CONTENTS
CEO Letter to Shareholders
2
Management’s Discussion and Analysis
4
Management’s Responsibility for Financial Reporting
33
Auditors’ Report
34
Consolidated Financial Statements
39
Notes to the Consolidated Financial Statements
43
Corporate Information
68
April 8, 2022
Dear Fellow Shareholders,
It has been about a year since my appointment as CEO and I am very encouraged by our progress and
direction. The strategy we put in place and our team’s persistence throughout 2021 in executing against
that strategy has put us in a strong position to realize our potential and drive growth over the long run.
The recent sale of our cloud and colocation business, which we completed in January, has transformed
TeraGo into a pure play wireless company. The sale bolstered our balance sheet by providing $30 million
in cash, which we used to pay off all outstanding debt, and positioned us with over $10 million to fund our
operating and growth initiatives. This strategic divestiture also enabled us to shift our focus to solely
providing wireless services to businesses across Canada. We are now much better positioned to focus on
growing our fixed wireless access business in addition to developing and growing our 5G private network
line of products and services.
In leading up to the sale, we believe we also reached an inflection point in our fixed wireless access
business in the second half of 2021. During this period, for the first time in many years, we saw our fixed
wireless access services bookings exceed churn, resulting in the addition of monthly recurring revenues.
This inflection point was reached due to measures we put in place last year to significantly reduce churn
intersecting with the double digit bookings growth our team has achieved over the past three years.
From a product standpoint, our team is executing on our strategy to expand our product portfolio offerings
and operating capabilities through key strategic partnerships. The recent launch of our TeraGo Internet
100/20 solution with Intracom’s radio equipment will allow us to operate our fixed wireless access network
more efficiently, while adding incremental capabilities to the connectivity solutions we can offer customers.
We recognize the synergies that come from these product partnerships, and we intend to capitalize on
more of these opportunities going forward.
The latter half of last year also brought encouraging tailwinds and support from several blue-chip companies
for 5G mmWave private networks, resulting in some market watchers coining 2022 as the “Year of 5G
mmWave Private Networks.” The leading supplier of 5G mmWave modems, recently announced its support
for standalone 5G mmWave. This means we will now have access to a chipset that is key to our deployment
of private networks and signals to the marketplace that 5G mmWave is ready for private network
deployments with customers. The largest wireless carrier in the US, also recently highlighted the importance
of 5G mmWave to its shareholders and customers and elaborated on the importance of mmWave within its
overall corporate strategy for 2022.
After investing capital last year to increase capacity and throughput in our core network and to our wireless
hub sites, which provide the network bandwidth that 5G fixed wireless access and private networks require,
we hit the ground running in starting to build our own 5G mmWave ecosystems. We formed partnerships
with McMaster University to jointly build and deploy the first university-based 5G millimeter wave private
network for research and with IKIN to develop innovative solutions that combine our 5G mmWave with their
holographic technologies.
Most recently, we announced the launch of the first 5G mmWave connected Multi-Dwelling Units (MDUs)
in Ontario. MDU operators across Canada will now have options to support customer demands for high-
speed internet and allow internet service providers, our customers in this case, to provide high-speed
2
internet services to previously hard to service buildings and residences. There are many more of these use
cases and opportunities throughout the Canadian enterprise market.
Looking ahead, the positive momentum we established during 2021 has continued into 2022. Our team is
extremely excited about where we are today as a company and the opportunity in front of us. We remain
focused on delivering a premier fixed wireless access connectivity experience to our customers while
building a line of business providing 5G mmWave private networks to customers operating manufacturing
and distribution operations across Canada.
In summary, it’s been an eventful year and a particularly transformative one for TeraGo. We couldn’t have
done it without the support of our employees, customers, partners, and shareholders, and we thank you for
your belief in us and for your continued support.
Sincerely,
(signed) “Matthew Gerber”
Matthew Gerber
Chief Executive Officer
3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS FOR THE THREE
MONTHS AND FISCAL YEAR ENDED DECEMBER 31, 2021 AND 2020
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 March 23, 2022 and should be read in conjunction with our consolidated financial statements for the
twelve months ended December 31, 2021 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 business, retention
campaign and initiatives to improve customer service, additional capital expenditures, investments in products and
other IT services, and the Company’s 5G technical trials and 5G private network business 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, 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 5G, and connectivity sectors may not be accurately projected, future ISED decisions in upcoming
Consultations being unfavourable to the Company, the technical 5G trial the Company is currently conducting may
not generate the results intended, the lack of availability of suitable 5G radio equipment, the inability of the Company
to successfully launch a 5G private network business, new market opportunities for 5G may not exist or require
additional capital that may not be available to the Company, prolonged economic impacts from the current COVID-19
pandemic, and those risks set forth in the “Risk Factors” section of this MD&A and other uncertainties and potential
events. If any of the risks materialize, the expectations and predictions 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.
4
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
OVERVIEW
Financial Highlights
•
Connectivity revenues stabilized quarter over quarter, with connectivity revenue totaling $6.5 million for the three
months ended December 31, 2021 compared to $6.5 million in the prior quarter. The stabilization of connectivity
revenues was driven by favourable customer churn1 results, and provisioning of new customers. For the three
months ended December 31, 2021, connectivity churn was 0.7% compared to 0.9% for the prior quarter. The
decline in churn was driven by the Company’s retention initiative to upgrade and retain its customers with new
service offerings. For the year ended December 31, 2021, connectivity churn was 1.1% compared to 1.5% for
the same period in 2020. The decrease was driven by the factors described above.
•
Total revenue decreased 1.8% to $10.7 million for the three months ended December 31, 2021 compared to
$10.9 million for the same period in 2020. The decrease in revenue was driven by lower connectivity revenue
which decreased 3.0% to $6.5 million compared to $6.7 million for the same period in 2020. The decrease in
connectivity revenue was attributable to churn exceeding provisioning in prior quarters. Cloud and colocation
revenue was flat year over year at $4.2 million for the three months ended December 31, 2021. Total revenue
decreased 4.6% to $43.3 million for the year ended December 31, 2021 compared to $45.4 million for the same
period in 2020. The decrease was driven by a decline in connectivity revenues.
•
Net loss increased to $9.0 million for the three months ended December 31, 2021 compared to a net loss of $2.2
million for the same period in 2020. The higher net loss was driven by a $4.5 million impairment loss on cloud
and colocation assets and liabilities that have been classified as held for sale as at December 31, 2021, a $1.6M
impairment loss on intangible assets and a decline in revenue. Net loss was $15.2 million for the year ended
December 31, 2021 compared to a net loss of $8.3 million for the same period in 2020. The higher net loss was
driven by the factors described above.
•
Adjusted EBITDA2,3 decreased 37.8% to $2.3 million for the three months ended December 31, 2021 compared
to $3.7 million for the same period in 2020. The decrease was driven primarily by a decline in gross profit, one-
time operating expenses and lower government grants. For the year ended December 31, 2021, Adjusted
EBITDA decreased 24.5% to $12.0 million compared to $15.9 million for the same period in 2020. The decrease
was driven by the factor described above.
Key Developments
•
On January 20, 2022, TeraGo announced it had entered into a definitive agreement to sell its cloud and
colocation business lines to a subsidiary of Hut 8 Mining Corp. (Nasdaq: HUT) (TSX: HUT) for an aggregate
consideration of Cdn.$30 million in cash. The transaction enables TeraGo to focus on its core wireless business
and leverage TeraGo’s extensive millimeter wave spectrum licenses to grow its mmWave 5G private networks
for businesses. The transaction subsequently closed on January 31, 2022
•
On February 1 2022, TeraGo repaid all indebtedness, liabilities and other obligations against its Term Debt
Facility totaling $20.0 million, and the Term Debt Facility was terminated. TeraGo was released and discharged
from all obligations, claims and demands under and in respect of the Term Debt Facility, other than certain
provisions which expressly survive repayment of the obligations.
•
On December 20, 2021, TeraGo announced a partnership with Intracom Telecom, a global telecommunication
systems and solutions vendor, for the supply of its leading wireless solutions, WiBAS™ G5 evo-BS and
WiBAS™ G5 Connect+, operating at 24 GHz frequency band. The WiBAS™ G5 will enable TeraGo to provide
faster and more reliable services to its subscribers in Canada.
1 Churn is a Non-GAAP ratio. See “Definitions – Key Performance Indicator, IFRS, Additional GAAP and Non-GAAP Measures
2 Adjusted EBITDA is a Non-GAAP measure. See "Definitions – Key Performance Indicator, IFRS, Additional GAAP and Non-GAAP Measures.
3 See “Adjusted EBITDA” for a reconciliation of net loss to Adjusted EBITDA
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5
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
•
On November 8, 2021, TeraGo announced a partnership with McMaster University (“McMaster”) to jointly build
and deploy the first university-based 5G millimeter wave private network for research. With an established 5G
millimeter wave private network, the two entities plan to develop the most cutting-edge technologies for
advanced manufacturing and Industry 4.0 in Canada.
•
On April 14, 2021, TeraGo announced that it entered into subscription agreements with certain institutional
investors, including Cymbria Corporation, acting at the direction of its portfolio manager, EdgePoint Investment
Group Inc. The Company issued and sold an aggregate of 934 thousand Series A Units, 934 thousand Series B
Units and 934 thousand Series C Units of the Company at a subscription price of $5.25 per Unit, for gross
proceeds of $14.7 million, all by way of a private placement (the “Private Placement”). The Private Placement
subsequently closed on April 21, 2021.
•
TeraGo’s Net Promoter Score (“NPS”), a widely utilized industry measurement of customer loyalty and
relationships with its customers was +72 in Q4 2021 across TeraGo’s entire product portfolio, and +48 across its
Network services. Both of these NPS scores compare favourably across Network and Cloud Operators.
•
The COVID-19 pandemic continues to impact the Canadian and global economy, including the markets in which
the Company and its customers operate. Management continues to operate under its pandemic response plan
for the Company to ensure it continues to provide services to the customer base while supporting the health and
well-being of TeraGo employees. These include: alternative work arrangements and work-from-home policies for
back office and other non-field service employees, online education and promotion of social distancing,
mandated face coverings at facilities attended by customers and vendors, as well as utilizing the Company’s
Health and Safety committee, its Senior Leadership Team and the Board of Directors to oversee the
administration of the pandemic response plan.
•
Due to the uncertainty of the outcome, length, and full extent of the impact the pandemic will have at this time,
Management will continue to actively monitor the impacts to the business and make appropriate adjustments to
policies, practices, and spending to ensure we continue to offer our services.
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6
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
TERAGO OVERVIEW
TeraGo provides wireless connectivity and private 5G wireless networking services to businesses operating across
Canada. The Company holds 2120 MHz of exclusive spectrum licenses in the 24 GHz and 38 GHz spectrum bands,
which it utilizes to provide secure and reliable enterprise grade networking and connectivity services. TeraGo serves
over 1800 Canadian and Global businesses operating in major markets across Canada, including Toronto, Montreal,
Calgary, Edmonton, Vancouver, Ottawa and Winnipeg, and has been providing wireless services since 1999. For
more information about TeraGo, please visit www.terago.ca.
TERAGO’S NETWORK
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 data connectivity, and associated managed network services.
TeraGo’s carrier grade IP communication network serves an important and growing demand among Canadian
businesses for network access diversity by offering wireless services that are redundant to their existing wireline
broadband connections.
TeraGo’s IP network has been designed to eliminate single points of failure and the Company backs its services with
customer service level commitments, including 99.9% service availability, industry leading mean time to repair, 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”). 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 fibre
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.
TeraGo’s Radio Frequency Spectrum
24-GHz and 38-GHz Wide-area Licences
The Company owns a 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
and has a total coverage of approximately 23.8 million of the population in Canada (or nearly 10 million households) 1.
This spectrum is used to deploy point-to-point and point-to-multipoint microwave radio systems, interconnecting core
1 Based on 2016 Canadian Census data cited by ISED.
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7
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
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.
On June 5, 2019, Innovation, Science, and Economic Development Canada (“ISED”), released its Decision on
Releasing Millimetre Wave Spectrum to Support 5G. Among other things in its decision document, ISED reported that
existing licensees of the 38 GHz band are eligible to apply for new “flexible use” licences for an equal amount of
spectrum upon expiry of the current 10-year licence term, or earlier upon voluntary licence cancellation. Flexible use
licences will permit licensees to deploy mobile systems to support 5G, while retaining the current ability to deploy on
a fixed wireless basis. The Company holds 25 of 27 issued 38 GHz spectrum licences in Canada.
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 was initially set
for the end of 2021, but is expected to be delayed several years due to the ongoing COVID-19 pandemic and ISED’s
recent mid-band spectrum consultations and auction.
For additional information on these Consultations 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_sf08436.html.
For further details on our licensed spectrums, please refer to the Company’s most recently filed AIF on SEDAR.
CLOUD AND COLOCATION DIVESTITURE
For the three months and fiscal year ended December 31, 2021, TeraGo provided businesses across Canada with
cloud and colocation services. TeraGo provided and managed cloud Infrastructure as a Service (“IaaS”) computing
and storage solutions, data centre colocation solutions, and operated five (5) data centres across Canada. On
January 31, 2022 TeraGo divested its cloud and colocation business to a subsidiary of Hut 8 Mining Corp. (Nasdaq:
HUT) (TSX: HUT) for consideration of $30 million in cash.
