Consolidated financial statements of
Sangoma Technologies Corporation
June 30, 2014 and 2013
Sangoma Technologies Corporation
June 30, 2014 and 2013
Table of contents
Independent Auditor’s Report ............................................................................................................................ 1-2
Consolidated statements of financial position ....................................................................................................... 3
Consolidated statements of comprehensive income (loss) .................................................................................. 4
Consolidated statements of changes in equity ..................................................................................................... 5
Consolidated statements of cash flows ................................................................................................................. 6
Notes to the consolidated financial statements ................................................................................................ 7-31
Deloitte LLP
5140 Yonge Street
Suite 1700
Toronto ON M2N 6L7
Canada
Tel: 416-601-6150
Fax: 416-601-6151
www.deloitte.ca
Independent Auditor’s Report
To the Shareholders of
Sangoma Technologies Corporation
We have audited the accompanying consolidated financial statements of Sangoma Technologies
Corporation, which comprise the consolidated statements of financial position as at June 30, 2014 and
2013, and the consolidated statements of comprehensive income (loss), consolidated statements of
changes in equity and consolidated statements of cash flows for the years then ended, and a summary of
significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide
a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Sangoma Technologies Corporation as at June 30, 2014 and 2013 and its financial
performance and its cash flows for the years then ended in accordance with International Financial
Reporting Standards.
Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants
October 23, 2014
Page 2
Sangoma Technologies Corporation
Consolidated statements of financial position
as at June 30, 2014, and 2013
(In Canadian dollars)
Assets
Current assets
Cash and cash equivalents (Note 8)
Trade receivables (Note 9)
Inventories (Note 4)
Investment tax credits receivable
Sales tax receivables
Investment in Vegastream Private Networks Limited (Note 16)
Other current assets
Non-current assets
Deferred income tax assets (Note 11)
Property, plant and equipment (Note 5)
Development costs (Note 7)
Intangible assets (Note 6)
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Provisions (Note 17)
Income tax payable
Current portion of term loan
Deferred revenue
Shareholders’ equity
Share capital (Note 10(i), 14)
Contributed surplus (Note 10(i), 14)
Deficit
Approved by the Board
(Signed) Al Guarino Director
(Signed) Yves Laliberte Director
2014
$
2013
$
4,981,571
5,309,728
2,587,634
367,874
44,422
10,665
115,348
13,417,242
4,012,126
4,963,684
3,035,704
321,794
28,854
10,665
47,677
12,420,504
944,282
349,553
2,745,227
998,514
887,581
333,451
2,539,418
1,172,642
18,454,818
17,353,596
1,705,802
43,318
21,598
-
300,226
2,070,944
1,628,555
23,318
-
17,035
146,514
1,815,422
15,333,326
1,730,025
(679,477)
16,383,874
18,454,818
15,333,326
1,621,375
(1,416,527)
15,538,174
17,353,596
The accompanying notes to the consolidated financial statements
are an integral part of this financial statement
Page 3
Sangoma Technologies Corporation
Consolidated statements of comprehensive income (loss)
years ended June 30, 2014, and 2013
(In Canadian dollars)
Revenue (Note 13)
Cost of sales
Gross profit
Expenses
Sales and marketing
Research and development
General and administration
Foreign currency exchange gain
Income before the undernoted
Interest income (Note 8)
Restructuring expense
Impairment of intangible asset (Note 6)
Impairment of goodwill (Note 3(i))
Income (loss) before income tax
Provision for (recovery of) income taxes
Current (Note 11)
Deferred (Note 11)
Net income (loss) and total comprehensive income (loss)
Earnings (loss) per share
Basic (Note 10(iii))
Diluted (Note 10(iii))
Weighted average number of shares outstanding (Note 10(iii))
Basic
Diluted
2014
$
2013
$
13,829,082
4,574,556
9,254,526
12,950,178
4,465,551
8,484,627
3,359,401
2,594,514
2,416,295
(56,472)
8,313,738
2,777,713
2,827,648
3,080,595
(141,024)
8,544,932
940,788
(60,305)
(26,809)
-
-
-
(26,809)
(26,907)
198,000
1,056,088
3,543,912
4,771,093
967,597
(4,831,398)
150,178
80,369
737,050
6,313
(503,054)
(4,334,657)
0.026
0.026
(0.148)
(0.148)
28,829,809
28,829,809
29,261,162
29,261,162
The accompanying notes to the consolidated financial statements
are an integral part of this financial statement
Page 4
Sangoma Technologies Corporation
Consolidated statement of changes in equity
years ended June 30, 2014 and 2013
(In Canadian dollars)
Number of
shares
Share
capital
$
Contributed
surplus
$
Retained
earnings
$
Total
equity
$
Balance, June 30, 2012
29,538,809
15,712,274
1,277,393
2,918,130
19,907,797
Net income/(loss) and total comprehensive income/(loss)
Share-based payment (Note 10(ii))
-
-
-
-
Normal course issuer bid redemption (Note 10(i))
(709,000)
(378,948)
-
(4,334,657)
(4,334,657)
193,789
150,193
-
-
193,789
(228,755)
Balance, June 30, 2013
28,829,809
15,333,326
1,621,375
(1,416,527)
15,538,174
Net income/(loss) and total comprehensive income/(loss)
Share-based payment (Note 10(ii))
Normal course issuer bid redemption (Note 10(i))
-
-
-
-
-
-
-
737,050
108,650
-
-
-
737,050
108,650
-
Balance, June 30, 2014
28,829,809
15,333,326
1,730,025
(679,477)
16,383,874
The accompanying notes to the consolidated financial statements
are an integral part of this financial statement
Page 5
Sangoma Technologies Corporation
Consolidated statements of cash flows
years ended June 30, 2014 and 2013
(In Canadian dollars)
Operating activities
Net income (loss) for the period
Adjustments for
Depreciation of property, plant and equipment (Note 5)
Amortization of intangible assets (Note 6)
Amortization of capitalized development costs (Note 7)
Income tax expense (recovery)
Income taxes paid
Share-based expense (Note 10(ii))
Impairment of intangible asset (Note 6)
Impairment of goodwill (Note 3(i))
Changes in item of working capital
Trade receivables
Inventories (Note 4)
Other current assets
Sales tax receivables
Accounts payable and accrued liabilities
Provisions (Note 17)
Deferred revenue
Income tax payable
Investment tax credits receivables
Investing activities
Purchase of property, plant and equipment (Note 5)
Development costs
Financing activities
Repayment of term loan
Normal course issuer bid redemption
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2014
$
2013
$
737,050
(4,334,657)
74,472
174,128
1,673,410
230,547
8,632
108,650
-
-
(346,044)
448,070
(67,671)
(15,568)
77,247
20,000
153,712
21,598
(46,080)
3,252,153
87,219
407,393
1,747,593
(496,741)
-
193,789
1,056,088
3,543,912
(468,666)
5,133
327,856
188,570
(473,043)
23,318
43,552
-
239,390
2,090,706
(90,574)
(2,175,099)
(2,265,673)
(42,110)
(2,790,468)
(2,832,578)
(17,035)
-
(17,035)
(34,072)
(228,755)
(262,827)
969,445
4,012,126
4,981,571
(1,004,699)
5,016,825
4,012,126
The accompanying notes to the consolidated financial statements
are an integral part of this financial statement
Page 6
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
1.
