ESPIAL GROUP INC. - Cantor Fitzgerald Canada · PDF fileThese services can include traditional TV content (linear TV channels), video -on ... Cantor Fitzgerald Canada, Luma, Company

February 29, 2016 Initiating Coverage

Ralph Garcea, MBA, P.Eng. Gianluca Tucci [email protected] [email protected] (416) 849-5004 (416) 350-2177

Sales/Trading — Toronto: (416) 363-5757, (866) 442-4485

See disclosure and a description of our recommendation structure at the end of this report. 1 of 27

Eq

uit

y R

ese

arc

h

Company profile: Espial Group designs, develops, and markets software solutions to enable the delivery of Internet protocol television (IPTV). The company's products allow cable TV, satellite TV, and telecom service providers and Internet service providers to deploy IPTV services to their subscribers.

ESPIAL GROUP INC. Transforming the Viewing Experience….One Operator at a Time

EVENT

We are initiating coverage of Espial Group (“ESP” or “the Company”) with a BUY rating and a $4.50 price target.

BOTTOM LINE

Customer Funnel Supports Large Growth Opportunity. Despite the recent hiccup at a top tier North American cable operator (transition from legacy STB to IPTV, with a 4K-TV stop in between), focus must be oriented towards TeleColumbus and the other European cable operator - with ~5M subs combined. In addition, the customer funnel has another ~5M subs that could get added before the end of 2016. We note that every 2M subs adds ~$0.75 in value to our target price.

FOCUS POINTS

▪ OTT Service Providers to Provide Next Catalyst. This new form of competition is spurring service providers to invest in next generation service offerings by making their products and services IP enabled through IPTV and Hybrid TV.

▪ Attractive Business Model. An operator with 2M subs can generate total revenue of ~$30M over a 5-year rollout – with annual recurring support revenue at scale of ~$4M+.

▪ High Barriers to Entry Provide the Moat. ESP holds a library of over 23 issued patents and 2 patents pending (400+ IP video related claims), with R&D offices in Ottawa, Canada; Cambridge, UK; and Sunnyvale, California.

▪ European Rollout or New Win. We believe a near-term catalyst would be confirmation of the TeleColumbus or European cableco rollout, or another customer win.

Recommendation: BUY

Symbol/Exchange: ESP-TSX

Sector: Technology – Application Software

All dollar values in C$ unless otherwise noted.

Current price: $1.81

One-year target: $4.50

Dividend / Yield ---/---

Target return 149%

Financial Summary

Shares O/S (M) 37.3 52-Week Range $1.67 - $4.3

Market Cap ($M) 67.6 Avg. Weekly Volume (M) 1.04

Net Cash ($M) 49.9 Fiscal Year End 31-Dec

$M 2015 2016E 2017E 2018E

Revenue 24.8 26.5 36.4 41.8

Revenue (YoY % ) 59.4% 6.9% 37.0% 15.0%

Adj. EBITDA 2.9 0.3 7.3 10.5

Adj. EBITDA margin 11.7% 1.1% 20.0% 25.0%

EPS (Basic) 0.03 0.01 0.22 0.34

EPS (Diluted) 0.03 0.01 0.22 0.34

Shares O/S (M) 24.6 37.3 37.3 37.3

EV / Revenue 0.7x 0.7x 0.5x 0.4x

EV / EBITDA 6.1x 58.0x 2.4x 1.7x

P/E (adj. EPS) 53.1x 148.1x 8.4x 5.3x

0.00

1.00

2.00

3.00

4.00

5.00

6.00

$0

$1

$1

$2

$2

$3

$3

$4

$4

$5

Feb/15 Apr/15 Jun/15 Aug/15 Oct/15 Dec/15 Feb/16

Vol

ume

(M)

Pric

e (C

$)

Espial Group Inc. February 29, 2016

Ralph Garcea, MBA, P. Eng. 416-849-5004 2 of 27

TABLE OF CONTENTS

Table of Contents ........................................................................................................... 2 Introduction ..................................................................................................................... 3 Investment Thesis ........................................................................................................... 3

OTT Service Providers to Provide Next Innovation Catalyst ......................... 3 Attractive Business Model ..................................................................................... 4 High Barriers to Entry Provide the Moat ............................................................ 4 Bluestreak Technology Acquisition ...................................................................... 4

Catalysts ............................................................................................................................ 5 Q1/16 Results .......................................................................................................... 5 Two Major European Cable Operators ............................................................... 5 Another Major Cable Operator? .......................................................................... 5

Risks .................................................................................................................................. 5 Market Penetration .................................................................................................. 5 Concentration Risk .................................................................................................. 5 Innovation ................................................................................................................ 5 Competitive Communications Service Provider Environment ....................... 5

Global Pay TV Industry Overview .............................................................................. 6 Market Growth ........................................................................................................ 7

Company Overview ......................................................................................................10 Company Description ...........................................................................................10 Products and Services ...........................................................................................10 Business Strategy ...................................................................................................11 Sales and Distribution Strategy ...........................................................................11 Bluestreak Technlogies adds Scale and Expertise ............................................13

Competition ...................................................................................................................14 Technology & Innovation ....................................................................................14 Canada – A Microcosm of What’s Happening Globally ................................14 What About Comcast – Friend or Foe? ............................................................14

Financial Forecast .........................................................................................................15 Forecast Assumptions ..........................................................................................16

Recommendation and Valuation ................................................................................17 Consolidation in the Global IPTV Sector ................................................................19 Technically Speaking ....................................................................................................20 Appendix 1: Management and Board of Directors .................................................21 Appendix 2: Financial statements...............................................................................23 Disclaimers and Disclosure .........................................................................................27



INTRODUCTION

Espial Group (“ESP” or “the Company”) designs, develops, and markets software solutions to enable the delivery of Internet protocol television (IPTV). The company's products allow cable TV, satellite TV, telecom service providers and Internet service providers to deploy IPTV services to their subscribers. Leveraging open standards, including HTML5 and the RDK (Reference Design Kit) stack, Espial client solutions are recognized as delivering exceptional user experiences with fast performance, elegant design and ease-of-use on STBs (set-top boxes) and Smart TVs. Espial is headquartered in Ottawa, Canada and has offices in the United States, Europe, and Asia, with European headquarters located in Cambridge, UK.

We are initiating coverage of Espial Group with a BUY recommendation and a DCF-based one-year price target of $4.50 per share. ESP currently trades at a C2017 EV/Sales of 0.5x and an EV/EBITDA of 2.4x vs. its Global IPTV comparables at an average of 1.9x and 8.2x, respectively.

INVESTMENT THESIS

OTT Service Providers to Provide Next Innovation Catalyst

Over-the-Top (OTT) video service providers offer video services directly to consumers. These services can include traditional TV content (linear TV channels), video-on-demand (VOD), and/or other video content or applications. Examples include Netflix, Amazon Prime Video, HBO, ESPN, MLB, NHL, YouTube, etc. Consumer electronics manufacturers have developed multiple devices including Smart TVs, Blu-ray players, gaming consoles, wireless tablets, etc. which can be connected to the internet and access OTT services. This new form of competition is spurring communication service providers to invest in a new generation of service offerings by making their products and services IP-enabled through IPTV and Hybrid TV.

