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Liquidity and Capital Resources
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Cash. We had $238.9 million and $321.0 million in
cash as at April 30, 2024 and January 31, 2024, respectively. All cash was held in interest-bearing bank accounts, primarily with major Canadian, US and European banks. The cash balance decreased from January 31, 2024 to April 30, 2024 by $82.1
million primarily due to cash used for acquisitions partially offset by cash generated from operations.
Credit facility. The facility is a $350.0 million
revolving operating credit facility to be available for general corporate purposes, including the financing of ongoing working capital needs and acquisitions. The credit facility has a five-year maturity with no fixed repayment dates prior to the
end of the term ending December 2027. With the approval of the lenders, the credit facility can be expanded to a total of $500.0 million. Borrowings under the credit facility are secured by a first charge over substantially all of Descartes’
assets. Depending on the type of advance, interest rates under the revolving operating portion of the credit facility are based on the Canada or US prime rate, Canadian Dollar Offered Rate (CDOR) or the Secured Overnight Financing Rate (SOFR)
plus an additional 0 to 250 basis points based on the ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization, as defined in the credit facility. A standby fee of between 20 to 40 basis points will be charged
on all undrawn amounts. The credit facility contains certain customary representations, warranties and guarantees, and covenants.
As at April 30, 2024, $350.0 million of the revolving operating credit facility remained available for use. We were in compliance with the covenants of the credit
facility as at April 30, 2024 and remain in compliance as of the date of this MD&A.
Short-form base shelf prospectus. On July 15, 2022, we filed a final short-form
base shelf prospectus (the “2022 Base Shelf Prospectus”), allowing us to offer and issue an unlimited quantity of the following securities during the 25-month period following thereafter: (i) common shares; (ii) preferred shares; (iii) senior
or subordinated unsecured debt securities; (iv) subscription receipts; (v) warrants; and (vi) securities comprised of more than one of the aforementioned common shares, preferred shares, debt securities, subscription receipts and/ or warrants
offered together as a unit. These securities may be offered separately or together, in separate series, in amounts, at prices and on terms to be set forth in one or more shelf prospectus supplements. No securities have yet been sold pursuant to
the 2022 Base Shelf Prospectus.
Working capital. As at April 30, 2024, our working
capital surplus (current assets less current liabilities) was $113.0 million. Current assets primarily include $238.9 million of cash, $53.9 million of current trade receivables and $37.1 million of prepaid expenses and other. Current liabilities
primarily include $100.5 million of accrued liabilities, $96.3 million of deferred revenue and $19.1 million of accounts payable. Our working capital has decreased from January 31, 2024 to April 30, 2024 by $101.6 million, primarily due to cash
used for acquisitions.
Historically, we’ve financed our operations and met our capital expenditure requirements primarily through cash flows provided from operations, issuances of
common shares and proceeds from debt. We anticipate that, considering the above, we have sufficient liquidity to fund our current cash requirements for working capital, contractual commitments, capital expenditures and other operating needs. We
also believe that we have the ability to generate sufficient amounts of cash in the long term to meet planned growth targets and to fund strategic transactions. Should additional future financing be undertaken, the proceeds from any such
transaction could be utilized to fund strategic transactions or for general corporate purposes, including the repayment of outstanding debt. We expect, from time to time, to continue to consider select strategic transactions to create value and
improve performance, which may include acquisitions, dispositions, restructurings, joint ventures and partnerships, and we may undertake further financing transactions, including draws on our credit facility, other debt instruments or equity
offerings, in connection with any such potential strategic transaction.
With respect to earnings of our non-Canadian subsidiaries, our intention is that these earnings will be reinvested in each subsidiary indefinitely. Of the $238.9
million of cash as at April 30, 2024, $173.8 million was held by our foreign subsidiaries, most significantly in the United States with lesser amounts held in other countries in the EMEA and Asia Pacific regions. To date, we have not encountered
significant legal or practical restrictions on the abilities of our subsidiaries to repatriate money to Canada, even if such restrictions may exist in respect of certain foreign jurisdictions where we have subsidiaries. In the future, if we elect
to repatriate the unremitted earnings of our foreign subsidiaries in the form of dividends, or if the shares of the foreign subsidiaries are sold or transferred, then we could be subject to additional Canadian or foreign income taxes, net of the
impact of any available foreign tax credits, which would result in a higher effective tax rate. We have not provided for foreign withholding taxes or deferred income tax liabilities related to unremitted earnings of our non-Canadian subsidiaries,
since such earnings are considered permanently invested in those subsidiaries or are not subject to withholding taxes.
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The table set forth below provides a summary of cash flows for the periods indicated in millions of dollars:
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| |
|
|
Three Months Ended
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| |
|
|
|
April 30, 2024
|
April 30, 2023
|
|
Cash provided by operating activities
|
|
|
|
63.7
|
48.9
|
|
Additions to property and equipment
|
|
|
|
(1.8)
|
(1.2)
|
|
Acquisition of subsidiaries, net of cash acquired
|
|
|
|
(140.0)
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(142.7)
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|
Issuance of common shares, net of issuance costs
|
|
|
|
4.2
|
5.4
|
|
Payment of withholding taxes on net share settlements
|
|
|
|
(6.7)
|
(4.9)
|
|
Effect of foreign exchange rate on cash
|
|
|
|
(1.5)
|
0.3
|
|
Net change in cash
|
|
|
|
(82.1)
|
(94.2)
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|
Cash, beginning of period
|
|
|
|
321.0
|
276.4
|
|
Cash, end of period
|
|
|
|
238.9
|
182.2
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Cash provided by operating activities was $63.7
million and $48.9 million for the first quarter of 2025 and 2024, respectively. For the first quarter of 2025, the $63.7 million of cash provided by operating activities resulted from $34.7 million of net income, plus adjustments for $19.4
million of non-cash items included in net income and plus $9.6 million of cash provided by changes in our operating assets and liabilities. For the first quarter of 2024, the $48.9 million of cash provided by operating activities resulted from
$29.4 million of net income, plus adjustments for $19.9 million of non-cash items included in net income and less $0.4 million of cash used by changes in our operating assets and liabilities. Cash provided by operating activities increased in the
first quarter of 2025 compared to the same period of 2024 primarily due to strong cash collections from customers as well as an increase in net income adjusted for non-cash items.
Additions to property and equipment were $1.8
million and $1.2 million in the first quarter of 2025 and 2024, respectively. Additions to property and equipment are primarily due to investments in computing equipment and software to support our network and continue to enhance our security
infrastructure.
Acquisition of subsidiaries, net of cash acquired
was $140.0 million and $142.7 million for the first quarter of 2025 and 2024, respectively. Acquisitions in the first quarter of 2025 related to OCR and ASD. Acquisitions in the first quarter of 2024 related to GroundCloud and Localz.
Issuance of common shares, net of issuance costs were
$4.2 million and $5.4 million for the first quarter of 2025 and 2024, respectively, as a result of the exercise of employee stock options.
Payment of withholding taxes on net share settlements was
$6.7 million and $4.9 million for the first quarter of 2025 and 2024, respectively. For the first quarter of 2025 and 2024, the Company reduced
issuances by 73,588 and 63,330 common shares, respectively, to satisfy employee tax withholding requirements for net share settlements of PSUs and RSUs.
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Commitments, Contingencies and Guarantees
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Commitments
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To facilitate a better understanding of our commitments, the following information is provided (in millions of dollars) in respect of our operating
obligations as of April 30, 2024:
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| |
Less than
1 year
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1-3 years
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4-5 years
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More than
5 years
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Total
|
| |
|
|
|
|
|
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Operating lease obligations
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3.4
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3.4
|
1.1
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0.1
|
8.0
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Lease Obligations
We are committed under non-cancelable operating leases for buildings, vehicles and computer equipment with terms expiring at various dates through 2030. The
undiscounted future minimum amounts payable under these lease agreements are presented in the table above.
Other Obligations
Deferred Share Unit (“DSU”) and Cash-settled Restricted Share Unit (“CRSU”) Plans
As discussed in Note 2 to the audited consolidated financial statements for 2024 included in our 2024 Annual Report, we maintain DSU and CRSU plans for our
directors and employees. Any payments made pursuant to these plans are settled in cash. For DSUs and CRSUs, the units vest over time and the liability recognized at any given consolidated balance sheet date reflects only those units vested at
that date that have not yet been settled in cash. As such, we had an unrecognized aggregate amount for the unvested DSUs and CRSUs of nil and $1.5 million, respectively, at April 30, 2024. The ultimate liability for any payment of DSUs and CRSUs
is dependent on the trading price of our common shares. To substantially offset our exposure to fluctuations in our stock price, we have entered into equity derivative contracts, including floating-rate equity forwards. As at April 30, 2024, we
had equity derivatives for 312,188 Descartes common shares and a DSU liability for 312,188 Descartes common shares, resulting in no net exposure arising from changes to our share price.
Contingencies
We are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. The consequences of these matters are
not presently determinable but, in the opinion of management after consulting with legal counsel, the ultimate aggregate liability is not currently expected to have a material effect on our results of operations or financial position.
Product Warranties
In the normal course of operations, we provide our customers with product warranties relating to the performance of our hardware, software and services. To date,
we have not encountered material costs as a result of such obligations and have not accrued any liabilities related to such obligations in our condensed consolidated financial statements.
Business combination agreements
In respect of our acquisitions of NetCHB, XPS, Supply Vision and GroundCloud, up to $178.0 million in cash may become payable if certain revenue performance
targets are met in the remaining earn-out period, up to a maximum period of two years following the acquisition. A balance of $36.9 million is accrued related to the fair value of this contingent consideration as at April 30, 2024.
Guarantees
In the normal course of business, we enter into a variety of agreements that may contain features that meet the definition of a guarantee under ASC Topic 460,
“Guarantees”. The following lists our significant guarantees:
Intellectual property indemnification obligations
We provide indemnifications of varying scope to our customers against claims of intellectual property infringement made by third parties arising from the use of
our products. In the event of such a claim, we are generally obligated to defend our customers against the claim and we are liable to pay damages and costs assessed against our customers that are payable as part of a final judgment or settlement.
These intellectual property infringement indemnification clauses are not generally subject to any dollar limits and remain in force for the term of our license agreement with our customer, which license terms are typically perpetual.
Historically, we have not encountered material costs as a result of such indemnification obligations.
Other indemnification agreements
In the normal course of operations, we enter into various agreements that provide general indemnities. These indemnities typically arise in connection with
purchases and sales of assets, securities offerings or buy-backs, service contracts, administration of employee benefit plans, retention of officers and directors, membership agreements, customer financing transactions, and leasing transactions.
In addition, our corporate by-laws provide for the indemnification of our directors and officers. Each of these indemnities requires us, in certain circumstances, to compensate the counterparties for various costs resulting from breaches of
representations or obligations under such arrangements, or as a result of third party claims that may be suffered by the counterparty as a consequence of the transaction. We believe that the likelihood that we could incur significant liability
under these obligations is remote. Historically, we have not made any significant payments under such indemnities.
In evaluating estimated losses for the guarantees or indemnities described above, we consider such factors as the degree of probability of an unfavorable outcome
and the ability to make a reasonable estimate of the amount of loss. We are unable to make a reasonable estimate of the maximum potential amount payable under such guarantees or indemnities as many of these arrangements do not specify a maximum
potential dollar exposure or time limitation. The amount also depends on the outcome of future events and conditions, which cannot be predicted. Given the foregoing, to date, we have not accrued any liability in our condensed consolidated
financial statements for the guarantees or indemnities described above.
We have an unlimited number of common shares authorized for issuance. As of May 29, 2024, we had 85,390,142 common shares issued and outstanding.
As of May 29, 2024, there were 1,716,705 options issued and outstanding, and 2,169,576 options remaining available for grant under all stock option plans.
As of May 29, 2024, there were 1,018,389 performance share units (“PSUs”) and 492,939 restricted share units (“RSUs”) issued and outstanding, with a potential of
up to a further 285,998 PSUs being earned if maximum performance is achieved in respect of the outstanding PSU awards. Also, as of May 29, 2024, there were 172,924 units remaining available for grant under all performance and restricted share
unit plans. The board of directors of the Company, subject to the approval of the shareholders of the Company at the annual meeting of shareholders being held on June 13, 2024, approved to increase the number of common shares issuable under the
Performance and Restricted Share Unit Plan by an additional 1,765,840 common shares.
Our board of directors has adopted a shareholder rights plan (the “Rights Plan”) to ensure the fair treatment of shareholders in connection with any take-over
offer, and to provide our board of directors and shareholders with additional time to fully consider any unsolicited take-over bid. We did not adopt the Rights Plan in response to any specific proposal to acquire control of the Company. The
Rights Plan was approved by the TSX and was originally approved by our shareholders on May 18, 2005 and took effect as of November 29, 2004. An amended and restated Rights Plan was ratified by shareholders at our annual shareholders’ meeting held
on June 15, 2023. The Rights Plan requires re-approval by the shareholders every three years. We understand that the Rights Plan is similar to plans adopted by other Canadian companies and approved by their shareholders.
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Application of Critical Accounting Policies and Estimates
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|
Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Estimates are deemed critical when a
different estimate could have reasonably been used or where changes in the estimates are reasonably likely to occur from period to period and would materially impact our financial condition or results of operations. Our accounting policies are
discussed in Note 2 to the audited consolidated financial statements for 2024 included in our 2024 Annual Report.
Our management has discussed the development, selection and application of our critical accounting policies with the audit committee of the board of directors.
The following reflect our more significant estimates, judgments and assumptions which we believe are the most critical to aid in fully understanding and
evaluating our reported financial results for the period ended April 30, 2024:
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• |
Impairment of long-lived assets;
|
|
• |
Stock-based compensation;
|
The significant accounting policies are unchanged from those disclosed in the Company’s 2024 Annual Report.
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Change In / Initial Adoption of Accounting Policies
|
|
Recently issued accounting pronouncements
In November 2023, the FASB issued Accounting Standards Update 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU
2023-07”). The amendments in ASU 2023-07 improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023,
which is our fiscal year that began on February 1, 2024 (fiscal 2025) and interim periods within fiscal years beginning after December 15, 2024, which will be our fiscal year beginning February 1, 2025 (fiscal 2026). Early adoption is permitted.
The Company will adopt this guidance in the fourth quarter of fiscal 2025. The adoption of this guidance is not expected to have a material impact on our results of operations or disclosures.