General information
Founded in 1984, Sangoma Technologies Corporation (“Sangoma” or the “Company”) is publicly traded
on the TSX Venture Exchange (TSX VENTURE: STC). The Company was incorporated in Canada, its
legal name is Sangoma Technologies Corp. and its operating subsidiary is Sangoma Technologies Inc.
Sangoma is a leading provider of hardware and software components that enable or enhance Internet
Protocol Communications Systems for both telecom and datacom applications. Enterprises, small to
medium sized businesses (“SMBs”) and telecom operators in over 150 countries rely on Sangoma’s
technology as part of their mission critical infrastructures. The product line includes data and telecom
boards for media and signal processing, as well as gateway appliances and software.
The Company is domiciled in Ontario, Canada. The address of the Company’s registered office and its
principal place of business is 100 Renfrew Dr., Suite 100, Markham, Ontario, L3R 9R6.
2.
Significant accounting policies
(i)
Statement of compliance
The consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”).
(ii)
Basis of preparation
The financial statements are prepared on a going concern basis, under the historical cost
convention except for the revaluation of certain financial assets and liabilities to fair value. All
financial information is presented in Canadian dollars, except per share amounts or as otherwise
noted. The Company has elected to present the net income (loss) and comprehensive income
(loss) in a single financial statement titled consolidated statement of comprehensive income
(loss).
The significant accounting policies adopted in the preparation of the consolidated financial
statements are set out below.
(iii)
Basis of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary Sangoma Technologies Inc.
Subsidiaries are entities controlled by the Company. Control is defined as the power to govern
the financial and operating policies of an entity so as to obtain benefits from its activities.
Subsidiaries are included in the consolidated financial statements from the date control is
obtained until the date control ceases. All intercompany balances, transactions, income and
expenses have been eliminated on consolidation.
(iv)
Inventories
Parts and finished goods are stated at the lower of cost and net realizable value. Inventory cost
includes all expenses directly attributable to the manufacturing process, which include the cost of
materials and labor, as well as suitable portions of related production overheads, based on
normal operating capacity. Costs of ordinary interchangeable items are assigned using the first in,
first out method. Net realizable value is the estimated selling price in the ordinary course of
business less any applicable selling expenses.
(v)
Revenue
Revenue comprises revenue from the sale of goods and the rendering of services. Revenue is
measured at the fair value of the consideration received or receivable for the gross inflow of
economic benefits during the period, arising in the ordinary course of the Company’s activities.
Revenue is recognized when it is probable that the economic benefits will flow to the Company.
Page 7
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
2.
Significant accounting policies (continued)
(v)
Revenue (continued)
Sale of goods (hardware and software)
For sales of hardware, the recognition criteria are generally met at the time the product is shipped
to the customer. Depending on the delivery conditions, title and risk have passed to the customer
at that point and acceptance of the product, when contractually required, has been obtained,
either via formal acceptance by the customer or lapse of rejection period.
Revenue that consists of license fees relating to software licenses that do not require significant
modification or customization of software or where services are not essential to the functionality
of the software are recognized when a contract with a customer has been executed, delivery and
acceptance of the software have occurred, the license fee is fixed and determinable, and
collection of the related receivable is deemed probable by management.
Rendering of services
Services comprise after-sales service and maintenance and consulting. The Company provides
support to its customers and the amount of the selling price associated with the servicing
agreement is deferred and recognized as revenue over the period during which the service is
performed. This deferred revenue is included in current liabilities. Revenues relating to
engineering services are recognized as the services are rendered. Cash received in advance of
revenue being recognized is classified as deferred revenue.
The Company also enters into transactions that represent multiple-element arrangements, which
may include any combination of equipment and service. These multiple element arrangements
are assessed to determine whether they can be sold separately in order to determine whether
they can be treated as more than one unit of accounting or element for the purpose of revenue
recognition. When there are multiple elements or units of accounting in an arrangement, the
arrangement consideration is allocated to the separate units of accounting or elements on a
relative fair value basis. If elements cannot be sold separately, revenue recognition is deferred
until all elements have been delivered. The revenue recognition policy described above is then
applied to each unit of accounting.
(vi) Cost of sales
Cost of product sales includes the cost of finished goods inventory and costs related to shipping
and handling.
(vii) Foreign currency
The Company’s presentation currency is the Canadian Dollar (“C$”). The functional currency of
the Company and its subsidiary is the Canadian Dollar.
In preparing the consolidated financial statements, transactions in currencies other than the
Company’s functional currency are recognized at the rates of exchange prevailing at the dates of
the transactions. At the end of each reporting period, monetary items denominated in foreign
currencies are re-translated at the rates prevailing at that date. Non-monetary items that are
measured in terms of historical cost in a foreign currency are not re-translated.
Exchange differences are recognized in profit or loss in the period in which they arise.
(viii)
Interest income
Interest income from financial assets is recognized when it is probable that the economic benefits
will flow to the Company and the amount of income can be measured reliably. Interest income is
accrued on the basis of time that has passed, by reference to the principal outstanding and at the
effective interest rate applicable.
Page 8
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
2.
Significant accounting policies (continued)
(ix)
Share-based payments
The Company grants stock options to certain employees. Stock options vest over and expire after
various periods of time, usually 25% of the options vest on the first anniversary of the grant and
the remainder vest in equal amounts every 3 months thereafter until the fifth anniversary of the
commencement date. The fair value of each tranche is measured at the date of grant using the
Black-Scholes option pricing model. Details regarding the determination of the fair value of
equity-settled share-based payment transactions are set out in Note 10(ii).
Share-based compensation expense is recognized over the tranche’s vesting period based on
the number of awards expected to vest. The number of awards expected to vest is reviewed at
least annually, with any impact being recognized immediately.
(x)
Income taxes and deferred taxes
The income tax provision comprises current and deferred tax. Income tax is recognized in the
statement of comprehensive income (loss) except to the extent that it relates to items recognized
directly in equity, in which case the income tax is also recognized directly in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates
enacted, or substantively enacted, at the end of the reporting period, and any adjustment to tax
payable in respect of previous years.
Deferred tax is recognized in respect of temporary differences arising between the tax bases of
assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred
income tax is determined on a non-discounted basis using tax rates and laws that have been
enacted or substantively enacted at the statement of financial position date and are expected to
apply when the asset is realized or liability is settled. Deferred income tax assets are recognized
for deductible temporary differences, unused tax losses and other income tax deductions to the
extent that it is probable the Company will have taxable income against which those deductible
temporary differences, unused tax losses and other income tax deductions can be utilized. The
extent to which deductible temporary differences, unused tax losses and other income tax
deductions are expected to be realized is reassessed at the end of each reporting period.
In a business combination, temporary differences arise as a result of differences in the fair values
of identifiable assets and liabilities acquired and their respective tax bases. Deferred income tax
assets and liabilities are recognized for the tax effects of these differences. Deferred income tax
assets and liabilities are not recognized for temporary differences arising from goodwill or from
the initial recognition of assets and liabilities acquired in a transaction other than a business
combination which do not affect either accounting or taxable income or loss.
(xi)
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment
losses. Cost includes expenditures that are directly attributable to the acquisition of the asset.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset,
as appropriate, only when it is probable that future economic benefits associated with the item will
flow to the Company and the cost can be measured reliably. The carrying amount of a replaced
asset is derecognized when replaced. Repairs and maintenance costs are charged to the
statement of comprehensive income (loss) during the period in which they are incurred.
Depreciation is calculated at 20% of the declining balance for all classes except for depreciation
for leasehold improvements which is calculated on a straight-line basis over the shorter of the
lease term or useful life. Residual values, method of depreciation and useful lives of the assets
are reviewed annually and adjusted, if required.
