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Annual Report 2018

Plain-text annual report

SANGOMA TECHNOLOGIES CORPORATION Consolidated Financial Statements for Year ended June 30, 2018 and 2017 100 Renfrew Drive, Suite 100, Markham, Ontario, Canada L3R 9R6 Sangoma Technologies Corporation June 30, 2018 and 2017 Table of contents Independent Auditors’ Report……. … ……………………………………………………………………………………1 Consolidated statements of financial position ....................................................................................................... 2 Consolidated statements of income and comprehensive income ......................................................................... 3 Consolidated statements of changes in shareholders’ equity .............................................................................. 4 Consolidated statements of cash flows ................................................................................................................. 5 Notes to the consolidated financial statements ................................................................................................ 6-32 Independent Auditors’ Report To the Shareholders of Sangoma Technologies Corporation and its subsidiaries: We have audited the accompanying consolidated financial statements of Sangoma Technologies Corporation and its subsidiaries, which comprise the consolidated statements of financial position as at June 30, 2018 and 2017, and the consolidated statements of income and comprehensive income, changes in shareholders' equity and 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditors' 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 auditors’ 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 and its subsidiaries, as at June 30, 2018, and 2017, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Toronto, Ontario October 22, 2018 Chartered Professional Accountants Licensed Public Accountants 1 Sangoma Technologies Corporation Consolidated statements of financial position as at June 30, 2018 and 2017 (In Canadian dollars) 2018 $ 2017 $ Assets Current assets Cash and cash equivalents (Note 13) Trade receivables (Note 13) Inventories (Note 4) Investment tax credits receivable Other current assets Non-current assets Property and equipment (Note 5) Intangible assets (Note 6) Development costs (Note 7) Deferred income tax assets (Note 10) Goodwill (Note 8) Liabilities Current liabilities Accounts payable and accrued liabilities (Note 13) Provisions (Note 16) Sales tax payable Income tax payable Operating facility and loan - current (Note 9) Deferred revenue Long term liabilities Operating facility and loan - long term (Note 9) Deferred revenue Shareholders’ equity Share capital Contributed surplus Warrant reserve (Note 11(i)) Accumulated other comprehensive income Retained earnings Approved by the Board (Signed) Al Guarino Director (Signed) Yves Laliberte Director 15,778,191 7,225,374 6,726,203 - 1,853,984 31,583,752 859,691 10,548,450 2,538,988 855,140 5,174,981 51,561,002 7,919,096 279,690 21,404 405,503 1,076,272 2,756,899 12,458,864 3,473,662 283,870 16,216,396 29,830,474 2,324,176 186,700 61,732 2,941,524 35,344,606 51,561,002 The accompanying notes are an integral part of these consolidated financial statements 6,758,889 3,001,167 4,545,739 206,264 699,157 15,211,216 571,425 5,534,781 2,763,664 1,539,327 1,638,546 27,258,959 2,872,996 123,318 73,854 182,490 3,883,434 787,480 7,923,572 - - 7,923,572 16,521,072 2,285,243 - 41,043 488,029 19,335,387 27,258,959 2 Sangoma Technologies Corporation Consolidated statements of income and comprehensive income years ended June 30, 2018 and 2017 (In Canadian dollars) Revenue (Note 17) Cost of sales Gross profit Expenses Sales and marketing Research and development General and administration Foreign currency exchange gain 2018 $ 2017 $ 57,361,653 26,454,357 30,907,296 26,880,311 9,353,401 17,526,910 7,980,211 7,766,210 10,770,462 (276,200) 26,240,683 5,152,543 5,137,744 5,800,477 (38,149) 16,052,615 Income before interest, income taxes, and business acquisition costs 4,666,613 1,474,295 Interest income (Note 13) Interest expense (Notes 9 & 13) Business acquisition costs (Note 18) Income before income taxes Provision for income taxes Current (Note 10) Deferred (Note 10) Net income Other comprehensive income Items to be reclassified to net income Foreign currency translation adjustment Comprehensive income Earnings per share Basic (Note 11(iii)) Diluted (Note 11(iii)) Weighted average number of shares outstanding (Note 11(iii)) Basic Diluted (1,566) 246,783 472,931 718,148 (820) 99,722 184,819 283,721 3,948,465 1,190,574 1,003,832 491,138 2,453,495 186,709 203,670 800,195 (20,689) 2,474,184 (60,205) 860,400 0.065 0.060 0.025 0.023 37,642,780 40,774,859 32,519,962 34,584,747 The accompanying notes are an integral part of these consolidated financial statements 3 Sangoma Technologies Corporation Consolidated statements of changes in shareholders' equity years ended June 30, 2018 and 2017 (In Canadian dollars) Number of common shares # Share capital $ Contributed surplus $ Warrant reserve $ Accumulated other comprehensive income (loss) $ Total Retained earnings Shareholders' equity (deficit) $ $ Balance, June 30, 2016 32,479,809 16,497,326 2,060,557 Net income Other comprehensive income Share-based compensation expense (Note 11(ii)) Common shares issued (Note 11(i)) Balance, June 30, 2017 Net income Other comprehensive income Common shares issued through - - - 40,153 32,519,962 - - - 23,746 16,521,072 - - 231,034 (6,348) 2,285,243 - - - - - - - - - - - - - - private placement, net of costs (Note 11(i)) Common shares issued for business combination (Note 11(i)) Common shares issued for options exercised (Note 11(i)) Broker warrants issued through private placement (Note 11(i)) Share-based compensation expense (Note 11(ii)) Balance, June 30, 2018 13,138,000 993,627 809,368 - - 47,460,957 12,140,963 824,710 530,429 (186,700) - 29,830,474 - - (135,204) - 174,137 2,324,176 - - - 186,700 - 186,700 (19,162) (312,166) 18,226,555 - 60,205 - - 41,043 800,195 - - - 488,029 800,195 60,205 231,034 17,398 19,335,387 - 20,689 2,453,495 - 2,453,495 20,689 - - - - - 61,732 - - - - - 2,941,524 12,140,963 824,710 395,225 - 174,137 35,344,606 The accompanying notes are an integral part of these consolidated financial statements 4 Sangoma Technologies Corporation Consolidated statements of cash flows years ended June 30, 2018 and 2017 (In Canadian dollars) Operating activities Net income Adjustments for: Depreciation of property and equipment (Note 5) Amortization of intangible assets (Note 6) Amortization of capitalized development costs (Note 7) Unrealized foreign exchange gain Income tax expense Income tax paid Income tax refunds Share-based compensation expense (Note 11(ii)) Accretion expense (Note 13) Changes in item of working capital Trade receivables Inventories Other current assets Sales tax payable Accounts payable and accrued liabilities Provisions Income tax payable Deferred revenue Investment tax credits receivable Investing activities Purchase of property and equipment (Note 5) Development costs (Note 7) Business combinations, net of cash and cash equivalents acquired (Note 18) Payment of contingent consideration Financing activities Proceeds from operating facility and loan (Note 9) Repayments of operating facility and loan Issuance of common shares through private placement, net (Note 11(i)) Issuance of common shares for stock option exercised (Note 11(i)) 2018 $ 2017 $ 2,453,495 800,195 196,315 1,771,551 1,697,161 (41,372) 1,494,970 (254,463) 169,806 174,137 44,319 1,176,449 (552,662) (693,831) (52,450) (292,538) 267,933 163,519 (939,881) 206,264 6,988,722 (161,104) (1,776,154) (9,014,113) (186,810) (11,138,181) 5,128,640 (4,514,795) 12,140,963 395,225 13,150,033 129,950 762,556 1,711,377 (141,844) 390,379 (208,722) 303,552 231,034 14,605 1,294,395 (669,274) (248,404) (39,881) 241,038 20,000 54,842 371,158 167,851 5,184,807 (96,164) (2,283,712) (454,195) (199,560) (3,033,631) 2,542,831 - - 17,398 2,560,229 Effect of foreign exchange rate changes on cash and cash equivalents 18,728 (39,448) Increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 9,019,302 6,758,889 15,778,191 4,671,957 2,086,932 6,758,889 The accompanying notes are an integral part of these consolidated financial statements 5 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (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 Corporation and its primary operating subsidiaries for fiscal 2018 were Sangoma Technologies Inc., Sangoma US Inc., and VoIP Supply 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 is 100 Renfrew Dr., Suite 100, Markham, Ontario, L3R 9R6 and the Company operates in multiple jurisdictions. 2. Significant accounting policies (i) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). (ii) Basis of preparation The consolidated 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 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 subsidiaries Sangoma Technologies Inc. (Canada), Sangoma US Inc. (United States), Sangoma Technologies US Inc. (United States), VoIP Supply LLC (United States), Sangoma Technologies Ltd. (Ireland), Sangoma HK Ltd. (Hong Kong) and Sangoma Technologies Private Limited (India). Subsidiaries are entities controlled by the Company where 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. 6 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 2. Significant accounting policies (continued) (v) Revenue (continued) Sale of goods (hardware and software) For sale of goods, the recognition criteria are generally met at the time the product is shipped to the customer, title and risks have passed to the customer, and acceptance of the product 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 delivers VoIP and S&P trunking services on a prepaid monthly subscription basis and revenue is recognized as the services are provided each month. The Company also enters into transactions that represent multiple-element arrangements, which may include any combination of goods and services. These multiple element arrangements are assessed to determine whether they consist of elements that 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 financial statements are presented in Canadian dollars. The functional currency of Sangoma Technologies Corporation and Sangoma Technologies Inc. is Canadian dollars, the functional currency of Sangoma US Inc., Sangoma Technologies US Inc., VoIP Supply LLC, and Sangoma HK Ltd. is US dollars, the functional currency of Sangoma Technologies Ltd is Euros and the functional currency of Sangoma Technologies Private Limited is Indian Rupees (INR). Assets and liabilities of subsidiaries having a functional currency other than the Canadian dollar are translated at the rate of exchange at the reporting period date. Revenues and expenses are translated at average rates for the period, unless exchange rates fluctuated significantly during the period, in which case the exchange rates at the dates of the transaction are used. The resulting foreign currency translation adjustments are recognized in the accumulated other comprehensive income (loss) included in shareholders’ equity. Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the date of the transactions. At the end of each reporting period, foreign currency denominated monetary assets and liabilities are translated to the functional currency using the prevailing rate of exchange at the reporting period date. Gains and losses on translation of monetary items are recognized in the statement of income and comprehensive income. 7 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 2. Significant accounting policies (continued) (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. (ix) Share-based payments The Company grants stock options to its employees. Stock options vest over and expire after various periods of time. The vesting policy is 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 11(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 income and comprehensive income 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 tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the end of the reporting period and are expected to apply when the asset is realized or liability is settled. Deferred 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 tax assets and liabilities are recognized for the tax effects of these differences. Deferred 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 and equipment Property 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 income and comprehensive income during the period in which they are incurred. 