TSX: TGO
8
10,904
-
-
43,303
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
SELECTED ANNUAL INFORMATION
The following table displays a summary of our Consolidated Statements of Comprehensive Earnings (Loss) for the
three months ended December 31, 2021 and 2020 and the years ended December 31, 2021, 2020 and 2019 and a
summary of select Balance Sheet data as at December 31, 2021, 2020 and 2019.
(in thousands of dollars, except with respect to
Three months ended
Year ended December 31
earnings (loss) per share) (unaudited)
December 31
2021
2020
2021
2020
2019
Revenue
Cloud and colocation revenue
$
4,160
4,177*
$
16,956
16,666*
17,262*
Connectivity revenue
6,535
6,727*
26,347
28,782*
31,175*
Total Revenue
10,695
45,448
48,437
Expenses
Cost of services
3,103
2,723
11,141
9,816
9,647
Salaries and related costs, net
2,955
3,571
14,565
16,254
17,511
Other operating expenses
2,850
2,080
8,235
7,940
8,314
Amortization of intangible assets
333
360
1,379
1,508
1,799
Depreciation of network assets, property and
3,352
3,283
13,175
13,301
13,488
equipment
12,593
12,017
48,495
48,819
50,759
Earnings (loss) from operations
(1,898)
(1,113)
(5,192)
(3,371)
(2,322)
Impairment loss on held for sale assets
(4,527)
-
(4,527)
-
-
Impairment loss on brand
(1,630)
-
(1,630)
-
-
Foreign exchange gain (loss)
8
(2)
29
(210)
(69)
Finance costs
(915)
(1,115)
(3,896)
(4,777)
(4,769)
Finance income
7
9
44
99
166
Earnings (loss) before income taxes
(8,955)
(2,221)
(15,172)
(8,259)
(6,994)
Income taxes
$
Income tax recovery (expense)
-
-
-
Net earnings (loss) and comprehensive
$
(8,955)
(2,221)
$
(15,172)
(8,259)
(6,994)
earnings (loss)
Deficit, beginning of period
(95,765)
(87,327)
$
(89,548)
(81,289)
(74,295)
Deficit, end of period
$
(104,720)
(89,548)
$
(104,720)
(89,548)
(81,289)
Basic earnings (loss) per share
$
(0.46)
(0.13)
(0.81)
(0.49)
(0.43)
Diluted earnings (loss) per share
$
(0.46)
(0.13)
(0.81)
(0.49)
(0.43)
Basic weighted average number of shares
19,655
16,750
18,769
16,693
16,195
outstanding
Diluted weighted average number of shares
19,655
16,750
18,769
16,693
16,195
outstanding
Selected Balance Sheet Data
As at December 31
2021
2020
2019
Cash and cash equivalents
$
5,481
$
5,858
$
8,686
Accounts receivable
$
1,586
$
2,500
$
2,889
Prepaid expenses and other assets
$
350
$
804
$
727
Network assets, property and equipment
$
33,990
$
56,649
$
59,562
Assets Held for Sale
$
39,952
$
-
$
-
Total Assets
$
93,230
$
103,168
$
110,677
Accounts payable and accrued liabilities
$
3,832
$
5,403
$
4,599
Liabilities associated with non-current assets held
for sale
$
12,265
$
-
$
-
Long-term debt
$
19,791
$
28,144
$
28,470
Other long-term liabilities
$
-
$
-
$
235
Shareholders' equity
$
40,262
$
40,866
$
48,105
*Comparative figures for Cloud and Colocation Revenue and Connectivity Revenue for 2019 and 2020 have changed
to conform with the presentation of revenue stream allocations effective Q2 2021.
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9
(in thousands of dollars, except with respect to gross profit margin, earnings per share
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
RESULTS OF OPERATIONS
Comparison of the three months and year ended December 31, 2021 and 2020, Backlog MRR, and ARPU)
(unaudited)
Three months ended
Year ended
December 31
December 31
2021
2020
2021
2020
Financial
Cloud and Colocation Revenue
$
4,160
4,177 *
16,956
16,666 *
Connectivity Revenue
$
6,535
6,727 *
26,347
28,782 *
Total Revenue
$
10,695
10,904
43,303
45,448
Cost of Services1
$
3,103
2,723
11,141
9,816
Selling, General, & Administrative Costs
$
5,805
6,629
22,800
24,194
Gross profit margin1
71.0%
75.0%
74.3%
78.4%
Adjusted EBITDA1, 2
$
2,330
3,695
12,048
15,920
Net loss
$
(8,955)
(2,221)
(15,172)
(8,259)
Basic loss per share
$
(0.46)
(0.13)
(0.81)
(0.49)
Diluted loss per share
$
(0.46)
(0.13)
(0.81)
(0.49)
Operating
Backlog MRR1
$
110,481
129,676
110,481
129,676
Connectivity
$
32,882
56,437
32,882
56,437
Cloud & Colocation
Churn1
Connectivity
0.7%
1.4%
1.1%
1.5%
Cloud & Colocation
1.5%
1.0%
1.3%
1.0%
ARPU1
$
1,043
1,057 *
1,035
1,061 *
Connectivity
$
3,634
3,416 *
3,650
3,237 *
Cloud & Colocation
*The three months and year ended 2020 comparative numbers for Cloud and Colocation Revenue, Connectivity
Revenue, and ARPU have changed to conform with the presentation of revenue stream allocations effective Q2
2021.
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 1.8% to $10.7 million for the three months ended December 31, 2021 compared to $10.9
million for the same period in 2020. Revenue decreased 4.6% to $43.3 million for the year ended December 31, 2021
compared to $45.4 million for the same period in 2020.
Connectivity Revenue
For the three months ended December 31, 2021, connectivity revenue decreased 3.0% to $6.5 million compared to
$6.7 million for the same period in 2020. The decrease was attributable to churn exceeding customer provisioning in
prior quarters.
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
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Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
For the year ended December 31, 2021, connectivity revenue decreased 8.7% to $26.3 compared to $28.8 million for
the same period in 2020. The decrease was driven by the factors described above.
Cloud and Colocation Revenue
For the three months ended December 31, 2021, cloud and colocation revenue was flat compared to the prior year
period at $4.2 million.
For the year ended December 31, 2021, cloud and colocation revenue increased 1.8% to $17.0 million compared to
$16.7 million for the same period in 2020. The increase was driven by customer upgrades and new customer
acquisition.
Cost of Services
For the three months ended December 31, 2021, cost of services increased 14.8% to $3.1 million from $2.7 million in
the same period in 2020. The increase was driven by a change in the mix of products and services sold.
For the year ended December 31, 2021, cost of services increased 13.3% to $11.1 million compared to $9.8 million in
the same period in 2020. The increase was driven by the factor described above.
Salaries and related costs and other operating expenses (“SG&A”)
For the three months ended December 31, 2021, SG&A decreased 12.1% to $5.8 million compared to $6.6 million for
the same period in 2020. The decrease was driven by lower stock based compensation expense.
For the year ended December 31, 2021, SG&A decreased 5.8% to $22.8 million compared to $24.2 million for the
same period in 2020. The decrease was driven by lower stock based compensation and severance expenses.
Net loss
Net loss increased to $9.0 million for the three months ended December 31, 2021 compared to a net loss of $2.2
million for the same period in 2020. The higher net loss was driven by an impairment loss on cloud and colocation
assets held for sale, an impairment loss on intangible assets, and a decline in revenue.
Net loss was $15.2 million for the year ended December 31, 2021 compared to a net loss of $8.3 million for the same
period in 2020. The higher net loss was driven by the factor described above.
Adjusted EBITDA 1, 2
Adjusted EBITDA decreased 37.8% to $2.3 million for the three months ended December 31, 2021 compared to $3.7
million for the same period in 2020. The decrease was driven primarily by a decline in gross profit, one-time operating
expenses and lower government grants.
For the year ended December 31, 2021, Adjusted EBITDA decreased 24.5% to $12.0 million compared to $15.9
million for the same period in 2020. The decrease was driven by the factors described above.
1 See "Definitions – Key Performance Indicators, IFRS, Additional GAAP and Non-GAAP Measures”
2 Adjusted EBITDA is a Non-GAAP measure. See "Definitions – Key Performance Indicator, IFRS, Additional GAAP and Non-GAAP Measures.
TSX: TGO
11
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
The table below reconciles net loss to Adjusted EBITDA1 for the three months and year ended December 31, 2021
and 2020.
Three months ended
Year ended
(in thousands of dollars)
December 31
December 31
2021
2020
2021
2020
Net loss for the period
$
(8,955)
(2,221)
$
(15,172)
(8,259)
Foreign exchange loss (gain)
(8)
2
(29)
210
Finance costs
915
1,115
3,896
4,777
Finance income
(7)
(9)
(44)
(99)
Impairment loss on assets on held for sale
4,527
-
4,527
-
Impairment on intangible assets
1,630
-
1,630
-
Loss from operations
(1,898)
(1,113)
(5,192)
(3,371)
Add:
Depreciation of network assets, property and equipment and
amortization of intangible assets
3,685
3,643
14,554
14,809
Loss on disposal of network assets
116
77
285
198
Impairment of Assets and Related Charges
188
654
496
1,139
Stock-based compensation expense (recovery)
(470)
276
164
1,515
Restructuring, acquisition-related, integration costs and other
710
158
1,742
1,630
Adjusted EBITDA1
$
2,330
3,695 $
12,048
15,920
Backlog MRR 1
Connectivity backlog MRR was $110,481 as at December 31, 2021, compared to $129,676 as at December 31,
2020. The decrease in backlog MRR was driven by the timing of sales bookings and customer provisioning.
Cloud and colocation backlog MRR was $32,882 as at December 31, 2021 compared to $56,437 as at December 31,
2020. The decrease in backlog MRR was driven by lower sales volume than the prior year period.
ARPU 1
For the three months ended December 31, 2021 connectivity ARPU was $1,043 compared to $1,057 for the same
period in 2020. The decrease in ARPU was driven by customer renewals at lower rates. For the year ended
December 31, 2021 connectivity ARPU was $1,035 compared to $1,061 for the same period in 2020. The decrease
was driven by the factors described above.
For the three months ended December 31, 2021 cloud and colocation ARPU was $3,634 compared to $3,416 for the
same period in 2020. The increase is due to customer upgrades and cross-selling activities as well as the churn of
lower ARPU customers. For the year ended December 31, 2021 cloud & colocation ARPU was $3,650 compared to
$3,237 for the same period in 2020. The increase was driven by the factors described above.
Churn1
For the three months ended December 31, 2021, connectivity churn was 0.7% compared to 1.4% for the same period
in 2020. The decline in churn is driven by the Company’s retention initiative to upgrade and retain its customers with
new service offerings. For the year ended December 31, 2021 connectivity churn was 1.1% compared to 1.5% for the
same period in 2020. The decrease was driven by the factors described above.
For the three months ended December 31, 2021, cloud and colocation churn was 1.5% compared to 1.0% for the
same period in 2020.The increase in churn was due to a higher churn rate of small business customers. For the year
ended December 31, 2021 cloud and colocation churn was 1.3% compared to 1.0% for the same period in 2020. The
increase was driven by the factor described above.
1 See "Definitions – Key Performance Indicators, IFRS, Additional GAAP and Non-GAAP Measures”
TSX: TGO
12
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
Finance costs
For the three months ended December 31, 2021, finance costs decreased 18.2% to $0.9 million compared to $1.1
million for the same period in 2020. The decrease was driven by a reduction in the Company’s long-term debt
compared to the prior year.
For the year ended December 31, 2021 finance costs declined to $3.9 million compared to $4.8 million for the same
period in 2020. The decrease was driven by the factor described above.
Depreciation and amortization
For the year ended December 31, 2021 depreciation of network assets, property and equipment and amortization of
intangibles decreased 1.4% to $14.6 million compared to $14.8 million for the same period in 2020. The decrease
was due to impaired and fully depreciated assets.
Summary of Quarterly Results
All financial results are in thousands, with the exception of Earnings per Share, Gross Profit Margin, Backlog MRR,
Churn Rate, and ARPU
(unaudited)
Q4-21
Q3-21
Q2-21
Q1-21
Q4-20
Q3-20
Q2-20
Q1-20
Financial
Revenue
$
10,695
10,876
10,903
10,829
10,904
11,279
11,648
11,617
Gross Profit Margin %1
71.0%
73.9%
75.4%
76.8%
75.0%
77.8%
80.0%
80.6%
Adjusted EBITDA1
$
2,330
3,116
3,369
3,233
3,695
3,775
4,828
3,622
Net income/(loss)
$
(8,955)
(2,255)
(1,796)
(2,166)
(2,221)
(3,179)
(656)
(2,203)
Basic income/(loss) per share
$
(0.46)
(0.11)
(0.09)
(0.13)
(0.13)
(0.19)
(0.04)
(0.13)
Diluted income/(loss) per share
$
(0.46)
(0.11)
(0.09)
(0.13)
(0.13)
(0.19)
(0.04)
(0.13)
Basic weighted average number of
19,655
19,635
19,618
16,773
16,750
16,715
16,670
16,635
shares outstanding
Diluted weighted average number of
19,655
19,635
19,618
16,733
16,750
16,715
16,670
16,635
shares outstanding
Operating
Backlog MRR1
Connectivity
$
110,481
102,911
126,834
131,078
129,676
113,231
86,903
89,296
Cloud & Colocation
$
32,882
38,665
15,454
34,518
56,437
31,935
18,864
18,225
Churn 1
Connectivity
0.7%
0.9%
1.4%
1.3%
1.4%
1.4%
1.7%
1.5%
Cloud & Colocation
1.5%
1.1%
1.1%
1.6%
1.0%
0.9%
1.1%
1.0%
ARPU1
Connectivity
$
1,043
1,026
1,032
1,039 *
1,057 *
1,056 *
1,069 *
1,060 *
Cloud & Colocation
$
3,634
3,785
3,722
3,460 *
3,416 *
3,323 *
3,108 *
3,103 *
*The comparative ARPU numbers for the historic quarterly results presented above have changed to conform with
the presentation of ARPU revenue allocations effective Q2 2021.