Gains and losses on disposals of property, plant and equipment are determined by comparing the
proceeds with the carrying amount of the asset and are included as part of other gains and losses
in the statement comprehensive of income (loss).
Page 9
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
2.
Significant accounting policies (continued)
(xii)
Intangible assets
Intangible assets with finite lives that are acquired separately are measured on initial recognition
at cost, which comprises its purchase price plus any directly attributable costs of preparing the
asset for its intended use. Following initial recognition, such intangible assets are carried at cost
less any accumulated amortization on a straight-line basis over 10 years for copyright to software,
straight-line basis over 10 years for purchased technology, and 3 years for websites. Amortization
expense is included in the statement of comprehensive income (loss) in general and
administration expense.
The estimated useful life and amortization method are reviewed annually, with the effect of any
change in estimate being accounted for on a prospective basis. These assets are subject to
impairment testing as described below in Note 2(xv).
(xiii) Research and development expenditures
The Company qualifies for certain investment tax credits related to its research and development
activities. Research costs are expensed as incurred and are reduced by related investment tax
credits, which are recognized when it is probable that they will be realized.
Costs that are directly attributable to the development phase of new products are recognized as
intangible assets and amortized over three years provided they meet the following recognition
requirements:
Completion of the intangible asset is technically feasible so that it will be available for use
or sale.
The Company intends to complete the intangible asset and use or sell it.
The Company has the ability to use or sell the intangible asset.
The intangible asset will generate probable future economic benefits. Among other things, this
requires that there is a market for the output from the intangible asset or for the intangible
asset itself, or, if it is to be used internally, the asset will be used in generating such benefits.
There are adequate technical, financial and other resources to complete the development and
to use or sell the intangible asset.
The expenditure attributable to the intangible asset during its development can be measured
reliably.
Development costs not meeting these criteria for capitalization are expensed as incurred.
Directly attributable costs include employee costs incurred on software development along with
an appropriate portion of relevant overheads and borrowing costs (if any). Internally generated
software development recognized as intangible assets are subject to the same subsequent
measurement method as externally acquired software licenses. These assets are subject to
impairment testing as described below in Note 2(xv).
Any gain or loss arising on the disposal of an intangible asset is determined as the difference
between the proceeds and the carrying amount of the asset, and is recognized in profit or loss
within “other income” or “other expenses”.
(xiv) Goodwill
Goodwill represents the excess of the acquisition cost in a business combination over the fair
value of the Company’s share of the identifiable net assets acquired. Goodwill is carried at cost
less accumulated impairment losses. As of June 30, 2014 the Company had no Goodwill.
Page 10
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
2.
Significant accounting policies (continued)
(xv)
Impairment testing of goodwill, other intangible assets and property, plant and equipment
For purposes of assessing impairment under IFRS, assets are grouped at the lowest levels for
which there are largely independent cash inflows (cash-generating units). Sangoma has only one
cash generating unit and intangible assets not yet available for use are tested for impairment at
least annually. All other long-lived assets and finite life intangible assets are tested for impairment
whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable.
An impairment loss is recognized for the amount by which the asset’s or cash-generating unit’s
carrying amount exceeds its recoverable amount, which is the higher of fair value less costs to
sell or value-in-use. To determine the value-in-use, management estimates expected future cash
flows from the cash-generating unit and determines a suitable pre-tax discount rate in order to
calculate the present value of those cash flows. The data used for impairment testing procedures
are directly linked to the Company’s latest approved budget, adjusted as necessary to exclude
the effects of future reorganizations and asset enhancements.
Discount factors have been determined for the cash-generating unit and reflect their respective
risk profiles as assessed by management.
Impairment losses for the cash-generating unit reduce first the carrying amount of any goodwill
allocated to that cash-generating unit, with any remaining impairment loss charged pro rata to the
other assets in the cash-generating unit. In allocating an impairment loss, the Company shall not
reduce the carrying amount of an asset below the highest of its fair value less costs of disposal or
its value in use and zero.
With the exception of goodwill, all assets are subsequently reassessed for indications that an
impairment loss previously recognized may no longer exist. An impairment charge is reversed if
the assets’ recoverable amount exceeds its carrying amount only to the extent of the new
carrying amount doesn’t exceed the carrying value of the asset had it not originally been
impaired.
(xvi) Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party to the
contractual provisions of the instrument. Financial assets are derecognized when the rights to
receive cash flows from the assets have expired or have been transferred and the Company has
transferred substantially all risks and rewards of ownership.
Financial assets and liabilities are offset and the net amount reported in the statement of financial
position when there is a legally enforceable right to offset the recognized amounts and there is an
intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
Page 11
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
2.
Significant accounting policies (continued)
(xvi) Financial instruments (continued)
At initial recognition, the Company classifies its financial instruments in the following categories
depending on the purpose for which the instruments were acquired:
(i) Financial assets and liabilities at fair value through profit or loss
A financial asset or liability is classified in this category if acquired principally for the purpose
of selling or repurchasing in the short-term. Derivatives are also included in this category
unless they are designated as hedges.
Financial instruments are recognized initially and subsequently at fair value. Transaction
costs are expensed in the statement of comprehensive income (loss). Gains and losses
arising from changes in fair value are presented in the statement of comprehensive income
(loss) within other gains and losses in the period in which they arise. Financial assets and
liabilities at fair value through profit or loss are classified as current except for the portion
expected to be realized or paid beyond twelve months of the statement of financial position
date, which are classified as non-current.
(ii) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. The Company’s loans and receivables are
comprised of trade receivables, investment tax credit receivable, sales tax receivables and
cash and cash equivalents, and are included in current assets due to their short-term nature.
Loans and receivables are initially recognized at the amount expected to be received less,
when material, a discount to reduce the loans and receivables to fair value. Subsequently,
loans and receivables are measured at amortized cost using the effective interest method
less a provision for impairment.
(iii) Financial liabilities at amortized cost
Financial liabilities at amortized cost include accounts payable and accrued liabilities and
term loan. Trade payables are initially recognized at the amount required to be paid less,
when material, a discount to reduce the payables to fair value. Subsequently, trade payables
are measured at amortized cost using the effective interest method. The term loan was
recognized initially at fair value, net of any transaction costs incurred, and subsequently at
amortized cost using the effective interest method.
Financial liabilities are classified as current liabilities if payment is due within twelve months.
Otherwise, they are presented as non-current liabilities.
The Company has classified its financial instruments as follows:
Asset/liability
Classification
Cash and cash equivalents
Investment tax credits receivable
Sales tax receivables
Trade receivables
Accounts payable and accrued liabilities
Term loan
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Other liabilities
Other liabilities
Measurement
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Page 12
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
2.
Significant accounting policies (continued)
(xvii)
Impairment of financial assets
At each reporting date, the Company assesses whether there is objective evidence that a
financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss,
as follows:
(i) Financial assets carried at amortized cost
The loss is the difference between the amortized cost of the loan or receivable and the
present value of the estimated future cash flows, discounted using the instrument’s original
effective interest rate. The carrying amount of the asset is reduced by this amount either
directly or indirectly through the use of an allowance account.
Impairment losses on financial assets carried at amortized cost are reversed in subsequent
periods if the amount of the loss decreases and the decrease can be related objectively to
an event occurring after the impairment was recognized.
(xviii) Provisions
Provisions represent liabilities to the Company for which the amount or timing is uncertain.
