Terago Inc. Annual Report 2017

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FY2017 Annual Report · Terago Inc.

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2017 Annual Report

CONTENTS

Letter to Shareholders

Management’s Discussion and Analysis

Management’s Responsibility for Financial Reporting

Auditors’ Report

Consolidated Financial Statements

Notes to the Consolidated Financial Statements

Corporate Information

April 9, 2018

Dear Shareholders,

At the beginning of 2017, we set on a clear path to reposition TeraGo with a sharpened focus on providing
managed cloud and connectivity solutions tailored for mid-sized business. Over the past year, our
organization has been dedicated to executing our strategic plan and we have made great strides to
simplify our products and services, improve our go-to-market effectiveness, and enhance the customer
experience.

PRODUCTS AND SERVICES: In 2017, we streamlined and re-launched our portfolio of services reducing
our number of SKU’s by 60% to better align to customer needs and improve sales efficiency. We also
enhanced our offers to feature in-demand services and improve the customer experience as we:

•
•

•

Launched new packages for popular Cloud and Colocation configurations;
Introduced Cloud Ready Internet Bundles (20/50/100), doubling the multi-product penetration in
the customer base; and
Established our AWS Practice and achieved the Standard Partner tier.

GO TO MARKET EFFECTIVENESS: To reinvigorate growth around Cloud and Colocation we have built a
practice around the Hybrid IT Framework and made investments in sales and marketing to target the right
customers:

•

Increased our sales headcount by 25% and restructured teams into vertically-focused accounts to
foster strong client relationships;
Restructured marketing campaign spending; and

•
• Developed and launched new branding which was accompanied by a new and improved website.

CUSTOMER EXPERIENCE: We implemented systems and processes to strengthen our relationships and
transform customers into ambassadors, including cross-selling new offers to reduce overall customer
churn as we target and acquire new customers:

• Designed and launched a new Customer Lifecycle Management Framework
• Developed and implemented a new support model for high value customers.

The improvements we have made to our operation were critical to building the capabilities needed to
deepen relationships with existing customers, capture new customers and new market share, and put
TeraGo in a much stronger competitive position going forward.

ADDING KEY OPERATING PERFORMANCE INDICATORS

However, 2017 was not without its challenges as total revenue decreased 6.3% to $55.4 million, driven by
a 10.7% decline in Connectivity revenue partially offset by a 3.6% increase in Cloud and Colocation
revenue. The decline in our Connectivity business was expected and consistent throughout the year, but
Cloud and Colocation growth slowed as we restructured our sales organization and rebuilt our sales
funnel. To that end, I’m very encouraged about some of the trends we have seen in our key performance
indicators as we enter 2018.

To provide investors and analysts with greater transparency in tracking the operating trends in our
business, we also introduced several new metrics with our 2017 year-end results – monthly recurring
revenue backlog (MRR), average revenue per user (ARPU), and customer churn.

Notably, in the third quarter of 2017 we signed the largest colocation agreement in TeraGo’s history,
ending the year with significant improvement in our Cloud and Colocation MRR backlog. Meanwhile ARPU
for both our Connectivity and Cloud & Colocation businesses has been stable and customer churn in the
Connectivity business improved modestly from 1.7% in the first half of 2017 to 1.5% - 1.6% in the second
half of 2017.

As we manage churn in our Connectivity business and continue to implement and add to our MRR backlog
by penetrating the mid-sized business market, we expect to see the returns of our efforts from executing
our strategic plan.

UNLOCKING HIDDEN VALUE

A strong operational foundation has taken shape in 2017 and we remain focussed on execution and
delivering results. Concurrently, and building upon this foundation, the Executive management team is
engaged in initiatives to unlock the hidden value of our assets.

One of these assets is our licensed millimetre wave spectrum. TeraGo has spectrum licences in the 24 and
38 GHz bands covering approximately 8.5 billion MHz/Pops across Canada. Innovation, Science and
Economic Development Canada (“ISED”) has identified 38 GHz as a band for next-generation 5G wireless
deployments, and we believe inclusion of the 24 GHz band will eventually follow. As ISED’s decisions
around the use of 5G spectrum are finalized, TeraGo is exploring options for broader use application of its
spectrum assets including enhancing its current product offering or expanding to target new products and
services.

Lastly, TeraGo is free cash flow positive and has sufficient balance sheet flexibility to address its strategic
growth needs, ending 2017 with $7.0 million in cash and cash equivalents, $36.2 million in long-term debt,
and access to an additional $35.0 million in unused credit facilities.

In summary, I believe we have the right team, offering, and strategy in place to return TeraGo to growth
and create long-term value for our shareholders. I would like to thank the employees of TeraGo for their
dedication and efforts, our customers, and you – the shareholders, for your ongoing commitment.

Thank you.

(signed) “Antonio Ciciretto”

Antonio (Tony) Ciciretto
President & Chief Executive Officer

TERAGO INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS FOR THE THREE
MONTHS AND FISCAL YEAR ENDED DECEMBER 31, 2017 AND 2016

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results
of operations and financial condition of TeraGo Inc. All references in this MD&A to “TeraGo”, the “Company”, “we”,
“us”, “our” and “our company” refer to TeraGo Inc. and its subsidiaries, unless the context requires otherwise. This
MD&A is dated February 21, 2018 and should be read in conjunction with our audited consolidated financial statements
for the year ended December 31, 2017 and the notes thereto. Additional information relating to TeraGo, including our
most recently filed Annual Information Form (“AIF”), can be found on SEDAR at www.sedar.com and our website at
www.terago.ca. For greater certainty, the information contained on our website is not incorporated by reference or
otherwise into this MD&A. All dollar amounts included in this MD&A are in Canadian dollars unless otherwise indicated.

Certain information included herein is forward-looking and based upon assumptions and anticipated results that are
subject to uncertainties. Should one or more of these uncertainties materialize or should the underlying assumptions
prove incorrect, actual results may vary significantly from those expected. For a description of material factors that
could cause our actual results to differ materially, see the “Forward-Looking Statements” section and the “Risk Factors”
section in this MD&A. This MD&A also contains certain industry-related non-GAAP and additional GAAP measures that
management uses to evaluate performance of the Company. These non-GAAP and additional GAAP measures are
not standardized and the Company’s calculation may differ from other issuers. See “Definitions – IFRS, Additional
GAAP and Non-GAAP Measures”.

FORWARD-LOOKING STATEMENTS

This MD&A includes certain forward-looking statements that are made as of the date hereof only and based upon
current expectations, which involve risks and uncertainties associated with our business and the economic environment
in which the business operates. All such statements are made pursuant to the ‘safe harbour’ provisions of, and are
intended to be forward-looking statements under, applicable Canadian securities laws. Any statements contained
herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, the
words anticipate, believe, plan, estimate, expect, intend, should, may, could, objective and similar expressions are
intended to identify forward-looking statements. This MD&A includes, but is not limited to, forward looking statements
regarding TeraGo’s growth strategy, strategic plan, the growth in TeraGo’s cloud and data centre businesses, retention
campaign and initiatives to improve customer service, additional capital expenditures, investments in data centres,
products and other IT services. By their nature, forward-looking statements require us to make assumptions and are
subject to inherent risks and uncertainties. We caution readers of this document not to place undue reliance on our
forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to
differ materially from the targets, expectations, estimates or intentions expressed with the forward-looking statements.
When relying on forward-looking statements to make decisions with respect to the Company, you should carefully
consider the risks, uncertainties and assumptions, including the risk that TeraGo’s growth strategy and strategic plan
will not generate the result intended by management, cross-selling of TeraGo’s cloud services may not succeed,
retention efforts decreasing profit margins, opportunities for expansion and acquisition not being available or at
unfavourable terms, TeraGo’s “go-to-market” strategy may not materialize, trends in the global cloud and data centre
sectors may not be accurately projected, the outcome of the ISED 5G Consultation may not be favourable to the
Company, the partnership with AWS not resulting in a favourable outcome, and those risks set forth in the “Risk Factors”
In particular, if any of the risks materialize, the
section of this MD&A and other uncertainties and potential events.
expectations, and the predictions based on them, of the Company may need to be re-evaluated. Consequently, all of
the forward-looking statements in this MD&A are expressly qualified by these cautionary statements and other
cautionary statements or factors contained herein, and there can be no assurance that
the actual results or
developments anticipated by the Company will be realized or, even if substantially realized, that they will have the
expected consequences for the Company.

Except as may be required by applicable Canadian securities laws, we do not intend, and disclaim any obligation, to
update or revise any forward-looking statements whether in words, oral or written as a result of new information, future
events or otherwise.

OVERVIEW

Financial Highlights

•

Total revenue decreased 7.2% to $13.5 million for the three months ended December 31, 2017 compared to $14.6
million for the same period in 2016. The decrease in revenue is primarily driven by lower connectivity revenue
which decreased 10.0% to $8.8 million compared to $9.8 million for the same period in 2016. In addition, cloud
and colocation revenue decreased 1.5% to $4.7 million compared to $4.8 million for the same period in 2016.
However, the percentage of revenues from cloud and colocation of our total revenue have increased steadily
quarter over quarter during 2017 (Q1 = 33.7%, Q2 = 34.0%, Q3 = 34.0%, Q4 = 35.0%) as the Company makes a
shift towards these higher growth service offerings.

Total revenue decreased 6.3% to $55.4 million for the year ended December 31, 2017, compared to $59.1 million
for the same period in 2016. The decrease was driven by the factors described above.

Net loss was $4.1 million for the three months ended December 31, 2017 compared to a net income of $0.4 million
for the same period in 2016. The increase in net loss was primarily driven by the impairment charge on certain
network assets, property and equipment and intangible assets to adjust the carrying amount to their recoverable
amount. In addition, the Company saw a decrease in revenue, increase in cost of services, increase in other
operating costs, increase in finance costs, and an increase in stock based compensation, partially offset by lower
restructuring and related costs, as well as lower depreciation and amortization. For the year ended December 31,
2017, net loss was $7.3 million compared to a net loss of $4.3 million for the same period in 2016. The increase in
net loss was driven by the factors described above.

Adjusted EBITDA(1)(2) decreased to $2.9 million for the three months ended December 31, 2017 compared to $4.9
million for the same period in 2016. The decrease was primarily driven by the reduction of connectivity revenue,
higher third party costs, higher real estate fees, higher software license costs, higher salary and related costs to
support strategic initiatives, and increases in other operating expenses. For the year ended December 31, 2017,
Adjusted EBITDA(1) decreased to $12.9 million compared to $18.9 million for the same period in 2016. The
decrease in Adjusted EBITDA was driven by the factors above, partially offset by higher cloud & colocation
revenue.

Key Developments

•

the Company’s wholly-owned subsidiaries, TeraGo Networks Inc. (“TeraGo
Effective January 1, 2017,
Networks”), RackForce Networks Inc. (“RackForce”), RackForce Cloud Video Inc. and Codeninja Ltd.
(“BoxFabric”) completed a vertical short-form amalgamation (the “Amalgamation”). The amalgamated
corporation continues to carry on business as “TeraGo Networks Inc.” and remains a wholly-owned subsidiary
of TeraGo Inc. The Amalgamation was undertaken to simplify the Company's corporate structure and to obtain
certain administrative and financial reporting efficiencies.

In April 2017, TeraGo was selected as one of Canada’s Top Small and Medium Employers for 2017 which
recognizes small and medium enterprises in Canada that lead in creating exceptional workplaces. TeraGo was
selected as a Top Employer based on a list of eight criteria consisting of the physical workplace environment,
atmosphere, benefits, vacation, employee communications, performance management, community involvement
and training and skills development.

• On June 14, 2017, TeraGo entered into an amending agreement to its credit facilities whereby, TeraGo and its
Lenders (defined below) agreed, among other things, to extend the maturity date from June 30, 2018 to June
14, 2021. The total credit facilities will decrease from an aggregate amount of $85.0 million to $75.0 million, to
reflect principal repayments previously made which have reduced the non-revolving term facility from $50.0
million to $40.0 million. The other facilities consist of a $10.0 million revolving operating credit facility and a $25.0
million non-revolving acquisitions facility, the latter of which remains undrawn and available. National Bank of
Canada, Royal Bank of Canada and The Toronto-Dominion Bank (collectively, the “Lenders”) remain as
syndicate lenders under the Credit Agreement. The covenants and other terms and conditions under the Credit
Agreement remain substantially unchanged.

(1) Adjusted EBITDA is a Non-GAAP measure. See "Definitions - IFRS, Additional GAAP and Non-GAAP Measures.
(2) See “Adjusted EBITDA” for a reconciliation of net loss to Adjusted EBITDA

• On June 15, 2017, the Company announced Mr. Matthew Gerber as the new Chair of the Board, who replaced
Mr. Jim Nikopoulos who did not stand for re-election. Mr. Gerber joined TeraGo’s Board in June 2016 and
currently serves as the Chief Executive Officer and a board member at Rohinni LLC. In addition, at TeraGo’s
shareholders’ meeting, a resolution was approved to reserve an additional 300,000 common shares issuable
pursuant to the Directors’ Share Compensation Program.

•

In June 2017, Innovation, Science and Economic Development Canada (ISED) issued the Consultation on
Releasing Millimetre Wave Spectrum to Support 5G. This Consultation contemplates the future use of certain
millimetre wave spectrum to support the deployment of 5th generation (5G) wireless networks and systems. The
spectrum bands identified by ISED includes (amongst others) the 38 GHz band which TeraGo currently holds
licences in. TeraGo has participated in this Consultation by submitting its comment letter to ISED on September
14, 2017. In addition, the Company has also since submitted a comment letter to another Consultation released
from ISED in October 2017 titled Consultation on the Spectrum Outlook 2018 to 2022. This Consultation seeks
comments from stakeholders on ISED’s overall approach and planned activities for spectrum over the next five
years.

• On July 10, 2017, the Company announced Mr. David Charron has been appointed as Chief Financial Officer,

which took effect on September 5, 2017.

• On August 15, 2017, the Company announced that it had signed the largest data centre services agreement in
Company history. The colocation agreement with a Canadian IT services provider is in respect to the Company’s
Vancouver Vault data centre facility.

TERAGO OVERVIEW

TeraGo provides businesses across Canada with cloud, colocation and connectivity services. The Company provides
cloud Infrastructure as a Service (“IaaS”) computing and storage solutions, data centre colocation solutions, and
operates five (5) data centres across Canada. With respect to the Company’s connectivity services, it owns and
operates a carrier-grade, Multi-Protocol Label Switching (“MPLS”) enabled fixed wireless, IP communications network
in Canada targeting businesses that require Internet access, private interconnection, and data connectivity services.

The Company provides enterprise-class cloud services to multiple high value, mid-market and enterprise customers
across a variety of industry verticals, federal, provincial and municipal governments and agencies, as well as non-profit
organizations. The Company is focussed on providing customers with tailored hybrid IT solutions, running their IT
workloads with the appropriate mix of on-premise, data centre colocation, private and public cloud environments.
It
currently has strategic relationships with several technology partners that give it access to certain products and
solutions to provide enterprise cloud services. The Company has aligned with Amazon Web Services (“AWS”) in
preparation to provide managed public cloud services and is an AWS Consulting Partner, part of the AWS APN partner
network. During the year, TeraGo attained the Standard Partner tier in the AWS Partner Program.

The Company’s subscription-based business model generally generates stable and predictable recurring revenue from
cloud, colocation and connectivity services. Once a customer is obtained, TeraGo’s strategy is to generate incremental
recurring revenue from that customer by cross-selling to bundle customers with multiple services and up-selling within
services provided.

Cloud Services

Colocation Services

Connectivity Services

•

Private and hybrid cloud

IaaS utility computing on virtual
and dedicated compute
platforms

High performance and secure
data storage and archiving

Business Continuity services
for critical situations

• Managed Services for public
and hybrid cloud offerings

•

Colocation services in partial,
full, or customized cabinets

• Managed, Private Dedicated,
and Co-location hosting
services

•

Private Vaults protected with
biometrics for maximum
security

• Other value added services

such as hybrid cloud

•

National high performance,
scalable Internet access
principally via wireless and
fibre optics

Active redundancy capability
with bundled connectivity
solution

• Managed network service

TERAGO’S BUSINESS MODEL

TeraGo’s business strategy is to provide enterprise-class hybrid IT solutions tailored to the mid-market. The Company
leverages its existing nationwide data centre footprint, VMware private/multi-tenant cloud and AWS, all underpinned by
a resilient national carrier grade network infrastructure, to align with customers’ current IT landscape. This allows
customers to operate on platforms best suited for their workloads – on-premise, data centre colocation, TeraGo private
and multi-tenant cloud, and AWS public cloud – all securely interconnected.

TeraGo’s customers typically sign one, two or three-year contracts. The majority of new customers sign contracts for
three years or more. Services are billed monthly over the term of the contract.

CLOUD SERVICES

TeraGo provides cloud services that seek to meet the complex and evolving IT needs of our customers. TeraGo
provides IaaS for compute, storage, disaster recovery cloud solutions and other offerings. These solutions allow the
Company to compete in the cloud services market.

TeraGo offers customized cloud storage and compute offerings to customers across Canada. TeraGo cloud can offer
a virtualized computing environment whereby customers can access on-demand computing without the need to acquire
and maintain expensive server equipment. TeraGo can also provide offsite cloud storage for key backup and disaster
recovery situations, including utilizing partnerships with software and hardware vendors such as Veeam and Solidfire.
The Company has strategic relationships and partnerships with technology leaders such as Amazon Web Services,
IBM, Cisco, VMware, Microsoft, Mitel and others that gives it early access to intelligence, products and solutions to
provide enterprise cloud services.

COLOCATION SERVICES

TeraGo provides data centre colocation services
valuable
information assets. Customers can provision their computing equipment within shared partial cabinets or full, private
cabinets, as well as customized caged space designed for their specific needs. TeraGo provides connectivity on
redundant routes in and out of the facilities.

that protect and connect our

customers’

Hosting and colocation revenue is derived from set-up fees for new installations and monthly recurring charges based
on the number of cabinets and/or the quantity of cage space, power requirements, managed services provided and
Internet/data bandwidth requirements. Other services, such as disaster recovery services, are provided under custom
contractual arrangements.

TeraGo also offers a variety of managed hosting solutions, which may require us to manage various aspects of a
customer’s hardware, software or operating systems in public or privately accessible environment. TeraGo offers
disaster recovery services on a custom basis. These facilities can be provisioned at the data centre location and provide
customers with the capability to restore office functionality with direct access to their information located in the data
centre.

Our network can provide these customers Internet and/or secure private interconnections between the data centre
facility and the customer’s office location(s).

Data centre services customers typically include national government agencies, financial services companies, IT
service providers, content and network service providers, and small and medium businesses which rely on TeraGo to
store and manage their critical IT equipment and provide the ability to directly connect to the networks that enable our
information-driven economy.

Data Centre Facilities

TeraGo’s data centres provide IT solutions, including colocation and disaster recovery, to a roster of small and medium-
sized businesses, enterprises, public sector and technology service providers. TeraGo has approximately 60,000
square feet of data centre capacity in the five (5) facilities it operates across Canada:

Mississauga, Ontario
TeraGo operates a 10,000 square foot AT 101 SOC2 Type 2 certified data centre facility in Mississauga, Ontario that
was previously managed by BlackBerry Limited and built to a tier 3 standard. This facility predominantly serves the
Greater Toronto Area.

Vaughan, Ontario
TeraGo operates a 16,000 square foot AT 101 SOC2 Type 2 certified data centre facility in Vaughan, Ontario, serving
the Greater Toronto Area.

Kelowna, British Columbia
TeraGo operates its 18,000 square feet AT 101 SOC2 Type 2 certified data centre in Kelowna named the GigaCenter.
The GigaCenter is built to a tier 3 standard and the location in Kelowna is considered ideal for a data centre as the
region is considered a seismically stable geographic location, has a temperate climate and has a lower probability of
both natural and man-made events that may be a risk.