Exhibit 1. Video Service Provider (VSP) Marketplace

Source: Cantor Fitzgerald Canada, Luma, Company Documents



Attractive Business Model

An operator with 2M subs can generate total revenue of ~$30M over a 5-year rollout – with annual recurring support revenue at scale of $4M+. We note that every 2M subs adds ~$0.75 in value to our target price.

High Barriers to Entry Provide the Moat

ESP holds a library of over 23 issued patents and 2 patents pending (400+ IP video related claims), with R&D offices in Ottawa, Canada; Cambridge, UK; and Sunnyvale, California.

Bluestreak Technology Acquisition

On June 23, 2015 the Company entered into an agreement pursuant to which Espial acquired certain assets of Bluestreak Technology (Canada) including 100% of its France based subsidiary, Bluestreak Technologie SAS. The acquisition further strengthens Espial’s software expertise and experience integrating leading OTT services. These capabilities enhance Espial’s RDK and HTML5 solutions which blend linear television with web-based video services. As shown by Exhibit 2, the market is crowded and in need of further consolidation.

Exhibit 2. What Does Espial Buy Next (Look in the Blue Boxes)?

Source: Google, Wikipedia, Cantor Fitzgerald Canada, Company Documents



CATALYSTS

Here are three catalysts that could move the stock over the next 3 to 12 months.

Q1/16 Results

ESP recently reported weaker than expected Q4/15 results. ESP is expected to report Q1/16 results in early May 2016. We are looking for revenue of $5.5M, EBITDA of $(0.7)M and EPS of $(0.02). We believe Q2/16 will be flat q/q as the two European cablecos should have full rollouts expected in 2H/16.

Two Major European Cable Operators

ESP has secured two major European cable operators serving ~5M subscribers. With field trials starting through the 1H/16, we expect licenses to ramp through the 2H/16. We are aware of the Telecolumbus field trials already under way (to ~250 subscribers); and await an update from the second operator in due course.

Another Major Cable Operator?

With at least six operators in active discussions with ESP, we would expect at least one deal (and maybe two) announcements before the end of 2016 (see Exhibit 6).

RISKS

Market Penetration

Results could be negatively impacted if Espial fails to further penetrate core markets or expand through the right channels. Some of Espial’s main competitors are larger, better capitalized, and provide end-to-end solutions, all of which could impact operational results going forward.

Concentration Risk

In many markets around the world, the communications service provider industry is characterized by its monopoly or oligopoly characteristic. The failure to attract, obtain and maintain such customers could adversely impact operations going forward.

Innovation

Espial competes in an industry known for its rapidly changing technology, evolving industry standards and frequent product introductions. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development. Espial must anticipate evolving industry trends and keep up with innovation and new product offerings.

Competitive Communications Service Provider Environment

Partly as a result of reductions in government regulations, advancing technologies, and geographic consolidations, consumers in most markets are now able to receive communications services, including voice, video, internet and even mobile, from multiple competing service providers. The competition now also includes OTT service providers. The newest would-be entrant is the virtual network operator, which leverages an incumbent operator's own high-speed data network to offer a competitive linear TV and OTT video service.



GLOBAL PAY TV INDUSTRY OVERVIEW

According to a report by the World Intellectual Property Organization (WIPO) and IHS Technology, global pay TV revenues increased at a CAGR of 7.3% from 2009 to 2014. IHS Technology expects subscription revenues to continue its positive growth trend over the next five years albeit at a rate lesser than that of 2009 to 2015. Pay TV is television broadcasting in which viewers pay by subscription to watch a particular channel.

The fastest growing regions of pay TV revenue have been the Middle East and Africa, and Central and South America, which grew at CAGR rates of 14% and 22% respectively from 2009 to 2014. IHS believes these regions will continue to be the main catalysts of growth as pay TV markets continue to widen in these regions.

North America comprises the largest portion of global pay TV revenues at 47%, albeit down from 54% in 2009. North American pay TV revenues are growing at a 4% CAGR, the slowest rate globally. Western European revenues also have been growing at a similar rate and accounts for 18% of total global revenues. IHS believes pay TV growth will continue to slow in these mature markets as saturation and substitution with other offering occurs.

Exhibit 3. Global Pay TV Revenue

Source: WIPO, Cantor Fitzgerald Canada, Company Documents

Based on data from IHS Technology, we estimate that for 2014, the pay TV market was $237 billion, of which North America totaled $111 billion, Western Europe totaled $43 billion, and Asia-Pacific totaled $57 billion. We estimate that by 2020, the global pay TV market will amount to roughly $313 billion, of which North America will comprise ~$147 billion, Western Europe, ~$56 billion; and Asia-Pacific, ~$75 billion.

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Glo

bal

Pay

TV

Re

ven

ue

s ($

Bill

ion

s)

Western Europe Central and Eastern Europe Middle-East/Africa

North America Central and South America Asia-Pacific

6.29% CAGR



Exhibit 4. Global Pay TV Subscribers

Source: SNL Kagan, Cantor Fitzgerald Canada, Company Documents

Market Growth

Europe has demonstrated material IPTV growth with telecom providers and cable MSOs adding IPTV to their services. The European market is characterized by lower network costs, increased competition, and entry of over-the-top ("OTT") providers like Netflix and YouTube. According to industry analysts IHS, European cable operators have been losing TV subscribers since 2009, and have been losing pay TV market share while telcos have gained. Despite this, European cable is still a growth industry – where 70%+ of European cable TV revenues are now digital, driving TV ARPU growth.



Exhibit 5. European Cable Operators Under Pressure – Losing TV subs and Pay TV Market Share

Source: Cantor Fitzgerald Canada, IHS

-2

-1

0

1

2

3

4

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Ho

me

s (m

)

EU 28 Revenue Generating Unit Additions/Losses

Total TV Internet TelephonySource: IHS

0%

20%

40%

60%

80%

100%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Pay

TV

mar

ket

shar

e

EU 28 Pay TV Market Share

Cable DTH IPTV DTTSource: IHS

0

5

10

15

20

25

30

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Tota

l AR

PI

(€)

Tota

l RG

Us

(m)

EU 28: RGUs vs ARPU

Total TV Internet Telephony ARPUSource: IHS



North American telecommunication service providers have established substantial IPTV customer bases, with AT&T ("UVerse"), Verizon ("FIOS"), CenturyLink and others deploying IPTV to millions of subscribers. This competition has spurred cable MSOs to consider a new generation of IP-based platforms. Led by Comcast (X1) and Liberty Global, Multiple System Operators (“MSOs”) are coalescing around the RDK stack, which lowers STB cost and increases software portability by providing a standard set of low-level hardware drivers and procedures. While RDK in many ways commoditizes the set-top box, it can be a significant benefit to client software solution developers such as Espial, making it easier to create solutions which work across a broad range of platforms.