In December 2023, the FASB issued Accounting Standards Update 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”). The amendments in ASU 2023-09 enhance transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income
taxes paid information. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, which will be our fiscal year beginning February 1, 2025 (fiscal 2026). Early adoption is permitted for annual financial statements that have
not yet been issued or made available for issuance. The Company will adopt this guidance in the fourth quarter of fiscal 2026. The adoption of this guidance is not expected to have
a material impact on our results of operations or disclosures.
During the period beginning on February 1, 2024 and ended on April 30, 2024, no changes were made to the Company’s internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Trends / Business Outlook
|
|
This section discusses our outlook for fiscal 2025 and in general as of the date of this MD&A and contains forward-looking statements.
Rates of inflation in some economies have begun to decline since reaching recent peaks over the last two years but in other economies persist at rates higher than
historically normal. As inflation returns to target rates in some countries, central banks have begun to ease monetary policy and lower interest rates in response, but in many economies interest rates remain elevated. While concerns of a global
recession have receded, global growth remains slow and the outlook for the shipping industry, in particular, is uncertain. Geopolitical tensions, climate change, volatile fuel prices, and increased operational costs may present challenges to
freedom of navigation and/or result in disruptions to global trade. These factors could adversely impact our business or the businesses of our customers and suppliers, which in turn could impact the level of usage and/or demand for our products
and services and our resulting revenues. The impact of these factors on the global economy in general and on our business specifically is uncertain at this time and the extent to which our business will be affected will depend on a variety of
factors, many of which are outside of our control.
More generally, our business may be impacted from time to time by the cyclical and seasonal nature of particular modes of transportation and the freight market,
as well as the cyclical and seasonal nature of the industries that such markets serve. Factors which may create cyclical fluctuations in such modes of transportation or the freight market in general include legal and regulatory requirements (for
example, the UK’s departure from the European Union, “Brexit”), timing of contract renewals between our customers and their own customers, seasonal-based tariffs, vacation periods applicable to particular shipping or receiving nations,
weather-related or global health events that impact shipping in particular geographies and amendments to international trade reshipments being processed, labor uncertainty or stoppages, adverse fluctuations in the volume of global shipments, or
shipments in any particular mode of transportation, may adversely affect our revenues. Significant declines in shipment volumes could likely have a material adverse effect on our business.
Industry consolidation, rapid technological change, growth of ecommerce and frequent new product introductions and enhancements continue to characterize the
software and services industries – particularly for logistics management technology companies. Organizations are increasingly requiring
greater levels of functionality and more sophisticated product offerings from their software and services providers.
Increased importance is being placed on leveraging cloud-based technology to better manage logistics processes and to connect and collaborate with trading
partners on a global basis, as well as to reuse and share supply chain data in order to accelerate time-to-value. Cloud-based technology also enables business networks to more easily unite and integrate services provided by a broad range of
partners and technology alliances to extend functionality and further enhance collaboration between business communities. As a result, we believe there is a trend away from using manual and paper-based supply chain and logistics processes towards
electronic processes powered by the exchange of electronic information between logistics and supply chain participants.
Accordingly, we expect that our future success will be dependent upon our ability to enhance current products or develop and
introduce new products offering enhanced performance and new functionality at competitive prices. In particular, we believe customers are looking for end-to-end solutions that combine a multi-modal, multi-process network with business document
exchange and wireless mobile resource management applications with end-to-end global trade compliance, trade content and collaborative supply chain execution applications. These applications include freight bookings, contract and rate management,
classification of goods for tariff and duty purposes, sanctioned party screening, customs filings and electronic shipment manifest processes, transportation management, routing and scheduling, purchase order to dock door processes, and inventory
visibility.
We believe there is a continued acceptance of subscription pricing and SaaS business models in the markets we serve that provide lower up-front cost and
easier-to-maintain alternatives than may be available through traditional perpetual license pricing models. In the first quarter of fiscal 2025, our services revenues comprised 91% of our total revenues, with the balance being license,
professional services and other revenues. We expect that our focus in fiscal 2025 will remain on generating services revenues, primarily by promoting the use of our GLN (including customs compliance services) and the migration of customers using
our legacy license-based products to our services-based architecture. We anticipate maintaining the flexibility to license our products to those customers who prefer to buy the products in that fashion and the composition of our revenues in any
one quarter will be impacted by the buying preferences of our customers.
We have significant contracts with our license customers for ongoing support and maintenance, as well as significant service contracts which provide us with
recurring services revenues. After their initial term, our service contracts are generally renewable at a customer’s option, and there are generally no mandatory payment obligations or obligations to license additional software or subscribe for
additional services. In a typical year, based on our historic experience, we anticipate that over a one-year period we may lose approximately 4% to 6% of our aggregate annualized recurring revenues from the previous year in the ordinary course,
excluding consideration of new customers.
We internally measure and manage our “baseline calibration”, which we define as the difference between our “baseline revenues” and “baseline operating expenses”.
Each of these measures constitutes a “supplementary financial measure” under Canadian Securities Administrators’ National Instrument 52-112 and does not have a directly comparable financial measure disclosed in our financial statements. We define our “baseline revenues” as our visible, recurring and contracted revenues. Baseline revenues are not a projection of anticipated total revenues for a period
as they exclude any anticipated or expected new sales for a period beyond the date that the baseline revenues are measured. We define our “baseline operating expenses” as our total expenses less interest, investment and other income, taxes, depreciation and amortization, stock-based compensation (for which we include related costs and taxes), acquisition-related costs, contingent
consideration and restructuring charges. Baseline operating expenses are not a projection of anticipated total expenses for a period as they exclude any expenses associated with anticipated or expected new sales for a period beyond the date
that the baseline expenses are measured. Our baseline calibration is not a projection of net income for a period or adjusted earnings before interest, taxes, depreciation and amortization for a period as it excludes anticipated or
expected new sales for a period beyond the date that the baseline calibration is measured, excludes any costs of goods sold or
other expenses associated with such new sales, and excludes the expenses identified as excluded in the definition of “baseline operating expenses,” above. We
calculate and disclose “baseline revenues,” “baseline operating expenses” and “baseline calibration” because management uses these metrics in determining its planned levels of expenditures for a period and we believe this information is useful to
our investors. These metrics are estimated operating metrics and not projections, nor actual financial results, and are not indicative of current or future performance. As noted above, these metrics do not have any directly comparable financial
measures disclosed in our financial statements. At May 1, 2024, using foreign exchange rates of $0.73 to CAD $1.00, $1.07 to EUR 1.00 and $1.24 to £1.00, we estimated that our baseline revenues for the second quarter of 2025 are approximately
$136.0 million and our baseline operating expenses are approximately $84.0 million. We consider this to be our baseline calibration of approximately $52.0 million for the second quarter of 2025, or approximately 38% of our baseline revenues as at
May 1, 2024.
We estimate that aggregate amortization expense for existing intangible assets will be $51.5 million for the remainder of fiscal 2025, $63.9 million for 2026,
$49.3 million for 2027, $42.0 million for 2028, $33.7 million for 2029 and $83.0 million thereafter. Expected future amortization expense is based on the level of existing intangible assets at April 30, 2024, is subject to fluctuations in foreign
exchange rates and assumes no future adjustments or impairment of existing intangible assets.
We anticipate that stock-based compensation expense for the remainder of fiscal 2025 for grants outstanding as at April 30, 2024 will be approximately $16.6
million, subject to any necessary adjustments resulting from actual stock-based compensation forfeitures and fluctuations in foreign exchange rates. We
anticipate that we’ll make additional grants of stock options in the remainder of fiscal 2025 as part of our regular compensation practices.
We performed our annual goodwill impairment tests in accordance with ASC Topic 350, “Intangibles – Goodwill and Other” (“ASC Topic 350”) as at
October 31, 2023 and determined that there was no evidence of impairment. We are currently scheduled to perform our next annual impairment test during the third quarter of fiscal 2025. We will continue to perform quarterly analyses of whether any
event has occurred that would more likely than not reduce our enterprise value below our carrying amounts and, if so, we will perform a goodwill impairment test between the annual dates. The likelihood of any future impairment increases if our
public market capitalization is adversely impacted by global economic, capital market or other conditions for a sustained period of time. Any future impairment adjustment will be recognized as an expense in the period that such adjustment is
identified.
In the first quarter of 2025, capital expenditures were $1.8 million or 1% of revenues, as we continue to invest in computer equipment and software to support our
network and build out our infrastructure. We anticipate that we will incur approximately $4.0 to $5.0 million in capital expenditures in the remainder of fiscal 2025 primarily related to investments in our network and security infrastructure.
In the remainder of fiscal 2025, we estimate that payments of contingent consideration for earn-out arrangements accrued as at April 30, 2024 will be
approximately $35.5 million, subject to any necessary adjustments resulting from the final earn-out calculations. Of the $35.5 million estimated to be paid, $9.2 million relates to the portion of the earn-out arrangements accrued for at the time
of acquisition and will be reflected in cash flow from financing activities with the remaining balance reflected in cash flow from operating activities.
We conduct business in a variety of foreign currencies and, as a result, our foreign operations are subject to foreign exchange fluctuations. Our
businesses operate in their local currency environment and use their local currency as their functional currency. Assets, including cash, and liabilities of foreign operations are translated into US dollars at the exchange rate in effect at the
balance sheet date. Revenues and expenses of foreign operations are translated using daily exchange rates. Translation adjustments resulting from this process are accumulated in other comprehensive income (loss) as a separate component of
shareholders’ equity.
Transactions incurred in currencies other than the functional currency are converted to the functional currency at the transaction date. All
foreign currency transaction gains and losses are included in net income. We currently have no specific hedging program in place to address fluctuations in international currency exchange rates. In addition, we can make no accurate prediction of
what will happen with international currency exchange rates going forward.
There can be varied impacts on our results of operations as a consequence of movements in international currency exchange rates. In the first
quarter of fiscal 2025, approximately 72% of our revenues were in US dollars, 10% in euro, 7% in Canadian dollars, 7% in British pound sterling, and the balance in mixed currencies. For that same period, approximately 51% of our operating
expenses were in US dollars, 13% in euro, 23% in Canadian dollars, 4% in British pound sterling, and the balance in mixed currencies. With this distribution, we generally expect that our revenues will be negatively impacted when the US dollar
strengthens compared to these foreign currencies.
However, the impact from movements in foreign exchange rates on our other aspects of our results of operations are more varied. Generally, if the
US dollar strengthens against the Canadian dollar, the decrease in our expenses will be greater than the decrease in our revenue, resulting in an improvement in our results of operations. However, if the US dollar were to strengthen against the
British pound or euro, the decrease in expenses would not be as large as the decrease in revenue, resulting in a weakening of our results of operations. We will continue to monitor the impact of foreign exchange on our operating results as
changes in foreign exchange rates may have a significant negative impact on our revenue and results of operations.
Our tax expense for a period is difficult to predict as it depends on many factors, including the actual jurisdictions in which income is earned, the tax rates in
those jurisdictions, the amount of deferred tax assets relating to the jurisdictions and the valuation allowances relating to those tax assets. We can provide no assurance as to the timing or amounts of any income tax expense or recovery, nor can
we provide any assurance that our current valuation allowance for deferred tax assets will not need to be adjusted further.
We experienced an effective tax rate of approximately 25% in the first quarter of fiscal 2025, which is within our expected range of 25% to 30%. For the remainder
of fiscal 2025, we anticipate an effective tax rate of between 23% to 28%.
We intend to continue to actively explore business combinations to add complementary services, products and customers to our existing businesses. We also intend
to continue to focus our acquisition activities on companies that are targeting the same customers as us and processing similar data and, to that end, we listen to our customers’ suggestions as they relate to acquisition opportunities. Depending
on the size and scope of any business combination, or series of business combinations, we may choose or need to use our existing credit facility or need to raise additional debt or equity capital. However, there can be no assurance that we will
be able to undertake such a financing transaction. If we use debt in connection with acquisition activity, we will incur additional interest expense from the date of the draw under such facility. Considering the balance of the credit facility as
at April 30, 2024, and subject to any further draws or repayments on the credit facility, we anticipate that interest expense will be approximately $0.8 million in the remainder of fiscal 2025, which includes debt standby charges as well as the
amortization of deferred financing charges.
Certain future commitments are set out above in the section of this MD&A called “Commitments, Contingencies and Guarantees”. We believe that we have
sufficient liquidity to fund our current operating and working capital requirements, including the payment of these commitments.
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Certain Factors That May Affect Future Results
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|
Any investment in us will be subject to risks inherent to our business. Before making an investment decision, you should carefully consider
the risks described below together with all other information included in this report. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are not aware of or have not focused
on, or that we currently deem immaterial, may also impair our business operations. This report is qualified in its entirety by these risk factors.
If any of the risks actually occur, they could materially adversely affect our business, financial condition, liquidity or results of
operations. In that case, the trading price of our securities could decline and you may lose all or part of your investment.
System or network failures, information security breaches or other cyber-security threats in connection with our business,
services and/or products could reduce our sales, impair our reputation, increase costs or result in liability claims, and seriously harm our business.
We rely on information technology networks and systems to process, transmit and store electronic information. Any disruption to our business, services and/or
products, our own information systems or communications networks or those of third-party providers on which we rely as part of our own product offerings could result in the inability of our customers to receive our products for an indeterminate
period of time. Our ability to deliver our products and services depends on the development and maintenance of hardware and communications infrastructure (including internet) by third parties. This includes maintenance of reliable networks with
the necessary security, speed, data capacity and bandwidth. While our services are designed to operate without interruption, we have experienced, and may in the future experience, interruptions and delays in services and availability from time to
time. In the event of a catastrophic event with respect to one or more of our systems, we may experience an extended period of system unavailability, which could negatively impact our relationship with customers. Our services and products may not
function properly for reasons which may include, but are not limited to, the following:
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System or network failure;
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Software errors, failures and crashes;
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Interruption in the supply of power;
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Virus proliferation or malware;
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Communications failures;
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Information or infrastructure security breaches;
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Insufficient investment in infrastructure;
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Earthquakes, fires, floods, natural disasters, or other force majeure events outside our control; and
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Acts of war, sabotage, cyber-attacks, denial-of-service attacks and/or terrorism.
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In addition, any disruption to the availability of customer information, or any compromise to the integrity or confidentiality of customer information in our
systems or networks, or the systems or networks of third parties on which we rely (including those third parties’ solutions that are used to detect and protect against such disruption and compromise), could result in our customers being unable to
effectively use our products or services or being forced to take mitigating actions to protect their information. Back-up and redundant systems may be insufficient or may fail and result in a disruption of availability of our products or services
to our customers or the integrity or availability of our customers’ information.
Some jurisdictions have enacted laws requiring companies to notify individuals of data security breaches
involving certain types of personal data and in some cases our agreements with certain customers require us to notify them in the event of a security incident.
