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