 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 communications test, monitoring 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. This discussion and analysis should be read in conjunction with the consolidated financial statements.




Page 6 of 47




*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 represent net earnings (loss) before interest and other income/expense, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges, acquisition-related deferred revenue fair value adjustment, and foreign exchange loss.

These non-IFRS measures eliminate the effect on IFRS results of non-cash statement of earnings elements, restructuring charges 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 used by financial analysts to evaluate and compare EXFO’s performance against that of 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 that of 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.




Page 7 of 47




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

Adjusted EBITDA

     
Q2 2020
      
Q2 2019
      
H1 2020
      
H1 2019
  
                                 
IFRS net earnings (loss) for the period
  
$
(9,021
)
  
$
5,193
    
$
(9,084
)
  
$
(2,274
)
                                 
Add (deduct):
                                
                                 
Depreciation and amortization
    
3,973
      
3,520
      
7,899
      
7,889
  
Interest and other (income) expense
    
285
      
(1,514
)
    
684
      
(1,137
)
Income taxes
    
(971
)
    
(440
)
    
1,698
      
1,201
  
Stock-based compensation costs
    
436
      
461
      
923
      
879
  
Restructuring charges
    
–
      
577
      
–
      
3,318
  
Acquisition-related deferred revenue fair value adjustment
    
–
      
571
      
–
      
1,435
  
Foreign exchange loss
    
382
      
416
      
508
      
201
  
Adjusted EBITDA for the period
  
$
(4,916
)
  
$
8,784
    
$
2,628
    
$
11,512
  
                                 
Adjusted EBITDA as a percentage of sales
    
(8.9
)%
    
11.9
%
    
2.0
%
    
8.0
%


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




Page 8 of 47


EXFO Inc.
Condensed Unaudited Interim Consolidated Balance Sheets

(in thousands of US dollars)


   
As at
February 29,
2020
    
As at
August 31,
2019
  
             
Assets
            
             
Current assets
            
Cash
  
$
19,126
    
$
16,518
  
Short-term investments
    
1,755
      
2,918
  
Accounts receivable
                
Trade
    
33,221
      
51,517
  
Other
    
3,083
      
3,396
  
Income taxes and tax credits recoverable
    
5,833
      
3,159
  
Inventories
    
41,530
      
38,017
  
Prepaid expenses
    
4,994
      
6,510
  
Other assets
    
3,669
      
3,083
  
     
113,211
      
125,118
  
                 
Tax credits recoverable
    
45,574
      
46,704
  
Property, plant and equipment
    
39,156
      
39,364
  
Right-of-use assets (note 2)
    
9,634
      
–
  
Intangible assets
    
18,830
      
21,654
  
Goodwill
    
38,728
      
38,648
  
Deferred income tax assets
    
5,126
      
4,821
  
Other assets
    
1,110
      
1,293
  
   
$
271,369
    
$
277,602
  
Liabilities
                
                 
Current liabilities
                
Bank loan
  
$
13,650
    
$
5,000
  
Accounts payable and accrued liabilities
    
41,410
      
50,790
  
Provisions
    
834
      
1,065
  
Income taxes payable
    
128
      
704
  
Deferred revenue
    
21,904
      
24,422
  
Other liabilities
    
1,600
      
1,606
  
Current portion of lease liabilities (note 5)
    
2,925
      
–
  
Current portion of long-term debt (note 6)
    
2,158
      
2,449
  
     
84,609
      
86,036
  
                 
Provisions
    
2,544
      
2,737
  
Deferred revenue
    
8,453
      
9,056
  
Lease liabilities (note 5)
    
6,665
      
–
  
Long-term debt (note 6)
    
2,252
      
3,293
  
Deferred income tax liabilities
    
3,130
      
3,598
  
Other liabilities
    
570
      
318
  
     
108,223
      
105,038
  
                 
Shareholders’ equity
                
Share capital (note 7)
    
93,827
      
92,706
  
Contributed surplus
    
18,780
      
19,196
  
Retained earnings
    
103,089
      
112,173
  
Accumulated other comprehensive loss
    
(52,550
)
    
(51,511
)
     
163,146
      
172,564
  
                 
   
$
271,369
    
$
277,602
  


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


Page 9 of 47


EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Earnings

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


   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Sales
  
$
55,313
    
$
128,864
    
$
73,927
    
$
143,128
  
                                 
Cost of sales (1)
    
23,796
      
54,037
      
29,062
      
57,959
  
Selling and administrative
    
24,303
      
48,807
      
25,474
      
51,849
  
Net research and development
    
12,566
      
24,315
      
12,216
      
27,440
  
Depreciation of property, plant and equipment
    
1,424
      
2,867
      
1,390
      
2,819
  
Depreciation of right-of-use assets (note 2)
    
854
      
1,705
      
–
      
–
  
Amortization of intangible assets
    
1,695
      
3,327
      
2,130
      
5,070
  
Interest and other (income) expense
    
285
      
684
      
(1,514
)
    
(1,137
)
Foreign exchange loss
    
382
      
508
      
416
      
201
  
Earnings (loss) before income taxes
    
(9,992
)
    
(7,386
)
    
4,753
      
(1,073
)
                                 
Income taxes (note 9)
    
(971
)
    
1,698
      
(440
)
    
1,201
  
                                 
Net earnings (loss) for the period
  
$
(9,021
)
  
$
(9,084
)
  
$
5,193
    
$
(2,274
)
                                 
Basic and diluted net earnings (loss)       per share
  
$
(0.16
)
  
$
(0.16
)
  
$
0.09
    
$
(0.04
)
                                 
Basic weighted average number of shares outstanding (000’s)
    
55,603
      
55,521
      
55,343
      
55,263
  
                                 
Diluted weighted average number of shares outstanding (000’s) (note 10)
    
55,603
      
55,521
      
56,160
      
55,263
  

(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 47


EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Comprehensive Income (Loss)

(in thousands of US dollars)


   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Net earnings (loss) for the period
  
$
(9,021
)
  
$
(9,084
)
  
$
5,193
    
$
(2,274
)
Other comprehensive income (loss), net of income taxes
                                
Items that may be reclassified subsequently to net earnings
                                
Foreign currency translation adjustment
    
(1,319
)
    
(758
)
    
1,807
      
(1,549
)
Unrealized gains/losses on forward exchange contracts
    
(718
)
    
(753
)
    
496
      
(191
)
Reclassification of realized gains/losses on forward exchange contracts
    
173
      
356
      
210
      
301
  
Deferred income tax effect of gains/losses on forward exchange contracts
    
146
      
116
      
(167
)
    
42
  
                                 
Other comprehensive income (loss)
    
(1,718
)
    
(1,039
)
    
2,346
      
(1,397
)
                                 
Comprehensive income (loss) for the period
  
$
(10,739
)
  
$
(10,123
)
  
$
7,539
    
$
(3,671
)


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


Page 11 of 47


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

(in thousands of US dollars)


   
Six months ended February 28, 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
    
–
      
–
      
(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 7)
    
1,067
      
(1,067
)
    
–
      
–
      
–
  
Redemption of share capital (note 7)
    
(126
)
    
21
      
–
      
–
      
(105
)
Stock-based compensation costs
    
–
      
895
      
–
      
–
      
895
  
Net loss for the period
    
–
      
–
      
(2,274
)
    
–
      
(2,274
)
Other comprehensive income (loss)
                                        
Foreign currency translation adjustment
    
–
      
–
      
–
      
(1,549
)
    
(1,549
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $42
    
–
      
–
      
–
      
152
      
152
  
                                         
Total comprehensive loss for the period
                                    
(3,671
)
                                         
Balance as at February 28, 2019
  
$
92,878
    
$
18,277
    
$
112,379
    
$
(48,747
)
  
$
174,787
  


   
Six months ended February 29, 2020
  
   
Share
capital
    
Contributed
surplus
    
Retained
earnings
    
Accumulated
other
comprehensive
loss
    
Total
shareholders’
equity
  
                               
Balance as at September 1, 2019
  
$
92,706
    
$
19,196
    
$
112,173
    
$
(51,511
)
  
$
172,564
  
Reclassification of stock-based compensation costs (note 7)
    
1,333
      
(1,333
)
    
–
      
–
      
–
  
Redemption of share capital (note 7)
    
(212
)
    
(13
)
    
–
      
–
      
(225
)
Stock-based compensation costs
    
–
      
930
      
–
      
–
      
930
  
Net loss for the period
    
–
      
–
      
(9,084
)
    
–
      
(9,084
)
Other comprehensive loss
                                        
Foreign currency translation adjustment
    
–
      
–
      
–
      
(758
)
    
(758
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $116
    
–
      
–
      
–
      
(281
)
    
(281
)
                                         
Total comprehensive loss for the period
                                    
(10,123
)
                                         
Balance as at February 29, 2020
  
$
93,827
    
$
18,780
    
$
103,089
    
$
(52,550
)
  
$
163,146
  


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


Page 12 of 47


EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Cash Flows

(in thousands of US dollars)



   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Cash flows from operating activities
                        
Net earnings (loss) for the period
  
$
(9,021
)
  
$
(9,084
)
  
$
5,193
    
$
(2,274
)
Add (deduct) items not affecting cash
                                
Stock-based compensation costs
    
436
      
923
      
461
      
879
  
Depreciation and amortization
    
3,973
      
7,899
      
3,520
      
7,889
  
Gain on disposal of capital assets
    
–
      
–
      
(1,732
)
    
(1,732
)
Write-off of capital assets
    
–
      
216
      
261
      
261
  
Deferred revenue
    
1,557
      
(2,815
)
    
