2018 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
3
5
36
37
41
45
72
April 10, 2019
Dear Shareholders,
When we set out to reposition TeraGo for growth we knew changing the trajectory in our core business
would take time, but we also understood that there was significant hidden value in our millimetre wave
spectrum assets that could be unlocked. We were very pleased to see the market recognize some of this
value in 2018, as TeraGo returned 143% for the year and was one of the best performing stocks on the
Toronto Stock Exchange.
In 2018, our goals were to stabilize the Connectivity business and grow Cloud and Colocation while
preserving Adjusted EBITDA generation and cash flow. Throughout the year, we made steady progress to
stabilize the Connectivity business by consistently growing ARPU and reducing churn. This reflects the
improvements we made in the customer experience and our continued focus on higher value mid-sized
business customers. In Cloud and Colocation, we achieved near double digit growth of 9.7%, adjusting for
changes in revenue classification from IFRS 15. The improvement in Cloud and Colocation is a result of
the sales investments made in the prior year, along with significant enhancements to our public and private
cloud offering to provide a full range of enterprise class hybrid IT solutions. Although total revenue for the
full year declined by 2.0%, Adjusted EBITDA grew 0.8% as a result of pro-active cost control.
In 2019, our core business objectives remain similar but with an increased focus on improving sales
efficiency. To increase the effectiveness of our sales teams, we have shifted from having sales
professionals sell all products and services to specialized sales teams for Connectivity and Cloud enabling
greater focus by lines of business. Additionally, we have supplemented and aligned our inside sales
resources to service our smaller customers, allowing our direct sales resources more time to focus on
closing higher value opportunities. To lead our sales effort, we have onboarded a new Executive sales
leader and we have introduced a newly created Business Development Lead role with a mandate to develop
and execute new markets such as a Channel Partnerships strategy.
Within the mid-sized business market, we continue to see significant growth potential for Cloud and
Colocation and cross selling additional services within our customer base. Executing against these
opportunities will help to stabilize our top line as we invest and prepare for the higher growth opportunities
ahead in 5G.
MILLIMETRE WAVE SPECTRUM AND 5G FIXED WIRELESS
In 2018, we also took important steps to surface greater value from our millimetre wave spectrum assets.
In June, we completed a public bought deal offering raising gross proceeds of $6.9 million, which was used
to acquire Mobilexchange Spectrum Inc. (MSI) in November. The acquisition added 24 GHz spectrum
licences totalling 960 MHz in Canada’s six largest cities covering approximately 3.1 billion MHz-Pop. These
licences were previously leased from MSI and the effective purchase price was approximately $0.0018 per
MHz-Pop. This is well below the valuation Verizon paid for StraightPath’s millimetre wave spectrum, the
spectrum sold in metropolitan markets in the recent 28 GHz spectrum auction in the United States, and the
price trends in the 24 GHz spectrum auction now in progress in the United States, suggesting a very strong
return on our investment.
In October 2018, we began a technical trial in the Greater Toronto Area using fixed wireless 5G millimetre
wave equipment from PHAZR Inc. In February 2019, the trial was completed and we saw performance of
up to 700 Mbps per customer end point with an aggregate of over 2 Gbps from the provider base station
and latency in the 3-4ms range, proving that fiber-like service with a variety of different package
configurations is definitely possible. We are now working with the equipment provider on enhancements to
3
the radio and software management platform with a second technical trial expected in the third quarter
focused on optimizing back office and provisioning processes. Following the completion of the second
technical trial, we expect to begin customer trials, targeting both enterprise and residential broadband
connectivity applications.
TeraGo has spectrum licences in the 24 and 38 GHz bands in 19 metropolitan markets covering
approximately 8.6 billion MHz/Pops, or more than two thirds of the country’s population. As one of the
largest holders of millimetre wave spectrum in Canada, we have a unique time to market advantage and
we look forward to exploring the business opportunities surrounding fixed wireless broadband services
based on 5G.
Lastly, TeraGo remains free cash flow positive and has sufficient balance sheet flexibility to address its
strategic growth needs in 2019. We ended the year unchanged with $29.0 million in debt net of cash and
access to an additional $35.0 million in unused credit facilities to fund investment initiatives.
In summary, I believe we have the right strategy in place with unique assets and a great opportunity to
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
4
TERAGO INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS FOR THE THREE
MONTHS AND FISCAL YEARS ENDED DECEMBER 31, 2018 AND 2017
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, 2019 and should be read in conjunction with our audited consolidated financial statements
for the year ended December 31, 2018 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 – Key Performance
Indicators, 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, and the Company’s 5G technical trials and strategy. 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, ISED decisions
in the various Consultations that the Company has participated in being unfavourable to the Company, the technical
5G trial the Company is currently conducting may not generate the results intended, new market opportunities for 5G
may not exist or require additional capital that may not be available to the Company, and those risks set forth in the
“Risk Factors” section of this MD&A and other uncertainties and potential events. In particular, if any of the risks
materialize, the 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.
5
OVERVIEW
Financial Highlights
•
Total revenue decreased 5.0% to $12.9 million for the three months ended December 31, 2018 compared to $13.5
million for the same period in 2017. The decrease in revenue is primarily driven by lower connectivity revenue
which decreased 4.8% to $8.4 million compared to $8.8 million for the same period in 2017. In addition, cloud and
colocation revenue decreased 5.3% to $4.5 million compared to $4.7 million for the same period in 2017. The
decreases were attributable to churn exceeding provisioning as a result of lower sales volume. Total revenue
decreased 2.0% to $54.3 million for the year ended December 31, 2018, compared to $55.4 million for the same
period in 2017. The decrease was driven by the factors described above.
• Net loss was $2.0 million for the three months ended December 31, 2018 compared to a net loss of $4.1 million
for the same period in 2017. The decrease in net loss was primarily driven by a reduction in impairment charge on
certain network assets, property and equipment and intangible assets recorded compared to 2017. The lower book
value of assets contributed to lower depreciation & amortization in the year which further contributed to the
decrease in net loss. In addition, the Company saw a decrease in cost of sales as a result of lower revenue and a
decrease in operating costs as a result of cost reduction efforts during the year. For the year ended December 31,
2018, net loss was $4.8 million compared to a net loss of $7.3 million for the same period in 2017. The decrease
in net loss was driven by the factors described above.
• Adjusted EBITDA(1)(2) increased 6.2% to $3.1 million for the three months ended December 31, 2018 compared to
$2.9 million for the same period in 2017. The increase was primarily driven by the lower cost of sales and selling,
general, and administrative costs as a result of the cost reduction efforts discussed above. These efforts include a
reduction in headcount in the fourth quarter to improve operational efficiencies to address the reduction in revenue
and loss in customers. For the year ended December 31, 2018, Adjusted EBITDA(1) increased to $13.0 million
compared to $12.9 million for the same period in 2017. The increase in Adjusted EBITDA was driven by the factors
discussed above.
Key Developments
• On June 18, 2018, the Company closed its bought deal offering (the “Offering”), including the exercise in full of
the underwriters’ over-allotment option. The Company issued and sold an aggregate of 1,302,950 Common
Shares at a price of $5.30 per Common Share for gross proceeds of $6,905,635.
• On September 18, 2018, TeraGo entered into a share purchase agreement to acquire all of the issued and
outstanding shares of Mobilexchange Spectrum Inc. and its parent holding company Mobilexchange Spectrum
Holdings Inc. (collectively, “MSI”) for aggregate cash consideration of $5.6 million. The acquisition was funded
through the net proceeds of TeraGo’s bought deal equity offering which previously closed on June 18, 2018. On
November 9, 2018, TeraGo completed its acquisition of MSI which is a holder of six 24 GHz spectrum licenses
in Calgary, Edmonton, Montreal, Ottawa, Toronto, and Vancouver covering approximately 3.1 billion MHz-Pop.
Prior to the acquisition, TeraGo was a lessee to such spectrum of MSI and held subordinate licenses.
• On October 10, 2018, the Company announced that it will be initiating a technical trial in the Greater Toronto
Area utilizing fixed wireless 5G millimeter wave equipment from PHAZR Inc.
(1) Adjusted EBITDA is a Non-GAAP measure. See "Definitions – Key Peformance Indicator, IFRS, Additional GAAP and Non-GAAP
Measures.
(2) See “Adjusted EBITDA” for a reconciliation of net loss to Adjusted EBITDA
6
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. TeraGo has since 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. Services are billed monthly over the term of the
contract.
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.
7
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, and 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 to Montreal 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.
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 national spectrum portfolio of exclusive 24 GHz and 38 GHz 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 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. As of the date,
hereof, the Company has submitted a comment letter and a subsequent reply comment letter in response to the
Consultation and final decisions from ISED on this Consultation are yet to be released.
In June 2018, ISED published its overall approach and planned activities for spectrum over the next five years in a
document titled Spectrum Outlook 2018 to 2022. In such document, ISED has confirmed that the 24 GHz band, among
several others has been designated as Priority 2 for future release for commercial mobile use. A definitive timeline for
the release of spectrum bands designated as Priority 2 and Priority 3 has not yet been confirmed by ISED. A timeline
for the release of the 38 GHz band, which has been designated as a Priority 1 band has been set for the end of 2021.
For additional information on these Consultations and to review the response letter of the Company or other
stakeholders,
https://www.ic.gc.ca/eic/site/smt-
gst.nsf/eng/h_sf11245.html.
Consultation
webpage:
ISED’s
please
refer
to
On November 9, 2018, TeraGo completed its acquisition of MSI which is a holder of six 24 GHz spectrum licenses
in Calgary, Edmonton, Montreal, Ottawa, Toronto, and Vancouver. Prior to the acquisition, TeraGo was a lessee to
such spectrum of MSI and held subordinate licenses. The transaction has been recorded directly in intangible assets
as the assets acquired did not meet the definition of a business under IFRS 3, Business Combinations.
For further details on our licensed spectrums, please refer to the Company’s 2018 AIF.
8
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
that protect and connect our customers’ 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.
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
approximately 7,000 square feet. The facility has redundant fibre facilities between the data centre and the ‘telco hotel’,
9
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.
SELECTED ANNUAL INFORMATION
The following table displays a summary of our Consolidated Statements of Comprehensive Earnings (Loss) for the
three months ended December 31, 2018 and 2017 and the years ended December 31, 2018, 2017 and 2016 and a
summary of select Balance Sheet data as at December 31, 2018, 2017 and 2016.