Vancouver, British Columbia
TeraGo operates two AT 101 SOC2 Type 2 certified data centre facilities in downtown Vancouver. Its first facility, is
5,000 square feet and is expandable to 7,000 square feet. The facility has redundant fibre facilities between the data
centre and the ‘telco hotel’, 555 West Hastings, in downtown Vancouver. The second facility is 7,000 square feet and
is served by TeraGo’s fiber optic lines. Both facilities are used to service the Greater Vancouver Area.

CONNECTIVITY SERVICES

TeraGo owns and operates a carrier-grade Multi-Protocol Label Switching (“MPLS”) enabled wireline and fixed
wireless, Internet Protocol (“IP”) communications network in Canada, providing businesses with high performance,
scalable, and secure access and data connectivity services.

TeraGo’s carrier grade IP communication network serves an important and growing demand among Canadian
businesses for network access diversity by offering wireless services that are redundant to their existing wireline
broadband connections.

TeraGo’s IP network has been designed to eliminate single points of failure and the Company backs its services with
customer service level commitments, including 99.9% service availability, industry leading mean time to repair, 24 x 7
telephone and e-mail access to technical support specialists.

TeraGo offers Canadian businesses high performance unlimited and usage-based dedicated Internet access
with upload and download speeds from 5 megabits per second (“Mbps”) up to 1 gigabit per second (“Gbps”). Unlike
asymmetrical DSL services offered by many of our competitors, TeraGo provides services that are symmetrical, hence
customers can have the same high speed broadband performance whether uploading or downloading. TeraGo
enhances service performance by minimizing the number of networks between our customers and their audiences,
using peering arrangements with multiple tier-one carriers to connect to the Internet.

To deliver its services, the Company has built and operates a carrier-grade, IP network, using licensed and license-
exempt spectrum and fibre-optic wireline infrastructure that supports commercially available equipment.

The Company owns and controls a national MPLS distribution network from Vancouver
that
aggregates customer voice and data traffic and interconnects where necessary with carrier diverse leased fiber
optic facilities. Major Internet peering and core locations are centralized in Vancouver, Toronto and Seattle, although
Internet access is also available in all regional markets for further redundancy.

to Montreal

TeraGo offers a range of diverse Ethernet-based services over a secured wireless connection to customer locations
up to 20 kilometres from a hub (provided line of sight or wireline networks exist) or through a fibre optic connection.

Quality of Service Capabilities

TeraGo’s MPLS network, including key high traffic hub sites, is equipped with Quality of Service (“QoS”) capabilities to
improve performance and traffic management. All of TeraGo’s major national markets are end-to-end QoS enabled
providing the foundation to support voice traffic and other potential future applications.

Radio Spectrum

24-GHz and 38-GHz Wide-area Licences
The Company owns and leases a national spectrum portfolio of exclusive 24GHz and 38GHz wide-area spectrum
licences which covers major regions throughout Canada including 2,120 MHz of spectrum across Canada’s 6 largest
cities. This spectrum is used to deploy point-to-point and point-to-multipoint microwave radio systems, interconnecting
core hubs in ring architectures (where possible) to backhaul metro area network traffic and in the access network or
“last mile” to deliver high capacity (speeds of 20Mbps to 1Gbps) IP-based services for business, government and
mobile backhaul.

In October 2017, ISED issued the Consultation on the Spectrum Outlook 2018 to 2022. This Consultation seeks
comments from stakeholders on ISED’s overall approach and planned activities for spectrum over the next five years.
This Consultation references the 24 GHz band, among several other bands, being considered for release in the future
for mobile use. As of the date, hereof, the Company has submitted a comment letter in response to the Consultation
and final decisions from ISED on this Consultation are yet to be released.

For additional
stakeholders,
gst.nsf/eng/h_sf11245.html.

please

information on these Consultations and to review the response letter of

refer

ISED’s

Consultation

webpage:

the Company or other
https://www.ic.gc.ca/eic/site/smt-

For further details on our licensed spectrums, please refer to the Company’s 2017 AIF.

SELECTED ANNUAL INFORMATION

The following table displays a summary of our Consolidated Statements of Comprehensive Earnings (Loss) for the
three months ended December 31, 2017 and 2016 and the years ended December 31, 2017, 2016 and 2015 and a
summary of select Balance Sheet data as at December 31, 2017, 2016 and 2015.

(in thousands of dollars, except with respect to
earnings (loss) per share)

Three months ended
December 31
2016

2017

Years ended December 31

2017

2016

2015

4,798
9,795
14,593

3,322
4,660

2,239
792

2,859
13,872
721
(2)
(379)
-
340

355
(63,498)
(63,143)
0.02
0.02

14,223

18,961
36,431
55,392

14,103
19,088

13,574
3,052

11,272
61,088
(5,696)
50
(1,698)
50
(7,294)

18,296
40,790
59,086

13,477
21,195

10,845
3,529

11,796
60,842
(1,756)
16
(1,882)
8
(3,614)

13,166
44,554
57,720

13,159
20,587

10,062
3,697

11,400
58,905
(1,185)
(171)
(2,624)
37
(3,943)

(700)

1,133

$
$
$

(7,294)
(63,143)
(70,437)
(0.51)
(0.51)

(4,314)
(58,829)
(63,143)
(0.23)
(0.23)

(2,810)
(56,019)
(58,829)
(0.34)
(0.34)

14,307

12,252

11,588

14,307

12,252

11,588

As at December 31
2016
13,034
3,673
3,150
44,161
102,837
11,027
40,778
1,567
48,648

$
$
$
$
$
$
$
$
$

2015
13,066
3,306
3,351
48,520
110,002
9,128
45,781
2,163
52,215

Revenue

Cloud and colocation revenue
Connectivity revenue
Total Revenue

Expenses
Cost of services
Salaries and related costs

Other operating expenses
Amortization of intangible assets
Depreciation of network assets, property and
equipment

Earnings (loss) from operations
Foreign exchange loss
Finance costs
Finance income
Earnings (loss) before income taxes
Income taxes
Income tax recovery (expense)
Net earnings (loss) and comprehensive
earnings (loss)
Deficit, beginning of year
Deficit, end of year
Basic earnings (loss) per share
Diluted earnings (loss) per share
Basic weighted average number of shares
outstanding
Diluted weighted average number of shares
outstanding

Selected Balance Sheet Data

Cash and cash equivalents
Accounts receivable
Prepaid expenses and other assets
Network assets, property and equipment
Total Assets
Accounts payable and accrued liabilities
Long-term debt
Other long-term liabilities
Shareholders' equity

$
$
$

$
$
$
$
$
$
$
$
$

4,727
8,816
13,543

3,544
4,495

5,583
745

2,746
17,113
(3,570)
15
(523)
17
(4,062)

(4,061)
(66,376)
(70,437)
(0.28)
(0.28)

14,335

2017
6,986
3,389
2,516
38,822
87,858
8,519
36,183
475
41,917

RESULTS OF OPERATIONS

Comparison of the three months and year ended December 31, 2017 and 2016
(in thousands of dollars, except with respect to gross profit margin, earnings per share, Backlog MRR, and ARPU)

Financial

Cloud and Colocation Revenue

Connectivity Revenue

Total Revenue
Cost of Services(1)
Gross profit margin (1)
Adjusted EBITDA(1) (2)
Income tax recovery (expense)

Net Income (Loss)

Basic loss per share

Diluted loss per share

Operating

Backlog MRR(1)
Connectivity

Cloud & Colocation

Churn Rate(1)
Connectivity

Cloud & Colocation

ARPU(1)

Connectivity

Cloud & Colocation

Three months ended
December 31
2016

Years ended
December 31
2016

2017

4,798

9,795

14,593

3,322

77.2%

4,889

355

0.02

73,923

20,223

1.7%

18,961

36,432

55,392

14,103

74.5%

12,864

(7,294)

(0.51)

84,191

291,698

1.6%

18,296

40,790

59,086

13,477

77.2%

18,941

(700)

(4,314)
(0.30)

(0.30)

73,923

20,223

1.4%

1.5%

2017

4,727

8,816

13,543

3,544

73.8%

2,937

(4,061)

(0.28)

84,191

291,698

1.6%

1.4%

996

3,027

963

3,113

980

3,106

961

3,039

(1) See "Definitions – Key Performance Indicators, IFRS, Additional GAAP and Non-GAAP Measures”

(2) See “Adjusted EBITDA” for a reconciliation of net loss to Adjusted EBITDA

Refer to “Definitions – Key Performance Indicators, IFRS, Additional GAAP and Non-GAAP Measures” for a
description of the components of relevant line items below.

Revenue
Total revenue decreased 7.2% to $13.5 million for the three months ended December 31, 2017 compared to $14.6
million for the same period in 2016. Total revenue decreased 6.3% to $55.4 million for the year ended December 31,
2017, compared to $59.1 million for the same period in 2016.

Cloud and Colocation Revenue
For the three months ended December 31, 2017, cloud and colocation revenue decreased 1.5% to $4.7 million
compared to $4.8 million for the same period in 2016. The decrease was driven by churn impacts throughout the year.
For the year ended December 31, 2017, cloud and colocation revenue increased 3.6% to $19.0 million compared to
$18.3 million for the same period in 2016. The increase was driven by greater provisioning of cloud and colocation
services to new and existing customers.

Connectivity Revenue
For the three months ended December 31, 2017, connectivity revenue decreased 10.0% to $8.8 million compared to
$9.8 million for the same period in 2016. Connectivity revenues were impacted by a variety of factors, including churn,
certain customers renewing long term contracts at lower current market rates, and lower usage revenues as certain
customers have shifted to unlimited usage plans. For the year ended December 31, 2017, connectivity revenue
decreased 10.7% to $36.4 million compared to $40.1 million for the same period in 2016. The decrease was driven by
the factors described above.

Cost of services
For the three months ended December 31, 2017, cost of services increased 6.7% to $3.5 million compared to $3.3
million for the same period in 2016. The increase was primarily driven by higher third party network costs, higher
software costs related to the growth in cloud revenue, and higher data centre costs, partially offset with savings from
fewer property access leases. For the year ended December 31, 2017, cost of services increased 4.6% to $14.1 million
compared to $13.5 million for the same period in 2016. The increase was driven by the factors described above.

Salaries and related costs and other operating expenses (“SG&A”)
For the three months ended December 31, 2017, SG&A increased 46.1% to $10.1 million compared to $6.9 million for
the same period in 2016. The increase was primarily driven by an impairment charge recognized to adjust the carrying
value of assets to their recoverable amount. In addition, the Company incurred higher personnel costs, higher data
centre rent, higher marketing costs, increased stock based compensation, and higher software license costs, partially
offset by lower restructuring, acquisition-related and integration costs, an increase in proportion of capital
labour
activities, and lower billing related charges.

For the year ended December 31, 2017, SG&A increased 1.9% to $32.7 million compared to $32.0 million for the same
period in 2016. The increase was driven primarily by the impairment charge discussed above. In addition, the Company
had higher data centre rent, salary and consultancy fees to support strategic initiatives, marketing costs, and recruiting
fees for key management personnel, partially offset by decreased restructuring, acquisition-related and integration
costs, an increase in proportion of capital labour, lower stock-based compensation related to executive-level headcount
departures, and stronger network inventory management.

Net loss
For the three months ended December 31, 2017, net loss was $4.1 million compared to a net income of $0.4 million
for the same period in 2016. The increase in net loss was primarily driven by the impairment charge on certain network
assets, property and equipment and intangible assets to adjust the carrying amount to their recoverable amount. In
addition, the Company saw a decrease in revenue, increase in cost of services, increase in other operating costs,
increase in finance costs, and an increase in stock based compensation, partially offset by lower restructuring and
related costs, as well as lower depreciation and amortization. For the year ended December 31, 2017, net loss was
$7.3 million compared to a net loss of $4.3 million for the same period in 2016. The increase in net loss was driven by
the factors described above.

Adjusted EBITDA(1)
For the three months ended December 31, 2017, Adjusted EBITDA(1) decreased 39.9% to $2.9 million for the three
months ended December 31, 2017 compared to $4.9 million for the same period in 2016. The decrease was primarily
driven by the reduction of connectivity revenue, higher third party costs, higher real estate fees, higher software license
costs, higher salary and related costs to support strategic initiatives, and increases in other operating expenses. The
increase in costs is primarily a result of the Company benefiting from several non-recurring recoveries in 2016 for which
it did not see a similar benefit in 2017. For the year ended December 31, 2017, Adjusted EBITDA(1) decreased 32.1%
to $12.9 million compared to $18.9 million for the same period in 2016. The decrease in Adjusted was driven by the
factors above, partially offset by higher cloud & colocation revenue.

The table below reconciles net loss to Adjusted EBITDA(1) for the three months and year ended December 31, 2017
and 2016.

(in thousands of dollars)

Three months ended
December 31

Year ended
December 31

Net earnings (loss) for the period

(4,061)

355

(7,294)

2017

2016

2017

Foreign exchange loss (gain)

Finance costs

Finance income

Income tax (recovery) expense

Earnings (loss) from operations

Add:

Depreciation of network assets, property and
equipment and amortization of intangible assets

Loss on disposal of network assets

Impairment of Assets and Related Charges

Stock-based Compensation Expense
Restructuring, acquisition-related, integration costs
and other

Adjusted EBITDA(1)

(15)

523

(17)

(3,570)

3,492

2,851

156

(7)

2,937

379

(15)

721

3,651

(50)

1,698

(50)

14,324

109

2,851

201

(5,696)

(1,756)

2016

(4,314)

(16)

1,882

(8)

700

15,325

397

866

4,109

18,941

416

4,889

1,075

12,864

(1) See "Definitions – Key Performance Indicators, IFRS, Additional GAAP and Non-GAAP Measures”

Backlog MRR
Cloud and colocation backlog MRR was $291,698 as at December 31, 2017 compared to $20,223 as at December 31,
2016. The increase is driven by growth in Cloud and Colocation sales bookings in the second half of 2017 with
provisioning scheduled into 2018.

Connectivity backlog MRR was $84,191 as at December 31, 2017, compared to $73,923 as at December 31, 2016.
The change in backlog MRR is driven primarily by the timing of customer provisioning.

ARPU
Cloud and colocation ARPU was $3,027 and $3,106, respectively, for the three and twelve months ended December
31, 2017 compared to $3,113 and $3,039 for the same periods in 2016. ARPU remained relatively flat in the period,
with recent large new customer colocation contracts scheduled to be provisioned in the first half of 2018.

Connectivity ARPU was $996 and $980, respectively, for the three and twelve months ended December 31, 2017
compared to $963 and $961 for the same periods in 2016. The increase is driven by the churn of low ARPU customers,
and the Company's focus on acquiring mid-market customers.

Churn
Cloud and colocation churn was 1.4% and 1.6%, respectively, for the three and twelve months ended December 31,
2017 compared to 1.7% and 1.5% for the same period in 2016. While the rate of churn will fluctuate based on the timing
of contract renewals and product lifecycles, the Company's investments in developing a robust customer experience
framework are expected to positively impact churn rates moving forward.

Connectivity churn was 1.6% and 1.6%, respectively, for the three and twelve months ended December 31, 2017
compared to 1.7% and 1.4% for the same period in 2016. The Company continues to focus on servicing and retaining
mid-market customers with churn expected to continue from lower ARPU customers due to competition at the low end
of the market.

Finance costs
For the three months ended December 31, 2017, finance costs increased 38.0% to $0.52 million compared to $0.38
million for the same period in 2016. The increase was a result of a favourable revaluation of the Company’s interest
rate swap contract in the prior year in addition to unfavourable valuation impacts of the Company’s asset retirement
obligation in the current year. For the year ended December 31, 2017, finance costs decreased 9.8% to $1.7 million
compared to $1.9 million for the same period in 2016. The decrease in both periods was primarily driven by lower
interest expense on the Company’s term facility.

Income tax expense
The income tax expense in the 2016 periods was from a reduction in the carrying value of the deferred income tax
asset. No such charge or recovery was recorded in 2017.

Depreciation and amortization
For the three months ended December 31, 2017, depreciation of network assets, property and equipment and
amortization of intangibles decreased 4.4% to $3.5 million compared to $3.7 million for the same period in 2016. The
decrease is mainly attributed to certain intangible assets reaching zero net book value after the three months ended
December 31, 2016. For the year ended December 31, 2017, depreciation of network assets, property and equipment
and amortization of intangibles decreased 6.5% to $14.3 million compared to $15.3 million for the same period in 2016.
The decrease was driven by the factors described above.

Summary of Quarterly Results

All financial results are in thousands, with the exception of earnings per share, Backlog MRR, and ARPU

Revenue
Gross Profit Margin % (1)
Adjusted EBITDA (1)
Net income/(loss)
Basic income/(loss) per
share
Diluted income/(loss)
per share
Basic weighted average
number of shares
outstanding
Diluted weighted
average number of
shares outstanding

Operating
Backlog MRR(1)
Connectivity
Cloud & Colocation

Churn Rate(1)
Connectivity
Cloud & Colocation

ARPU(1)

Connectivity
Cloud & Colocation

$
$
$

$
$

Q4-17

Q3-17

Q2-17

Q1-17

Q4-16

Q3-16

Q2-16

Q1-16

13,543
73.8%
2,937
(4,061)
(0.28)

13,680
74.3%
3,213
(1,047)
(0.07)

13,892
74.3%
3,003
(1,131)
(0.08)

14,277
75.6%
3,711
(1,055)
(0.07)

14,593
77.2%
4,889
355
0.02

14,780
77.5%
4,481
(3,454)
(0.24)

14,784
77.3%
4,895
(395)
(0.03)

14,929
76.8%
4,676
(820)
(0.06)

(0.28)

(0.07)

(0.08)

(0.07)

0.02

(0.24)

(0.03)

(0.06)

14,335

14.334

14,283

14,258

14,223

14,190

14,159

14,135

14,335

14.334

14,283

14,258

14,230

14,190

14,159

14,135

84,191
291,698

98,345
134,283

76,254
39,977

69,518
33,962

73,923
20,223

1.6%
1.4%

996
3,027

1.5%
1.5%

984
3,112

1.7%
2.2%

972
3,124

1.7%
1.2%

968
3,160

1.7%
1.7%

963
3,113

69,455
46,612

1.3%
0.8%

962
2,995

n/a(2)
n/a(2)

1.1%
1.3%

960
2,998

n/a(2)
n/a(2)

1.3%
2.1%

959
3,050

(1) See "Definitions – Key Performance Indicators, IFRS, Additional GAAP and Non-GAAP Measures"
(2) Information was tracked Q3 2016 and onwards

Seasonality
The Company’s net customer growth, with respect to its connectivity business, is typically impacted adversely by
weather conditions as the majority of new customer locations require the installation of rooftop equipment. Typically,
harsher weather in the first quarter of the year results in a reduction of productive installation days. In addition, certain
customers using our cloud services may have higher usage during certain times of the year based on the seasonality
of their respective businesses.

The Company’s cash flow and earnings are typically impacted in the first quarter of the year due to several annual
agreements requiring payments in the first quarter including annual rate increases in long-term contracts and the restart
on January 1st of payroll taxes and other levies related to employee compensation.

LIQUIDITY AND CAPITAL RESOURCES

TeraGo has historically financed its growth and operations through cash generated by operations, the issuance of
equity securities and long-term debt.

The table below is a summary of cash inflows and outflows by activity.