8 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 2. Significant accounting policies (continued) (xi) Property and equipment (continued) Depreciation is calculated at 20% of the declining balance for all classes of property and equipment. 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 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 of income and comprehensive income. (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 the following periods: Copyright to software Purchased technology Website Customer relationship Brand Other purchased intangibles 10 years 6 - 10 years 1 - 10 years 4 - 10 years 6 years – indefinite life 2 months to 10 years Amortization expense is included in the statement of income and comprehensive income 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(xvi). (xiii) Research and development expenditures The Company qualifies for certain investment tax credits related to its research and development activities in Canada. 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 identified 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. 9 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 2. Significant accounting policies (continued) (xiii) Research and development expenditures (continued) 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 costs 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(xvi). 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) Foreign currency hedging The Company enters into forward foreign currency exchange contracts to hedge the cash flow risk associated with forecasted transactions in foreign currencies and foreign-currency denominated balances. The Company does not enter into derivative contracts for speculative purposes. The contracts, which have not been designated as hedges for accounting purposes, are marked to market each period. The resulting gain or loss is recorded as foreign currency exchange (gain) loss on the consolidated statement of income and comprehensive income. (xv) 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. (xvi) Impairment testing of goodwill, other intangible assets and property 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). The Company has multiple cash generating units 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 units and reflect its risk profile as assessed by management. Impairment losses for the cash-generating units 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 does 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 does not exceed the carrying value of the asset had it not originally been impaired. 10 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 2. Significant accounting policies (continued) (xvii) 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. 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 income and comprehensive income. Gains and losses arising from changes in fair value are presented in the statement of income and comprehensive income 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 end of the reporting period, 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 credits receivable, other current assets 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 operating facility and loan. Financial liabilities are initially recognized at the amount required to be paid less, when material, a discount to reduce the payables to fair value. Subsequently, these financial liabilities are measured 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 Trade receivables Investment tax credits receivable Accounts payable and accrued liabilities Operating facility and loan Loans and receivables Loans and receivables Loans and receivables Other liabilities Other liabilities Measurement Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost 11 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 2. Significant accounting policies (continued) (xviii) 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. (xix) Provisions Provisions represent liabilities of 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. (xx) Earnings per share Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average number of shares outstanding during the reporting period. Diluted earnings per share is computed similarly to basic earnings per share except that the weighted average number of shares outstanding is increased to include additional shares for the assumed exercise of stock options and warrants, 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. (xxi) Business combinations On the acquisition of a business, the acquisition method of accounting is used, whereby the purchase consideration is allocated to the identifiable assets and liabilities on the basis of fair value of the date of acquisition. Provisional fair values allocated at a reporting date are finalized as soon as the relevant information is available, within a period not to exceed twelve months from the acquisition date with retroactive restatement of the impact of adjustment to those provisional fair values effective as at the acquisition date. Incremental costs related to acquisitions are expensed as incurred. When the consideration transferred by the Company in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the measurement period (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not re-measured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is re-measured at subsequent reporting dates in accordance with IAS 39, or IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognized in profit or loss. 12 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 2. Significant accounting policies (continued) (xxii) 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. (xxiii) Standards, amendments and interpretations issued and 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 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 with additions in October 2010 and May 2013 and will replace IAS 39 - Financial Instruments: Recognition and Measurement ("IAS 39"). IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9, except that an entity choosing to measure a financial liability at fair value will present the portion of any change in its fair value due to changes in the entity's own credit risk in other comprehensive income, rather than within profit or loss. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2018. Earlier adoption is permitted. The Company is currently assessing the impact of this pronouncement. 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, 2018. The Company is currently assessing the impact of this pronouncement. In January 2016, the IASB issued IFRS 16, Leases (“IFRS 16”). IFRS 16 is effective for periods beginning on or after January 1, 2019, with early adoption permitted. IFRS 16 eliminates the current dual model for lessees, which distinguishes between on-statement of financial position finance leases and off-statement of financial position operating leases. Instead, there is a single, on-statement of financial position accounting model that is similar to current finance lease accounting. The Company is currently assessing the impact of this pronouncement. 13 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (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) Goodwill impairment testing and recoverability of assets The Company has multiple cash-generating units 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 units 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, 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. (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. All acquisitions have been accounted for using the acquisition method. Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods. However, the measurement period will last for one year from the acquisition date. (iii) Income taxes At the end of each reporting period, the Company assesses whether the realization of deferred tax benefits is sufficiently probable to recognize deferred 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 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 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. 14 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 3. Significant accounting judgments, estimates and uncertainties (continued) (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 utilization in terms of duration of the assets to the Company. Actual utilization, 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. (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. (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 and its subsidiaries 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 and its subsidiaries’ functional currency. (x) Investment tax credits receivable Investment tax credits are recorded based on management’s estimate that all conditions attached to its receipt have been met. The Company has significant investment tax credits receivable 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 investment 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. 15 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 3. Significant accounting judgments, estimates and uncertainties (continued) (xii) Sales returns and allowances provision The sales returns and allowances provision represent management’s best estimate of the value of the products sold in the current financial year that may be returned in a future year. (xiii) 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 consolidated statements of financial position are comprised of: Finished goods Parts Provision for obsolescence Net inventory carrying value June 30, 2018 $ June 30, 2017 $ 4,307,048 2,597,449 6,904,497 (178,294) 6,726,203 2,379,175 2,220,640 4,599,815 (54,076) 4,545,739 During the year ended June 30, 2018, inventories in the amount of $25,850,250 (2017 - $8,753,845) were included in cost of sales. 16 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 5. Property and equipment Cost Balance at June 30, 2016 Additions Effects of movements in exchange rates Balance at June 30, 2017 Acquisitions Additions Effects of movements in exchange rates Balance at June 30, 2018 Accumulated depreciation Balance at June 30, 2016 Depreciation expense Effects of movements in exchange rates Balance at June 30, 2017 Depreciation expense Effect of movements in exchange rates Balance at June 30, 2018 Net book value as at: June 30, 2017 June 30, 2018 Office furniture and computer equipment $ 1,076,568 59,102 5,112 1,140,782 293,008 126,044 16,399 1,576,233 Software and books $ 216,737 37,062 3,206 257,005 39 8,580 1,235 266,859 697,757 84,440 210 782,407 139,854 682 922,943 161,529 14,219 - 175,748 16,549 154 192,451 Stockroom and production equipment $ 162,873 - - 162,873 12,312 - 1,297 176,482 88,745 14,489 - 103,234 13,975 921 118,130 Tradeshow equipment $ 64,338 - - 64,338 - - - 64,338 Leasehold improvements $ 135,557 - - 135,557 - 26,480 1,609 163,646 38,458 5,208 - 43,666 3,929 65 47,660 72,481 11,594 - 84,075 22,008 600 106,683 Total $ 1,656,073 96,164 8,318 1,760,555 305,359 161,104 20,540 2,247,558 - 1,058,970 129,950 210 1,189,130 196,315 2,422 1,387,867 - 358,375 653,290 81,257 74,408 59,639 58,352 20,672 16,678 51,482 56,963 571,425 859,691 Depreciation expense is included in general and administration expense in the consolidated statement of income and comprehensive income. 17 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 6. Intangible assets Cost Copyright Purchased Customer Other purchased to software technology Website relationship Brand intangibles $ $ $ $ $ $ Total $ Balance, June 30, 2016 2,948,461 3,075,000 10,000 2,651,766 730,000 120,970 9,536,197 Additions Business combinations (Note 18) Effects of movements on exchange rates - - - - 122,216 544 - 8,326 36 - 521,458 2,320 - 40,739 181 - 122,217 544 - 814,956 3,625 Balance, June 30, 2017 2,948,461 3,197,760 18,362 3,175,544 770,920 243,731 10,354,778 Business combinations (Note 18) Effects of movements on exchange rates - - 880,001 207,632 3,815,332 1,472,585 209,999 6,585,549 32,962 3,056 152,995 56,717 4,653 250,383 Balance, June 30, 2018 2,948,461 4,110,723 229,050 7,143,871 2,300,222 458,383 17,190,710 Accumulated amortization and impairment Balance, June 30, 2016 Amortization expense 2,781,204 44,784 Effects of movements on exchange rates - 747,500 315,837 789 1,500 1,568 3 Balance, June 30, 2017 Amortization expense 2,825,988 1,064,126 3,071 83,628 390,955 205,031 Effects of movements on exchange rates - 11,746 6,160 397,764 303,938 784 702,486 883,416 26,541 109,500 75,779 190 185,469 85,398 2,566 18,146 20,650 61 4,055,614 762,556 1,827 38,857 4,819,997 123,123 1,771,551 3,699 50,712 Balance, June 30, 2018 2,909,616 1,466,827 214,262 1,612,443 273,433 165,679 6,642,260 Carrying amount Balance, June 30, 2017 Balance, June 30, 2018 122,473 2,133,634 38,845 2,643,896 15,291 14,788 2,473,058 585,451 204,874 5,534,781 5,531,428 2,026,789 292,704 10,548,450 Amortization expense is included in general and administration expense in the consolidated statement of income and comprehensive income. 