(in thousands of dollars, except with respect to
earnings (loss) per share)
Three months ended
December 31
2017(1)
2018
Years ended December 31
2018
2017(1)
2016(1)
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 gain (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 (1)
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,475
8,393
12,868
3,473
4,641
3,265
479
2,249
14,107
(1,239)
(20)
(766)
53
(1,972)
4,727 $
8,816
13,543
19,290
35,005
54,295
18,961
36,431
55,392
18,296
40,790
59,086
3,544
4,495
5,583
745
2,746
17,113
(3,570)
15
(523)
17
(4,061)
13,982
19,132
12,010
2,354
9,401
56,879
(2,584)
(2)
(2,315)
81
(4,820)
14,103
19,088
13,573
3,052
11,272
61,088
(5,696)
50
(1,698)
50
(7,294)
13,477
21,195
10,845
3,529
11,796
60,842
(1,756)
16
(1,882)
8
(3,614)
-
-
-
-
(700)
(1,972)
(72,323)
(74,295)
(0.13)
(0.13)
(4,061) $
(66,376)
(70,437) $
(0.28) $
(0.28) $
(4,820)
(69,475)
(74,295)
(0.32)
(0.32)
(7,294)
(63,143)
(70,437)
(0.51)
(0.51)
(4,314)
(58,829)
(63,143)
(0.30)
(0.30)
15,756
14,335
15,123
14,307
14,177
15,756
14,335
15,123
14,307
14,177
2018
3,918
3,604
996
35,346
84,349
5,781
32,294
1,092
44,643
As at December 31
$
$
$
$
$
$
$
$
$
2017(1)
6,986
3,389
2,516
38,822
87,858
8,519
36,183
475
41,917
$
$
$
$
$
$
$
$
$
2016(1)
13,034
3,673
3,150
44,161
102,837
11,027
40,778
1,567
48,648
(1) The Company has applied IFRS 15 on January 1, 2018 using the cumulative effect method. Under this method, the comparative information is not restated. See
“Accounting Pronouncements Adopted in 2018” for further information.
10
RESULTS OF OPERATIONS
Comparison of the three months and year ended December 31, 2018 and 2017
(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)
Selling, General, & Administrative Costs
Gross profit margin (1)
Adjusted EBITDA(1) (2)
Net 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
2017(3)
2018
Year ended
December 31
2017(3)
2018
$
$
$
$
$
$
$
$
$
4,475
8,393
4,727 $
8,816 $
12,868
13,543 $
3,473
7,906
73.0%
3,119
(1,972)
(0.13)
(0.13)
3,543 $
10,078
73.8%
2,937 $
(4,061) $
(0.28) $
(0.28) $
19,290
35,005
54,295
13,982
31,142
74.2%
12,964
(4,820)
(0.32)
(0.32)
18,961
36,431
55,392
14,103
32,661
74.5%
12,864
(7,294)
(0.51)
(0.51)
$
$
64,659
31,742
84,191 $
291,698 $
64,659
31,742
84,191
291,698
1.4%
1.3%
1,054
3,138
1.6%
1.4%
996 $
3,027 $
1.5%
1.9%
1,053
3,147
1.6%
1.6%
980
3,106
$
$
(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
(3) The Company has applied IFRS 15 on January 1, 2018 using the cumulative effect method. Under this method, the comparative information is not restated.
See “Accounting Pronouncements Adopted in 2018” for further information.
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 5.0% to $12.9 million for the three months ended December 31, 2018 compared to $13.5
million for the same period in 2017. Total revenue decreased 2.0% to $54.3 million for the year ended December 31,
2018, compared to $55.4 million for the same period in 2017. The decrease was attributable to churn exceeding
provisioning.
Connectivity Revenue
For the three months ended December 31, 2018, connectivity revenue decreased 4.8% to $8.4 million compared to
$8.8 million for the same period in 2017. Connectivity revenues were impacted by a variety of factors, including churn
and certain customers renewing long term contracts at lower current market rates partially offset by the positive impact
of reclassifications as a result of first time adoption of IFRS 15. Excluding the impact of IFRS 15 classification of revenue
from cloud and colocation to connectivity, connectivity revenue for the three months ended December 31, 2018 would
have been $8.0 million or 9.3% decrease compared to $8.8 million for the same period in 2017.
For the year ended December 31, 2018, connectivity revenue decreased 3.9% to $35.0 million compared to $36.4
million for the same period in 2017. The decrease was driven by factors described above. Excluding the impact of IFRS
15 classification of revenue from cloud and colocation to connectivity, connectivity revenue for the year ended
11
December 31, 2018 would have been $33.5 million or 8.1% decrease compared to $36.4 million for the same period in
2017.
Cloud and Colocation Revenue
For the three months ended December 31, 2018, cloud and colocation revenue decreased 5.3% to $4.5 million
compared to $4.7 million for the same period in 2017. The decrease was attributable to churn, partially offset by
provisioning. Excluding the impact of IFRS 15 classification of revenue from cloud and colocation to connectivity, cloud
and colocation revenue for the three months ended December 31, 2018 would have been $4.9 million or 3.3% increase
compared to $4.7 million for the same period in 2017.
For the year ended December 31, 2018, cloud and colocation revenue increased 1.7% to $19.3 million compared to
$19.0 million for the same period in 2017. The increase was driven by the beneficial impact of non-recurring customer
termination fees. Excluding the impact of IFRS 15 classification of revenue from cloud and colocation to connectivity,
cloud and colocation revenue for the year ended December 31, 2018 would have been $20.8 million or 9.7% increase
compared to $19.0 million for the same period in 2017.
Salaries and related costs and other operating expenses (“SG&A”)
For the three months ended December 31, 2018, SG&A decreased 21.6% to $7.9 million compared to $10.1 million for
the same period in 2017. The increase was primarily driven by lower impairment charges recognized to adjust the
carrying value of assets to their recoverable amount. In addition, the Company had lower cost of sales due to lower
revenues as well as lower personnel costs, marketing costs, data centre costs, and maintenance costs due cost
reduction efforts. In addition, there was an increase in proportion of capital labour activities.
For the year ended December 31, 2018, SG&A decreased 4.6% to $31.2 million compared to $32.7 million for the same
period in 2017. The decrease was a result of lower marketing spend, recruiting fees, employee travel/meals costs,
telephone costs, and lower personnel costs due to cost reduction efforts. Similarly, there was an increase in proportion
of capital labour activities compared to the same period in 2017. These reductions were partially offset by restructuring
related charges for headcount reductions that occurred in the quarter.
Net loss
Net loss was $2.0 million for the three months ended December 31, 2018 compared to a net loss of $4.1 million for the
same period in 2017. The decrease in net loss was primarily driven by a reduction in the impairment charge on certain
network assets, property and equipment and intangible assets recorded compared to 2017. The lower book value of
assets contributed to lower depreciation & amortization in the year which further contributed to the decrease in net loss.
In addition, the Company saw a decrease in cost of sales as a result of lower revenue and a decrease in operating
costs as a result of cost reduction efforts during the year. For the year ended December 31, 2018, net loss was $4.8
million compared to a net loss of $7.3 million for the same period in 2017. The decrease in net loss was driven by the
factors described above.
Adjusted EBITDA(1)
Adjusted EBITDA increased to $3.1 million for the three months ended December 31, 2018 compared to $2.9 million
for the same period in 2017. The increase was primarily driven by lower cost of sales and SG&A as a result of cost
reduction efforts discussed in detail above. These efforts include a reduction in headcount to improve operational
efficiencies to address the reduction in revenue and loss in customers.. Adjusted EBITDA increased to $13.0 million
for the year ended December 31, 2018 compared to $12.9 million for the same period in 2017. The increase was
primarily driven by the factors described above.
The table below reconciles net loss to Adjusted EBITDA(1) for the three months and year ended December 31, 2018
and 2017.
12
(in thousands of dollars)
Net earnings (loss) for the period
Foreign exchange loss (gain)
Finance costs
Finance income
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 (Recovery)
Restructuring, acquisition-related, integration costs and
other
Adjusted EBITDA(1)
$
$
20
766
(53)
(1,239)
2,728
397
333
279
621
3,119
Three months ended
December 31
2017(2)
(4,061) $
2018
(1,972)
(15)
523
(17)
Year ended
December 31
2017(2)
(7,294)
2018
(4,820)
2
2,315
(81)
(50)
1,698
(50)
(3,570)
(2,584)
(5,696)
3,492
15
2,851
156
(7)
11,755
14,324
757
764
963
109
2,851
201
1,309
1,075
2,937 $
12,964
12,864
(1) See "Definitions – Key Performance Indicators, IFRS, Additional GAAP and Non-GAAP Measures”
(2) The Company has initially applied IFRS 15 using the cumulative effect method. Under this method, the comparative information is not restated.
Backlog MRR
Cloud and colocation backlog MRR was $31,742 as at December 31, 2018 compared to $291,698 as at December 31,
2017. The decrease is driven by the provisioning of large colocation customers acquired in the prior year, partially offset
by new customer backlog.
Connectivity backlog MRR was $64,659 as at December 31, 2018, compared to $84,191 as at December 31, 2017.
The change in backlog MRR is driven primarily by bookings and the timing of customer provisioning.
ARPU
For the three months ended December 31, 2018 cloud and colocation ARPU was $3,138 compared to $3,027 for the
same period in 2017. Excluding the impact of IFRS 15 classification of revenue from cloud and colocation to
connectivity, ARPU for the three months ended December 31, 2018 would have been $3,413, representing growth of
12.8% compared to the prior period. The increase was driven by the provisioning of large customers in the first half of
2018, as well as planned churn of low value cloud customers. For the year ended December 31, 2018 cloud and
colocation ARPU was $3,147 compared to $3,106 for the same period in 2017. The increase was driven by factors
described above.
For the three months ended December 31, 2018 Connectivity ARPU was $1,054 compared to $996 for the same period
in 2017. The ARPU is consistent with prior year period as the Company continues to churn low value ARPU customers.
Excluding the impact of IFRS 15 on the classification of revenue from cloud and colocation to connectivity, connectivity
ARPU for the three months ended December 31, 2018 would have been $1,004, which represents an increase of 0.8%
compared to the prior year period. For the year ended December 31, 2018 connectivity ARPU was $1,053 compared
to $980 for the same period in 2017. The increase was driven by factors described above.
Churn
For the three months ended December 31, 2018, cloud and colocation churn was 1.3% compared to 1.4% for the same
period in 2017. The decrease was a result of churn management efforts. For the year ended December 31, 2018, cloud
and colocation churn was 1.9% compared to 1.6% for the same period in 2017. The increase was driven by low value
customer churn on legacy and end of life services that the Company ceased early in 2018.
For the three months ended December 31, 2018, connectivity churn was 1.4% compared to 1.6% for the same period
in 2017. For the year ended December 31, 2018, connectivity churn was 1.5% compared to 1.6% for the same period
in 2017. The decrease was driven by favourable impacts of the Company’s investment in developing a robust customer
experience framework.
Finance costs
For the three months ended December 31, 2018, finance costs increased 46.5% to $0.8 million compared to $0.5
million for the same period in 2017. The increase was a result of an unfavourable valuation of the Company’s interest
rate swaps. For the year ended December 31, 2018, finance costs increased 36.3% to $2.3 million compared to $1.7
13
million for the same period in 2017. The increase was a result of the factors mentioned above.