(in thousands of dollars)

Statement of Cash Flows Summary

Cash inflows and (outflows) by activity:

Operating activities

Investing activities

Financing activities

Net cash inflows (outflows)

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

Three months ended
December 31

Year ended
December 31

2017

2016

2017

2016

4,459

(3,201)

(1,398)

(140)

7,126

6,986

5,067

(2,312)

(1,614)

1,141

11,893

13,034

10,362

(10,294)

(6,116)

(6,048)

13,034

6,986

16,358

(9,565)

(6,825)

(32)

13,066

13,034

Operating Activities
For the three months ended December 31, 2017, cash generated from operating activities was $4.5 million compared
to cash generated of $5.1 million for the same period in 2016. The decrease in cash from operating activities is mainly
due to the decrease in revenues partially offset by favourable changes in working capital. For the year ended December
31, 2017, cash generated from operating activities was $10.4 million compared to cash generated of $16.4 million for
the same period in 2016. The decrease was driven by the factors described above in addition to higher severances
and stock based compensation costs paid in 2017.

Investing Activities
For the three months ended December 31, 2017, cash used in investing activities was $3.2 million compared to cash
used of $2.3 million for the same period in 2016. The increase in cash used in investing activities was due to increased
capital expenditures partially offset by favourable timing of payments for network assets, property and equipment and
intangible assets. For the year ended December 31, 2017, cash used in investing activities was $10.3 million compared
to cash used of $9.6 million for the same period in 2016. The increase in cash used in investing activities was mainly
due to increased capital expenditures and unfavourable timing of payments for network assets, property and equipment
and intangible asset.

Financing Activities
For the three months ended December 31, 2017, cash used in financing activities was $1.4 million compared to cash
used of $1.6 million for the same period in 2016. For the year ended December 31, 2017, cash used in financing
activities was $6.1 million compared to $6.8 million for the same period in 2016. The decrease in cash used in financing
activities is mainly due to a reduction of the Company’s interest expense and a reduction of principal repayments
required under the amended credit facilities, partially offset by financing fees related to the amended credit facilities.

Capital Resources
As at December 31, 2017, the Company had cash and cash equivalents of $7.0 million and access to approximately
$35.0 million undrawn portion of its $75 million credit facilities, subject to the terms and conditions of the credit facilities.

The Company anticipates incurring additional capital expenditures for the purchase and installation of network,
colocation and cloud assets and customer premise equipment. As economic conditions warrant, the Company may
expand its network coverage into new Canadian markets and making additional investments in colocation, cloud and
other IT services through acquisitions or expansion.

Management believes the Company’s current cash, anticipated cash from operations, access to the undrawn portion
of debt facilities and its access to additional financing in the form of debt or equity will be sufficient to meet its working
capital and capital expenditure requirements for the foreseeable future.

Term Debt Facility
In June 2014, the Company entered into an agreement with a syndicate led by the National Bank of Canada (“NBC”)
to provide a $50.0 million credit facility that is principally secured by a general security agreement over the Company’s
assets.

In March 2015, the Company entered into an amended agreement with the Lenders that increases the credit facility by
$35.0 million ($30.0 million increase to the term debt facility and $5.0 million increase to the revolving facility) and
extended the term from June 6, 2017 to June 30, 2018. Other terms are substantially consistent with the existing credit
facilities.

In June 2017, the Company entered into a second amended agreement with the Lenders that reduced the term debt
facility from $50.0 million to $40.0 million (as a result of principal previously repaid), reduced the quarterly principal
installment from $1.25 million to $1.0 million and extended the term from June 30, 2018 to June 14, 2021. Other terms
were substantially consistent with the existing credit facilities.

The total $75.0 million facility that matures June 14, 2021 is made up of the following:

•

$10.0 million revolving facility which bears interest at prime plus a margin percent. As of December 31,
2017, $nil amount is outstanding. Letters of credit issued under the facility totaled $0.7 million as of
December 31, 2017.

$40.0 million term facility which bears interest at prime or Banker’s Acceptance (at the Company’s option) plus
a margin percent and is repayable in quarterly principal installments of $1.0 million. This facility was fully drawn
upon signing the second amended agreement.

On December 31, 2017, $36.8 million of the term facility principal was in a Banker’s Acceptance and the
remaining $0.2 million was at a floating rate. In 2015, the Company entered into amended interest rate swap
contracts that matures June 29, 2018. The interest rate on the Banker’s Acceptance at December 31, 2017
was 3.99%. The interest rate swap contract has not been designated as a hedge and will be marked-to-market
each quarter. The fair value of the interest rate swap contract at December 31, 2017 was an asset of $0.03
million (December 31, 2016 liability of $0.3 million) and is recorded in other long-term assets/liabilities, with a
corresponding charge (recovery) for the change in fair value recorded in finance costs.

As at December 31, 2017, the Company prepaid interest in the amount of $0.4 million which represents the
net settlement of the Banker’s Acceptance and is recorded as a reduction in the carrying value of the debt.

•

$25.0 million available for funding acquisitions and will bear interest at prime or Banker’s Acceptance (at
the Company’s option) plus a margin percent and is repayable in quarterly principal installments of 2.5% of
the aggregate amount outstanding. As of December 31, 2017, this facility remains undrawn.

In connection with the second amended agreement, the Company incurred financing fees of $0.29 million, which
have been deferred and will be amortized using the effective interest method over the amended term of the facility.
The balance of previously incurred financing fee is also amortized over the same amended term.

The NBC facility is subject to certain financial and non-financial covenants which the Company is in compliance with
at December 31, 2017. Under this facility, the Company is subject to a cash flow sweep that could accelerate a
certain amount of principal repayment based on a calculation outlined by the credit agreement not later than 120
days after the end of each fiscal year.

Equity Offering
On June 11, 2015, the Company completed an equity offering to issue and sell 1,755 common shares for gross
proceeds of $10,004 (the “Offering”). Proceeds net of commissions, legal, accounting and listing fees were $9,210. The
Offering was carried out pursuant to an underwriting agreement with a syndicate of underwriters led by National Bank
Financial Inc. and TD Securities Inc. and included Cormark Securities Inc., PI Financial Corp. and RBC Capital Markets.

The Company allocated $9,210 of the intended use of net proceeds from the equity offering as follows:

Intended Use of Net Proceeds
a) Fund its continued growth strategy, which is expected

Allocation
$4.0 million

Use of Net Proceeds
as at December 31, 2017
$3.6 million

to include potential strategic acquisitions

b) Fund operational efficiency initiatives
c)

Invest in new product development activities,
specifically in the cloud and data centre segments

$3.2 million
$2.0 million

$1.7 million
$1.1 million

As of December 31, 2017, $6.4 million of the net proceeds from the equity offering were used. The Company’s intended
use of these proceeds has not changed.

Contractual Obligations
The Company is committed to leases for premises, office equipment, network real estate access, automobiles,
telecommunication facilities and radio spectrum licenses. Annual minimum payments over the next five years and
thereafter are as follows:

2018
2019
2020
2021
2022
Thereafter

Amount
9,932
8,010
6,175
5,035
3,664
15,316
48,132

Off-balance Sheet Arrangements
As of December 31, 2017, the Company had no off-balance sheet arrangements apart from operating leases noted
above.

Transactions with Related Parties
Two former Directors of the Company, who retired effective June 23, 2016, also served as Chairman of the Board
and a Director of a customer of the Company. Revenue from this customer for the year ended December 31, 2017
was $nil and $40 thousand. Accounts receivable from this customer as at December 31, 2017 was $nil (2016 - $nil).

The terms governing these related party transactions are consistent with those negotiated on an arm’s length basis
with non-related parties.

Share Capital
TeraGo’s authorized share capital consists of an unlimited number of Common Shares, an unlimited number of Class
A Non-Voting Shares and two Class B Shares. A detailed description of the rights, privileges, restrictions and conditions
attached to the authorized shares is included in the Company’s 2016 Annual Information Form, a copy of which can be
found on SEDAR at www.sedar.com.

As of February 21, 2018, there were 14,399 Common Shares issued and outstanding and two Class B Shares issued
and outstanding. In addition, as of February 21, 2018, there were 97 Common Shares issuable upon exercise of TeraGo
stock options.

Financial Instruments
The Company initially measures financial instruments at fair value. Transaction costs that are directly attributable to the
issuance of financial assets or liabilities are accounted for as part of the carrying value at inception (except for
transaction costs related to financial instruments recorded as FVTPL financial assets which are expensed as incurred),
and are recognized over the term of the assets or liabilities using the effective interest method.

Subsequent measurement and treatment of any gain or loss is recorded as follows:

(i)

(ii)

(iii)

Financial assets and financial liabilities at FVTPL are measured at fair value at the balance sheet
date with any gain or loss recognized immediately in net loss.
Interest and dividends earned from
financial assets are also included in net loss for the period.
Loans and receivables are measured at amortized cost using the effective interest method. Any
gains or losses are recognized in net loss for the period.
Other financial liabilities are measured at amortized cost using the effective interest method. Any
gains or losses are recognized in net loss for the period.

The following is a summary of the Company’s significant categories of financial instruments as at December 31, 2017:

impairment loss is calculated as the difference between its carrying amount and the present value of the estimated
future cash flows discounted at the asset's original effective interest rate.

In assessing impairment, the Company uses historical trends of the probability of default, timing of recoveries and the
amount of loss incurred, adjusted for management's judgment as to whether current economic and credit conditions
are such that the actual losses are likely to be greater or less than suggested by historical trends. Losses are recognized
in the consolidated statements of loss and reflected in an allowance account against the financial asset.

Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market.
Such assets currently are comprised of cash and cash equivalents, accounts receivable and restricted cash.

(i)

(ii)

Cash and Cash Equivalents and restricted cash
Cash and cash equivalents consists of bank balances, cash on hand, demand deposits that can be
withdrawn without penalty and short-term, highly liquid securities such as debt securities with an
initial maturity date of not more than three months from the date of acquisition, that can readily be
converted into known amounts of cash and are subject to an insignificant risk of change in value.
Bank overdrafts that are repayable upon demand and form an integral part of the Company’s cash
management are included as a component of cash and cash equivalents. Cash and cash equivalents
and restricted cash are carried at amortized cost.

Accounts Receivable
Accounts receivable are measured at the amount the item is initially recognized. The allowance for
doubtful accounts is based on the Company’s assessment of the collectability of outstanding trade
receivables. The evaluation of collectability of customer accounts is done on an individual account
If, based on an evaluation of accounts, it is concluded that it is probable that a customer will
basis.
not be able to pay all amounts due, an expected impairment loss is recognized. Recoveries are only
recorded when objective verifiable evidence supports the change in the original allowance. Changes
in the carrying amount of the allowance account are recognized in the statement of comprehensive
loss for the period.

Other financial liabilities
The Company recognizes debt securities issues and subordinated liabilities on the date that they originated. All other
financial liabilities are recognized initially on the date that the Company becomes a party to the contractual provisions.
The Company has the following non-derivative financial liabilities: current and long-term debt, accounts payable and
accrued liabilities, and current portion and long-term portion of other long term liabilities.

Such liabilities are recognized initially at fair value less any directly attributable transaction costs. Subsequent to initial
recognition these financial liabilities are measured at amortized cost using the effective interest method.

Interest on loans and borrowings is expensed as incurred unless capitalized for qualifying assets in accordance with
IAS 23, Borrowing Costs. Loans and borrowings are classified as a current liability unless the Company has an
unconditional right to defer settlement for at least 12 months after the end of the year.

Derivative instruments
The Company uses an interest rate swap contract to manage the risk associated with the fluctuations of interest rates
on its long-term debt. Management does not apply hedge accounting on the interest rate swap contract. As a result,
the interest rate swap contract is marked to market each period, resulting in a gain or loss in net loss for the year.

Financial Instrument Risks

Fair value of financial instruments
The Company has determined the estimated fair values of its financial instruments based on appropriate valuation
methodologies. Where quoted market values are not readily available, the Company may use considerable judgment
to develop estimates of fair value. Accordingly, any estimated values are not necessarily indicative of the amounts the
Company could realize in a current market exchange and could be materially affected by the use of different
assumptions or methodologies. The Company classifies its fair value measurements within a fair value hierarchy,

which reflects the significance of the inputs used in making the measurements as defined in IFRS 7 – Financial
Instruments – Disclosures.

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 - Inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly

or indirectly; and

Level 3 - Unobservable inputs for the asset or liability which are supported by little or no market activity

The fair values of cash and cash equivalents, short-term investments and restricted cash, which are primarily money
market and fixed income securities, are based on quoted market values. The fair values of short-term financial assets
and liabilities, including accounts receivable, accounts payable and accrued liabilities, as presented in the consolidated
statements of financial position, approximate their carrying amounts due to their short-term maturities. The fair value
of long-term debt approximates its carrying value because management believes the interest rates approximate the
market interest rate for similar debt with similar security. The fair value of our interest rate swap contract is based on
broker quotes and therefore, these contracts are measured using Level 2 inputs. Similar contracts are traded in an
active market and the quotes reflect the actual transactions in similar instruments.

Credit risk
The Company’s cash and cash equivalents and restricted cash subject the Company to credit risk. The Company
maintains cash and investment balances at Tier 1 Canadian financial institutions. The Company’s maximum exposure
to credit risk is limited to the amount of cash and cash equivalents.

Credit risk related to our interest rate swap contract arises from the possibility that the counter party to the agreement
may default on their obligation. The Company assesses the creditworthiness of the counterparty to minimize the risk of
counterparty default. The interest rate swap is held by National Bank Financial.

The Company, in the normal course of business, is exposed to credit risk from its customers and the accounts
receivable are subject to normal industry risks. The Company attempts to manage these risks by dealing with credit
worthy customers. If available, the Company reviews credit bureau ratings, bank accounts and industry references for
all new customers. Customers that do not have this information available are typically placed on a pre-authorized
payment plan for service or provide deposits to the Company. This risk is minimized as the Company has a diverse
customer base located across various provinces in Canada.

As at December 31, 2017 and 2016, the Company had no material past due trade accounts receivable.

Interest rate risk
The Company is subject to interest rate risk on its cash and cash equivalents and long-term debt. The Company is
exposed to interest rate risk on its operating line of credit since the interest rates applicable are variable and is,
therefore, exposed to cash flow risks resulting from interest rate fluctuations. As at December 31, 2017, the operating
line of credit balance was $nil. The drawn term facility as at December 31, 2017 was $37.0 million, $36.8 million of
which was held in a Bankers Acceptance. In 2015, the Company entered into amended interest rate swap contracts
that matures June 29, 2018. The interest rate on the Banker’s Acceptance at December 31, 2017 was 3.99%. The
remaining $200 thousand drawn under this facility bears interest for the period at prime rate plus a margin.

Liquidity risk
The Company believes that its current cash and cash equivalents and anticipated cash from operations will be sufficient
to meet its working capital and capital expenditure requirements for the foreseeable future. As at December 31, 2017,
the Company had cash and cash equivalents of $7.0 million. The Company has access to the $34.3 million undrawn
portion of its $75 million credit facilities after consideration of outstanding letters of credit, subject to certain financial
and non-financial covenants.

SIGNIFICANT ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates
and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income
and expenses. Actual results may differ from these estimates. Estimates and assumptions are reviewed on an ongoing

basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any
future periods affected.

Key areas of estimation and information about critical judgments in applying accounting policies that have the most
significant effect on amounts recognized in the consolidated financial statements are:

(i)

(ii)

(iii)

(iv)

(v)

(vi)

(vii)

(viii)

(ix)

Estimates of useful
lives of network assets, property and equipment and intangible assets:
Management's judgment involves consideration of intended use, industry trends and other factors in
determining the expected useful lives of depreciable assets, to determine depreciation methods, the
asset's residual value and whether an asset is a qualifying asset for the purposes of capitalizing
borrowing costs.

Capitalization of costs:
Judgments and estimates are used in assessing the direct labour and other costs capitalized to
network assets, property and equipment.

Cash generating units:
Judgment is required to assess the Company’s determination of cash generating units for the
purpose of impairment testing.

Impairment of non-financial assets:
The process to calculate the recoverable amount of our cash generating unit requires use of valuation
methods such as the discounted cash flow method which uses assumptions of key variables including
future cash flows, discount rate and terminal growth rates.

Allowance for doubtful accounts:
In developing the estimates for an allowance against existing receivables, the Company considers
general and industry economic and market conditions as well as credit information available for the
customer and the aging of the account. Changes in the carrying amount due to changes in economic
and market conditions could significantly affect the loss for the period.

Stock-based compensation:
Estimating fair value for stock-based payments requires determining the most appropriate valuation
model for a grant, which is dependent on the terms and conditions of the grant.
In valuing stock
options, the Company uses the Black-Scholes option pricing model. Several assumptions are used
in the underlying calculation of fair values of the Company's stock options using the Black-Scholes
option pricing model including the expected life of the option, risk-free interest rate and volatility of
the underlying stock.

Business combination:
The amount of goodwill initially recognized as a result of a business combination, the fair value
estimate of any contingent consideration and the determination of the fair value of the identifiable
assets acquired and the liabilities assumed is based, to a considerable extent, on management's
estimate of future cash flows expected to be derived from the assets acquired.

Income taxes:
A deferred tax asset
tax credits and deductible temporary
differences to the extent that it is probable that future taxable income will be available against which
they can be utilized. Significant estimates are required in evaluating the recoverability of deferred
tax assets. The Company’s assessment is based on existing tax laws, estimates of future profitability
and tax planning strategies.

is recognized for unused losses,

Provisions:
Judgment is required to assess the likelihood of an outflow of the economic benefits to settle
contingencies, such as litigations or decommissioning and restoration obligations, which may require
a liability to be recognized. Significant judgments include assessing estimates of future cash flows,
selection of discount rates and the probability of the occurrence of future events.

RISK FACTORS

TeraGo is exposed to a number of risks and uncertainties that are common to other companies engaged in the same
or similar businesses. The following is a summary of the material risks that could significantly affect the financial
condition, operating results or business of TeraGo.

Revenues and Operating Results Can Fluctuate
Our revenue in past periods may not be indicative of future performance from quarter to quarter or year to year. In
addition, our operating results may not follow any past trends. The factors affecting our revenue and results, many of
which are outside of our control, include:

•

competitive conditions in the industry, including strategic initiatives by us or our competitors, new services,
service announcements and changes in pricing policy by us or our competitors;

• market acceptance of our services;
•
•

timing and contractual terms of orders for our services, which may delay the recognition of revenue;
the discretionary nature of purchase and budget cycles of our customers and changes in their budgets for,
and timing of, services orders;
strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures,
strategic investments or changes in business strategy;
general weakening of the economy resulting in a decrease in the overall demand for telecommunications, data
centre, cloud or IT services or otherwise affecting the capital investment levels of medium-sized and enterprise
businesses;
timing of the development of new service offerings;
no assurance that the Company’s current and future competitors will not be able to develop data centre or
cloud services or other infrastructure expertise comparable or superior to those developed by the Company
or to adapt more quickly than the Company to new technologies, evolving industry standards or customer
requirements;
seasonal factors which may cause certain cloud service customers to increase or decrease their usage based
services

•

•
•

•

Transition of the Company to a Multi-Product IT Services Company
In the past, the core business of the Company was to provide internet access services. The Company has recently
transitioned to a multi-product IT services company focused on the management of its customer’s data flow. In doing
so, TeraGo is offering colocation services through its data centres and is offering cloud storage and cloud services. If
TeraGo is unable to execute on its new business strategy and to grow the business, either as a result of the risks
identified in this section or for any other reason, the business, prospects, financial condition and results of operations
will be materially and adversely affected.

Reliance on Certain Third Parties
We rely on third-party suppliers, in some cases sole suppliers or limited groups of suppliers, to provide us with
components necessary for the operation and upgrading of our network and infrastructure. If we are unable to obtain
sufficient allocations of components, our network expansion will be delayed, we may lose customers and our profitability
will be affected. Reliance on suppliers also reduces our control over costs, delivery schedules, reliability and quality of
components. Any inability to obtain timely deliveries of quality components, or any other circumstances that would
require us to seek alternative suppliers, could adversely affect our ability to expand and maintain our network or
infrastructure.

In addition, the Company relies on third party partners, agents and resellers to carry out its business. If these third
parties do not honour their contractual commitments or cease to do business, it may have a significant impact on our
business. Replacements for such third parties may require a lengthy period of time in order to establish a commercially
comparable relationship.