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.
1 See "Definitions – Key Performance Indicators, IFRS, Additional GAAP and Non-GAAP Measures”
TSX: TGO
13
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
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.
Three months ended
Year ended
(in thousands of dollars)
December 31
December 31
(unaudited)
2021
2020
2021
2020
Statement of Cash Flows Summary
Cash inflows and (outflows) by activity:
Operating activities
$
2,515
2,275
$
9,322
13,332
Investing activities
(1,400)
(1,680)
(7,753)
(7,584)
Financing activities
(2,320)
(2,351)
(1,946)
(8,576)
Net cash inflows (outflows)
(1,205)
(1,756)
(377)
(2,828)
Cash and cash equivalents, beginning of period
6,686
7,614
5,858
8,686
Cash and cash equivalents, end of period
$
5,481
5,858
$
5,481
5,858
Operating Activities
For the three months ended December 31, 2021, cash generated from operating activities was $2.5 million compared
to $2.3 million for the same period in 2020. The increase was driven by higher severance payments in the prior year
period. For the year ended December 31, 2021, cash generated from operating activities was $9.3 million compared
to cash from operations of $13.3 million for the same period in 2020. The decrease was due to lower income from
operations.
Investing Activities
For the three months ended December 31, 2021, cash used in investing activities was $1.4 million compared to $1.7
million for the same period in 2020. The decrease was driven by lower discretionary connectivity capital expenditures
in the current period. For the year ended December 31, 2021, cash used in investing activities was $7.8 million
compared to cash used of $7.6 million for the same period in 2020. The increase was driven by increased capital
expenditures due to higher customer provisioning.
Financing Activities
For the three months ended December 31, 2021, cash used in financing activities was $2.3 million compared to $2.4
million for the same period in 2020. The decrease in cash used in financing activities was due to lower debt principal
and interest payments in the current period. For the year ended December 31, 2021, cash used in financing activities
was $1.9 million compared to cash used of $8.6 million for the same period in 2020. The lower cash used was driven
by the Company’s equity offering in the Q2 2021, partially offset by higher long-term debt repayments in 2021.
Capital Resources
As at December 31, 2021, the Company had cash and cash equivalents of $5.5 million. Subsequent to year end, on
January 31, 2022, TeraGo divested its cloud and colocation business lines to a subsidiary of Hut 8 Mining Corp.
(Nasdaq: HUT) (TSX: HUT) for consideration of $30 million in cash. The proceeds were used to repay TeraGo’s term
debt in full, totaling $20.0 million, as described below, and for general corporate and working capital purposes.
Management believes the Company’s current cash, anticipated cash from operations, net proceeds for the cloud and
colocation divestiture 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 at least the twelve-month period following December 31,
2021. In light of the current COVID-19 pandemic and the impacts it has had on businesses globally, including that of
the Company (see “Risk Factors”), the Company continues to monitor its cash position closely and has taken certain
mitigation efforts to conserve its cash, implement cost saving measures and avail itself of available Government
support programs.
TSX: TGO
14
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
Term Debt Facility
In June 2020, the Company entered into an amended and restated credit (the “Term Debt Facility”) agreement with a
syndicate led by Royal Bank of Canada (“RBC”) to replace the Company’s existing credit facilities which reduced the
credit facility to $35 million (from $75 million) and extended the term from June 14, 2021 to June 30, 2022. Effective
June 30, 2020, NBC ceased to be an administrative agent and a lender to the Company and assigned its right and
obligations to RBC, in its capacity as administrative agent.
In June 2021, the Company entered into an amending agreement with the syndicate led by RBC to extend the Term
Debt Facility to June 30, 2023.
The Term Debt Facility matures June 30, 2023, and is made up of the following:
•
$5 million revolving facility which bears interest at prime plus a margin percent. As of December 31, 2021,
$nil was drawn and outstanding on the revolving facility (2020 - $nil). Letters of credit issued under the
facility totaled $0.6 million as of December 31, 2021 (December 31, 2020 - $0.6 million).
•
$30 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 $563 thousand. This facility was fully
drawn upon signing the amended and restated credit agreement.
On December 30, 2021, the Company entered into a second amending agreement of the Term Debt Facility to
change certain financial covenants for the fiscal quarter ending December 31, 2021. The financial covenants return to
their previous levels for the fiscal quarter ending March 31, 2022.
At December 31, 2021, $20.0 million of the Term Debt Facility principal balance outstanding was entirely in a prime
rate loan.
During the year ended December 31, 2021, the Company incurred $87 thousand (2020 – $267 thousand) in finance
costs to amend the Term Debt Facility. Financing fees 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 Term Debt Facility is subject to certain financial and non-financial covenants and the Company was in
compliance with at December 31, 2021.
On February 1, 2022, TeraGo repaid all indebtedness, liabilities and other obligations, totaling $20.0 million, against
this credit facility, and the credit facility was terminated. TeraGo was released and discharged from all obligations,
liabilities, claims and demands under and in respect of the credit facility, other than certain provisions which expressly
survive repayment of the obligations.
Demand Revolving credit facility
On January 31, 2022 entered into a demand revolving credit facility with the Royal Bank of Canada (“RBC”). $nil was
drawn and outstanding on the demand facility, while letters of credit issued under the facility totaled $0.6 million.
Equity Offering
On April 14, 2021, TeraGo announced that it entered into subscription agreements with certain institutional investors,
including Cymbria Corporation, acting at the direction of its portfolio manager, EdgePoint Investment Group Inc. The
Company issued and sold an aggregate of 934 thousand Series A Units, 934 thousand Series B Units and 934
thousand Series C Units of the Company at a subscription price of $5.25 per Unit, for gross proceeds of $14.7 million,
all by way of a private placement (the “Private Placement”). The Private Placement subsequently closed on April 21,
2021.
The Company intends to use the net proceeds of the Private Placement in support of the Company’s proposed
launch of 5G fixed wireless services in Canada, to continue testing and trialing 5G technology, upgrade its core
network, and support its current networking business. In addition, portions of the net proceeds were used to repay
indebtedness and for general corporate purposes.
TSX: TGO
15
$
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
Contractual Obligations
The Company is committed to leases for premises, office equipment, network real estate access, automobiles,
telecommunication facilities and radio spectrum licences. Annual minimum payments over the next five years and
thereafter are as follows (in thousands):
2022
2023
2024
2025
2026
Thereafter
Total
Network
assets,
property,
and
1,192
-
-
-
-
-
1,192
equipment
Other Purchase Obligations
5,968
2,577
1,421
347
19
- 10,332
2,350
Long-term debt*
17,638
-
-
-
- 19,988
Lease liabilities
7,857
6,673
5,330
4,310
3,411
7,375
34,956
Total
17,367
26,888
6,751
4,657
3,430
7,375
66,468
*TeraGo’s long-term debt was repaid in full on February 1, 2022
Off-balance Sheet Arrangements
As of December 31, 2021, the Company had no off-balance sheet arrangements.
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 2021 Annual Information Form, a copy of
which can be found on SEDAR at www.sedar.com.
As of December 31, 2021, there were 19.7 million Common Shares issued and outstanding. In addition, as of
December 31, 2021 there were 323 thousand Common Shares issuable upon exercise of TeraGo stock options, 67
thousand Common Shares issuable upon vesting of restricted share units, 37 thousand Common Shares issuable
upon vesting of performance share units and 1.4 million Common Shares issuable upon exercise of warrants which
were issued to certain institutional investors pursuant to the Private Placement.
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 and 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.
Subsequent measurement and treatment of any gain or loss is recorded as follows:
(i)
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.
(ii)
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.
(iii)
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 18 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.
TSX: TGO
16
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
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.
The following is a summary of the Company’s significant categories of financial instruments as at December 31,
2021:
Financial Instrument
Classification and measurement method
Financial Assets
Cash and cash equivalents
Amortized cost
Accounts Receivable
Amortized cost
Financial liabilities
Accounts payable
Amortized cost
Accrued Liabilities
Amortized cost
Long-term debt
Amortized cost
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 is not engaged in any derivative contracts as at December 31, 2021.
TSX: TGO
17
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
Financial Instrument Risks
Fair value of financial instruments
The Company has determined the estimated fair values of its financial instruments based on appropriate valuation
methodologies. Where quoted market values are not readily available, the Company may use considerable judgment
to develop estimates of fair value. Accordingly, any estimated values are not necessarily indicative of the amounts the
Company could realize in a current market exchange and could be materially affected by the use of different
assumptions or methodologies. The Company classifies its fair value measurements within a fair value hierarchy,
which reflects the significance of the inputs used in making the measurements as defined in IFRS 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.
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.
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, 2021 and 2020, 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 and Term Credit Facility since the interest rates applicable
are variable and are, therefore, exposed to cash flow risks resulting from interest rate fluctuations. As at December
31, 2021, the revolving facility balance was $nil. The drawn Term Credit Facility as at December 31, 2021 was $20.0
million, drawn via a prime rate loan. The prime rate loan bears interest at prime rate plus a margin. The Company
assesses its interest rate risk as low, as a 1% change in interest rate would have increased (decreased) quarterly
interest by $50 thousand. The Term Credit Facility was subsequently paid off in full on February 1, 2022 (see Note 22
Subsequent Events in the consolidated financial statements for the twelve months ended December 31, 2021)
Liquidity risk
As at December 31, 2021, the Company had cash and cash equivalents of $5.5 million. Subsequent to year end, on
January 31, 2022, TeraGo divested its cloud and colocation business lines to a subsidiary of Hut 8 Mining Corp.
(Nasdaq: HUT) (TSX: HUT) for an aggregate consideration of $30 million in cash (see Note 22 Subsequent Events in
the consolidated financial statements for the twelve months ended December 31, 2021). The proceeds were used to
repay the Company’s term debt in full and for general corporate and working capital purposes. The Company
believes that its current cash and cash equivalents, net proceeds divested cloud and colocation business lines, and
anticipated cash from operations will be sufficient to meet its working capital and capital expenditure requirements for
at least the twelve-month period following December 31, 2021. 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
TSX: TGO
18
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
SIGNIFICANT ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates
and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities,
income and expenses. Actual results may differ from these estimates. Estimates and assumptions are reviewed on
an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised
and in any future periods affected.
Key areas of estimation and information about critical judgments in applying accounting policies that have the most
significant effect on amounts recognized in the consolidated financial statements are:
(i)
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 significant assumptions
including expected future revenue, operating margins, capital investment, discount rate, terminal
growth rate. The Company also applied judgement on the use of available market data to
estimate the value of its Spectrum holdings.
(v)
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. 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.
(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)
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.
TSX: TGO
19
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
(viii)
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.
(ix)
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.
(x)
Leases:
Judgment is required to determine the lease term for some lease contracts in which it is a lessee
that includes renewal options. The assessment of whether the Company is reasonably certain to
exercise such options will impact the lease term. The rate at which these leases will be renewed
requires estimation as most are negotiated at the time of renewal. In addition, as most of the
Company’s leases do not have embedded financing rates, judgment is required to arrive at
discount rates that reflect the risk associated with each individual lease. The impact of these
assumptions significantly impacts the amount of lease liabilities and right-of-use assets
recognized.
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, 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 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
5G private networks Business launch is unsuccessful
The Company’s proposed 5G private networks business (the “5G Private Networks Business”) is subject to many
risks. The Company is still in the process of testing and trialing equipment that would be vital to offering any 5G fixed
wireless service to its customers and there are currently no assurances that such trials will be successful, nor will
there be assurances that there is suitable equipment available from vendors. As of the date hereof, the general
availability of 5G equipment has been delayed in the market as reported by various partners and vendors the
Company has been working with.
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Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
In addition, the opportunities and business case for the 5G Private Networks Business has not yet been fully
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 Company has not fully determined the capital needs, and
whether such capital is available to provide 5G-related services, or whether equipment suppliers like Nokia Inc. and
its competitors could be relied on to supply such equipment in a manner that would support a 5G-related opportunity.
The Company has not historically serviced residential customers, having focused all of its services to business
customers. As a result, should the Company launch the 5G Private Networks Business to residential customers as
well, it will need to adapt its sales and marketing strategy, systems, support and focus to also include this new
segment of customers. The lack of experience servicing this segment of the market may cause delays or significantly
increase the cost to the Company of offering 5G services.
