TORONTO, ONTARIO — (Marketwired) — 03/17/16 — TeraGo Inc. (“TeraGo” or the “Company”) (TSX: TGO) (), today announced financial and operating results for the three months ended and year ended December 31, 2015.
Stewart Lyons, President and CEO of TeraGo commented, “I–m very pleased by our incredible success in the past year which has been reflected in our financial results and can be attributed to the hard working team we have in place who all shared the vision of seeing TeraGo become a multi-product IT services company, and I–m pleased to say this transition is now complete.”
Mr. Lyons added, “2015 was a transformational year for TeraGo. We successfully acquired and integrated two cloud service businesses and we were recognized by IDC, a leading third party research firm, as a Major Player in the Canadian Hybrid Cloud Services industry and by CIO Review magazine as one of the “20 Most Promising IT Infrastructure Solution Providers of 2015″. We look forward to building upon the success we achieved in 2015 through the addition of our many new products and services to our robust IT platform.”
Key Developments
1Non-IFRS Measures
This press release contains references to “Adjusted EBITDA” which is not a measure prescribed by International Financial Reporting Standards (IFRS). 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, stock-based compensation and restructuring, acquisition-related and integration costs. The Company believes that “Adjusted EBITDA” is useful additional information to management, the Board and investors as 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 imply they are non-recurring. Investors are cautioned that Adjusted EBITDA should not be construed as an alternative to operating earnings or net earnings determined in accordance with IFRS as an indicator of our financial performance or as a measure of our liquidity and cash flows. Adjusted EBITDA does not take into account the impact of working capital changes, capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed in the consolidated statements of cash flows.
A reconciliation of net earnings (loss) to Adjusted EBITDA is found in the MD&A for the year ended December 31, 2015. Adjusted EBITDA as presented may not be comparable to similar measures presented by other companies.
Conference Call
Management will host a conference call tomorrow, Friday, March 18, 2016, at 9:00 am ET to discuss these results.
To access the conference call, please dial 647-788-4919 or 1-877-291-4570. The audited financial statements for the year ended December 31, 2015 and Management–s Discussion & Analysis for the same period have been filed on SEDAR at . Alternatively, these documents along with a presentation in connection with the conference call can be accessed online at .
An archived recording of the conference call will be available until March 25, 2016. To listen to the recording, call 416-621-4642 or 1-800-585-8367 and enter passcode 70333451.
About TeraGo
TeraGo provides businesses across Canada and globally with network and voice services, data center services and enterprise infrastructure cloud services. TeraGo manages over 3,000 cloud workloads, seven data centers in the Greater Toronto Area, the Greater Vancouver Area, Ottawa, Kelowna and Winnipeg and owns and manages its own IP network. The Company serves over 4,000 business customers in 46 major markets across Canada including Toronto, Montreal, Calgary, Edmonton, Vancouver and Winnipeg. TeraGo Networks is a Competitive Local Exchange Carrier (CLEC) and was selected as one of Canada–s Top Small and Medium Employers for 2015 and is recognized as a Canadian Telecommunications Employer of Choice for 2015.
Forward-Looking Statements
This press release includes certain forward-looking statements that are made as of the date hereof. Such forward-looking statements may include, but are not limited to, statements relating to TeraGo–s growth strategy, the addition of new products and services in the future, the acceleration of the development and deployment of VMware vCloud powered services, acquisition opportunities and the integration of Rackforce Networks Inc. and CodeNinja Ltd. (doing business as BoxFabric) into the Company. 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. The forward-looking statements reflect the Company–s views with respect to future events and is subject to risks, uncertainties and assumptions, including the risk that TeraGo–s growth strategy and rate of growth will not generate the result intended by management, cross-selling of TeraGo–s cloud services may not succeed, TeraGo may not meet the growing and complex needs of its customers, retention efforts decreasing profit margins, opportunities for expansion and acquisition not being available or at unfavourable terms, the Company not being able to realize the anticipated benefits and synergies from combining and integrating Rackforce and BoxFabric into TeraGo–s existing business and those risks set forth in the “Risk Factors” section in the annual MD&A of the Company for the year ended December 31, 2015 available on . Accordingly, readers should not place undue reliance on 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. Except as may be required by applicable Canadian securities laws, TeraGo does not intend, and disclaims 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.
TERAGO INC.