The Company has recently aligned with AWS in preparation to provide managed public cloud services. During the most
recent year, TeraGo attained the Standard Partner tier in the AWS Partner Program. The benefits of such partnership
has not yet been proven and an early termination of the partnership or any unanticipated setbacks may have a material
impact on the Company’s business and strategic plan.

Regulatory Environment
We are subject to the laws of Canada and to regulations set by regulatory authorities of the Canadian government,
primarily the CRTC and Innovation, Science, Economic Development Canada (“ISED”, formerly Industry Canada).
Regulatory authorities may adopt new laws, policies or regulations, or change their interpretation of existing laws,

policies or regulations, that could cause our existing authorizations to be changed or cancelled, require us to incur
additional costs, or otherwise adversely affect our operations, revenue or cost of capital.

Any currently held regulatory approvals or licences may be subject to rescission and non-renewal. Additional approvals
or licences may be necessary that we may not be able to obtain on a timely basis or on terms that are not unduly
burdensome. Further, if we fail to obtain or maintain particular approvals on acceptable terms, such failure could delay
or prevent us from continuing to offer some or all of our current or new services, or offer new services, and adversely
affect our results of operations, business prospects and financial condition. Even if we were able to obtain the necessary
approvals, the licences or other approvals we obtain may impose significant operational restrictions. The acquisition,
lease, maintenance and use of spectrum are extensively regulated in Canada.

These regulations and their application are subject to continual change as new legislation, regulations or amendments
to existing regulations are adopted from time to time by governmental or regulatory authorities, including as a result of
judicial interpretations of such laws and regulations. Current regulations directly affect the breadth of services we are
able to offer and may impact the rates, terms and conditions of our services.

The breach of the conditions of a licence or applicable law, even if inadvertent, can result in the revocation, suspension,
cancellation or reduction in the term of a licence or the imposition of fines. In addition, regulatory authorities may grant
new licences to third parties, resulting in greater competition in markets where we already have rights to licenced
spectrum. In order to promote competition, licences may also require that third parties be granted access to our
bandwidth, frequency capacity, facilities or services. We may not be able to obtain or retain any required licence, and
we may not be able to renew our licences on favourable terms, or at all.

Our internet access services may become subject to greater regulation in the future.
If we become subject to
proceedings before the CRTC or ISED with respect to our compliance with the relevant legislation and regulations
relating to restrictions on foreign ownership and control, we could be materially adversely affected, even if it were
ultimately successful in such a proceeding. There can be no assurance that a future CRTC or ISED determination or
events beyond our control will not result in our ceasing to comply with the relevant legislation or regulations.
If this
occurs, our ability to operate as a Canadian carrier under the Telecommunications Act or to hold, renew or secure
licences under the Radio Communication Act could be jeopardized and our business, operating results and financial
condition could be materially adversely affected.

Obtaining and Maintaining Licenced Spectrum in Certain Markets
To offer our internet services using licenced spectrum in Canada, we depend on our ability to acquire and maintain
sufficient rights to use spectrum through ownership or long-term leases in each of the markets in which we operate or
intend to operate. Obtaining the necessary amount of licenced spectrum can be a long and difficult process that can
be costly and require a disproportionate amount of our resources. We may not be able to acquire, lease or maintain
the spectrum necessary to execute our business strategy. In addition, we may spend significant resources to acquire
spectrum licences, even if the amount of spectrum actually acquired in certain markets is not adequate to deploy our
network on a commercial basis in all such markets.

Using licenced spectrum, whether owned or leased, poses additional risks to us, including:

•

•
•

•

inability to satisfy build-out or service deployment or research and development requirements upon which our
spectrum licences or leases are, or may be, conditioned;
adverse changes to regulations or licence conditions governing our spectrum rights;
inability to use the spectrum we have acquired or leased due to interference from licenced or licence-exempt
operators in our band or in adjacent bands;
refusal by ISED to recognize our acquisition or lease of spectrum licences from others or our investments in
other licence holders;
inability to offer new services or to expand existing services to take advantage of new capabilities of our
network resulting from advancements in technology due to regulations governing our spectrum rights;
inability to control leased spectrum due to contractual disputes with, or the bankruptcy or other reorganization
of, the licence holders;
failure of ISED to renew our spectrum licences as they expire and our failure to obtain extensions or renewals
of spectrum leases before they expire;
imposition by ISED of new or amended conditions of licence, or licence fees, upon the renewal of our spectrum
licences or in other circumstances;
potentially significant increases in spectrum prices, because of increased competition for the limited supply of
licenced spectrum in Canada; and
invalidation of our authorization to use all or a significant portion of our spectrum, resulting in, among other
things, impairment charges related to assets recorded for such spectrum.

In particular, in June 2017, ISED issued the Consultation on Releasing Millimetre Wave Spectrum to Support 5G. This
Consultation contemplates the future use of certain millimetre wave spectrum to support
the deployment of
5th generation (5G) wireless networks and systems. The spectrum bands identified by ISED includes (amongst others)
the 38 GHz band which the Company currently holds licences in. As of the date, hereof, the Company has submitted
a comment letter in response to the Consultation and final decisions from ISED on this Consultation are yet to be
released. For additional information on the Consultation and to review the response letter of the Company or other
https://www.ic.gc.ca/eic/site/smt-
stakeholders,
gst.nsf/eng/h_sf11245.html. The final decisions made by ISED may have a negative and material
impact on the
Company, if there is a decision to not renew the Company’s spectrum licences in the 38 GHz band, or a renewal is
only permitted for a portion of such licences, all such outcomes currently contemplated via the abovementioned
Consultation. If the 38 GHz licences are not permitted to renew beyond their current licencing terms, the value of such
licences will decrease and the Company will be forced to seek alternative spectrum and bands, and may incur significant
costs to continue to provide certain of its connectivity services.

Consultation

webpage:

ISED’s

please

refer

We expect ISED to make additional spectrum available from time to time. Additionally, other companies hold spectrum
rights that could be made available for lease or sale. The availability of additional spectrum in the marketplace could
change the market value of spectrum rights generally and, as a result, may adversely affect the value of our spectrum
assets.

We also use radio equipment under individual radio licences issued by ISED, and subject to annual renewal. We may
not be able to obtain the licences we require thereby jeopardizing our ability to reliably deliver our internet services.
ISED may decline to renew our licences, or may impose higher fees upon renewal, or impose other conditions that
adversely affect us. ISED may decide to reassign the spectrum in the bands we use to other purposes, and may require
that we discontinue our use of radio equipment in such bands.

Licence-exempt Spectrum
We presently utilize licence-exempt spectrum in connection with a majority of our internet customers. Licence-exempt
or “free” spectrum is available to multiple simultaneous users and may suffer bandwidth limitations, interference and
slowdowns if the number of users exceeds traffic capacity. The availability of licence-exempt spectrum is not unlimited
and others do not need to obtain permits or licences to utilize the same licence-exempt spectrum that we currently or
may in the future utilize, threatening our ability to reliably deliver or expand our services. Moreover, the prevalence of
licence-exempt spectrum creates low barriers to entry in our business, creating the potential for heightened competition.

Integration and Anticipated Benefits Pursuant to Past Acquisitions
On March 27, 2015, the Company completed the acquisition of RackForce, on September 18, 2015, the Company
completed the acquisition of BoxFabric and on May 26, 2016 the Company completed the acquisition of certain assets
from AirVM Inc (the “Hosting Business”) (collectively the “Acquisitions”). The Company may not be able to fully realize
the anticipated future benefits and synergies of the Acquisitions on a timely basis or at all. The Acquisitions involve
challenges and risks, including risks that the transactions do not advance TeraGo’s business strategy or that the
Company will not realize a satisfactory return. The potential failure of the due diligence processes to identify significant
problems, liabilities or other shortcomings or challenges with respect to assets of RackForce, BoxFabric and the Hosting
Business including customer contracts, condition of the equipment acquired, intellectual property, revenue recognition
or other accounting practices, taxes, corporate governance and internal controls, regulatory compliance, employee,
supplier or partner disputes or issues and other legal and financial contingencies could decrease or eliminate the
anticipated benefits and synergies of the Acquisitions and could negatively affect the Company’s future business and
financial results.

The overall success of the Acquisitions will depend, in part, on the Company’s ability to realize the anticipated benefits
and synergies from combining and integrating the acquired businesses into TeraGo’s existing business. In particular,
the Company’s offering of cloud services is relatively new and the limited experience of management in providing cloud
services prior to the Acquisitions may limit the full benefits or continued growth of such business. Integration of
acquisitions require significant management attention and expansion of TeraGo’s staff in operations, marketing, sales
and general and administrative functions. The Company may have difficulties in the integration of the acquired
company’s departments, systems,
including accounting, human resource and other administrative systems,
technologies, books and records, and procedures, as well as in maintaining uniform standards, controls, including
internal control over financial reporting required by Canadian securities laws and related procedures and policies. If we
cannot integrate the acquisitions successfully, it could have a material adverse impact on our business, financial
condition and results of operations.

As part of the Company’s business strategy, TeraGo may also continue to acquire additional companies, assets or
technologies principally related to, or complementary to, our current operations. Any such acquisitions will be
accompanied by certain risks including but not limited to exposure to unknown liabilities of acquired companies, higher
than anticipated acquisition costs and expenses, the difficulty and expense of integrating operations, systems, and

personnel of acquired companies, disruption of the Company’s ongoing business, inability to retain key customers,
distributors, vendors and other business partners of the acquired company, diversion of management’s time and
attention; and possible dilution to shareholders.

Price Sensitive Market
The competitive market in which the Company conducts its business could require the Company to reduce its prices.
If competitors offer discounts on certain products or services in an effort to recapture or gain market share or to sell
other products, the Company may be required to lower prices or offer other favourable terms to compete successfully.
Any such changes would likely reduce the Company’s margins and could adversely affect operating results. Some of
the Company’s competitors may bundle services that compete with the Company for promotional purposes or as a
long-term pricing strategy or provide guarantees of prices and product implementations. These practices could, over
time, limit the prices that the Company can charge for its products. If the Company cannot offset price reductions with
a corresponding increase in volume, bundling of services or with lower spending, then the reduced revenues resulting
from lower prices would adversely affect the Company’s margins and operating results.

Market Demand for Available Capacity
The Company currently has available capacity in its data centres and intends to expand its footprint in the cloud and
data centre market. There can be no assurance that the existing or future market demand will be sufficient to fill this
capacity. Should the demand for the Company’s cloud and data centre services decline or fail to increase, this may
negatively affect the Company’s ability to capitalize on its high operating leverage and may adversely affect the
Company’s future financial performance.

Reductions in the amount or cancellations of customers’ orders would adversely affect our business, results of
operations and financial condition.

Cyber Security Risk
Our network security, data centre security and the authentication of our customer credentials are designed to protect
unauthorized access to data on our network and to our data centre premises. Because techniques used to obtain
unauthorized access to or to sabotage networks (including DDoS attacks) change frequently and may not be recognized
until launched against a target, we may be unable to anticipate or implement adequate preventive measures against
unauthorized access or sabotage. Consequently, unauthorized parties may overcome our network security and obtain
access to confidential, customer or employee data on our network, including on a device connected to our network. In
addition, because we own and operate our network, unauthorized access or sabotage of our network could result in
damage to our network and to the computers or other devices used by our customer. An actual or perceived breach of
network security or data centre security could harm public perception of the effectiveness of our security measures,
adversely affect our ability to attract and retain customers, expose us to significant liability and adversely affect our
business and revenue prospects.

The Company aims to mitigate and manage certain cyber security risks by employing specific policies and procedures,
carrying out IT security-related audits, establishing internal controls relevant to mitigating security risks, performing
certain “penetration” tests either internally or with help of
third party consultants, obtaining IT security-related
compliance certificates, designating a security officer that oversees the IT security of the Company, designating a
privacy officer that is accountable for the Company’s compliance with applicable privacy laws, using DDoS mitigation,
tools and services, utilizing back-up and disaster recovery services and maintaining specific cyber liability insurance
coverage to insure against cyber security incidents. The Audit Committee of Company has been tasked to periodically
review the various measures management and the Company has undertaken to manage its cyber security risks.

Excessive Customer Churn
The successful implementation of our business strategy depends upon controlling customer churn. Customer churn is
a measure of customers who stop using our services. Customer churn could increase as a result of:

•
•
•

•

billing errors and/or reduction in the quality of our customer service;
interruptions to the delivery of services to customers;
the availability of competing technology and other emerging technologies, some of which may, from time to
time, be less expensive or technologically superior to those offered by us; and
competitive conditions in the industry, including strategic initiatives by us or our competitors, new services,
service announcements and changes in pricing policy by us or our competitors.

An increase in customer churn can lead to slower customer growth, increased costs and a reduction in revenue. Given
the current economic environment, there is risk that churn levels could increase in the future.

Insufficient Capital
The continued growth and operation of our business may require additional funding for working capital, debt service,
the enhancement and upgrade of our network, the build-out of infrastructure to expand the coverage area of our
services, possible acquisitions and possible bids to acquire spectrum licences. We may be unable to secure such
funding when needed in adequate amounts or on acceptable terms, if at all.

To execute our business strategy, we may issue additional equity securities in public or private offerings, potentially at
a price lower than the market price at the time of such issuance. Similarly, we may seek debt financing and we may be
forced to incur significant interest expense. If we cannot secure sufficient funding, we may be forced to forego strategic
opportunities or delay, scale back or eliminate network deployments, operations, acquisitions, spectrum acquisitions
and other investments.

Reliance on Credit Facilities and Restrictive Debt Covenants
The Company relies on its Credit Facilities to operate its business, including for the maintenance of a certain level of
liquidity and to carry out its strategy. There can be no assurance that the Company will continue to have access to
appropriate Credit Facilities on reasonable terms and conditions, if at all beyond the maturity date of June 14, 2021 for
the existing Credit Facilities. An inability to draw down upon the Credit Facilities could have a material adverse effect
on the Company’s business, liquidity, financial condition and results of operations.

Covenants in our Credit Facilities with our lenders impose operating and financial restrictions on us. A breach of any of
these covenants could result in a default under our Credit Facilities. These restrictions may limit our ability to obtain
additional financing, withstand downturns in our business and take advantage of business opportunities. Moreover, we
may be required to seek additional debt financing on terms that include more restrictive covenants, may require
repayment on an accelerated schedule or may impose other obligations that limit our ability to grow our business,
acquire needed assets, or take other actions we might otherwise consider appropriate or desirable.

Key Competitors are More Established and Have More Resources
The market for internet access, data connectivity, cloud and data centre services is highly competitive and we compete
with several other companies within each of our markets. Many of our competitors are better established or have greater
financial resources than we have. Our competitors include:

•

•
•
•
•
•
•

•

ILECs and CLECs providing DSL and fibre-optic enabled services over their existing wide, metropolitan and
local area networks and who have started to provide cloud and colocation services;
Utelcos offering or planning to offer internet and data connectivity over fibre optic networks;
Large cloud service providers and IT companies;
Colocation and disaster recovery service providers;
cable operators offering high-speed Internet connectivity services and voice communications;
wireless Internet service providers using licenced or licence-exempt spectrum;
satellite and fixed wireless service providers offering or developing broadband Internet connectivity and VoIP;
and
resellers providing wireless Internet or other wireless services using infrastructure developed and operated by
others.

Many of our competitors are well established with larger and better developed networks and support systems, longer
standing relationships with customers and suppliers, greater name recognition and greater financial, technical and
marketing resources than we have. Our competitors may subsidize competing services with revenue from other sources
and, thus, may offer their products and services at prices lower than ours. We may not be able to reduce our prices
which may make it more difficult to attract and retain customers.

We expect other existing and prospective competitors to adopt technologies and/or business plans similar to ours, or
seek other means to develop services competitive with ours, particularly if our services prove to be attractive in our
target markets.

Acquisitions and Other Strategic Transactions
We may from time to time make strategic acquisitions of other assets and businesses. Any such transactions can be
risky, may require a disproportionate amount of our management and financial resources and may create unforeseen
operating difficulties or expenditures, including:

•

difficulties in integrating acquired businesses and assets into our business while maintaining uniform
standards, controls, policies and procedures;

•

obligations imposed on us by counterparties in such transactions that limit our ability to obtain additional
financing, our ability to compete in geographic areas or specific lines of business or other aspects of our
operational flexibility;
increasing cost and complexity of assuring the implementation and maintenance of adequate internal control
and disclosure controls and procedures;
difficulties in consolidating and preparing our financial statements due to poor accounting records, weak
financial controls and, in some cases, procedures at acquired entities not based on IFRS, particularly those
entities in which we lack control; and
inability to predict or anticipate market developments and capital commitments relating to the acquired
company, business or assets.

If we do not successfully address these risks or any other problems encountered in connection with an acquisition, the
acquisition could have a material adverse effect on our business, results of operations and financial condition. In
addition, if we proceed with an acquisition, our available cash may be used to complete the transaction, diminishing
our liquidity and capital resources, or additional equity may be issued which could cause significant dilution to existing
shareholders.

Changes to Technologies and Standards
The industries TeraGo operates is characterized by rapidly changing technology, evolving industry standards and
increasingly sophisticated customer requirements. The introduction of new or alternative technology and the
emergence of new industry standards may render our existing network, equipment and/or infrastructure obsolete and
our services unmarketable and may exert price pressures on existing services. It is critical to our success that we be
able to anticipate changes in technology or in industry standards and ensure that we can leverage such new
technologies and standards in a timely and cost-effective manner to remain competitive from a service and cost
perspective.

Investments in Development of New Technologies, Products and Services
The Company has and will continue to make significant investments in the development and introduction of new
products and services that make use of the Company’s network, infrastructure and equipment. There is no assurance
that the Company will be successful in implementing and marketing these new products and services in a reasonable
time, or that they will gain market acceptance. Development could be delayed for reasons beyond our control.
Alternatively, we may fail to anticipate or satisfy the demand for certain products or services, or may not be able to offer
or market these new products or services successfully to customers. The failure to attract customers to new products
or services, cross-sell service to our existing customer base or failure to keep pace with changing consumer
preferences for products or services would slow revenue growth and could have a materially adverse effect on our
business, results of operations and financial condition.

Expanding, Upgrading and Maintaining Network and Infrastructure
We expect to allocate significant resources in expanding, maintaining and improving our network. Additionally, as the
number of our customer locations increases, as the usage habits of our customers change and as we increase our
service offerings, we may need to upgrade our network to maintain or improve the quality of our services. If we do not
successfully implement upgrades to our network, the quality of our services may decline and our churn rate may
increase.

We may experience quality deficiencies, cost overruns and delays with the expansion, maintenance and upgrade of
our network and existing infrastructure including the portions of those projects not within our control. Expansion of our
network or infrastructure may require permits and approvals from governmental bodies and third parties. Failure to
receive approvals in a timely fashion can delay expansion of our network. In addition, we are typically required to obtain
rights from land, building and tower owners to install the antennas and other equipment that provide our internet access
service to our customers. We may not be able to obtain, on terms acceptable to us or at all, the rights necessary to
expand our network or existing infrastructure.

We also may face challenges in managing and operating our network and existing infrastructure. These challenges
include ensuring the availability of customer equipment that is compatible with our network and managing sales,
advertising, customer support, and billing and collection functions of our business while providing reliable network
service that meets our customers’ expectations. Our failure in any of these areas could adversely affect customer
satisfaction, increase churn, increase our costs, decrease our revenue and otherwise have a material adverse effect
on our business, prospects, financial condition and results of operations.

Foreign Exchange
While the majority of the Company’s revenues are earned in Canadian dollars, a portion of its costs, including for certain
capital expenditures are paid in U.S. dollars. As a result, the Company is exposed to currency exchange rate risks. A

change in the currency exchange rate may increase or decrease the amount of Canadian dollars required to be paid
by the Company for its U.S. expenditures. The Company does not currently have any foreign exchange contracts to
manage the foreign exchange risk. As a result, there can be no assurance that currency fluctuations will not have a
material adverse effect on the Company.