Such mandatory disclosures could lead to negative publicity and may cause our current and prospective customers to lose confidence in the effectiveness of our data security measures. Moreover, if a high-profile security breach occurs with respect
to another
SaaS provider, customers may lose trust in the security of the SaaS business model generally, which could adversely impact our ability to retain existing
customers or attract new ones.
Any actual or perceived threat of disruption to our services or any compromise of customer information could impair our reputation and cause us to lose customers
or revenue, or face litigation, necessitate customer service or repair work that would involve substantial costs and distract management from operating our business. Despite the implementation of advanced threat protection, information and
network security measures and disaster recovery plans, our systems and those of third parties on which we rely may be subjected to deficiencies, vulnerabilities and security risks of increasing frequency, scope and potential harm. If we are
unable (or are perceived as being unable) to prevent, or promptly identify and remedy, such outages and breaches, our operations may be disrupted, our business reputation could be adversely affected, and there could be a negative impact on our
financial condition and results of operations.
General economic conditions may affect our results of operations and financial condition.
Demand for our products depends in large part upon the level of capital and operating expenditures by many of our customers. Decreased capital and operational
spending could have a material adverse effect on the demand for our products and our business, results of operations, cash flow and overall financial condition. Decreased spending from customers could be caused by pessimism relating to particular
economic indicators, such as increases in inflation and interest rates. Decreased spending could also be caused by the impact of geopolitical events, such as the Russia-Ukraine Conflict, or the Israel-Hamas Conflict, or catastrophic events, such
as the Pandemic. These types of economic indicators and events may also cause disruptions in the financial markets. Disruptions in the financial markets may adversely impact the availability of credit already arranged and the availability and
cost of credit in the future, which could result in the delay or cancellation of projects or capital programs on which our business depends. In addition, disruptions in the financial markets may also have an adverse impact on regional economies
or the world economy, which could negatively impact the capital and operating expenditures of our customers. Decreased capital and operational spending or disruptions in the financial markets could be caused by inflationary pressures, acts of
war, or the outbreak of a contagious illness, such as the Pandemic. Any of these conditions may reduce the willingness or ability of our customers and prospective customers to commit funds to purchase our products and services, or their ability
to pay for our products and services after purchase.
Catastrophic events, armed conflict, wars, climate change and its effects, including natural
disasters and severe weather, disease and similar events could disrupt the demand of our customers for our products and services and our ability to operate our business.
Our business may be negatively impacted to varying degrees by a number of events which are beyond our control, including acts of war, armed conflicts, energy
blackouts, pandemics (or other public health crises), terrorist attacks, earthquakes, climate change and its effects, including hurricanes, tornados, fires, floods, ice storms or other natural or manmade catastrophes. We cannot be sure that our
emergency preparedness or the preparedness of our customers, including business continuity planning, to mitigate risks will be effective since such events can evolve very rapidly, and their impacts can be difficult to predict. As such, there can
be no assurance that in the event of such a catastrophe that the operations and ability to carry on business of us or our customers will not be disrupted. The occurrence of such events may not release us from performing our obligations to third
parties. A catastrophic event, including an outbreak of infectious disease, or a similar health threat, such as the Pandemic, or fear of any of the foregoing, could adversely impact us, our customers and our investments. In addition, liquidity
and volatility, credit availability and market and financial conditions, generally could change at any time as a result of any of these events. Any of these events in isolation or in combination, could have a material negative impact on our
performance, financial condition, results of operations and cash flows.
We may have difficulties identifying, successfully integrating or maintaining or growing our acquired businesses.
Businesses that we acquire may sell products or services that we have limited experience operating or managing. We may experience unanticipated challenges or
difficulties identifying suitable acquisition
candidates, integrating their businesses into our company, maintaining these businesses at their current levels or growing these businesses. Factors that may
impair our ability to identify, successfully integrate, maintain or grow acquired businesses may include, but are not limited to:
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Challenges identifying suitable businesses to buy and negotiating the acquisition of those businesses on acceptable terms;
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Challenges completing the acquisitions within our expected time frames and budgets;
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Challenges in integrating acquired businesses with our business;
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Loss of customers of the acquired business;
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Loss of key personnel from the acquired business, such as former executive officers or key technical personnel;
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Non-compatible business cultures;
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For regulatory compliance businesses, changes in government regulations impacting electronic regulatory filings or import/export compliance, including changes in which
government agencies are responsible for gathering import and export information;
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Difficulties in gaining necessary approvals in international markets to expand acquired businesses as contemplated;
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Our inability to obtain or maintain necessary security clearances to provide international shipment management services;
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Our failure to make appropriate capital investments in infrastructure to facilitate growth; and
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Other risk factors identified in this report.
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We may fail to properly respond to any of these risks, which may have a material adverse effect on our business results.
Investments in acquisitions and other business initiatives involve a number of risks that could harm our business.
We have in the past acquired, and in the future, expect to seek to acquire, additional products, services, customers, technologies and businesses that we believe
are complementary to ours. We are unable to predict whether or when we will be able to identify any appropriate products, technologies or businesses for acquisition, or the likelihood that any potential acquisition will be available on terms
acceptable to us or will be completed. We also, from time to time, take on investments in other business initiatives, such as the implementation of new systems.
Acquisitions and other business initiatives involve a number of risks, including: substantial investment of funds, diversion of management’s attention from
current operations; additional demands on resources, systems, procedures and controls; and disruption of our ongoing business. Acquisitions specifically involve risks, including: difficulties in integrating and retaining all or part of the
acquired business, its customers and its personnel; assumption of disclosed and undisclosed liabilities; dealing with unfamiliar laws, customs and practices in foreign jurisdictions; and the effectiveness of the acquired company’s internal
controls and procedures. In addition, we may not identify all risks or fully assess risks identified in connection with an investment. As well, by investing in such initiatives, we may deplete our cash resources or dilute our shareholder base by
issuing additional shares. Furthermore, for acquisitions, there is a risk that our valuation assumptions, customer retention expectations and our models for an acquired product or business may be erroneous or inappropriate due to foreseen or
unforeseen circumstances and thereby cause us to overvalue an acquisition target. There is also a risk that the contemplated benefits of an acquisition or other investment may not materialize as planned or may not materialize within the time
period or to the extent anticipated. The individual or combined effect of these risks could have a material adverse effect on our business.
If we fail to attract and retain key personnel, it would adversely affect our ability to develop and effectively manage our
business and inflationary pressures in compensation could impact the cost structure of our business.
Our performance is substantially dependent on the performance of our highly qualified management, technical expertise, and sales and marketing personnel, which we
regard as key individuals to our business. Significant competition exists for management and skilled personnel and as a result of that competition we are seeing wage and labor cost escalation in various areas and levels within our workforce.
Our success is highly dependent on our ability to identify, hire, train, motivate, promote, and retain key individuals. In responding to inflationary wage
pressure to retain or attract key individuals, we could see increases in our operating costs that outpace our ability to grow revenues. If we fail to cross train key employees, particularly those with specialized knowledge it could impair our
ability to provide consistent and uninterrupted service to our customers. If we are not able to attract, retain or establish an effective succession planning program for key individuals it could have a material adverse effect on our business,
results of operations, financial condition and the price of our common shares.
We have in the past, and may in the future, make changes to our executive management team or board of directors. There can be no assurance that any such changes
and the resulting transition will not have a material adverse effect on our business, results of operations, financial condition and the price of our common shares.
Changes in government filing or screening requirements for global trade may adversely impact our business.
Our regulatory compliance services help our customers comply with government filing and screening requirements relating to global trade. The services that we
offer may be impacted, from time to time, by changes in these requirements, including potential future changes as a consequence of Brexit, the United States-Mexico-Canada Agreement or similar cross-border trade agreements. In addition, and more
generally, changes in requirements that impact electronic regulatory filings or import/export compliance, including changes adding or reducing filing requirements, changes in enforcement practices or changes in the government agency responsible
for such requirements could adversely impact our business, results of operations and financial condition.
Disruptions in the movement of freight could negatively affect our revenues.
Our business is highly dependent on the movement of freight from one point to another since we generate transaction revenues as freight is moved by, to or from
our customers. If there are disruptions in the movement of freight, proper reporting or the overall volume of international shipments, whether as a result of labor disputes, weather or natural disasters, acts of war, terrorist events, political
instability, changes in cross border trade agreements, contagious illness outbreaks (such as the Pandemic), or otherwise, then the traffic volume on our Global Logistics Network will be impacted and our revenues will be adversely affected. As
these types of freight disruptions are generally unpredictable, there can be no assurance that our business, results of operations and financial condition will not be adversely affected by such events.
Our existing customers might cancel contracts with us, fail to renew contracts on their renewal dates, and/or fail to
purchase additional services and products, and we may be unable to attract new customers.
We depend on our installed customer base for a significant portion of our revenues. We have significant contracts with our license customers for ongoing support
and maintenance, as well as significant service contracts that provide recurring services revenues to us. In addition, our installed customer base has historically generated additional new license and services revenues for us. Service contracts
are generally renewable at a customer’s option and/or subject to cancellation rights, and there are generally no mandatory payment obligations or obligations to license additional software or subscribe for additional services.
If our customers fail to renew their service contracts, fail to purchase additional services or products, or we are unable to attract new customers, then our
revenues could decrease and our operating results could be adversely affected. Factors influencing such contract terminations could include changes in the financial circumstances of our customers, dissatisfaction with our products or services,
our retirement or lack of support for our legacy products and services, our customers selecting or building alternate technologies to replace us, the cost of our products and services as compared to the cost of products and services offered by
our competitors, acceptance of future price increases, our ability to attract, hire and maintain qualified personnel to meet customer needs, consolidating activities in the market, and changes in our customers’ business or in regulation impacting
our customers’ business that may no longer necessitate the use of our products or services, general economic or market conditions, or other reasons. Further, our
customers could delay or terminate implementations or use of our services and products or be reluctant to migrate to new products. Such customers will not
generate the revenues we may have anticipated within the timelines anticipated, if at all, and may be less likely to invest in additional services or products from us in the future. We may not be able to adjust our expense levels quickly enough
to account for any such revenue losses. In addition, loss of one or more of our key customers could adversely impact our competitive position in the marketplace and hurt our credibility and ability to attract new customers.
Our success depends on our ability to continue to innovate and to create new solutions and enhancements to our existing
products
We may not be able to develop and introduce new solutions and enhancements to our existing products that respond to new technologies or shipment regulations on a
timely basis. If we are unable to develop and sell new products and new features for our existing products that keep pace with rapid technological and regulatory change as well as developments in the transportation logistics industry, our
business, results of operations and financial condition could be adversely affected. We intend to continue to invest significant resources in research and development to enhance our existing products and services and introduce new high-quality
products that customers will want. If we are unable to predict or quickly react to user preferences or changes in the transportation logistics industry, or its regulatory requirements, or if we are unable to modify our products and services on a
timely basis or to effectively bring new products to market, our sales may suffer.
In addition, we may experience difficulties with software or hardware development, design, integration with third-party software or hardware, or marketing that
could delay or prevent our introduction, deployment or implementation of new solutions and enhancements. The introduction of new solutions by competitors, the emergence of new industry standards or the development of entirely new technologies to
replace existing offerings could render our existing or future solutions obsolete.
We may not have sufficient resources to make the necessary investments in software development and our technical infrastructure, and we may experience
difficulties that could delay or prevent the successful development, introduction or marketing of new products or enhancements. In addition, our products or enhancements may not meet increasingly complex customer requirements or achieve market
acceptance at the rate we expect, or at all. Any failure by us to anticipate or respond adequately to technological advancements, customer requirements and changing industry standards, or any significant delays in the development, introduction or
availability of new products or enhancements, could undermine our current market position and negatively impact our business, results of operations or financial condition.
We may not remain competitive. Increased competition could seriously harm our business.
The market for supply chain technology is highly competitive and subject to rapid technological change. We expect that competition will increase in the future. To
maintain and improve our competitive position, we must continue to develop and introduce in a timely and cost-effective manner new products, product features and services to keep pace with our competitors. We currently face competition from a
large number of specific market entrants, some of which are focused on specific industries, geographic regions or other components of markets we operate in.
Current and potential competitors include supply chain application software vendors, customers that undertake internal software development efforts, value-added
networks and business document exchanges, enterprise resource planning software vendors, regulatory filing companies, trade data vendors and general business application software vendors. Many of our current and potential competitors may have one
or more of the following relative advantages:
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Established relationships with existing customers or prospects that we are targeting;
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Superior product functionality and industry-specific expertise;
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Broader range of products to offer and better product life cycle management;
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Larger installed base of customers;
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Greater financial, technical, marketing, sales, distribution and other resources;
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Lower cost structure and more profitable operations;
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Greater investment in infrastructure;
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Greater worldwide presence;
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Early adoption of, or adaptation to changes in, technology; or
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Longer operating history; and/or greater name recognition.
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Further, current and potential competitors have established, or may establish, cooperative relationships and business combinations among themselves or with third
parties to enhance their products, which may result in increased competition. In addition, we expect to experience increasing price competition and competition surrounding other commercial terms as we compete for market share. In particular,
larger competitors or competitors with a broader range of services and products may bundle their products, rendering our products more expensive and/or less functional. As a result of these and other factors, we may be unable to compete
successfully with our existing or new competitors.
Emergence or increased adoption of alternative sources for trade data may adversely impact our business.
With recent acquisitions in the area of supplying trade data and content, an increasing portion of our business relates to the supply of trade data and content
that is often used by our customers in other systems, such as enterprise resource planning systems. Emergence or increased adoption of alternative sources of this data and content could have an adverse impact on our customers’ needs to obtain
this data and content from us and/or the need for certain of the third-party system vendors in this field to refer customers to us for this data and content, each of which could adversely impact upon the revenues and income we generate from these
areas of our business.
If we need additional capital in the future and are unable to obtain it or can only obtain it on unfavorable terms, our
operations may be adversely affected, and the market price for our securities could decline.
Historically, we have financed our operations primarily through cash flows from our operations, the sale of our equity securities and borrowings under our credit
facility. In addition to our current cash and available debt facilities, we may need to raise additional debt or equity capital to repay existing debt, fund expansion of our operations, to enhance our services and products, or to acquire or
invest in complementary products, services, businesses or technologies. However, there can be no assurance that we will be able to undertake incremental financing transactions. If we raise additional funds through further issuances of convertible
debt or equity securities, our existing shareholders could suffer significant dilution and any new equity securities we issue could have rights, preferences and privileges superior to those attaching to our common shares. Our current credit
facility contains, and any debt financing secured by us in the future could contain restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain
additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If adequate funds are not available on terms favorable
or at all, our operations and growth strategy may be adversely affected and the market price for our common shares could decline.