COMPANY OVERVIEW

Company Description

Espial Group was founded in April 1997 as a supplier of embedded browser and application products to the Internet appliances market. In 2001, ESP entered the hospitality market and secured a leadership position providing embedded browser, applications and user experience products for IPTV and included premium hotel chains. In 2003, Espial extended its market focus to the service provider IPTV industry, and developed a back-office IPTV service management platform. Espial’s IPO on the TSX debuted in 2007. In 2010, Espial adopted WebKit, a browser engine shared by Apple and Google, to launch the advanced Espial TV Browser for Digital TVs and STBs to power HTML5 user experiences and applications. In 2012, Espial became one of the first companies to join the Reference Design Kit (“RDK”) community which has since gained strong momentum initially with leading cable multiple system operators (“MSOs”), and increasingly telco service providers as well as others. On February 4, 2013 Espial acquired ANT plc - a Cambridge, UK based company that provides IP, hybrid, and connected TV products and services. On July 29, 2015, Espial acquired Bluestreak Technology – a Montreal, Canada based company that delivers rich media services for embedded devices.

Products and Services

Espial's products and services consist of Espial STB Client, Espial Media Service Platform, Espial Professional Services, Espial TV Browser, and Espial MediaBase.

Espial STB Client. Enables operators to create, deploy, and enhance a rich, responsive and engaging user experience that incorporates a highly responsive user interface and data-driven application architecture. The Client achieves high performance due to an industry-leading architecture whose key components include Espial's Application Framework, Espial's UX Framework, and by leveraging RDK and HTML5. Espial's solution accelerates an operator's time-to-market with an approach that is extensible and customizable.

Espial Professional Services (EPS). The group helps operators respond to increasing competition by creating entirely new service environments for their subscribers. With particular expertise in RDK, the group helps network operators create and deliver a world-class user experience to their subscribers which is immersive, personalized, and seamlessly blends traditional television with OTT content services. EPS specializes in rapid and efficient integration to any backend, porting clients across any chipset, customizing look and feel, and optimizing the user interface to ensure the best possible viewing experience. The end result is a rich, responsive experience by which subscribers efficiently navigate to the content they seek.

Espial Media Service Platform. The platform is a proven and powerful multiscreen user experience system with rich capabilities in TV service management, video merchandising, multiscreen user experience, and ecosystem and back-office integration. It allows carriers to cost efficiently expand their managed video services to include interactive applications and multiscreen TV services. It supports broadcast (satellite, cable and terrestrial), IPTV and hybrid



managed services. The Espial Media Services Platform allows operators to incrementally expand their services without having to wait for network expansion or evolution.

Espial MediaBase. A high performance on-demand video platform back-office solution that operates on commercial off the shelf (COTS) hardware for the management, delivery and streaming of video content to any screen. Key services on the platform include ecosystem integration, content ingest and capture, Quality Of Service (“QoS”), high availability, resource optimization, performance, streaming and content distribution. It enables on-demand, multiscreen ingest and capture services, STB QoS services, multiscreen streaming and content distribution.

Espial TV Browser. The browser accelerates the deployment of internet navigation, OTT video services, and other applications on consumer electronics devices such as Smart TVs. Based on HTML5, it is an embedded web browser designed to support the challenging browsing requirements of Connected TV's, STBs and Digital Media Devices. It is easily ported across devices and offers the latest and most advanced W3C Web standards support. Consumers enjoy a compelling internet browsing experience while manufacturers and developers can simply and quickly build customized user interfaces that deliver exciting, interactive applications and compelling content to consumers. It supports a wide range of end-user applications including open web browsing, product menus, social media, interactive advertising, email, chat, games and portals.

Business Strategy

Espial’s objective is to become the preferred provider of software solutions which enable service providers and Smart TV manufacturers to deliver world-class user experiences for their customers, and once created, in a manner which allows for rapid innovation and enhancement of the user experience over time. This goal is achievable by growing the current customer base, leveraging the increase in subscribers and set-top-boxes, expanding and strengthening global distribution channels, and pursuing strategic acquisitions.

Sales and Distribution Strategy

Espial targets communications service providers through both a direct sales force and indirect channels that include device manufacturers, system integrators and network vendors. Sales to consumer electronics manufacturers are primarily through the direct sales force.

Espial has a direct sales channel consisting of regional sales teams in Canada, the United States, the United Kingdom, France, Japan, The Netherlands and Taiwan. These sales teams include sales representatives, sales engineers and support personnel for local regions. As the product portfolio has expanded over time, it has become increasingly important to have a direct sales force which is focused on educating TV service providers and CE manufacturers on the merits of current products. Espial collaborates with channel partners including STB manufacturers, system integrators and network equipment vendors to win customer opportunities. The belief is certain communications service providers prefer to purchase solutions from integrators and vendors offering an end-to-end IPTV solution.



Exhibit 6. Key Service Providers by Region + Number of Subs = Large Growth Opportunity

Source: Cantor Fitzgerald Canada, Company Documents

Global Market:1000's of Pay Tv Operators worldwide200+ operators with > 1 million subs

Espial Target:Pay TV Operators with 1+

million subs in EU & NAM (60+)

Espial Sales Engagement (30)

Deeper Engagement (6)

WIN $-

$100

$200

$300

$400

$500

$600

$700

One Customer Three CurrentCustomers

10 Customers 20 Customers

Mill

ion

s

Services G4 License Product upsell Support

North America(20) Comcast - USA 22.3M TimeWarner - USA 10.98M Charter - USA 4.26M Cablevision - USA 2.64M Cox - USA 4.5M Brighthouse - USA 2M Mediacom - USA 0.88M Suddenlink - USA 1.1M CableOne - USA 0.4M DirecTV - USA 20.28M Dish - USA 13.93M AT&T - USA 5.97M Verizon - USA 5.77M CenturyLink - USA 0.27M Bell Canada - Canada 2.7M Telus - Canada 0.94M Shaw - Canada 2.24M Cogeco - Canada 0.86M Videotron - Canada 1.6M Rogers - Canada 2.3M Total 85.92M

Europe (45) UnityMedia 6.5M VirginMedia 12.5M Swisscom 6.4M Telefonica 5.1M Deutsche Telecom 2.4M BSkyB 10.6M DNA-Welho 1.1M NOS 3.73M TeleColumbus 2.8M British Telecom 7.6M Telecom Austria 23M Portugal Telecom 1.7M Vodafone 9.2M TalkTalk 4.28M OTE 0.4M Vodafone Portugal 6.2M Sky Deutschland 4.12M Viasat 0.7M Ziggo 4.29M Mediaset 1.83M Canal+ 15.4M Telia Sonera 2.4M UPC 0.5M Telecom Italia 4.1M Free 9M Com Hem 1.83M KPN 6.3M Tivusat 0.3M Bouygues 4.6M TDC 8.5M Telenet 2.1M Sky Italia 4.74M Numericable 6.5M Telenor 3.19M Belgacom 1.7M Total 239.4M SFR 21M HOT 0.87M YES 0.62M France Telecom 26.7M Cablecom 2.6M Orio 2M

Japan (4) KDDI 44.6M JCOM 19.5M SkyPerfect 3.5M NTT 21.3M Total 88.9M



Bluestreak Technlogies adds Scale and Expertise

ESP announced the acquisition of Bluestreak Technologies on June 23rd, 2015. Bluestreak Technologies is a software and services provider of video solutions for connected devices, including set-top boxes, smart TVs, smartphones, and tablets. With highly talented teams based in Montreal and Paris, Bluestreak strengthens Espial’s expertise in advanced video technologies, software development and integration of leading over-the-top services. These capabilities enhance Espial’s RDK and HTML5 solutions which blend linear television with web-based video services.