MANAGEMENT–S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
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 17, 2016 and should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2015 and the notes thereto. Additional information relating to TeraGo, including our most recently filed Annual Information Form (“AIF”), can be found on SEDAR at and our website at . For greater certainty, the information contained on our website is not incorporated by reference or otherwise into this MD&A. All dollar amounts included in this MD&A are in Canadian dollars unless otherwise indicated.
Certain information included herein is forward-looking and based upon assumptions and anticipated results that are subject to uncertainties. Should one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected. For a description of material factors that could cause our actual results to differ materially, see the “Forward-Looking Statements” section and the “Risk Factors” section in this MD&A. This MD&A also contains certain industry-related non-GAAP and additional GAAP measures that management uses to evaluate performance of the Company. These non-GAAP and additional GAAP measures are not standardized and the Company–s calculation may differ from other issuers. See “Definitions – IFRS, Additional GAAP and Non-GAAP Measures”.
FORWARD-LOOKING STATEMENTS
This MD&A includes certain forward-looking statements that are made as of the date hereof only and based upon current expectations, which involve risks and uncertainties associated with our business and the economic environment in which the business operates. All such statements are made pursuant to the –safe harbour– provisions of, and are intended to be forward-looking statements under, applicable Canadian securities laws. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, the words anticipate, believe, plan, estimate, expect, intend, should, may, could, objective and similar expressions are intended to identify forward-looking statements. This MD&A includes, but is not limited to, forward looking statements regarding TeraGo–s growth strategy, the growth in the TeraGo–s cloud and data centre businesses, retention campaign and initiatives to improve customer service, additional capital expenditures, investments in data centres and other IT services and the integration of RackForce Networks Inc. (“RackForce”) and Codeninja Ltd. (doing business as “BoxFabric”) into the Company. 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 will not generate the result intended by management, cross-selling of TeraGo–s cloud services may not succeed, retention efforts decreasing profit margins, opportunities for expansion and acquisition not being available or at unfavourable terms, the Company not being able to realize the anticipated benefits and synergies from combining and integrating RackForce Networks Inc. and BoxFabric into TeraGo–s existing business and those risks set forth in the “Risk Factors” section of this MD&A and other uncertainties and potential events. In particular, if any of the risks materialize, the expectations, and the predictions based on them, of the Company may need to be re-evaluated. Consequently, all of the forward-looking statements in this MD&A are expressly qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences for the Company.
Except as may be required by applicable Canadian securities laws, we do not intend, and disclaim any obligation, to update or revise any forward-looking statements whether in words, oral or written as a result of new information, future events or otherwise.
OVERVIEW
Financial Highlights
Key Developments
TERAGO OVERVIEW
TeraGo, operating through its wholly-owned subsidiaries TeraGo Networks, RackForce and BoxFabric, provides businesses across Canada with data and voice communications services, data centre colocation and hosting services through its seven (7) data centres as well as cloud Infrastructure as a Service (“IaaS”) computing and storage solutions. With respect to the Company–s data and voice communications services, it owns and operates a carrier-grade, Multi-Protocol Label Switching (“MPLS”) enabled fixed wireless, IP communications network in Canada targeting businesses that require Internet access and data connectivity services.
Subsequent to its acquisitions of RackForce and BoxFabric, the Company now provides enterprise cloud services nationally and globally to multiple high value enterprise customers across a variety of verticals, including secondary and post-secondary education, hospitals, federal and provincial governments and non-profit organizations. The Company specializes in managing enterprise cloud services including IaaS and Platform as a Service (“PaaS”) with network. It currently has strategic relationships with several technology partners that give it access to certain products and solutions to provide enterprise cloud services.
The Company–s subscription-based business model generates stable and predictable recurring revenue from network services, data services, voice services, and cloud services. The Company offers its network and voice services across Canada and its data and cloud services globally. Once a customer is obtained, TeraGo–s strategy is to generate incremental recurring revenue from that customer by: adding new customer locations, increasing service capacity supplied to existing locations, increasing data centre cabinet space and power and/or providing additional services, as applicable.
TERAGO–S BUSINESS MODEL
TeraGo–s subscription-based business model generates stable and predictable recurring revenue from Internet, data, voice services, data centre services and cloud services.
TeraGo–s customers typically sign one, two or three-year contracts. The majority of new customers sign contracts for three years or more. Services are billed monthly or quarterly over the term of the contract.