Changes in the value of the U.S. dollar, as compared to the currencies of other countries where we transact business, could
harm our operating results and financial condition.
Historically, the largest percentage of our revenues has been denominated in U.S. dollars. However, the majority of our international expenses, including the
wages of our non-U.S. employees and certain key supply agreements, have been denominated in Canadian dollars, British pounds, euros and other foreign currencies. Therefore, changes in the value of the U.S. dollar as compared to the Canadian
dollar, the British pound, the euro and other foreign currencies may materially affect our operating results. We generally have not implemented hedging programs to mitigate our exposure to currency fluctuations affecting international accounts
receivable, cash balances and inter-company accounts. We also have not hedged our exposure to currency fluctuations affecting future international revenues and expenses and other commitments. Accordingly, currency exchange rate fluctuations have
caused, and may continue to cause, variability in our foreign currency denominated revenue streams, expenses, and our cost to settle foreign currency denominated liabilities.
We may have exposure to greater than anticipated tax liabilities or expenses.
We are subject to income and non-income taxes in various jurisdictions, our tax structure is subject to review by both domestic and foreign taxation authorities
and we currently have tax audits open in a number of jurisdictions in which we operate. On a quarterly basis, we assess the status of these audits and the potential for adverse outcomes to determine whether a provision for income and other taxes
is appropriate. The timing of the resolution of income tax audits is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from any amounts that we accrue from time to
time. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes.
The determination of our worldwide provision for income taxes and other tax liabilities requires judgment. In the ordinary course of a global business, there are
many transactions and calculations where the ultimate tax outcome is uncertain. Any audit of our tax filings could materially change the amount of current and deferred income tax assets and liabilities. We have recorded a valuation allowance
against a portion of our net deferred tax assets. If we achieve a consistent level of profitability, the likelihood of further reducing our deferred tax valuation allowance for some portion of the losses incurred in prior periods in one of our
jurisdictions will increase. We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during subsequent years. Adjustments based on
filed returns are generally recorded in the period when the tax returns are filed and the global tax implications are known. Our estimate of the potential outcome for any uncertain tax issue is based on a number of assumptions. Any further
changes to the valuation allowance for our deferred tax assets would also result in an income tax recovery or income tax expense, as applicable, on the consolidated statements of operations in the period in which the valuation allowance is
changed.
Changes to earnings resulting from past acquisitions may adversely affect our operating results.
Under ASC Topic 805, “Business Combinations”, we allocate the total purchase price to an acquired company’s net tangible assets, intangible assets and in-process
research and development based on their values as of the date of the acquisition (including certain assets and liabilities that are recorded at fair value) and record the excess of the purchase price over those values as goodwill. Management’s
estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain. After we complete an acquisition, the following factors, among others, could result in material charges that would adversely affect
our operating results and may adversely affect our cash flows:
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Impairment of goodwill or intangible assets;
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A reduction in the useful lives of intangible assets acquired;
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Identification of assumed contingent liabilities after we finalize the purchase price allocation period;
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Charges to our operating results to eliminate certain pre-merger activities that duplicate those of the acquired company or to reduce our cost structure; and
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Charges to our operating results resulting from revised estimates to restructure an acquired company’s operations after we finalize the purchase price allocation period.
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Routine charges to our operating results associated with acquisitions include amortization of intangible assets, acquisition-related costs and restructuring
charges. Acquisition-related costs primarily include retention bonuses, advisory services, brokerage services and administrative costs with respect to completed and prospective acquisitions.
We expect to continue to incur additional costs associated with combining the operations of our acquired companies, which may be substantial. Additional costs may
include costs of employee redeployment, relocation and retention, including salary increases or bonuses, accelerated stock-based compensation expenses and severance payments, reorganization or closure of facilities, taxes, and termination of
contracts that provide redundant or conflicting services. These costs would be accounted for as expenses
and would decrease our net income and earnings per share for the periods in which those adjustments are made.
As we continue to increase our international operations we increase our exposure to international business risks that could
cause our operating results to suffer.
While our headquarters are in Canada, we currently have direct operations in the U.S., EMEA, Asia Pacific and South American regions. We anticipate that these
international operations will continue to require significant management attention and financial resources to localize our services and products for delivery in these markets, to develop compliance expertise relating to international regulatory
agencies, and to develop direct and indirect sales and support channels in those markets. We face a number of risks associated with conducting our business internationally that could negatively impact our operating results. These risks include,
but are not limited to:
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The risk of continued or increased limitations of travel advisories or travel restrictions related to the outbreak of contagious illnesses, such as the Pandemic, could impact
our ability to operate in certain markets and/or manage our operations in those markets;
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Longer collection time from foreign clients, particularly in the EMEA region and the Asia Pacific region;
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Difficulty in repatriating cash from certain foreign jurisdictions;
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Language barriers, conflicting international business practices, and other difficulties related to the management and administration of a global business;
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Increased management, travel, infrastructure and legal compliance costs associated with having international operations;
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Difficulties and costs of staffing and managing geographically disparate direct and indirect operations;
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Volatility or fluctuations in foreign currency and tariff rates;
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Multiple, and possibly overlapping, tax structures;
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Complying with complicated and widely differing global laws and regulations in areas such as employment, tax, privacy and data protection;
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Enhanced security procedures and requirements relating to certain jurisdictions;
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The need to consider characteristics unique to technology systems used internationally;
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Economic or political instability in some markets; and
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Other risk factors set out herein.
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Concerns about the environmental impacts of greenhouse gas emissions, global climate change, and any other environmental,
social and governance matters may result in environmental taxes, charges, regulatory schemes, assessments or penalties, which could restrict or negatively impact our operations or reduce our profitability.
The impacts of human activity on global climate change have attracted considerable public and scientific attention, as well as the attention of the U.S. and other
governments. Efforts are being made to reduce greenhouse gas emissions and energy consumption, including those from automobiles and other modes of transportation. The added cost of any environmental regulation, taxes, charges, assessments or
penalties levied or imposed on our customers in light of these efforts could result in additional costs for our customers, which could lead them to reduce use of our services. There are also a number of legislative and social, environmental and
governance regulatory initiatives internationally that could restrict or negatively impact our operations or increase our costs. Additionally, environmental regulation, taxes, charges, assessments or penalties could be levied or imposed directly
on us. Any enactment of laws or passage of regulations regarding greenhouse gas emissions, or any other environmental, social and governance matters, by Canada, the U.S., or any other jurisdiction we conduct our business in, could adversely
affect our operations and financial results.
From time to time, we may be subject to litigation or dispute resolution that could result in significant costs to us and
damage to our reputation.
From time to time, we may be subject to litigation or dispute resolution relating to any number or type of claims, including claims for damages related to
undetected errors or malfunctions of our services and products or their deployment, claims related to previously-completed acquisition transactions or claims
relating to applicable securities laws. Litigation may seriously harm our business because of the costs of defending the lawsuit, diversion of employees’ time and
attention and potential damage to our reputation.
Further, our services and products are complex and often implemented by our customers to interact with third-party technology or networks. Claims may be made
against us for damages properly attributable to those third-party technologies or networks, regardless of our lack of responsibility for any failure resulting in a loss, even if our services and products perform in accordance with their
functional specifications. We may also have disputes with key suppliers for damages incurred which, depending on resolution of the disputes, could impact the ongoing quality, price or availability of the services or products we procure from the
supplier. Limitation of liability provisions in certain third-party contracts may not be enforceable under the laws of some jurisdictions. As a result, we could be required to pay substantial amounts of damages in settlement or upon the
determination of any of these types of claims and incur damage to our reputation and products. The likelihood of such claims and the amount of damages we may be required to pay may increase as our customers increasingly use our services and
products for critical business functions, or rely on our services and products as the systems of record to store data for use by other customer applications. Our insurance may not cover potential claims or may not be adequate to cover all costs
incurred in defense of potential claims or to indemnify us for all liability that may be imposed. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby harming our operating results and leading
analysts or potential investors to lower their expectations of our performance, which could reduce the trading price of our common shares.
Increases in fuel prices, driver shortages and other increased transportation costs may have an adverse effect on the
businesses of our customers resulting in them spending less money with us.
Our customers are all involved, directly or indirectly, in the delivery of goods from one point to another, particularly transportation providers and freight
forwarders. As the costs of these deliveries become more expensive, whether as a result of increases in fuel costs or otherwise, our customers may have fewer funds available to spend on our products and services. There can be no assurance that
these companies will be able to allocate sufficient funds to use our products and services. In addition, rising fuel costs or driver shortages may cause global or geographic-specific reductions in the number of shipments being made, thereby
impacting the number of transactions being processed by our Global Logistics Network and our corresponding network revenues.
We may not be able to compensate for downward pricing pressure on certain products and services by increased volumes of
transactions or increased prices elsewhere in our business, ultimately resulting in lower revenues.
Some of our products and services are sold to industries where there is downward pricing pressure on the particular product or service due to competition, general
industry conditions or other causes. If we cannot offset any such downward pricing pressure, then the particular customer may generate less revenue for our business or we may have less aggregate revenue. This could have an adverse impact on our
operating results.
Our success and ability to compete depend upon our ability to secure and protect patents, trademarks and other proprietary
rights.
We consider certain aspects of our internal operations, products, services and related documentation to be proprietary, and we primarily rely on a combination of
patent, copyright, trademark and trade secret laws and other measures to protect our proprietary rights. Patent applications or issued patents, as well as trademark, copyright, and trade secret rights may not provide adequate protection or
competitive advantage and may require significant resources to obtain and defend. We will also not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual
property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. We also rely on contractual
restrictions in our agreements with customers, employees, outsourced developers and others to protect our intellectual property rights. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for
any breach, or that our patents, copyrights, trademarks or trade secrets will not otherwise become known. Through an escrow
arrangement, we have granted some of our customers a contingent future right to use our source code for software products solely for their internal maintenance
services. If our source code is accessed through an escrow, the likelihood of misappropriation or other misuse of our intellectual property may increase.
Moreover, the laws of some countries do not protect proprietary intellectual property rights as effectively as do the laws of the U.S. and Canada. Protecting and
defending our intellectual property rights could be costly regardless of venue. In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. The Company is currently
involved in, and expects to remain involved in, certain litigation to protect its intellectual property from infringement by third parties. In addition, further litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Litigation brought to protect and enforce our intellectual property
rights could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with
defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights and/or exposing us to claims for damages in any related counterclaims or countersuits. Our inability to protect our proprietary
technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our solutions, impair the functionality of our
solutions, delay introductions of new solutions, result in our substituting inferior or more costly technologies into our solutions, or injure our reputation.
We are dependent on certain key vendors for the availability of hardware devices, which could impede our development and
expansion.
We currently have relationships with a small number of hardware device vendors over which we have no operational or financial control and no influence in how
these vendors conduct their businesses. Suppliers of hardware devices could among other things, extend delivery times, raise prices and limit supply due to their own shortages and business requirements. Interruption in the supply of equipment
from these vendors could delay our ability to maintain, grow and expand our telematics solutions business and those areas of our business that interact with telematics units. If our relationships with any of these unit vendors were to terminate,
there is no guarantee that our remaining unit vendors would be able to handle the increased equipment supply required to maintain and grow our expansive networks at our desired rates. There is also no guarantee that business relationships with
other key unit vendors could be entered into on terms desirable or favorable to us, if at all. Fewer key vendors might mean that existing or potential customers are unable to meaningfully communicate using our Global Logistics Network, which may
cause existing and potential customers to move to competitors’ products. Such equipment supply issues could adversely affect our business, results of operations and financial condition.
The general cyclical and seasonal nature of the freight market may have a material adverse effect on our business, results
of operations and financial condition.
Our business may be impacted from time to time by the general cyclical and seasonal nature of particular modes of transportation and the freight market in
general, as well as the cyclical and seasonal nature of the industries that such markets serve. Factors which may create cyclical fluctuations in such modes of transportation or the freight market in general include legal and regulatory
requirements, timing of contract renewals between our customers and their own customers, seasonal-based tariffs, vacation periods applicable to particular shipping or receiving nations, weather-related events that impact shipping in particular
geographies and amendments to international trade agreements. Since some of our revenues from particular products and services are tied to the volume of shipments being processed, adverse fluctuations in the volume of global shipments or
shipments in any particular mode of transportation may adversely affect our revenues. Declines in shipment volumes would likely have a material adverse effect on our business.
If we are unable to generate broad market acceptance of our services, products and pricing, serious harm could result to
our business.
We currently derive substantially all of our revenues from our federated network and global logistics technology solutions and expect to do so in the future.
Broad market acceptance of these types of services
and products, and their related pricing, is therefore critical to our future success. The demand for, and market acceptance of, our services and products is
subject to a high level of uncertainty. Some of our services and products are often considered complex and may involve a new approach to the conduct of business by our customers. The market for our services and products may weaken, competitors
may develop superior services and products that perform logistics services on a global scale or within a particular geographic region, or we may fail to develop or maintain acceptable services and products to address new market conditions,
governmental regulations or technological changes. Any one of these events could have a material adverse effect on our business, results of operations and financial condition.
Claims that we infringe third-party proprietary rights could trigger indemnification obligations and result in significant
expenses or restrictions on our ability to provide our products or services.
Competitors and other third parties have claimed, and in the future, may claim, that our current or future services or products infringe their proprietary rights
or assert other claims against us. Many of our competitors have obtained patents covering products and services generally related to our products and services, and they may assert these patents against us. Such claims, whether with or without
merit, could be time consuming and expensive to litigate or settle and could divert management attention from focusing on our core business.
As a result of such a dispute, we may have to pay damages, incur substantial legal fees, suspend the sale or deployment of our services and products, develop
costly non-infringing technology, if possible, or enter into license agreements, which may not be available on terms acceptable to us, if at all. Any of these results would increase our expenses and could decrease the functionality of our
services and products, which would make our services and products less attractive to our current and/or potential customers. We have agreed in some of our agreements, and may agree in the future, to indemnify other parties for any expenses or
liabilities resulting from claimed infringements of the proprietary rights of third parties. If we are required to make payments pursuant to these indemnification agreements, such payments could have a material adverse effect on our business,
results of operations and financial condition.
Our results of operations may vary significantly from quarter to quarter and therefore may be difficult to predict or may
fail to meet investment community expectations.