5G services are not widely available at the moment and the demand for such services is estimated only. While
indications are that there will be a high demand, it remains to be seen whether such demand will translate to the 5G
fixed wireless services that the Company is planning to offer and whether the Company can capture certain market
share in this new business. Assuming the technical and customer trials the Company plans on conducting are
successful, the launch and growth of the 5G Private Networks Business will necessitate additional skilled employees
and human resources which the Company does not yet have. The recruitment and hiring of such people is expected
to be competitive as a result of short supply, which will in turn affect the progress and success of the launch of the 5G
Private Networks Business.
Future ISED Consultations and decisions resulting in unfavourable outcome for 24 GHz and 38 GHz
spectrum bands
While the decision issued on June 5, 2019 by ISED for the Consultation on Releasing Millimetre Wave Spectrum to
Support 5G was generally favourable from the perspective of the Company for its 38 GHz spectrum licences, the
decision also contemplates that there will be a future consultation on the 38 GHz band to establish the licensing
framework for the new 38 GHz flexible use licences. In addition, ISED also noted that when new flexible use licences
are issued, existing licensees will be issued such licences under a new spectrum band plan which will necessitate the
assignment to the Company of new frequency blocks. These new flexible licences are also expected to cover smaller
licensing areas than the existing Tier 3 licence areas of current licences. As such, the full extent of the rules and
terms and conditions surrounding the Company’s 38 GHz spectrum licences when converted over to flexible use
have not yet been established. The new rules, as well as terms and conditions of these licences could have a
negative impact on the Company’s operations and may cause either disruption of services, or will require additional
costs to ensure the Company maintains its existing deployments to service customers.
ISED has identified and designated the 38 GHz band as a Priority 1 band for future use to support the deployment of
5G. The 24 GHz band has not yet been subject to similar consultations like the 38 GHz band. ISED, through its
release of the Spectrum Outlook 2018 - 2022 decision document did confirm 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. There can be
no assurances that the 24 GHz band licences that the Company holds will be identified in the future for potential 5G
use.
If the 24 GHz licences that the Company holds are determined by ISED to not qualify for 5G use, or do qualify but
with stringent conditions and terms of use, or a large percentage of the spectrum will be “clawed back”, it will have a
negative effect on the value of these licences, severely inhibit the Company’s 5G Private Networks Business plan,
and therefore impact negatively on the value of the Common Shares.
COVID-19 Pandemic and Public Health Emergency
The global COVID-19 pandemic has evolved rapidly in the past year and may have a material adverse effect on the
operations and financial results of the Company. The Company is currently operating under its Pandemic Response
Plan which involves certain mitigation measures to reduce the spread of COVID-19, employees working from home
where possible, alternative work arrangements, the elimination of in-person meetings, and mandating face coverings
in certain of its facilities. As of the date of this MD&A, the initial impacts of COVID-19 on the Company include lower
sales volume and therefore lower revenues than otherwise would be generated as businesses have generally
reduced or suspended their IT and telecommunications spend. The Company has seen a limited number of requests
by customers to defer monthly payments for services, or have services suspended during the COVID-19 pandemic. If
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Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
sales volumes continue to materially decline due to COVID-19, or there is an increase in the number and/or dollar
amounts of customers who have defaulted on their obligations to pay under their service contracts, the Company will
experience a material adverse effect on its business, results of operations and financial condition.
In addition, economic conditions globally in light of COVID-19 are beyond our control. A sustained downturn in the
economy 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. While a
disruption in the Company’s supply chain for radio equipment has not yet been experienced, a significant disruption in
this supply chain due to COVID-19 will cause unintended backlog, provisioning delays and reduce the Company’s
ability to offer services and generate new revenue.
The full extent to which the COVID-19 pandemic may impact our business and our financial results will depend on
future developments, which are highly uncertain and cannot be predicted at this time. Many factors that will determine
the extent of COVID-19’s impact include the duration of the outbreak in Canada and the U.S. (and to a lesser extent
globally), its disruptions in supply chains and global trade, the effectiveness of vaccines and the speed at which they
are distributed and administered to the broader population, the time to recovery in the global economy and consumer
confidence. Management continues to monitor the developments of COVID-19 and has taken steps to mitigate initial
impacts caused by it.
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
There can be no assurance that the Company will gain access to appropriate and sufficient Credit Facilities on
reasonable terms and conditions. An inability to access Credit Facilities could have a material adverse effect on the
Company’s business, liquidity, financial condition and results of operations.
Moreover, we may be required to seek debt financing on terms that include 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.
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, as well as to develop our
5G Private Networks Business Plan. If we are unable to obtain sufficient allocations of components, our 5G initiatives
and/or 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 several partners both as part of its channel program, as well as its
technology program. The benefits of such partnerships have not yet been proven and an early termination of the
partnerships or any unanticipated setbacks may have a material impact on the Company’s business and strategic
plan.
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Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
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 ISED. 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 Radiocommunication 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, long-term leases, or developmental licences 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, leased, or developmental, 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;
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Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
•
failure of ISED to renew our spectrum licences as they expire and our failure to obtain extensions or
renewals of spectrum leases before they expire;
•
imposition by ISED of new or amended conditions of licence, or licence fees, upon the renewal of our
spectrum licences or in other circumstances;
•
potentially significant increases in spectrum prices, because of increased competition for the limited supply
of licenced spectrum in Canada; and
•
invalidation of our authorization to use all or a significant portion of our spectrum, resulting in, among other
things, impairment charges related to assets recorded for such spectrum.
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 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.
Integration and Anticipated Benefits Pursuant to Past Acquisitions
The overall success of 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.
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Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
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 network infrastructure and other assets. 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 services decline or fail to increase, this may negatively affect the Company’s ability to capitalize on its
high operating leverage and may adversely affect the Company’s future financial performance.
Reductions in the amount or cancellations of customers’ orders would adversely affect our business, results of
operations and financial condition.
Cyber Security Risk
Our network security, data centre security and the authentication of our customer credentials are designed to protect
unauthorized access to data on our network and to our data centre premises. Because techniques used to obtain
unauthorized access to or to sabotage networks (including DDoS attacks) change frequently and may not be
recognized until launched against a target, we may be unable to anticipate or implement adequate preventive
measures against unauthorized access or sabotage. Consequently, unauthorized parties may overcome our network
security and obtain access to confidential, customer or employee data on our network, including on a device
connected to our network. In addition, because we own and operate our network, unauthorized access or sabotage of
our network could result in damage to our network and to the computers or other devices used by our customer. An
actual or perceived breach of network security or data centre security could harm public perception of the
effectiveness of our security measures, adversely affect our ability to attract and retain customers, expose us to
significant liability and adversely affect our business and revenue prospects.
The Company aims to mitigate and manage certain cyber security risks by employing specific policies and
procedures, carrying out IT security-related audits, establishing internal controls relevant to mitigating security risks,
performing certain “penetration” tests either internally or with help of third party consultants, obtaining IT security-
related compliance certificates, designating a security officer that oversees the IT security of the Company,
designating a privacy officer that is accountable for the Company’s compliance with applicable privacy laws, using
DDoS mitigation, tools and services, utilizing back-up and disaster recovery services and maintaining specific cyber
liability insurance coverage to insure against cyber security incidents. The Audit Committee of Company has been
tasked to periodically review the various measures management and the Company has undertaken to manage its
cyber security risks.
Excessive Customer Churn
The successful implementation of our business strategy depends upon controlling customer churn. Customer churn is
a measure of customers who stop using our services. Customer churn could increase as a result of:
•
billing errors and/or reduction in the quality of our customer service;
•
interruptions to the delivery of services to customers;
•
the availability of competing technology and other emerging technologies, some of which may, from time to
time, be less expensive or technologically superior to those offered by us; and
•
competitive conditions in the industry, including strategic initiatives by us or our competitors, new services,
service announcements and changes in pricing policy by us or our competitors.
An increase in customer churn can lead to slower customer growth, increased costs and a reduction in revenue.
Given the current economic environment, there is risk that churn levels could increase in the future.
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Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
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 and spectrum resources than we have. Our competitors include:
•
ILECs and CLECs providing DSL and fibre-optic enabled services over their existing wide, metropolitan and
local area networks and who have started to provide cloud and colocation services;
•
Utelcos offering or planning to offer internet and data connectivity over fibre optic networks;
•
cable operators offering high-speed Internet connectivity services and voice communications;
•
wireless Internet service providers using licenced or licence-exempt spectrum;
•
satellite and fixed wireless service providers offering or developing broadband Internet connectivity and
VoIP; and
•
resellers providing wireless Internet or other wireless services using infrastructure developed and operated
by others.
Many of our competitors are well established with larger and better developed networks and support systems, longer
standing relationships with customers and suppliers, greater name recognition and greater financial, technical and
marketing resources than we have. Our competitors may subsidize competing services with revenue from other
sources and, thus, may offer their products and services at prices lower than ours. We may not be able to reduce our
prices which may make it more difficult to attract and retain customers.
We expect other existing and prospective competitors to adopt technologies and/or business plans similar to ours, or
seek other means to develop services competitive with ours, particularly if our services prove to be attractive in our
target markets.
Acquisitions and Other Strategic Transactions
We may from time to time make strategic acquisitions or divestitures certain assets and businesses. Any such
transactions can be risky, may require a disproportionate amount of our management and financial resources and
may create unforeseen operating difficulties or expenditures, including:
•
difficulties in integrating acquired or carving out businesses and assets 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 increased complexity, or 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 or
divestiture, the transaction 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
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Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
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.
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 and SG&A 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.
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Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
Physical Inventory
The nature of our business requires the Company to procure, deploy, track, and maintain large volumes of
specialized network 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
datacentre 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 with variable interest rates, the Company is
exposed to rising interest rates. A significant rise in interest rates may materially increase the cost of either its
revolving or non-revolving credit facilities. The Company does not currently have any interest rate swap contracts to
manage the interest rate risk. As a result, there can be no assurance that interest rate fluctuations will not have a
material adverse effect on the Company.
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 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.
Electrical Power and Outages
The Company’s infrastructure is susceptible to 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 extended service interruptions. While the Company attempts to
limit exposure to system downtime, the Company cannot limit the Company’s exposure entirely.
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
TSX: TGO
28
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
deploy and operate our network, data centres or provide cloud services. Some of these patents, copyrights or rights
may grant very broad protection to the owners. We cannot determine with certainty whether any existing third party
intellectual property or the issuance of any third party intellectual property would require us to alter technology or
software we use, obtain licences or cease certain activities. Defending against infringement claims, even meritless
ones, would be time consuming, distracting and costly.
If we are found to be infringing the proprietary rights of a third party, we could be enjoined from using such third
party’s rights, may be required to pay substantial royalties and damages, and may no longer be able to use the
intellectual property subject to such rights on acceptable terms or at all. Failure to obtain licences to intellectual
property held by third parties on reasonable terms, or at all, could delay or prevent us from providing services to
customers and could cause us to expend significant resources to acquire technology which includes non-infringing
intellectual property.
If we have to negotiate with third parties to establish licence arrangements, or to renew existing licences, it may not
be successful and we may not be able to obtain or renew a licence on satisfactory terms or at all. If required licences
cannot be obtained, or if existing licences are not renewed, litigation could result.
Operating Losses
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 5G. 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, pandemics, 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.
INTERNAL CONTROL OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND
PROCEDURES
Our Chief Executive Officer and Interim Chief Financial Officer, designed or caused to be designed under his
supervision, TeraGo’s disclosure controls and procedures and internal control over financial reporting.
The Company has adopted a work-from-home program as of March 16, 2020. As substantially all of the Company’s
day-to-day activities can be fully performed by personnel working remotely, the Company is able to remain fully
operational during this period, and continues to pursue revenue opportunities, execute on its product development
roadmap and generate revenue from both new and existing customers. The Company has complied with applicable
federal, provincial and other local regulations related to the pandemic. The Company will continue to monitor closely
developments in this regard, with the health and safety of the Company’s employees and management as the
primary concern. Due to the fluidity of the COVID-19 pandemic and the uncertainty of its magnitude, outcome and
duration, the Company is unable to definitively quantify its potential impact.
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
TSX: TGO
29
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
are being prepared and that information required to be disclosed by TeraGo in its annual filings, interim filings or
other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported
within the time periods specified in securities legislation. TeraGo’s disclosure controls and procedures includes
controls and procedures designed to ensure that information required to be disclosed by TeraGo in its annual filings,
interim filings or other reports filed or submitted under securities legislation is accumulated and communicated to
management, as appropriate to allow timely decisions regarding required disclosure.
TeraGo’s internal control over financial reporting are designed to provide reasonable assurance regarding reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
TeraGo’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the
assets of TeraGo; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and expenditures of TeraGo are
being made only in accordance with authorizations of management and directors of TeraGo; and (iii) are designed to
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of TeraGo’s assets that could have a material effect on TeraGo’s financial statements. There have been no changes
to the Company’s internal controls over financial reporting in the period that have materially affected or are
reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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.