6,021
      
9,943
  
Deferred income taxes
    
(212
)
    
(654
)
    
(2,124
)
    
(2,153
)
Changes in foreign exchange gain/loss
    
902
      
881
      
76
      
(453
)
     
(2,365
)
    
(2,634
)
    
11,676
      
12,360
  
                                 
Changes in non-cash operating items
                                
Accounts receivable
    
18,539
      
18,611
      
9,871
      
5,819
  
Income taxes and tax credits
    
(3,178
)
    
(2,662
)
    
1,031
      
33
  
Inventories
    
(458
)
    
(3,951
)
    
999
      
(362
)
Prepaid expenses
    
610
      
988
      
22
      
205
  
Other assets
    
(491
)
    
(456
)
    
(327
)
    
(339
)
Accounts payable, accrued liabilities and provisions
    
(5,580
)
    
(9,273
)
    
(3,114
)
    
18
  
Other liabilities
    
58
      
42
      
(1,470
)
    
(1,521
)
     
7,135
      
665
      
18,688
      
16,213
  
                                 
Cash flows from investing activities
                                
Additions to short-term investments
    
–
      
(147
)
    
(292
)
    
(292
)
Disposal of short-term investments
    
701
      
1,264
      
–
      
342
  
Purchases of capital assets
    
(2,146
)
    
(4,186
)
    
(1,797
)
    
(4,679
)
Proceeds from disposal of capital assets
    
–
      
–
      
3,318
      
3,318
  
     
(1,445
)
    
(3,069
)
    
1,229
      
(1,311
)
                                 
Cash flows from financing activities
                                
Bank loan
    
16
      
8,370
      
(12,501
)
    
(1,244
)
Repayment of lease liabilities (note 5)
    
(846
)
    
(1,690
)
    
–
      
–
  
Repayment of long-term debt
    
(639
)
    
(1,315
)
    
(735
)
    
(1,452
)
Redemption of share capital
    
–
      
(225
)
    
(105
)
    
(105
)
     
(1,469
)
    
5,140
      
(13,341
)
    
(2,801
)
Effect of foreign exchange rate changes on cash
    
(140
)
    
(128
)
    
100
      
(96
)
                                 
Change in cash during the period
    
4,081
      
2,608
      
6,676
      
12,005
  
Cash – Beginning of the period
    
15,045
      
16,518
      
18,087
      
12,758
  
Cash – End of the period
  
$
19,126
    
$
19,126
    
$
24,763
    
$
24,763
  
                                 
Supplementary information
                                
Income taxes cash outflow
  
$
530
    
$
1,271
    
$
615
    
$
1,486
  
Additions to capital assets
  
$
1,660
    
$
3,946
    
$
1,523
    
$
3,371
  

As at February 28, 2019 and February 29, 2020, unpaid purchases of capital assets amounted to $480 and $654 respectively.


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


Page 13 of 47


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 smart test, monitoring and analytics solutions for fixed and mobile network operators, web-scale companies, and equipment manufacturers in the global communications industry.

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

These condensed unaudited interim consolidated financial statements were authorized for issue by the Board of Directors on April 7, 2020.


2
Basis of Presentation

These condensed unaudited interim consolidated financial statements have been prepared in accordance with 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.

Critical estimates and assumptions

During the three months ended February 29, 2020, in order to contain the spread of infection of the coronavirus, Chinese public health authorities imposed preventive measures within affected regions including an extended shutdown of businesses, restrictions on various forms of public transportation and lockdown periods for individuals—all of which affected the company’s factory and supply chain. As at February 29, 2020, the company reviewed critical estimates and assumptions considering the impact of the coronavirus outbreak and believes that it had no significant impact on the measurement of assets and liabilities as of that date.

Subsequent to the quarter end, the coronavirus epidemic became a pandemic and most countries have been imposing ongoing constraints and preventive measures that are affecting the global economy. Significant declines in the stock market have occurred for various reasons linked to the coronavirus pandemic. The breath and duration of this pandemic is unknown and raise uncertainties that may impact the measurement of assets and liabilities in future periods.

Recently Issued IFRS Pronouncements

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 supersedes IAS 17, “Leases”, and related interpretations. Under IFRS 16, lessees recognize a right-of-use (ROU) asset and a lease liability measured at the present value of lease payments for virtually all 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.


Page 14 of 47


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 adopted this new standard on September 1, 2019, using the modified retrospective method, which did not require adjustments to comparative periods. The company applied IFRS 16 at the adoption date and recognized ROU assets and lease liabilities in the period of adoption. The new standard provides several optional practical expedients in transition. Upon implementation of the new standard, the company elected the practical expedients to combine lease and non-lease components and to not recognize ROU assets and lease liabilities for short-term leases. Also, contracts that were not identified as leases under previous standards were not reassessed for whether there is a lease therein. The company identified appropriate changes to its accounting policies, information technology systems, business processes, and related internal controls to support recognition and disclosure requirements under IFRS 16.

The adoption of IFRS 16 on September 1, 2019 resulted in the recognition of ROU assets of $11,321,000, lease liabilities of $10,843,000, and the elimination of prepaid rents of $478,000 in the consolidated balance sheet as of that date. In addition, lease payments, previously reported in cash flow from operating activities are now reported in cash flow from financing activities in the consolidated statements of cash flows. However, the adoption of this standard had no significant impact on net loss.

Upon the adoption of IFRS 16, the lease expense, previously recorded under the cost of sales, selling and administrative expenses and net research and development expenses line items, is recorded as depreciation expenses for the ROU asset and as interest expenses on the lease liability in the consolidated statements of earnings.

Finally, the adoption of IFRS 16 had no significant impact on liquidity and debt covenant compliance under existing debt agreements.

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 adopted this interpretation on September 1, 2019 and its adoption had no significant impact on its consolidated financial statements.

New Accounting Policy upon Adoption of Recently Issued IFRS

Leases

The company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date, and are subsequently adjusted for interest and lease payments. When the rate implicit in the lease is not readily determinable, the company uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. The lease term is the non-cancelable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that an option will be exercised. ROU assets are recognized at commencement based on the amount of the initial measurement of the lease liability. ROU assets also include any lease payments made prior to lease commencement and exclude lease incentives. ROU assets are depreciated on a straight-line basis over the lease term.

The company’s lease terms may include options to extend or terminate the lease where it is reasonably certain that the company will exercise those options. The company considers several economic factors when making this determination including, but not limited to, the significance of leasehold improvements incurred in the office space, the difficulty in replacing the asset, underlying contractual obligations, or specific characteristics unique to a lease.


Page 15 of 47


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 acquired monitoring and analytics technologies from EXFO Solutions 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 six months ended February 29, 2020:

   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
  
             
  Balance – Beginning of the period
  
$
1,043
    
$
1,133
  
  Payments
    
(109
)
  
$
(199
)
                 
  Balance – End of the period
  
$
934
    
$
934
  


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

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 observable prices and forward exchange rates at the consolidated 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 February 29, 2020
    
As at August 31, 2019
  
   
Level 1
    
Level 2
    
Level 1
    
Level 2
  
  Financial assets
                        
  Short-term investments
  
$
1,755
    
$
–
    
$
2,918
    
$
–
  
  Forward exchange contracts
  
$
–
    
$
–
    
$
–
    
$
79
  
                                 
  Financial liabilities
                                
  Forward exchange contracts
  
$
–
    
$
1,375
    
$
–
    
$
1,057
  


Page 16 of 47


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)


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 February 29, 2020, 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
  
               
 
March 2020 to August 2020
  
$
18,000
      
1.3062
  
 
September 2020 to August 2021
    
29,500
      
1.3145
  
 
September 2021 to August 2022
    
12,000
      
1.3234
  
 
September 2022 to January 2023
    
2,800
      
1.3291
  
 
Total
  
$
62,300
      
1.3145
  

US dollars – Indian rupees

 
Expiry dates
  
Contractual
amount
    
Weighted average
contractual forward rate
  
               
 
March 2020 to August 2020
  
$
2,400
      
71.88
  

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 $978,000 as at August 31, 2019, and $1,375,000 as at February 29, 2020.

As at February 29, 2020, forward exchange contracts in the amount of $969,000 are presented as short-term liabilities in accounts payable and accrued liabilities, and forward exchange contracts in the amount of $406,000 are presented as long-term liabilities in other long-term liabilities in the consolidated balance sheet. Forward exchange contracts of $174,000 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 February 29, 2020, 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 income to net earnings (sales) over the next 12 months, amounts to $795,000.

During the three and six months ended February 28, 2019 and February 29, 2020, the company recognized within its sales the following foreign exchange losses on forward exchange contracts:


Page 17 of 47


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)


   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Losses on forward exchange contracts
  
$
99
    
$
244
    
$
181
    
$
160
  


5
Leases

The company has operating leases for certain of its premises under various non-cancelable lease agreements. The company’s operating leases have remaining lease terms ranging from 1 year to 8 years. The company’s operating lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Minimal rentals payable under operating leases are as follows as at February 29, 2020:

  No later than 1 year
  
$
2,925
  
  Later than 1 year and no later than 5 years
    
6,104
  
  Later than 5 years
    
561
  
  Total lease liabilities as at February 29, 2020
  
$
9,590
  

The difference between operating lease commitments disclosed applying IAS 17 as at August 31, 2019, discounted using the incremental borrowing rate of 2% at the date of the initial application of IFRS 16 as at September 1, 2019 and the lease liabilities recognized in the consolidated balance sheet as of that date is as follows:

  Discounted operating lease commitments under IAS 17 as at August 31, 2019
  
$
8,915
  
  Discounted impact of renewal options that are reasonably certain to be exercised
    
1,928
  
  Lease liabilities as at September 1, 2019
  
$
10,843
  

Depreciation of lease ROU assets for the three months and six months ended February 29, 2020 amounted to $854,000 and $1,705,000, respectively (note 8).