Our results of operations may vary from quarter to quarter in the future due to a variety of factors, many of which are outside of our control. Such factors
include, but are not limited to:
|
• |
Volatility or fluctuations in foreign currency exchange rates;
|
|
• |
Volatility or fluctuations in interest rates;
|
|
• |
Timing of acquisitions and related costs;
|
|
• |
Timing of restructuring activities;
|
|
• |
The introduction of enhanced products and services from competitors;
|
|
• |
Our ability to introduce new products and updates to our existing products on a timely basis;
|
|
• |
The termination of any key customer contracts, whether by the customer or by us;
|
|
• |
Recognition and expensing of deferred tax assets;
|
|
• |
Legal costs incurred in bringing or defending any litigation with customers or third-party providers, and any corresponding judgments or awards;
|
|
• |
Legal and compliance costs incurred to comply with regulatory requirements;
|
|
• |
Fluctuations in the demand for our services and products;
|
|
• |
The impact of stock-based compensation expense;
|
|
• |
Price and functionality competition in our industry;
|
|
• |
Changes in legislation and accounting standards;
|
|
• |
Our ability to satisfy contractual obligations in customer contracts and deliver services and products to the satisfaction of our customers; and
|
|
• |
Other risk factors discussed in this report.
|
Although our revenues may fluctuate from quarter to quarter, significant portions of our expenses are not variable in the short term, and we may not be able to
reduce them quickly to respond to decreases in revenues. If revenues are below expectations, this shortfall is likely to adversely and/or disproportionately affect our operating results. If this occurs, the trading price of our common shares may
fall substantially.
We may not be able to prevent or detect all errors or fraud.
Due to the inherent limitations of internal control systems, misstatements due to error or fraud may occur and may not be detected in a timely manner or at all.
Accordingly, we cannot provide absolute assurance that all control issues, errors or instances of fraud, if any, impacting us have been or will be prevented or detected. In addition, over time, certain aspects of a control system may become
inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate, which we may not be able to address quickly enough to prevent all instances of error or fraud. In connection with our
on-going assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses” in our internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The existence of any material weakness
may require management to devote significant time and incur significant expense to remediate any such material weaknesses. The existence of any material weakness in our internal control over financial reporting may result in errors in our
financial statements that could require us to make corrective adjustments, restate our financial statements, cause us to fail to meet our reporting obligations, and cause shareholders to lose confidence in our reported financial information, all
of which could materially and adversely affect the market price of our securities. If we are unable to successfully identify and remediate any material weaknesses that may arise in a timely manner, the accuracy and timing of our financial
reporting may be adversely affected, and we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports and applicable stock exchange listing requirements.
Privacy laws and regulations are extensive, open to various interpretations, complex to implement and may reduce demand for
our products, and failure to comply may impose significant liabilities.
Our customers can use our products to collect, use, process and store information regarding their transactions with their customers. Federal, state and foreign
government bodies and agencies have been increasingly adopting new laws and regulations regarding the collection, use, processing, storage and disclosure of such information obtained from consumers and individuals. In addition to government
regulatory activity, privacy advocacy groups and the technology industry and other industries may consider various new, additional or different self-regulatory standards that may place additional burdens directly on our customers and target
customers, and indirectly on us. Our products are expected to be capable of use by our customers in compliance with such laws and regulations. The functional and operational requirements and costs of compliance with such laws and regulations may
adversely impact our business, and failure to enable our products to comply with such laws and regulations could lead to significant fines and penalties imposed by regulators, as well as claims by our customers or third parties. Additionally, all
of these domestic and international legislative and regulatory initiatives could adversely affect our customers’ ability or desire to collect, use, process and store shipment logistics information, which could reduce demand for our products.
The price of our common shares has in the past, including recently, been volatile and may also be volatile in the future.
The trading price of our common shares may be subject to fluctuation in the future. This may make it more difficult for you to resell your common shares when you
want at prices that you find attractive or make it more difficult for us to raise capital through the issuance of commons shares. Increases in our common share price may also increase our compensation expense pursuant to our existing director,
officer and employee compensation arrangements. We enter into equity derivative contracts including floating-rate equity forwards to partially offset the potential fluctuations of certain share-based compensation expenses. Fluctuations in our
common share price may be caused by events unrelated to our operating performance and beyond our control. Factors that may contribute to fluctuations include, but are not limited to:
|
• |
Revenue or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment community;
|
|
• |
Changes in recommendations or financial estimates by industry or investment analysts;
|
|
• |
Changes in management or the composition of our board of directors;
|
|
• |
Outcomes of litigation or arbitration proceedings;
|
|
• |
Announcements of technological innovations or acquisitions by us or by our competitors;
|
|
• |
Introduction of new products or significant customer wins or losses by us or by our competitors;
|
|
• |
Developments with respect to our intellectual property rights or those of our competitors;
|
|
• |
Fluctuations in the share prices of other companies in the technology and emerging growth sectors;
|
|
• |
General market conditions; and
|
|
• |
Other risk factors set out in this report.
|
If the market price of our common shares drops significantly, shareholders could institute securities class action lawsuits against us, regardless of the merits
of such claims. Such a lawsuit could cause us to incur substantial costs and could divert the time and attention of our management and other resources from our business.
Fair value assessments of our intangible assets required by GAAP may require us to record significant non-cash charges
associated with intangible asset impairment.
Significant portions of our assets, which include customer agreements and relationships, non-compete covenants, existing technologies and trade names, are
intangible. We amortize intangible assets on a straight-line basis over their estimated useful lives. We review the carrying value of these assets at least annually for evidence of impairment. In accordance with ASC Topic 360-10-35, “Property,
Plant, and Equipment: Overview: Subsequent Measurement” an impairment loss is recognized when the estimate of undiscounted future cash flows generated by such assets is less than the carrying amount. Measurement of the impairment loss is based on
the present value of the expected future cash flows. Future fair value assessments of intangible assets may require impairment charges to be recorded in the results of operations for future periods. This could impair our ability to achieve or
maintain profitability in the future.
If our common share price decreases to a level such that the fair value of our net assets is less than the carrying value
of our net assets, we may be required to record additional significant non-cash charges associated with goodwill impairment.
We account for goodwill in accordance with ASC Topic 350, “Intangibles – Goodwill and Other”, which among other things, requires that goodwill be tested for
impairment at least annually. We have designated October 31st for our annual impairment test. Should the fair value of our net assets, determined by our market capitalization, be less than the carrying value of our net assets at future
annual impairment test dates, we may have to recognize goodwill impairment losses in our results of operations in future periods. This could impair our ability to achieve or maintain profitability in the future.
The Descartes Systems Group Inc.
Condensed
Consolidated Balance Sheets
(US dollars in thousands; US GAAP; Unaudited)
| |
April 30,
|
January 31,
|
| |
2024
|
2024
|
|
ASSETS
|
|
|
|
CURRENT ASSETS
|
|
|
|
Cash
|
238,922
|
320,952
|
|
Accounts receivable (net)
|
|
|
|
Trade (Note 5)
|
53,861
|
51,569
|
|
Other (Note 6)
|
11,782
|
12,193
|
|
Prepaid expenses and other
|
37,097
|
33,468
|
| |
341,662
|
418,182
|
|
OTHER LONG-TERM ASSETS (Note 18)
|
25,218
|
24,737
|
|
PROPERTY AND EQUIPMENT, NET (Note 7)
|
11,630
|
11,552
|
|
RIGHT-OF-USE ASSETS (Note 12)
|
6,763
|
6,257
|
|
DEFERRED INCOME TAXES
|
2,262
|
2,097
|
|
INTANGIBLE ASSETS, NET (Note 8)
|
323,406
|
251,047
|
|
GOODWILL (Note 9)
|
832,290
|
760,413
|
| |
1,543,231
|
1,474,285
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
CURRENT LIABILITIES
|
|
|
| |
Accounts payable
|
19,068
|
17,484
|
| |
Accrued liabilities (Note 10)
|
100,527
|
91,824
|
| |
Lease obligations (Note 12)
|
3,110
|
3,075
|
| |
Income taxes payable
|
9,685
|
6,734
|
| |
Deferred revenue (Note 18)
|
96,290
|
84,513
|
| |
228,680
|
203,630
|
|
LONG-TERM DEBT (Note 11)
|
-
|
-
|
|
LEASE OBLIGATIONS (Note 12)
|
4,300
|
3,903
|
|
DEFERRED REVENUE (Note 18)
|
1,765
|
1,464
|
|
INCOME TAXES PAYABLE
|
4,761
|
6,153
|
|
DEFERRED INCOME TAXES
|
37,167
|
21,101
|
| |
276,673
|
236,251
|
|
COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 13)
|
|
|
|
SHAREHOLDERS’ EQUITY (Note 14)
|
|
|
|
Common shares – unlimited shares authorized; Shares issued and outstanding totaled 85,390,142 at April 30, 2024
(January 31, 2024 – 85,183,455)
|
557,741
|
551,164
|
|
Additional paid-in capital
|
489,378
|
494,701
|
|
Accumulated other comprehensive income (loss)
|
(35,983)
|
(28,586)
|
|
Retained earnings
|
255,422
|
220,755
|
| |
1,266,558
|
1,238,034
|
| |
1,543,231
|
1,474,285
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The Descartes Systems Group Inc.
Condensed
Consolidated Statements of Operations
(US dollars in thousands, except per share and weighted average share amounts; US GAAP; Unaudited)
| |
|
|
Three Months Ended
|
| |
|
|
|
April 30,
|
April 30,
|
| |
|
|
|
2024
|
2023
|
| |
|
|
|
|
|
|
REVENUES
|
|
|
|
151,348
|
136,614
|
|
COST OF REVENUES (exclusive of amortization presented separately
below)
|
|
|
|
35,413
|
32,885
|
|
GROSS MARGIN
|
|
|
|
115,935
|
103,729
|
|
EXPENSES
|
|
|
|
|
|
|
Sales and marketing
|
|
|
|
17,471
|
17,053
|
|
Research and development
|
|
|
|
22,191
|
20,067
|
|
General and administrative
|
|
|
|
14,948
|
13,444
|
|
Other charges (Note 19)
|
|
|
|
3,918
|
1,933
|
|
Amortization of intangible assets
|
|
|
|
15,024
|
14,674
|
| |
|
|
|
73,552
|
67,171
|
|
INCOME FROM OPERATIONS
|
|
|
|
42,383
|
36,558
|
|
INTEREST EXPENSE
|
|
|
|
(273)
|
(337)
|
|
INVESTMENT AND OTHER INCOME
|
|
|
|
4,059
|
1,561
|
|
INCOME BEFORE INCOME TAXES
|
|
|
|
46,169
|
37,782
|
|
INCOME TAX EXPENSE (RECOVERY) (Note 17)
|
|
|
|
|
|
|
Current
|
|
|
|
12,318
|
7,621
|
|
Deferred
|
|
|
|
(816)
|
808
|
| |
|
|
|
11,502
|
8,429
|
|
NET INCOME
|
|
|
|
34,667
|
29,353
|
|
EARNINGS PER SHARE (Note 15)
|
|
|
|
|
|
|
Basic
|
|
|
|
0.41
|
0.35
|
|
Diluted
|
|
|
|
0.40
|
0.34
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)
|
|
|
|
|
|
|
Basic
|
|
|
|
85,274
|
84,949
|
|
Diluted
|
|
|
|
87,116
|
86,746
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The Descartes Systems Group Inc.
Condensed
Consolidated Statements of Comprehensive Income
(US dollars in thousands; US GAAP; Unaudited)
| |
|
|
Three Months Ended
|
| |
|
|
|
April 30,
|
April 30,
|
| |
|
|
|
2024
|
2023
|
|
Comprehensive income
|
|
|
|
|
|
|
Net Income
|
|
|
|
34,667
|
29,353
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of income tax expense (recovery) of ($578) for the period ended April 30,
2024 (April 30, 2023 – $152)
|
|
|
|
(7,397)
|
4
|
|
Total other comprehensive income (loss)
|
|
|
|
(7,397)
|
4
|
|
COMPREHENSIVE INCOME
|
|
|
|
27,270
|
29,357
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The Descartes Systems Group Inc.
Condensed
Consolidated Statements of Shareholders’ Equity
(US dollars in thousands; US GAAP; Unaudited)
| |
|
|
Three Months Ended
|
| |
|
|
|
April 30,
|
April 30,
|
| |
|
|
|
2024
|
2023
|
| |
|
|
|
|
|
|
Common shares
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
|
551,164
|
538,448
|
|
Stock options and share units exercised
|
|
|
|
6,577
|
7,826
|
|
Balance, end of period
|
|
|
|
557,741
|
546,274
|
| |
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
|
494,701
|
486,551
|
|
Stock-based compensation expense (Note 16)
|
|
|
|
3,769
|
2,919
|
|
Stock options and share units exercised
|
|
|
|
(9,092)
|
(7,256)
|
|
Balance, end of period
|
|
|
|
489,378
|
482,214
|
| |
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
|
(28,586)
|
(30,456)
|
|
Other comprehensive income (loss), net of income taxes
|
|
|
|
(7,397)
|
4
|
|
Balance, end of period
|
|
|
|
(35,983)
|
(30,452)
|
| |
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
|
220,755
|
104,848
|
|
Net income
|
|
|
|
34,667
|
29,353
|
|
Balance, end of period
|
|
|
|
255,422
|
134,201
|
| |
|
|
|
|
|
|
Total Shareholders’ Equity
|
|
|
|
1,266,558
|
1,132,237
|
| |
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The Descartes Systems Group Inc.
Condensed
Consolidated Statements of Cash Flows
(US dollars in thousands; US GAAP; Unaudited)
| |
|
Three Months Ended
|
| |
|
April 30,
|
April 30,
|
| |
2024
|
2023
|
|
OPERATING ACTIVITIES
|
|
|
|
Net income
|
34,667
|
29,353
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|
|
|
Depreciation
|
1,358
|
1,265
|
|
Amortization of intangible assets
|
15,024
|
14,674
|
|
Stock-based compensation expense (Note 16)
|
3,769
|
2,919
|
|
Other non-cash operating activities
|
96
|
220
|
|
Deferred tax expense (recovery)
|
(816)
|
808
|
|
Changes in operating assets and liabilities (Note 20)
|
9,643
|
(384)
|
|
Cash provided by operating activities
|
63,741
|
48,855
|
|
INVESTING ACTIVITIES
|
|
|
|
Additions to property and equipment
|
(1,764)
|
(1,203)
|
|
Acquisition of subsidiaries, net of cash acquired (Note 3)
|
(139,973)
|
(142,700)
|
|
Cash used in investing activities
|
(141,737)
|
(143,903)
|
|
FINANCING ACTIVITIES
|
|
|
|
Payment of debt issuance costs
|
(38)
|
(39)
|
|
Issuance of common shares for cash, net of issuance costs (Note 14)
|
4,231
|
5,455
|
|
Payment of withholding taxes on net share settlements
|
(6,745)
|
(4,886)
|
|
Cash provided by (used in) financing activities
|
(2,552)
|
530
|
|
Effect of foreign exchange rate changes on cash
|
(1,482)
|
320
|
|
Decrease in cash
|
(82,030)
|
(94,198)
|
|
Cash, beginning of period
|
320,952
|
276,385
|
|
Cash, end of period
|
238,922
|
182,187
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
Cash paid during the period for interest
|
-
|
-
|
|
Cash paid during the period for income taxes
|
10,765
|
8,218
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The Descartes Systems Group Inc.