18 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 7. Development costs Development costs Balance, June 30, 2016 Additions Investment tax credits Balance, June 30, 2017 Additions Investment tax credits Balance, June 30, 2018 Accumulated amortization Balance, June 30, 2016 Amortization Balance, June 30, 2017 Amortization Balance, June 30, 2018 $ 16,814,264 2,283,712 (315,123) 18,782,853 1,776,154 (303,669) 20,255,338 (14,307,812) (1,711,377) (16,019,189) (1,697,161) (17,716,350) 2018 $ 2017 $ Net capitalized development costs 2,538,988 2,763,664 Each period, additions to development costs are recognized net of investment tax credits accrued. In addition to the above amortization, the Company has recognized $6,069,049 of engineering expenditures as an expense during the year ended June 30, 2017 (2017 - $3,426,367). 8. Goodwill The carrying amount of goodwill was allocated to cash-generating units (“CGUs”) as follows: Sangoma US ("SUS") VoIP Supply LLC ("VoIP") Movements in the balance of goodwill consisted of the following: Balance as at June 30, 2016 and 2017 Additions through business combinations (Note 18) Effect of movements in exchange rates Balance as at June 30, 2018 June 30, 2018 $ 3,858,955 1,316,026 5,174,981 June 30, 2017 $ 1,638,546 - 1,638,546 $ 1,638,546 3,411,931 124,504 5,174,981 The recoverable amount of the SUS CGU was determined based on a value in use calculation which uses cash flow projections based on financial budgets covering a five-year period and an after-tax discount rate of 17.0% (pre-tax – 22.4%) per annum. The cash flows beyond the five-year period have been extrapolated using a steady 2.0% per annum growth rate. 19 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 8. Goodwill (continued) The recoverable amount of the VoIP CGU was determined based on a value in use calculation which uses cash flow projections based on financial budgets covering a five-year period and an after-tax discount rate of 16.5% (pre-tax – 21.7%) per annum. The cash flows beyond the five-year period have been extrapolated using a steady 2.0% per annum growth rate. The cash flow projections used in estimating the recoverable amounts are generally consistent with results achieved historically adjusted for anticipated growth. The Company believes that any reasonably possible change in key assumptions on which the recoverable amounts were based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the CGUs. 9. Operating facility and loan As at June 30, 2018, the following borrowing facilities are effective: (i) (ii) (iii) A Demand Operating Line of Credit of up to $3,500,000 to ensure sufficient cash for operations. This facility is governed by a General Security Agreement and standard operating covenants. The amount drawn against the Demand Operating Line of Credit for the acquisition of Converged Communications Division of Dialogic Corporation (“CCD”) was fully repaid such that the closing balance on June 30, 2018 was $nil (June 30, 2017 - $2,910,159). The Demand Operating Line of Credit carries an interest rate of prime plus 0.80%. As at June 30, 2018, the full value of the $3,500,000 is available. A Term Loan Facility of up to $1,000,000 which was used to finance the acquisition of VoIP Supply LLC. This facility is governed by the General Security Agreement and standard operating covenants. The Term Loan Facility has a maturity date of June 2022 and carries an interest rate of prime plus 1.25%. The balance drawn against this Term Loan Facility as of June 30, 2018 was $773,620 (June 30, 2017 - $973,275). As at June 30, 2018, $296,280 (June 30, 2017 - $973,275) in Term Loan Facility is classified as current and $477,340 (June 30, 2017 - $nil) as long-term in the consolidated statements of financial position. A 2nd Term Loan Facility of up to $4,128,640 ($3,200,000 USD) which was used to finance the acquisition of the CCD. This facility is governed by the General Security Agreement and standard operating covenants. This Term Loan Facility has a maturity date of January 2023 and carries a fixed interest rate of 5.38%. The balance drawn against this Term Loan facility as of June 30, 2018 was $3,776,314 (June 30, 2017 - $nil). As at June 30, 2018, $779,992 in Term Loan Facility is classified as current and $2,996,322 as long-term in the consolidated statements of financial position. For the year ended June 30, 2018, the Company incurred interest costs to service the borrowing facilities in the amount of $246,783 (2017 - $99,722). Under its credit agreements with its lenders, the Company must satisfy certain financial covenants, principally in respect of total funded debt to earnings before interest, taxes and amortization (“EBITDA”), and debt service coverage ratio. As at June 30, 2018 and 2017, the Company was in compliance with all covenants related to its credit agreements. 