With its entry into data centre services and cloud services, TeraGo has built an operating platform to service the IT solutions sector. Cross selling opportunities to the customer base, while leveraging the Company–s carrier grade network has augmented and diversified the Company–s revenue base.
CLOUD SERVICES
TeraGo provides cloud services that seek to meet the complex and evolving IT needs of our customers. TeraGo provides Infrastructure as a Service (“IaaS”) for compute, storage, disaster recovery cloud solutions and other offerings either on a direct or indirect basis. These solutions allow the Company to compete in the cloud services market.
The combination of TeraGo and Rackforce offers customized cloud storage and compute offerings to customers across Canada. TeraGo cloud can offer a virtualized computing environment whereby customers can access on-demand computing power without the need to acquire and maintain expensive server equipment. TeraGo can also provide offsite cloud storage for key backup and disaster recovery situations, including utilizing partnerships with software and hardware vendors such as Veeam and Solidfire. The Company has strategic relationships and partnerships with technology leaders such as IBM, Cisco, VMware, Mitel and others that gives it early access to intelligence, products and solutions to provide enterprise cloud services.
DATA CENTRE AND MANAGED SERVICES
TeraGo provides data centre services that protect and connect our customers– valuable information assets. Customers can provision computing equipment within shared partial cabinets or full, private cabinets, as well as customized caged space designed for their specific needs. TeraGo provides connectivity on redundant routes in and out of the facilities.
Hosting and colocation revenue is derived from set-up fees for new installations and monthly recurring charges based on the number of cabinets and/or the quantity of cage space, power requirements, managed services provided and Internet/data bandwidth requirements. Other services, such as disaster recovery services, are provided under custom contractual arrangements.
TeraGo also offers a variety of managed hosting solutions, which may require us to manage various aspects of a customer–s hardware, software or operating systems in public or privately accessible environment. TeraGo offers disaster recovery services on a custom basis. This includes back-up office facilities that can be used in case of disaster. These facilities can be provisioned at the data centre location and provide customers with the capability to restore office functionality with direct access to their information located in the data centre.
Our network can provide these customers Internet and/or secure private virtual LAN connections between the data centre facility and the customer–s office location(s).
Data centre services customers typically include national government agencies, financial services companies, cloud and data storage service providers, content and network service providers, and small and medium businesses which rely on TeraGo to store and manage their critical IT equipment and provide the ability to directly connect to the networks that enable our information-driven economy.
Data Centre Facilities
TeraGo–s data centres provide data centre solutions, including colocation and disaster recovery, to a roster of small and medium-sized businesses, enterprises, public sector and technology service providers. TeraGo has approximately 60,000 square feet of data centre capacity in seven facilities across Canada:
Vaughan, Ontario
TeraGo operates a 16,000 square foot AT 101 SOC2 Type 2 certified data centre facility in Vaughan, Ontario, serving the Greater Toronto Area. This data centre and its operations were purchased in May 2013 when the Company acquired Data Centres Canada Inc.
Mississauga, Ontario
TeraGo operates a 10,000 square foot AT 101 SOC2 Type 2 certified data centre facility in Mississauga, Ontario that was previously managed by BlackBerry Limited and built to a tier 3 standard. This facility predominantly serves the Greater Toronto Area.
Vancouver, British Columbia
TeraGo operates two AT 101 SOC2 Type 2 certified data centre facilities in downtown Vancouver. Its first facility, acquired in December 2013, is 5,000 square feet and is expandable to 7,000 square feet. The facility has redundant fibre facilities between the data centre and the –telco hotel–, 555 West Hastings, in downtown Vancouver. The second facility which was acquired in April 2014 is 7,000 square feet and is served by TeraGo–s fiber optic lines. Both facilities are used to service the Greater Vancouver Area.
Kelowna, British Columbia
TeraGo operates its 18,000 square feet AT 101 SOC2 Type 2 certified data centre in Kelowna named the GigaCenter. The Gigacenter is built to a tier 3 standard and the location in Kelowna is considered ideal for a data centre as the region is considered a seismically stable geographic location, has a temperate climate and has a lower probability of both natural and man-made events that may be a risk.
Winnipeg, Manitoba
TeraGo provides data centre services to its customers in central Canada through a data centre in Winnipeg. Colocation services, via the data centre facility, are provided through an agreement that TeraGo has with a local operator.