Notes
to Condensed Consolidated Financial Statements
(Tabular amounts in thousands of US dollars, except per share amounts or as otherwise indicated; US GAAP; Unaudited)----
Note 1 - Description of the Business
The Descartes Systems Group Inc. (“Descartes”, “Company”, “our” or “we”) is a provider of global logistics technology solutions. Customers use our modular,
software-as-a-service (“SaaS”) and data solutions to route, schedule, track and measure delivery resources; plan, allocate and execute shipments; rate, audit and pay transportation invoices; access and analyze global trade data; research and
perform trade tariff and duty calculations; file customs and security documents for imports and exports; and complete numerous other logistics processes by participating in a large, collaborative multi-modal logistics community. Our pricing model
provides our customers with flexibility in purchasing our solutions either on a subscription, transactional or perpetual license basis. Our primary focus is on serving transportation providers (air, ocean and truck modes), logistics service
providers (including third-party logistics providers, freight forwarders and customs brokers) and distribution-intensive companies for which logistics is either a key or a defining part of their own product or service offering, or for which our
solutions can provide an opportunity to reduce costs, improve service levels, or support growth by optimizing the use of assets and information.
Note 2 –Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are presented in United States (“US”) dollars and are prepared in accordance with generally
accepted accounting principles in the US (“GAAP”) and the rules and regulations of the Canadian Securities Administrators and US Securities and Exchange Commission (“SEC”) for the preparation of condensed interim financial statements.
Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and notes required for compliance with GAAP for annual financial statements. These statements should be read in conjunction with our
audited annual consolidated financial statements prepared in accordance with GAAP for the fiscal year ended January 31, 2024.
The unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of
results for the interim periods presented. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed
consolidated financial statements and the accompanying notes. Actual results could differ from these estimates and the results of operations for the interim period should not be considered indicative of results to be expected for the full year
ending January 31, 2025.
Our fiscal year commences on February 1st of each year and ends on January 31st of the following year. Our fiscal year, which ends on
January 31, 2025, is referred to as the “current fiscal year”, “fiscal 2025”, “2025” or using similar words. Our previous fiscal year, which ended on January 31, 2024, is referred to as the “previous fiscal year”, “fiscal 2024”, “2024” or using
similar words. Other fiscal years are referenced by the applicable year during which the fiscal year ends. For example, “2026” refers to the annual period ending January 31, 2026 and the “fourth quarter of 2026” refers to the quarter ending
January 31, 2026.
The significant accounting policies used in preparing these condensed consolidated financial statements are unchanged from those disclosed in the Company’s fiscal
2024 annual consolidated financial statements and have been applied consistently to all periods presented in these condensed consolidated financial statements.
Recently issued accounting pronouncements
In November 2023, the FASB issued Accounting Standards Update 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU
2023-07”). The amendments in ASU
2023-07 improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective
for fiscal years beginning after December 15, 2023, which is our fiscal year that began on February 1, 2024 (fiscal 2025) and interim periods within fiscal years beginning after December 15, 2024, which will be our fiscal year beginning February
1, 2025 (fiscal 2026). Early adoption is permitted. The Company will adopt this guidance in the fourth quarter of fiscal 2025. The adoption of this guidance is not expected to have a material impact on our results of operations or disclosures.
In December 2023, the FASB issued Accounting Standards Update 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”). The amendments in ASU 2023-09 enhance transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income
taxes paid information. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, which will be our fiscal year beginning February 1, 2025 (fiscal 2026). Early adoption is permitted for annual financial statements that have
not yet been issued or made available for issuance. The Company will adopt this guidance in the fourth quarter of fiscal 2026. The adoption of this guidance is not expected to have
a material impact on our results of operations or disclosures.
Note 3 – Acquisitions
Fiscal 2025 Acquisitions
On March 28, 2024, Descartes acquired all of the shares of OCR Services, Inc. (“OCR”), a leading provider of global trade compliance solutions and content. The
purchase price for the acquisition was approximately $82.8 million, net of cash acquired, which was funded from cash on hand. The gross contractual amount of trade receivables acquired was $4.7 million with a fair value of $3.9 million at the
date of acquisition. Our acquisition date estimate of contractual cash flows not expected to be collected was $0.8 million. The completion of the initial purchase price allocation is pending the finalization of the fair value for trade
receivables, accrued liability balances, deferred revenue as well as potential unrecorded liabilities. We expect to finalize the purchase price allocation on or before March 28, 2025.
On April 22, 2024, Descartes acquired substantially all of the shares of Aerospace Software Developments (“ASD”), a leading provider of global trade compliance
solutions and content.
The purchase price for the acquisition was approximately $62.5 million (EUR 58.7 million), net of cash acquired, which was substantially paid at closing from cash on hand with the remaining
$5.1 million expected to be paid by the end of Descartes’ fiscal 2025 fourth quarter.
The gross contractual amount of trade receivables acquired was $1.1 million with a fair value
of $1.1 million at the date of acquisition. Our acquisition date estimate of contractual cash flows not expected to be collected was nominal. The completion of the initial purchase price allocation is pending the finalization of the fair value
for trade receivables, intangible assets, accrued liability balances, deferred revenue as well as potential unrecorded liabilities. We expect to finalize the purchase price allocation on or before April 22, 2025.
For the businesses acquired during fiscal 2025, we incurred acquisition-related costs of $1.7 million for the three month period ended April 30, 2024. The
acquisition-related costs were primarily for advisory services and are included in other charges in our condensed consolidated statements of operations. During the three month period ended April 30, 2024, we have recognized revenues of $2.0
million and net income of $0.3 million from OCR and ASD since the date of acquisition in our condensed consolidated statements of operations.
|
The preliminary purchase price allocation for the businesses acquired during 2025, which has not been finalized, is as follows:
|
| |
OCR
|
ASD
|
Total
|
|
Purchase price consideration:
|
|
|
|
|
Cash, net of cash acquired related to OCR ($5,743) and ASD ($2,475)
|
82,569
|
57,404
|
139,973
|
|
Consideration payable
|
280
|
5,118
|
5,398
|
|
Net working capital adjustments (receivable) / payable
|
(693)
|
388
|
(305)
|
| |
82,156
|
62,910
|
145,066
|
|
Allocated to:
|
|
|
|
|
Current assets, excluding cash acquired
|
3,911
|
4,213
|
8,124
|
|
Deferred income tax asset
|
77
|
-
|
77
|
|
Right-of-use Assets
|
59
|
-
|
59
|
|
Other long-term assets
|
13
|
6
|
19
|
|
Current liabilities
|
(1,072)
|
(628)
|
(1,700)
|
|
Deferred revenue
|
(9,755)
|
(315)
|
(10,070)
|
|
Lease obligations
|
(59)
|
-
|
(59)
|
|
Deferred income tax liability
|
(13,107)
|
(4,560)
|
(17,667)
|
|
Net tangible assets (liabilities) assumed
|
(19,933)
|
(1,284)
|
(21,217)
|
|
Finite life intangible assets acquired:
|
|
|
|
|
Customer agreements and relationships
|
24,200
|
15,975
|
40,175
|
|
Existing technology
|
25,000
|
21,299
|
46,299
|
|
Trade names
|
1,500
|
-
|
1,500
|
|
Non-compete covenants
|
600
|
-
|
600
|
|
Goodwill
|
50,789
|
26,920
|
77,709
|
| |
82,156
|
62,910
|
145,066
|
The above transactions were accounted for using the acquisition method in accordance with ASC Topic 805, “Business Combinations”. The purchase price allocations
in the table above represents our estimates of the allocation of the purchase price and the fair value of net assets acquired. The preliminary purchase price allocations may differ from the final purchase price allocation, and these differences
may be material. Revisions to the allocations will occur as additional information about the fair value of assets and liabilities becomes available. The final purchase price allocations will be completed within one year from the acquisition date.
The acquired intangible assets are being amortized over their estimated useful lives as follows:
| |
OCR
|
ASD
|
|
Customer agreements and relationships
|
13 years
|
13 years
|
|
Existing technology
|
6 years
|
6 years
|
|
Trade names
|
10 years
|
N/A
|
|
Non-compete covenants
|
5 years
|
N/A
|
The goodwill on the OCR and ASD acquisitions arose as a result of the combined strategic value to our growth plan. The goodwill arising from the OCR and ASD
acquisitions are not deductible for tax purposes.
Fiscal 2024 Acquisitions
On February 14, 2023, Descartes acquired all of the shares of Windigo Logistics, Inc., doing business as GroundCloud (“GroundCloud”), a cloud-based provider of
final-mile carrier solutions and road safety compliance tools. The purchase price for the acquisition was approximately $136.8 million, net of cash acquired, which was funded from cash on hand, plus potential performance-based contingent
consideration of up to $80.0 million based on GroundCloud achieving revenue-based targets over the first two years post-acquisition. The fair value of the contingent consideration was valued at $19.6 million at the acquisition date. The gross
contractual amount of trade receivables acquired was $1.5 million with a fair value of $1.5 million at the date of acquisition. Our acquisition date estimate of contractual cash flows not expected to be collected was nominal. The purchase price
was finalized in the three month period ended January 31, 2024 with no adjustments.
On April 20, 2023, Descartes acquired substantially all of the assets of Localz Pty Ltd.(“Localz”), a cloud-based customer engagement platform for day-of-service
interaction and order management. The purchase price for the acquisition was approximately $5.9 million, net of cash acquired, which was funded from cash on hand. The gross contractual amount of trade receivables acquired was $0.6 million with a
fair value of $0.6 million at the date of acquisition. Our acquisition date estimate of contractual cash flows not expected to be collected was nominal. The purchase price was finalized in the three month period ended April 30, 2024 with no
adjustments.
Pro Forma Results of Operations (Unaudited)
The financial information in the table below summarizes selected results of operations on a pro forma basis as if we had acquired ASD, OCR, Localz, and
GroundCloud as of February 1, 2023.
This pro forma information is for information purposes only and does not purport to represent what our actual results of operations for the periods presented
would have been had the acquisitions of ASD, OCR, Localz, and GroundCloud occurred at February 1, 2023, or to project our results of operations for any future period.
| |
Three Months Ended
|
| |
April 30,
|
April 30,
|
| |
2024
|
2023
|
| |
|
|
|
Revenue
|
156,268
|
145,022
|
|
Net income
|
34,243
|
27,629
|
|
Earnings per share
|
|
|
|
Basic
|
0.40
|
0.33
|
|
Diluted
|
0.39
|
0.32
|
Note 4 – Fair Value Measurements
ASC Topic 820 “Fair Value Measurements and Disclosures” (Topic 820) defines fair value as the price that would be received upon sale of an asset or paid upon
transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value, in this context, should be calculated based on
assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including our own credit
risk.
Topic 820 establishes a fair value hierarchy which prioritizes the inputs used in the valuation methodologies in measuring fair value into three levels:
|
• |
Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
|
|
• |
Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
• |
Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The
fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
|
The carrying amounts of the Company’s cash, accounts receivable (net), accounts payable, accrued liabilities and income taxes payable approximate their fair value
(a Level 2 measurement) due to their short maturities.
The following table shows the Company’s financial instruments measured at fair value on a recurring basis as of April 30, 2024:
| |
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Assets:
|
|
|
|
|
|
Equity derivative contracts
|
-
|
18,108
|
-
|
18,108
|
| |
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent consideration
|
-
|
-
|
36,934
|
36,934
|
The following table shows the Company’s financial instruments measured at fair value on a recurring basis as of January 31, 2024:
| |
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Assets:
|
|
|
|
|
|
Equity derivative contracts
|
-
|
16,206
|
-
|
16,206
|
| |
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent consideration
|
-
|
-
|
35,146
|
35,146
|
The Company enters into equity derivative contracts including floating-rate equity forwards to partially offset the potential fluctuations of certain future
share-based compensation expenses. The equity derivative contracts are not designated as hedge instruments and the Company does not hold derivatives for speculative purposes. As at April 30, 2024, we had equity derivatives for 312,188 Descartes
common shares with a weighted average purchase price of $35.07.
The fair value of equity contract derivatives is determined utilizing a valuation model based on the quoted market value of our common shares at the balance sheet date (Level 2 fair value inputs). The fair value of equity contract derivatives is recorded as other current assets and gains and losses are recorded
in general and administrative expenses in the condensed consolidated financial statements. For the three month periods ended April 30, 2024 and April 30, 2023, we recognized an expense (recovery) in general and administrative expenses of ($2.3)
million and ($2.1) million, respectively.
Estimates of the fair value of contingent consideration is performed by the Company on a quarterly basis. Key unobservable inputs include revenue growth rates and
the discount rates applied (11% to 12%). The estimated fair value increases as the annual revenue growth rate increases and as the discount rate decreases and vice versa. The following table presents the changes in the fair value measurements of
the contingent consideration in Level 3 of the fair value hierarchy:
| |
Level 3
|
|
Balance at January 31, 2024
|
35,146
|
|
Charges through profit or loss
|
1,788
|
|
Balance at April 30, 2024
|
36,934
|
Note 5 – Trade Accounts Receivable
| |
April 30,
|
January 31,
|
| |
2024
|
2024
|
|
Trade accounts receivable
|
55,025
|
52,268
|
|
Less: Provision for credit losses
|
(1,164)
|
(699)
|
| |
53,861
|
51,569
|
Included in accounts receivable are unbilled receivables in the amount of $4.0 million as at April 30, 2024 ($2.4 million as at January 31, 2024). No single
customer accounted for more than 10% of the accounts receivable balance as of April 30, 2024 and January 31, 2024.