Page 18 of 47


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
Long-term Debt

   
As at
February 29,
2020
    
As at
August 31,
2019
  
             
  Unsecured, non-interest-bearing loans, denominated in euros, repayable in quarterly instalments, maturing in March 2024 and March 2025
  
$
824
    
$
866
  
  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
    
2,373
      
3,111
  
  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 1.5%, maturing at different dates between April 2020 and August 2022
    
331
      
459
  
  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 from 1.1% to 2.9%, maturing at different dates between March 2020 and July 2022
    
882
      
1,306
  
     
4,410
      
5,742
  
  Less: current portion of long-term debt
    
2,158
      
2,449
  
   
$
2,252
    
$
3,293
  

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

   
As at
February 29,
2020
    
As at
August 31,
2019
  
             
  No later than 1 year
  
$
2,158
    
$
2,449
  
  Later than 1 year and no later than 5 years
    
2,227
      
3,237
  
  Later than 5 years
    
25
      
56
  
   
$
4,410
    
$
5,742
  


Page 19 of 47


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)


7
Share Capital

The following tables summarize changes in share capital for the six months ended February 28, 2019 and February 29, 2020.

   
Six months ended February 28, 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
  

   
Six months ended February 29, 2020
  
   
Multiple voting shares
    
Subordinate voting shares
        
   
Number
    
Amount
    
Number
    
Amount
    
Total
amount
  
                               
Balance as at September 1, 2019
    
31,643,000
    
$
1
      
23,703,675
    
$
92,705
    
$
92,706
  
Redemption of restricted share units
    
−
      
−
      
255,822
      
−
      
−
  
Redemption of share capital
    
−
      
−
      
(54,528
)
    
(212
)
    
(212
)
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
    
−
      
−
      
−
      
861
      
861
  
                                         
Balance as at November 30, 2019
    
31,643,000
      
1
      
23,904,969
      
93,354
      
93,355
  
Redemption of restricted share units
    
−
      
−
      
111,476
      
−
      
−
  
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
    
−
      
−
      
−
      
472
      
472
  
                                         
Balance as at February 29, 2020
    
31,643,000
    
$
1
      
24,016,445
    
$
93,826
    
$
93,827
  

On January 7, 2020, 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 3.1% of the issued and outstanding subordinate voting shares, representing 600,000 subordinate voting shares at the prevailing market price. The normal course issuer bid started on January 14, 2020 and will end on January 13, 2021 or earlier if the company repurchases the maximum number of shares permitted. All shares repurchased under the bid will be cancelled.


Page 20 of 47


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)


8
Statements of Earnings

Sales are as follows:

   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Test and measurement
  
$
37,477
    
$
93,424
    
$
50,407
    
$
100,171
  
Service assurance, systems and services
    
17,935
      
35,684
      
23,701
      
43,117
  
Foreign exchange losses on forward exchange contracts
    
(99
)
    
(244
)
    
(181
)
    
(160
)
                                 
Total sales for the period
  
$
55,313
    
$
128,864
    
$
73,927
    
$
143,128
  

Net research and development expenses comprise the following:

   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Gross research and development expenses
  
$
14,382
    
$
28,214
    
$
14,157
    
$
31,382
  
Research and development tax credits
    
(1,816
)
    
(3,899
)
    
(1,941
)
    
(3,942
)
                                 
Net research and development expenses for the period
  
$
12,566
    
$
24,315
    
$
12,216
    
$
27,440
  

Inventory write-down is as follows:

   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Inventory write-down for the period
  
$
711
    
$
1,245
    
$
903
    
$
1,948
  


Page 21 of 47


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
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Cost of sales
                        
Depreciation of property, plant and equipment
  
$
495
    
$
950
    
$
436
    
$
960
  
Depreciation of ROU assets
    
280
      
568
      
–
      
–
  
Amortization of intangible assets
    
1,358
      
2,676
      
1,522
      
4,045
  
     
2,133
      
4,194
      
1,958
      
5,005
  
                                 
Selling and administrative expenses
                                
Depreciation of property, plant and equipment
    
262
      
557
      
442
      
706
  
Depreciation of ROU assets
    
381
      
743
      
–
      
–
  
Amortization of intangible assets
    
173
      
325
      
401
      
633
  
     
816
      
1,625
      
843
      
1,339
  
                                 
Net research and development expenses
                                
Depreciation of property, plant and equipment
    
667
      
1,360
      
512
      
1,153
  
Depreciation of ROU assets
    
193
      
394
      
–
      
–
  
Amortization of intangible assets
    
164
      
326
      
207
      
392
  
     
1,024
      
2,080
      
719
      
1,545
  
                                 
   
$
3,973
    
$
7,899
    
$
3,520
    
$
7,889
  
                                 
Depreciation of property, plant and equipment
  
$
1,424
    
$
2,867
    
$
1,390
    
$
2,819
  
Depreciation of ROU assets
    
854
      
1,705
      
–
      
–
  
Amortization of intangible assets
    
1,695
      
3,327
      
2,130
      
5,070
  
                                 
Total depreciation and amortization expenses for the period
  
$
3,973
    
$
7,899
    
$
3,520
    
$
7,889
  


Page 22 of 47


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)


Employee compensation comprises the following:

   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Salaries and benefits
  
$
35,602
    
$
69,909
    
$
35,106
    
$
70,847
  
Restructuring charges
    
–
      
–
      
507
      
2,733
  
Stock-based compensation costs
    
436
      
923
      
461
      
879
  
                                 
Total employee compensation for the period
  
$
36,038
    
$
70,832
    
$
36,074
    
$
74,459
  

Stock-based compensation costs by functional area are as follows:

   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Cost of sales
  
$
21
    
$
61
    
$
35
    
$
71
  
Selling and administrative expenses
    
335
      
715
      
381
      
665
  
Net research and development expenses
    
80
      
147
      
45
      
143
  
                                 
Total stock-based compensation for the period
  
$
436
    
$
923
    
$
461
    
$
879
  

Restructuring charges by functional area are as follows:

   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Cost of sales
  
$
–
    
$
–
    
$
17
    
$
304
  
Selling and administrative expenses
    
–
      
–
      
98
      
495
  
Net research and development expenses
    
–
      
–
      
462
      
2,519
  
Income taxes
    
–
      
–
      
(45
)
    
(42
)
                                 
Total restructuring charges for the period
  
$
–
    
$
–
    
$
532
    
$
3,276
  


Page 23 of 47


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)


9
Income Taxes

For the three months and six months ended February 28, 2019 and February 29, 2020, the reconciliation of the income tax provision (recovery) calculated using the combined Canadian federal and provincial statutory income tax rate with the income tax provision in the consolidated financial statements is as follows:

   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Income tax provision (recovery) at combined Canadian federal and provincial statutory tax rate (27%)
  
$
(2,698
)
  
$
(1,994
)
  
$
1,283
    
$
(290
)
                                 
Increase (decrease) due to:
                                
Foreign income taxed at different rates
    
(23
)
    
155
      
(246
)
    
(12
)
Non-deductible loss (non-taxable income)
    
305
      
319
      
(67
)
    
33
  
Non-deductible expenses
    
166
      
344
      
25
      
251
  
Foreign exchange effect of translation of foreign subsidiaries
    
10
      
(105
)
    
(124
)
    
(284
)
Recognition of previously unrecognized deferred income tax assets
    
(471
)
    
(471
)
    
(2,383
)
    
(2,383
)
Utilization of previously unrecognized deferred income tax assets
    
2
      
(14
)
    
(307
)
    
(391
)
Unrecognized deferred income tax assets on temporary deductible differences and unused tax losses
    
1,435
      
2,877
      
802
      
3,355
  
Other
    
303
      
587
      
577
      
922
  
                                 
Income tax provision (recovery) for the period
  
$
(971
)
  
$
1,698
    
$
(440
)
  
$
1,201
  

The income tax provision (recovery) consists of the following:

   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Current
  
$
(759
)
  
$
2,352
    
$
1,684
    
$
3,354
  
Deferred
    
(212
)
    
(654
)
    
(2,124
)
    
(2,153
)
                                 
   
$
(971
)
  
$
1,698
    
$
(440
)
  
$
1,201
  


Page 24 of 47


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)


10
Earnings per Share

The following table summarizes the reconciliation of the basic weighted average number of shares outstanding to the diluted weighted average number of shares outstanding:

   
Three months
ended
February 29,
2020
    
Six months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 28,
2019
  
                         
Basic weighted average number of shares outstanding (000’s)
    
55,603
      
55,521
      
55,343
      
55,263
  
Plus dilutive effect of (000’s):
                                
Restricted share units
    
–
      
–
      
615
      
–
  
Deferred share units
    
–
      
–
      
202
      
–
  
                                 
Diluted weighted average number of shares outstanding (000’s)
    
55,603
      
55,521
      
56,160
      
55,263
  
Stock awards excluded from the calculation of diluted weighted average number of shares because their exercise price was greater than the average market price of the common shares, or their inclusion would be antidilutive (000’s)
    
1,990
      
2,009
      
127
      
1,694
  

For the three months ended February 29, 2020 and the six months ended February 28, 2019 and February 29, 2020, the diluted amount per share was the same amount as the basic amount per share, since the dilutive effect of restricted share units and deferred share units was not included in the calculation; otherwise, the effect would have been antidilutive. Accordingly, the diluted amount per share for these periods was calculated using the basic weighted average number of shares outstanding.