COMPETITION

Technology & Innovation

Espial faces competition primarily in product technology architecture, functionality, scalability, quality and reliability of products, ease of integration, industry credibility, business size, TCO (total cost of ownership) impacts and price. Significant competitors include Seachange, Alticast, Cisco, WiPlay, Zodiac and Opera. Indirect competitors include large system integrators like Ericsson, Arris, Accenture, Huawei and others that may include a competitor’s product as part of their customer proposal.

Canada – A Microcosm of What’s Happening Globally

The competition for subscribers in the Canadian market is similar to what’s happening in other regional markets as cable companies are losing subscribers to new services from telcos or OTT providers. We believe this is what has caused some strategic changes at Rogers as it has slowed its IPTV launch plans in favour of accelerated roll-out of 4K TV set-top boxes – with content that includes 20+ NHL games and 81 Toronto Blue Jay home games. Unfortunately, we believe Espial is caught in the middle of this shift and it remains to be seen how this will all unfold. Shaw dropped its IPTV development and went with Comcast’s X1 solution. Videotron has used Espial’s solution (acquired via Bluestreak) for its initial generation illico offering and currently deploys Cisco/Alticast for its existing generation illico service. It is rumoured that Videotron is contemplating a next generation IPTV platform for which Espial would be a candidate.

Exhibit 7. Canadian Cableco’s Losing TV Subs to Telcos


What About Comcast – Friend or Foe?

Although Comcast has been instrumental in driving the development of RDK, it has to be considered a competitor as the Comcast X1 platform is gaining momentum domestically and globally (through licensing deals). Comcast posted +89K net video adds in Q4/15; its best quarter in the last nine years. Rolling out ~40K X1 boxes per day, X1 customers now represent about 30% of Comcast’s total video customer base. The X1 box is helping to drive increased ARPU through more VOD views (+40% y/y), lower churn, and more DVR usage (+5% y/y).

Net Adds (000s) Q4/15 Q3/15 Q2/15 Q1/15 Q4/14 Q3/14 Q2/14

Bell FibeTV 74.1 67.9 50.5 60.9 58.4 61.5 46.5

Bell ExpressVu (36.3) (42.0) (33.8) (33.9) (34.0) (37.0) (25.6)

Telus 25.0 26.0 17.0 21.0 28.0 23.0

Rogers (24.0) (31.0) (32.0) (41.0) (36.0) (30.0) (33.0)

Shaw Cable (20.9) (39.3) (24.5) (36.0) (11.9) (20.2) (12.1)

Shaw Sat (12.6) (8.1) (2.8) (8.3) (18.3) (6.6) (5.6)

Videotron - illico DTV NA 11.8 (2.7) 1.9 19.2 (3.0)

Videotron - Analog TV NA (13.5) (20.3) (13.5) (16.9) (14.2)



FINANCIAL FORECAST

In Q4/15, ESP reported revenue of $5.2M vs. $8.7M q/q. EBITDA was $(0.6)M vs. $2.3M q/q. Software comprised 47% of revenue in Q4/15, down from 60% q/q and 55% y/y.

For Q1/16, we are looking for revenue of $5.5M, EBITDA of $(0.7)M and EPS of $(0.02).

Exhibit 8. Summary of Estimates


Exhibit 9. Product Revenue Split


Exhibit 10. CFCC Estimates vs. Consensus


Forecasts Q315 Q415 Q116 Q116E Diff. Q216E Q316E

Revenue ($M) $8.7 $5.2 $5.5 - $5.6 $7.4

EBITDA ($M) $2.3 ($0.6) ($0.7) - ($0.5) $0.4

EPS (FD) $0.06 ($0.03) ($0.02) - ($0.01) $0.01

EPS (Basic) $0.07 ($0.03) ($0.02) - ($0.01) $0.01

CFPS ($0.01) $0.05 ($0.08) - ($0.01) ($0.05)

58% 59% 62% 63% 57% 56%44% 47%

26%16% 14% 17%

17%10% 32%

33%

16%25% 24% 21% 27%

33%24% 19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008

2009

2010

2011

2012

2013

2014

2015

Reve

nu

e M

ix (

%)

Software Professional Services Support and Maintenance

2016E 2017E 2018E

CFCC Previous Consensus CFCC Previous Consensus CFCC Previous Consensus

Revenue $ 26.5 - $ 28.7 $ 36.4 - $ 40.7 $ 41.8 - $ 42.5

Revenue (YoY %) 6.9% - 15% 37.0% - 42% 15.0% - 4%

EBITDA $ 0.3 - $ 1.2 $ 7.3 - $ 8.8 $ 10.5 - $ 8.1

EBITDA (%) 1.1% - 4% 20.0% - 22% 25.0% - 19%

EPS, basic $ 0.01 - $(0.01) $ 0.22 - $ 0.19 $ 0.34 - $ 0.14

EPS, diluted $ 0.01 - $(0.01) $ 0.22 - $ 0.19 $ 0.34 - $ 0.14



Forecast Assumptions

An operator with 2M subs can generate a total revenue of ~$30M over a 5-year rollout – with annual recurring support revenue at scale of $4M+. A typical life cycle includes: (1) Integration services heavy for 12-24 months; (2) License and support after integration; (3) Product license rollout 4 years from start of deployment; and (4) Product up-sell (analytics, ecommerce, new apps, features).

Exhibit 11. Every 2M Subs Adds ~$0.75/share in Value


We believe the investments made in the 1H/16 (ahead of revenue ramp) are a sign of confidence in the expected rollouts of two European cablecos, plus the expectations of another one or two license deals by the end of 2016.

Exhibit 12. Revenue and EBITDA Margins


$-

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

Year 1 Year 2 Year 3 Year 4 Year 5

Services G4 License Product upsell Support

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

0

10,000

20,000

30,000

40,000

50,000

60,000

2008

2009

2010

2011

2012

2013

2014

2015

2016E

2017E

2018E

2019E

2020E

EB

ITD

A M

arg

in (

%)

Reve

nu

e (

$000s)

Revenue



RECOMMENDATION AND VALUATION

We are initiating coverage of Espial Group with a BUY recommendation and a DCF-based one-year price target of $4.50 per share. ESP currently trades at a C2017 EV/Sales of 0.5x and an EV/EBITDA of 2.4x vs. its Global IPTV comparables at an average of 1.9x and 8.2x, respectively.