The following table presents the changes in the provision for credit losses as follows:
| |
Provision for Credit Losses
|
|
Balance at January 31, 2024
|
699
|
|
Current period provision for expected losses
|
657
|
|
Write-offs charged against the provision
|
(185)
|
|
Effect of movements in foreign exchange
|
(7)
|
|
Balance at April 30, 2024
|
1,164
|
Note 6 – Other Receivables
| |
April 30,
|
January 31,
|
| |
2024
|
2024
|
|
Net working capital adjustments receivable from acquisitions
|
693
|
-
|
|
Other receivables
|
11,089
|
12,193
|
| |
11,782
|
12,193
|
Other receivables include receivables related to sales and use taxes, income taxes, non-trade receivables and contract assets. At April 30, 2024, $0.7 million
(nil at January 31, 2024) of the net working capital adjustments receivable from acquisitions is recoverable from amounts held in escrow related to the respective acquisitions.
Note 7 – Property and Equipment
| |
April 30,
|
January 31,
|
| |
2024
|
2024
|
|
Cost
|
|
|
|
Computer equipment and software
|
38,067
|
48,943
|
|
Furniture and fixtures
|
1,443
|
1,432
|
|
Leasehold improvements
|
994
|
994
|
|
Equipment installed with customers
|
2,336
|
2,314
|
|
Assets under construction
|
476
|
497
|
| |
43,316
|
54,180
|
|
Accumulated depreciation
|
|
|
|
Computer equipment and software
|
27,773
|
38,825
|
|
Furniture and fixtures
|
1,304
|
1,287
|
|
Leasehold improvements
|
760
|
730
|
|
Equipment installed with customers
|
1,849
|
1,786
|
| |
31,686
|
42,628
|
|
Net
|
11,630
|
11,552
|
Note 8 - Intangible Assets
| |
April 30,
|
January 31,
|
| |
2024
|
2024
|
|
Cost
|
|
|
|
Customer agreements and relationships
|
336,323
|
299,524
|
|
Existing technology
|
445,954
|
403,944
|
|
Trade names
|
11,562
|
10,139
|
|
Non-compete covenants
|
15,380
|
14,911
|
| |
809,219
|
728,518
|
|
Accumulated amortization
|
|
|
|
Customer agreements and relationships
|
174,590
|
172,026
|
|
Existing technology
|
290,650
|
285,148
|
|
Trade names
|
8,351
|
8,227
|
|
Non-compete covenants
|
12,222
|
12,070
|
| |
485,813
|
477,471
|
|
Net
|
323,406
|
251,047
|
Intangible assets related to our acquisitions are recorded at their fair value at the acquisition date. The change in intangible assets during the three month
period ended April 30, 2024 is primarily due to the acquisitions of OCR and ASD partially offset by amortization. The balance of the change in intangible assets is due to foreign currency translation.
Intangible assets with a finite life are amortized into income over their useful lives. Amortization expense for existing intangible assets is expected to be
$323.4 million over the following periods: $51.5 million for the remainder of fiscal 2025, $63.90 million for 2026, $49.3 million for 2027, $42.0 million for 2028, $33.7 million for 2029 and $83.0 million thereafter. Expected future amortization
expense is subject to fluctuations in foreign exchange rates and assumes no future adjustments to acquired intangible assets.
Note 9 – Goodwill
Goodwill is recorded when the consideration paid for an acquisition of a business exceeds the fair value of identifiable net tangible and intangible assets
acquired. The following table summarizes the changes in goodwill since January 31, 2023:
| |
April 30,
|
January 31,
|
| |
2024
|
2024
|
|
Balance at beginning of period
|
760,413
|
675,647
|
|
Acquisition of GroundCloud
|
-
|
82,750
|
|
Acquisition of Localz
|
-
|
954
|
|
Acquisition of OCR
|
50,789
|
-
|
|
Acquisition of ASD
|
26,920
|
-
|
|
Adjustments on account of foreign exchange
|
(5,832)
|
1,062
|
|
Balance at end of period
|
832,290
|
760,413
|
Note 10 - Accrued Liabilities
| |
April 30,
|
January 31,
|
| |
2024
|
2024
|
|
Accrued compensation and benefits
|
41,043
|
43,075
|
|
Accrued contingent acquisition consideration
|
36,934
|
35,146
|
|
Accrued professional fees
|
2,271
|
1,577
|
|
Other accrued liabilities
|
20,279
|
12,026
|
| |
100,527
|
91,824
|
Other accrued liabilities include accrued expenses related to third party resellers and royalties, suppliers, accrued restructuring charges, and accrued
consideration payable.
Note 11 – Long-Term Debt
We have a senior secured revolving credit facility in place with a syndicate of lenders. The facility is a $350.0 million revolving
operating credit facility to be available for general corporate purposes, including the financing of ongoing working capital needs and acquisitions. The credit facility has a five-year maturity with no fixed repayment dates prior to the end of
the term ending December 2027. With the approval of the lenders, the credit facility can be expanded to a total of $500.0 million. Borrowings under the credit facility are secured by a first charge over substantially all of Descartes’ assets.
Depending on the type of advance, interest rates under the revolving operating portion of the credit facility are based on the Canada or US prime rate, Canadian Dollar Offered Rate (CDOR) or the Secured Overnight Financing Rate (SOFR) plus an
additional 0 to 250 basis points based on the ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization, as defined in the credit facility. A standby fee of between 20 to 40 basis points will be charged on all
undrawn amounts. The credit facility contains certain customary representations, warranties and guarantees, and covenants.
No amounts were drawn on the credit facility as of April 30, 2024 and the balance of $350.0 million is available for use. We were in compliance with the covenants
of the credit facility as of April 30, 2024.
As at April 30, 2024, we had outstanding letters of credit of approximately $0.2 million ($0.2 million as at January 31, 2024), which were not related to our
credit facility.
Note 12 – Leases
We have operating leases for buildings, vehicles and computer equipment. Our leases have remaining terms of up to 6 years, some of which include options to extend
the leases for up to 5 years.
The components of operating lease expense were as follows:
| |
|
|
Three Months Ended
|
| |
|
|
|
April 30,
|
April 30,
|
| |
|
|
|
2024
|
2023
|
|
Operating lease cost
|
|
|
|
908
|
973
|
|
Short-term lease cost
|
|
|
|
120
|
182
|
|
Total operating lease cost
|
|
|
|
1,028
|
1,155
|
Supplemental cash flow information related to operating leases was as follows:
| |
|
|
Three Months Ended
|
| |
|
|
|
April 30,
|
April 30,
|
| |
|
|
|
2024
|
2023
|
|
Operating cash outflows from operating leases included in measurement of lease liabilities
|
|
|
|
954
|
989
|
|
New ROU assets obtained in exchange for lease obligations
|
|
|
|
953
|
482
|
Supplemental information related to operating leases was as follows:
| |
|
April 30, 2024
|
January 31, 2024
|
|
Weighted average remaining lease term (years)
|
|
3.1
|
3.0
|
|
Weighted average discount rate (%)
|
|
4.5
|
4.1
|
Maturities of operating lease liabilities were as follows as of April 30, 2024:
|
Years Ended January 31,
|
|
|
Operating Leases
|
|
Remainder of 2025
|
|
|
2,656
|
|
2026
|
|
|
2,443
|
|
2027
|
|
|
1,431
|
|
2028
|
|
|
819
|
|
2029
|
|
|
406
|
|
2030 and thereafter
|
|
|
209
|
|
Total lease payments
|
|
|
7,964
|
|
Less: imputed interest
|
|
|
554
|
|
Total lease obligations
|
|
|
7,410
|
|
Current
|
|
|
3,110
|
|
Long-term
|
|
|
4,300
|
Note 13 - Commitments, Contingencies and Guarantees
Commitments
As described in Note 2 to the audited consolidated financial statements for 2024 included in our 2024 Annual Report, we maintain deferred share unit (“DSU”) and
cash-settled restricted share unit (“CRSU”) plans for our directors and employees. Any payments made pursuant to these plans are settled in cash. For DSUs and CRSUs, the units vest over time and the liability recognized at any given consolidated
balance sheet date reflects only those units vested at that date that have not yet been settled in cash. As such, we had an unrecognized aggregate liability for the unvested DSUs and CRSUs of nil and $1.5 million, respectively, at April 30, 2024.
The ultimate liability for any payment of DSUs and CRSUs is dependent on the trading price of our common shares. To partially offset our exposure to fluctuations in our stock price, we have entered into equity derivative contracts, including
floating-rate equity forwards. As at April 30, 2024, we had equity derivatives for 312,188 Descartes common shares and a DSU liability for 312,188 Descartes common
shares, resulting in no net exposure resulting from changes to our share price.
Contingencies
We are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. The consequences of these matters are
not presently determinable but, in the opinion of management after consulting with legal counsel, the ultimate aggregate potential liability is not currently expected to have a material effect on our results of operations or financial position.
Product Warranties
In the normal course of operations, we provide our customers with product warranties relating to the performance of our hardware, software and services. To date,
we have not encountered material costs as a result of such obligations and have not accrued any liabilities related to such obligations in our condensed consolidated financial statements.
Business combination agreements
In respect of our acquisitions of NetCHB, XPS, Supply Vision and GroundCloud, up to $178.0 million in cash may become payable if certain revenue performance
targets are met in the two years following the acquisition. A balance of $36.9 million is accrued related to the fair value of this contingent consideration as at April 30, 2024.
Guarantees
In the normal course of business, we enter into a variety of agreements that may contain features that meet the definition of a guarantee under ASC Topic 460,
“Guarantees”. The following lists our significant guarantees:
Intellectual property indemnification obligations
We provide indemnifications of varying scope to our customers against claims of intellectual property infringement made by third parties arising from the use of
our products. In the event of such a claim, we are generally obligated to defend our customers against the claim and we are liable to pay damages and costs assessed against our customers that are payable as part of a final judgment or settlement.
These intellectual property infringement indemnification clauses are not generally subject to any dollar limits and remain in force for the term of our license agreement with our customer, which license terms are typically perpetual.
Historically, we have not encountered material costs as a result of such indemnification obligations.
Other indemnification agreements
In the normal course of operations, we enter into various agreements that provide general indemnities. These indemnities typically arise in connection with
purchases and sales of assets, securities offerings or buy-backs, service contracts, administration of employee benefit plans, retention of officers and directors, membership agreements, customer financing transactions, and leasing transactions.
In addition, our corporate by-laws provide for the indemnification of our directors and officers. Each of these indemnities requires us, in certain circumstances, to compensate the counterparties for various costs resulting from breaches of
representations or obligations under such arrangements, or as a result of third party claims
that may be suffered by the counterparty as a consequence of the transaction. We believe that the likelihood that we could incur significant liability under these
obligations is remote. Historically, we have not made any significant payments under such indemnities.
In evaluating estimated losses for the guarantees or indemnities described above, we consider such factors as the degree of probability of an unfavorable outcome
and the ability to make a reasonable estimate of the amount of loss. We are unable to make a reasonable estimate of the maximum potential amount payable under such guarantees or indemnities as many of these arrangements do not specify a maximum
potential dollar exposure or time limitation. The amount also depends on the outcome of future events and conditions, which cannot be predicted. Given the foregoing, to date, we have not accrued any liability in our condensed consolidated
financial statements for the guarantees or indemnities described above.
Note 14 – Share Capital
On July 15, 2022, we filed the 2022 Base Shelf Prospectus, allowing us to offer and issue an unlimited quantity of the following securities during
the 25-month period following thereafter: (i) common shares; (ii) preferred shares; (iii) senior or subordinated unsecured debt securities; (iv) subscription receipts; (v) warrants; and (vi) securities comprised of more than one of the
aforementioned common shares, preferred shares, debt securities, subscription receipts and/ or warrants offered together as a unit. These securities may be offered separately or together, in separate series, in amounts, at prices and on terms to
be set forth in one or more shelf prospectus supplements. No securities have yet been sold pursuant to the 2022 Base Shelf Prospectus.
For the three month periods ended April 30, 2024 and April 30, 2023, cash flows provided from stock options and share units exercised were $4.2 million and $5.4
million, respectively.
For the three month periods ended April 30, 2024 and April 30, 2023, the Company withheld 73,588 and 63,330 common shares,
respectively, to satisfy employee tax withholding requirements for net share settlements of PSUs and RSUs. For the three months ended April 30, 2024 and April 30, 2023, total payments to satisfy employee tax withholding requirements for net share
settlements of PSUs and RSUs were $6.7 million and $4.9 million, respectively, and are reflected as a financing activity in the condensed consolidated statements of cash flows.
Note 15 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”) (number of shares in thousands):
| |
|
|
Three Months Ended
|
| |
|
|
|
April 30,
|
April 30,
|
| |
|
|
2024
|
2023
|
|
Net income for purposes of calculating basic and diluted earnings per share
|
|
|
|
34,667
|
29,353
|
| |
|
|
|
|
|
Weighted average shares outstanding
|
|
|
85,274
|
84,949
|
|
Dilutive effect of employee stock options
|
|
|
563
|
548
|
|
Dilutive effect of restricted and performance share units
|
|
|
1,279
|
1,249
|
|
Weighted average common and common equivalent shares outstanding
|
|
|
87,116
|
86,746
|
|
Earnings per share
|
|
|
|
|
|
Basic
|
|
|
0.41
|
0.35
|
|
Diluted
|
|
|
|
0.40
|
0.34
|
For the three month periods ended April 30, 2024 and April 30, 2023, 276,004 and 269,558 options, respectively, were excluded from the
calculation of diluted EPS as those options had an exercise price greater than or equal to the average market value of our common shares during the applicable periods and their inclusion would have been anti-dilutive.
For the three month periods ended April 30, 2024 and April 30, 2023, the application of the treasury stock method excluded 270,039 and 14,009 options,
respectively, from the calculation of diluted EPS as the assumed proceeds from the unrecognized stock-based compensation expense of such options that are attributed to future service periods made such options anti-dilutive.
Additionally, for the three month periods ended April 30, 2024 and April 30, 2023, the application of the treasury stock method excluded PSUs and RSUs of 92,873
and 156,908, respectively, from the calculation of diluted EPS as the unrecognized stock-based compensation expense of such PSUs and RSUs that are attributed to future service periods made such PSUs and RSUs anti-dilutive.
Note 16 - Stock-Based Compensation Plans
Total estimated stock-based compensation expense recognized in our condensed consolidated statement of operations was as follows:
| |
|
|
Three Months Ended
|
| |
|
|
|
April 30,
|
April 30,
|
| |
|
|
|
2024
|
2023
|
|
Cost of revenues
|
|
|
|
266
|
201
|
|
Sales and marketing
|
|
|
|
1,212
|
870
|
|
Research and development
|
|
|
|
495
|
385
|
|
General and administrative
|
|
|
|
1,796
|
1,463
|
|
Effect on net income
|
|
|
3,769
|
2,919
|
Differences between how GAAP and applicable income tax laws treat the amount and timing of recognition of stock-based
compensation expense may result in a deferred tax asset. We have recorded a valuation
allowance against any such deferred tax asset except for $1.0 million ($1.0 million at January 31, 2024) recognized in the United States. The tax
benefit in connection with stock options exercised during both the three month periods ended April 30, 2024 and April 30, 2023 was nominal.