Ottawa, Ontario
TeraGo provides data centre services to its customers in Ottawa, Ontario through a Tier III AT 101 SOC 1 Type 2 certified data centre. Colocation services, via the data centre facility, are provided through an agreement that TeraGo has with a local operator.
NETWORK SERVICES
TeraGo owns and operates a carrier-grade Multi-Protocol Label Switching (“MPLS”) enabled wireline and fixed wireless, Internet Protocol (“IP”) communications network in Canada, providing businesses with high performance, scalable, and secure access and data connectivity services.
TeraGo–s carrier grade IP communication network serves an important and growing demand among Canadian businesses for network access diversity by offering wireless services that are redundant to their existing wireline broadband connections.
TeraGo–s IP network has been designed to eliminate single points of failure and the Company backs its services with customer service level commitments, including 99.9% service availability, industry leading mean time to repair, 24 x 7 telephone and e-mail access to technical support specialists.
TeraGo offers Canadian businesses high performance unlimited and usage-based dedicated Internet access with upload and download speeds from 5 megabits per second (“Mbps”) up to 1 gigabit per second (“Gbps”). Unlike asymmetrical DSL services offered by many of our competitors, TeraGo provides services that are symmetrical, hence customers can have the same high speed broadband performance whether uploading or downloading. TeraGo enhances service performance by minimizing the number of networks between our customers and their audiences, using peering arrangements with multiple tier-one carriers to connect to the Internet.
To deliver its services, the Company has built and operates a carrier-grade, IP network, using licensed and license-exempt spectrum and fibre-optic wireline infrastructure that supports commercially available equipment.
The Company owns and controls a national MPLS distribution network from Vancouver to Montreal that aggregates customer voice and data traffic and interconnects where necessary with carrier diverse leased fiber optic facilities. Major Internet peering and core locations are centralized in Vancouver, Toronto and Seattle, although Internet access is also available in all regional markets for further redundancy.
TeraGo offers a range of diverse Ethernet-based services over a secured wireless connection to customer locations up to 20 kilometres from a hub (provided line of sight or wireline networks exist) or through a fibre optic connection.
Quality of Service Capabilities
TeraGo–s MPLS network, including key high traffic hub sites, is equipped with Quality of Service (“QoS”) capabilities to improve performance and traffic management. All of TeraGo–s major national markets are end-to-end QoS enabled providing the foundation to support voice traffic and other potential future applications.
Radio Spectrum
24-GHz and 38-GHz Wide-area Licences
The Company owns a national spectrum portfolio of 24-GHz and 38-GHz wide-area spectrum licences which covers regions across Canada, including 1,160 MHz in Canada–s 6 largest cities. This spectrum is used for: point-to-point and point-to-multipoint microwave radio deployments; connecting core hubs together to create a wireless backbone where appropriate (often in a ring configuration to avoid points of failure); and in the access network or “last mile” to deliver high capacity (speeds of 10 to 1,000 Mbps) Ethernet-based links for business, government and cellular backhaul.
For further details on licensed spectrums, please refer to the Company–s 2015 AIF.
VOICE SERVICES
TeraGo provides a number of unified communications services and is approved by the Canadian Radio-television and Telecommunications Commission (“CRTC”) to offer voice services as a Type IV competitive local exchange carrier (“CLEC”). TeraGo provides businesses with a cost effective, flexible and high quality connection from their private branch exchange (PBX) to the public switched telephone network (PSTN). TeraGo–s service provides features and capabilities generally consistent with those provided by incumbent local exchange carriers (“ILECs”), while offering greater value for our customers.
SELECTED ANNUAL INFORMATION
The following table displays a summary of our Consolidated Statements of Comprehensive Earnings (Loss) for the three months ended December 31, 2015 and 2014 and the years ended December 31, 2015, 2014 and 2013 and a summary of select Balance Sheet data as at December 31, 2015, 2014 and 2013
RESULTS OF OPERATIONS
Comparison of the three months and year ended December 31, 2015 and 2014
(in thousands of dollars, except with respect to gross profit margin and loss per share)
Revenue
Total revenue increased by 19.6% to $15.1 million for the three months ended December 31, 2015 compared to $12.6 million for the same period in 2014. The increase in revenue is primarily driven by the growth in the Company–s cloud and data centre services resulting from the acquisitions of RackForce and BoxFabric. The Company continues its transition to focus on cloud and data centre services. The percentage of revenues from cloud and data centre services as a percentage of our total revenue have increased steadily quarter over quarter during 2015 (Q2 = 26%, Q3 = 27%, Q4 = 28%).