Exhibit 13. Discounted Cash Flow Analysis


Exhibit 14. Sensitivity Analysis


Discounted Cash Flow Analysis 2014 2015E 2016E 2017E 2018E 2019E 2020E

Revenue ($) 20,003,757 24,834,692 26,539,554 36,351,196 41,803,876 47,866,881 54,573,639

Revenue Growth 59.4% 24.2% 6.9% 37.0% 15.0% 14.5% 14.0%

EBITDA ($) 3,170,984 2,907,404 304,256 7,270,239 10,450,969 12,718,324 15,826,355

EBITDA Growth 207.1% -8.3% -89.5% 2289.5% 43.7% 21.7% 24.4%

EBITDA Margin 15.9% 11.7% 1.1% 20.0% 25.0% 26.6% 29.0%

Depreciation and Amortization 840,737 939,473 1,246,992 1,427,528 1,524,029 1,627,579 1,738,712

EBIT ($) 2,330,247 1,967,931 942,735- 5,842,711 8,926,940 11,090,745 14,087,643

NOPAT 1,138,493 500,028 1,170,681- 4,881,951 7,621,354 9,516,796 12,161,987

Plus Amortization ($) 840,737 939,473 1,246,992 1,427,528 1,524,029 1,627,579 1,738,712

Less Capital Expenditures ($) (426,411) (2,349,626) (1,433,345) (1,623,568) (1,734,352) (1,853,273) (1,980,959)

Capital Intensity 2.1% 9.5% 5.4% 4.5% 4.1% 3.9% 3.6%

Net Working Capital Changes (1,715,059) (3,407,276) (6,670,588) 8,733,581 (32,112) (35,612) (39,268)

EPS (Continuing) 0.05 0.03 0.01 0.22 0.34 0.46 0.61

Unlevered Free Cash Flow ($) (162,240) (4,317,401) (8,027,622) 13,419,492 7,378,920 9,255,490 11,880,472

PV of Unlevered FCFs ($) (181,235) (4,384,431) (7,409,207) 11,259,735 5,628,494 6,418,095 7,487,457

Valuation Assumptions:

Discount Rate 10%

Terminal Multiple 8.00x

Valuation Analysis: Current 1-Yr Target 2-Yr Target

Total PV of FCFs ($) 23,384,574 30,793,781 19,534,046

Terminal Value ($) 126,610,843 126,610,843 126,610,843

PV of Terminal Value ($) 87,796,586 96,576,244 106,233,869

Net (debt) cash position 49,947,096 43,891,538 60,977,215 Net Debt Q416E Q417E

Total Value ($) 161,128,256 171,261,563 186,745,130

DCF Value/Share 4.27 4.54 4.95

FD Shares O/S 37,754,624 37,754,624 37,754,624

Terminal EV/EBITDA Multiple

4.54 5.0 6.0 7.0 8.0 9.0 10.0 11.0

6% 3.86 4.21 4.57 4.92 5.28 5.63 5.99

8% 3.71 4.05 4.39 4.72 5.06 5.40 5.73

Discount Rate 10% 3.58 3.90 4.22 4.54 4.86 5.18 5.50

12% 3.45 3.76 4.06 4.36 4.67 4.97 5.27

14% 3.34 3.62 3.91 4.20 4.49 4.78 5.07

16% 3.23 3.50 3.78 4.05 4.33 4.60 4.88



Exhibit 15. Global IPTV Comparables

Source: Cantor Fitzgerald Canada, FactSet

Exhibit 16. Canada Small Cap Technology Comparables

Source: Cantor Fitzgerald Canada, FactSet

Ticker Price Mkt Cap LTM Rev EV/Rev EV/EBITDA P/E

(Local) (US$) (US$) 2015 2016 2017 2015 2016 2017 2015 2016 2017

Espial Group Inc. ESP-CA 1.81 68 20 0.9 0.7 0.5 8.0 18.0 2.4 45.3 NM 9.7

SeaChange International, Inc. SEAC 5.60 189 111 1.1 1.0 0.9 NM 25.1 14.5 NM 56.7 22.9

Alticast Corp. 085810-KR 4565.00 78 55 2.1 2.0 1.9 7.8 7.3 6.9 10.0 9.1 8.3

Opera Software ASA OPERA-NO 67.25 1,128 616 1.9 1.7 1.4 11.7 10.1 7.8 109.4 28.5 18.4

TiVo Inc. TIVO 8.29 811 481 0.9 0.8 0.8 3.8 3.1 2.5 34.2 15.9 11.8

Rovi Corporation ROVI 22.64 1,882 526 5.1 4.6 4.4 12.5 12.9 9.6 13.2 11.5 9.5

Access Co., Ltd. 4813-JP 603.00 208 69 NM NM NM NM NM NM NM NM NM

Amdocs Limited DOX 57.54 8,652 3,563 2.1 2.0 1.9 10.5 10.2 9.8 17.0 16.0 14.9

CSG Systems International, Inc. CSGS 38.58 1,256 753 1.8 1.8 1.7 7.5 7.4 6.1 14.7 14.6 13.6

AVERAGES: 2.1 2.0 1.9 8.9 10.9 8.2 33.1 21.8 14.2

Price Mkt Cap. LTM Rev EV/Sales EV/EBITDA P/E

Ticker (Local) (Local) (Local) 2015 2016 2017 2015 2016 2017 2015 2016 2017

Sylogist Ltd. SYZ-CA 8.40 199 30 NM NM NM NM NM NM NM NM NM

TIO Networks Corp. TNC-CA 1.75 104 58 1.1 0.9 0.6 18.9 7.8 5.0 NM 25.5 18.3

Espial Group Inc. ESP-CA 1.81 68 25 0.9 0.7 0.5 8.0 18.0 2.4 45.3 NM 9.7

AgJunction Inc. AJX-CA 0.46 57 46 0.3 0.2 0.4 NM 4.1 NM NM NM NM

BSM Technologies Inc. GPS-CA 1.04 94 39 2.3 1.2 1.1 21.7 8.7 6.5 NM NM 33.2

QHR Corporation QHR-CA 1.22 63 28 2.0 1.7 1.5 NM 10.3 7.4 NM 30.5 15.3

Symbility Solutions, Inc. SY-CA 0.26 62 25 2.2 1.8 NM NM NM NM NM NM NM

NexJ Systems Inc. NXJ-CA 1.99 42 29 0.9 0.9 0.9 NM NM NM NM NM NM

Norsat International Inc. NII-CA 5.70 33 44 0.5 0.5 0.4 3.9 4.4 3.7 8.0 7.4 5.7

C-COM Satellite Systems, Inc. CMI-CA 0.94 34 12 NM NM NM NM NM NM NM NM NM

International Road Dynamics Inc. IRD-CA 1.42 21 58 NM NM NM NM NM NM NM NM NM

Intrinsyc Technologies Corporation ITC-CA 1.09 23 14 NM NM NM NM NM NM NM NM NM

CounterPath Corporation CCV-CA 3.26 14 16 NM NM NM NM NM NM NM NM NM

Posera-HDX Limited PAY-CA 0.21 16 20 NM NM NM NM NM NM NM NM NM

Dragonwave Inc. DWI-CA 2.75 8 147 0.2 0.2 0.1 NM NM NM NM NM NM

NTG Clarity Networks Inc. NCI-CA 0.22 8 16 NM NM NM NM NM NM NM NM NM

Averages: 1.2 0.9 0.7 13.1 8.9 5.0 26.6 21.1 16.4



CONSOLIDATION IN THE GLOBAL IPTV SECTOR

There has been several large transactions on the hardware side of the business as companies are dealing with STB prices moving from $300+ per unit to <$100 per unit. Cisco sold its STB business to Technicolor and Arris has acquired both Motorola and Pace’s STB businesses.