20 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 10. Income tax The reconciliation of the combined Canadian federal and provincial statutory income tax rate of 26.52% (2017 - 26.51%) to the effective tax rate is as follows: Statutory income tax rate Net income before income taxes Expected income tax expense Difference in foreign tax rates Tax rate changes and other adjustments Share based compensation and non-deductible expenses Business acquisition costs True-up Currency translation adjustment and other adjustments Change in tax benefits not recognized Income tax expense 2018 26.52% 2017 26.51% $ $ 3,948,465 1,047,130 147,540 54,740 73,550 98,890 9,860 - 63,260 1,494,970 1,190,574 315,630 5,520 (64,430) 125,230 - - 8,429 - 390,379 The Company's income tax expense is allocated as follows: $ $ Current tax expense Deferred income tax expense Income tax expense The following table summarizes the components of deferred tax asset: Deferred income tax assets (liabilities) Non-deductible reserves - Canadian Non-deductible reserves - US SR&ED investment tax credits, net of 12(1)(x) Unutilized SR&ED expenditure pools Property and equipment - Canadian Property and equipment - US Deferred development costs Intangible assets including goodwill - Canadian Intangible assets including goodwill - US Net deferred income tax assets 1,003,832 491,138 1,494,970 186,709 203,670 390,379 June 30, 2018 $ June 30, 2017 $ 117,540 183,250 1,839,750 - (496,040) (114,540) (837,300) (64,290) 226,770 855,140 137,400 106,204 1,985,934 704,675 (603,114) (63,800) (816,150) (49,912) 138,090 1,539,327 Deferred income tax assets and liabilities have been offset where they relate to income taxes levied by the same taxation authority and the Company has the legal right and intent to offset. Movement in net deferred income tax assets: Balance at the beginning of the year Recognized in net income Other Deferred income tax assets June 30, 2018 26.52% June 30, 2017 26.51% 1,539,327 (491,138) (193,049) 855,140 1,520,472 (203,670) 222,525 1,539,327 21 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 10. Income tax (continued) The Company has deducted available SR&ED for federal and provincial purposes and unutilized SR&ED tax credits. These consolidated financial statements take into account an income tax benefit resulting from tax credits available to the Company to reduce its net income for federal and provincial income tax purposes in future years as follows: Year of expiration 2032 2033 2034 2035 2036 2037 2038 Federal tax credits carry forward $ 239,832 651,641 347,033 288,821 334,585 300,386 227,467 2,389,765 Ontario tax credits carry forward $ - - - - 61,545 68,347 50,936 180,828 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. 11. Shareholders’ equity (i) Share capital Issued and outstanding common shares consist of the following: Shares issued and outstanding: June 30, 2018 June 30, 2017 # # Outstanding, beginning of the year Shares issued for business combinations Shares issued through private placement Shares issued upon exercise of options Shares issued and outstanding, end of year 32,479,809 - - 40,153 32,519,962 As described in Note 18, the Company issued 993,627 common shares valued at $824,710 as consideration for the acquisition of VoIP Supply LLC. 32,519,962 993,627 13,138,000 809,368 47,460,957 In March 2018, the Company completed a private placement of 13,138,000 common shares at a price of $1.00 per share for total gross proceeds of $13,138,000. As part of the private placement, the Company issued 394,140 broker warrants, which are exercisable at $1.00 per common share from the date of issuance for a period of 18 months from the date of closing. The Company incurred $997,037 of share issuance costs (excluding broker warrants) relating to the private placement, which has been capitalized as share issuance costs. The broker warrants issued have been recorded as a warrant reserve in the amount of $186,700 in the consolidated statements of changes in shareholders’ equity. The warrants fair value was determined using the Black-Scholes option pricing model with the following assumptions: share price - $1.17; exercise price - $1.00; expected life - 1.5 years; annualized volatility - 73.0%; dividend yield - nil; risk free rate - 1.83%. For the year ended June 30, 2018, 809,368 (2017 – 40,153) options were exercised for cash consideration of $395,225 and $17,398, respectively. The Company reclassed $135,204 from contributed surplus to share capital as a result of underlying exercise of options during the year ended June 30, 2018 (2017 - $6,348). 22 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 11. Shareholders’ equity (continued) (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 issuance under the plan (and under all other management stock option and employee stock option plans) is limited to 6,199,160 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. 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, 2016 Exercised Expired Forfeited Balance, June 30, 2017 Granted Exercised Expired Forfeited Balance, June 30, 2018 Weighted average Number exercise price $ of options # 5,969,160 (40,153) (15,627) (21,000) 5,892,380 401,000 (809,368) (17,000) (8,438) 5,458,574 0.31 (0.43) (0.35) (0.34) 0.31 0.69 (0.48) (0.17) (0.31) 0.47 23 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 11. Shareholders’ equity (continued) (ii) Stock options (continued) The Company uses the fair value method to account for all share-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. Share price Exercise price Expected volatility Expected option life Expected dividend yield Expected forfeiture rate Risk-free interest rate 2018 2017 $ $ 0.69 0.69 64.77% 5 years - - 1.82% - - - - - - - The following table summarizes information about the stock options outstanding and exercisable at the end of each year: 2018 2017 Exercise price Number of stock options outstanding and exercisable Weighted average remaining contractual life Number of stock options outstanding and exercisable Weighted average remaining contractual life $0.26 - $0.50 $0.51 - $0.75 Total 2,605,065 132,874 2,737,939 1.69 4.50 2.01 2,426,823 - 2,426,823 2.69 - 2.69 The Company recognized share-based compensation expense in the amount of $174,137 for the year ended June 30, 2018 (2017 - $231,034). 