EXECUTIVE MANAGEMENT CHANGES
•
Effective March 8, 2021, Matt Gerber was appointed as Chief Executive Officer of the Company
•
Effective August 5, 2021, Candice Levy, Vice President, People & Culture was no longer with the Company
•
Effective September 3, 2021, Duncan McGregor, Vice President of Operations, was no longer with the Company
•
Effective October 22, 2021, Mark Lau, Vice President Legal and General Counsel was no longer with the
Company
•
Effective October 29, 2021, David Charron, Chief Financial Officer, was no longer with the Company
•
Effective October 29, 2021, Andy Ramsey was appointed as VP Finance and Interim Chief Financial Officer
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
TSX: TGO
30
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
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. The most directly comparable GAAP
financial measure in the Company’s financial statements is Earnings (loss) from Operations. Investors are cautioned
that Adjusted EBITDA should not be construed as an alternative to Earnings (loss) from Operations or net earnings
determined in accordance with IFRS as an indicator of our financial performance or as a measure of our liquidity and
cash flows. Adjusted EBITDA does not take into account the impact of working capital changes, capital expenditures,
debt principal reductions and other sources and uses of cash, which are disclosed in the consolidated statements of
cash flows.
Adjusted EBITDA does not have any standardized meaning under GAAP. TeraGo’s method of calculating Adjusted
EBITDA may differ from other issuers and, accordingly, Adjusted EBITDA may not be comparable to similar
measures presented by other issuers. See “Results of Operations – Adjusted EBITDA” for reconciliation of net loss to
Adjusted EBITDA.
Key Performance Indicators
Backlog MRR
The term “Backlog MRR” is a measure of contracted monthly recurring revenue (MRR) from customers that have not
yet been provisioned. The Company believes backlog MRR is useful additional information as it provides an
indication of future revenue. Backlog MRR is not a recognized measure under IFRS and may not translate into future
TSX: TGO
31
Management’s Discussion and Analysis
Quarter and Year Ended December 31, 2021
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.
TSX: TGO
32
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.
March 23, 2022
“Matthew Gerber”
“Andy Ramsey”
Chief Executive Officer
VP Finance and Interim Chief Financial Officer
33
KPMG LLP
100 New Park Place, Suite 1400
Vaughan, ON Canada L4K 0J3
Telephone (905) 265-5900
Fax (905) 265-6390
www.kpmg.ca
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 end of December 31, 2021 and
2020
•
the consolidated statements of comprehensive loss for the years then ended
•
the consolidated statements of cash flows for the years then ended
•
the consolidated statements of changes in equity 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, 2021 and December 31, 2020, and
its consolidated financial performance and its consolidated cash flows for the year then ended in
accordance with International Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board.
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.
34
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance
in our audit of the financial statements for the year ended December 31, 2021. These matters
were addressed in the context of our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters.
We have determined the matters described below to be the key audit matters to be communicated
in our auditors’ report.
Evaluation of the impairment assessment of goodwill and indefinite-life intangible
assets
Description of the matter
We draw attention to Notes 2(d), 3(f), and 7 to the financial statements. The Entity performs
impairment testing of its non-financial assets annually, or more frequently if events or
circumstances indicate the carrying value of the Entity’s single cash generating unit might exceed
its recoverable amount. The Entity has goodwill and indefinite-life intangibles of $861 thousand
and $10,278 thousand, respectively. The carrying values of identifiable intangible assets with
indefinite lives and goodwill are tested at minimum annually for impairment.
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 costs 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. The Entity’s
determination of the recoverable amount incorporates significant assumptions including expected
future revenue, operating margins, capital investment, discount rate and terminal growth rate. The
fair value less costs to sell is based primarily on available market data to value the Entity’s
spectrum holdings.
Why the matter is a key audit matter
We identified the evaluation of the impairment assessment of goodwill and indefinite-life intangible
assets as a key audit matter. This matter represented a significant risk of material misstatement
given the magnitude of the asset values and the high degree of estimation uncertainty in
assessing the Entity’s significant assumptions. As a result, significant auditor judgment and the
involvement of professionals with specialized skill and knowledge was required to evaluate the
Entity’s use of estimates and assumptions in assessing the recoverable amount of the cash
generating unit.
How the matter was addressed in our audit
The primary procedures we performed to address this key audit matter included the following:
For the Entity’s single cash generating unit, we:
•
Evaluated the expected future revenue, operating margins, and capital investment in
comparison to the actual historical sales and operating margins generated by, and capital
investment used by, the cash generating unit to assess the Entity’s ability to accurately
predict cash flows.
35
•
Considered changes in conditions and events to assess the assumptions made in arriving
at the expected future revenue and operating margins estimates.
•
Evaluated the terminal growth rate by comparing to published reports of industry analysts.
•
Evaluated the fair value less costs to sell of the Entity’s indefinite-life intangible assets by
comparing to published reports of industry analysts.
We involved valuation professionals with specialized skills and knowledge who assisted in
performing the following procedures:
•
Assessing the discounted cash flow methodology adopted by the Entity to determine the
fair value less cost to sell amount used in the determination of the recoverable amount.
•
Evaluating the appropriateness of the discount rate assumption by comparing it to a
discount rate range that was independently developed using publicly available market data
for comparable entities.
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.
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 auditor’s 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.
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.
36
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.
•
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 the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
•
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.
37
•
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 though to bear our independence,
and where applicable, related safeguards.
•
Determine, from the matters communicated with those charged with governance, those
matters that were of most significance in the audit of the financial statements of the current
period and are therefore the key audit matters. We describe these matters in our auditors’
report unless law or regulation precludes public disclosure about the matter or when, in
extremely rare circumstances, we determine that a matter should not be communicated in
our auditors’ report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditor’s report is Lesley Bridget Luk.
Vaughan, Canada
March 23, 2022
38
TERAGO INC.
Consolidated Statements of Financial Position
(In thousands of Canadian dollars)
December 31
December 31
Notes
2021
2020
Assets
Cash and cash equivalents
5
$
5,481 $
5,858
Accounts receivable, net
5
1,586
2,500
Prepaid expenses and other assets
350
804
Current portion of contract costs
4
192
324
Current portion of other long-term assets
11
8
79
Assets classified as held for sale
21
39,952
-
Total current assets
47,569
9,565
Other long-term assets
6,21
33,990
56,649
Intangible assets
7,21
10,291
17,097
Goodwill
7,21
861
19,419
Contract costs
4,21
518
397
Other long-term assets
11,21
1
41
Total non-current assets
45,661
93,603
Total Assets
$
93,230
$
103,168
Liabilities
Accounts payable and accrued liabilities
$
3,832 $
5,403
Current portion of contract liabilities
4
191
193
Current portion of long-term debt
9
2,250
3,000
Current portion of lease liabilities
10
5,632
7,236
Liabilities associated with assets classified as held for sale
21
12,265
-
Total current liabilities
24,170
15,832
Decommissioning and restoration obligations
8
494
360
4
271
187
Contract liabilities
9
17,541
25,144
Long-term debt
Lease liabilities
10
10,492
20,779
28,798
46,470
Total non-current liabilities
Total Liabilities
52,968
62,302
Shareholders' Equity
117,848
103,223
Share capital
26,391
27,191
Contributed surplus
743
Warrant reserve
-
(104,720)
(89,548)
Deficit
Total Shareholders' Equity
$
40,262
$
40,866
Total Liabilities and Shareholders' Equity
$
93,230
$
103,168
Commitments and Contingencies – Note 12
Subsequent events – Note 22
On behalf of the Board:
(signed) “Ken Campbell”
(signed) “Gary Sherlock”
Director
Director
The accompanying notes are an integral part of these consolidated financial statements.
39
TERAGO INC.
Consolidated Statements of Comprehensive Loss
(In thousands of Canadian dollars, except per share amounts)
Year ended
Year ended
December 31
December 31
Note
2021
2020
Revenue
4
$
43,303
45,448
Expenses
Cost of services
11,141
9,816
Salaries and related costs, net
20
14,565
16,254
Other operating expenses
8,235
7,940
Depreciation of network assets, property and equipment
6
13,175
13,301
Amortization of intangible assets
7
1,379
1,508
48,495
48,819
Loss from operations
(5,192)
(3,371)
Impairment loss on assets held for sale
21
(4,527)
-
Impairment loss on intangible asset
7
(1,630)
-
Foreign exchange gain (loss)
29
(210)
Finance costs
(3,896)
(4,777)
Finance income
44
99
Loss before income taxes
$
(15,172)
(8,259)
Income taxes
Income tax expense
-
-
Net loss and comprehensive loss
$
(15,172)
(8,259)
Deficit, beginning of year
$
(89,548)
(81,289)
Deficit, end of year
$
(104,720)
(89,548)
Basic & Diluted loss per share
16
$
(0.81)
(0.49)
Basic & Diluted weighted average number of shares
outstanding
18,769
16,693
The accompanying notes are an integral part of these consolidated financial statements.
40
4, 6, 7
TERAGO INC.
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
Year ended
Year ended
December 31
December 31
2021
2020
Note
Operating Activities
Net loss for the year
(15,172)
(8,259)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Severance, acquisition, and other costs
1,742
1,630
Depreciation of network assets, property and equipment
6
13,175
13,301
Amortization of intangible assets
7
1,379
1,508
Stock-based compensation expense
15
164
1,515
Finance costs
3,896
4,777
Finance income
(44)
(99)
Loss on adjustments and disposal of network assets
and intangible assets
6, 10
285
198
Impairment of assets and related charges
2,125
1,139
Severance, acquisition, and other costs paid
(1,371)
(1,777)
Impairment loss on assets held for sale
21
4,527
-
Changes in non-cash working capital items:
Accounts receivable
(166)
401
Prepaid expenses
29
(98)
Accounts payable and accrued liabilities
(1,048)
(1,039)
Contract liabilities
142
146
Contract costs
(341)
(11)
Cash from Operating Activities
9,322
13,332
Investing Activities
Purchase of network assets, property and equipment
6
(7,380)
(7,616)
Change in non-cash working capital related to network
assets, property and equipment and intangible assets
(373)
32
(7,753)
(7,584)
Cash used in Investing Activities
Financing Activities
Proceeds from issuance of warrants
743
-
Proceeds from equity offering
14
13,812
-
Proceeds from debt borrowings
-
3,100
Interest swap settlement
9
-
(629)
Interest paid, net of received
(943)
(1,011)
Repayment of long-term debt
9
(8,513)
(3,600)
Financing costs incurred
9
(85)
(267)
Payments of lease liabilities
10
(7,787)
(7,434)
Government grants
20
827
1,265
Cash from (used in) Financing Activities
(1,946)
(8,576)
Net change in cash and cash equivalents, during the year
(377)
(2,828)
Cash and cash equivalents, beginning of year
5,858
8,686
Cash and cash equivalents, end of year
5,481
5,858
The accompanying notes are an integral part of these consolidated financial statements.
41
TERAGO INC.
Consolidated Statements of Changes in Equity
(In thousands of Canadian dollars)
Share Capital
Number
Contributed
Warrant
Surplus
(in 000’s)
Amount
Reserve
Deficit
Total
Balance, January 1, 2021
16,762
$
103,223
$
27,191
$
-
$ (89,548)
$
40,866
Issuance of shares upon
1
3
(3)
-
-
-
exercise of options
-
-
(132)
-
-
(132)
Stock-based compensation
Issuance of common shares
69
515
(515)
-
-
-
from vesting of RSUs/PSUs
Shares deducted for payment
(20)
-
(150)
-
-
(150)
of withholding tax
Issuance of shares and
2,802
13,812
-
743
-
14,555
warrants for equity offering (net
of issuance costs)
Issuance of shares for directors'
53
295
-
-
-
295
fees
Net loss and comprehensive
-
-
-
-
(15,172)
(15,172)
loss
Balance, December 31, 2021
19,667
$
117,848
$
26,391
$
743
$(104,720)
$
40,262
Share Capital
Warrant
Number
Contributed
Reserve
(in 000’s)
Amount
Surplus
Deficit
Total
Balance, January 1, 2020
16,628
$
101,846
$
27,548
$
-
$ (81,289)
$
48,105
Issuance of shares upon
2
4
(4)
-
-
-
exercise of options
-
-
1,226
-
1,226
Stock-based compensation
-
Issuance of shares for directors'
46
289
-
-
-
289
fees
Issuance of common shares
159
1,084
(1,084)
-
-
-
from vesting of RSUs/PSUs
Shares deducted for payment
(73)
-
(495)
-
-
(495)
of withholding tax
Net loss and comprehensive
-
-
-
-
(8,259)
(8,259)
loss
-
Balance, December 31, 2020
16,762
$
103,223
$
27,191
$
$ (89,548)
$
40,866
The accompanying notes are an integral part of these consolidated financial statements.
42
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, 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 March 23, 2022.
(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
(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 significant assumptions including expected
future revenue, operating margins, capital investment, discount rate, terminal growth rate. The Company
also applied judgement on the use of available market data to estimate the value of its Spectrum holdings.
The accompanying notes are an integral part of these consolidated financial statements.
43
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
(v)
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. 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.
(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) 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.
(viii) 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.
(ix) 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.