Interest Rates
As the Company currently borrows funds through its credit facility, certain portions of the facility are based on a variable
interest rate. A significant rise in interest rates may materially increase the cost of either its revolving or non-revolving
credit facilities. The Company mitigates a portion of the underlying interest rate risk with respect to the non-revolving
term credit facility by entering into an interest rate swap contract to effectively fix the underlying interest rate on a
variable rate debt. Similar interest rate swap contracts have not been entered into for the other portions of the credit
facility. To the extent funds have been drawn down from such facilities, the Company will be exposed to interest rate
fluctuations.

Interruption or Failure of Information Technology and Communications Systems
We have experienced service interruptions in some markets in the past and may experience service interruptions or
system failures in the future. Our services depend on the continuing operation of our cloud and data centre, information
technology and communications systems. Any service interruption adversely affects our ability to operate our business
and could result in an immediate loss of revenue. If we experience frequent or persistent system, power or network
failures, our reputation and brand could be permanently harmed. We may make significant capital expenditures to
increase the reliability and security of our systems, but these capital expenditures may not achieve the results we
expect.

Our systems and data centres are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires,
power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to
harm our systems, and similar events. Some of our systems are not fully redundant and our disaster recovery planning
may not be adequate. The occurrence of a natural disaster or unanticipated problems at our network centres or data
centres could result in lengthy interruptions in our service and adversely affect our operating results. The Company
could also be required to make significant expenditures if the Company’s systems were damaged or destroyed, or pay
damages if the delivery of the Company’s services to its customers were delayed or stopped by any of these
occurrences.

Retention and Motivation of Personnel
We depend on the services of key technical, sales, marketing and management personnel. The loss of any of these
key persons could have a material adverse effect on our business, results of operations and financial condition. Our
success is also highly dependent on our continuing ability to identify, hire, train, motivate and retain highly qualified
technical, sales, marketing and management personnel.

Competition for such personnel can be intense and we cannot provide assurance that we will be able to attract or retain
highly qualified technical, sales, marketing and management personnel in the future. Our inability to attract and retain
the necessary technical, sales, marketing and management personnel may adversely affect our future growth and
profitability. It may be necessary for us to increase the level of compensation paid to existing or new employees to a
degree that our operating expenses could be materially increased.

If we cannot hire, train and retain motivated and well-qualified individuals, we may face difficulties in attracting, recruiting
and retaining various sales and support personnel in the markets we serve, which may lead to difficulties in growing
our subscriber base.

Leased Data Centre Facilities
The Company’s data centres are located in leased premises and there can be no assurance that the Company will
remain in compliance with the Company’s leases, that the landlord will continue to support the operation of the
Company’s data centre and that the leases will not be terminated despite negotiation for long term lease periods and
renewal provisions. Termination of a lease could have a material adverse effect on the Company’s business, results of
operations and financial condition.

Electrical Power and Outages
The Company’s data centres are susceptible to regional variations in the cost of power, electrical power outages,
planned or unplanned power outages and limitations on availability of adequate power resources. Power outages can
harm, and in the past, have harmed the Company’s customers and its business, including the loss of customers' data
and extended service interruptions. While the Company attempts to limit exposure to system downtime by using backup
generators and power supplies, the Company cannot limit the Company’s exposure entirely even with these protections
in place. With respect to any increase in energy costs, the Company may not always be able to pass these increased

costs on to the Company’s customers which could have a material adverse effect on the Company’s business, results
of operations and financial condition.

Litigation Risk and Intellectual Property Claims
Competitors or other persons may independently develop, patent
technologies or copyright software that are
substantially equivalent or superior to those we currently use or plan to use or that are necessary to permit us to deploy
and operate our network, data centres or provide cloud services. Some of these patents, copyrights or rights may grant
very broad protection to the owners. We cannot determine with certainty whether any existing third party intellectual
property or the issuance of any third party intellectual property would require us to alter technology or software we use,
obtain licences or cease certain activities. Defending against infringement claims, even meritless ones, would be time
consuming, distracting and costly.

If we are found to be infringing the proprietary rights of a third party, we could be enjoined from using such third party’s
rights, may be required to pay substantial royalties and damages, and may no longer be able to use the intellectual
property subject to such rights on acceptable terms or at all. Failure to obtain licences to intellectual property held by
third parties on reasonable terms, or at all, could delay or prevent us from providing services to customers and could
cause us to expend significant resources to acquire technology which includes non-infringing intellectual property.

If we have to negotiate with third parties to establish licence arrangements, or to renew existing licences, it may not be
successful and we may not be able to obtain or renew a licence on satisfactory terms or at all. If required licences
cannot be obtained, or if existing licences are not renewed, litigation could result.

Operating Losses
Our accumulated deficit at December 31, 2017 was $70.4 million and have incurred a net loss in the last three fiscal
years. We cannot anticipate with certainty what our earnings, if any, will be in any future period. However, we could
incur further net losses as we continue to expand our network into new and existing markets and pursue our business
strategy in providing cloud and data centre services. Accordingly, our results of operations may fluctuate significantly,
which may adversely affect the value of an investment in our Common Shares. We may also invest significantly in our
business before we expect cash flow from operations to be adequate to cover our anticipated expenses.

Economic and Geopolitical Risk
The market for our services depends on economic and geopolitical conditions affecting the broader market. Economic
conditions globally are beyond our control. In addition, acts of terrorism and the outbreak of hostilities and armed
conflicts between countries can create geopolitical uncertainties that may affect the global economy. Downturns in the
economy or geopolitical uncertainties may cause customers to delay or cancel projects, reduce their overall capital or
operating budgets or reduce or cancel orders for our services, which could have a material adverse effect on our
business, results of operations and financial condition.

Regulation of Internet
Regulation of the Internet and the content transmitted through that medium is a topic that receives considerable political
discussion from time to time, from both a “pro-regulation” and an “anti-regulation” perspective, including discussions on
whether all internet traffic should be delivered equally. It is unclear as to what impact decisions made on either side of
this issue by various political and governing bodies could have on us and our business or on the ability of our customers
to utilize our internet services.

UPCOMING ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

Certain new standards, interpretations, amendments and improvements to existing standards have been issued by
the IASB. The standards impacted that may be applicable to the Company are as follows:

(a) IFRS 15 Revenue from Contracts with Customers

On May 28 2014, the IASB issued IFRS 15 which supersedes existing standards and interpretations including IAS 18,
Revenue and IFRIC 13, Customer Loyalty Programmes.
IFRS 15 introduces a single model for recognizing revenue
from contracts with customers with the exception of certain contracts under other IFRSs. The standard requires revenue
to be recognized in a manner that depicts the transfer of promised goods or services to a customer and at an amount
that reflects the expected consideration receivable in exchange for transferring those goods or services. This is
achieved by applying the following five steps:

Identify the contract with a customer;

Identify the performance obligations in the contract;

Determine the transaction price;

Allocate the transaction price to the performance obligations in the contract; and

Recognize revenue when (or as) the entity satisfies a performance obligation.

IFRS 15 also provides guidance relating to the treatment of contract acquisition and contract fulfillment costs.

The standard is effective for annual periods beginning on or after January 1, 2018 with early adoption permitted. The
Company will adopt IFRS 15 and the clarifications in its financial statements for annual period beginning on January 1,
2018. The Company has a team focused on the adoption and compliance with IFRS 15. This team is responsible for
determining existing policies, differences between existing policies and IFRS 15, ensuring the Company’s data
collection is appropriate, and communicating the upcoming changes with various stakeholders. In addition, this team
is assisting with the development, implementation, and monitoring of processes and policies that are involved with the
transition.

The Company continues to assess all potential
impacts of the new revenue recognition standard. The Company
currently believes the most significant impacts will relate to expanded disclosure on revenue, performance obligations,
and contract balances. The Company expects revenue from certain revenue streams to have a significant presentation
reclassification impact. Furthermore, the Company anticipates the development of new internal controls to ensure timely
and accurate revenue reporting in accordance with the new standard.

(b) IFRS 9 Financial Instruments

On July 24, 2014, the IASB issued the final publication of the IFRS 9 standard, superseding the current IAS 39, Financial
Instruments: recognition and measurement (“IAS 39”) standard. IFRS 9 includes revised guidance on the classification
and measurement of financial instruments, including a new expected credit loss model for calculating impairment on
financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on
recognition and derecognition of financial instruments from IAS 39.

The standard is effective for annual periods beginning on or after January 1, 2018 with early adoption permitted. The
Company is assessing the impact of this standard on the consolidated financial statements. The extent of the impact
has not yet been determined. The adoption of IFRS 9 is not expected to have a material impact on the Company’s
consolidated financial statements.

On January 13, 2016, the IASB issued the final publication of the IFRS 16 standard, which will supersede the current
IAS 17, Leases standard. Under IFRS 16, a lease will exist when a customer controls the right to use an identified asset
as demonstrated by the customer having exclusive use of the asset for a period of time. IFRS 16 introduces a single
accounting model for lessees and all leases will require an asset and liability to be recognized on the statement of
financial position at inception.

The accounting treatment for lessors will remain largely the same as under IAS 17. The standard is effective for annual
periods beginning on or after January 1, 2019 with early adoption permitted, but only if the entity is also applying IFRS
15. The extent of the impact of the adoption of this standard has not yet been determined.

INTERNAL CONTROL OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND
PROCEDURES

Our President and Chief Executive Officer and Chief Financial Officer, designed or caused to be designed under their
supervision, TeraGo’s disclosure controls and procedures and internal control over financial reporting.

TeraGo’s disclosure controls and procedures are designed to provide reasonable assurance that material information
relating to TeraGo is made known to management by others, particularly during the period in which the interim filings
are being prepared and that information required to be disclosed by TeraGo in its annual filings, interim filings or other

reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the
time periods specified in securities legislation. TeraGo’s disclosure controls and procedures includes controls and
procedures designed to ensure that information required to be disclosed by TeraGo in its annual filings, interim filings
or other reports filed or submitted under securities legislation is accumulated and communicated to management, as
appropriate to allow timely decisions regarding required disclosure.

TeraGo’s internal control over financial reporting are designed to provide reasonable assurance regarding reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. TeraGo’s
internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of TeraGo;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and expenditures of TeraGo are being made only in accordance
with authorizations of management and directors of TeraGo; and (iii) are designed to provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of TeraGo’s assets that could
have a material effect on TeraGo’s financial statements.

The control framework used to design TeraGo’s internal control over financial reporting is based on the Internal Control
– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO
2013).

Due to its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
change.

There were no changes in the Company’s internal controls over financial reporting for the year ended December 31,
2017 that have materially affected or are reasonably likely to materially affect internal controls over financial reporting.
Management has concluded that there are no material weaknesses relating to the design of TeraGo’s internal controls
over financial reporting as of December 31, 2017.

EXECUTIVE MANAGEMENT CHANGES

Effective March 16, 2017, Joe Prodan (Chief Financial Officer) was no longer with the Company.

Effective February 1, 2017, Ron Perrotta joined the Company as Vice President, Marketing & Strategy. Mr. Perrotta
previously provided consulting services to the Company on an interim basis.

Effective August 31, 2017 Daren Hanson (Vice President, Sales) was no longer with the Company.

Effective September 5, 2017, David Charron joined the Company as Chief Financial Officer.

Effective September 18, 2017, Christine Gauthier joined the Company as Vice President, Sales.

Effective October 10, 2017, Jeffrey Yim (Vice President, Finance and Corporate Development) was no longer with the
Company.

DEFINITIONS – KEY PERFORMANCE INDICATORS, IFRS, ADDITIONAL GAAP AND NON-GAAP
MEASURES

IFRS Measures

Cost of services
Cost of services consists of expenses related to delivering service to customers and servicing the operations of our
networks. These expenses include costs for the lease of intercity facilities to connect our cities, internet transit and
peering costs paid to other carriers, network real estate lease expense, spectrum lease expenses and lease and utility
expenses for the data centres and salaries and related costs of staff directly associated with the cost of services.

Gross profit margin %
Gross profit margin % consists of gross profit margin divided by revenue where gross profit margin is revenue less cost
of services.

Other operating expenses
Other operating expenses includes sales commission expense, advertising and marketing expenses, travel expenses,
administrative expenses including insurance and professional fees, communication expenses, maintenance expenses
and rent expenses for office facilities.

Foreign exchange gain (loss)
Foreign exchange gain (loss) relates to the translation of monetary assets and liabilities into Canadian dollars using
the exchange rate in effect at that date. The resulting foreign exchange gains and losses are included in net income
in the period.

Finance costs
Finance costs consist of interest charged on our short- and long-term debt, amortization of deferred financing costs
including expenses associated with closing our long-term debt facility and accretion expense on the Company’s
decommissioning and restoration obligations. The deferred financing costs are amortized using the effective interest
method over the term of the loan.

Finance income
Finance income consists of interest earned on our cash and cash equivalent and short-term investment balances.

Additional GAAP Measures

Earnings (loss) from operations
Earnings (loss) from operations exclude foreign exchange gain (loss), income taxes, finance costs and finance income.
We include earnings (loss) from operations as an additional GAAP measure in our consolidated statement of earnings.
We consider earnings (loss) from operations to be representative of the activities that would normally be regarded as
operating for the Company. We believe this measure provides relevant information that can be used to assess the
consolidated performance of the Company and therefore, provides meaningful information to investors.

Non-GAAP Measures

Adjusted EBITDA
The term “EBITDA” refers to earnings before deducting interest, taxes, depreciation and amortization. The Company
believes that Adjusted EBITDA is useful additional information to management, the Board and investors as it provides
an indication of the operational results generated by its business activities prior to taking into consideration how those
activities are financed and taxed and also prior to taking into consideration asset depreciation and amortization and it
excludes items that could affect the comparability of our operational results and could potentially alter the trends
analysis in business performance. Excluding these items does not necessarily imply they are non-recurring, infrequent
or unusual. Adjusted EBITDA is also used by some investors and analysts for the purpose of valuing a company. The
Company calculates Adjusted EBITDA as earnings before deducting interest, taxes, depreciation and amortization,
foreign exchange gain or loss, finance costs, finance income, gain or loss on disposal of network assets, property and
equipment,
impairment of property, plant, & equipment and intangible assets, stock-based compensation and
restructuring, acquisition-related and integration costs. Investors are cautioned that Adjusted EBITDA should not be
construed as an alternative to operating earnings or net earnings determined in accordance with IFRS as an indicator
of our financial performance or as a measure of our liquidity and cash flows. Adjusted EBITDA does not take into
account the impact of working capital changes, capital expenditures, debt principal reductions and other sources and
uses of cash, which are disclosed in the consolidated statements of cash flows.

Adjusted EBITDA does not have any standardized meaning under GAAP. TeraGo’s method of calculating Adjusted
EBITDA may differ from other issuers and, accordingly, Adjusted EBITDA may not be comparable to similar measures
presented by other issuers. See “Results of Operations – Adjusted EBITDA” for reconciliation of net loss to Adjusted
EBITDA.

Key Performance Indicators

Backlog MRR
The term “Backlog MRR” is a measure of contracted monthly recurring revenue (MRR) from customers that have not
yet been provisioned. The Company believes backlog MRR is useful additional information as it provides an indication
of future revenue. Backlog MRR is not a recognized measure under IFRS and may not translate into future revenue,
and accordingly, investors are cautioned in using it. The Company calculates backlog MRR by summing the MRR of
new customer contracts and upgrades that are signed but not yet provisioned, as at the end of the period. TeraGo’s
method of calculating backlog MRR may differ from other issuers and, accordingly, backlog MRR may not be
comparable to similar measures presented by other issuers.

ARPU
The term “ARPU” refers to the Company’s average revenue per customer per month in the period. The Company
believes that ARPU is useful supplemental information as it provides an indication of our revenue from an individual
customer on a per month basis. ARPU is not a recognized measure under IFRS and, accordingly, investors are
cautioned that ARPU should not be construed as an alternative to revenue determined in accordance with IFRS as an
indicator of our financial performance. The Company calculates ARPU by dividing our total revenue before revenue
from early terminations by the number of customers in service during the period and we express ARPU as a rate per
month. TeraGo’s method of calculating ARPU has changed from the Company’s past disclosures to exclude revenue
from early termination fees, where ARPU was previously calculated as revenue divided by the number of customers in
service during the period. TeraGo’s method may differ from other issuers, and accordingly, ARPU may not be
comparable to similar measures presented by other issuers.

Churn
The term “churn” or “churn rate” is a measure, expressed as a percentage, of customer cancellations in a particular
month. The Company calculates churn by dividing the number of customer cancellations during a month by the total
number of customers at the end of the month before cancellations. The information is presented as the average monthly
churn rate during the period. The Company believes that the churn rate is useful supplemental information as it provides
an indication of future revenue decline and is a measure of how well the business is able to renew and keep existing
customers on their existing service offerings. Churn and churn rate are not recognized measures under IFRS and,
accordingly, investors are cautioned in using it. TeraGo’s method of calculating churn and churn rate may differ from
other issuers and, accordingly, churn may not be comparable to similar measures presented by other issuers.

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

The accompanying consolidated financial statements of TeraGo Inc. and its subsidiaries and all the information in
Management’s Discussion and Analysis are the responsibility of management and have been approved by the Board
of Directors.

The consolidated financial statements have been prepared by management in accordance with International
Financial Reporting Standards. The consolidated financial statements include certain amounts that are based on the
best estimates and judgments of management and in their opinion present fairly, in all material respects, TeraGo
lnc.’s financial position, results of operations and cash flows. Management has prepared the financial information
presented elsewhere in the Management’s Discussion and Analysis and has ensured that it is consistent with the
consolidated financial statements, or has provided reconciliations where inconsistencies exist.

Management of TeraGo Inc., in furtherance of the integrity of the consolidated financial statements, has developed
and maintains a system of internal controls. Management believes the internal controls provide reasonable
assurance that transactions are properly authorized and recorded, financial records are reliable and form a proper
basis for the preparation of consolidated financial statements and that TeraGo lnc.’s material assets are properly
accounted for and safeguarded. The internal control processes include management’s communication to employees
of policies that govern ethical business conduct.

The Board of Directors is responsible for overseeing management’s responsibility for financial reporting and is
ultimately responsible for reviewing and approving the consolidated financial statements. The Board carries out this
responsibility through its Audit Committee.

The Audit Committee meets periodically with management and the Company’s independent auditors to review the
Company’s reported financial performance and to discuss audit, internal controls, accounting policies, and financial
reporting matters; and to review Management’s Discussion and Analysis, the consolidated financial statements and
the external auditors’ report. The Audit Committee reports its findings to the Board of Directors for consideration
when approving the consolidated financial statements for issuance to the shareholders. The Audit Committee also
considers, for review by the Board of Directors and approval by the shareholders, the engagement or re-appointment
of the external auditors.

The consolidated financial statements have been audited by KPMG LLP, the external auditors, in accordance with
Canadian generally accepted auditing standards on behalf of the shareholders. KPMG LLP has full and free access
to the Audit Committee.

February 21, 2018

“Antonio Ciciretto”

“David Charron”

President and Chief Executive Officer

Chief Financial Officer

KPMG LLP
Vaughan Metropolitan Centre
100 New Park Place, Suite 1400
Vaughan ON L4K 0J3
Canada
Tel 905-265-5900
Fax 905-265-6390

INDEPENDENT AUDITORS' REPORT

To the Shareholders of TeraGo Inc.

We have audited the accompanying consolidated financial statements of TeraGo Inc., which comprise the
consolidated statements of financial position as at December 31, 2017 and 2016, the consolidated
statements of comprehensive loss, changes in equity and cash flows for the years then ended, and notes,
comprising a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.