Depreciation and amortization
For the three months ended December 31, 2018, depreciation of network assets, property and equipment and
amortization of intangibles decreased 21.9% to $2.7 million compared to $3.5 million for the same period in 2017. The
decrease is mainly attributed to impairment charges, disposals, and assets reaching zero net book value earlier in the
year. For the year ended December 31, 2018, depreciation of network assets, property and equipment and amortization
of intangibles decreased 17.9% to $11.8 million compared to $14.3 million for the same period in 2017. The decrease
was a result of 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
Financial
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
$
$
$
$
$
$
$
$
$
Q4-18
Q3-18
Q2-18
Q1-18
Q4-17(2)
Q3-17(2)
Q2-17(2)
Q1-17(2)
12,868
73.0%
3,119
(1,972)
(0.13)
(0.13)
15,756
14,004
75.1%
3,593
(47)
(0.00)
(0.00)
15,736
13,683
74.7%
3,123
(1,489)
(0.10)
(0.10)
14,588
13,740
74.1%
3,129
(1,312)
(0.09)
(0.09)
14,391
13,543
73.8%
2,937
(4,061)
(0.28)
(0.28)
14,335
13,680
74.3%
3,213
(1,047)
(0.07)
(0.07)
14.334
13,892
74.3%
3,003
(1,131)
(0.08)
(0.08)
14,283
14,277
75.6%
3,711
(1,055)
(0.07)
(0.07)
14,258
15,756
15,736
14,588
14,391
14,335
14.334
14,283
14,258
64,659
31,742
71,659
30,172
60,750
67,747
58,336
133,687
84,191
291,698
98,345
134,283
76,254
39,977
69,518
33,962
1.4%
1.3%
1,054
3,138
1.4%
1.0%
1,071
3,049
1.4%
1.5%
1,062
3,336
1.6%
3.1%
1,041
3,084
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) See "Definitions – Key Performance Indicators, IFRS, Additional GAAP and Non-GAAP Measures"
(2) The Company has initially applied IFRS 15 using the cumulative effect method. Under this method, the comparative information is not restated.
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.
14
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)
Three months ended
December 31
Year ended
December 31
2018
2017
2018
2017
$
2,503
4,459
10,756
10,362
(6,651)
(1,422)
(5,570)
(3,201)
(1,398)
(140)
(14,195)
(10,294)
371
(3,068)
(6,116)
(6,048)
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
9,488
3,918
7,126
6,986
6,986
3,918
13,034
6,986
Operating Activities
For the three months ended December 31, 2018, cash generated from operating activities was $2.5 million compared
to cash from operations of $4.5 million for the same period in 2017. The decrease in cash from operating activities is
mainly due to favourable timing of payments in the prior year period. For the year ended December 31, 2018, cash
generated from operating activities was $10.8 million compared to $10.4 million for the same period in 2017. The
increase is primarily due to significant restructuring and severance related payments paid in 2017.
Investing Activities
For the three months ended December 31, 2018, cash used in investing activities was $6.7 million compared to cash
used of $3.2 million for the same period in 2017. The increase in cash used in investing activities was due to the
acquisition of MSI and its spectrum licenses during the year, partially offset by more favourable changes in the timing
of payments for purchases of capital expenditures in 2017 compared to 2018. For the year ended December 31, 2018,
cash used in investing activities was $14.2 million compared to $10.3 million for the same period in 2017. The increase
was due to the spectrum acquisition mentioned above, partially offset by lower operational capital expenditures during
the year.
Financing Activities
For the three months ended December 31, 2018 cash used in financing activities was $1.4 million compared to cash
used in financing activities of $1.4 million for the same period in 2017. For the year ended December 31, 2018, cash
generated from finance activities was $0.4 million compared to cash used in financing activities of $6.1 million for the
same period in 2017. The increase was due to the successful completion of the equity offering in the second quarter of
2018, which raised $6.1 million, net of expenditures.
Capital Resources
As at December 31, 2018, the Company had cash and cash equivalents of $3.9 million and access to an undrawn
revolving facility and acquisition funding capital as described in the subsequent section below, 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.
15
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 syndicate led by NBC that increased 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 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 $50.0 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 $75,000 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, 2018,
$nil amount is outstanding (2017 - $nil). Letters of credit issued under the facility totaled $0.7 million as of
December 31, 2018 (2017 - $0.7 million).
$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, 2018, $32.9 million of the term facility principal balance outstanding was in a Banker’s
Acceptance and the remaining $0.2 million was at a floating rate. During 2018, the Company entered into two
amended interest rate swap contracts that mature June 29, 2021. The interest rate swap contracts have not
been designated as a hedge and will be marked-to-market each quarter. The fair value of the interest rate
swap contracts at December 31, 2018 was a liability of $0.1 million (December 31, 2017 – asset of $0.03
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. The effective interest rate on the Company’s long-term debt at
December 31, 2018 was 5.34% which represents the Company’s interest on its Banker’s Acceptance net of
its interest swap contracts.
As at December 31, 2018, 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 plus a margin percent and is
repayable in quarterly principal installments of 2.5% of the aggregate amount outstanding. As of December
31, 2018, this facility remains undrawn.
Financing fees incurred as part of the Company’s debt origination and modifications have been recorded as a reduction
in the carrying amount of the debt and deferred and amortized using the effective interest method over the remaining
term of the facility.
The NBC facility is subject to certain financial and non-financial covenants which the Company is in compliance with at
December 31, 2018. 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 18, 2018, the Company completed the Offering to issue and sell 1,303 common shares for gross proceeds of
$6.9 million. Proceeds net of actual and expected additional commissions, legal, accounting and listing fees was $6.1
million. The Offering was carried out pursuant to an underwriting agreement dated June 4, 2018 with a syndicate of
underwriters led by TD Securities Inc., and included Cormark Securities Inc. and Desjardins Securities Inc.
The Company used the net proceeds of the Offering to fund its acquisition of MSI as further described in Overview –
Key Developments.
16
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 (in thousands):
2019
2020
2021
2022
2023
Thereafter
Amount
9,892
6,534
5,072
3,594
2,505
8,952
36,549
$
$
Off-balance Sheet Arrangements
As of December 31, 2018, the Company had no off-balance sheet arrangements apart from operating leases noted
above.
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 2018 Annual Information Form, a copy of which can be
found on SEDAR at www.sedar.com.
As of February 21, 2019, there were 15,775 Common Shares issued and outstanding and two Class B Shares issued
and outstanding. In addition, as of February 21, 2019, there were 47 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.
Impairment of Financial Assets
The Company’s financial assets measured at amortized cost consist of assets discussed in Note 19 of the financial
statements.
Under IFRS 9, loss allowances are measured on either of the following bases:
•
•
12-month ECLs: these are expected credit losses (“ECLs”) that result from possible default events within the
12 months after the reporting date; and
lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial
instrument.
The Company measures loss allowances for trade receivables and any contract assets at an amount equal to lifetime
ECLs. When determining whether the credit risk of a financial asset has increased significantly since initial recognition
and when estimating ECLs, the Company considers reasonable and supportable information that is relevant and
17
available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based
on the Company’s historical experience and informed credit assessment and including forward-looking information.
Loss allowances on financial assets measured at amortized cost are deducted from the gross carrying amount of the
asset and the related impairment loss is recorded separately on the statement of comprehensive income.
The following is a summary of the Company’s significant categories of financial instruments as at December 31,
2018:
Financial Instrument
Classification and measurement method
Financial Assets
Cash and cash equivalents
Accounts Receivable
Financial liabilities
Accounts payable
Accrued Liabilities
Long-term debt
Derivatives¹
Interest rate swap
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVTPL
¹Derivatives can be in an asset or liability position at a point in time historically or in the future
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,
18
which reflects the significance of the inputs used in making the measurements as defined in IFRS 9 – 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 large 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, 2018 and 2017, 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, 2018, the operating
line of credit balance was $nil. The drawn term facility as at December 31, 2018 was $33.0 million, $32.9 million of
which was held in a Bankers Acceptance. In 2018, the Company entered into amended interest rate swap contracts to
manage interest rate risk on its term facility. The interest rate on the Banker’s Acceptance at December 31, 2018 was
5.24%. The remaining $0.1 million 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, 2018,
the Company had cash and cash equivalents of $3.9 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
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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)
(x)
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.
Valuation Allowance on Trade Receivables:
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. The Company applies the IFRS 9 model to record valuation
allowances on Trade Receivables. See Note 3(c) in the Financial Statements for more detail.
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 is recognized for unused losses, 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.
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.
Revenue from contracts with customers:
The enforceable term of contracts requires estimating average contract terms based on available
historical data. Significant judgements are also made in determining whether the promises to
deliver certain services are considered distinct and represent separate performance obligations. In
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addition, evaluating whether costs incurred to obtain a contract are incremental and expected to
be recoverable requires judgment based on conditions of each individual contract.
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; and
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 in recent
years 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 related
managed/professional services. If TeraGo is unable to execute on its 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. 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.
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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 (including 5G) 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;
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•
•
•
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 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 and a reply
comment letter in response to the Consultation and final decisions from ISED on this Consultation are yet to be
released. 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 be renewed beyond their current licencing term ending in 2025, the value of such licences
may 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.
For additional information on the Consultation and to review the response letter of the Company or other stakeholders,
please refer to ISED’s Consultation webpage: https://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/h_sf11245.html.
While the 38 GHz spectrum band has been identified by ISED as one of the bands contemplated for future use to
support the deployment of 5G through a Consultation, a similar Consultation has not been issued for the 24 GHz band.
The Company’s 24 GHz licences have a set expiry date in 2025. There are no guarantees that such licences will be
renewed beyond 2025 or won’t be subject to any potential claw back by ISED. If the licences are not renewed or a
material portion of the licences are required to be return to ISED, the Company may be forced to seek alternative
spectrum and bands, discontinue existing services, and/or may incur significant costs to continue to provide certain of
its connectivity services.
As of the date hereof, decisions from ISED on the Consultation on Releasing Millimetre Wave Spectrum to Support 5G
have yet to be released and there can be no assurances that the particular 38 GHz and 24 GHz band licences that the
Company holds or leases will be identified in the future for potential 5G use. If either of the 38 GHz and 24 GHz licences
that the Company holds are determined by ISED to not qualify for 5G use, or does qualify but with stringent conditions
and terms of use, it may have a negative effect on the value of these licences and therefore impact negatively on the
value of the Company and its common shares.
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.
Potential Use of 5G Equipment and Business Case
In 2018, the Company began a technical trial in the Greater Toronto Area involving fixed wireless 5G millimetre wave
equipment from PHAZR Inc. This is preliminary testing of new technology and equipment by the Company and the
results of these technical trials for 5G equipment may not be satisfactory. In addition, the opportunities and business
case for a 5G-related business has not yet been developed nor fully explored, and therefore no assumptions or
assurances can be made that TeraGo will develop or provide 5G-services on a commercial basis. Moreover, the
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Company has not yet determined the capital needs, and whether such capital is available to provide 5G-related
services, or whether equipment suppliers like PHAZR and its competitors could be relied on to supply such equipment
in a manner that would support a 5G-related opportunity.
Integration and Anticipated Benefits Pursuant to Past Acquisitions
On March 27, 2015, the Company completed the acquisition of RackForce and on November 9, 2018 the Company
completed its acquisition of MSI (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. 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
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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;
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• 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;
•
• wireless Internet service providers using licenced or licence-exempt spectrum;
•
cable operators offering high-speed Internet connectivity services and voice communications;
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:
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•
•
•
•
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. Rapid changes in business demands may also affect the Company’s internal processes where certain
software tools, processes, and standards may become inefficient or obsolete. The Company may fail to keep pace with
changes in these technologies and practices which may result in operational breakdowns and/or financial losses.