The larger service providers have acquired technology to enable them to provide one-stop solutions or services. Ericsson acquired Microsoft Mediaroom and FYI TV; Kudelski acquired OpenTV; and Accenture acquired S3 Group.

Recently, a private Chinese consortium led by Golden Brick Capital and Qihoo 360 Software launched a voluntary offer to acquire Opera Software for ~NOK10.3B (US$1.2B) in cash – valuing Opera at 2017E of 1.7x EV/Sales and 10.3x EV/EBITDA (vs ESP at 0.3x and 2.4x. respectively).



TECHNICALLY SPEAKING

After a runaway gap down in late October (after Q3/15 results and a Rogers update), ESP has seen fresh 52-week lows and a retest of its longer term support at ~$1.75. We feel technical and fundamental history is repeating itself and would expect a contract announcement to take the stock higher. We would be buyers of weakness on fundamental momentum, as ESP is near the bottom end of its channel, looking for a move higher. Resistance will be tested at its 50- and 200-day moving averages ($2.04 and $2.81, respectively).

Exhibit 17. ESP Technical Chart

Source: Cantor Fitzgerald Canada, Stockcharts.com



APPENDIX 1: MANAGEMENT AND BOARD OF DIRECTORS

Exhibit 18. Management Team

Name Office Previous positions Shares Options

Jaison Dolvane President & CEO

Jaison Dolvane is the CEO of Espial. Jaison co-founded Espial in 1997, and has led the company from a start-up to a global business, has raised over $65 million of financing, transitioned Espial into new markets, drove M&A transactions and led Espial to a successful Initial Public Offering in 2007. Jaison has also led the acquisition and structuring of customer and partner deals with some of the world’s largest consumer electronics, service providers and network vendors. Prior to Espial, Jaison held various roles at Nortel, Bell Northern Research, Entrust Technologies and Corel. Jaison actively speaks and participates at industry events and panels for the broadcast, Pay TV and Smart TV industries. He holds a Bachelor of Computer Science, Business from Carleton University in Ottawa, Canada. Jaison is also a member of the prestigious Young Presidents Organization (YPO), a global network of CEOs and business leaders.

293,748 930,000

Kumanan Yogaratnam

CTO Kumanan Yogaratnam is the CTO of Espial. Kumanan co-founded Espial in 1997 and has been the Chief Architect and technology visionary for the broad range of Espial products. Kumanan has led the creation and delivery of Espial’s world leading, carrier grade and highly scalable client and server products for the Pay TV and Smart TV markets. Kumanan has been at the front of major industry changes actively participating in setting standards for Java & HTML5 in set-top boxes and smartphones (the basis for Android today), Digital Video Broadcast systems, Internet Protocol TV or IPTV, and HTML5 Web standards. Recently, Kumanan has also been instrumental in re-defining an IP TV architecture and Espial product suite for high performance cloud-based user experiences using HTML5 on set-top boxes, smart-phones and tablets. This cloud centric service vision for Pay TV operators is critical to enable long term service provider sustainability. Kumanan leads the Espial technology, product direction and participation and contributions to the Comcast RDK initiative, an open source set-top box operating system being adopted by major cable and telecom service providers globally. Kumanan holds a Masters & Bachelor of Computer Science from Carleton University in Ottawa, Canada.

358,126 720,000

Carl Smith CFO Carl Smith joined Espial as Chief Financial Officer on March 24, 2008. Mr. Smith is a Chartered Accountant, has more than 18 year’s experience in finance and executive leadership positions in public and private high technology companies. Most recently, from 2003 to March 2008 he held the position of Chief Financial Officer at Nuvo Network Management, a public company traded on the TSXV that was acquired by a leading US based software company. Prior to Nuvo, Mr. Smith served as CFO of OZ Optics and held senior finance roles at JetForm Corporation. Mr. Smith holds a Bachelor of Commerce degree from the University of Windsor.

166,643 395,000

Source: Cantor Fitzgerald Canada, Company Documents, www.sedi.ca



Exhibit 19. Board of Directors

Name Office Principal occupation Shares Options

Jaison Dolvane Director See bio in management section above. See above

Kumanan Yogaratnam

Director See bio in management section above. See above

Peter Seeligsohn Chairman and Director

Peter Seeligsohn is the President of KAJS Group Inc., an independent organisation pursuing the acquisition of or control positions in established businesses and the provision of strategy, operations and financing advice to private and public companies. Prior to this Mr. Seeligsohn was a General Partner at VG Partners Inc., which he joined in 1997. Prior to this he was in Corporate Finance at a mid-sized accounting firm, which was subsequently acquired by Deloitte LLP. Peter is a Chartered Accountant CA(SA) and holds Bachelor of Accounting Science (Honours) and Bachelor of Commerce (Accounting) degrees.

4,750 147,898

Tawfiq Arafat Director Tawfiq Arafat is a Partner at Relay Ventures (formerly JLA Ventures). Mr. Arafat joined JLA Ventures in 1998. JLA Ventures was established in 1996 and has raised $315 million over four funds from a diverse group of institutional investors. JLA Ventures invest in early stage companies that focus on digital media and software. Tawfiq's extensive experience in venture capital investing includes evaluating, structuring and executing investments in various sectors of the technology industry and assisting entrepreneurs shape their vision and capital plans into successful long term growth programs. Prior to joining JLA ventures, Tawfiq was employed by Buro Happold, U.K as a consulting engineer overseeing Sheraton Hotels International construction activities in Jordan. Tawfiq received his Honours Bachelor of Science, Civil Engineering degree from University College, London University, U.K. Tawfiq serves as a director of HealthUnity, ecobee, Shoplogix, Leonardo and TIM Group.

4,266,385 60,000

Michael T Hayashi

Director Honored with the Vanguard Award for Science & Technology in 2001, Hayashi led technology and development at Time Warner Cable (TWC) for over 20 years. His contributions include pioneering innovations in digital set-tops and client software, VOD, HD and DVRs. Prior to his retirement from TWC in March 2015, Hayashi oversaw all engineering development activities, including high speed Internet, digital phone, digital video and web development within Time Warner Cable. Most recently, Hayashi was instrumental in the formation of the RDK initiative, a joint venture of Comcast, TWC, and Liberty Global. Prior to joining Time Warner Cable, Hayashi was Vice President of Subscriber Video Products at Scientific-Atlanta (now Cisco) where he launched the earliest digital set-tops, on-screen program guides, and digital music services. He started his career at Pioneer Communications, playing a key role in Warner Cable’s Qube project.