Provisions are recognized when the Company has a present legal or constructive obligation as
a result of past events, it is probable that an outflow of resources will be required to settle the
obligation, and the amount can be reliably estimated. Provisions are not recognized for future
operating losses. Where material, provisions are measured at the present value of the expected
expenditures to settle the obligation using a discount rate that reflects current market
assessments of the time value of money and the risks specific to the obligation. The increase in
the provision due to passage of time is recognized as interest expense.
(xix) Earnings per share
Basic earnings per share is computed by dividing the net income (loss) available to common
shareholders by the weighted average number of shares outstanding during the reporting period.
Diluted earnings per share is computed similar to basic earnings per share except that the
weighted average number of shares outstanding are increased to include additional shares for
the assumed exercise of stock options, if dilutive. The average number of shares is calculated by
assuming that outstanding conversions were exercised and that the proceeds from such
exercises were used to acquire common shares at the average market price during the reporting
period.
(xx) Business combination
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The
cost of the business combination is measured as the aggregate of the fair values (at the date of
acquisition) of the asset acquired, liabilities incurred or assumed, and equity instruments issued
by the Company in exchange for control of the acquiree. Acquisition costs are recognized in the
statement of comprehensive income (loss) as incurred unless they relate to the issuance of debt
or equity securities.
Page 13
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
2.
Significant accounting policies (continued)
(xxi)
Investment tax credits
Investment tax credits (“ITCs”) are recognized where there is reasonable assurance that the ITCs
will be received and all attached conditions will be complied with. When the ITCs relates to an
expense item, it is netted against the related expense. Where the ITCs relates to an asset, it
reduces the carrying amount of the asset. The ITCs is then recognized as income over the useful
life of a depreciable asset by way of a reduced depreciation charge. The Company is actively
engaged in scientific research and development (“R&D”) and, accordingly, has previously filed for
ITC refunds under both the Canadian federal and Ontario provincial Scientific Research and
Experimental Development (“SR&ED”) tax incentive programs. The ITCs recorded in the
accounts are based on management’s interpretation of the Income Tax Act of Canada, provisions
which govern the eligibility of R&D costs. The claims are subject to review by the Canada
Revenue Agency and the Minister of Revenue for Ontario before the refunds can be released. To
the extent that collection is reasonably assured, ITCs are recorded as a reduction to the
underlying expense or asset to which the ITCs is attributable.
(xxii) New and revised standards and interpretations adopted as at January 1, 2013
IFRS 7, “Financial Instruments: Disclosure” (amendment);
IFRS 10, “Consolidated Financial Statements” (new);
IFRS 11, “Joint Arrangements” (new);
IFRS 12, “Disclosure of Interests in Other Entities” (new); and
IFRS 13, “Fair Value Measurement” (new).
The adoption of these new and revised standards and interpretations did not have a significant
impact on the Company’s consolidated financial statements.
(xxiii) Standards, amendments and interpretations to existing standards that are not yet effective and
have not been adopted by the Company
At the date of authorization of these consolidated financial statements, certain new standards,
amendments and interpretations to existing standards have been issued but are not yet effective,
and have not been adopted early by the Company.
IFRS 9, “Financial instruments” (“IFRS 9”) was issued by the IASB in November 2009 and will
replace IAS 39, “Financial instruments: recognition and measurement” (IAS 39). IFRS 9 replaces
the multiple rules in IAS 39 with a single approach to determine whether a financial asset is
measured at amortized cost or fair value and a new mixed measurement model for debt
instruments having only two categories: amortized cost and fair value. The approach in IFRS 9 is
based on how an entity manages its financial instruments in the context of its business model
and the contractual cash flow characteristics of the financial assets. This standard also requires a
single impairment method to be used, replacing the multiple impairment methods in IAS 39.
In December 2011, the IASB issued amendments to IFRS 9 that also provide relief from the
requirement to restate comparative financial statements for the effect of applying IFRS 9 which
was originally limited to companies that chose to apply IFRS 9 prior to 2012. Alternatively,
additional transition disclosures will be required to help investors understand the effect that the
initial application of IFRS 9 has on the classification and measurement of financial instruments. In
November 2013, the IASB issued amendments to IFRS 9 deferring the mandatory effective date,
which has not yet been finalized; however early adoption is permitted. The Company is currently
evaluating the impact of this standard and amendments on its consolidated financial statements.
IFRS 9, “Financial instruments” or IAS 39, “Financial instruments: recognition and measurement”.
The amendments to IFRS 10 are effective for annual periods beginning on or after January 1,
2014. The adoption of this standard is not expected to have a significant impact on the
Company’s consolidated financial statements.
Page 14
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
2.
Significant accounting policies (continued)
(xxiii) Standards, amendments and interpretations to existing standards that are not yet effective and
have not been adopted by the Company (continued)
IFRS 10, “Consolidated financial statements” (“IFRS 10”) was amended by the IASB in October
2012. The amendments introduce an exception for investment entities to the principle that all
subsidiaries are consolidated. The amendments define an investment entity and require an
investment entity to measure subsidiaries at fair value through profit or loss in accordance with
IFRS 9, “Financial instruments” or IAS 39, “Financial instruments: recognition and measurement”.
The amendments to IFRS 10 are effective for annual periods beginning on or after January 1,
2014. The adoption of this standard is not expected to have a significant impact on the Company’s
consolidated financial statements.
IFRS 12, “Disclosure of interests in other entities” (“IFRS 12”) was amended by the IASB in
October 2012. The amendments add disclosure requirements for investment entities as defined in
IFRS 10, “Consolidated financial statements”. The amendments to IFRS 12 are effective for
annual periods beginning on or after January 1, 2014. The adoption of this standard is not
expected to have a significant impact on the Company’s consolidated financial statements.
IFRS 15, “Revenue from contracts and customers” (“IFRS 15”) was issued by the IASB on
May 28, 2014, and will replace IAS 18, revenue, IAS 11, construction contracts, and related
interpretations on revenue. IFRS 15 sets out the requirements for recognizing revenue that apply
to all contracts with customers, except for contracts that are within the scope of the standards on
leases, insurance contracts and financial instruments. IFRS 15 uses a control based approach to
recognize revenue which is a change from the risk and reward approach under the current
standard. Companies can elect to use either a full or modified retrospective approach when
adopting this standard and it is effective for annual periods beginning on or after January 1, 2017.
The Company is currently evaluating the impact of IFRS 15 on its consolidated financial
statements.
IAS 36, “Impairment of assets” (“IAS 36”) was amended by the IASB in May 2013. The
amendments require the disclosure of the recoverable amount of impaired assets when an
impairment loss has been recognised or reversed during the period and additional disclosures
about the measurement of the recoverable amount of impaired assets when the recoverable
amount is based on fair value less costs of disposal, including the discount rate when a present
value technique is used to measure the recoverable amount. The amendments to IAS 36 are
effective for annual periods beginning on or after January 1, 2014. The adoption of this standard is
not expected to have a significant impact on the Company’s consolidated financial statements.
IAS 39, “Financial instruments: recognition and measurement” (“IAS 39”) was amended by the
IASB in June 2013. The amendments clarify that novation of a hedging derivative to a clearing
counterparty as a consequence of laws or regulations or the introduction of laws or regulations
does not terminate hedge accounting. The amendments to IAS 39 are effective for annual periods
beginning on or after January 1, 2014. The adoption of this standard is not expected to have a
significant impact on the Company’s consolidated financial statements.