Page 25 of 47


Management’s Discussion and Analysis of Financial Condition
and Results of Operations
This discussion and analysis contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, expect, believe, plan, anticipate, intend, could, estimate, continue, or similar expressions or the negative of such expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty, namely the impact of the coronavirus pandemic on our employees, customers and global operations, including the ability of our suppliers to fulfil raw material requirements and services, and our ability to manufacture and deliver our products and services to our customers; the effects of emergency measures related to isolation periods for individuals in affected areas, lockdown restrictions imposed by national governments on businesses in countries where we operate and have employees, and limitations on travel to attract new customers and serve existing ones; deteriorating financial and market conditions as well as potential recession; trade wars;  our ability to successfully integrate businesses that we acquire; capital spending and network deployment levels in the communications industry (including our ability to quickly adapt cost structures to anticipated levels of business and our ability to manage inventory levels with market demand); consolidation in the global communications test, monitoring 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. This discussion and analysis should be read in conjunction with the consolidated financial statements.

The following discussion and analysis of financial condition and results of operations is dated April 7, 2020.

All financial data are expressed in US dollars, except as otherwise noted, and determined based on International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). This discussion and analysis also contains financial data that do not comply with IFRS. Where such measures are presented, they are defined and the reader is informed.


COMPANY OVERVIEW AND RECENT DEVELOPMENTS

We are a leading provider of test, monitoring and analytics solutions for fixed and mobile network operators, web‑scale companies, and equipment manufacturers in the global communications industry. Our broad portfolio of intelligent hardware and software solutions enable transformations related to fiber, 4G/LTE, 5G, and network virtualization. Ultimately, customers rely on our solutions to increase network capacity and improve quality of experience for end-users while driving operational efficiencies.


Page 26 of 47


Our sales decreased 25.2% to $55.3 million in the second quarter of fiscal 2020 compared to $73.9 million for the same period last year, mainly due to the global impact of the coronavirus outbreak, which prevented us from manufacturing and shipping our products manufactured in China in the last month of the quarter. Bookings (purchase orders received from customers) decreased 4.2% to $72.9 million in the second quarter of fiscal 2020, for a book-to-bill ratio of 1.32, from $76.1 million for the same period last year.

Net loss amounted to $9.0 million, or $0.16 per share, in the second quarter of fiscal 2020, compared to net earnings of $5.2 million, or $0.09 per diluted share, for the same period last year. Net loss for the second quarter of fiscal 2020 included net expenses totaling $2.3 million, comprising $1.5 million in after-tax amortization of intangible assets, $0.4 million in stock-based compensation costs, and a foreign exchange loss of $0.4 million. For the same period last year, net earnings included net expenses totaling $3.9 million, comprising $1.9 million in after-tax amortization of intangible assets, $0.5 million in stock-based compensation costs, $0.5 million in after‑tax restructuring charges, $0.6 million for the acquisition-related deferred revenue fair value adjustment, and a foreign exchange loss of $0.4 million. Net earnings also included $1.7 million for a gain on disposal of capital assets and $2.4 million for a deferred income tax recovery.

Adjusted EBITDA (net earnings (loss) before interest and other income/expense, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges, acquisition-related deferred revenue fair value adjustment, and foreign exchange loss) reached minus $4.9 million, or 8.9% of sales, in the second quarter of fiscal 2020, compared to $8.8 million, or 11.9% of sales for the same period last year. Adjusted EBITDA is a non‑IFRS measure. See page 42 of this document for a complete reconciliation of adjusted EBITDA to IFRS net earnings (loss).


RISKS AND UNCERTAINTIES

In December 2019, a novel strain of the coronavirus surfaced in China. To contain the spread of infection, Chinese public health authorities imposed preventive measures within affected regions including an extended shutdown of businesses, restrictions on various forms of public transportation and lockdown periods for individuals—all of which affected our factory and supply chain and resulted in lower sales than anticipated in the second quarter of fiscal 2020. In addition, subsequent to the quarter-end, the coronavirus epidemic became a pandemic, and most countries have imposed ongoing constraints and preventive measures that are affecting the global economy. Significant declines in the stock market have occurred for various reasons linked to the coronavirus pandemic. The breadth and duration of this pandemic is unknown and raises uncertainty about our future sales, results of operations and financial position.


BUSINESS OUTLOOK

Sales and IFRS net loss outlook for the second quarter of fiscal 2020

For the second quarter of fiscal 2020, we expected our sales to range between $66 million and $71 million and our IFRS net loss to range between $0.09 and $0.05 per share, as disclosed in our first quarter of 2020 press release.

On February 24, 2020, due to the coronavirus outbreak impact on our supply chain and manufacturing operations in China, as well as an information technology issue, we updated our sales outlook with anticipated sales of approximately $55 million.

In the second quarter of fiscal 2020, our actual sales reached $55.3 million, in line with our updated sales outlook. Actual IFRS net loss for the second quarter of fiscal 2020 amounted to $0.16 per share, compared to $0.09 per share at the low-end of our initial earnings guidance, due to lower sales.


Page 27 of 47


Short-term and mid-term adjusted EBITDA target

We had forecasted adjusted EBITDA of $33 million for fiscal 2020 and set an adjusted EBITDA margin target of 15% of sales by the end of fiscal 2021. Due to the prolonged lockdown period that affected our manufacturing facility in China, ongoing constraints on a worldwide basis, as well as the uncertainty surrounding the breadth and duration of this coronavirus pandemic, we have suspended our short-term and mid-term adjusted EBITDA outlook.


RESULTS OF OPERATIONS
(in thousands of US dollars, except per share data, and as a percentage of sales for the periods indicated)

   
Three months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 29,
2020
    
Six months
ended
February 28,
2019
  
                         
Sales
  
$
55,313
    
$
73,927
    
$
128,864
    
$
143,128
  
                                 
Cost of sales (1)
    
23,796
      
29,062
      
54,037
      
57,959
  
Selling and administrative
    
24,303
      
25,474
      
48,807
      
51,849
  
Net research and development
    
12,566
      
12,216
      
24,315
      
27,440
  
Depreciation of property, plant and equipment
    
1,424
      
1,390
      
2,867
      
2,819
  
Depreciation of lease right-of-use assets
    
854
      
–
      
1,705
      
–
  
Amortization of intangible assets
    
1,695
      
2,130
      
3,327
      
5,070
  
Interest and other (income) expense
    
285
      
(1,514
)
    
684
      
(1,137
)
Foreign exchange loss
    
382
      
416
      
508
      
201
  
Earnings (loss) before income taxes
    
(9,992
)
    
4,753
      
(7,386
)
    
(1,073
)
Income taxes
    
(971
)
    
(440
)
    
1,698
      
1,201
  
Net earnings (loss) for the period (2)
  
$
(9,021
)
  
$
5,193
    
$
(9,084
)
  
$
(2,274
)
                                 
Basic and diluted net earnings (loss) per share
  
$
(0.16
)
  
$
0.09
    
$
(0.16
)
  
$
(0.04
)
                                 
Other selected information:
                                
                                 
Gross margin before depreciation and amortization (3)
  
$
31,517
    
$
44,865
    
$
74,827
    
$
85,169
  
                                 
Gross research and development
  
$
14,382
    
$
14,157
    
$
28,214
    
$
31,382
  
                                 
Restructuring charges included in:
                                
Cost of sales
  
$
–
    
$
17
    
$
–
    
$
304
  
Selling and administrative expenses
  
$
–
    
$
98
    
$
–
    
$
495
  
Net research and development expenses
  
$
–
    
$
462
    
$
–
    
$
2,519
  
                                 
Adjusted EBITDA (2) (3)
  
$
(4,916
)
  
$
8,784
    
$
2,628
    
$
11,512
  

(1)
The cost of sales is exclusive of depreciation and amortization, shown separately.
(2)
IFRS net loss for the three months and the six months ended February 29, 2020 takes into account the impact of the adoption of IFRS 16 on September 1, 2019. The adoption of IFRS 16 had a positive impact on adjusted EBITDA of $854 and $1,705 for the three months and the six months ended February 29, 2020 respectively. Comparative figures were not adjusted.
(3)
Refer to page 42 for non-IFRS measures.