(x)
Leases:
Judgment is required to determine the lease term for some lease contracts in which it is a lessee that
includes renewal options. The assessment of whether the Company is reasonably certain to exercise such
options will impact the lease term. The rate at which these leases will be renewed requires estimation as
most are negotiated at the time of renewal. In addition, as most of the Company’s leases do not have
embedded financing rates, judgment is required to arrive at discount rates that reflect the risk associated
with each individual lease. The impact of these assumptions significantly impacts the amount of lease
liabilities and right-of-use assets recognized.
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 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
44
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
consistent with a monthly passage of time model as services are provided.
•
Transaction price is determined as the list price of services (net of discounts) that the Company promises to
deliver to its customers, taking into account the term of each individual contract, and the ability to enforce and
collect the consideration.
•
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.
(i)
Sale of Bundled Services
The Company offers certain customers bundled connectivity, colocation, and cloud services. 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.
(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. The Company 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 IFRS 15 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
45
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
The consolidated financial statements include the accounts of TeraGo Inc. and its wholly owned subsidiaries TeraGo
Networks Inc. and TeraGo Networks (U.S.) 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.
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
Amortized cost
Accounts Receivable
Amortized cost
Financial liabilities
Accounts payable
Amortized cost
Accrued Liabilities
Amortized cost
Long-term debt
Amortized cost
Impairment of Financial Assets
The Company’s financial assets measured at amortized cost consist of assets discussed in Note 18.
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 (i.e.
economic indicators).
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
46
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
asset and include directly attributable internally and externally generated engineering and construction costs and
equipment on-hand. They also include the cost of dismantling and removing items and restoring the site on which they
are located and specifically attributable borrowing costs on qualifying assets. Subsequent costs are included in the
asset’s carrying amount or recognized as a separate asset only when it is probable that future economic benefits
associated with the item will flow to the Company and the costs of the item can be reliably measured. All other
expenditures are charged to operating expenses as incurred.
When major components of an item of network assets and property and equipment have different useful lives, they are
accounted for as separate items. Depreciation of network assets and property and equipment is based on the estimated
useful life of the assets as follows:
Estimated useful life/ Asset depreciation method
Network assets
3 to 25 years straight line
Cloud and Datacentre infrastructure
3 to 15 years straight line
Computer equipment
3 years straight line
Office furniture and equipment
5 years straight line
Leasehold improvements
over the term of lease
Vehicles
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, and Non-compete agreements
Customer relationships, brand, non-compete agreements are recorded at cost, initially measured at fair value on the
acquisition date if acquired in a business combination, less accumulated amortization. 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.
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.
(f)
Impairment of non-financial assets
The Company performs impairment testing of its non-financial assets annually, or more frequently if events or
circumstances indicate the carrying value of the Entity’s single cash generating unit might exceed its recoverable
amount. 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
47
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
identified. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are
separately identifiable cash flows (“cash generating units” or “CGUs”).
The carrying values of identifiable intangible assets with indefinite lives and goodwill are tested at minimum annually
for impairment. Goodwill and indefinite life intangible assets are allocated to CGUs for the purpose of impairment testing
based on the level at which management monitors it, which is not higher than an operating segment. The allocation is
made to those CGUs that are expected to benefit from the business combination in which the goodwill arose. The
Company currently has assessed that it has a single CGU.
The carrying values of non-financial assets with finite useful lives, such as network assets, property and equipment
and intangible and other assets subject to amortization, are assessed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. If any such indication exists, the
recoverable amount of the asset must be determined. Such assets are impaired if their recoverable amount is lower
than their carrying amount. If it is not possible to estimate the recoverable amount of an individual asset, the recoverable
amount of the CGU to which the asset belongs is tested for impairment.
(g)
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
At inception of a contract, the Company assesses whether a contract is, or contains, a lease based on whether the
contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use
asset is initially measured based on the initial amount of the lease liability adjusted for any lease payments made at or
before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove
the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives
received. The assets are depreciated to the earlier of the end of the useful life of the right-of-use asset or the lease
term using the straight-line method as this most closely reflects the expected pattern of consumption of the future
economic benefits.
48
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
The lease term includes periods covered by an option to extend if the Company is reasonably certain to exercise that
option. In addition, the right-of-use asset can be periodically reduced by impairment losses, if any, and adjusted for
certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease
payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that
rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its
incremental borrowing rate as the discount rate.
The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a
change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate
of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of
whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a
corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the
carrying amount of the right-of-use asset has been reduced to zero.
(i)
Provisions
A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that
can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
Where the impact is significant, provisions are determined by discounting the expected future cash flows at a pre-tax
rate that reflects the current market assessments of the time value of money and the risk specific to the liability. The
unwinding of the discount is recognized as a finance cost.
Decommissioning and Restoration Obligations:
In the course of the Company's operations, network and other assets are utilized on leased premises. Often costs are
expected to be incurred associated with decommissioning these assets and restoring the location where these assets
are situated upon ceasing their use on those premises.
These decommissioning and restoration provisions are calculated on the basis of the identified costs for the current
financial year, extrapolated into the future based on management's best estimates of future trends in prices, inflation,
and other factors, and are discounted to present value at a risk-adjusted rate specifically applicable to the liability.
Assumptions related to the amount and timing of cash flows required to satisfy the Company's future legal obligations
include labour costs based on current marketplace wages and the rate of inflation over expected years to settlement;
the length of facility lease renewal periods and probability of such renewals; and the appropriate discount rate to present
value the future cash flows. Forecasts of estimated future provisions are reviewed periodically in light of future changes
in business conditions or technological requirements.
The Company records these decommissioning and restoration costs as Network Assets, Property and Equipment, and
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.
(j)
Foreign Currency Translation
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 and changes in fair value of financial assets at FVTPL.
Finance costs comprise interest expense on borrowings, accretion of discounts on provisions, accretion of lease
liabilities, and changes in fair value of financial assets at FVTPL. Borrowing costs that are not directly attributable are
recognized in loss for the year.
(l)
Income Taxes
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.
49
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
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) Stock-based Compensation Plans
The Company has equity-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. The Company
accounts for the effects of service and non-market performance conditions in measuring the fair value of the equity
instruments by adjusting the number of rights to receive awards 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.
(n)
Operating Segments
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,
2021 substantially all of the Company’s identifiable assets are located in Canada.
(o)
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.
(p)
Government Grants
Government grants are recognized when management has reasonable assurance that the entity will comply with the
conditions attached to the grant and the grant will be received. Government grants recognized are accounted for as a
reduction in the expense which they are intended to compensate.
50
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
4.
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.
a) Disaggregation of revenue
In the following table, the Company’s disaggregates revenue into two primary categories that depict the nature of its
revenue streams.
Year ended
December 31
2021
2020
Cloud and Colocation Revenue
$
16,956
16,666
Connectivity Revenue
26,347
28,782
$
43,303
45,448
The disaggregated revenue comparative numbers for the year ended December 31, 2020 have been changed to
conform with the presentation of revenue stream allocations for December 31, 2021.
b) Contract Costs
The following table summarizes the changes in contract costs during the year:
2021
2020
$
721
756
Balance, January 1, 2021
832
539
Incremental commissions capitalized
(22)
(46)
Impairment charges from contract terminations
(491)
(528)
Amortization
(330)
-
Contract costs classified as held for sale (Note 21)
710
721
Balance, December 31, 2021
$
(192)
(324)
Less: current
518
397
c) Contract Liabilities
The following is a table that summarizes the change in contract liabilities during the year:
2021
2020
$
380
234
Balance, January 1, 2021
451
519
Additions from provisioning
(296)
(361)
Revenue recognized for services provided
(13)
(12)
Impairment charges from contract terminations
Contract liabilities classified as held for sale (Note
(60)
-
21)
462
380
Balance, December 31, 2021
$
(191)
(193)
Less: current
271
187
d) Unsatisfied Performance Obligations
The aggregate amount of revenue allocated to performance obligations that are unsatisfied as of December 31, 2021
51
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
was $42,929, of which $28,842 relates to connectivity business. 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.
5.
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, net
The Company’s accounts receivable is comprised of the following:
December 31
December 31
2021
2020
Trade receivables
$
2,631
$
2,465
Loss allowances (Note 18)
(97)
(66)
Other
256
101
Accounts receivable, net classified
as assets held for sale (Note 21)
(1,204)
-
$
1,586 $
2,500
52
(4)
(100)
(1)
(2)
(1)
(34)
-
(5)
-
-
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
6.
Network Assets, Property and Equipment
Office
Cloud &
Furniture
Network
Datacentre
Computer
and
Leasehold
Right-of-
Cost
Assets
Infrastructure
Equipment
Equipment
Improvements
Vehicles
use Assets
Total
$
127,403 $
12,131 $
5,079 $
2,323 $
3,070 $
49 $
35,954 $
186,009
Balance, January 1, 2021
6,737
508
122
8
5
-
1,030
8,410
Additions
(839)
(1)
-
-
-
-
(63)
(903)
Disposals
(27)
27
-
-
-
-
3,024
3,024
Reclassifications / Modifications
(940)
(74)
(2)
(1)
-
-
-
(1,017)
Impairment
Balance, December 31, 2021
$
132,334 $
12,591 $
5,199 $
2,330 $
3,075 $
49 $
39,945 $
195,523
Accumulated Depreciation
$
104,002 $
4,884 $
4,974 $
2,305 $
2,452 $
49 $
10,694 $
129,360
Balance, January 1, 2021
6,106
938
65
16
301
-
5,749
13,175
Depreciation for the period
(595)
-
-
-
-
-
(13)
(608)
Disposals
(8)
8
-
-
-
-
(9)
(9)
Reclassifications / Modifications
(537)
-
(543)
Impairment
Balance, December 31, 2021
$
108,968 $
5,826 $
5,038 $
2,320 $
2,753 $
49 $
16,421 $
141,375
Network Assets, Property, and
Equipment classified as assets
held for sale (Note 21)
$
(3,913) $
(6,730) $
(6) $
(2) $
(310) $
- $
(9,197) $
(20,158)
Net Book Value, December 31,
2021
$
19,453 $
35 $
155 $
8 $
12 $
- $
14,327 $
33,990
Office
Cloud &
Furniture
Network
Datacentre
Computer
and
Leasehold
Right-of-
Cost
Assets
Infrastructure
Equipment
Equipment
Improvements
Vehicles
use Assets
Total
$
123,639 $
12,104 $
4,971 $
2,362 $
3,077 $
49 $
32,016 $
178,218
Balance, January 1, 2020
7,256
247
102
11
-
-
1,200
8,816
Additions
(763)
-
-
-
-
-
(251)
(1,014)
Disposals
-
-
9
(9)
-
-
3,043
3,043
Reclassifications / Modifications
(2,729)
(220)
(3)
(41)
(7)
-
(54)
(3,054)
Impairment
Balance, December 31, 2020
$
127,403 $
12,131 $
5,079 $
2,323 $
3,070 $
49 $
35,954 $
186,009
Accumulated Depreciation
$
99,884 $
4,081 $
4,928 $
2,307 $
2,138 $
49 $
5,269 $
118,656
Balance, January 1, 2020
6,474
901
48
32
319
-
5,527
13,301
Depreciation for the period
(565)
-
-
-
-
-
(67)
(632)
Disposals
(2)
2
-
-
-
-
(4)
(4)
Reclassifications / Modifications
(1,789)
(31)
(1,961)
Impairment
Balance, December 31, 2020
$
104,002 $
4,884 $
4,974 $
2,305 $
2,452 $
49 $
10,694 $
129,360
Net Book Value, December 31,
2020
$
23,401 $
7,247 $
105 $
18 $
618 $
- $
25,260 $
56,649
For the years ended December 31, 2021 and 2020, the Company had additions of capitalized wages and other directly
attributable costs of $2,081 and $2,149, respectively, in network assets, property and equipment.
During 2021, the Company wrote off assets with net book value of $295 (Cost of $903 less accumulated depreciation
of $608, $10 of which was recognized against lease liabilities) which primarily represents replaced assets and obsolete
assets disposed of for negligible value. During 2020, the Company wrote off assets with a net book value of $382 (Cost
of $1,014 less accumulated depreciation of $632, $184 of which was recognized against lease liabilities). The
corresponding loss on disposal is included in other operating expenses.
53
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
Impairment of Network Assets, Property, and Equipment
The Company tests Network assets, property and equipment for impairment when events or circumstances may indicate
the carrying value is no longer recoverable. In performing the annual impairment test the Company identified evidence
of impairment in certain assets and an analysis was done on the recoverable amount. The Company determined that
the recoverable amount of certain network assets, cloud and datacentre infrastructure, and computer equipment was
less than their carrying values. This was the result of the loss of certain 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. For the year ended December 31, 2021
the Company recorded a charge of $474 in other operating expenses on the statement of comprehensive loss
(December 31, 2020 – $1,093).
7.