IFRIC 21 - Levies was issued in May 2013 and is an interpretation of IAS 37 - Provisions,
Contingent Liabilities and Contingent Assets. The interpretation clarifies the obligating event that
gives rise to a liability to pay a levy. IFRIC 21 is effective for periods beginning on or after
January 1, 2014. The Company is currently evaluating the impact of this interpretation on its
consolidated financial statements.
Page 15
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
3.
Significant accounting judgments, estimates and uncertainties
The preparation of consolidated financial statements in accordance with IFRS requires management to
make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and notes to the consolidated financial statements. These estimates are based on
management’s best knowledge of current events and actions the Company may undertake in the future.
Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on
an ongoing basis. Revisions to the accounting estimates are recognized in the period in which the
estimates are revised. Significant areas requiring the Company to make estimates include goodwill
impairment testing and recoverability of assets, business combinations, income taxes, estimated useful
life of long-lived assets, internally generated development costs, the fair value of share-based payments,
allowance for doubtful accounts, inventory obsolescence, and warranty provision. These estimates and
judgments are further discussed below:
(i)
Intangible asset impairment testing and recoverability of assets
Sangoma has a single cash-generating unit and reviews the value in use versus the carrying
value both in total and for each of the individual assets. The recoverable amount of the cash-
generating unit was estimated based on an assessment of value in use using a discounted cash
flow approach. The approach uses cash flow projections based upon a financial forecast
approved by management and the Board of Directors, covering a five year period. Cash flows for
the years thereafter are extrapolated using the estimated terminal growth rate. The risk premiums
expected by market participants related to uncertainties about the industry and assumptions
relating to future cash flows may differ or change quickly, depending on economic conditions and
other events.
The following are the key assumptions upon which management based its determination of the
recoverable amount of goodwill.
Cash flow projections have been discounted using a discount rate derived from the Company’s
after-tax weighted average cost of capital adjusted for specific risks relating to the cash
generating unit. At June 30, 2014, the after-tax discount rate used in the recoverable amount
calculation was 18% (2013 - 19%). The cash flow forecasts were extrapolated beyond the five
year period using an estimated long term growth rate of 2% (2013 - 2.0%).
During fiscal 2013 the previously recorded goodwill of $3,543,912 was written down in its entirety.
(ii)
Business combinations
In a business combination, all identifiable assets, liabilities and contingent liabilities acquired are
recorded at their fair values. One of the most significant estimates relates to the determination of
the fair value of these assets and liabilities. For any intangible asset identified, depending on the
type of intangible asset and the complexity of determining its fair value, an independent valuation
expert or management may develop the fair value, using appropriate valuation techniques, which
are generally based on a forecast of the total expected future net cash flows. The evaluations are
linked closely to the assumptions made by management regarding the future performance of the
assets concerned and any changes in the discount rate applied. In August 2011, Sangoma
purchased the assets of VegaStream for $1,515,754 and recorded an intangible asset,
Purchased Technology, of $905,000 (see note 16) and Goodwill of $559,191 which was written
down to zero in fiscal 2013. The acquisition has been accounted for using the acquisition
method.
Page 16
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
3.
Significant accounting judgments, estimates and uncertainties (continued)
(iii)
Income taxes
The Company operates and earns income in Canada and the United Kingdom and is subject to
changing income tax laws within these countries. Significant judgments are necessary in
determining worldwide income tax liabilities.
At each consolidated statement of financial position date, the Company assesses whether the
realization of deferred income tax benefits is sufficiently probable to recognize deferred income
tax assets. This assessment requires the exercise of judgment on the part of management with
respect to, among other things, benefits that could be realized from available income tax
strategies and future taxable income, as well as other positive and negative factors. The recorded
amount of total deferred income tax assets could be reduced if estimates of projected future
taxable income and benefits from available income tax strategies are lowered, or if changes in
current income tax regulations are enacted that impose restrictions on the timing or extent of the
Company’s ability to utilize deferred income tax benefits.
The Company’s effective income tax rate can vary significantly quarter-to-quarter for various
reasons, including the mix and volume of business in lower income tax jurisdictions and in
jurisdictions for which no deferred income tax assets have been recognized because
management believed it was not probable that future taxable profit would be available against
which income tax losses and deductible temporary differences could be utilized. The Company’s
effective income tax rate can also vary due to the impact of foreign exchange fluctuations.
(iv)
Estimated useful lives of long-lived assets
Management reviews useful lives of depreciable assets at each reporting date. Management
assesses that the useful lives represent the expected utility in terms of duration of the assets to
the Company. Actual utility, however, may vary due to technical obsolescence, particularly
relating to software and Information Technology equipment.
(v)
Internally generated development costs
Management monitors the progress of internal research and development projects and uses
judgment to distinguish research from the development phase. Expenditures during the research
phase are expensed as incurred. Development costs are recognized as an intangible asset when
the Company can demonstrate certain criteria listed in Note 2(xiii). Otherwise, they are expensed
as incurred.
(vi)
Share-based payments
The fair value of all share-based payments granted are determined using the Black-Scholes
option pricing model which incorporates assumptions regarding risk-free interest rates, dividend
yield, expected volatility, estimated forfeitures, and the expected life of the options. The Company
has a significant number of options outstanding and expects to continue to make grants.
Therefore the estimates and assumptions related to stock options are critical to the Company’s
financial position.
(vii) Allowance for doubtful accounts
The Company is exposed to credit risk associated with its trade receivables. This risk is reduced
by having customers’ trade receivables insured by Export Development Canada (“EDC”)
wherever possible. Management reviews the trade receivables at each reporting date and
assesses and makes an allowance for doubtful accounts when the expected recovery could be
less than the actual trade receivable. The expected recovery amount can vary from the actual
cash received.
Page 17
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
3.
Significant accounting judgments, estimates and uncertainties (continued)
(viii)
Inventory obsolescence
Inventory consists of parts and finished goods recorded at the lower of cost and net realizable
value. Inventory represents a significant portion of the asset base of the Company and its value is
reviewed at each reporting period. Inventories are written down to net realizable value when the
cost of inventories is estimated to be unrecoverable due to obsolescence, damage or slow
moving. Actual net realizable value can vary from the estimated provision.
(ix)
Functional currency
The functional currency of the Company has been assessed by management based on
consideration of the currency and economic factors that mainly influence operating costs,
financing and related transactions. Changes to these factors may have an impact on the
judgment applied in the future determination of the Company’s functional currency.
(x)
Tax credits recoverable
Tax credits are recorded based on management’s estimate that all conditions attached to its
receipt have been met. The Company has significant tax credits recoverable and expects to
continue to apply for future tax credits as their research and development activities remain
applicable. Therefore the estimates related to the recoverability of these tax credits are important
to the Company’s financial position.
(xi) Warranty provision
The warranty provision represents management’s best estimate of costs of product warranties at
the time the product is installed or delivered. Therefore, the estimates and assumptions related to
costs of repairs and/or replacement costs to correct product failures impact the Company’s
financial position.
(xii) Sales returns and allowances provision
The sales returns and allowances provision represents management’s best estimate of the value
of the products sold in the current financial year that may be returned in a future year.
Stock rotation provision
The stock rotation provision represents management’s best estimate of the value of the products
sold in the current financial year that may be rotated in a future year.
4.
Inventories
Inventories recognized in the statement of financial position can be analyzed as follows:
Finished goods
Parts
Provision for obsolescence
Net inventory carrying value
2014
$
2013
$
1,106,897
1,763,274
2,870,171
(282,537)
2,587,634
1,684,678
1,500,445
3,185,123
(149,419)
3,035,704
During the year ended June 30, 2014, the provision for obsolescence was increased by $133,118 and a
total of $4,279,868 of inventories were included in cost of goods sold compared to $4,128,146 for the
year ended June 30, 2013.