24 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 11. Shareholders’ equity (continued) (iii) Earnings per share 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. Number of shares: Weighted average number of shares used in basic earnings per share Shares deemed to be issued in respect of options and warrants Weighted average number of shares used in diluted earnings per share Net income for the year Earnings per share: Basic earnings per share Diluted earnings per share 12. Related parties 2018 2017 37,642,780 3,132,079 32,519,962 2,064,785 40,774,859 $2,453,495 34,584,747 $800,195 $0.065 $0.060 $0.025 $0.023 The Company’s related parties include key management personnel and directors. Unless otherwise stated, none of the transactions incorporated 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: Related parties Total transactions during the year: General and administration expenses Outstanding balances as at June 30: Accounts payable and accrued liabilities Compensation of key management personnel 2018 $ 2017 $ 10,000 11,055 5,000 5,000 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 the fiscal year ended June 30, 2018 and 2017 were as follows: Short-term benefits Long-term benefits Share-based compensation 2018 $ 2017 $ 1,393,836 33,690 104,478 1,532,004 1,200,634 28,562 163,594 1,392,790 25 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 13. Financial instruments The fair values of the cash and cash equivalents, trade receivables, investment tax credits receivable, accounts payable and accrued liabilities and operating facility and loan approximate their carrying values due to the relatively short-term nature of these financial instruments. Cash and cash equivalents are comprised of: Cash at bank and on hand 2018 $ 2017 $ 15,778,191 15,778,191 6,758,889 6,758,889 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. As at June 30, 2018 and 2017, the Company had no cash equivalents. Total interest income and interest expense for financial assets or financial liabilities that are not at fair value through profit or loss can be summarized as follows: Interest income Interest expense (Note 9) Net interest expense 2018 $ (1,566) 246,783 245,217 2017 $ (820) 99,722 98,902 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 some 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 receivables June 30, 2018 $ June 30, 2017 $ 6,710,565 822,994 289,949 7,823,508 (598,134) 7,225,374 2,088,000 660,568 289,737 3,038,305 (37,138) 3,001,167 26 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 13. Financial instruments (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 Net allowance used (recorded) during the year Allowance for doubtful accounts, ending balance June 30, 2018 $ June 30, 2017 $ (37,138) (560,996) (598,134) (250,768) 213,630 (37,138) All of the Company’s cash and cash equivalents are held with a major Canadian financial institution and thus the exposure to credit risk is considered insignificant. 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 cash equivalents and working capital, maintained through stringent cash flow management, to ensure sufficient liquidity is maintained. Maturity analysis of liabilities which are due in next twelve months can be summarized as follows: Accounts payable and accrued liabilities Operating facility and loan 2018 $ 7,919,096 1,076,272 8,995,368 2017 $ 2,872,996 3,883,434 6,756,430 As part of the acquisition of VoIP Supply LLC, the Company recorded a contingent consideration of $488,454 ($376,400 USD) to the selling shareholders of VoIP Supply LLC, which was included in accounts payable and accrued liabilities. As at June 30, 2018, the balance outstanding was $547,240 ($400,000 USD), which is included in accounts payable and accrued liabilities. The contingent consideration was discounted using an effective interest rate of 1.90% and the Company recorded an accretion expense of $44,319 for the year ended June 30, 2018 (2017 – $14,605). 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 end of the reporting period through its U.S. denominated trade receivables, accounts payable and cash. As at June 30, 2018, a 10% depreciation or appreciation of the U.S. dollar against the Canadian dollar would have resulted in an approximate $156,737 (2017 - $480,425) decrease or increase, respectively, in total comprehensive income (loss). Interest rate risk The Company has no significant exposure at June 30, 2018 to interest rate risk through its financial instruments as the operating facility and loan which are due after twelve months from the reporting date are at fixed rates of interest that do not fluctuate during the remaining term. 27 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 14. Capital management 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. 15. Commitments The future minimum lease payments for office space as at June 30, 2018 are as follows: Not later than one year Later than one year and not later than five years 16. Provisions Warranty Sales returns provision and allowances provision $ $ Balance at June 30, 2017 Additional provision recognized Balance at June 30, 2018 28,722 136,372 165,094 24,596 10,000 34,596 $ 1,436,259 2,009,750 3,446,009 Total $ 123,318 156,372 279,690 Stock rotation provision $ 70,000 10,000 80,000 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 represent 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. 17. Segment disclosures 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 and the United States (“US”). The Company sells into three major geographic centers: United States of America (“USA”), 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. 28 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 17. Segment disclosures (continued) Revenues for group of similar products and services can be summarized for the year ended June 30, 2018 and 2017: Products Services 2018 $ 2017 $ 43,255,442 14,106,211 57,361,653 16,681,546 10,198,765 26,880,311 The sales, in Canadian dollars, in each of these geographic locations for the year ended June 30, 2018 and 2017 are below: USA Canada All other countries 2018 $ 2017 $ 43,772,686 802,439 12,786,528 57,361,653 16,225,040 1,368,138 9,287,133 26,880,311 The non-current assets, in Canadian dollars, in each of the geographic locations as at June 30, 2018 and 2017 are below: Canada USA 18. Business combinations June 30, 2018 $ June 30, 2017 $ 6,812,340 12,309,770 19,122,110 7,518,812 2,989,604 10,508,416 a) On December 1, 2016, Sangoma US Inc., a wholly owned subsidiary of Sangoma Technologies Inc., acquired all the key assets of the Telecom business of Micro Advantage Inc. The Company acquired Micro Advantage Inc. to expand and broaden the suite of service offerings, add key customers and realize synergies by removing redundancies. Sangoma US Inc. paid an initial cash consideration of $454,195 ($350,000 USD) and entered into retention payment of $194,655 ($150,000 USD) and discounted earn-out arrangements for contingent consideration of $166,106 ($128,000 USD) which was paid out during the fiscal year ended June 30, 2018 for the full amount of $150,000. The acquisition was accounted for using the acquisition method under IFRS 3, Business Combinations and the purchase price of $814,956 ($628,000 USD) was allocated the following assets: 29 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 18. Business combinations (continued) Consideration Cash consideration Retention payment Contingent consideration Purchase price allocation Purchased technology Website Customer relationships Brand Other purchased intangibles $ $ $ $ $ $ USD 350,000 150,000 128,000 628,000 USD 94,179 6,416 401,832 31,393 94,180 628,000 $ $ CAD 454,195 194,655 166,106 814,956 CAD 122,216 8,326 521,458 40,739 122,217 814,956 b) Effective July 1, 2017, Sangoma US Inc., a wholly owned subsidiary of Sangoma Technologies Inc., acquired all the membership interests of VoIP Supply LLC for total consideration of $4,687,543 ($3,612,193 USD). The Company paid $3,374,379 ($2,600,276 USD) in cash at closing and issued 993,627 common shares valued at $824,710 ($635,517 USD). In addition, the Company has contingent consideration in the amount of $488,454 ($376,400 USD) payable on the first anniversary of the closing, which has been discounted using a risk-free rate and is contingent upon meeting certain targets. The Company acquired VoIP Supply LLC to expand and broaden the suite of service offerings, add key customers and realize synergies by removing redundancies. The carrying value of the trade receivables acquired approximated fair value. The allowance for doubtful accounts at the acquisition date was $32,443 ($25,000 USD). The Company incurred $100,058 in business acquisition costs, which has been expensed and included in the consolidated statement of income and comprehensive income. The acquisition has been accounted for using the acquisition method under IFRS 3, Business Combinations and the purchase price has been allocated to the assets and liabilities as described below: Consideration Cash consideration Less: working capital adjustments Share consideration Contingent consideration¹ $ $ USD 3,000,000 (399,724) 635,517 376,400 3,612,193 CAD 3,893,100 (518,721) 824,710 488,454 4,687,543 $ $ 1 The contingent consideration amounts represent the discounted amount estimated to be paid out in accordance with the agreement. Purchase price allocation Working capital Capital assets Customer relationships Website Brand Goodwill $ $ USD 201,412 41,369 1,160,000 160,000 1,050,000 999,412 3,612,193 CAD 261,372 53,685 1,505,332 207,632 1,362,585 1,296,937 4,687,543 $ $ 30 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 18. Business combinations (continued) c) Effective January 9, 2018, Sangoma Technologies Inc., acquired all the key assets of the Converged Communications Division (“CCD”) from Dialogic Corporation for total consideration of $5,683,038 ($4,516,190 USD) of which $568,304 was held in escrow pending finalization of Working Capital and completion of certain transition plans. The amounts held in escrow was discounted to $561,414 using a 5.0% discount rate. The Company acquired CCD to expand and broaden the suite of service offerings, add key customers and realize synergies by removing redundancies. The carrying value of the trade receivables acquired approximated fair value. The allowance for doubtful accounts at the acquisition date was $698,098 ($554,764 USD). The Company incurred $372,873 in business acquisition costs to close the transaction which has been expensed and included in the consolidated statement of income and comprehensive income. The acquisition has been accounted for using the acquisition method under IFRS 3 - Business Combinations and the purchase price has been allocated to the assets and liabilities as described below: Consideration Cash consideration Amounts held in escrow and paid on May 9, 2018 Purchase price allocation Working capital deficiency assumed Property and equipment Customer relationships Technology Brand Other purchased intangibles Goodwill 19. Subsequent events Business combination USD 4,064,571 446,144 4,510,715 $ $ CAD 5,114,734 561,414 5,676,148 $ $ $ $ USD (159,349) 200,000 1,835,708 699,318 87,415 161,407 1,686,216 4,510,715 CAD (200,520) 251,674 2,310,000 880,001 110,000 203,109 2,121,884 5,676,148 $ $ On September 5, 2018, Sangoma Technologies US Inc. a wholly owned subsidiary of Sangoma Technologies Inc., merged with Digium Inc., a US based company. The total consideration for the acquisition was $35,725,829 ($27,550,246) including customary working capital adjustments. The purchase price consisted of $30,927,847 ($23,850,246) in cash and 3,943,041 Sangoma common shares valued at $4,731,649 ($3,648,848 USD) based on a share price of $1.20 per common share. The Company acquired Digium Inc. to expand and broaden the suite of service offerings, add key customers and realize synergies by removing redundancies. The total transaction costs are expected to be approximately $2,100,000 which will be included in the Company’s unaudited interim consolidated financial statements for the three months ended September 30, 2018. The Company is still in the process of gathering information to perform a preliminary purchase price allocation. Financing In preparation for the closing of the acquisition of Digium, the Company drew down $20,748,027 ($16,000,000 USD) of new debt from its existing lender, bringing the Company’s total credit facilities to approximately $28,000,000. The new facility will be repaid over 7 years, with $12,000,000 USD at a fixed rate of 6.18% and $4,000,000 USD at a variable rate of the bank’s US dollar base rate plus 1.25%, which is 6.25% at the date of acquisition of Digium. 31 Sangoma Technologies Corporation Notes to the consolidated financial statements June 30, 2018 and 2017 (In Canadian dollars) 20. Authorization of the consolidated financial statements The consolidated financial statements were authorized for issuance by the Board of Directors on October 22, 2018. 32 

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