Intangible Assets and Goodwill
Radio
Total
spectrum
Computer
Customer
Total
Intangibles
Cost
licenses
Software
relationships
Other
Intangibles
Goodwill and Goodwill
Balance, January 1, 2021
$
12,649 $
9,868 $
18,021 $
4,831 $
45,369 $
19,419 $
64,788
Additions
-
-
-
-
-
-
-
Disposals / Adjustments
-
-
-
-
-
-
-
Impairment
-
-
-
-
-
-
-
Balance, December 31, 2021
$
12,649 $
9,868 $
18,021 $
4,831 $
45,369 $
19,419 $
64,788
Accumulated Depreciation
Balance, January 1, 2021
$
2,371 $
9,800 $
13,022 $
3,079 $
28,272 $
- $
28,272
Amortization for the period
-
55
1,201
123
1,379
-
1,379
Impairment
-
-
-
1,629
1,629
4,527
6,156
Balance, December 31, 2021
$
2,371 $
9,855 $
14,223 $
4,831 $
31,280 $
4,527 $
35,807
Intangibles Assets and Goodwill
classified as assets held for sale
(Note 21)
$
- $
- $
(3,798) $
- $
(3,798) $
(14,031) $
(17,829)
Net Book Value, December 31, 2021 $
10,278 $
13 $
- $
- $
10,291 $
861 $
11,152
Radio
Total
spectrum
Computer
Customer
Total
Intangibles
Cost
licenses
Software
relationships
Other
Intangibles
Goodwill
and Goodwill
Balance, January 1, 2020
$
12,649 $
9,868 $
18,021 $
4,831 $
45,369 $
19,419 $
64,788
Additions
-
-
-
-
-
-
-
Disposals / Adjustments
-
-
-
-
-
-
-
Impairment
-
-
-
-
-
-
-
Balance, December 31, 2020
$
12,649 $
9,868 $
18,021 $
4,831 $
45,369 $
19,419 $
64,788
Accumulated Depreciation
Balance, January 1, 2020
$
2,371 $
9,661 $
11,780 $
2,952 $
26,764 $
- $
26,764
Amortization for the period
-
139
1,242
127
1,508
-
1,508
Impairment
-
-
-
-
-
-
-
Balance, December 31, 2020
$
2,371 $
9,800 $
13,022 $
3,079 $
28,272 $
- $
28,272
Net Book Value, December 31, 2020 $
10,278 $
68 $
4,999 $
1,752 $
17,097 $
19,419 $
36,516
54
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
Impairment of Intangible Assets
The Company tests intangible assets for impairment when events or circumstances may indicate the carrying value is
no longer recoverable. In performing the impairment assessment at December 31, 2021, the Company identified
evidence of impairment in certain assets and an analysis was completed where $1,629 of brand assets was identified
as impaired (December 31, 2020 – nil). The impairment loss recorded related to a brand asset that arose from a prior
cloud and colocation acquisition that was deemed to have no future value to the Company as a result of the sale of
the cloud and colocation assets (see Note 22).
Impairment of Goodwill and Indefinite Life Intangible Assets
The annual impairment test of goodwill and indefinite life intangible assets was performed on December 31, 2021,
following consideration of assets held for sale assessment (see Note 21), and December 31, 2020 and did not result
in any goodwill impairment loss.
In performing the annual impairment test the Company determined there was a single CGU comprising of all the
assets to operate the connectivity business. The Company measured the fair value less cost to sell of the CGU by
valuing the Company's spectrum holdings and performing a discounted cash flow on estimated future cash flows. The
Company relied on analyst reports, comparable spectrum auctions, and other data to value the spectrum. Additionally,
the company relied on significant management assumptions, such as cash flow projections over a five-year period,
based primarily on the financial budget reviewed by the Board of Directors, plus a terminal value using a 3% terminal
growth rate. The Company discounted these estimates of future cash flows to their present value using an after-tax
discount rate of 9.3% which reflects the entity’s weighted average cost of capital. The Company’s fair value less costs
to sell significantly exceeded the net carrying amount of the CGU.
8.
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 are related to future site restoration costs associated to these leased
or licensed premises. The decommissioning and restoration obligations were determined using a discount rate of 9.3%
over a range of periods from 2025 to 2045. As at December 31, 2021, the estimated amount of undiscounted cash
flows required to settle this liability was $1,648 (2020 – $1,218).
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:
December 31
December 31
2021
2020
Obligation, beginning of year
$
360 $
276
Accretion expense included in finance costs
38
28
Changes in assumptions
96
56
Obligation, end of year
$
494 $
360
55
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
9.
Long-term Debt
December 31
December 31
2021
2020
Term debt facility
$
19,988
$
28,405
(197)
(261)
less: financing fees
19,791
28,144
(2,250)
(3,000)
less: current portion
$
17,541
$
25,144
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 $50,000 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.
In March 2019, the Company entered into a third amended agreement with the syndicate led by NBC which had the
effect of excluding the impact of IFRS 16 on certain covenant calculations, and thereby maintaining accounting definitions
in effect when the credit agreement was first entered into in June 2014.
In June 2020, the Company entered into an amended and restated credit agreement (the “Term Debt Facility”) with a
syndicate led by Royal Bank of Canada (“RBC”) to replace the Company’s existing credit facilities which reduced the
credit facility to $35,000 (from $75,000) and extended the term from June 14, 2021 to June 30, 2022. Effective June 30,
2020, NBC ceased to be an administrative agent and a lender to the Company and assigned its right and obligations to
RBC, in its capacity as administrative agent.
In June 2021, the Company entered into an amending agreement with the syndicate led by RBC to extend the Term
Debt Facility to June 30, 2023.
The Term Debt Facility matures June 30, 2023 and is made up of the following:
•
$5,000 revolving facility which bears interest at prime plus a margin percent. As of December 31, 2021, $nil was
drawn and outstanding on the revolving facility (2020 - $nil). Letters of credit issued under the facility totaled $625
as of December 31, 2021 (December 31, 2020 - $625).
•
$30,000 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 $563. This facility was fully drawn upon signing the
amended and restated credit agreement.
On December 30, 2021, the Company entered into a second amending agreement of the Term Debt Facility to change
certain financial covenants for the fiscal quarter ending December 31, 2021. The financial covenants return to their
previous levels for the fiscal quarter ending March 31, 2022.
At December 31, 2021, $19,988 of the Term Debt Facility principal balance outstanding was entirely in a prime rate loan.
During the year ended December 31, 2021, the Company incurred $87 (2020 – $267) in finance costs to amend the
Term Debt Facility. Financing fees 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.
56
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
The Term Debt Facility is subject to certain financial and non-financial covenants which the Company is in compliance
with at December 31, 2021. The Company has subsequently repaid all indebtedness, liabilities and other obligations
against the Term Debt Facility (See Subsequent Events Note 22).
10. Leases
The Company has many leases of which it is a lessee. The major categories of leases are building leases for the
Company’s fixed wireless services, datacentre leases for colocation and cloud service offerings, network equipment,
corporate offices, and warehouses. Lease terms vary by category and range from 1 to 15 years.
a) Right-of-use Asset
Changes in the right-of-use asset are summarized in Note 6 of these Consolidated Financial Statements.
b) Lease Liability
The following table is a summary of the changes in the lease liability during the year:
2021
2020
Lease liabilities, beginning of period
$
28,015 $
28,758
Additions
1,030
1,200
Terminations
(10)
(184)
Interest on lease liabilities
2,497
2,651
Modifications
2,974
3,024
Lease payments
(7,787)
(7,434)
Lease liabilities classified as held for sale (Note 21)
(10,595)
-
Lease liabilities – end of period
16,124
28,015
less: current portion
(5,632)
(7,236)
$
10,492 $
20,779
A maturity analysis of these leases is set out in the below table:
2022
2023
2024
2025
2026
Thereafter
Total
Undiscounted cash flows
$
7,857 6,673 5,330 4,310 3,411
7,375 34,956
11. Other Long-Term Assets/Liabilities
(a) Other long-term assets
December 31
December 31
2021
2020
Contract asset
$
40 $
120
Contract asset classified as held for sale
(31)
-
9
120
less: current portion
(8)
(79)
$
1 $
41
57
(15,172)
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
12. Commitments & Contingencies
(a) Contingencies
From time to time the Company is subject to reviews conducted by its vendors over various licenses we purchase and
offer to our customers. One such review was conducted in 2019 which gave rise to a contingent liability. At December
31, 2021, the Company has formally negotiated a settlement with the vendor which is contingent on certain revenue
targets. Included in the accrued liabilities balance as at December 31, 2021 is a provision of $96 which, using all
currently available information, that represents management’s best estimate (within a range of probable outcomes) of
the expected cash outflow (2020 - $491). The final outcome is subject to measurement uncertainty and is expected to
be finalized within fiscal 2022.
(b) Commitments
At December 31, 2021, the Company had various purchase commitments to fulfill sales orders in the normal course
of operations. Below is a summary of the future minimum payments for contractual obligations that are not recognized
as liabilities at December 31, 2021:
2022
2023
2024
2025
2026
Thereafter
Total
Network assets, property, and equipment
$
1,192
-
-
-
-
-
565
Other Purchase Obligations
5,968
2,577
1,421
347
19
-
10,332
Total Commitments
7,160
2,577
1,421
347
19
-
10,897
The Company is required to pay, under a CRTC-administered regime, a percentage (2021 - 0.44%, 2020 – 0.44%) of
its adjusted Canadian telecommunications service revenue (as defined by CRTC and excluding retail Internet revenue)
into a fund administered by CRTC.
13. Income Taxes
(a) Income tax expense (recovery)
December 31
December 31
2021
2020
$
$
Profit (Loss) before income taxes (recovery)
(8,259)
Income tax recovery at enacted rate of 26.95%
(4,089)
(2,181)
Non-deductible expenses and permanent differences
142
405
Change in unrecognized deductible temporary differences
4,365
1,879
Effect of change in future tax rates
(361)
118
Other
(57)
(221)
$
- $
-
58
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
(b) Recognized deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
December 31
December 31
2021
2020
Deferred Tax Assets:
Income tax loss carryforwards
$
3,200
$
2,629
Deferred Tax Liabilities:
Financing Fees
(41)
-
Property, Plant, & Equipment
(3,159)
(2,629)
$
- $
-
(c) Unrecognized deferred tax assets and liabilities
Deferred tax assets have not been recognized in respect of the following items because they do not meet the criteria
for recognition.
December 31
December 31
Unrecognized Deferred Tax Assets:
2021
2020
Non-capital tax loss carryforwards
$
21,147
$
17,103
Capital lease obligations
1,399
722
Other deductible temporary differences
894
1,250
$
23,440
$
19,075
(d) Tax loss expiry schedule
The non-capital tax losses carried forward are available to reduce future taxable income in Canada and expire as
follows:
2027
$
273
2028
-
2029
1,386
2030
1,356
2031
-
2032
-
2033
647
2034
674
2035
1,651
2036
2,701
2037
21,192
2038
16,020
2039
16,129
2040
14,713
2041 and later
13,593
$
90,335
59
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
14. Share Capital
Authorized
Unlimited
Common Shares
In $000’s
Number
of
Share
Common
Common
Issue
Issued
Shares
Shares
Costs
Total
16,628
109,907
(8,061)
101,846
Balance, January 1, 2020
2
4
-
4
Issuance of common shares on exercise of stock options
46
289
-
289
Issuance of common shares for directors' fees
159
1,084
-
1,084
Issuance of common shares from vesting of RSUs/PSUs
Shares deducted for payment of withholding taxes
(73)
-
-
-
16,762
111,284
(8,061)
103,223
Balance, December 31, 2020
1
3
-
3
Issuance of common shares on exercise of stock options
53
295
-
295
Issuance of common shares for directors' fees
2,802
13,971
(159)
13,812
Issuance of shares and warrants for equity offering
69
515
-
515
Issuance of common shares from vesting of RSUs/PSUs
Shares deducted for payment of withholding taxes
(20)
-
-
-
19,667
126,068
(8,220)
117,848
Balance, December 31, 2021
Equity Offering
On April 21, 2021, the Company completed a private placement where the Company issued and sold an aggregate
of 934 Series A Units, 934 Series B Units and 934 Series C Units of the Company at a subscription price of $5.25
per Unit, for gross proceeds of $14,711. Each Unit is comprised of one common share and one-half (½) of a Series
A, B or C Warrant (each a “Warrant”). Each whole series A, B, C Warrant entitles the holder to purchase one
common share at prices of $7.00, $7.50, and $8.00, respectively. In total, the Company issued 2,802 Common
Shares, 467 Series A Warrants, 467 Series B Warrants, and 467 Series C Warrants. The warrants were valued
using the Black Scholes model and the residual method was used to value the common shares. The Company
accounted for the warrants net of issuance costs in the Company’s warrant reserve.
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, 2021 and 2020.
15. Stock-Based Compensation
(a) Stock Options
The company adopted its current option plan on June 18, 2007 (the “Option Plan”) which is available to directors,
officers, employees and other persons approved by the Board from time to time. The options granted under the Option
Plan expire 10 years from the date of grant and generally vest over three years. All options under the Option Plan will
vest immediately on a change of control of the Company. As of December 31, 2021, there are 323 (2020 – 389) options
outstanding under the Option Plan.
60
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
For the years ended December 31, 2021 and 2020, the Company recorded stock-based compensation related to
stock options of ($49) and $640, respectively.
A summary of the status of the Company’s stock Option Plan as at December 31, 2021 and 2020 is presented below
(number of options in 000’s).