Page 18
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
5.
Property, plant and equipment
Office
furniture
and
computer
equipment
$
Software
and
books
$
Stockroom
and
production
equipment
$
Tradeshow
equipment
$
Leasehold
improvement
$
635,347
41,112
676,459
48,720
725,179
446,780
43,127
489,907
51,007
540,914
182,184
-
182,184
30,330
212,514
116,642
11,870
128,512
8,529
137,041
99,148
-
99,148
6,553
105,701
59,006
7,265
66,271
4,785
71,056
41,631
-
41,631
-
41,631
21,194
3,665
24,859
1,821
26,680
186,552
184,265
53,672
75,473
32,877
34,645
16,772
14,951
91,764
998
92,762
4,971
97,733
27,892
21,292
49,184
8,330
57,514
43,578
40,219
Total
$
1,050,074
42,110
1,092,184
90,574
1,182,758
671,514
87,219
758,733
74,472
833,205
333,451
349,553
Cost
Balance, June 30, 2012
Additions
Balance, June 30, 2013
Additions
Balance, June 30, 2014
Accumulated depreciation and impairment
Balance, June 30, 2012
Depreciation expense
Balance, June 30, 2013
Depreciation expense
Balance, June 30, 2014
Carry amount
Balance, June 30, 2013
Balance, June 30, 2014
Depreciation expense is included in general and administration expense in the statement of
comprehensive income (loss).
Page 19
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
6.
Intangible assets
Cost
Balance, June 30, 2012
Additions
Disposals
Balance, June 30, 2013
Additions
Disposals
Balance, June 30, 2014
Accumulated depreciation and impairment
Balance, June 30, 2012
Depreciation expense
Impairment
Balance, June 30, 2013
Depreciation expense
Impairment
Balance, June 30, 2014
Carry amount
Balance, June 30, 2013
Balance, June 30, 2014
Copyright to
software
$
Purchased
technology
$
Website
$
Total
$
2,948,461
-
-
2,948,461
-
-
2,948,461
1,179,385
294,846
1,056,088
2,530,319
83,628
-
2,613,947
905,000
-
-
905,000
-
-
905,000
60,000
90,500
-
150,500
90,500
-
241,000
441,828
-
-
441,828
-
-
441,828
419,781
22,047
-
441,828
-
-
441,828
4,295,289
-
-
4,295,289
-
-
4,295,289
1,659,166
407,393
1,056,088
3,122,647
174,128
-
3,296,775
418,142
334,514
754,500
664,000
-
-
1,172,642
998,514
Amortization expense is included in general and administration expense in the statement of
comprehensive income (loss).
During the year ended June 30, 2013, the Company recorded a $1,056,088 impairment charge to
intangible assets related to a portion of the copyright associated with the Paraxip acquisition from 2008.
Page 20
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
7.
Development costs
Development costs
Balance, June 30, 2012
Additions
Investment tax credits
Balance, June 30, 2013
Additions
Investment tax credits
Balance, June 30, 2014
Accumulated amortization
Balance, June 30, 2012
Amortization
Balance, June 30, 2013
Amortization
Balance, June 30, 2014
$
9,857,559
2,790,468
(750,670)
11,897,357
2,175,099
(295,880)
13,776,576
(7,610,346)
(1,747,593)
(9,357,939)
(1,673,410)
(11,031,349)
2014
$
2013
$
Net capitalized development costs
2,745,227
2,539,418
Each period the new spending is added net of Investment Tax Credits accrued. In addition to the above
amortization, the Company has recognized $921,104 of engineering expenditures as an expense during
the year ended June 30, 2014 (2013 - $1,080,055).
8.
Financial instruments
The Company categorizes each of its fair value measurements in accordance with a fair value hierarchy.
The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to
measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets
or liabilities. Level 2 inputs are quoted prices in markets that are not active, quoted prices for similar
assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or
liability (for example, interest rate and yield curves observable at commonly quoted intervals, forward
pricing curves used to value currency and commodity contracts and volatility measurements used to
value option contracts), or inputs that are derived principally from or corroborated by observable market
data or other means. Level 3 inputs are unobservable (supported by little or no market activity).
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3
inputs.
The fair values of the cash and cash equivalents, trade receivables, sales tax receivables, investment
tax credits receivable, accounts payable and accrued liabilities and term loan approximate their carrying
values due to the relatively short-term maturity of these financial instruments.
Page 21
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
8.
Financial instruments (continued)
Cash and cash equivalent is comprised of:
Cash at bank and on hand
Short-term investments
2014
$
2013
$
4,005,755
975,816
4,981,571
1,672,439
2,339,687
4,012,126
Cash includes demand deposits with financial institutions and cash equivalents consist of short-term,
highly liquid investments purchased with original maturities of three months or less.
The Company’s interest income on short-term investment carried at amortized cost is presented on the
statement of comprehensive income (loss) in the interest income line.
Total interest income for financial assets or financial liabilities that are not at fair value through profit or
loss can be summarized as follows:
2014
$
2013
$
Interest income on short-term investments
(26,809)
(26,907)
9.
Financial instruments risks
The Company thoroughly examines the various financial instrument risks to which it is exposed and
assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity risk,
foreign currency risk, interest rate risk and market risk.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial
instrument fails to meet its obligations. Where possible the Company uses an insurance policy with
Export Development Canada (“EDC”) for its trade receivables to manage this risk and minimize any
exposure. The Company’s maximum exposure to credit risk for its trade receivables is summarized as
follows with the majority of the over 90 day receivable not being covered by EDC:
Trade receivables aging
0-30 days
31-90 days
Greater than 90 days
Provision for doubtful accounts
Net trade receivable
2014
$
2013
$
3,319,116
667,599
1,663,969
5,650,684
(340,956)
5,309,728
3,334,059
312,190
1,327,588
4,973,837
(10,153)
4,963,684
Page 22
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
9.
Financial instruments risks (continued)
Credit risk (continued)
The movement in the allowance for doubtful accounts can be reconciled as follows:
Provision for doubtful accounts
Allowance for doubtful accounts beginning balance
Allowance used (recorded) during the year
Allowance for doubtful accounts ending balance
2014
$
2013
$
(10,153)
(330,803)
(340,956)
(18,433)
8,280
(10,153)
All of the Company’s cash and cash equivalents and short-term investments are held with a major
Canadian financial institution and thus the exposure to credit risk is considered insignificant. The
short-term investments are cashable in whole or in part, generally with interest, at any time to maturity.
Management actively monitors the Company’s exposure to credit risk under its financial instruments,
including with respect to trade receivables.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its obligations associated with financial
liabilities. The Company has a planning and budgeting process in place by which it anticipates and
determines the funds required to support its normal operating requirements. The Company coordinates
this planning and budgeting process with its financing activities through its capital management process.