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 our 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, we consider 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
consolidated financial position of TeraGo Inc. as at December 31, 2017 and 2016, and its consolidated
financial performance and its consolidated cash flows for the years then ended in accordance with
International Financial Reporting Standards.

Chartered Professional Accountants, Licensed Public Accountants

February 21, 2018
Vaughan, Canada

TERAGO INC.
Consolidated Statements of Financial Position
(In thousands)

Assets

Cash and cash equivalents
Accounts receivable
Prepaid expenses and other assets
Current portion of other long-term assets

Total current assets

Network assets, property and equipment
Intangible assets
Goodwill
Total non-current assets

Total Assets

Liabilities

Accounts payable and accrued liabilities
Current portion of deferred revenue
Current portion of long-term debt
Current portion of other long-term liabilities

Total current liabilities

Decommissioning and restoration obligations
Deferred revenue
Long-term debt
Other long-term liabilities
Total non-current liabilities

Total Liabilities

Shareholders' Equity

Share capital
Contributed surplus
Deficit

Total Shareholders' Equity

Total Liabilities and Shareholders' Equity

Note

6(a)
6(b)

10(a)

7
8
8

9
10(b)

December 31
2017

December 31
2016

6,986
3,389
2,516
27
12,918

38,822
16,699
19,419
74,940

13,034
3,673
3,150
-
19,857

44,161
19,400
19,419
82,980

87,858

102,837

8,519
282
4,000
56
12,857

277
205
32,183
419
33,084

45,941

86,653
25,701
(70,437)
41,917

87,858

11,027
287
5,170
774
17,258

207
323
35,608
793
36,931

54,189

86,171
25,620
(63,143)
48,648

102,837

On behalf of the Board:

(signed) “Matthew Gerber”

(signed) “Gary Sherlock”

Director

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Consolidated Statements of Comprehensive Loss
(In thousands, except per share amounts)

Revenue

Expenses

Cost of services

Salaries and related costs

Other operating expenses

Depreciation of network assets, property and equipment

Amortization of intangible assets

Loss from operations

Foreign exchange gain

Finance costs

Finance income

Loss before income taxes

Income taxes

Income tax expense

Net loss and comprehensive loss

Deficit, beginning of year

Deficit, end of year

Basic loss per share

Diluted loss per share

Basic weighted average number of shares outstanding

Diluted weighted average number of shares outstanding

Year ended
December 31
2017
55,392

Year ended
December 31
2016
59,086

Note
16

14,103

19,088

13,573

11,272

3,052

61,088

(5,696)

(1,698)

(7,294)

(63,143)

(70,437)

(0.51)

14,307

13,477

21,195

10,845

11,796

3,529

60,842

(1,756)

(1,882)

(3,614)

(700)

(4,314)

(58,829)

(63,143)

(0.30)

14,177

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Consolidated Statements of Cash Flows
(In thousands)

Operating Activities

Net loss for the year

Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:

Severance, acquisition, and other costs
Depreciation of network assets, property and equipment
Amortization of intangible assets
Stock-based compensation expense
Finance costs
Finance income
Income tax expense
Loss on adjustments and disposal of network assets and
intangible assets
Impairment of assets and related charges
Severance, acquisition, and other costs paid

Stock-based compensation paid

Changes in non-cash working capital items:

Accounts receivable
Prepaid expenses

Accounts payable and accrued liabilities
Deferred revenue

Cash from Operating Activities
Investing Activities

Acquisitions, net of cash acquired
Change in restricted cash
Purchase of network assets, property and equipment
Purchase of intangible assets

Change in non-cash working capital related to network
assets, property and equipment and intangible assets

Cash used in Investing Activities
Financing Activities

Proceeds from exercise of stock options
Interest paid, net of received
Repayment of long-term debt
Financing costs incurred

Note

7
8
14

7
7,8

7
8

9
9

Cash used in Financing Activities
Net change in cash and cash equivalents, during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year

The accompanying notes are an integral part of these financial statements.

Year ended
December 31
2017

Year ended
December 31
2016

(7,294)

(4,314)

1,076
11,272
3,052
201
1,698
(50)
-

109
2,851
(3,233)

(644)

284
634

529
(123)
10,362

-
-
(8,490)
(754)

(1,050)
(10,294)

196
(1,604)
(4,420)
(288)
(6,116)
(6,048)
13,034
6,986

3,650
11,796
3,529
866
1,882
(8)
700

397
-
(1,943)
(26)

(367)
201
(134)
129
16,358

(1,102)
172
(7,697)
(496)

(442)
(9,565)

182
(1,746)
(5,261)
-
(6,825)
(32)
13,066
13,034

TERAGO INC.
Consolidated Statements of Changes in Equity
(In thousands)

Balance, January 1, 2017

Issuance of shares upon exercise of
options

Stock-based compensation

Issuance of shares for directors' fees

Net loss and comprehensive loss

Share Capital

Number
14,250

Amount
86,171

Contributed
Surplus

25,620

Deficit
(63,143)

Total
48,648

196

286

196

286

(7,294)

Balance, December 31, 2017

14,365

86,653

25,701

(70,437)

41,917

Balance, January 1, 2016

Issuance of shares upon exercise of
options

Stock-based compensation

Issuance of shares for directors' fees

Net loss and comprehensive loss

Share Capital

Number
14,133

Amount
85,636

Contributed
Surplus

25,408

Deficit
(58,829)

Total
52,215

182

353

212

(4,314)

(63,143)

182

212

353

(4,314)

48,648

Balance, December 31, 2016

14,250

86,171

25,620

See Note 13 – Share capital for classes of shares.

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

1. Reporting Entity

TeraGo Inc. (the “Company”) provides businesses across Canada with connectivity services, colocation services and
enterprise infrastructure cloud services. The Company’s head office is located in Canada at Suite 800 – 55 Commerce
Valley Drive West, Thornhill, Ontario. The Company was incorporated under the Canada Business Corporations Act on
December 21, 2000 and owns and operates a carrier-grade, fixed wireless, fibre-based, IP communications network, as
well as cloud and colocation facilities in Canada targeting enterprise customers that require cloud, colocation, and
connectivity services. The Company’s common shares are listed on the Toronto Stock Exchange (TSX) under the
symbol TGO.

2. Basis of Preparation and Presentation

(a) Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards
(“IFRS”) as issued by the International Accounting Standards Board ("IASB").

The Board of Directors authorized the consolidated financial statements for issue on February 21, 2018.

(b) Basis of Measurement
The consolidated financial statements have been prepared on a historical cost basis except for the following material
items in the statement of financial position:

•

financial instruments at fair value through profit (loss) (“FVTPL”) are measured at fair value through net income or
loss

liabilities for cash-settled stock-based payment arrangements are measured at fair value

Functional and Presentation Currency

(c)
These consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency.

(d) Use of Estimates and Judgments
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates
and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income
and expenses. Actual results may differ from these estimates. Estimates and assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any
future periods affected.

(i)

Estimates of useful lives of network assets, property and equipment and intangible assets:
Management's judgment
intended use, industry trends and other factors in
determining the expected useful lives of depreciable assets, to determine depreciation methods, the asset's
residual value and whether an asset is a qualifying asset for the purposes of capitalizing borrowing costs.

involves consideration of

(ii) Capitalization of costs:

Judgments and estimates are used in assessing the direct labour and other costs capitalized to network
assets, property and equipment.

(iii) Cash generating units:

Judgment is required to assess the Company’s determination of cash generating units for the purpose of
impairment testing.

(iv)

Impairment of non-financial assets:
The process to calculate the recoverable amount of our cash generating unit requires use of valuation
methods such as the discounted cash flow method which uses assumptions of key variables including future
cash flows, discount rate and terminal growth rates.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

(v) Allowance for doubtful accounts:

In developing the estimates for an allowance against existing receivables, the Company considers general
and industry economic and market conditions as well as credit information available for the customer and the
aging of the account. Changes in the carrying amount due to changes in economic and market conditions
could significantly affect the loss for the period. When the Company determines amounts previously
recognized through an allowance are not probable to be collected, the allowance is written off through
revenue.

(vi) Stock-based compensation:

Estimating fair value for stock-based payments requires determining the most appropriate valuation model
for a grant, which is dependent on the terms and conditions of the grant.
In valuing stock options, the
Company uses the Black-Scholes option pricing model. Several assumptions are used in the underlying
calculation of fair values of the Company's stock options using the Black-Scholes option pricing model
including the expected life of the option, risk-free interest rate and volatility of the underlying stock.

(vii) Business combination:

The amount of goodwill initially recognized as a result of a business combination, the fair value estimate of
any contingent consideration and the determination of the fair value of the identifiable assets acquired and
the liabilities assumed is based, to a considerable extent, on management's estimate of future cash flows
expected to be derived from the assets acquired.

(viii) Income taxes:

that

is probable that

A deferred tax asset is recognized for unused losses, tax credits and deductible temporary differences to the
extent
future taxable income will be available against which they can be
utilized. Significant estimates are required in evaluating the recoverability of deferred tax assets. The
Company’s assessment is based on existing tax laws, estimates of future profitability and tax planning
strategies.

(ix) Provisions:

Judgment is required to assess the likelihood of an outflow of the economic benefits to settle contingencies,
such as litigations or decommissioning and restoration obligations, which may require a liability to be
recognized. Significant judgments include assessing estimates of future cash flows, selection of discount
rates and the probability of the occurrence of future events.

3. Significant Accounting Policies

(a) Revenue Recognition
The Company earns revenue by providing cloud, colocation, and connectivity services. Revenue is measured at the fair
value of the consideration received or receivable for services, net of discounts and sales taxes. Revenue is recognized
as the related services are provided to customers, if evidence of an arrangement exists, collection is deemed probable
by management and revenue and costs are reliably measurable. The principal sources of revenue to the Company and
recognition of these revenues are as follows:

(i) Monthly recurring revenue from cloud, colocation, and connectivity are recognized as service revenue ratably

over the number of months in the contract term as related services are provided to the customer.

(ii) Revenue from installation services that do not have standalone value from the ongoing service are deferred

and recognized over the term of the contract.

(iii) Usage revenue is recorded as service revenue in the month the usage occurs.

Billings or payments received from customers in advance of revenue recognition are recorded in deferred revenue on
the consolidated statement of financial position.

(b) Basis of Consolidation
The consolidated financial statements include the accounts of TeraGo Inc., TeraGo Networks Inc. and its wholly owned
subsidiaries RackForce Networks Inc., RackForce Cloud Video Inc., and Codeninja Ltd. (collectively, the Company). A
subsidiary is an entity that is controlled by another entity, known as the parent. Control is the power to govern the

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

financial and operating policies of an entity so as to obtain benefits from its activities. All intercompany transactions
between subsidiaries are eliminated on consolidation. On January 1, 2017, TeraGo Networks Inc., RackForce Networks
Inc., RackForce Cloud Video Inc., and Codeninja Ltd were amalgamated.

Financial Instruments

(c)
The Company initially measures financial instruments at fair value. Transaction costs that are directly attributable to the
issuance of financial assets or liabilities are accounted for as part of the carrying value at inception (except for transaction
costs related to financial instruments recorded as FVTPL financial assets which are expensed as incurred), and are
recognized over the term of the assets or liabilities using the effective interest method.

Subsequent measurement and treatment of any gain or loss is recorded as follows:

(i)

(ii)

(iii)

Financial assets and financial liabilities at FVTPL are measured at fair value at the balance sheet date with
any gain or loss recognized immediately in net loss. Interest and dividends earned from financial assets are
also included in net loss for the period.
Loans and receivables are measured at amortized cost using the effective interest method. Any gains or
losses are recognized in net loss for the period.
Other financial liabilities are measured at amortized cost using the effective interest method. Any gains or
losses are recognized in net loss for the period.

Impairment of Financial Assets
A financial asset carried at amortized cost is considered impaired if objective evidence indicates that one or more events
have had a negative effect on the estimated future cash flow of that asset that can be estimated reliably. An impairment
loss is calculated as the difference between its carrying amount and the present value of the estimated future cash flows
discounted at the asset's original effective interest rate.

In assessing impairment, the Company uses historical trends of the probability of default, timing of recoveries and the
amount of loss incurred, adjusted for management's judgment as to whether current economic and credit conditions are
such that the actual losses are likely to be greater or less than suggested by historical trends. Losses are recognized in
the consolidated statements of loss and reflected in an allowance account against the financial asset.

The following is a summary of the Company’s significant categories of financial instruments as at December 31, 2017:

(i)

(ii)

Cash and Cash Equivalents and restricted cash
Cash and cash equivalents consists of bank balances, cash on hand, demand deposits that can be withdrawn
without penalty and short-term, highly liquid securities such as debt securities with an initial maturity date of
not more than three months from the date of acquisition, that can readily be converted into known amounts of
cash and are subject to an insignificant risk of change in value. Bank overdrafts that are repayable upon
demand and form an integral part of the Company’s cash management are included as a component of cash
and cash equivalents. Cash and cash equivalents and restricted cash are carried at amortized cost.

Accounts Receivable
Accounts receivable are measured at the amount the item is initially recognized. The allowance for doubtful
accounts is based on the Company’s assessment of the collectability of outstanding trade receivables. The
evaluation of collectability of customer accounts is done on an individual account basis.
If, based on an
evaluation of accounts, it is concluded that it is probable that a customer will not be able to pay all amounts
due, an expected impairment loss is recognized. Recoveries are only recorded when objective verifiable
evidence supports the change in the original allowance. Changes in the carrying amount of the allowance
account are recognized in the statement of comprehensive loss for the period.

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

The Company has the following non-derivative financial liabilities: current and long-term debt, accounts payable and
accrued liabilities, and current portion and long-term portion of other long term liabilities.

Interest on loans and borrowings is expensed as incurred unless capitalized for qualifying assets in accordance with IAS
23, Borrowing Costs. Loans and borrowings are classified as a current liability unless the Company has an unconditional
right to defer settlement for at least 12 months after the end of the year.

Derivative instruments
The Company uses an interest rate swap contract to manage the risk associated with the fluctuations of interest rates
on its long-term debt. Management does not apply hedge accounting on the interest rate swap contract. As a result, the
interest rate swap contract is marked to market each period, resulting in a gain or loss in net loss for the year. The gain
(loss) on revaluation is recognized in finance income (costs) on the statement of comprehensive loss.

(d) Network Assets, Property and Equipment
Network assets, property and equipment are recorded at cost less accumulated depreciation and impairment charges,
if any. These costs include expenditures directly attributable to the acquisition of the asset. The cost of self-constructed
network assets includes the cost of materials and direct labour and any other costs directly attributable to bringing the
assets to a working condition for their intended purpose. This includes direct costs to design, acquire and build the asset
and include directly attributable internally and externally generated engineering and construction costs and equipment
on-hand. They also include the cost of dismantling and removing items and restoring the site on which they are located
and specifically attributable borrowing costs on qualifying assets. Subsequent costs are included in the asset’s carrying
amount or recognized as a separate asset only when it is probable that future economic benefits associated with the
item will flow to the Company and the costs of the item can be reliably measured. All other expenditures are charged to
operating expenses as incurred.

When major components of an item of network assets and property and equipment have different useful lives, they are
accounted for as separate items. Depreciation of network assets and property and equipment is based on the estimated
useful life of the assets as follows:

Estimated useful life/ Asset depreciation method

Network assets
Cloud and Data centre infrastructure
Computer equipment
Office furniture and equipment
Leasehold improvements
Vehicles

6 to 25 years straight line
10 to 15 years straight line
3 years straight line
5 years straight line
over the term of lease
30% declining balance

Depreciation methods, useful lives and residual values are reviewed at least annually. Adjustments, if necessary, are
recognized prospectively.

(e) Goodwill and Intangible Assets

Intangible assets include the following:

Radio Spectrum Licenses
Radio spectrum licenses are classified as indefinite life intangible assets and are not amortized but are tested for
impairment on an annual basis. The licenses are granted with an auto-renewal policy and non-renewal of licenses by
the regulatory body is considered remote unless license conditions are breached. As such, it is difficult to determine the
period over which these assets are expected to generate future net cash inflows to the Company and it is common
industry practice for established telecommunications companies to treat these licenses as indefinite life.

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

Computer Software
Computer software is recorded at cost less accumulated amortization and amortized on a straight-line basis over 3 years
or where there is a term license for the software, over the shorter of the term of the license or the useful life of the
software.

Customer Relationships, Brand, Non-compete agreements, and Acquired Real Estate Leases
Customer relationships, brand, non-compete agreements and vendor’s real estate leases are recorded at cost less
accumulated amortization, initially measured at fair value on the acquisition date if acquired in a business combination.
Customer relationships are amortized on a straight-line basis over a range of 5 to 10 years, brands are amortized over
a period of 5 to 20 years, non-compete agreements are amortized on a straight-line basis in accordance with the term
of the contracts and acquired real estate leases are amortized over the term of the lease.

Amortization methods, useful lives and residual values are reviewed at least annually. Adjustments, if necessary, are
recognized prospectively.

Goodwill
Goodwill is the amount that results when the fair value of consideration transferred for an acquired business exceeds
the net fair value of the identifiable assets and liabilities acquired. When the Company enters into a business
combination, the acquisition method of accounting is used. Goodwill
is assigned, as of the date of the business
combination, to cash generating units that are expected to benefit from the business combination.

Impairment of non-financial assets

(f)
The Company monitors events and changes in circumstances that may require an assessment of the recoverability of
its non-financial long-lived assets. When an impairment test is performed, the recoverable amount is assessed by
reference to the higher of i) the net present value of the expected future cash flows (value-in-use) and ii) the fair value
less cost to sell. If the recoverable amount is estimated to be less than the carrying amount, the carrying amount of the
asset is reduced to its recoverable amount and an impairment loss is charged to operations in the period in which the
impairment is identified. For the purposes of assessing impairment, assets are grouped at the lowest levels for which
there are separately identifiable cash flows (“cash generating units” or “CGUs”).

The carrying values of identifiable intangible assets with indefinite lives and goodwill are tested at minimum annually for
impairment. Goodwill and indefinite life intangible assets are allocated to CGUs for the purpose of impairment testing
based on the level at which management monitors it, which is not higher than an operating segment. The allocation is
made to those CGUs that are expected to benefit from the business combination in which the goodwill arose. The
Company currently has assessed that it has a single CGU.

The carrying values of non-financial assets with finite useful lives, such as network assets, property and equipment and
intangible and other assets subject to amortization, are assessed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. If any such indication exists, the recoverable
amount of the asset must be determined. Such assets are impaired if their recoverable amount is lower than their
carrying amount. If it is not possible to estimate the recoverable amount of an individual asset, the recoverable amount
of the CGU to which the asset belongs is tested for impairment.

(g) Subscriber acquisition costs
Subscriber acquisition costs are expensed as incurred.

(h) Business Combinations
Acquisitions of businesses are accounted for using the acquisition method. The consideration for each acquisition is
measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed,
and equity instruments issued by the Company in exchange for control of the acquiree. Acquisition-related costs are
recognized in loss in the period incurred.

Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent
consideration arrangement, measured at its acquisition-date fair value. Subsequent changes in such fair values are
adjusted against the cost of acquisition where they qualify as measurement period adjustments. All other subsequent
changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

with relevant IFRS sections. Changes in the fair value of contingent consideration initially classified as equity are not
recognized.

Where a business combination is achieved in stages, the Company’s previously held interests in the acquired entity are
remeasured to fair value at the acquisition date (i.e. the date the Company attains control) and the resulting gain or loss,
if any, is recognized in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that
have previously been recognized in other comprehensive income are reclassified to profit or loss, where such treatment
would be appropriate if that interest were disposed.

The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS
3 are recognized at their fair value at the acquisition date.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the
combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete.
Those provisional amounts are adjusted during the measurement period or additional assets or liabilities are recognized,
to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known,
would have affected the amounts recognized as of that date.