Hayashi graduated from St. Joseph College (Yokohama, Japan) in 1974, earned a B.S. in Engineering from Harvey Mudd College in 1978, and an MBA from The Ohio State University in 1986.

NA 50,000

Michael Lee Director Michael Lee is a General Partner for Rogers Venture Partners where he invests in early stage technology companies, with a focus on IoT, mobile, enterprise SaaS, and Digital Media. Prior to this, Michael served as Chief Strategy Officer for Rogers Communications where he was responsible for strategy development, business development, and strategic partner management for the Rogers Communications group of companies, which include Rogers Cable, Rogers Wireless and Rogers Media. Michael also held the roles of VP, Strategy and Development; and VP Product Management at Rogers Cable. Previous to joining Rogers, he was a founder-entrepreneur in two technology companies. Michael serves as a director of SecureKey, PayLiquid, ScribbleLive, Watchwith and Cognitive Networks.

NA 160,000

Source: Cantor Fitzgerald Canada, Company Documents, www.sedi.ca



APPENDIX 2: FINANCIAL STATEMENTS

Exhibit 20. Income Statement


Income Statement (C$, FYE Dec) 2014 2015 2016E 2017E 2018E 2019E 2020E

Revenue

Software 8,723,977 11,767,217 11,382,216 18,050,114 20,757,631 23,663,699 26,739,980

Professional Services 6,429,023 8,294,954 9,571,870 11,877,794 13,659,463 15,708,383 18,064,640

Support and Maintenance 4,850,757 4,772,521 5,585,468 6,423,289 7,386,782 8,494,799 9,769,019

Total Revenue 20,003,757 24,834,692 26,539,554 36,351,196 41,803,876 47,866,881 54,573,639

Total Cost of Sales 4,297,770 6,372,626 7,695,574 5,089,167 5,852,543 6,701,363 7,640,309

Sales and Marketing 3,991,274 5,041,955 5,678,150 9,087,799 9,614,891 10,736,447 11,460,464

General and Administrative 2,843,586 3,423,686 3,104,471 3,998,632 4,180,388 4,786,688 5,457,364

Research and Development 6,756,521 8,730,666 9,757,102 10,905,359 11,705,085 12,924,058 14,189,146

Restructuring Charges 0 0 0 0 0 0 0

Stock Based Compensation 0 0 345,014 472,566 543,450 622,269 709,457

Depreciation of Property & Equipment 0 0 426,655 539,569 562,874 587,194 612,565

Amortization 645,871 677,108 820,337 887,959 961,155 1,040,385 1,126,147

Total Operating Expenses 14,237,252 17,873,415 20,131,729 25,891,883 27,567,844 30,697,042 33,555,143

Operating Income 1,468,735 588,651 (1,287,750) 5,370,146 8,383,490 10,468,476 13,378,186

Total Other Income 181,967 957,368 1,794,826 3,602,710 5,768,881 8,439,189 11,784,316

EBT 1,650,702 1,546,019 507,076 8,972,856 14,152,371 18,907,664 25,162,502

Income Taxes (478,818) (274,010) (50,708) (897,286) (1,415,237) (1,890,766) (2,516,250)

Net Income (Loss) 1,171,884 1,272,009 456,368 8,075,570 12,737,134 17,016,898 22,646,252

EPS

Basic EPS 0.05 0.03 0.01 0.22 0.34 0.46 0.61

Diluted EPS 0.05 0.03 0.01 0.22 0.34 0.46 0.61

Shares Outstanding

Shares Outstanding, Basic 22,786,909 37,348,057 37,348,057 37,348,057 37,348,057 37,348,057 37,348,057

Shares Outstanding, Diluted 24,572,562 37,348,057 37,348,057 37,348,057 37,348,057 37,348,057 37,348,057

Operating Metrics

Gross Profit 15,705,987 18,462,066 18,843,979 31,262,029 35,951,333 41,165,518 46,933,330

EBITDA 3,170,984 2,907,404 304,256 7,270,239 10,450,969 12,718,324 15,826,355

EBT 1,650,702 1,546,019 507,076 8,972,856 14,152,371 18,907,664 25,162,502

Net Income 1,171,884 1,272,009 456,368 8,075,570 12,737,134 17,016,898 22,646,252



Exhibit 21. Balance Sheet


Balance Sheet (C$, FYE Dec) 2014 2015 2016E 2017E 2018E 2019E 2020E

Current Assets

Cash 18,111,324 49,947,096 43,891,538 60,977,215 74,015,365 91,393,226 114,467,420

Restricted Cash & Short-Term Investments 0 0 0 0 0 0 0

Trade & Other Receivables 3,861,058 8,397,948 14,198,305 5,775,895 6,642,279 7,603,092 8,662,551

Investment Tax Credits Receivable 312,329 413,920 413,920 413,920 413,920 413,920 413,920

Prepaid Expenses & Other Assets 567,853 734,906 732,119 612,183 704,010 805,846 918,137

Total Current Assets 22,852,564 59,493,870 59,235,882 67,779,213 81,775,574 100,216,085 124,462,028

Non-Current Assets

Property and Equipment 727,626 1,062,544 1,112,174 1,160,220 1,210,351 1,262,647 1,317,203

Intangible Assets 1,496,794 1,658,610 1,795,333 1,943,326 2,103,519 2,276,916 2,464,607

Goodwill 3,340,808 3,632,604 3,632,604 3,632,604 3,632,604 3,632,604 3,632,604

Total Assets 28,417,792 65,847,628 65,775,993 74,515,363 88,722,047 107,388,252 131,876,442

Current Liabilities

Trade & Other Payables 2,521,480 3,165,144 3,253,382 2,587,601 2,975,741 3,406,185 3,880,823

Deferred Revenue 3,557,667 3,690,638 2,729,382 3,586,398 4,124,357 4,720,950 5,378,794

Operating Line 0 0 0 0 0 0 0

Short-Term Debt 0 0 0 0 0 0 0

Provisions 0 0 0 0 0 0 0

Total Current Liabilities 6,079,147 6,855,782 5,982,764 6,173,999 7,100,098 8,127,136 9,259,617

Non-Current Liabilities

Term Loan 0 0 0 0 0 0 0

Provisions 275,234 0 0 0 0 0 0

Total Liabilities 6,354,381 6,855,782 5,982,764 6,173,999 7,100,098 8,127,136 9,259,617

Shareholders Equity

Capital Stock 91,072,570 126,583,844 126,583,844 126,583,844 126,583,844 126,583,844 126,583,844

Warrants 928,063 0 0 0 0 0 0

Share Based Payment Reserve 12,986,590 14,059,806 14,404,820 14,877,386 15,420,836 16,043,106 16,752,563

Deficit (82,923,812) (81,651,804) (81,195,436) (73,119,865) (60,382,731) (43,365,833) (20,719,582)

Total Shareholders Equity 22,063,411 58,991,846 59,793,229 68,341,365 81,621,949 99,261,116 122,616,825

Total Liabilities & Shareholders Equity 28,417,792 65,847,628 65,775,993 74,515,363 88,722,047 107,388,252 131,876,442