The Company holds sufficient cash and equivalents and working capital, maintained through stringent
cash flow management, to ensure sufficient liquidity is maintained. Maturity analysis of debt can be
summarized as follows:
2015
$
2016
$
2017
$
Fiscal year
Total
$
Accounts payable and accrued liabilities
1,705,802
-
-
1,705,802
Foreign currency risk
A large portion of the Company’s transactions occur in a foreign currency (mainly in US dollars) and,
therefore, the Company is exposed to foreign currency risk at the statement of financial position date
through its U.S. denominated trade receivables, accounts payable and cash. As at June 30, 2014 a 10%
depreciation or appreciation of the U.S. dollar against the Canadian dollar would have resulted in an
approximate $582,000 decrease or increase, respectively, in total comprehensive income (loss) and
retained earnings (deficit) (2013 - $530,000). The Company employed currency hedging programs
periodically during the current period and reduced its U.S. dollar exposure after the reporting date, see
Note 17. On an ongoing basis the Company’s top line revenues are also impacted by the swings in the
US dollar.
Interest rate risk
The Company has no significant exposure at June 30, 2014 to interest rate risk through its financial
instruments as the short-term investments are at fixed rates of interest that do not fluctuate during the
remaining term.
Page 23
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
10.
Shareholders’ equity
(i) Share capital and contributed surplus
Issued and outstanding common shares consist of the following:
Shares issued and fully paid
Beginning balance
Share issue
Normal course bid redemption
Opening balance number of stock options outstanding
Share-based options granted
Share-based payments options expired/cancelled
Number of stock options outstanding
For each class of share capital
The number of shares authorized
The number of shares issued and fully paid
The number of shares issued but not fully paid
Par value per share, or that the shares have no
par value
2014
#
2013
#
28,829,809
-
-
28,829,809
4,089,160
1,650,000
(508,126)
5,231,034
34,060,843
29,538,809
-
(709,000)
28,829,809
4,238,410
470,000
(619,250)
4,089,160
32,918,969
Unlimited
28,829,809
-
Unlimited
28,829,809
-
-
-
Effective March 5, 2013, the Company received approval from the TSX Venture Exchange to
purchase its own common shares up to a maximum of 5% of the issued and outstanding common
shares being 1,476,940 of the 29,538,809 shares outstanding. During fiscal 2014 the Company did
not make any purchases under the bid which expired on March 4, 2014. In fiscal 2013 the Company
repurchased and canceled 709,000 shares at a total cost of $228,755 at an average of $0.32 per
share. The difference between the share capital and the cost of redemption of $150,193 was added
back to the contributed surplus.
(ii) Stock options
The Company has a stock option plan (the “plan”) for directors, officers, employees and consultants
of the Company. The number of common shares that may be set aside for issue under the plan (and
under all other management stock option and employee stock option plans) is limited to 5,542,160
common shares of the Company, provided that the board of directors has the right, from time to
time, to increase such number subject to the approval of the shareholders of the Company and
provided that the Company complies with the provisions of policies, rules and regulations of
applicable securities legislation.
The maximum number of common shares that may be reserved for issuance to any one person
under the plan is 5% of the common shares outstanding at the time of grant (calculated on a
non-diluted basis) less the number of common shares reserved for issuance to such person under
any stock option to purchase common shares granted as a compensation or incentive mechanism.
Any common shares subject to a stock option, which for any reason is cancelled or terminated prior
to exercise, will be available for a subsequent grant under the plan, subject to applicable regulatory
requirements.
Page 24
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
10.
Shareholders’ equity (continued)
(ii) Stock options (continued)
The stock option price of any common shares cannot be less than the closing price or the minimum
price as determined by applicable regulatory authorities of the relevant class or series of shares, on
the day immediately preceding the day on which the stock option is granted. Stock options granted
under the plan may be exercised during a period not exceeding five years from the date of grant,
subject to earlier termination on the termination of the optionee’s employment, on the optionee’s
ceasing to be an employee, officer or director of the Company or any of its subsidiaries, as
applicable, or on the optionee’s retiring, becoming permanently disabled or dying, subject to certain
grace periods to allow the optionee or his or her personal representative time to exercise such stock
options. The stock options are non-transferable.
The plan contains provisions for adjustment in the number of common shares issuable thereunder in
the event of the subdivision, consolidation, reclassification or change of the common shares, a
merger or other relevant changes in the Company’s capitalization. The board of directors may, from
time to time, amend or revise the terms of the plan or may terminate the plan at any time.
The following table shows the movement in the stock option plan:
Measurement date
Balance, June 30, 2012
Granted
Exercised
Expired
Cancelled
Forfeited
Balance, June 30, 2013
Granted
Exercised
Expired
Cancelled
Forfeited
Balance, June 30, 2014
Weighted
average
exercise
price
$
0.57
0.50
-
1.13
0.58
-
0.51
0.35
-
0.72
0.53
0.51
0.44
Number
of options
4,238,410
470,000
-
(310,000)
(309,250)
-
4,089,160
1,650,000
-
(345,000)
(53,122)
(110,004)
5,231,034
Page 25
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
10.
Shareholders’ equity (continued)
(ii) Stock options (continued)
The Company uses the fair value method to account for all stock-based awards granted to
employees, officers and directors. The estimated fair value of stock options granted is determined
using the Black-Scholes option pricing model and is recorded as a charge to income over the
vesting period of the stock options, with a corresponding increase to contributed surplus. Stock
options are granted at a price equal to or above the fair value of the common shares on the day
immediately preceding the date of the grant. The consideration received on the exercise of stock
options is added to stated capital at the time of exercise (see consolidated statement of changes in
equity).The fair value of the stock options granted has been estimated on the date of the grant using
the Black-Scholes option pricing model with the following assumptions:
Weighted average share price
Exercise price
Expected volatility
Expected option life
Expected dividend yield
Expected forfeiture rate
Risk-free interest rate
2014
$
0.31
0.35
60.3%
4.55
-
-
1.3%
2013
$
0.29
0.50
65.6%
4.55
-
-
1.3%
The expected volatility used in the Black-Scholes option pricing model is based on the historical
volatility of the Company’s shares.
The following table summarizes information about the stock options outstanding and exercisable at
the end of each period:
Number of
stock options
outstanding
and
exercisable
2014
Weighted
average
remaining
contractual
life
Number of
stock options
outstanding
and
exercisable
2013
Weighted
average
remaining
contractual
life
Exercise price
$0.26-$0.50
$0.51-$0.75
3,900,372
1,330,662
5,231,034
3.02
1.57
2.65
2,363,498
1,725,662
4,089,160
2.62
2.25
2.46
Total expense recognized for share based payments was $108,650 (2013 - $193,789).
(iii) Earnings per share and dividends
Both the basic and diluted earnings per share have been calculated using the net income
attributable to the shareholders of the Company as the numerator.
The weighted average number of outstanding shares used for basic earnings per share amounted
to 28,829,809 shares (2013 - 29,261,162).
Page 26
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
10.
Shareholders’ equity (continued)
(iii) Earnings per share and dividends (continued)
The weighted average number of shares for the purposes of diluted earnings per share can be
reconciled to the weighted average number of ordinary shares used in the calculation of basic
earnings per share as follows:
Number of shares
Weighted average number of shares used in basic
earnings per share
Shares deemed to be issued in respect of share-based
payments
Weighted average number of shares used in diluted
earnings per share
2014
2013
28,829,809
29,261,162
-
-
28,829,809
29,261,162
As of June 30, 2014, no options were in-the-money hence none were included in the weighted
average number of shares for the purposes of diluted earnings per share calculation above
(2013 - none). As a result, 5,231,034 options (2013 - 4,089,160) are excluded from the weighted
average number of shares calculation above.
11.