2021
2020
Weighted
Weighted
Number of
Average
Number of
Average
Options
Exercise Price
Options
Exercise Price
389
$7.73
217
$8.72
Outstanding - January 1
Granted
178
$6.32
194
$6.45
Exercised
(6)
$4.40
(2)
$4.40
Forfeited / Expired
(238)
$7.71
(20)
$6.44
323
$7.03
389
$7.73
Outstanding - December 31
Exercisable
144
$7.84
135
$7.59
The Company granted stock options to certain key executives during the year. The fair value of stock option grants is
estimated using the Black-Scholes option pricing model, with the following weighted average assumptions: risk-free
rates ranging from 0.22% to 0.97%; dividend yield of nil; volatility rates ranging from 36.02% to 39.76%; and expected
term of stock options of 6.5 years. Expected volatility has been based on an evaluation of the historical period
commensurate with the expected term. The expected term of the stock options has been based on historical experience
and general option holder behavior. The fair value of the stock options is expensed over the vesting period of the
options using the graded method.
As at December 31, 2021, the range of exercise prices, the weighted average exercise price and the weighted average
remaining contractual life are as follows (number of options in 000’s):
Options Outstanding
Options Exercisable
Weighted
average
remaining
Weighted
Weighted
Range of exercise
Number
contractual
average
Number
average
prices
outstanding
life (years)
exercise price
exercisable
exercise price
$4.01 - $6.00
77
9.19
$5.46
5
$4.40
$6.01 - $12.00
246
8.28
$7.91
139
$7.95
323
8.45
$7.03
144
$7.84
(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. 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. The value of one RSU is equal
to the value of one Common Share. At the end of the vesting period, the RSUs vest if the plan participant is employed
by the Company. On June 21, 2019, the shareholders of the Company approved the board of directors’
recommendation to amend the RSU Plan whereby common shares may be issued from treasury to settle current and
future vested PSUs and RSUs.
In 2021, the Company granted 75 RSUs to certain executives (2020 – 46). In 2021, 69 RSUs vested and the
company issued common shares (2020 – 159). For the years ended December 31, 2021 and December 31, 2020,
the Company recorded compensation expense of $19 and $582, respectively, related to the RSUs granted.
The following table is a summary of the number of outstanding RSUs (in 000’s) as at:
61
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
December 31
December 31
2021
2020
255
Opening Balance, January 1, 2021
110
46
Granted
75
(32)
Forfeited
(49)
(159)
Vested and settled / paid
(69)
110
Ending Balance, December 31, 2021
67
(c) Performance Based Share Units (PSUs)
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. The value of one PSU is equal to the value
of one Common Share. 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. On June 21, 2019,
the shareholders of the Company approved the board of directors’ recommendation to amend the RSU Plan whereby
common shares may be issued from treasury to settle current and future vested PSUs and RSUs.
There were 61 PSUs granted in 2021 (2020– 46) to certain key executives. In 2021, 25 PSUs vested and were paid
(2020 – nil). For the years ended December 31, 2021 and December 31, 2020, the Company recorded stock-based
compensation expense of $4 and $4, respectively, related to the PSUs outstanding.
The following table is a summary of the number of outstanding PSUs (in 000’s) as at:
December 31
December 31
2021
2020
32
Opening Balance, January 1, 2021
28
46
Granted
61
Vested and paid
(25)
-
(50)
Forfeited / Expired
(27)
37
28
Ending Balance, December 31, 2021
(d) Stock-Based Compensation Summary
The following table is a summary of the stock-based compensation expense:
Year ended
Year ended
December 31
December 31
2021
2020
Restricted share units
$
19 $
582
4
4
Performance-based share units
(154)
640
Stock options
295
289
Directors' fees paid in shares
$
164 $
1,515
62
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
16. Loss Per Share
The following table sets forth the calculation of basic and diluted loss per share.
Year ended
Year ended
December 31
December 31
2021
2020
Numerator for basic and diluted loss
per share:
(8,259)
Net loss for the period
$
(15,172)
Denominator for basic and diluted loss
per share:
Basic weighted average number of
18,769
16,693
shares outstanding
Effect of stock options, RSUs and
-
-
PSUs
Diluted weighted average number of
18,769
16,693
shares outstanding
Loss per share:
(0.49)
Basic
$
(0.81)
(0.81)
(0.49)
Diluted
$
For the year ended December 31, 2021, the effect of outstanding share-based awards totaling 611 (2020 – 561), 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:
Year ended
Year ended
December 31
December 31
2021
2020
Salaries, fees and benefits
$
1,981
$
2,297
Termination expense
312
1,140
Share-based compensation expense
327
1,505
$
2,620
$
4,942
63
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
18. Fair value of financial instruments
The Company has determined the estimated fair values of its financial instruments based on appropriate valuation
methodologies. Where quoted market values are not readily available, the Company may use considerable judgment to
develop estimates of fair value. Accordingly, any estimated values are not necessarily indicative of the amounts the
Company could realize in a current market exchange and could be materially affected by the use of different assumptions
or methodologies. The Company classifies its fair value measurements within a fair value hierarchy, which reflects the
significance of the inputs used in making the measurements as defined in IFRS 7 – Financial Instruments – Disclosures.
Level 1 -
Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 -
Inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either
directly or indirectly; and
Level 3 -
Unobservable inputs for the asset or liability which are supported by little or no market activity
The fair values of cash and cash equivalents 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 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
December
December
December
31
31
31
31
2021
2020
2021
2020
Financial Liabilities
Long-term debt
19,791
28,144
19,791
28,144
b) Credit risk
As a result of the recent major changes in market conditions as a result of the ongoing COVID-19 pandemic, the
Company re-evaluated its credit risk and concluded that no major changes to existing strategies were necessary in
addition to those already disclosed in the notes to these Consolidated Financial Statements. The Company will continue
to monitor and re-evaluate this risk as the COVID-19 pandemic and its associated impacts continue to unfold.
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.
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 place 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, 2021 and 2020, 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:
64
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
December 31
December 31
2021
2020
Current
$
1,925
$
1,996
31 to 60 days
416
307
61 to 90 days
158
48
over 90 days
132
114
$
2,631
2,465
During the year, the movement in the credit loss allowance in respect of trade receivables was as follows:
December 31
December 31
2021
2020
Opening Balance, January 1, 2021
66
40
Amounts written off
(25)
(31)
Remeasurement of loss allowance
56
57
97
66
Ending Balance, December 31, 2021
c)
Liquidity Risk
As a result of the recent major changes in market conditions as a result of the ongoing COVID-19 pandemic, the
Company re-evaluated its liquidity risk and concluded that no major changes to existing strategies were necessary in
addition to those already disclosed in the notes to these Consolidated Financial Statements. The Company will continue
to monitor and re-evaluate this risk as the COVID-19 pandemic and its associated impacts continue to unfold.
As at December 31, 2021, the Company had cash and cash equivalents of $5,481. Subsequent to year end (see Note
22 Subsequent Events), on January 31, 2022, TeraGo divested its cloud and colocation business lines to a subsidiary
of Hut 8 Mining Corp. (Nasdaq: HUT) (TSX: HUT) for an aggregate consideration of $30 million in cash. The proceeds
were used to repay the Company’s term debt in full and for general corporate and working capital purposes. The
Company believes that its current cash and cash equivalents, net proceeds divested cloud and colocation business
lines, and anticipated cash from operations will be sufficient to meet its working capital and capital expenditure
requirements for at least the twelve-month period following December 31, 2021. 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, 2020, the Company’s financial liabilities that have contractual maturities are summarized below:
Less than
1 year
2 - 3 years
Total
Long-term debt
$
2,250 $
17,541 $
19,791
Accounts payable
2,339
-
2,339
Total
$
4,589 $
17,541 $
22,130
d) Interest Rate Risk
As a result of the recent modification of the Company’s credit facility (see Note 9), the Company no longer has a fixed
interest rate on its long-term debt. As such, the Company is more exposed to fluctuations in interest rates. A 1% change
in interest rate would have increased (decreased) quarterly interest by $50.
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 an
insignificant impact on income. Balances denominated in foreign currencies that are considered financial instruments
65
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
are as follows:
December 31
December 31
Currency
2021
2020
Cash and cash equivalents
USD
$
26
$
45
Accounts payable and accrued
USD
526
695
liabilities
19. 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.
December 31
December 31
2021
2020
Cash and cash equivalents
$
(5,481)
$
(5,858)
Long term debt
19,791
28,144
Share capital
117,848
103,223
Contributed surplus
26,391
27,191
Deficit
(104,720)
(89,548)
$
53,829
$
63,152
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, 2020.
20. Government Grants
The Company determined it was eligible for both the Canadian Emergency Wage Subsidy (“CEWS”) and the Canada
Emergency Rent Subsidy (“CERS”) based on criteria prescribed by the Government of Canada. During the year ended
December 31, 2021, the Company recorded a benefit of $585 related to the CEWS program (2020 - $1,265). During
the year ended December 31, 2021, the Company recorded $276 related to the CERS program (2020 - $nil). Amounts
received related to the CEWS have been recorded as a reduction in salaries and related costs and amounts received
under the CERS program have been recorded as a reduction in other operating expenses.
66
TERAGO INC.
Notes to the Consolidated Financial Statements
(In thousands of Canadian dollars, except for per share amounts)
21. Assets Held for Sale
During the fourth quarter of the year ended December 31, 2021, TeraGo determined that the cloud and colocation
business was no longer core to the Company’s growth plans for its 5G private network business and determined to sell
the cloud and colocation business. In accordance with IFRS 5 – Non-current Assets Held for Sale and Discontinued
Operations, the assets and liabilities of the cloud and colocation business have been classified as a disposal group
held for sale. As at December 31, 2021, the sale of the cloud and colocation business was in the due diligence process,
there is a signed letter of intent and the transaction was expected to be completed and executed in Q1 of fiscal 2022.
As a result, the criteria for classifying the assets and liabilities of the cloud and colocation business as held for sale, in
accordance with IFRS 5, was met and the assets and liabilities were assessed for impairment and adjusted to their fair
values accordingly, this resulted in an impairment loss of $4,527 being recognized in the Statement of Comprehensive
Loss and a corresponding reduction to the goodwill assets included in the disposal group. The fair value of the assets
and liabilities was determined based on the final purchase price of the cloud and colocation business, less costs TeraGo
incurred to sell the business. The summary of the assets classified as held for sale and liabilities associated with assets
classified as held for sale as at December is as follows:
Assets Held for Sale
Accounts receivable
1,204
Contract costs
330
Prepaid expenses and other assets
398
Goodwill
14,032
Network assets, property and equipment
20,159
Other long-term assets
31
Intangible assets
3,798
Assets classified as held for sale
$
39,952
Account payables and accrued liabilities
1,610
Current portion of lease liabilities
2,225
Current portion contract liabilities
60
Lease liability
8,370
Liabilities associated with assets classified as
held for sale
$
12,265
As TeraGo has one CGU, the cloud and colocation business was not considered a discontinued operation.
22. Subsequent Events
On January 19, 2022, TeraGo and TeraGo Networks entered into an Asset Purchase Agreement to sell its cloud and
colocation services business to Hut 8 Mining Corp. (“Hut 8”) for $30.0 million (“Hut 8 Transaction”). As part of the Hut
8 Transaction, TeraGo Networks agreed to provide certain transitional services for up to six (6) months post-closing to
Hut 8 under a transition services agreement (“TSA’). The Hut 8 Transaction was successfully completed on January
31, 2022. Currently, TeraGo Networks is providing the transition services under the TSA, which are anticipated to be
completed by July 31, 2022.
On February 1, 2022, TeraGo repaid all indebtedness, liabilities and other obligations against the term debt facility,
and the facility was terminated. TeraGo was released and discharged from all obligations, liabilities, claims and
demands under and in respect of the credit facility, other than certain provisions which expressly survive repayment of
the obligations.
67
CORPORATE INFORMATION
DIRECTORS
CORPORATE HEAD OFFICE
55 Commerce Valley Drive West
Kenneth Campbell
Suite 800
Chair, TeraGo Inc.
Thornhill, Ontario L3T 7V9
Senior Advisor, Performance Management Partners
1.866.TeraGo.1 (837-2461)
Matthew Gerber
Chief Executive Officer, TeraGo Inc.
EXCHANGE LISTING
Michael Martin
Toronto Stock Exchange
Vice President of Technology, Metercor Inc.
STOCK SYMBOL
Richard Brekka
TGO
Managing Partner, Second Alpha Partners, LLC
Gary Sherlock
INVESTOR RELATIONS CONTACT
Chief Executive Officer, commercebuild Holdings Inc.
Matt Glover and John Yi
Gateway Group, Inc.
Laurel Buckner
Telephone: 949-574-3860
Managing Director, Riverstone Holdings, LLC
TGO@gatewayir.com
Martin (Marty) Pinnes
Chief Operating Officer, Shared Tower
WEBSITE
www.terago.ca
SENIOR LEADERSHIP TEAM
YEAR END
Matthew Gerber
December 31
Chief Executive Officer
Blake Wetzel
AUDITORS
Chief Operating Officer and Chief Revenue Officer
KPMG LLP
Vaughan, Ontario, Canada
Andy Ramsey
Vice President Finance and Interim Chief Financial
Officer
TRANSFER AGENT
Computershare Investor Services Inc.
Shaunik Katyal
Toronto, Ontario, Canada
General Counsel
68