The measurement period is the period from the date of acquisition to the date the Company obtains complete information
about facts and circumstances that existed as of the acquisition date and is subject to a maximum period of one year.

Leases

(i)
Leases entered into by the Company as lessee that transfer substantially all the benefits and risks of ownership to the
Company are recorded as finance leases and are included in property and equipment and obligations under finance
leases. Obligations under finance leases are reduced by lease payments net of imputed interest. All other leases are
classified as operating leases under which lease payments are expensed on a straight-line basis over the term of the
lease. Lease incentives received are recognized as an integral part of the total lease cost, over the term of the lease.
Contingent lease payments are accounted for in the period incurred.

Provisions

(j)
A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that
can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
Where the impact is significant, provisions are determined by discounting the expected future cash flows at a pre-tax
rate that reflects the current market assessments of the time value of money and the risk specific to the liability. The
unwinding of the discount is recognized as a finance cost.

Decommissioning and Restoration Obligations:
In the course of the Company's operations, network and other assets are utilized on leased premises. Often costs are
expected to be incurred associated with decommissioning these assets and restoring the location where these assets
are situated upon ceasing their use on those premises.

These decommissioning and restoration provisions are calculated on the basis of the identified costs for the current
financial year, extrapolated into the future based on management's best estimates of future trends in prices, inflation,
and other factors, and are discounted to present value at a risk-adjusted rate specifically applicable to the liability.
Assumptions related to the amount and timing of cash flows required to satisfy the Company's future legal obligations
include labour costs based on current marketplace wages and the rate of inflation over expected years to settlement;
the length of facility lease renewal periods and probability of such renewals; and the appropriate discount rate to present
value the future cash flows. Forecasts of estimated future provisions are reviewed periodically in light of future changes
in business conditions or technological requirements.

The Company records these decommissioning and restoration costs as Network Assets, Property and Equipment, and
life. The
subsequently allocates them to expense using a systematic and rational method over the asset's useful
Company records the accretion of the liability (unwinding of the discount) as a charge to finance costs.

Foreign Currency Translation

(k)
Foreign currency accounts are translated into Canadian dollars as follows: At the transaction date, each asset, liability,
revenue, and expense is translated into Canadian dollars using the exchange rate in effect at that date. At the year-end

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

date, monetary assets and liabilities are translated into Canadian dollars by using the exchange rate in effect at that
date. The resulting foreign exchange gains and losses are included in net loss in the current year.

Finance income and finance costs

(l)
Finance income comprises interest income on funds invested, dividend income, gains on sale of available-for-sale
financial assets, and changes in fair value of financial assets at FVTPL.

Finance costs comprise interest expense on borrowings, accretion of discounts on provisions, and changes in fair value
of financial assets at FVTPL. Borrowing costs that are not directly attributable are recognized in loss for the year.

Income Taxes

(m)
Income taxes on losses include current and deferred taxes. Income taxes are recognized in loss except to the extent
that it relates to business combinations, or items recognized directly in equity or in other comprehensive income. Current
tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is generally recognized in respect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets and liabilities
are measured, on an undiscounted basis, at the tax rates that are expected to be applied to temporary differences when
they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability in the consolidated
statement of financial position differs from its tax base, except for differences arising on:

•
•

•

the initial recognition of goodwill;
the initial recognition of an asset or liability in a transaction which is not a business combination and at the
time of the transaction affects neither accounting or taxable profit; and
investments in subsidiaries, branches and associates, and interests in joint ventures where the Company is
able to control the timing of the reversal of the difference and it is probable that the difference will not reverse
in the foreseeable future.

A deferred tax asset is recognized to the extent it is probable that it will be realized. Deferred tax assets are reviewed at
each reporting date and are reduced to the extent it is no longer probable the related tax benefit will be realized.

(n) Government incentives
From time to time, the Company applies for government incentive programs such as investment tax credits. Government
incentives are recognized when there is reasonable assurance of realization and reflected as a reduction of the
expenditure to which the incentive relates.
In the event the investment tax credits received differs from the amount
claimed, the difference will be reflected in operations in the year in which it is determined.

(o) Stock-based Compensation Plans
The Company has equity-settled and cash-settled stock-based compensation plans.

The grant date fair values of equity settled stock-based payment awards to employees and directors are recognized as
compensation cost, with a corresponding increase to equity, over the vesting period of the award. For cash-settled
awards, the awards are classified as a liability and are re-measured to fair value at each reporting date. The Company
accounts for the effects of service and non-market performance conditions in measuring the fair value of the liability in
cash-settled awards by adjusting the number of rights to receive cash that are expected to satisfy any service and non-
market performance conditions on a best estimate basis.

Awards with graded vesting are valued and recognized as compensation cost based on the respective vesting tranche.
The amount of compensation cost recognized is adjusted to reflect the number of awards expected to vest based on
continued employment vesting conditions, such that the amount ultimately recognized as compensation cost is based
on the number of awards that vest.

The Employee share purchase plan allows employees to voluntarily participate in a share purchase plan. Under the
terms of the plan, employees can contribute a specified percentage of their regular earnings through payroll deductions
and the Company makes a contribution match which is recorded as compensation expense.

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

Operating Segments

(p)
Management has determined that the Company operates in a single reportable operating segment. The Company
provides cloud, colocation, and connectivity services and earns revenues primarily in Canada. As at December 31, 2017
substantially all of the Company’s identifiable assets are located in Canada, with an immaterial amount of assets located
in the United States and the United Kingdom.

Loss Per Share

(q)
The basic loss per share has been computed by dividing the net loss for the year by the weighted average number of
common shares outstanding during the year. Diluted loss per share is computed by adjusting the net loss attributable
to common shareholders for the year and the weighted average number of common shares outstanding for the period
for the effects of all potentially dilutive common shares including shares subject to the exercise of stock options, where
dilutive. The Company uses the treasury stock method for calculating diluted loss per share.

4. Upcoming accounting pronouncements not yet adopted

The IASB has issued new standards and amendments to existing standards. These changes are not yet adopted as at
December 31, 2017 and could have an impact on future periods.

IFRS 15 Revenue from Contracts with Customers

On May 28 2014, the IASB issued IFRS 15 which supersedes existing standards and interpretations including IAS 18,
IFRS 15 introduces a single model for recognizing revenue
Revenue and IFRIC 13, Customer Loyalty Programmes.
from contracts with customers with the exception of certain contracts under other IFRSs. The standard requires revenue
to be recognized in a manner that depicts the transfer of promised goods or services to a customer and at an amount
that reflects the expected consideration receivable in exchange for transferring those goods or services. This is achieved
by applying the following five steps:

Identify the contract with a customer;

Identify the performance obligations in the contract;

3. Determine the transaction price;

4. Allocate the transaction price to the performance obligations in the contract; and

5. Recognize revenue when (or as) the entity satisfies a performance obligation.

IFRS 15 also provides guidance relating to the treatment of contract acquisition and contract fulfillment costs.

The standard is effective for annual periods beginning on or after January 1, 2018 with early adoption permitted. The
Company will adopt IFRS 15 and the clarifications in its financial statements for annual period beginning on January 1,
2018. The Company has a team focused on the adoption and compliance with IFRS 15. This team is responsible for
determining existing policies, differences between existing policies and IFRS 15, ensuring the Company’s data collection
is appropriate, and communicating the upcoming changes with various stakeholders. In addition, this team is assisting
with the development, implementation, and monitoring of processes and policies that are involved with the transition.

The Company continues to assess all potential impacts of the new revenue recognition standard. The Company currently
believes the most significant impacts will relate to expanded disclosure on revenue, performance obligations, and
contract balances. The Company expects revenue from certain revenue streams to have a presentation reclassification
impact. Furthermore, the Company anticipates the development of new internal controls to ensure timely and accurate
revenue reporting in accordance with the new standard.

IFRS 9 Financial Instruments

On July 24, 2014, the IASB issued the final publication of the IFRS 9 standard, superseding the current IAS 39, Financial
Instruments: recognition and measurement (“IAS 39”) standard. IFRS 9 includes revised guidance on the classification
and measurement of financial instruments, including a new expected credit loss model for calculating impairment on
financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition
and derecognition of financial instruments from IAS 39.

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

The standard is effective for annual periods beginning on or after January 1, 2018 with early adoption permitted. The
Company will adopt IFRS 9 and the classifications in its financial statements for annual period beginning on January 1,
2018. The Company is assessing the impact of this standard on the consolidated financial statements. The extent of the
impact has not yet been determined. The adoption of IFRS 9 is not expected to have a material impact on the Company’s
consolidated financial statements.

IFRS 16 Leases

On January 13, 2016, the IASB issued the final publication of the IFRS 16 standard, which will supersede the current
IAS
17, Leases standard. Under IFRS 16, a lease will exist when a customer controls the right to use an identified asset as
demonstrated by the customer having exclusive use of the asset for a period of time. IFRS 16 introduces a single
accounting model for lessees and all leases will require an asset and liability to be recognized on the statement of
financial position at inception.

5. Business Combinations

AirVM Hosting Business

On May 26, 2016, the Company closed an asset purchase agreement to acquire the Hosting Business of Ottawa-based
AirVM Inc. for consideration of $1,102. The acquisition brought expanded Infrastructure as a Service (Iaas) offerings to
the Company from locations in the United States and the United Kingdom.

The acquisition was accounted for using the acquisition method in accordance with IFRS 3, Business Combinations,
with the results of operations consolidated with those of the Company effective from the acquisition date. In connection
with the acquisition, the Company recorded network assets, property and equipment of $137, customer relationships
and other intangible assets of $609, and goodwill of $356.

Goodwill recognized in the transaction represents the expected operational synergies with the acquiree including
intangible assets that do not qualify for separate recognition. The goodwill and intangibles assets are tax deductible.

The identifiable intangible assets are being amortized over periods of 2 to 5 years.

6. Current Assets

Details of selected current asset balances are as follows:

(a)

Cash and cash equivalents

The Company’s cash and cash equivalents are comprised of bank balances at major Canadian financial institutions.

(b)

Accounts receivable

The Company’s accounts receivable is comprised of the following:

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

Trade receivables
Allowance for doubtful accounts
Other

December 31
2017

December 31
2016

3,137
(21)
273

3,389

3,531
(124)
266

3,673

7. Network Assets, Property and Equipment

Cost

Balance, January 1, 2017

Additions / reclassifications

Disposals / Adjustments

Impairment

Balance, December 31, 2017

Accumulated Depreciation

Balance, January 1, 2017

Depreciation for the period

Disposals / Adjustments

Impairment

Balance, December 31, 2017

Net Book Value, December 31, 2017

Cost

Balance, January 1, 2016

Additions / reclassifications

Acquisitions

Disposals / Adjustments

Balance, December 31, 2016

Accumulated Depreciation

Balance, January 1, 2016

Depreciation for the period

Disposals / Adjustments

Balance, December 31, 2016

Net Book Value, December 31, 2016

Network
Assets

Cloud &
Datacentre
Infrastructure

Computer
Equipment

Office
Furniture and
Equipment

Leasehold
Improvements

Vehicles

118,609 $

14,386 $

2,660 $

2,332 $

1,648 $

49 $

7,007

(1,121)

(7,325)

620

(7)

(421)

156

(46)

682

Total
139,684

8,490

(1,128)

(7,792)

117,170 $

14,578 $

2,770 $

2,357 $

2,330 $

49 $

139,254

87,527 $

2,479 $

2,245 $

2,172 $

1,051 $

49 $

95,523

9,158

(1,024)

(5,207)

1,531

(3)

(105)

321

(24)

212

11,272

(1,027)

(5,336)

90,454 $

3,902 $

2,542 $

2,222 $

1,263 $

49 $

100,432

26,716 $

10,676 $

228 $

135 $

1,067 $

- $

38,822

Network
Assets

Cloud &
Datacentre
Infrastructure

Computer
Equipment

Office
Furniture and
Equipment

114,869 $

13,752 $

2,173 $

6,530

(2,795)

645

(11)

355

132

2,211 $

121

Leasehold
Improvements

Vehicles

1,602 $

49 $

Total
134,656

7,697

137

(2,806)

118,609 $

14,386 $

2,660 $

2,332 $

1,648 $

49 $

139,684

80,080 $

888 $

2,133 $

2,132 $

854 $

49 $

86,136

9,857

(2,410)

1,590

112

197

11,796

(2,409)

87,527 $

2,479 $

2,245 $

2,172 $

1,051 $

49 $

95,523

31,082 $

11,907 $

415 $

160 $

597 $

- $

44,161

For the years ended December 31, 2017 and 2016, the Company had additions of capitalized wages and other directly
attributable costs of $2,157 and $2,097, respectively, in network assets.

During 2017, the Company wrote off assets with a net book value of $101 (Cost of $1,128 less accumulated depreciation
of $1,027). During 2016, the Company wrote off assets with a net book value of $397 (Cost of $2,806 less accumulated
depreciation of $2,409). The corresponding loss on disposal of assets was included in other operating expenses.

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

Impairment of Property, Plant, and Equipment

The annual impairment test of Property, Plant, and Equipment was performed on December 31, 2017 and a charge of
$2,456 was recorded in other operating expenses on the statement of comprehensive loss (December 31, 2016 – $nil).

The Company tests assets for impairment when events or circumstances may indicate the carrying value is no longer
recoverable. The asset is impaired when the recoverable amount is less than the net book value. The recoverable
amount is the higher of (i) an asset‘s fair value less costs to sell and (ii) its value-in-use. In performing the annual
impairment test the Company identified evidence of impairment in certain assets and an analysis was done on the
recoverable amount.

During the annual review, the Company determined that the recoverable amount of certain network assets, cloud and
data centre infrastructure, and computer equipment was less than their carrying values. This was the result of the loss
of certain connectivity customers, changes in services demanded and provided to certain customers in primarily
connectivity offerings, and assets not expected to be deployed. The fair value less costs to sell (or salvage value) for
the impaired assets was insignificant.

Intangible Assets and Goodwill

Cost

Balance, January 1, 2017

Additions

Disposals / Adjustments

Impairment

Balance, December 31, 2017

Accumulated Depreciation

Balance, January 1, 2017

Amortization for the period

Impairment

Balance December 31, 2017

Radio
spectrum
licenses

Computer
Software

Customer
relationships

Other

Total
Intangibles

Goodwill

Total
Intangibles
and Goodwill

7,041 $

9,056 $

18,241 $

4,880 $

39,218 $

19,419 $

58,637

754

(7)

(555)

(5)

(44)

754

(8)

(599)

7,041 $

9,803 $

17,690 $

4,831 $

39,365 $

19,419 $

2,371 $

7,999 $

7,481 $

1,967 $

- $

585

- $

1,866

601

(170) $

(34) $

2,371 $

8,584 $

9,177 $

2,534 $

19,818 $

3,052

(204) $

22,666 $

- $

754

(8)

(599)

58,784

19,818

3,052

(204)

22,666

Net Book Value, December 31, 2017 $

4,670 $

1,219 $

8,513 $

2,297 $

16,699 $

19,419 $

36,118

Cost

Balance, January 1, 2016

Additions

Acquisitions

Disposals / Adjustments

Balance, December 31, 2016

Accumulated Depreciation

Balance, January 1, 2016

Amortization for the period

Balance December 31, 2016

Radio
spectrum
licenses

Computer
Software

Customer
relationships

Other

Total
Intangibles

Goodwill

Total
Intangibles
and Goodwill

7,041 $

8,560 $

17,677 $

4,835 $

38,113 $

19,063 $

57,176

496

564

496

609

356

496

965

7,041 $

9,056 $

18,241 $

4,880 $

39,218 $

19,419 $

58,637

2,371 $

7,178 $

5,385 $

1,355 $

16,289 $

821

2,096

612

3,529

2,371 $

7,999 $

7,481 $

1,967 $

19,818 $

- $

16,289

3,529

19,818

Net Book Value, December 31, 2016 $

4,670 $

1,057 $

10,760 $

2,913 $

19,400 $

19,419 $

38,819

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

Impairment of Intangible Assets

The annual impairment test of intangible assets was performed on December 31, 2017 and a charge of $395 was
recorded in other operating expenses on the statement of comprehensive loss (December 31, 2016 – $nil).

During the annual review, the Company determined that the recoverable amount of certain customer relationships and
brand assets was less than their carrying value. This was the result of a strategic shift in cloud product offerings and the
strategic focus made on the Company’s customer base.

Impairment of Goodwill

The annual impairment test of goodwill and indefinite life intangible assets was performed on December 31, 2017 and
December 31, 2016 and did not result in any goodwill impairment loss.

In
The recoverable amount is the higher of (i) an asset‘s or CGU’s fair value less costs to sell and (ii) its value-in-use.
performing the annual impairment test for the Company’s single CGU, the Company measured the value-in-use of the
CGU using certain key management assumptions. Cash flow projections, which were made over a five-year period,
were based primarily on the financial budget reviewed by the Board of Directors plus a terminal value using a 3% terminal
growth rate. The Company discounted these estimates of future cash flows to their present value using an after-tax
discount rate of 9.9% which reflects the entity’s weighted average cost of capital. The fair value less costs to sell, primarily
based on the Company’s market capitalization as at December 31, 2017, also significantly exceeded the net carrying
amount of the CGU.

9. Long-term Debt

Term debt facility
Equipment loans
less:

financing fees

less: current portion

Term Debt Facility

December 31
2017
36,611
-
(428)
36,183
(4,000)
32,183

December 31
2016
40,897
170
(289)
40,778
(5,170)
35,608

In June 2014, the Company entered into an agreement with a syndicate led by the National Bank of Canada (“NBC”) to
provide a $50,000 credit facility that is principally secured by a general security agreement over the Company’s assets.

In March 2015, the Company entered into an amended agreement with the syndicate led by NBC that increased the
credit facility by $35,000 ($30,000 increase to the term debt facility and $5,000 increase to the revolving facility) and
extended the term from June 6, 2017 to June 30, 2018. Other terms were substantially consistent with the existing credit
facilities.

In June 2017, the Company entered into a second amended agreement with the syndicate led by NBC that reduced the
term debt facility from $50,000 to $40,000 (as a result of principal previously repaid), reduced the quarterly principal
installment from $1,250 to $1,000 and extended the term from June 30, 2018 to June 14, 2021. Other terms were
substantially consistent with the existing credit facilities.

The total $75,000 facility that matures June 14, 2021 is made up of the following:

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

•

$10,000 revolving facility which bears interest at prime plus a margin percent. As of December 31, 2017, $nil
amount is outstanding (2016 - $nil). Letters of credit issued under the facility totaled $655 as of December 31, 2017
(2016 - $655).

$40,000 term facility which bears interest at prime or Banker’s Acceptance (at the Company’s option) plus a margin
percent and is repayable in quarterly principal installments of $1,000. This facility was fully drawn upon signing the
second amended agreement.

On December 31, 2017, $36,800 of the term facility principal balance outstanding was in a Banker’s Acceptance
and the remaining $200 was at a floating rate. In 2015, the Company entered into amended interest rate swap
contracts that mature June 29, 2018. The interest rate on the Banker’s Acceptance at December 31, 2017 was
3.99%. The interest rate swap contract has not been designated as a hedge and will be marked-to-market each
quarter. The fair value of the interest rate swap contract at December 31, 2017 was an asset of $27 (December 31,
2016 – liability of $261) and is recorded in other long-term assets/liabilities (Note 10(a)), with a corresponding charge
(recovery) for the change in fair value recorded in finance costs.

As at December 31, 2017, the Company prepaid interest in the amount of $389 which represents the net settlement
of the Banker’s Acceptance and is recorded as a reduction in the carrying value of the debt.

•

$25,000 available for funding acquisitions and will bear interest at prime plus a margin percent and is repayable in
quarterly principal installments of 2.5% of the aggregate amount outstanding. As of December 31, 2017, this facility
remains undrawn.