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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 (including 5G) 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.
Physical Inventory
The nature of our business requires the Company to procure, deploy, track, and maintain large volumes of specialized
network and datacentre equipment purchased in Canada and abroad. Equipment is frequently moved between
provinces in Canada as part of provisioning. As a result, the Company is subject to inventory risk due to delays in
inventory movement as well as process breakdowns in provisioning and deploying inventory to a customer site, network
site, or datacenter facility. These delays may result in unintended backlog and inventory losses. The Company relies
heavily on the ability of our vendors to supply us in a timely manner as well as the diligence of the Company’s internal
process owners to ensure provisioning and inventory management is effective.
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.
27
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
28
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
We have incurred a net loss in the past several 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.
ACCOUNTING PRONOUNCEMENTS ADOPTED IN 2018
a)
IFRS 15 Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted IFRS 15 Revenue from Contracts with Customers. IFRS 15
supersedes the 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:
1.
Identify the contract with a customer;
2.
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 Company adopted IFRS 15 using the cumulative effect method, i.e. by recognizing the cumulative effect of initially
applying IFRS 15 as an adjustment to the opening balance of retained earnings at January 1, 2018. Therefore,
comparative information has not been restated and continues to be reported under IAS 18.
The Company has implemented several processes and policies to ensure the consistent, timely, and appropriate
allocation of revenue between performance obligations in contracts with customers.
29
The adoption of IFRS 15 did not affect the Company’s cash flows from operating, investing, or financing activities.
Furthermore, the impact on timing of revenue recognition was not material as the treatment of revenue for services
rendered over time, which is the method under which Company satisfies the majority of its performance obligations, is
consistent under IFRS 15 and IAS 18.The details of the significant changes and quantitative impact of the changes are
outlined in Note 4 of the Consolidated Financial Statements for the year ended December 31, 2018.
i) Sale of Bundled Services
The Company offers customers bundled connectivity, colocation, and cloud services. Revenue from these
arrangements were previously classified on the nature of the contract. Under IFRS 15, total consideration in contracts
with customers are allocated to distinct performance obligations based on their stand-alone selling prices. The
Company determined the stand-alone selling price to be the list price at which the Company sells connectivity, and
colocation & cloud services. As a result of the allocation of performance obligations under IFRS 15, certain amounts
that would have been classified as cloud & colocation revenue are now presented as connectivity revenue.
ii) Service Credits
The Company has obligations for credits under its contracts with customers when certain criteria are met. Credits are
recognized net of revenue recognized and presented in total revenue on the statement of comprehensive income.
iii) Contract Costs
IFRS 15 requires certain contract acquisition costs to be recognized as an asset on the statement of financial position
and amortized into income over time. The Company typically incurs internal or external sales commissions fees to
obtain contracts with customers. Prior to the adoption of IFRS 15, the Company had expensed all commission costs
as incurred. The Company now capitalizes these commission fees as costs of obtaining a contract when they are
incremental and expected to be recovered. These costs are amortized consistently with the pattern of revenue for the
related contracts and are recorded in salaries and related costs on the statement of comprehensive loss.
Contract costs are presented separately as an asset on the consolidated statement of financial position. The Company
has opted not to use practical expedients under the cumulative effect method and as a result, the current portion of
contract costs are presented in current assets. The current portion represent amounts expected to be amortized in the
next 12 months. The Company had to make significant judgments and estimates when estimating certain contract costs
incurred in prior years that continue to be incremental and recoverable in the current period.
iv) Contract Assets
Contract assets arise primarily as a result of services offered and provided in advance of payments received from a
customer. From time to time, the Company will offer promotions which will give rise to contract assets. These
arrangements are recorded in other long-term assets on the balance sheet with current and long-term amounts
presented separately on the statement of financial position. The current portion represents the performance obligation
to be satisfied and recognized as revenue in the next twelve months.
v) Contract Liabilities
Contract liabilities arise primarily as a result of payment made in advance of providing services to a customer. The
Company had previously presented these arrangements as deferred revenue. These payments are now presented as
contract liabilities with current and long-term amounts presented separately on the statement of financial position. The
current portion represents the performance obligation to be satisfied and recognized in revenue in the next 12 months.
30
vi) Impacts on Financial results
The following table highlights some of the key impacts on our financial metrics discussed in the MD&A:
Three months ended
December 31
2018
(Without
adoption
of IFRS
15)
2018
(As
reported)
%
Change
4,475
8,393
4,881
8,000
-8.3%
4.9%
12,868
12,881
-
3,119
3,249
(1,972)
(1,842)
-4.0%
7.1%
64,659
31,742
63,624
32,777
1.6%
-3.2%
1,054
3,138
1,004
3,413
5.0%
-8.1%
Year ended
December 31
2018
(As
reported)
2018
(Without
adoption of
IFRS 15)
%
Change
$
$
$
$
$
$
$
$
$
19,290
35,005
54,295
12,964
(4,820)
64,659
31,742
1,053
3,147
20,802
33,495
54,297
12,912
(4,872)
-7.3%
4.5%
-
0.4%
-1.1%
63,624
32,777
1.6%
-3.2%
1,010
3,411
4.3%
-7.7%
Financial
Cloud and Colocation Revenue
Connectivity Revenue
Total Revenue
Adjusted EBITDA(1) (2)
Net Income (Loss)
Operating
Backlog MRR(1)
Connectivity
Cloud & Colocation
ARPU(1)
Connectivity
Cloud & Colocation
$
$
$
$
$
$
$
$
$
(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
vii) Use of estimates
The Company used estimates in the following areas:
• Determining the enforceable term of contracts required estimating average contract terms based on available
historical data
• Significant judgments in determining whether the promises to deliver certain services are considered distinct
and represent separate performance obligations
• Evaluating whether costs incurred to obtain a contract were incremental and expected to be recoverable
b)
IFRS 9 Financial Instruments
Effective January 1, 2018, the Company adopted IFRS 9 Financial Instruments. IFRS 9 sets out requirements for
recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items.
This standard replaces IAS 39 Financial Instruments: Recognition and Measurement.
The adoption of this standard did not have a material effect on our consolidated financial statements.
i) Impairment of financial assets
IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ (ECL) model. The new impairment
model applies to financial assets measured at amortized cost, contract assets and debt investments at FVOCI, but not
to investments in equity instruments. Under IFRS 9, credit losses are recognized earlier than under IAS 39.
The Company’s financial assets measured at amortized cost consist of trade receivables.
Under IFRS 9, loss allowances are measured on either of the following bases:
•
•
12-month ECLs: these are expected credit losses (“ECLs”) that result from possible default events within the
12 months after the reporting date; and
lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial
instrument.
31
The Company measures loss allowances for trade receivables and any contract assets at an amount equal to lifetime
ECLs. When determining whether the credit risk of a financial asset has increased significantly since initial recognition
and when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available
without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the
Group’s historical experience and informed credit assessment and including forward-looking information.
At each reporting date, the Company assesses whether financial assets carried at amortized cost are credit-impaired.
ii) Measurement of loss allowances
For trade receivables, the Company uses historic actual credit losses as the basis for estimating ECLs and uniformly
applies this estimate to its gross balance net of balances already fully impaired at each reporting date. The Company
believes this amount to best estimate the expected credit losses.
iii) Presentation of loss allowances
Loss allowances on financial assets measured at amortized cost are deducted from the gross carrying amount of the
asset and the related impairment loss is recorded separately on the statement of comprehensive income.
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:
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.
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 Company has a dedicated team to assess the impact of IFRS 16 and
the team has gathered a significant portion of the information necessary to evaluate the impact of the standard. The
team is expected to quantify the impact of the standard upon completion of their assessment. The Company expects
the standard to have a significant impact on the Consolidated Statements of Financial Position as the Company will be
required to recognize a right-of-use asset and corresponding lease liability for its network sites, datacenters, and office
leases. Furthermore, the Company expects a decrease in other operating expenses, an increase in depreciation
expense (as the right-of-use asset is depreciated), and an increase in finance costs (due to accretion of the lease
liability). This impact will have a positive impact on Adjusted EBITDA as both depreciation and finance costs are added
back in its calculation.
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.
32
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,
2018 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, 2018. In accordance with Section 3.3 of National Instrument 52-109 –
Certificate of Disclosure in Issuers’ Annual and Interim Filings, the Company has limited the design of disclosure
controls and procedures and internal controls over financial reporting to exclude controls, policies and procedures of
MSI which was acquired not more than 365 days before the end of year ended December 31, 2018. The table below
shows a summary of the financial information for MSI which is included in the year end consolidated financial statements
of the Company as at December 31, 2018:
Non-current assets:
$5.6 million
EXECUTIVE MANAGEMENT CHANGES
Effective January 1, 2018, Mark Lau was appointed as Vice President, Legal & General Counsel, having previously
served as General Counsel to the Company.
Effective May 15, 2018, Christine Gauthier, Vice President of Sales, is no longer with the Company.
Effective August 15, 2018, Christopher Taylor was appointed as Vice President, Product Management and Business
Development, having previously served as Director, Product Management to the Company.
33
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.
34
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.
35
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, 2019
“Antonio Ciciretto”
“David Charron”
President and Chief Executive Officer
Chief Financial Officer
36
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.
Opinion
We have audited the consolidated financial statements of TeraGo Inc. (the Entity),
which comprise:
the consolidated statements of financial position as at December 31, 2018 and
2017
the consolidated statements of comprehensive loss for the years then ended
the consolidated statements of changes in equity for the years then ended
the consolidated statements of cash flows for the years then ended
and notes to the consolidated financial statements, including a summary of
significant accounting policies
(Hereinafter referred to as the "financial statements").
In our opinion, the accompanying financial statements present fairly, in all material
respects, the consolidated financial position of the Entity as at December 31, 2018
and December 31, 2017, and its consolidated financial performance and its
consolidated cash flows for the years then ended in accordance with International
Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Our responsibilities under those standards are further described in the
"Auditors' Responsibilities for the Audit of the Financial Statements" section of
our auditors' report.
We are independent of the Entity in accordance with the ethical requirements that are
relevant to our audit of the financial statements in Canada and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
KPMG LLP, is a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
KPMG Canada provides services to KPMG LLP.
37
Emphasis of Matter
We draw attention to note 4(a) to the financial statements which indicates that the
Entity has changed its accounting policy for revenue, as a result of the adoption of
IFRS 15, Revenue from Contracts with Customers, and has applied that change using
the cumulative effect method.
Our opinion is not modified in respect of this matter.
Other Information
Management is responsible for the other information. Other information comprises:
the information included in Management's Discussion and Analysis filed with the
relevant Canadian Securities Commissions.
the information, other than the financial statements and the auditors' report
thereon, included in a document likely to be entitled "2018 Annual Report".
Our opinion on the financial statements does not cover the other information and we
do not and will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our knowledge
obtained in the audit and remain alert for indications that the other information appears
to be materially misstated.