Page 28 of 47


RESULTS OF OPERATIONS
(as a percentage of sales for the periods indicated)

   
Three months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 29,
2020
    
Six months
ended
February 28,
2019
  
                         
Sales
    
100.0
%
    
100.0
%
    
100.0
%
    
100.0
%
                                 
Cost of sales (1)
    
43.0
      
39.3
      
41.9
      
40.5
  
Selling and administrative
    
44.0
      
34.4
      
37.9
      
36.2
  
Net research and development
    
22.7
      
16.5
      
18.9
      
19.2
  
Depreciation of property, plant and equipment
    
2.6
      
1.9
      
2.2
      
2.0
  
Depreciation of lease right-of-use assets
    
1.5
      
–
      
1.3
      
–
  
Amortization of intangible assets
    
3.1
      
2.9
      
2.6
      
3.5
  
Interest and other (income) expense
    
0.5
      
(2.0
)
    
0.5
      
(0.8
)
Foreign exchange loss
    
0.7
      
0.6
      
0.4
      
0.1
  
Earnings (loss) before income taxes
    
(18.1
)
    
6.4
      
(5.7
)
    
(0.7
)
Income taxes
    
(1.8
)
    
(0.6
)
    
1.3
      
0.9
  
Net earnings (loss) for the period (2)
    
(16.3
)%
    
7.0
%
    
(7.0
)%
    
(1.6
)%
                                 
                                 
                                 
Other selected information:
                                
                                 
Gross margin before depreciation and amortization (3)
    
57.0
%
    
60.7
%
    
58.1
%
    
59.5
%
                                 
Gross research and development
    
26.0
%
    
19.1
%
    
21.9
%
    
21.9
%
                                 
Restructuring charges included in:
                                
Cost of sales
    
–
%
    
–
%
    
–
%
    
0.2
%
Selling and administrative expenses
    
–
%
    
0.1
%
    
–
%
    
0.3
%
Net research and development expenses
    
–
%
    
0.6
%
    
–
%
    
1.8
%
                                 
Adjusted EBITDA (2) (3)
    
(8.9
)%
    
11.9
%
    
2.0
%
    
8.0
%

(1)
The cost of sales is exclusive of depreciation and amortization, shown separately.
(2)
IFRS net loss for the three months and the six months ended February 29, 2020 takes into account the impact of the adoption of IFRS 16 on September 1, 2019. The adoption of IFRS 16 had a positive impact on adjusted EBITDA of 1.5% and 1.3% of sales for the three months and the six months ended February 29, 2020 respectively. Comparative figures were not adjusted.
(3)
Refer to page 42 for non-IFRS measures.


Page 29 of 47


RESULTS OF OPERATIONS

Sales and Bookings

The following tables summarize sales and bookings by product line in thousands of US dollars:

Sales

   
Three months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 29,
2020
    
Six months
ended
February 28,
2019
  
                         
Test and measurement
  
$
37,477
    
$
50,407
    
$
93,424
    
$
100,171
  
Service assurance, systems and services
    
17,935
      
23,701
      
35,684
      
43,117
  
     
55,412
      
74,108
      
129,108
      
143,288
  
Foreign exchange losses on forward exchange contracts
    
(99
)
    
(181
)
    
(244
)
    
(160
)
Total sales
  
$
55,313
    
$
73,927
    
$
128,864
    
$
143,128
  

Bookings

   
Three months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 29,
2020
    
Six months
ended
February 28,
2019
  
                         
Test and measurement
  
$
52,003
    
$
45,320
    
$
107,012
    
$
109,316
  
Service assurance, systems and services
    
20,963
      
30,953
      
36,012
      
48,174
  
     
72,966
      
76,273
      
143,024
      
157,490
  
Foreign exchange losses on forward exchange contracts
    
(99
)
    
(181
)
    
(244
)
    
(160
)
Total bookings
  
$
72,867
    
$
76,092
    
$
142,780
    
$
157,330
  

Sales by geographic region

The following table summarizes sales by geographic region:

   
Three months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 29,
2020
    
Six months
ended
February 28,
2019
  
                         
Americas
    
48
%
    
50
%
    
51
%
    
50
%
Europe, Middle-East and Africa (EMEA)
    
31
      
34
      
30
      
34
  
Asia-Pacific (APAC)
    
21
      
16
      
19
      
16
  
                                 
     
100
%
    
100
%
    
100
%
    
100
%


Page 30 of 47


For the three months ended February 29, 2020, our sales decreased 25.2% to $55.3 million, compared to $73.9 million for the same period last year, and our bookings decreased 4.2% to $72.9 million, compared to $76.1 million the same period last year, for a book-to-bill ratio of 1.32.

For the six months ended February 29, 2020, our sales decreased 10.0% to $128.9 million, from $143.1 million for the same period last year, and our bookings decreased 9.2% to $142.8 million, from $157.3 million for the same period last year, for a book-to-bill ratio of 1.11.

Sales

Second quarter review

In the second quarter of fiscal 2020, the 25.2% decrease in total sales year-over-year comes from both product lines.

In the second quarter of fiscal 2020, sales of our T&M product line decreased by $12.9 million, or 25.7% year-over-year mainly due to the global impact of the outbreak of the coronavirus, which prevented us from manufacturing and shipping to our customers our products manufactured in China in the last month of the quarter. Among our two product lines, our T&M product line was the most significantly impacted by the outbreak of the coronavirus as it is mainly comprised of hardware products that are for the most part manufactured at our facility in China. In addition, in fiscal 2019, timing of orders received at the end of first quarter for large calendar year-end budget spending on the part of some communication service providers (CSPs) in the Americas, resulted in a large portion of these orders being recognized into revenue in the second quarter of 2019. We did not have such a high level of calendar year-end budget spending in fiscal 2020. In the second quarter of 2020, we reported a year-over-year decrease in sales of our T&M product line in all geographic area, with higher declines in EMEA and the Americas.

In the second quarter of fiscal 2020, sales of our SASS product line decreased by $5.8 million, or 24.3% year-over-year. Sales of our SASS product line for the second quarter of fiscal 2019 included a negative impact of $0.6 million for EXFO Solutions’ acquisition-related deferred revenue fair value adjustment. Excluding this adjustment, sales of our SASS product line would have decreased 26.1% year-over-year in the second quarter of fiscal 2020. The year-over-year decrease in sales of our SASS product line in the second quarter of fiscal 2020 is mainly due to the $4.9 million order for our real-time network topology solution recognized in the second quarter of fiscal 2019, as we did not have such order in the same period this quarter. In addition, sales of our SASS product line were partially impacted by the outbreak of the coronavirus. Sales and bookings of our SASS product line are characterized by large intermittent orders from customers that may have prolonged sales and revenue recognition cycles; therefore, our quarterly sales and bookings are subject to quarterly fluctuations.

First half review

In the first half of fiscal 2020, the 10.0% decrease in total sales year-over-year comes from both product lines.

In the first half of fiscal 2020, sales of our T&M product line decreased by $6.7 million, or 6.7% year-over-year, mainly due to the impact the coronavirus outbreak.

In the first half of fiscal 2020, sales of our SASS product line decreased by $7.4 million, or 17.2% year-over-year. Sales of our SASS product line for the second half of fiscal 2019 included a negative impact of $1.4 million for EXFO Solutions’ acquisition-related deferred revenue fair value adjustment. Excluding this adjustment, sales of our SASS product line would have decreased 19.9% year-over-year in the first half of fiscal 2020. The year-over-year decrease in sales of our SASS product line in the first half of fiscal 2020 is mainly due to the $4.9 million order for our real-time network topology solution. In addition, sales of our SASS product line were partially impacted by the coronavirus outbreak in the first half of fiscal 2020.


Page 31 of 47


Bookings

Second quarter review

In the second quarter of fiscal 2020, total bookings decreased 4.2% year-over-year. During the second quarter of fiscal 2020, a 14.7% increase in bookings of our T&M product line was more than offset by a 32.3% decrease in bookings of our SASS product line.

The year-over-year increase in T&M bookings is mainly due to the timing of orders received in the first and second quarters of fiscal 2020 as overall, after the first half of the fiscal year, bookings of our T&M product line are down 2.1% year-over-year. In fiscal 2019, we had stronger bookings in the first quarter of the year compared to the second quarter, mainly due to large calendar year-end budget spending on the part of some CSPs in the Americas. In fiscal 2020, we reported a more linear influx of orders as we did not benefit from such high level of calendar year-end budget spending. In addition, in the second quarter of fiscal 2020, the outbreak of the coronavirus had to some extent a negative impact on the bookings of our T&M product line.

In the second quarter of fiscal 2020, bookings of our SASS product line decreased 32.3% year-over-year. In the second quarter of fiscal 2019, we received large orders totaling approximately $11 million for our real-time network topology solution, including products and professional services. We did not have such orders in the second quarter of 2020; this mainly explains the year-over-year decrease in bookings year-over-year. Bookings of the SASS product line are characterized by large intermittent orders from customers, with long revenue recognition cycles, and may vary from quarter to quarter.

First half review

In the first half of fiscal 2020, the 9.2% decrease in total bookings year-over-year can be attributed to both product lines.

In the first half of fiscal 2020, bookings of our T&M product line decreased 2.1% year-over-year, mainly due to the negative impact of the coronavirus outbreak.

In the first half of fiscal 2020, bookings of our SASS product line decreased 25.2% year-over-year, mainly due to the large orders received in fiscal 2019 for our real-time network topology solution totaling approximately $11 million. We did not have such orders in the first half of fiscal 2020.

Customer concentration

In the second quarter of fiscal 2020, no customer accounted for more than 10% of our sales, and our top three customers accounted for 19.5% of our sales. For the corresponding period last year, our top customer accounted for 14.9% of sales, and our top three customers accounted for 24.7% of sales. In the first half of fiscal 2020, our top customer accounted for 10.3% of sales, and our top three customers accounted for 18.8% of sales. For the corresponding period last year, our top customer accounted for 10.8% of sales, and our top three customers accounted for 21.9% of sales.


GROSS MARGIN BEFORE DEPRECIATION AND AMORTIZATION
(non-IFRS measure — refer to page 42 of this document)

Gross margin before depreciation and amortization amounted 57.0% of sales for the three months ended February 29, 2020, compared to 60.7% for the same period last year.

Gross margin before depreciation and amortization reached 58.1% of sales for the six months ended February 29, 2020, compared to 59.5% for the same period last year.


Page 32 of 47


In the second quarter and the first half of fiscal 2020, the adoption of IFRS 16 had a positive effect of 0.5% and 0.4% of sales on our gross margin before depreciation and amortization year-over-year.