Income tax
The Company has deducted available SR&ED for federal and provincial purposes and has utilized
SR&ED investment tax credits, as required, to reduce federal income taxes payable. These consolidated
financial statements take into account an income tax benefit resulting from investment tax credits
available to the Company to reduce its income for federal income tax purposes in future years as
follows:
Year of investment
2012
2013
2014
Year of
expiration
Carry forward
credits
$
2032
2033
2034
514,164
651,451
357,408
1,523,023
The income tax benefit of eligible SR&ED costs incurred in prior years but not utilized have been taken
into account in these consolidated financial statements.
Federal
$
Provincial
$
SR&ED expenditures carried forward
1,664,694
995,232
Page 27
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
11.
Income tax (continued)
The following reconciles the effective tax rate to the statutory rate on a percentage basis:
Statutory tax rate (recovery)
Tax effect on non-deductible expenses
Rate change for future income tax assets
Impairment of goodwill not recognised for tax
Tax rate (recovery) on others
Effective income tax rate (recovery)
2014
%
26.5
4.0
(9.1)
-
1.9
23.3
2013
%
(26.5)
1.3
(1.2)
16.2
(0.1)
(10.3)
The tax effects of temporary differences and credits carry forwards that give rise to the deferred income
tax assets and liabilities are summarized below:
Property, plant and equipment
Non-deductible reserves
Deferred development costs
Intangible assets including goodwill
SR&ED investment tax credits
Deferred revenue
Non-capital losses
Unutilized SR&ED expenditure pools
Deferred income tax assets (liabilities)
Income tax recognized in profit or loss:
Current tax
Current tax expense in respect of the current year
Adjustments in current year relating to prior years
Deferred tax
Current movement in the deferred taxes
Adjustments in current period related to prior periods
Adjustments due to change in rates
Impairment of goodwill not recognized for tax
Effective income tax rate (recovery)
Net taxes
2014
$
2013
$
(35,479)
90,353
(728,134)
(113,116)
1,226,283
79,560
-
424,815
944,282
(29,591)
2,691
(635,115)
(147,857)
1,085,581
38,826
24
573,022
887,581
2014
$
138,490
11,688
150,178
168,216
(87,847)
-
-
80,369
230,547
2013
$
-
6,313
6,313
27,634
(39,125)
(42,563)
(449,000)
(503,054)
(496,741)
Page 28
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
12. Related parties
The Company’s related parties include its subsidiary and key management personnel and their close
family members. Unless otherwise stated, none of the transactions incorporate special terms and
conditions and no guarantees were given or received. Outstanding balances payable are usually settled
in cash and relate to director fees.
The Company had the following balances with related parties:
Other reatlated parties
The total of the transactions:
Expenses
The amount of outstanding balaces:
Payable
2014
$
2013
$
25,549
27,571
10,000
2,500
Compensation of key management personnel
Key management personnel are those individuals having authority and responsibility for planning,
directing and controlling the activities of the Company, including members of the Company’s Board of
Directors. The Company considers key management to be the members of the Board of Directors and
three officers.
The remuneration of directors and other members of key management personnel during fiscal year
ended June 30, 2014 were as follows:
Short-term benefits
Long-term benefits
Share-based payment transactions
13.
Segment disclosures
2014
$
2013
$
1,017,080
30,000
91,406
1,138,486
940,483
30,000
157,310
1,127,793
The Company operates in one industry segment; development, manufacturing, distribution and support
of voice and data connectivity components for software-based communication applications. The majority
of the Company’s assets are located in Canada. The Company sells into three major geographic
centers: the United States, Canada and other foreign countries. The Company has determined that it
has a single reportable segment as the Company’s decision makers review information on a
consolidated basis.
Page 29
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
13.
Segment disclosures (continued)
Revenues for each group of similar products and services can be summarized for year ended June 30:
Products
Services
2014
$
2013
$
12,900,984
928,098
13,829,082
12,360,066
590,112
12,950,178
The sales, in Canadian dollars, in each of these geographic locations for year ended June 30:
USA
Canada
All other countries
14. Capital management
2014
$
2013
$
5,051,334
362,007
8,415,741
13,829,082
5,020,740
585,623
7,343,815
12,950,178
The Company’s objectives in managing capital are to safeguard the Company’s assets, to ensure
sufficient liquidity to sustain the future development of the business via advancement of its significant
research and development efforts, to conservatively manage financial risk and to maximize investor,
creditor and market confidence. The Company considers its capital structure to include its shareholders’
equity. Working capital is optimized via stringent cash flow policies surrounding disbursement, foreign
currency exchange and investment decision-making.
There were no changes in the Company’s approach to capital management during the year and the
Company is not subject to any capital requirements imposed by external parties.
The Company manages the following capital:
Share capital
Contributed surplus
Deficit
15. Commitments
2014
$
2013
$
15,333,326
1,730,025
(679,477)
16,383,874
15,333,326
1,621,375
(1,416,527)
15,538,174
The future minimum lease payments for office space as at June 30, 2014 are as follows:
Not later than one year
Later than one year and not later than five years
$
228,099
38,017
266,116
Page 30
Sangoma Technologies Corporation
Notes to the consolidated financial statements
June 30, 2014, and 2013
(In Canadian dollars)
16. Business combination
On August 22, 2011 Sangoma Technologies Inc. acquired certain assets of the VegaStream Group of
Companies; a United Kingdom (“UK”) based developer of voice over Internet Protocol (“VoIP”) Gateway
appliances for a total cash consideration of $1,515,754 and an intangible asset for Purchased
Technology of $905,000 was established together with a 5% shareholding in VegaStream Private
Networks Limited an Indian company based in Bangalore, which is majority owned by an independent
party, and which sells the Vega line of products in India and surrounding countries. On December 1,
2011 Sangoma launched the Vega product line as part of the Sangoma portfolio of products and has
since incorporated all revenues and costs into Sangoma’s financial statements.
17.
Provisions
Balance at June 30, 2013
Additional provision recognized
Balance at June 30, 2014
Warranty
provision
$
14,318
-
14,318
Sales returns
& allowances
provision
$
9,000
-
9,000
Stock
rotation
provision
$
-
20,000
20,000
The provision for warranty obligations represents the Company’s best estimate of repair and/or
replacement costs to correct product failures. The sales returns and allowances provision represents the
Company’s best estimate of the value of the products sold in the current financial year that may be
returned in a future year. The stock rotation provision represents the Company’s best estimate of the
value of the products sold in the current financial year that may be exchanged for alternative products in
a future year. The Company accrues for product warranties, stock rotation, and sales returns and
allowances at the time the product is delivered.
18.
Post-reporting date events
In the period commencing July 1, 2014 the Company:
(i)
initiated a United States dollar (“USD”) forward contract for the conversion of $1.5 million USD to
Canadian dollars at the rate of $1.0905 which was subsequently settled.
(ii) initiated a United States dollar forward contract for the conversion of $1.5 million USD to Canadian
dollars at the rate of $1.0920 to be settled on December 31, 2014.
(iii) initiated a United States dollar forward contract for the conversion of $2.0 million USD to Canadian
dollars at the rate of $1.1200 to be settled on March 31, 2015
(iv) initiated a United States dollar forward contract for the conversion of $1.0 million USD to Canadian
dollars at the rate of $1.1189 to be settled on June 30, 2015
(v) On July 24, 2014 the Company filed a claim against a customer for non-payment of $85,676.03 USD
and the customer has filed a counter claim for $15,000 plus attorney fees.
19. Authorization of financial statements
The consolidated financial statements for the period ended June 30, 2014 (including comparatives)
were, as per recommendation of the Audit Committee, approved by the Board of Directors on
October 23, 2014.
Page 31