We obtained the information included in Management's Discussion and Analysis filed
with the relevant Canadian Securities Commissions as at the date of this auditors'
report. If, based on the work we have performed on this other information, we
conclude that there is a material misstatement of this other information, we are
required to report that fact in the auditors' report.
We have nothing to report in this regard.
The information, other than the financial statements and the auditors' report thereon,
included in a document likely to be entitled "2018 Annual Report" is expected to be
made available to us after the date of this auditors' report. If, based on the work we
will perform on this other information, we conclude that there is a material
misstatement of this other information, we are required to report that fact to those
charged with governance.
38
Responsibilities of Management and Those Charged with
Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with International Financial Reporting Standards (IFRS),
and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
In preparing the financial statements, management is responsible for assessing the
Entity's ability to continue as a going concern, disclosing as applicable, matters related
to going concern and using the going concern basis of accounting unless
management either intends to liquidate the Entity or to cease operations, or has no
realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity's financial
reporting process.
Auditors' Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud or
error, and to issue an auditors' report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with Canadian generally accepted auditing standards
will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing
standards, we exercise professional judgment and maintain professional skepticism
throughout the audit.
We also:
Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to
those risks, and obtain audit evidence that is sufficient and appropriate to provide
a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher
than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit 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.
39
Evaluate the appropriateness of accounting policies used and the reasonableness
of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management's use of the going concern
basis of accounting and, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that may cast significant
doubt on the Entity's ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in our auditors' report
to the related disclosures in the financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit
evidence obtained up to the date of our auditors' report. However, future events
or conditions may cause the Entity to cease to continue as a going concern.
Evaluate
the overall presentation, structure and content of
financial
statements, including the disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves fair
presentation.
the
Communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit findings,
including any significant deficiencies in internal control that we identify during our
audit.
Provide those charged with governance with a statement that we have complied
with relevant ethical requirements regarding independence, and communicate
with them all relationships and other matters that may reasonably be thought to
bear on our independence, and where applicable, related safeguards.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors' report is Kevin James
Fisher.
Vaughan, Canada
February 21, 2019
40
TERAGO INC.
Consolidated Statements of Financial Position
(In thousands)
Assets
Cash and cash equivalents
Accounts receivable
Prepaid expenses and other assets
Current portion of contract costs
Current portion of other long-term assets
Total current assets
Network assets, property and equipment
Intangible assets
Goodwill
Contract costs
Other long-term assets
Total non-current assets
Total Assets
Liabilities
Accounts payable and accrued liabilities
Current portion of deferred revenue
Current portion of contract liabilities
Current portion of long-term debt
Current portion of other long-term liabilities
Total current liabilities
Decommissioning and restoration obligations
Deferred revenue
Contract liabilities
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
7(a)
7(b)
6(b)
11(a)
8
9
9
6(b)
11(a)
6(c)
10
11(b)
12
6(c)
10
11(b)
December 31
2018
December 31
2017*
3,918 $
3,604
996
501
37
9,056
35,346
20,043
19,419
452
33
75,293
6,986
3,389
2,516
-
27
12,918
38,822
16,699
19,419
-
-
74,940
84,349 $
87,858
5,781 $
-
178
4,000
186
10,145
277
-
84
28,294
906
29,561
39,706
8,519
282
-
4,000
56
12,857
277
205
-
32,183
419
33,084
45,941
93,262
25,676
(74,295)
44,643 $
86,653
25,701
(70,437)
41,917
84,349 $
87,858
$
$
$
$
$
*The Company retrospectively applied IFRS 15 using the cumulative effect method. Under this method, the comparative
information is not restated. See Note 4(a).
On behalf of the Board:
(signed) “Matthew Gerber”
(signed) “Gary Sherlock”
Director
Director
The accompanying notes are an integral part of these financial statements.
41
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
8
9
Loss from operations
Foreign exchange gain (loss)
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
$
$
$
$
$
$
16
16
Year ended
December 31
2018
54,295
$
Year ended
December 31
2017*
55,392
Note
6
$
13,982
19,132
12,010
9,401
2,354
56,879
(2,584)
(2)
(2,315)
81
(4,820)
$
14,103
19,088
13,573
11,272
3,052
61,088
(5,696)
50
(1,698)
50
(7,294)
-
-
(4,820)
$
(7,294)
$
$
$
$
(69,475)
(74,295)
(0.32)
(0.32)
15,123
15,123
(63,143)
(70,437)
(0.51)
(0.51)
14,307
14,307
*The Company retrospectively applied IFRS 15 using the cumulative effect method. Under this method, the comparative
information is not restated.
**Adjusted for the adoption of IFRS 15 on January 1, 2018 (Note 4(a)(i))
The accompanying notes are an integral part of these financial statements.
42
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
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
Loss on adjustments and disposal of network 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
Contract liabilities
Contract costs
Cash from Operating Activities
Investing Activities
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
Proceeds from equity offering
Equity offering costs incurred
Interest paid, net of received
Repayment of long-term debt
Financing costs incurred
Note
8
9
15
8
8, 9, 6(b)
8
9
14
14
Cash from (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
$
Year ended
December 31
2018
Year ended
December 31
2017*
$
(4,820)
(7,294)
1,310
9,401
2,354
963
2,315
(81)
757
764
(1,450)
-
(285)
1,520
(1,690)
-
(162)
(140)
10,756
(7,314)
(5,720)
(1,161)
(14,195)
-
6,906
(858)
(1,677)
(4,000)
-
371
(3,068)
6,986
3,918
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
*The Company retrospectively applied IFRS 15 using the cumulative effect method. Under this method, the comparative
information is not restated.
The accompanying notes are an integral part of these financial statements.
43
TERAGO INC.
Consolidated Statements of Changes in Equity
(In thousands)
Balance, January 1, 2018
Adjustments on adoption of
IFRS 15*
Adjusted Balance at January 1, 2018
Issuance of shares upon exercise of
options
Stock-based compensation
Issuance of shares for directors' fees
Share Capital
Number
14,365 $
Amount
86,653 $
Contributed
Surplus
Deficit
25,701 $
(70,437) $
-
14,365
-
86,653
-
25,701
962
(69,475)
41
-
59
115
-
446
(114)
89
-
-
-
-
-
-
Total
41,917
962
42,879
1
89
446
6,048
Issuance of shares for equity offering - net
of issuance costs (Note 14)
1,303
6,048
Net loss and comprehensive loss
-
-
-
(4,820)
(4,820)
Balance, December 31, 2018
15,768 $
93,262 $
25,676 $
(74,295) $
44,643
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
Contributed
Number
14,250 $
Amount
86,171 $
Surplus
Deficit
25,620 $
(63,143) $
Total
48,648
49
-
66
-
196
-
286
-
-
81
-
-
-
-
-
196
81
286
(7,294)
(7,294)
Balance, December 31, 2017**
14,365
86,653
25,701
(70,437)
41,917
*See Note 4(a)(i).
**The Company retrospectively applied IFRS 15 using the cumulative effect method. Under this method, the comparative
information is not restated.
See Note 14 – Share capital for classes of shares.
The accompanying notes are an integral part of these financial statements.
44
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, 2019.
(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
(c) Functional and Presentation Currency
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.
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) 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.
(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.
(v) Valuation allowance on Trade Receivables:
In developing the estimates for an allowance against existing receivables, the Company considers general and
45
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
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. The Company applies the IFRS 9 model to record valuation
allowances on Trade Receivables. See Note 3(c) for more detail.
(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:
A deferred tax asset is recognized for unused losses, 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.
(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.
(x) Revenue from contracts with customers:
The enforceable term of contracts requires estimating average contract terms based on available historical
data. Significant judgements are also made in determining whether the promises to deliver certain services are
considered distinct and represent separate performance obligations. In addition, evaluating whether costs
incurred to obtain a contract are incremental and expected to be recoverable requires judgment based on
conditions of each individual contract.
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. The Company applies the five step IFRS 15 Revenue from Contracts with
Customers model (Note 4(a)) in determining the appropriate treatment of its various sources of revenue. The principal
sources of revenue to the Company and recognition of these revenues are as follows:
Monthly recurring revenue (MRR) from cloud, colocation, and connectivity are recognized as service revenue
ratably over the enforceable term of individual contracts which is typically the stated term. The Company satisfies
its performance obligation as these services are made available over time. The Company believes this method
to be the best representation of transfer of services as it is consistent with industry practice to measure
satisfaction through passage of time. In addition, many of the Company’s contractual terms are consistent with a
monthly passage of time model as services are provided.
Revenue from installation services, which are not treated as distinct performance obligations, are recognized
over the enforceable term of individual contracts consistent with the schedule of MRR discussed above.
Usage revenue (overage and consumption-based services) is recorded as service revenue in the month the
usage is incurred/service is consumed by the customer, based on a fixed agreed upon amount per unit
consumed.
Payment is typically due at the beginning of each month for MRR services and at the end of each month for
usage revenue.
46
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
(i)
Sale of Bundled Services
The Company offers certain customers bundled connectivity, colocation, and cloud services. Revenue from these
arrangements were previously classified based on the nature of the contract. Under IFRS 15, total consideration in
contracts with customers are allocated to distinct performance obligations based on their stand-alone selling prices.
The Company determined the stand-alone selling price to be the list price at which the Company sells connectivity,
and colocation and cloud services. As a result of the allocation of performance obligations under IFRS 15, certain
amounts that would have been classified as cloud and colocation revenue are now presented as connectivity
revenue.
(ii)
Service Credits
The Company has obligations for credits under its contracts with customers when certain criteria are met. Credits
are measured at agreed upon contractual rates and are recognized net of revenue and presented in total revenue
on the statement of comprehensive loss.
(iii)
Contract Costs
IFRS 15 requires certain contract acquisition costs to be recognized as an asset on the statement of financial
position and amortized into income over time. The Company typically incurs internal or external sales commissions
to obtain contracts with customers. Prior to the adoption of IFRS 15, the Company expensed all commission costs
as incurred. The Company now capitalizes these commission fees as costs of obtaining a contract when they are
incremental and expected to be recovered. These costs are amortized consistently with the pattern of revenue for
the related contracts and are recorded in salaries and related costs on the statement of comprehensive loss.
Contract costs are presented separately as an asset on the consolidated statement of financial position. The
Company has opted not to use practical expedients under the cumulative effect method and as a result, the current
portion of contract costs are presented in current assets. The current portion represent amounts expected to be
amortized in the next 12 months. The Company uses significant judgments and estimates when estimating certain
contract costs incurred in prior years that continue to be incremental and recoverable in the current period.
(iv)
Contract Assets
Contract assets arise primarily as a result of services offered and provided in advance of payments received from
a customer. From time to time, the Company will offer promotions which will give rise to contract assets. These
arrangements are recorded in other long-term assets on the balance sheet with current and long-term amounts
presented separately on the statement of financial position. The current portion represents the performance
obligation to be satisfied and recognized as revenue in the next twelve months.
(v)
Contract Liabilities
Contract liabilities arise primarily as a result of payment received in advance of providing services to a customer;
for example, when a customer pays for a service up-front on a multi-year contract. The Company had previously
presented these arrangements as deferred revenue. These payments are now presented as contract liabilities with
current and long-term amounts presented separately on the statement of financial position. The current portion
represents the performance obligation to be satisfied and recognized as revenue in the next twelve months.