Stock Options
As of April 30, 2024, we had 1,717,874 stock options granted and outstanding under our shareholder-approved stock option plan and 2,168,407 remained available for
grant.
As of April 30, 2024, $15.9 million of total unrecognized compensation costs related to non-vested stock option awards is
expected to be recognized over a weighted average period of 2.8 years. The total fair value of stock options vested during the three month period ended April 30, 2024 was $0.1 million.
The total number of options granted during the three month periods ended April 30, 2024 and April 30, 2023 was 276,004 and 276,292, respectively.
The weighted average grant-date fair value of options granted during the three month periods ended April 30, 2024 and April 30, 2023 was $29.97 and $26.10 per option, respectively.
The weighted-average assumptions were as follows:
| |
|
Three Months Ended
|
| |
|
April 30, 2024
|
April 30, 2023
|
|
Expected dividend yield (%)
|
|
-
|
-
|
|
Expected volatility (%)
|
|
30.0
|
30.8
|
|
Risk-free rate (%)
|
|
3.7
|
3.2
|
|
Expected option life (years)
|
|
5
|
5
|
|
A summary of option activity under all of our plans is presented as follows:
|
| |
|
Number of Stock Options Outstanding
|
Weighted-
Average Exercise
Price
|
Weighted- Average Remaining Contractual Life (years)
|
Aggregate Intrinsic
Value
(in millions)
|
|
Balance at January 31, 2024
|
|
1,568,551
|
$52.31
|
3.9
|
$54.8
|
|
Granted
|
|
276,004
|
$90.05
|
|
|
|
Exercised
|
|
(125,019)
|
$33.86
|
|
|
|
Forfeited
|
|
(1,662)
|
$68.92
|
|
|
|
Balance at April 30, 2024
|
|
1,717,874
|
$59.43
|
4.3
|
$59.5
|
| |
|
|
|
|
|
|
Vested or expected to vest at April 30, 2024
|
|
1,717,874
|
$59.43
|
4.3
|
$59.5
|
| |
|
|
|
|
|
|
Exercisable at April 30, 2024
|
|
1,003,190
|
$47.84
|
3.3
|
$46.4
|
The total intrinsic value of options exercised during the three month periods ended April 30, 2024 and April 30, 2023 was $7.2 million and $8.8
million, respectively.
Performance Share Units
A summary of PSU activity is as follows:
| |
|
Number of PSUs Outstanding
|
Weighted-
Average Granted Date Fair Value
|
Weighted- Average Remaining Contractual Life (years)
|
Aggregate Intrinsic
Value
(in millions)
|
|
Balance at January 31, 2024
|
|
988,543
|
$53.81
|
4.5
|
$86.3
|
|
Granted
|
|
92,873
|
$111.50
|
|
|
|
Performance units issued
|
|
40,477
|
$81.37
|
|
|
|
Exercised
|
|
(103,504)
|
$13.68
|
|
|
|
Balance at April 30, 2024
|
|
1,018,389
|
$64.06
|
5.3
|
$95.8
|
| |
|
|
|
|
|
|
Vested or expected to vest at April 30, 2024
|
|
1,018,389
|
$64.06
|
5.3
|
$95.8
|
| |
|
|
|
|
|
|
Exercisable at April 30, 2024
|
|
732,391
|
$48.49
|
4.0
|
$68.9
|
The aggregate intrinsic value represents the total pre-tax intrinsic value (the aggregate closing share price of our common shares on April 30,
2024) that would have been received by PSU holders if all PSUs had been vested on April 30, 2024.
As of April 30, 2024, $18.3 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a
weighted average period of 2.2 years. The total fair value of PSUs vested during the three month period ended April 30, 2024 was $6.1 million.
Restricted Share Units
A summary of RSU activity is as follows:
| |
|
Number of RSUs Outstanding
|
Weighted-
Average Granted Date Fair Value
|
Weighted- Average Remaining Contractual Life (years)
|
Aggregate Intrinsic
Value
(in millions)
|
|
Balance at January 31, 2024
|
|
482,094
|
$40.19
|
4.8
|
$42.1
|
|
Granted
|
|
62,597
|
$90.05
|
|
|
|
Exercised
|
|
(51,752)
|
$11.32
|
|
|
|
Balance at April 30, 2024
|
|
492,939
|
$49.34
|
5.7
|
$46.3
|
| |
|
|
|
|
|
|
Vested or expected to vest at April 30, 2024
|
|
492,939
|
$49.34
|
5.7
|
$46.3
|
| |
|
|
|
|
|
|
Exercisable at April 30, 2024
|
|
367,938
|
$38.46
|
4.6
|
$34.6
|
The aggregate intrinsic value represents the total pre-tax intrinsic value (the aggregate closing share price of our common shares on April 30,
2024) that would have been received by RSU holders if all RSUs had been vested on April 30, 2024.
As of April 30, 2024, $9.4 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a
weighted average period of 2.2 years. The total fair value of RSUs vested during the three month period ended April 30, 2024 was nil.
Deferred Share Unit Plan
As at April 30, 2024, the total number of DSUs held by participating directors was 312,188 (311,081 at January 31, 2024), representing an
aggregate accrued liability of $29.0 million ($27.3 million at January 31, 2024). During the three month period ended April 30, 2024, 1,107 DSUs were granted and nil DSUs were redeemed and settled in cash. As at April 30, 2024, the unrecognized
aggregate liability for the unvested DSUs was nil (nil at January 31, 2024). The fair value of the DSU liability is based on the closing price of our common shares at the balance sheet date. The total compensation cost related to DSUs recognized
during both the three month periods ended April 30, 2024 and April 30, 2023 was $2.4 million.
Cash-Settled Restricted Share Unit Plan
A summary of activity under our CRSU plan is as follows:
| |
|
|
|
Number of CRSUs Outstanding
|
Weighted- Average Remaining Contractual Life (years)
|
|
Balance at January 31, 2024
|
|
|
|
11,370
|
1.8
|
|
Granted
|
|
|
|
8,579
|
|
|
Vested and settled in cash
|
|
|
|
(1,735)
|
|
|
Forfeited
|
|
|
|
(7)
|
|
|
Balance at April 30, 2024
|
|
|
|
18,207
|
2.3
|
| |
|
|
|
|
|
|
Non-vested at April 30, 2024
|
|
|
|
18,207
|
2.3
|
We recognize the compensation cost of the CRSUs ratably over the service/vesting period relating to the grant and have recorded an aggregate
accrued liability of $0.2 million at April 30, 2024 ($0.2 million at January 31, 2024). As at April 30, 2024, the unrecognized aggregate liability for the unvested CRSUs was $1.5 million ($0.8 million at January 31, 2024). The fair value of the
CRSU liability is based on the closing price of our common shares at the balance sheet date. The total compensation cost related to CRSUs recognized during both the three month periods ended April 30, 2024 and April 30, 2023 was $0.2 million.
The effective tax rate (which is the provision for income taxes expressed as a percentage of income before income taxes) was 24.9%
and 22.3% for the three month periods ended April 30, 2024 and 2023, respectively. The increase in the three month period ended April 30, 2024 compared to the three month period ended April 30, 2023 was primarily due to a recovery of tax credits
related to prior years in Canada in fiscal 2024. The remainder of the difference is due to normal course movements and non-material items.
Note 18 – Contract Balances, Performance Obligations and Contract Costs
Deferred Revenue
The following table presents the changes in the deferred revenue balance as follows:
| |
|
| |
Deferred Revenue
|
|
Balance at January 31, 2024
|
85,977
|
|
Recognition of previously deferred revenue
|
(15,700)
|
|
Deferral of revenue
|
19,819
|
|
Increases from business combinations, net
|
8,096
|
|
Effect of movements in foreign exchange
|
(137)
|
|
Balance at April 30, 2024
|
98,055
|
|
Current
|
96,290
|
|
Long-term
|
1,765
|
Performance Obligations
As of April 30, 2024, approximately $404.2 million of revenue is expected to be recognized in the future related to performance obligations that are unsatisfied
(or partially unsatisfied) at the end of the reporting period. We expect to recognize revenue on approximately 85% of these remaining performance obligations over the next 24 months with the balance recognized thereafter.
Contract Assets
The following table presents the changes in the contract assets balance as follows:
| |
Contract Assets
|
|
Balance at January 31, 2024
|
3,029
|
|
Transfers to trade receivables from contract assets
|
(406)
|
|
Increases as a result of revenue recognized during the period, net of amounts transferred to trade receivables
|
32
|
|
Effect of movements in foreign exchange
|
(14)
|
|
Balance at April 30, 2024
|
2,641
|
Contract Costs
Capitalized contract costs net of accumulated amortization is $18.3 million at April 30, 2024 ($18.6 million at January 31, 2024). Capitalized contract costs are
amortized consistent with the pattern of transfer to the customer for the goods and services to which the asset relates. For the three month periods ended April
30, 2024 and April 30, 2023, the total contract cost amortization included in sales and marketing expenses was $1.7 million and $1.6 million, respectively. For both the three month periods ended April 30, 2024 and April 30, 2023, there was no impairment loss in relation to the capitalized contract costs.
Note 19 - Other Charges
Other charges are comprised of acquisition-related costs, contingent consideration adjustments and restructuring initiatives which have been undertaken from time
to time under various restructuring plans. Acquisition-related costs primarily include advisory services, administrative costs and retention bonuses to employees joining by way of an acquisition, and collectively relate to completed and
prospective acquisitions. Contingent consideration adjustments relate to changes in anticipated acquisition earnout payment accruals primarily as a result of increases or decreases to revenue performance and forecasts. Revenue forecasts are
updated on a quarterly basis and the related earnout payment accruals are updated accordingly.
The following tables shows the components of other charges as follows:
| |
|
|
Three Months Ended
|
| |
|
|
|
April 30,
|
April 30,
|
| |
|
|
|
2024
|
2023
|
|
Acquisition-related costs
|
|
|
2,078
|
1,328
|
|
Contingent consideration accretion and adjustments
|
|
|
1,788
|
603
|
|
Restructuring plans
|
|
|
52
|
2
|
| |
|
|
|
3,918
|
1,933
|
Fiscal 2024 Restructuring Plan
In the third quarter of fiscal 2024, management approved and began to implement the fiscal 2024 restructuring plan to reduce operating expenses and increase
operating margins. To date, $1.7 million has been recorded within other charges in conjunction with this restructuring plan. These charges are comprised of office closures and workforce reduction charges. As of April 30, 2024, we expect total
remaining office closures and workforce reduction costs to be incurred of approximately $0.1 million to $0.2 million.
The following table shows the changes in the restructuring provision for the fiscal 2024 restructuring plan:
| |
Workforce
Reduction
|
Office Closures
|
Total
|
|
Balance at January 31, 2024
|
442
|
-
|
442
|
|
Accruals and adjustments
|
-
|
52
|
52
|
|
Cash draw downs
|
(28)
|
(53)
|
(81)
|
|
Non-cash draw downs and foreign exchange
|
(12)
|
1
|
(11)
|
|
Balance at April 30, 2024
|
402
|
-
|
402
|
Note 20 – Supplemental Cash Flow Information
The following tables presents the cash flow changes in operating asset and liabilities:
| |
|
|
Three Months Ended
|
| |
|
|
|
April 30,
|
April 30,
|
| |
|
|
|
2024
|
2023
|
|
Trade accounts receivable
|
|
|
2,474
|
(3,119)
|
|
Other accounts receivable
|
|
|
3,793
|
(1,040)
|
|
Prepaid expenses and other
|
|
|
(4,586)
|
(3,740)
|
|
Inventory
|
|
|
(120)
|
(20)
|
|
Accounts payable
|
|
|
1,408
|
1,026
|
|
Accrued liabilities
|
|
|
2,891
|
1,649
|
|
Income taxes payable
|
|
|
1,456
|
(717)
|
|
Operating leases
|
|
|
(31)
|
(19)
|
|
Deferred revenue
|
|
|
2,358
|
5,596
|
| |
|
|
|
9,643
|
(384)
|
Note 21 - Segmented Information
We review our operating results, assess our performance, make decisions about resources, and generate discrete financial information at the single enterprise
level. Accordingly, we have determined that we operate in one reportable business segment providing logistics technology solutions. The following tables provide our disaggregated revenue information by geographic location of customer and revenue
type:
| |
|
|
Three Months Ended
|
| |
|
|
|
April 30,
|
April 30,
|
| |
|
|
2024
|
2023
|
|
Revenues
|
|
|
|
|
|
United States
|
|
|
101,565
|
90,516
|
|
Europe, Middle-East and Africa
|
|
|
35,134
|
33,655
|
|
Canada
|
|
|
|
9,971
|
8,287
|
|
Asia Pacific
|
|
|
|
4,678
|
4,156
|
| |
|
|
151,348
|
136,614
|
| |
|
|
Three Months Ended
|
| |
|
|
|
April 30,
|
April 30,
|
| |
|
|
2024
|
2023
|
|
Revenues
|
|
|
|
|
|
Services
|
|
|
137,835
|
124,110
|
|
Professional services and other
|
|
|
12,973
|
11,544
|
|
License
|
|
|
540
|
960
|
| |
|
|
151,348
|
136,614
|
License revenues are derived from perpetual licenses granted to our customers to use our software products. Services revenues are comprised of ongoing
transactional and/or subscription fees for use of our services and products by our customers and maintenance, which include revenues associated with maintenance and support of our services and products. Professional services and other revenues
are comprised of professional services revenues from consulting, implementation and training services related to our services and products, hardware revenues and other revenues.
The following table provides information by geographic area of operation for our long-lived assets. Long-lived assets represent property and equipment and
intangible assets that are attributed to geographic areas.
| |
April 30,
|
January 31,
|
| |
2024
|
2024
|
|
Total long-lived assets
|
|
|
|
United States
|
221,376
|
178,843
|
|
Europe, Middle-East and Africa
|
61,271
|
26,298
|
|
Canada
|
42,893
|
47,072
|
|
Asia Pacific
|
9,496
|
10,386
|
| |
335,036
|
262,599
|
Our common stock trades on the Toronto Stock Exchange under the symbol DSG and on The Nasdaq Stock Market under the symbol DSGX.
The Descartes Systems Group Inc.
The Descartes Systems Group Inc.