In addition, in the second quarter and the first half of fiscal 2019, gross margin before depreciation and amortization included a negative impact of 0.3% and 0.4% of sales respectively for the acquisition-related deferred revenue fair value adjustment from the acquisition of EXFO Solutions (nil in fiscal 2020).

Excluding these two elements, our gross margin before depreciation and amortization would have decreased 4.5% and 2.2% year-over-year for the second quarter and the first half of fiscal 2020.

Second quarter review

In the second quarter of fiscal 2020, the outbreak of the coronavirus emanating from China led to the temporary shutdown of our manufacturing facility in Shenzhen, China, for a portion of the quarter; this negatively impacted our sales and our gross margin before depreciation and amortization as a portion of our cost of sales is fixed in the short-term.

In addition, in the second quarter of fiscal 2019, our gross margin before depreciation and amortization was positively affected by the $4.9 million order received for our real-time network topology software. This software-intensive solution delivered an above-average gross margin. We did not have such order during this quarter.

First half review

In the first half of fiscal 2020, the temporary shutdown of our manufacturing facility in Shenzhen, China, following the outbreak of the coronavirus negatively impacted our sales and our gross margin before depreciation and amortization for the period as a portion of our cost of sales is fixed in the short-term.

In addition, in the first half of fiscal 2019, our gross margin before depreciation and amortization was positively impacted by the $4.9 million order received for our real-time network topology software. This software-intensive solution delivered above-average gross margin.

Otherwise, in the first half of fiscal 2020, we recorded lower inventory writeoffs compared to the same period last year, which contributed to increasing our gross margin before depreciation and amortization by 0.4% of sales year-over-year.


SELLING AND ADMINISTRATIVE EXPENSES

For the three months ended February 29, 2020, selling and administrative expenses were $24.3 million, or 44.0% of sales, compared to $25.5 million, or 34.4% of sales for the same period last year.

For the six months ended February 29, 2020, selling and administrative expenses were $48.8 million, or 37.9% of sales, compared to $51.9 million, or 36.2% of sales for the same period last year.

Second quarter and first half review

In the second quarter and the first half of fiscal 2020, our selling and administrative expenses decreased $1.2 million and $3.0 million respectively compared to the same periods last year.

In the second quarter and the first half of fiscal 2020, commissions on our sales were lower compared to the same periods last year due the year-over-year decrease in sales.


Page 33 of 47


In addition, in the second quarter and the first half of fiscal 2020, we had the full impact of our 2018 restructuring plan, which reduced our selling and administrative expenses year-over-year.

Also, in the second quarter and the first half of fiscal 2020, the adoption of IFRS 16 had a positive effect of $0.4 million or 0.7% of sales and $0.8 million or 0.6% of sales respectively on our selling and administrative expenses year-over-year.

Finally, in the second quarter and the first half of fiscal 2019, we incurred restructuring charges of $0.1 million or 0.1% of sales and $0.5 million or 0.3% of sales respectively (nil in 2020).

Otherwise, in the second quarter and the first half of fiscal 2020, inflation and salary increases contributed to raise our selling and administrative expenses year-over-year.

In the second quarter of fiscal 2020, our selling and administrative expenses amounted to 44.0% of sales, 9.6% higher compared to 34.4% of sales in the same period last year. In the first half of fiscal 2020, our selling and administrative expenses amounted to 37.9% of sales, 1.7% higher compared to 36.2% of sales in the same period last year. The year-over-year increase in our selling and administrative expenses as percentage of sales for these periods is mainly due to the decrease in sales year-over-year as these expenses tend to be relatively fixed in the short term.


RESEARCH AND DEVELOPMENT EXPENSES

Gross Research and Development Expenses

For the three months ended February 29, 2020, gross research and development expenses totaled $14.4 million, or 26.0% of sales, compared to $14.2 million, or 19.1% of sales, for the same period last year.

For the six months ended February 29, 2020, gross research and development expenses totaled $28.2 million, or 21.9% of sales, compared to $31.4 million, or 21.9% of sales, for the same period last year.

Second quarter review

In the second quarter of fiscal 2020, our gross research and development expenses slightly increased $0.2 million compared to the same period last year.

In the second quarter of fiscal 2020, inflation and salary increases, as well as the mix of research and development project resulted in higher gross research and development expenses year-over-year.

However, in the second quarter of fiscal 2020, the adoption of IFRS 16 had a positive effect of $0.2 million, or 0.3% of sales on our gross research and development expenses year-over-year.

In addition, in the second quarter of fiscal 2019, we incurred restructuring charges of $0.5 million, or 0.6% of sales (nil in 2020).

In the second quarter of fiscal 2020, our gross research and development expenses amounted to 26.0% of sales, 6.9% higher than 19.1% of sales in the same period last year, mainly due to the decrease in sales year-over-year as these expenses tend to be fixed in the short term.

First half review

In the first half of fiscal 2020, our gross research and development expenses decreased $3.2 million compared to the same period last year.


Page 34 of 47


In the first half of fiscal 2019, we incurred restructuring charges of $2.5 million (1.8% of sales) compared to nil in 2020.

In addition, in the first half of fiscal 2020, the adoption of IFRS 16 had a positive effect of $0.4 million, or 0.3% of sales on our gross research and development expenses year-over-year.

Finally, in the first half of fiscal 2020, we had the full impact of our 2018 restructuring plan, which reduced our gross research and development expenses year-over-year.

Otherwise, in the first half of fiscal 2020, inflation and salary increases contributed to raise our gross research and development expenses year-over-year.


DEPRECIATION OF LEASE RIGHT-OF-USE ASSETS

On September 1, 2019, following the adoption of IFRS 16, we recorded $11.3 million for lease right-of-use (ROU) assets in the consolidated balance sheet. These assets are depreciated over the lease terms and resulted in a depreciation expense of $0.9 million and $1.7 million during the three months and the six months ended February 29, 2020 respectively, compared to nil for the same periods last year, as fiscal 2019 comparative figures were not adjusted. Upon the adoption of IFRS 16, the lease expense, previously recorded under the cost of sales, selling and administrative expenses and net research and development expenses line items is now mainly recorded under depreciation expenses for the ROU asset in the consolidated statements of earnings.

This new standard was adopted using the modified retrospective method and, accordingly, comparative figures were not adjusted.


AMORTIZATION OF INTANGIBLE ASSETS

In conjunction with the business combinations we completed, we recorded intangible assets primarily consisting of core technology and customer relationships. In addition, intangible assets include software.

For the three months ended February 29, 2020, amortization of intangible assets amounted to $1.7 million compared to $2.1 million for the same period last year.

For the six months ended February 29, 2020, amortization of intangible assets amounted to $3.3 million compared to $5.1 million for the same period last year.

The year-over-year decrease in our amortization expense in the second quarter and the first half of fiscal 2020, compared to the same periods last year, was mainly due to the fact that some acquired intangible assets became fully amortized in 2019.


FOREIGN EXCHANGE LOSS

Foreign exchange gains and losses are mainly the result of the translation of operating activities denominated in currencies other than our functional currency, which is the Canadian dollar. A portion of our foreign exchange gains or losses results from the translation of cash balances and deferred income taxes denominated in US dollars. We manage our exposure to currency risk in part with forward exchange contracts. In addition, some of our entities’ operating activities are denominated in US dollars, euros and British pounds, which further hedges this risk. However, we remain exposed to a currency risk; namely, any increase in the value of the Canadian dollar compared to the US dollar would have a negative impact on our operating results.


Page 35 of 47


For the three months ended February 29, 2020, we recorded a foreign exchange loss of $0.4 million, that is flat compared to the same period last year.

For the six months ended February 29, 2020, foreign exchange loss amounted to $0.5 million compared to $0.2 million for the same period last year.

Second quarter review

During the second quarter of fiscal 2020, we witnessed some volatility in the value of the Canadian dollar as it fluctuated compared to the US dollar, which overall resulted in a foreign exchange loss of $0.4 million. The period-end value of the Canadian dollar slightly decreased 1.0% versus the US dollar to CA$1.3428 = US$1.00 in the second quarter of fiscal 2020, compared to CA$1.3289 = US$1.00 at the end of the previous quarter.

During the same period last year, we witnessed some volatility in the value of the Canadian dollar as it fluctuated compared to the US dollar, which overall resulted in a foreign exchange loss of $0.4 million. The period-end value of the Canadian dollar slightly increased by 1.0% versus the US dollar to CA$1.3168 = US$1.00 in the second quarter of fiscal 2019, compared to CA$1.3301 = US$1.00 at the end of the previous quarter.

First half review

During the first half of fiscal 2020, we witnessed some volatility in the value of the Canadian dollar as it fluctuated compared to the US dollar, which overall resulted in a foreign exchange loss of $0.5 during the period. The period-end value of the Canadian dollar slightly decreased 1.0% versus the US dollar to CA$1.3428 = US$1.00, compared to CA$1.3294 = US$1.00 at the end of the previous year.

During the same period, last year, we also witnessed some volatility in the value of the Canadian dollar as it fluctuated compared to the US dollar, which overall resulted in a foreign exchange loss of $0.2 during the period. The period-end value of the Canadian dollar slightly decreased 0.9% versus the US dollar to CA$1.3168 = US$1.00, compared to CA$1.3055 = US$1.00 at the end of the previous year.


INCOME TAXES

For the three months ended February 29, 2020, we reported income tax recovery of $1.0 million on a loss before income taxes of $10.0 million. For the corresponding period, last year, we reported an income tax recovery of $0.4 million on earnings before income taxes of $4.8 million.

For the six months ended February 29, 2020, we reported income tax expenses of $1.7 million on a loss before income taxes of $7.4 million. For the corresponding period, last year, we reported income tax expenses of $1.2 million on a loss before income taxes of $1.1 million.