(b) Basis of Consolidation
The consolidated financial statements include the accounts of TeraGo Inc. and its wholly owned subsidiaries TeraGo
Networks Inc., Mobilexchange Spectrum Holdings Inc., and Mobilexchange Spectrum Inc. (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 financial
and operating policies of an entity so as to obtain benefits from its activities. All intercompany transactions between
subsidiaries are eliminated on consolidation.
(c) 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 fair value through profit or loss (FVTPL) financial assets which are
expensed as incurred), and are recognized over the term of the assets or liabilities using the effective interest method.
47
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
The classification and methods of measurement subsequent to initial recognition of our financial assets and financial
liabilities are as follows:
Financial Instrument
Classification and measurement method
Financial Assets
Cash and cash equivalents
Accounts Receivable
Financial liabilities
Accounts payable
Accrued Liabilities
Long-term debt
Derivatives¹
Interest rate swap
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVTPL
¹Derivatives can be in an asset or liability position at a point in time historically or in the future
Impairment of Financial Assets
The Company’s financial assets measured at amortized cost consist of assets discussed in Note 19.
Under IFRS 9, loss allowances are measured on either of the following bases:
12-month ECLs: these are expected credit losses (“ECLs”) that result from possible default events within the 12
months after the reporting date; and
lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial
instrument.
The Company measures loss allowances for trade receivables and any contract assets at an amount equal to lifetime ECLs.
When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when
estimating ECLs, the Company considers reasonable and supportable information that is relevant and available without
undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Company’s
historical experience and informed credit assessment and including forward-looking information.
Loss allowances on financial assets measured at amortized cost are deducted from the gross carrying amount of the asset
and the related impairment loss is recorded separately on the statement of comprehensive loss. The Company subsequently
writes off financial assets where it is not economical to pursue recovery and when all reasonable legal avenues of pursuit
for material assets have been exhausted.
(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.
48
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
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. 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.
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.
49
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
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) 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 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.
(h) Leases
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
(i)
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
50
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
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
subsequently allocates them to expense using a systematic and rational method over the asset's useful life. The Company
records the accretion of the liability (unwinding of the discount) as a charge to finance costs.
Foreign Currency Translation
(j)
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
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.
(k) Finance income and finance costs
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
(l)
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.
(m) 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.
(n) 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
51
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
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.
Operating Segments
(o)
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, 2018
substantially all of the Company’s identifiable assets are located in Canada.
(p) Loss Per Share
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. Accounting Pronouncements Adopted in 2018
a) IFRS 15 Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted IFRS 15 Revenue from Contracts with Customers. IFRS 15 supersedes
the 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:
1.
Identify the contract with a customer;
2.
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 Company adopted IFRS 15 using the cumulative effect method, i.e. by recognizing the cumulative effect of initially
applying IFRS 15 as an adjustment to the opening balance of retained earnings at January 1, 2018. Therefore, comparative
information has not been restated and continues to be reported under IAS 18.
The Company has implemented several processes and policies to ensure the consistent, timely, and appropriate allocation
of revenue between performance obligations in contracts with customers.
The adoption of IFRS 15 did not affect the Company’s cash flows from operating, investing, or financing activities.
Furthermore, the impact on timing of revenue recognition was not material as the treatment of revenue for services rendered
over time, which is the method under which Company satisfies the majority of its performance obligations, is consistent
under IFRS 15 and IAS 18. The details of the significant changes and quantitative impact of the changes are outlined below.
The treatment of costs incurred in acquiring customer contracts is affected as IFRS 15 requires certain contract acquisition
52
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
costs (such as sales commissions) to be recognized as an asset and amortized into operating expenses over time (note
3(a)). Previously, such costs were expensed as incurred.
In addition, new assets and liabilities have been recognized on our Consolidated Statements of Financial Position.
Specifically, a contract asset and contract liability is recognized to account for any timing differences between the revenue
recognized and the amounts billed to the customer.
The Company used estimates in the following areas:
Determining the enforceable term of contracts required estimating average contract terms based on available
historical data
Significant judgments in determining whether the promises to deliver certain services are considered distinct and
represent separate performance obligations
Evaluating whether costs incurred to obtain a contract were incremental and expected to be recoverable
i) Impacts on Consolidated Financial Statements
Impact on Consolidated Statement of Financial Position
As at December 31
2018
Balances
without
adoption
of IFRS 15
As
Balance
after
adoption
As at January 1
2018
Balances
without
adoption
of IFRS 15
Reported Adjust.
of IFRS 15 Adjust.
Assets
Cash and cash equivalents
Accounts receivable
Prepaid expenses and other assets
Other long-term assets
Network assets, property and equipment
Intangible assets
Goodwill
Contract costs
Total Assets
Liabilities
Accounts payable and accrued liabilities
Deferred revenue
Contract liabilities
Long-term debt
Other long-term liabilities
Decommissioning and restoration obligations
Total Liabilities
Shareholders’ Equity
Share capital
Contributed surplus
Deficit
Total Shareholders' Equity
3,918
3,604
996
70
35,346
20,043
19,419
953
84,349
5,781
-
262
32,294
1,092
277
39,706
-
70
-
(70)
-
-
-
(953)
(953)
-
323
(262)
-
-
-
61
3,918
3,674
996
-
35,346
20,043
19,419
-
83,396
5,781
323
-
32,294
1,092
277
39,767
6,986
3,389
2,516
27
38,822
16,699
19,419
899
88,757
-
-
-
-
-
-
-
(899)
(899)
8,519
-
424
36,183
475
277
45,878
-
487
(424)
-
-
-
63
6,986
3,389
2,516
27
38,822
16,699
19,419
-
87,858
8,519
487
-
36,183
475
277
45,941
93,262
25,676
(74,295)
84,349
-
-
(1,014)
(953)
93,262
25,676
(75,309)
83,396
86,653
25,701
(69,475)
88,757
-
-
(962)
(899)
86,653
25,701
(70,437)
87,858
53
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
Impact on Consolidated Statement of Comprehensive Income
Revenue
Cost of services
Salaries and related costs
Other operating expenses
Depreciation of network assets, property and
equipment
Amortization of intangible assets
Foreign exchange gain
Finance costs
Finance income
Income tax expense
Net loss and comprehensive loss
Basic loss per share
Diluted loss per share
Impact on Consolidated Statement of Cash Flows
As
Year ended December 31
2018
Balances
without
adoption
of IFRS 15
54,297
(13,982)
(19,272)
(11,924)
Reported Adjust.
2
-
(140)
86
54,295
(13,982)
(19,132)
(12,010)
(9,401)
(2,354)
(2)
(2,315)
81
-
(4,820)
(0.32)
(0.32)
-
-
-
-
-
-
(52)
(9,401)
(2,354)
(2)
(2,315)
81
-
(4,872)
-
-
(0.32)
(0.32)
Year ended December 31
2018
Balances
without
adoption
of IFRS 15
As
Reported Adjust.
Operating Activities
Net loss for the year
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities
Changes in non-cash working capital
items:
Accounts receivable
Prepaid expenses
Accounts payable and accrued liabilities
Deferred revenue
Contract liabilities
Contract costs
Cash from Operating Activities
Cash used in Investing Activities
Cash from Financing Activities
Net change in cash and cash equivalents,
during the period
Cash and cash equivalents, beginning of
period
Cash and cash equivalents, end of period
(4,820)
(52)
(4,872)
16,333
(86)
16,247
(285)
1,520
(1,690)
-
(162)
(140)
10,756
(14,195)
371
(3,068)
6,986
3,918
-
-
(164)
162
140
-
-
-
-
-
-
(285)
1,520
(1,690)
(164)
-
-
10,756
(14,195)
371
(3,068)
6,986
3,918
b) IFRS 9 Financial Instruments
Effective January 1, 2018, the Company adopted IFRS 9 Financial Instruments. IFRS 9 sets out requirements for recognising
and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard
replaces IAS 39 Financial Instruments: Recognition and Measurement.
54
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
The adoption of this standard did not have a material effect on our consolidated financial statements.
Below is a summary showing the classification and measurement bases of the Company’s financial instruments as at
January 1, 2018 as a result of adopting IFRS 9 (along with a comparison to IAS 39).
Financial Instrument
IAS 39
IFRS 9
Financial Assets
Cash and cash equivalents
Accounts Receivable
Loans and receivables (amortized cost)
Loans and receivables (amortized cost)
Amortized Cost
Amortized Cost
Financial liabilities
Accounts payable
Accrued Liabilities
Long-term debt
Derivatives
Interest rate swap
i) Impairment of financial assets
Other financial liabilities (amortized cost)
Other financial liabilities (amortized cost)
Other financial liabilities (amortized cost)
Amortized Cost
Amortized Cost
Amortized Cost
Held-for-trading (FVTPL)
FVTPL
IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ (ECL) model. The new impairment model
applies to financial assets measured at amortised cost, contract assets and debt investments at FVOCI, but not to
investments in equity instruments. Under IFRS 9, credit losses are recognised earlier than under IAS 39.
The Company’s financial assets measured at amortized cost consist of assets discussed in Note 19.
Under IFRS 9, loss allowances are measured on either of the following bases:
12-month ECLs: these are expected credit losses (“ECLs”) that result from possible default events within the 12
months after the reporting date; and
lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial
instrument.
The Company measures loss allowances for trade receivables and any contract assets at an amount equal to lifetime ECLs.
When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when
estimating ECLs, the Company considers reasonable and supportable information that is relevant and available without
undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Company’s
historical experience and informed credit assessment and including forward-looking information.
At each reporting date, the Company assesses whether financial assets carried at amortized cost are credit-impaired.
ii) Measurement of loss allowances
For trade receivables, the Company uses historic actual credit losses as the basis for estimating ECLs and uniformly applies
this estimate to its gross balance net of balances already fully impaired at each reporting date. The Company believes this
amount to best estimate the expected credit losses.
iii) Presentation of loss allowances
Loss allowances on financial assets measured at amortized cost are deducted from the gross carrying amount of the asset
and the related impairment loss is recorded separately on the statement of comprehensive income.
5. 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, 2018 and could have an impact on future periods.
55
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
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.
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 Company has a dedicated team to assess the impact of IFRS 16 and the team has
gathered a significant portion of the information necessary to evaluate the impact of the standard. The team is expected to
quantify the impact of the standard upon completion of their assessment. The Company expects the standard to have a
significant impact on the Consolidated Statements of Financial Position as the Company will be required to recognize a
right-of-use asset and corresponding lease liability for its network sites, datacenter, and office leases. Furthermore, the
Company expects a decrease in other operating expenses, an increase in depreciation expense (as the right-of-use asset
is depreciated), and an increase in finance costs (due to accretion of the lease liability).
6. Revenue
The Company’s operations, main sources of revenue, and methods for recognition are those described in Note 3. The
Company’s revenue is primarily derived from contracts with customers.
The effect of initially applying IFRS 15 on the Company’s financial statements is disclosed in Note 4.
a) Disaggregation of revenue
In the following table and in accordance with IFRS 15, the Company’s disaggregates revenue into two primary categories
that depict the nature of its revenue streams.