In connection with the second amended agreement, the Company incurred financing fees of $288 which have been
deferred and will be amortized using the effective interest method over the amended term of the facility. The balance of
previously incurred financing fee is also amortized over the same amended term.

The NBC facility is subject to certain financial and non-financial covenants which the Company is in compliance with at
December 31, 2017. Under this facility, the Company is subject to a cash flow sweep that could accelerate a certain
amount of principal repayment based on a calculation outlined by the credit agreement not later than 120 days after the
end of each fiscal year.

10. Other Long-Term Assets/Liabilities

(a) Other long-term assets

Fair value of interest rate swap contract (Note 9)$

less: current portion

December 31
2017
27
27
(27)
-

December 31
2016
-
-
-
-

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

(b) Other long-term liabilities

Performance based share units (Note 14(c))
Restricted share units (Note 14 (b))
Fair value of interest rate swap contract (Note 9)
Lease inducement liability

less: current portion

11. Decommissioning and Restoration Obligations

December 31
2017
43
171
-
261
475
(56)
419

December 31
2016
318
707
261
281
1,567
(774)
793

The Company’s hub sites are established in leased or licensed premises. As part of these arrangements, the Company
is liable for all restoration costs to ensure that the space is returned to its original state upon termination of the leases.
The decommissioning and restoration obligations related to future site restoration costs related to these arrangements
or licenses. The decommissioning and restoration obligations were determined using a discount rate of 9.9% over a
range of periods from 2025 to 2045. As at December 31, 2017, the estimated amount of undiscounted cash flows
required to settle this liability was $1,345.

The following table presents the reconciliation of
decommissioning and restoration obligations associated with the retirement of network assets:

the beginning and ending aggregate carrying amount of

the

Obligation, beginning of year
Accretion expense included in finance costs
Changes in assumptions
Obligation, end of year

12.

Income Taxes

(a) Income tax expense (recovery)

Profit (Loss) before income taxes (recovery)

Income taxes at enacted rate of 26.5%

Non-deductible expenses and permanent differences
Change in unrecognized deductible temporary
differences
True-up adjustment
Other

December 31
2017
207
19
51
277

December 31
2016
234
17
(44)
207

December 31
2017
(7,294)

(1,933)
109

1,672
152
-
-

December 31
2016
(3,614)

(958)
150

2,048
(428)
(112)
700

(b) Recognized deferred tax assets and liabilities

The Company has a history of tax losses, including a taxable loss during the fiscal year-ended December 31, 2017. As
such, deferred tax assets are only recognized to the extent of deferred tax liabilities recorded. The Company had no
deferred tax liabilities as at December 31, 2017 and as a result no deferred tax asset was recognized.

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

Deferred tax assets have not been recognized in respect of the following items because they do not meet the criteria for
recognition.

Excess of tax value of network assets, property and
equipment, and intangible assets over net book value
Non-capital tax loss carryforwards
Other deductible temporary differences

(d) Reconciliation of effective tax rate

Loss before Income taxes
Income tax recovery at statutory rates
Permanent differences
Unrecognized deferred tax assets
Provision to return adjustment for prior year
Other
Income tax expense (recovery)

(e) Tax loss expiry schedule

December 31
2017

December 31
2016

5,351
7,354
1,436
14,141

9,027
1,964
1,478
12,469

December 31
2017
%

December 31
2016
%

(7,294)
(1,933)
109
1,672
152
-
-

(26.5)
1.5
22.9
2.1
-
-

(3,614)
(958)
150
2,048
(428)
(112)
700

(26.5)
4.2
56.7
(11.8)
(3.1)
19.4

The non-capital tax losses carried forward are available to reduce future taxable income in Canada and expire as follows:

2030
2031
2032
2033
2034
2035
2036
2037 and later

1,386
1,356
-
647
674
1,651
2,640
19,440
27,794

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

13. Share Capital

Authorized

Unlimited Common Shares
Two

Class B Shares, non-transferable unless approved by the Board, non-participating and redeemable. Holder
of Class B shares are entitled to nominate and elect one director for each Class B Share held.

Issued
Balance, January 1, 2016

Issuance of common shares on exercise of stock options
Issuance of common shares for directors' fees

Balance, December 31, 2016

Issuance of common shares on exercise of stock options
Issuance of common shares for directors' fees

Balance, December 31, 2017

Dividends

Number
of
Common
Shares
14,133
46
71
14,250
49
66
14,365

Common
Shares
92,086
182
353
92,621
196
286
93,103

In $

Share
Issue
Costs
(6,450)
-
-
(6,450)
-
-
(6,450)

Total
85,636
182
353
86,171
196
286
86,653

Dividends are payable in an equal amount on each common share if declared by the Board of Directors of the
Company. No dividends were declared for the years ended December 31, 2017 and 2016.

14. Stock-Based Compensation

(a) Stock Options

There are 986 common shares reserved for issuance under the Company’s previous stock option plan. Upon closing of
the Company’s initial public offering on June 26, 2007, 799 options granted under the Company’s original option plan
(the “Old Plan”) fully vested. Options granted under the Old Plan expire 10 years from date of vesting and as at
December 31, 2017, there are nil (2016 – 63) options outstanding under the Old Plan with a weighted average exercise
price of $4.00.

On June 18, 2007, the Company adopted a new option plan (the “2007 Option Plan”) which is available to directors,
officers, employees and other persons approved by the Board from time to time. On closing of the Company’s initial
public offering, 833 common shares were reserved for issuance under the 2007 Option Plan. The options granted under
the 2007 Option Plan expire 10 years from the date of grant and vest over three years. All options under the 2007 Option
Plan will vest immediately on a change of control of the Company. As of December 31, 2017, there are 588 (2016 – 609)
options outstanding under the 2007 option plan.

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

For the years ended December 31, 2017 and 2016, the Company recorded stock-based compensation related
to stock options of $81 and $212, respectively.

A summary of the status of the Company’s stock option plan as at December 31, 2017 and 2016 is presented
below.

Outstanding - January 1
Granted
Exercised
Forfeited / Expired
Outstanding - December 31
Exercisable

2017

Weighted
Average
Exercise Price
$5.99
$4.40
$4.00
$7.26
$5.58
$5.78

Number of
Options
672
101
(49)
(136)
588
501

2016

Weighted
Average
Exercise Price
$5.89
$5.12
$4.00
$5.00
$5.99
$6.05

Number of
Options
684
40
(46)
(6)
672
592

As at December 31, 2017, the range of exercise prices, the weighted average exercise price and the weighted average
remaining contractual life are as follows:

Range of exercise prices
$4.01 - $5.50
$4.01 - $5.50
$5.51 - $11.50

Number
outstanding
85
503
588

Options Outstanding

Options Exercisable

Weighted
average
remaining
contractual
life (years)
9.64
6.21
6.60

Weighted
average
exercise price
$4.40
$5.78
$5.58

Number
exercisable
-
501
501

Weighted
average
exercise price
-
$5.78
$6.05

The fair value of stock option grants made to directors during the year is estimated using the Black-Scholes option pricing
model, with the following weighted average assumptions: risk-free rate of 1.23% (2016 – 1.08%); dividend yield of nil
(2016 – nil); volatility of 39.55% (2016 – 46.60%); and expected lives of stock options of 10 years (2016 – 7.9). Expected
volatility has been based on an evaluation of the historical period commensurate with the expected term. The expected
term of the stock options has been based on historical experience and general option holder behavior. The fair value of
the stock options is expensed over the vesting period of the options using the graded method.

(b) Restricted Share Units (RSUs)

On March 12, 2009, the Company established a RSU Plan which is available to the directors, officers, and full-time
employees approved by the Board. The value of one RSU is equal to the value of one Common Share. Plan participants
are granted a specific number of RSUs for a given period based on their position and level of contribution. At the end
of the three-year vesting period, the RSUs vest if the plan participant is employed by the Company. Vested RSUs are
expected to be paid in cash or Common Shares purchased on the open market, or a combination of both, as the
Company chooses.

In 2017, the Company granted 180 RSUs to certain executives (2016 – 12). In 2017, 150 RSUs vested and the Company
paid cash of $587 (2016 – nil).

For the year ended December 31, 2017 and December 31, 2016, the Company recorded compensation expense of $51
and $266, respectively, related to the RSUs granted. As of December 31, 2017, a liability of $171 (2016 - $707) related
to the RSUs granted is included in other long-term liabilities (Note 10(b)).

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

The following table is a summary of the number of outstanding RSU as at:

Opening Balance, January 1, 2017
Granted
Forfeited
Vested and paid
Ending Balance, December 31, 2017

December 31
2017
162
180
(43)
(150)
149

December 31
2016
150
12
-
-
162

Plan participants are granted a specific number of PSUs for a given period based on their role within the Company and
level of performance. PSUs are also issued pursuant to the RSU Plan. At the end of the three-year vesting period, the
PSUs vest if the plan participant is employed by the Company and certain non-market performance criteria are met.
Vested PSUs are expected to be paid in cash or Common Shares purchased on the open market, or a combination of
both, as the Company chooses. The PSUs are re-measured to fair value each reporting period. The value of one PSU
is equal to the value of one Common Share.

In 2017, the Company granted nil PSUs to certain executives (2016 – 256). In 2017, 12 PSUs vested and the Company
paid cash of $58 (2016 – $25).

For the year ended December 31, 2017 and December 31, 2016, the Company recorded stock-based compensation
expense (recovery) of ($217) and $35, respectively, related to the PSUs outstanding. As at December 31, 2017, a
liability of $43 (2016 - $318) related to the PSUs granted is included in the other long-term liabilities (Note 10(b)).

The following table is a summary of the number of outstanding PSUs as at:

Opening Balance, January 1, 2017

Granted

Vested and paid

Forfeited / Expired

Ending Balance, December 31, 2017

December 31
2017
195
-
(12)
(164)
19

December 31
2016
252
256

(5)

(308)

195

(d) Stock-Based Compensation Summary

The following table is a summary of the stock-based compensation expense (recovery):

Restricted share units

Performance-based share units
Stock options
Directors' fees paid in shares

Year ended
December 31
2017
51
(217)
81
286
201

Year ended
December 31
2016
266
35
212
353
866

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

15. Loss Per Share

The following table sets forth the calculation of basic and diluted loss per share.

Numerator for basic and diluted loss
per share:

Net loss for the period

Denominator for basic and diluted loss
per share:

Basic weighted average number of
shares outstanding
Effect of stock options, RSUs and
PSUs
Diluted weighted average number of
shares outstanding

Loss per share:

Basic

Diluted

Year ended
December 31
2017

Year ended
December 31
2016

(7,294)

(4,314)

14,307

14,177

14,307

14,177

(0.51)
(0.51)

(0.30)

For the year ended December 31, 2017, the impact of all options, RSUs and PSUs totaling 859 (2016 – 1,223) were
excluded in the calculation of diluted loss per share because they were antidilutive.

16. Revenue

The Company’s revenue is comprised of the following:

Cloud and Colocation Revenue
Connectivity Revenue

17. Key Management Personnel Compensation

Year ended
December 31
2017
18,961
36,431

55,392

Year ended
December 31
2016
18,296
40,790

59,086

Key management personnel are those persons having authority and responsibility for planning, directing and controlling
the activities of the Company, including the directors of the Company.

Key management personnel compensation, including directors, is as follows:

Salaries, fees and benefits
Termination expense
Share-based compensation expense

Year ended
December 31
2017

Year ended
December 31
2016

1,787
1,126
201

3,114

1,759
2,860
866

5,485

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

18. Commitments

The Company is committed to leases for premises, office equipment, network real estate access, telecommunication
facilities and radio spectrum licenses. Annual minimum payments over the next five years and thereafter are as follows:

2018
2019
2020
2021
2022
Thereafter

Amount
9,932
8,010
6,175
5,035
3,664
15,316
48,132

For the year ended December 31, 2017, the Company recorded rent expense of $7,777 (2016 - $7,494) relating to
premises and network real estate access leases.

It is common practice for the Company to re-negotiate network real estate access lease or license arrangements as they
become due for renewal.
Included in the amounts above are estimates for the renewal of leases or licenses that are
currently due for renewal or are due for renewal in 2017.

The Company is required to pay, under a CRTC-administered regime, a percentage (2017 - 0.60%, 2016 – 0.53%) of
its adjusted Canadian telecommunications service revenue (as defined by CRTC and excluding retail Internet revenue)
into a fund administered by CRTC.

19. Fair value of financial instruments

The Company has determined the estimated fair values of its financial instruments based on appropriate valuation
methodologies. Where quoted market values are not readily available, the Company may use considerable judgment to
develop estimates of fair value. Accordingly, any estimated values are not necessarily indicative of the amounts the
Company could realize in a current market exchange and could be materially affected by the use of different assumptions
or methodologies. The Company classifies its fair value measurements within a fair value hierarchy, which reflects the
significance of the inputs used in making the measurements as defined in IFRS 7 – Financial Instruments – Disclosures.

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 -
or indirectly; and
Level 3 - Unobservable inputs for the asset or liability which are supported by little or no market activity

Inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly

The fair values of cash and cash equivalents is based on quoted market values. The fair values of short-term financial
assets and liabilities, including accounts receivable, accounts payable and accrued liabilities, as presented in the
consolidated statements of financial position, approximate their carrying amounts due to their short-term maturities. The
fair value of
long-term debt approximates its carrying value because management believes the interest rates
approximate the market interest rate for similar debt with similar security. The fair value of our interest rate swap contract
is based on broker quotes and therefore, these contracts are measured using Level 2 inputs. Similar contracts are traded
in an active market and the quotes reflect the actual transactions in similar instruments.

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

The Company has classified its financial instruments as follows:

Financial assets:

Loans and receivables, measured at
amortized cost
Cash and cash equivalents
Accounts receivable
Fair value of interest rate swap contract

Financial liabilities:

Accounts payable and accrued liabilities,
measured at amortized cost
Fair value of interest rate swap contract
Long-term debt, measured at amortized
cost

December 31
2017

December 31
2016

Carrying
amount

Fair
Value

Carrying
amount

Fair
Value

6,986
3,389
27

13,034
3,673
-

8,519

11,027

261

36,183

40,778

The Company, in the normal course of business, is exposed to credit risk from its customers and the accounts receivable
are subject to normal
industry risks. The Company attempts to manage these risks by dealing with credit worthy
customers.
If available, the Company reviews credit bureau ratings, bank accounts and industry references for all new
customers. Customers that do not have this information available are typically placed on a pre-authorized payment plan
for service or provide deposits to the Company. This risk is minimized as the Company has a diverse customer base
located across various provinces in Canada.

As at December 31, 2017 and 2016, the Company had no material trade receivable accounts that were not expected to
be collected. The following table provides the aging of the trade accounts receivable:

Current
31 to 60 days
61 to 90 days
over 90 days

December 31
2017
2,311
608
103
115
3,137

December 31
2016
2,597
650
116
168
3,531

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

Acceptance. In 2015, the Company entered into amended interest rate swap contracts that matures June 29, 2018. The
interest rate on the Banker’s Acceptance at December 31, 2017 was 3.99%. The remaining $200 drawn under this facility
bears interest for the period at prime rate plus a margin.

Liquidity risk

The Company believes that its current cash and cash equivalents and anticipated cash from operations will be sufficient
to meet its working capital and capital expenditure requirements for the foreseeable future. As at December 31, 2017,
the Company had cash and cash equivalents of $6,986. The Company has access to the $34,300 undrawn portion of
its $75,000 credit facilities after consideration of outstanding letters of credit.

The Company’s financial liabilities that have contractual maturities are summarized below:

Long-term debt
Accounts payable
Stock-based compensation(1)
Total

Less than
1 year

4,000
2,950
-

2 - 3 years

32,183
-
215

6,950

32,398

Total

36,183
2,950
215

39,348

(1) Represents recognized amounts for cash-settled stock-based compensation arrangements (See Note 14). Settlement is subject to
achievement of vesting criteria.

Currency risk

The Company has suppliers that are not based in Canada which gives rise to a risk that earnings and cash flows may
be adversely affected by fluctuations in foreign currency exchange rates. The Company is primarily exposed to the
fluctuations in the dollar. The Company believes this risk is minimal and does not use financial instruments to hedge
these risks. A one cent appreciation in the U.S. dollar to Canadian dollar foreign exchange rate would have resulted in
a decrease (increase) in income of $6. Balances denominated in foreign currencies that are considered financial
instruments are as follows:

Cash and cash equivalents
Accounts payable and accrued
liabilities

Currency
USD

USD

December 31
2017
336

December 31
2016
275

915

744

20. Capital Risk Management

The Company’s objectives when managing capital are:

(a)

(b)

(c)

to ensure that the Company will continue as a going concern so that it can continue to provide services to its
customers and offer a return on investment to its shareholders;
to maintain a capital structure which optimizes the cost of capital while providing flexibility and diversity of
funding sources and timing of debt maturities along with adequate anticipated liquidity for future growth; and
to comply with debt covenants

The accompanying notes are an integral part of these financial statements.

TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)

The Company defines capital that it manages as the aggregate of its cash and cash equivalents, short-term investments,
debt facilities including finance leases and equity comprising of share capital, contributed surplus and deficit.

Cash and cash equivalents
Long term debt
Share capital
Contributed surplus
Deficit

December 31
2017

December 31
2016

(6,986)
36,183
86,653
25,701
(70,437)

71,114

(13,034)
40,778
86,171
25,620
(63,143)

76,392

The Company manages its capital structure and makes adjustments to it in light of economic conditions. The Company,
upon approval from its Board of Directors, will make changes to its capital structure as deemed appropriate under the
specific circumstances.

The Company’s overall strategy with respect to management of capital remains unchanged from the year ended
December 31, 2017.

21. Related Party Transactions

Two former Directors of the Company, who retired effective June 23, 2016, also served as Chairman of the Board and
a Director of a customer of the Company. Revenue from this customer for the year ended December 31, 2017 and 2016
was nil and $40, respectively. Accounts receivable from this customer as at December 31, 2017 and 2016 was nil and
nil, respectively.

The terms governing these related party transactions are consistent with those negotiated on an arm’s length basis with
non-related parties.

The accompanying notes are an integral part of these financial statements.

CORPORATE INFORMATION

DIRECTORS

Matthew Gerber
Chairman, TeraGo Inc.
Chief Executive Officer, Rohinni LLC

Antonio Ciciretto
President & Chief Executive Officer, TeraGo Inc.

Richard Brekka
Managing Partner, Second Alpha Partners

Jerry S. Grafstein, Q.C.
Corporate Director

Michael Martin
Senior Executive, IBM Canada

CORPORATE HEAD OFFICE
55 Commerce Valley Drive West
Suite 800
Thornhill, Ontario L3T 7V9

1.866.TeraGo.1 (837-2461)

EXCHANGE LISTING
Toronto Stock Exchange

STOCK SYMBOL
TGO

INVESTOR RELATIONS CONTACT
Dennis Fong, LodeRock Advisors Inc.
Telephone: 1-416-282-9930
IR@terago.ca

Jim Sanger
Managing Partner, Second Alpha Partners

Gary Sherlock
Corporate Director

WEBSITE
www.terago.ca

YEAR END
December 31

AUDITORS
KPMG LLP
Vaughan, Ontario, Canada

TRANSFER AGENT
Computershare Investor Services Inc.
Toronto, Ontario, Canada

EXECUTIVE MANAGEMENT

Antonio Ciciretto
President & Chief Executive Officer

David Charron
Chief Financial Officer

Ron Perrotta
Vice President, Marketing & Strategy

Duncan McGregor
Vice President, Operations & Engineering

Christine Gauthier
Vice President, Sales

Mark Lau
Vice President, Legal, General Counsel &
Corporate Secretary

Certain trademarks used in this annual report, such as “TeraGo”, “TeraGo Networks” and www.terago.ca, are
trademarks owned by TeraGo or its subsidiaries. Other trademarks or service marks appearing in this annual
report are trademarks or service marks of the person who owns them.