Discrete items affecting our effective income tax rate

Fiscal 2019

During the three months ended February 28, 2019, as part of our fiscal 2018 restructuring plan and the shutdown of some of our facilities in the United States, we 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 $2.4 million during the three and six months ended February 28, 2019 as the recovery of this asset is probable.


Page 36 of 47


Otherwise, our distorted tax rates for the three months and the six months ended February 28, 2019 and February 29, 2020 mainly resulted from the fact that we did not recognize deferred income tax assets for some of our subsidiaries at loss. In addition, we had some other non-deductible losses and expenses, such as stock-based compensation costs. Otherwise, our effective tax rate would have been closer to the combined Canadian and provincial statutory tax rate of 27% for these periods.

Please refer to note 9 to our condensed unaudited interim consolidated financial statements for a full reconciliation of our income tax provision.


LIQUIDITY AND CAPITAL RESOURCES

Cash Requirements and Capital Resources

As at February 29, 2020, cash and short-term investments totaled $20.9 million, while our working capital was at $28.6 million. Our cash and short-term investments increased by $3.3 million in the second quarter of fiscal 2020 compared to the previous quarter-end.

The following table summarizes the increase in cash and short-term investments during the second quarter of fiscal 2020 in thousands of US dollars:

Cash flows provided by operating activities
  
$
7,135
  
Increase in bank loan
    
16
  
Purchases of capital assets
    
(2,146
)
Repayment of lease obligations and long-term debt
    
(1,485
)
Unrealized foreign exchange loss on cash and short-term investments
    
(175
)
         
   
$
3,345
  

Our short-term investments of $1.8 million consist of deposits issued by high-credit-quality corporations; therefore, we consider the risk of non-performance of these financial instruments to be limited. Due to their short-term maturity, our term deposits are not expected to be affected by a significant liquidity risk. For managing our cash position, we have established a cash management policy, which we follow and monitor on a regular basis.

We believe that our cash balances and short-term investments totaling $20.9 million, combined with our available revolving credit facilities of up to $46.8 million, will be sufficient to meet our liquidity and capital requirements for the foreseeable future. In addition to these assets and credit facilities, we have unused available lines of credit of $22.3 million for foreign currency exposure related to forward exchange contracts. However, a potential slowdown or recession due to effect of the coronavirus pandemic, possible operating losses, additional restructuring costs and/or possible investments in or acquisitions of complementary businesses, products or technologies may require additional financing. There can be no assurance that additional debt or equity financing will be available when required or, if available, that it can be secured on satisfactory terms.

Sources and Uses of Cash

We finance our operations and meet our capital expenditure requirements through a combination of cash flows from operating activities, the use of our cash and short-term investments, borrowing under our existing credit facilities as well as the issuance of subordinate voting shares.

Operating activities

Cash flows provided by operating activities were $7.1 million for the three months ended February 29, 2020, compared to $18.7 million for the same period last year.


Page 37 of 47


Cash flows provided by operating activities were $0.7 million for the six months ended February 29, 2020, compared to $16.2 million for the same period last year.

Second quarter review

Cash flows provided by operating activities in the second quarter of fiscal 2020 were attributable to net loss after items not affecting cash of $2.4 million, more than offset by the positive net change in non-cash operating items of $9.5 million; this was mainly due to the positive effect on cash of the $18.5 million decrease in our accounts receivable due to the lower level of sales especially in the last month of the quarter and timing of receipts during the quarter. This positive effect on cash was offset in part by the negative effect on cash of the $3.2 million increase in our income taxes and tax credits recoverable due to tax credits earned during the quarter as well as current income taxes receivable on net loss not yet recovered, the $0.5 million increase in our inventories due to the shutdown of our facility in China during the quarter, as well as the $5.6 million decrease in our accounts payable, accrued liabilities and provisions due to the timing of purchases and payments during the quarter.

Cash flows provided by operating activities in the second quarter of fiscal 2019 were attributable to net earnings after items not affecting cash of $11.7 million, and the net change in non-cash operating items of $7.0 million; this was mainly due to the positive effect on cash of the $9.9 million decrease in our accounts receivable due to the timing of sales and receipts during the quarter, the $1.0 million decrease in our income taxes and tax credits due to tax credits recovered during the quarter, and the $1.0 million decrease in inventories due to higher inventory turn. These positive effects on cash were offset in part by the negative effect on cash of the $3.1 million decrease in our accounts payable, accrued liabilities and provisions due to the timing of purchases and payments during the quarter, and the $1.5 million decrease in other liabilities due to payment during the quarter.

First half review

Cash flows provided by operating activities in the first half of fiscal 2020 were attributable to net loss after items not affecting cash of $2.6 million, more than offset by the positive net change in non-cash operating items of $3.3 million; this was mainly due to the positive effect on cash of the decrease of $18.6 million in our accounts receivable due to the timing of receipts and the lower level sales especially in the last month of the period. This positive effect on cash was offset in part by the negative effect on cash of the $2.7 million increase in our income taxes and tax credits recoverable due to tax credits earned during the period as well as current income taxes receivable on net loss not yet recovered, the $4.0 million  increase in our inventories to meet future demand, as well as the $9.3 million decrease in our accounts payable, accrued liabilities and provisions due to the timing of purchases and payments during the period.

Cash flows provided by operating activities in the first half of fiscal 2019 were attributable to the net earnings after items not affecting cash of $12.4 million, and the positive net change in non-cash operating items of $3.9 million; this was mainly due to the positive effect on cash of the decrease of $5.8 million in our accounts receivable due to the timing of receipts and sales during the period. This positive effect on cash was offset in part by the negative effect on cash of the $1.5 million decrease in other liabilities due to payments during the period.

Investing activities

Cash flows used by investing activities were $1.4 million for the three months ended February 29, 2020, compared to cash flows provided of $1.2 million for the same period last year.

Cash flows used by investing activities were $3.1 million for the six months ended February 29, 2020, compared to $1.3 million for the same period last year.


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Second quarter review

In the second quarter of fiscal 2020, we made cash payments of $2.1 million for the purchase of capital assets but we disposed of $0.7 million worth of short-term investments.

For the corresponding period last year, we received net proceeds of $3.3 million from the sale of capital assets. However, during that quarter, we made cash payments of $1.8 million for the purchase of capital assets and we acquired $0.3 million worth of short-term investments.

First half review

In the first half of fiscal 2020, we made cash payments of $4.2 million for the purchase of capital assets. However, during the period, we disposed of $1.1 million worth of short-term investments.

For the corresponding period last year, we made cash payments of $4.7 million for the purchase of capital assets. However, during the period, we received net proceeds of $3.3 million from the sale of capital assets.

Financing activities

Cash flows used by financing activities were $1.5 million for the three months ended February 29, 2020, compared to $13.3 million for the same period last year.

Cash flows provided by financing activities were $5.1 million for the six months ended February 29, 2020, compared to cash flows used of $2.8 million for the same period last year.

In the second quarter of fiscal 2020, we repaid $1.5 million of our lease liabilities and our long-term debt.

For the corresponding period last year, our bank loan decreased by $12.5 million, we repaid $0.7 million of our long-term debt and other liabilities, and we redeemed share capital for $0.1 million.

In the first half of fiscal 2020, our bank loan increased by $8.4 million, but we repaid $3.0 million of our lease liabilities and our long-term debt and other liabilities, and we redeemed share capital for $0.3 million.

For the corresponding period last year, our bank loan decreased by $1.2 million, we repaid $1.5 million of our long-term debt and other liabilities, and we redeemed share capital for $0.1 million.

Contractual Obligations

We are committed under the terms of contractual obligations, which have various expiration dates, primarily for our lease liabilities, our long-term debt and licensing of intellectual property. The following table summarizes our contractual obligations as at February 29, 2020 in thousands of US dollars:

   
Lease liabilities
    
Long-term
debt
    
Licensing
agreements
    
Total
  
                         
No later than 1 year
  
$
2,925
    
$
2,158
    
$
2,042
    
$
7,125
  
Later than 1 year and no later than 5 years
    
6,104
      
2,227
      
1,282
      
9,613
  
Later than 5 years
    
561
      
25
      
–
      
586
  
   
$
9,590
    
$
4 410
    
$
3,324
    
$
17,324
  


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In addition, as at February 29, 2020, we had letters of guarantee amounting to $1.1 million for our own selling and purchasing requirements, which were reserved from our lines of credit; these letters of guarantee expire at various dates through fiscal 2022.


FORWARD EXCHANGE CONTRACTS

We are exposed to a currency risk as a result of our export sales of products manufactured in Canada, China, Finland and France, the majority of which are denominated in US dollars and euros. In addition, we are exposed to currency risk as a result of our research and development activities in India (Indian rupees). These risks are partially hedged by forward exchange contracts. Forward exchange contracts, which are designated as cash flow hedging instruments, qualify for hedge accounting.

As at February 29, 2020, we held forward exchange contracts to sell US dollars for Canadian dollars and Indian rupees at various forward rates, which are summarized as follows:

US dollars – Canadian dollars

 Expiry dates
  
Contractual
amounts
    
Weighted average
contractual
forward rates
  
             
 March 2020 to August 2020
  
$
18,000,000
      
1.3062
  
 September 2020 to August 2021
    
29,500,000
      
1.3145
  
 September 2021 to August 2022
    
12,000,000
      
1.3234
  
 September 2022 to January 2023
    
2,800,000
      
1.3291
  
 Total
  
$
62,300,000
      
1.3145
  

US dollars – Indian rupees

Expiry dates
  
Contractual
amounts
    
Weighted average contractual
forward rate
  
             
March 2020 to August 2020
  
$
2,400,000
      
71.88
  

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 $1.0 million as at August 31, 2019 and $1.4 million as at February 29, 2020, mainly for our US/Canadian dollar forward exchange contracts. The quarter-end exchange rate was CA$1.3428 = US$1.00 as at February 29, 2020.