Cloud and Colocation Revenue
Connectivity Revenue
Year ended
December 31
2017*
18,961
36,431
2018
19,290
35,005
54,295
55,392
$
$
*The Company has initially applied IFRS 15 using the cumulative effect method. Under this method, the comparative
information is not restated.
56
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
b) Contract Costs
The following table summarizes the change in contract costs during the year ended December 31, 2018:
Balance, January 1, 2018
Incremental commissions capitalized
Impairment charges from contract terminations
Amortization
Balance, December 31, 2018
Less: current
$
$
2018
899
782
(86)
(642)
953
(501)
452
c) Contract Liabilities
The following is a table that summarizes the change in contract liabilities during the year ended December 31, 2018:
Balance, January 1, 2018
Additions from provisioning
Revenue recognized for services provided
Impairments from contract terminations
Balance, December 31, 2018
Less: current
$
$
2018
424
413
(539)
(36)
262
(178)
84
d) Unsatisfied Performance Obligations
The aggregate amount of transaction price allocated to performance obligations that are unsatisfied as of December 31,
2018 was $69,498. This represents contractual service obligations that the Company has yet to fulfill under its contracts
with customers. The Company expects to recognize this revenue over the next 3 years which represents the average
remaining contractual terms prior to renewals. This amount excludes obligations owing for month-to-month contracts as
the unsatisfied term is calculated monthly.
7. 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:
Trade receivables
Loss allowances (Note 19(b))
Other
December 31
2018
December 31
2017
$
$
3,519 $
(47)
132
3,604 $
3,137
(21)
273
3,389
57
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
8. Network Assets, Property and Equipment
Cost
Balance, January 1, 2018
Additions / reclassifications
Disposals
Reclassifications / Adjustments
Impairment
Network
Assets
$
117,170
Cloud &
Datacentre
Infrastructure
14,578
Computer
Equipment
Office
Furniture and
Equipment
2,770
2,357
Leasehold
Improvements
2,330
Vehicles
49
Total
139,254
6,107 $
384 $
9 $
1 $
813 $
- $
7,314
(2,338)
643
(1,557)
(281)
(2,946)
-
(11)
2,293
(73)
(12)
10
-
(37)
-
(7)
-
-
-
(2,679)
-
(1,637)
Balance, December 31, 2018
$
120,025 $
11,735 $
4,988 $
2,356 $
3,099 $
49 $
142,252
Accumulated Depreciation
Balance, January 1, 2018
Depreciation for the period
Disposals
Reclassifications / Adjustments
Impairment
$
90,454 $
3,902 $
2,542 $
2,222 $
1,263 $
49 $
100,432
7,189
(1,742)
(38)
(939)
877
(145)
(1,428)
-
844
(9)
1,463
(64)
49
(9)
3
-
442
(17)
-
(2)
-
-
-
-
9,401
(1,922)
-
(1,005)
Balance, December 31, 2018
$
94,924 $
3,206 $
4,776 $
2,265 $
1,686 $
49 $
106,906
Net Book Value, December 31, 2018 $
25,101 $
8,529 $
212 $
91 $
1,413 $
- $
35,346
Cost
Balance, January 1, 2017
Additions / reclassifications
Disposals / Adjustments
Impairment
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)
25
-
-
682
-
-
-
-
-
Total
139,684
8,490
(1,128)
(7,792)
Balance, December 31, 2017
$
117,170 $
14,578 $
2,770 $
2,357 $
2,330 $
49 $
139,254
Accumulated Depreciation
Balance, January 1, 2017
Depreciation for the period
Disposals / Adjustments
Impairment
$
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)
50
-
-
212
-
-
-
-
-
11,272
(1,027)
(5,336)
Balance, December 31, 2017
$
90,454 $
3,902 $
2,542 $
2,222 $
1,263 $
49 $
100,432
Net Book Value, December 31, 2017 $
26,716 $
10,676 $
228 $
135 $
1,067 $
- $
38,822
For the year ended December 31, 2018, the Company recorded reclassifications to adjust the presentation of certain computer
equipment and network assets that were recorded in cloud & datacentre infrastructure. This change had no impact on the
financial statements.
For the years ended December 31, 2018 and 2017, the Company had additions of capitalized wages and other directly
attributable costs of $2,537 and $2,157, respectively, in network assets.
During 2018, the Company wrote off assets with net book value of $757 (Cost of $2,679 less accumulated depreciation of
$1,922) which primarily represents replaced assets and obsolete assets disposed of for negligible value. During 2017, the
Company wrote off assets with a net book value of $104 (Cost of $331 less accumulated depreciation of $227). The
corresponding loss on disposal is included in other operating expenses.
Impairment of Property, Plant, and Equipment
The annual impairment test of Network assets, property and equipment was performed on December 31, 2018 and a charge
of $632 was recorded in other operating expenses on the statement of comprehensive loss (December 31, 2017 – $2,456).
The Company tests assets for impairment when events or circumstances may indicate the carrying value is no longer
58
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
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.
9.
Intangible Assets and Goodwill
Cost
Radio
spectrum
licenses
Computer
Software
Customer
relationships
Other
Total
Intangibles
Goodwill
Balance, January 1, 2018
$
7,041 $
9,803 $
17,690 $
4,831 $
39,365 $
19,419 $
Additions
Impairment
5,608
-
112
(75)
-
-
-
-
5,720
(75)
-
-
Total
Intangibles
and Goodwill
58,784
5,720
(75)
Balance, December 31, 2018
$
12,649 $
9,840 $
17,690 $
4,831 $
45,010 $
19,419 $
64,429
Accumulated Depreciation
Balance, January 1, 2018
$
2,371 $
8,584 $
9,177 $
2,534 $
22,666 $
Amortization for the period
Impairment
-
-
645
(53)
1,420
-
289
-
2,354
(53)
- $
-
-
22,666
2,354
(53)
Balance December 31, 2018
$
2,371 $
9,176 $
10,597 $
2,823 $
24,967 $
- $
24,967
Net Book Value, December 31, 2018 $
10,278 $
664 $
7,093 $
2,008 $
20,043 $
19,419 $
39,462
Cost
Radio
spectrum
licenses
Computer
Software
Customer
relationships
Other
Total
Intangibles
Goodwill
Total
Intangibles
and Goodwill
Balance, January 1, 2017
$
7,041 $
9,056 $
18,241 $
4,880 $
39,218 $
19,419 $
58,637
Additions
Disposals / Adjustments
Impairment
Balance, December 31, 2017
Accumulated Depreciation
Balance, January 1, 2017
Amortization for the period
Impairment
$
$
-
-
-
754
(7)
-
-
4
-
(5)
(555)
(44)
754
(8)
(599)
-
-
-
754
(8)
(599)
7,041 $
9,803 $
17,690 $
4,831 $
39,365 $
19,419 $
58,784
2,371 $
7,999 $
7,481 $
1,967 $
19,818 $
- $
19,818
-
-
585
-
1,866
(170)
601
(34)
3,052
(204)
-
-
3,052
(204)
Balance December 31, 2017
$
2,371 $
8,584 $
9,177 $
2,534 $
22,666 $
- $
22,666
Net Book Value, December 31, 2017 $
4,670 $
1,219 $
8,513 $
2,297 $
16,699 $
19,419 $
36,118
Spectrum Purchase
On September 18, 2018, TeraGo entered into a share purchase agreement to acquire all of the issued and outstanding
shares of Mobilexchange Spectrum Inc. and its parent holding company Mobilexchange Spectrum Holdings Inc.
(collectively, “MSI”) for aggregate cash consideration of $5,608. The acquisition was funded through the net proceeds of
TeraGo’s bought deal equity offering which previously closed on June 18, 2018. On November 9, 2018, TeraGo completed
its acquisition of MSI which is a holder of six 24 GHz spectrum licenses in Calgary, Edmonton, Montreal, Ottawa, Toronto,
and Vancouver. Prior to the acquisition, TeraGo was a lessee to such spectrum of MSI and held subordinate licenses.
The acquisition of MSI was not determined to be a business combination under IFRS 3, and accordingly the Company
reflected the acquisition as a purchase of spectrum licenses under intangible assets.
Impairment of Intangible Assets
The annual impairment test of intangible assets was performed on December 31, 2018 and a charge of $22 was recorded
59
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
in other operating expenses on the statement of comprehensive loss (December 31, 2017 – $395).
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 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, 2018 and
December 31, 2017 and did not result in any goodwill impairment loss.
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. In
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 10.4% 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, 2018, also significantly exceeded the net carrying
amount of the CGU.
10. Long-term Debt
Term debt facility
less: financing fees
less: current portion
Term Debt Facility
December 31
2018
32,600 $
(306)
32,294
(4,000)
28,294 $
December 31
2017
36,611
(428)
36,183
(4,000)
32,183
$
$
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:
$10,000 revolving facility which bears interest at prime plus a margin percent. As of December 31, 2018, $nil amount
is outstanding (2017 - $nil). Letters of credit issued under the facility totaled $655 as of December 31, 2018 (2017 -
$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, 2018, $32,900 of the term facility principal balance outstanding was in a Banker’s Acceptance and
60
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
the remaining $100 was at a floating rate. During 2018, the Company entered into two amended interest rate swap
contracts that mature June 29, 2021. The interest rate swap contracts have not been designated as a hedge and will
be marked-to-market each quarter. The fair value of the interest rate swap contracts at December 31, 2018 was a
liability of $245 (December 31, 2017 – asset of $27) and is recorded in other long-term assets/liabilities (Note 11), with
a corresponding charge (recovery) for the change in fair value recorded in finance costs. The effective interest rate on
the Company’s long-term debt at December 31, 2018 was 5.34% which represents the Company’s interest on its
Banker’s Acceptance net of its interest swap contracts.
As at December 31, 2018, the Company prepaid interest in the amount of $400 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, 2018, this facility
remains undrawn.
Financing fees incurred as part of the Company’s debt origination and modifications have been recorded as a reduction in
the carrying amount of the debt and deferred and amortized using the effective interest method over the remaining term of
the facility.
The NBC facility is subject to certain financial and non-financial covenants which the Company is in compliance with at
December 31, 2018. 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.
11. Other Long-Term Assets/Liabilities
(a) Other long-term assets
Interest rate swap contract (Note 10)
Contract Asset
less: current portion
(b) Other long-term liabilities
Performance based share units (Note 15(c))
Restricted share units (Note 15(b))
Interest rate swap contract (Note 10)
Lease inducement liability
less: current portion
December 31
2018
- $
70
70
(37)
33 $
December 31
2017
27
-
27
(27)
-
December 31
2018
70 $
573
245
204
1,092
(186)
906 $
December 31
2017
43
171
-
261
475
(56)
419
$
$
$
$
61
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
12. Decommissioning and Restoration Obligations
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 10.4% over a range
of periods from 2025 to 2045. As at December 31, 2018, the estimated amount of undiscounted cash flows required to
settle this liability was $1,282.