Exhibit 22. Cash Flow Statement


Cash Flow Statement (C$, FYE Dec) 2014 2015 2016E 2017E 2018E 2019E 2020E

Cash Provided By Operating Activities

Net Income (Loss) 1,171,884 1,272,009 456,368 8,075,570 12,737,134 17,016,898 22,646,252

Amortization of Intangibles 645,869 677,109 820,337 887,959 961,155 1,040,385 1,126,147

Depreciation of Property & Equipment 194,868 262,364 426,655 539,569 562,874 587,194 612,565

Stock Based Compensation Expense 861,510 1,379,281 345,014 472,566 543,450 622,269 709,457

Lease Provision (369,711) (275,234) 0 0 0 0 0

Interest on Loan Payable 57,944 0 0 0 0 0 0

Changes in Non-Cash Working Capital

Trade & Other Receivables (1,803,836) (3,407,479) (5,800,357) 8,422,410 (866,384) (960,813) (1,059,458)

Investment Tax Credits (302) 43,649 0 0 0 0 0

Prepaid Expenses & Other Assets (64,863) (99,347) 2,787 119,936 (91,827) (101,836) (112,291)

Trade & Other Payables 648,975 (174,444) 88,238 (665,781) 388,140 430,444 474,637

Provisions 0 176,526 0 0 0 0 0

Deferred Revenue (495,033) 53,819 (961,256) 857,016 537,960 596,593 657,844

Total Cash Provided By Operating Activities 847,305 (91,747) (4,622,214) 18,709,245 14,772,501 19,231,135 25,055,153

Investing Activities

Purchase of Property & Equipment (383,146) (532,511) (476,285) (587,616) (613,004) (639,490) (667,121)

Purchase of Intangibles (43,265) (95,492) (957,060) (1,035,952) (1,121,348) (1,213,783) (1,313,838)

Business Acquisition 0 (1,721,623) 0 0 0 0 0

Redemption of ST Investments & Restricted Cash 0 0 0 0 0 0 0

Total Cash From Investing Activities (426,411) (2,349,626) (1,433,345) (1,623,568) (1,734,352) (1,853,273) (1,980,959)

Financing Activities

Proceeds from Loan 0 0 0 0 0 0 0

Operating Line (Repayment) 17,310 0 0 0 0 0 0

Repayment of Loan (2,500,000) 0 0 0 0 0 0

Issue of Equity 11,500,092 32,616,688 0 0 0 0 0

Cash Acquired on Acquisition & Deferred revenue (935,206) 0 0 0 0 0 0

Total Cash From Financing Activities 10,283,337 34,277,145 0 0 0 0 0

Effect of Exchange Rates on Cash 0 0 0 0 0 0 0

Net Increase in Cash 10,704,231 31,835,772 (6,055,558) 17,085,677 13,038,149 17,377,862 23,074,194

Beginning Cash 7,407,093 18,111,324 49,947,096 43,891,538 60,977,215 74,015,365 91,393,226

Ending Cash 18,111,324 49,947,096 43,891,538 60,977,215 74,015,365 91,393,226 114,467,420



This page is intentionally left blank.



DISCLAIMERS AND DISCLOSURE

Disclaimers

The opinions, estimates and projections contained in this report are those of Cantor Fitzgerald Canada Corporation (“CFCC”) as of the date hereof and are subject to change without notice. CFCC makes every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and that contain information and opinions that are accurate and complete; however, CFCC makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to CFCC that is not herein.

This report is provided, for informational purposes only, to institutional investor clients of CFCC, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. This report is issued and approved for distribution in Canada, CFCC, a member of the Investment Industry Regulatory Organization of Canada ("IIROC"), the Toronto Stock Exchange and the CIPF. This report has not been reviewed or approved by Cantor Fitzgerald & Co. (CF & Co.), a member of FINRA. This report is intended for distribution in the United States only to Major Institutional Investors (as such term is defined in SEC 15a-6 and Section 15 of the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Major Institutional Investors receiving this report should effect transactions in securities discussed in the report through CF & Co.

Non US Broker Dealer 15a-6 disclosure: This report is being distributed by (CF Canada/CF Europe/CF Hong Kong) in the ¢United States and is intended for distribution in the United States solely to “major U.S. institutional investors” (as such term is defined in Rule15a-6 of the U.S. Securities Exchange Act of 1934 and applicable interpretations relating thereto) and is not intended for the use of any person or entity that is not a major institutional investor. This material is intended solely for institutional investors and investors who Cantor reasonably believes are institutional investors. It is prohibited for distribution to non-institutional clients including retail clients, private clients and individual investors. Major Institutional Investors receiving this report should effect transactions in securities discussed in this report through Cantor Fitzgerald & Co. This report has been prepared in whole or in part by research analysts employed by non-US affiliates of Cantor Fitzgerald & Co that are not registered as broker-dealers in the United States. These non-US research analysts are not registered as associated persons of Cantor Fitzgerald & Co. and are not licensed or qualified as research analysts with FINRA or any other US regulatory authority and, accordingly, may not be subject (among other things) to FINRA’s restrictions regarding communications by a research analyst with a subject company, public appearances by research analysts, and trading securities held by a research analyst account.

Potential conflicts of interest

The author of this report is compensated based in part on the overall revenues of CFCC, a portion of which are generated by investment banking activities. CFCC may have had, or seek to have, an investment banking relationship with companies mentioned in this report. CFCC and/or its officers, directors and employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. Although CFCC makes every effort possible to avoid conflicts of interest, readers should assume that a conflict might exist, and therefore not rely solely on this report when evaluating whether or not to buy or sell the securities of subject companies.

Disclosures as of February 29, 2016

CFCC has not provided investment banking services or received investment banking related compensation from Espial Group Inc. within the past 12 months.

The analyst responsible for this research report does not have, either directly or indirectly, a long or short position in the shares or options of Espial Group Inc.

The analyst responsible for this report has visited the material operations of Espial Group Inc. No payment or reimbursement was received for the related travel costs.

Analyst certification

The research analyst whose name appears on this report hereby certifies that the opinions and recommendations expressed herein accurately reflect his personal views about the securities, issuers or industries discussed herein.

Definitions of recommendations

BUY: The stock is attractively priced relative to the company’s fundamentals and we expect it to appreciate significantly from the current price over the next 6 to 12 months.

BUY (Speculative): The stock is attractively priced relative to the company’s fundamentals, however investment in the security carries a higher degree of risk.

HOLD: The stock is fairly valued, lacks a near term catalyst, or its execution risk is such that we expect it to trade within a narrow range of the current price in the next 6 to 12 months. The longer term fundamental value of the company may be materially higher, but certain milestones/catalysts have yet to be fully realized.

SELL: The stock is overpriced relative to the company’s fundamentals, and we expect it to decline from the current price over the next 6 to 12 months.

TENDER: We believe the offer price by the acquirer is fair and thus recommend investors tender their shares to the offer.

UNDER REVIEW: We are temporarily placing our recommendation under review until further information is disclosed.

Member-Canadian Investor Protection Fund. Customers' accounts are protected by the Canadian Investor

Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available upon request