SHARE CAPITAL

As at April 7, 2020, EXFO had 31,643,000 multiple voting shares outstanding, entitling to 10 votes each and 24,016,445 subordinate voting shares outstanding. The multiple voting shares and the subordinate voting shares are unlimited as to number and without par value.


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STRUCTURED ENTITIES

As at February 29, 2020, we did not have interests in any structured entities.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

During the three months ended February 29, 2020, to contain the spread of infection of the coronavirus, Chinese public health authorities imposed preventive measures within affected regions including an extended shutdown of businesses, restrictions on various forms of public transportation and lockdown periods for individuals—all of which affected our factory and supply chain. As at February 29, 2020, we reviewed critical estimates and assumptions considering the impact of the coronavirus outbreak and we believe that it had no significant impact on the measurement of assets and liabilities as of that date.

Subsequent to the quarter-end, the coronavirus epidemic became a pandemic and most countries have been imposing ongoing constraints and preventive measures that are affecting the global economy. The breath and duration of this pandemic is unknown and raise uncertainties that may impact the measurement of our assets and liabilities in future periods.

For a description of the critical accounting policies, judgments in applying accounting policies as well as estimates and assumptions used in the preparation of our consolidated financial statements, refer to our Annual Report on Form 20-F for the year ended August 31, 2019, filed with the U.S. Securities and Exchange Commission and the Canadian securities commissions.


NEW IFRS PRONOUNCEMENTS

Recently Issued IFRS Pronouncements Adopted in Fiscal 2020

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 supersedes IAS 17, “Leases”, and related interpretations. Under IFRS 16, lessees recognize a right-of-use (ROU) asset and a lease liability measured at the present value of lease payments for virtually all 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.

We adopted this new standard on September 1, 2019, using the modified retrospective method, which did not require adjustments to comparative periods. We applied IFRS 16 at the adoption date and recognized ROU assets and lease liabilities in the period of adoption. The new standard provides several optional practical expedients in transition. Upon implementation of the new standard, we elected the practical expedients to combine lease and non-lease components, and to not recognize ROU assets and lease liabilities for short-term leases. We identified appropriate changes to our accounting policies, information technology systems, business processes, and related internal controls to support recognition and disclosure requirements under IFRS 16.

The adoption of IFRS 16 on September 1, 2019 resulted in the recognition of ROU assets of $11.3 million, lease liabilities of $10.8 million, and the elimination of prepaid rents of $0.5 million in the consolidated balance sheet as of that date. In addition, lease payments for ROU assets, previously reported in cash flow from operating activities are reported in cash flow from financing activities in the consolidated statements of cash flows. However, the adoption of this standard had no significant impact on net loss.


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Upon the adoption of IFRS 16, the lease expense, previously recorded under the cost of sales, selling and administrative expenses and net research and development expenses line items is recorded as depreciation expenses for the ROU asset and as interest expenses on the lease liability in the consolidated statements of earnings.

Finally, the adoption of IFRS 16 had no significant impact on liquidity and debt covenant compliance under existing debt agreements.

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. We adopted this interpretation on September 1, 2019, and its adoption had no significant impact on our consolidated financial statements.


NON-IFRS MEASURES

We provide non-IFRS measures (gross margin before depreciation and amortization and adjusted EBITDA) as supplemental information regarding our operational performance. Gross margin before depreciation and amortization represents sales, less cost of sales, excluding depreciation and amortization. Adjusted EBITDA represent net earnings (loss) before interest and other income/expense, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges, acquisition-related deferred revenue fair value adjustment, and foreign exchange loss.

These non-IFRS measures eliminate the effect on our IFRS results of non-cash statement of earnings elements, restructuring charges as well as elements subject to significant volatility such as foreign exchange gain or loss. We use these measures for evaluating our historical and prospective financial performance, as well as our performance relative to our competitors. These non-IFRS measures are also used by financial analysts that evaluate and compare our performance against that of our competitors and industry players in our sector.

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


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Adjusted EBITDA

   
Three months
ended
February 29,
2020
    
Three months
ended
February 28,
2019
    
Six months
ended
February 29,
2020
    
Six months
ended
February 28,
2019
  
                         
IFRS net earnings (loss) for the period (1)
  
$
(9,021
)
  
$
5,193
    
$
(9,084
)
  
$
(2,274
)
                                 
Add (deduct):
                                
                                 
Depreciation and amortization
    
3,973
      
3,520
      
7,899
      
7,889
  
Interest and other (income) expense
    
285
      
(1,514
)
    
684
      
(1,137
)
Income taxes
    
(971
)
    
(440
)
    
1,698
      
1,201
  
Stock-based compensation costs
    
436
      
461
      
923
      
879
  
Restructuring charges
    
–
      
577
      
–
      
3,318
  
Acquisition-related deferred revenue fair value adjustment
    
–
      
571
      
–
      
1,435
  
Foreign exchange loss
    
382
      
416
      
508
      
201
  
Adjusted EBITDA for the period
  
$
(4,916
)
  
$
8,784
    
$
2,628
    
$
11,512
  
                                 
Adjusted EBITDA as a percentage of sales
    
(8.9
)%
    
11.9
%
    
2.0
%
    
8.0
%

(1)
IFRS net loss for the three months and the six months ended February 29, 2020 takes into account the impact of the adoption of IFRS 16 on September 1, 2019. The adoption of IFRS 16 on September 1, 2019 had a positive impact on adjusted EBITDA of $854,000 or 1.5% of sales and $1,705,000 or 1.3% of sales respectively for the three months and the six months ended February 29, 2020. Comparative figures were not adjusted.


QUARTERLY SUMMARY FINANCIAL INFORMATION (1)
(tabular amounts in thousands of US dollars, except per share data)

   
Quarters ended
  
   
February 29,
2020
    
November 30,
2019
    
August 31,
2019
    
May 31,
2019
  
                         
Sales
  
$
55,313
    
$
73,551
    
$
70,175
    
$
73,587
  
Cost of sales (2)
  
$
23,796
    
$
30,241
    
$
30,260
    
$
30,458
  
Net earnings (loss)
  
$
(9,021
)
  
$
(63
)
  
$
(227
)
  
$
21
  
Basic and diluted net earnings (loss) per share
  
$
(0.16
)
  
$
(0.00
)
  
$
(0.00
)
  
$
0.00
  

   
Quarters ended
  
   
February 28,
2019
    
November 30,
2018
    
August 31,
2018
    
May 31,
2018
  
                         
Sales
  
$
73,927
    
$
69,201
    
$
69,216
    
$
72,217
  
Cost of sales (2)
  
$
29,062
    
$
28,897
    
$
27,426
    
$
28,963
  
Net earnings (loss)
  
$
5,193
    
$
(7,467
)
  
$
(3,951
)
  
$
(5,970
)
Basic and diluted net earnings (loss) per share
  
$
0.09
    
$
(0.14
)
  
$
(0.07
)
  
$
(0.11
)

(1)
Quarterly financial information has been derived from our condensed unaudited interim consolidated financial statements, which are prepared in accordance with IFRS, as issued by the IASB, applicable to the preparation of interim financial statements, including IAS 34, “Interim Financial Reporting”. The presentation currency is the US dollar, which differs from the functional currency of the company (Canadian dollar).
(2)
The cost of sales is exclusive of depreciation and amortization.


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FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, PHILIPPE MORIN, Chief Executive Officer of EXFO INC., certify the following:
1.
Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of EXFO Inc. (the “issuer”) for the interim period ended February 29, 2020.

2.
No misrepresentation: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3.
Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4.
Responsibility: The issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in Regulation 52-109 respecting Certification of Disclosure in Issuer’s Annual and Interim Filings (c. V-1.1, r. 27), for the issuer.

5.
Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer and I have, as at the end of the period covered by the interim filings


(a)
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that


(i)
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and


(ii)
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and


Page 44 of 47



 (b)
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.

5.1
Control framework: The control framework the issuer's other certifying officer and I used to design the issuer's ICFR is the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2
N/A

5.3
N/A

6.
Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer's ICFR that occurred during the period beginning on December 1, 2019 and ended on February 29, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.


Date: April 7, 2020


/s/ Philippe Morin
Philippe Morin
Chief Executive Officer


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FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, PIERRE PLAMONDON, Chief Financial Officer and Vice-President, Finance of EXFO INC., certify the following:
1.
Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of EXFO Inc. (the “issuer”) for the interim period ended February 29, 2020.

2.
No misrepresentation: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3.
Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4.
Responsibility: The issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in Regulation 52-109 respecting Certification of Disclosure in Issuer’s Annual and Interim Filings (c. V-1.1, r. 27), for the issuer.

5.
Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer and I have, as at the end of the period covered by the interim filings


(a)
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that


(i)
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and


(ii)
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and


Page 46 of 47



 (b)
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.

5.1
Control framework: The control framework the issuer's other certifying officer and I used to design the issuer's ICFR is the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2
N/A

5.3
N/A

6.
Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer's ICFR that occurred during the period beginning on December 1, 2019 and ended on February 29, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.


Date: April 7, 2020


/s/ Pierre Plamondon
Pierre Plamondon, CPA
Chief Financial Officer and Vice-President, Finance


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