The following table presents the reconciliation of the beginning and ending aggregate carrying amount of the
decommissioning and restoration obligations associated with the retirement of network assets:
Obligation, beginning of year
Accretion expense included in finance costs
Changes in assumptions
Obligation, end of year
December 31
2018
277 $
27
(27)
277 $
December 31
2017
207
19
51
277
$
$
62
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
13. Income Taxes
(a) Income tax expense (recovery)
Profit (Loss) before income taxes (recovery)
Income taxes at enacted rate of 26.4%
Non-deductible expenses and permanent differences
Change in unrecognized deductible temporary differences
True-up adjustment and other
(b) Recognized deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Deferred Tax Assets:
Income tax loss carryforwards
Deferred Tax Liabilities:
Contract Costs
December 31
2018
(4,820)
$
December 31
2017
(7,294)
(1,275)
155
1,388
(268)
(1,933)
109
1,672
152
- $
-
December 31
2018
December 31
2017
88 $
-
(88)
- $
-
- -
$
$
$
$
The Company has recognized deferred tax assets of $88 (2017 – nil) related to income tax loss carryforwards and
recognized deferred tax liabilities in the amount of $88 related to true-up of opening balance in contract costs as a result
of the adoption of IFRS 15.
The net movement of the deferred tax assets and liabilities was as follows:
Deferred Tax Asset – net, beginning of year
Income tax loss carryforward
Contract costs (IFRS 15 opening balance adjustment)
Deferred Tax asset – net, end of year
$
$
- $
(88)
88
- $
-
-
-
-
December 31
2018
December 31
2017
(c) Unrecognized deferred tax assets
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
December 31
2018
December 31
2017
$
$
2,184 $
11,653
1,692
15,529 $
5,351
7,354
1,436
14,141
63
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
(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
Income tax expense (recovery)
(e) Tax loss expiry schedule
December 31
2018
%
$
(4,820)
(1,275)
155
1,388
(268)
$
26.4%
(3.2%)
(28.8%)
5.6%
$
-
- $
December 31
2017
%
(7,294)
(1,933)
109
1,672
152
-
26.5%
(1.5%)
(22.9%)
(2.1%)
-
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
2038 and later
$
$
1,386
1,356
-
647
674
1,651
2,640
20,828
14,552
43,734
14. 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, 2017
Issuance of common shares on exercise of stock options
Issuance of common shares for directors' fees
Balance, December 31, 2017
Issuance of common shares on exercise of stock options
Issuance of common shares for directors' fees
Issuance of common shares for bought deal
Balance, December 31, 2018
Number
of
Common
Shares
14,250
49
66
14,365
41
59
1,303
15,768
Common
Shares
92,621
196
286
93,103
115
446
6,906
100,570
In $
Share
Issue
Costs
(6,450)
-
-
(6,450)
-
-
(858)
(7,308)
Total
86,171
196
286
86,653
115
446
6,048
93,262
64
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
Equity Offering
On June 18, 2018, the Company completed an equity offering to issue and sell 1,303 common shares for gross proceeds
of $6,906 (the “Offering”). Proceeds net of commissions, legal, accounting and listing fees was $6,048. The Offering was
carried out pursuant to an underwriting agreement dated June 4, 2018 with a syndicate of underwriters led by TD
Securities Inc., and included Cormark Securities Inc. and Desjardins Securities Inc.
Dividends
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, 2018 and 2017.
15. Stock-Based Compensation
(a) Stock Options
The company adopted its current option plan on June 18, 2007 (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, 2018, there are 55 (2017 – 588)
options outstanding under the 2007 option plan.
For the years ended December 31, 2018 and 2017, the Company recorded stock-based compensation related to stock
options of $89 and $81, respectively.
A summary of the status of the Company’s stock option plan as at December 31, 2018 and 2017 is presented below.
Outstanding - January 1
Granted
Exercised
Forfeited / Expired
Outstanding - December 31
Exercisable
2018
Weighted
Average
Exercise Price
$5.58
-
$5.74
$4.52
$4.40
$4.40
Number of
Options
588
-
(517)
(16)
55
13
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
As at December 31, 2018, 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
Options Outstanding
Options Exercisable
Weighted
average
remaining
contractual
life (years)
8.64
8.64
Number
outstanding
55
55
Weighted
average
exercise price
$4.40
4.40
Number
exercisable
13
13
Weighted
average
exercise price
$4.40
4.40
65
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
(b) Restricted Share Units (RSUs)
On March 12, 2009, the Company established an 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 which generally
vest over a three-year period. At the end of the 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.
In 2018, the Company granted 151 RSUs to certain executives (2017 – 180). In 2018, no RSUs vested (2017 - 150
RSUs vested and the Company paid cash of $587).
For the year ended December 31, 2018 and December 31, 2017, the Company recorded compensation expense of $401
and $51, respectively, related to the RSUs granted. As of December 31, 2018, a liability of $573 (2017 - $171) related to
the RSUs granted is included in other long-term liabilities (Note 11(b)).
The following table is a summary of the number of outstanding RSU as at:
Opening Balance, January 1, 2018
Granted
Forfeited
Vested and paid
Ending Balance, December 31, 2018
(c) Performance Based Share Units (PSUs)
December 31
2018
149
151
(18)
-
282
December 31
2017
162
180
(43)
(150)
149
Plan participants are granted a specific number of PSUs for a given period based on their role within the Company and
level of performance which generally vest over a three-year period. PSUs are also issued pursuant to the RSU Plan. At
the end of the vesting period, the PSUs vest if the plan participant is employed by the Company and certain 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. 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.
There were no PSUs granted in 2018 or 2017. In 2018, no PSUs vested (2017 - 12 PSUs vested and the Company paid
cash of $58).
For the year ended December 31, 2018 and December 31, 2017, the Company recorded stock-based compensation
expense (recovery) of $27 and ($217), respectively, related to the PSUs outstanding. As at December 31, 2018, a liability
of $70 (2017 - $43) related to the PSUs granted is included in the other long-term liabilities (Note 11(b)).
The following table is a summary of the number of outstanding PSUs as at:
Opening Balance, January 1, 2018
Granted
Vested and paid
Forfeited / Expired
Ending Balance, December 31, 2018
December 31
2018
19
-
-
-
19
December 31
2017
195
-
(12)
(164)
19
(d) Stock-Based Compensation Summary
The following table is a summary of the stock-based compensation expense (recovery):
66
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
Restricted share units
Performance-based share units
Stock options
Directors' fees paid in shares
Year ended
December 31
2018
401 $
27
89
446
963 $
Year ended
December 31
2017
51
(217)
81
286
201
$
$
16. 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
2018
Year ended
December 31
2017
$
(4,820) $
(7,294)
15,123
14,307
-
-
15,123
14,307
$
$
(0.32) $
(0.32) $
(0.51)
(0.51)
For the year ended December 31, 2018, the impact of all options, RSUs and PSUs totaling 401 (2017 – 859) were excluded
in the calculation of diluted loss per share because they were antidilutive.
17. Key Management Personnel Compensation
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
2018
2,254 $
330
963
3,547 $
Year ended
December 31
2017
1,787
1,126
201
3,114
$
$
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:
67
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
2019
2020
2021
2022
2023
Thereafter
Amount
9,892
6,534
5,072
3,594
2,505
8,952
36,549
$
$
For the year ended December 31, 2018, the Company recorded rent expense of $7,648 (2016 - $7,777) relating to data
centre, 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 2019 as well as escalations.
The Company is required to pay, under a CRTC-administered regime, a percentage (2018 - 0.54%, 2017 – 0.60%) 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.
68
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
The following table outlines the carrying amounts and fair value of its financial assets and financial liabilities including their
level in the fair value hierarchy. Cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities
are not shown below as the carrying value of these financial instruments approximates their fair value due to their short-term
maturities.
a) Classification and fair values
Carrying Amount
Fair Value (Level 2)
December
31
2018
December
31
2017
December
31
2018
December
31
2017
- $
27
$
- $
27
245 $
32,294
-
36,183
$
245 $
32,294
-
36,183
Financial Assets
Interest rate swap contract
Financial Liabilities
Interest rate swap contract
Long-term debt
$
$
b) 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 large 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, 2018 and 2017, 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
2018
2,666 $
692
128
33
3,519
December 31
2017
2,311
608
103
115
3,137
$
$
69
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
During 2018 the change in the credit loss allowance in respect of trade receivables was as follows:
Opening Balance, January 1, 2018
Amounts written off
Remeasurement of loss allowance
Ending Balance, December 31, 2018
December 31
2018
21
(21)
47
47
c)
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, 2018, the operating line of credit
balance was $nil. The drawn term facility as at December 31, 2018 was $33,000, $32,900 of which was held in a Bankers
Acceptance. In 2018, the Company entered into amended fixed-interest swap contracts to manage interest rate risk on its
term facility. As a result, the Company is exposed to potential interest rate risk should rates rapidly decline and maintain
low for extended periods of time. The interest rate on the Banker’s Acceptance net of swap contracts at December 31,
2018 was 5.24%. The remaining $100 drawn under this facility bears interest for the period at prime rate plus a margin.
d) 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. The Company continues to
manage liquidity by ensuring trade turnover is consistent with the objectives of the organization as well as through cost
management strategies. As at December 31, 2018, the Company had cash and cash equivalents of $3,918. 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 $
1,447
130
2 - 3 years
28,294 $
-
513
Total
32,294
1,447
643
5,577 $
28,807 $
34,384
$
$
(1) Represents recognized amounts for cash-settled stock-based compensation arrangements (See Note 15). Settlement is subject to
achievement of vesting criteria.
e) 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
2018
79 $
397
December 31
2017
336
915
70
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands, except for per share amounts)
20. Capital Risk Management
The Company’s objectives when managing capital are:
(a) 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;
(b) 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
(c) to comply with debt covenants.
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
2018
December 31
2017
$
$
(3,918) $
32,294
93,262
25,676
(74,295)
73,019 $
(6,986)
36,183
86,653
25,701
(70,437)
71,114
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, 2018.
71
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: 1-416-283-9930
IR@terago.ca
WEBSITE
www.terago.ca
YEAR END
December 31
AUDITORS
KPMG LLP
Vaughan, Ontario, Canada
TRANSFER AGENT
Computershare Investor Services Inc.
Toronto, Ontario, Canada
CORPORATE INFORMATION
DIRECTORS
Matthew Gerber
Chairman, TeraGo Inc.
Chief Executive Officer, Rohinni LLC
Antonio Ciciretto
President & Chief Executive Officer, TeraGo Inc.
Michael Martin
Senior Executive, IBM Canada
Richard Brekka
Managing Partner, Second Alpha Partners
Jim Sanger
Managing Partner, Second Alpha Partners
Gary Sherlock
Corporate Director
Laurel Buckner
Senior Vice President, ATN International
SENIOR LEADERSHIP TEAM
Antonio Ciciretto
President & Chief Executive Officer
David Charron
Chief Financial Officer
Ron Perrotta
Vice President, Marketing & Strategy
Duncan McGregor
Vice President, Engineering & Operations
Geoff Kereluik
Vice President, Sales
Christopher Taylor
Vice President, Product Management &
Business Development
Mark Lau
Vice President, Legal, General Counsel &
Corporate Secretary
Candice Levy
Director, Human Resources
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.
72