For the year ended December 31, 2015, total revenue increased by 11.7% to $57.7 million compared to $51.2 million for the same period in 2014. On a year over year basis, the growth in the Company–s cloud and data centre services were partially offset by a decline in network and voice services associated with the loss of a wireless entrant customer. Excluding revenues of $1.9 million attributable to a wireless entrant customer in the year ended December 31, 2014, network and voice revenues for the year ended December 31, 2015 decreased by 2.9% or $1.3 million compared to the same period in 2014.
Cost of services
Cost of services increased to $3.4 million and $13.2 million for the three months and the year ended December 31, 2015, respectively, compared with $2.6 million and $10.1 million for the same periods in 2014. The increase is mainly due to introduction of costs associated with owning RackForce. To a lesser extent, higher utilities costs associated with increased data centre utilization also contributed to the increase compared to the prior year.
Salaries and related costs and other operating expenses (“SG&A”)
SG&A expenses increased to $7.4 million and $30.6 million for the three months and year ended Dec 31, 2015, respectively, compared with $7.3 million and $29.8 million for the same periods in 2014. The increase in both periods is directly attributable to the introduction of costs associated with the RackForce operations, mainly offset by a decrease in personnel costs associated with certain headcount reductions and other operational efficiency initiatives.
Adjusted EBITDA
Adjusted EBITDA increased 23.1% to $4.9 million for the three months ended December 31, 2015 compared to $4.0 million for the same period in 2014. For the year ending December 31, 2015, Adjusted EBITDA increased by 13.8% to $18.4 million compared to $16.2 million for the same period in 2014. The increase in both periods is a results of the revenue gains described above, reductions in personnel costs and RackForce synergies obtained from the Company–s restructuring efforts in prior periods offset by the introduction of costs associated with owning RackForce.
The table below reconciles net loss to Adjusted EBITDA for the three months and year ended December 31, 2015 and 2014.
Income tax expense (recovery)
During the year ended December 31, 2015, management reviewed the tax implication of its acquisitions in the year. Management determined it probable that the tax benefit of $1.1 million for the year ended December 31, 2015 (associated with previously unrecognized tax losses) would have future taxable income available against which it can be utilized. The deferred tax asset was determined based on existing laws, estimates of future probability based on financial forecasts and tax planning strategies.
Finance costs
Finance costs increased $0.2 million and $0.1 million for the three months and the year ended December 31, 2015 compared to the same periods in 2014. The increase in both periods was driven by higher debt levels associated with the cash proceeds drawn on the amended credit facility to finance the acquisition of RackForce and the mark to market impact of revaluing the Company–s interest rate swap contract on the drawn credit facility.
Depreciation and amortization
Depreciation of network assets, property and equipment and amortization of intangibles increased to $4.0 million and $15.1 million for the three months and the year ended December 31, 2015 compared with $3.3 million and $13.3 million for the same periods in 2014. The increase in both periods is mainly attributed to the depreciation and amortization of RackForce acquired intangible and cloud and data centre infrastructure.
Stock based compensation expense
Stock based compensation expense decreased to $0.3 million and $1.3 million for three months and the year ended December 31, 2015 compared with $0.4 million and $2.0 million for the same periods in 2014. The improvement for the three months ended December 31, 2015 is mainly due to a decrease in stock option expense associated with fewer options vesting in the period vs. the prior year, partially offset by higher stock based director fees and performance share unit fees. In addition, the stock based compensation expense for the year end December 31, 2014 included a one-time stock based compensation expense of $0.6 million that was incurred in Q1 2014 related to a former officer of the Company.
Net loss
Net loss was $0.2 million and $2.8 million for the three months and year end ended December 31, 2015, compared to a net loss of $1.1 million and $3.9 million for the same periods in 2014. For the three months ended December 31, 2015 net loss was positively impacted by revenue growth in the cloud and data centre services associated with the RackForce acquisition and lower restructuring, acquisition-related and integration costs, offset by incremental depreciation/amortization costs associated with the acquired RackForce assets and higher finance costs to finance the acquisition of RackForce compared to the same period in 2014. For the year ended December 31, 2015, net loss compared to the same period in the prior year was positively impacted by similar factors identified in the three months ended December 31, 2015 including the recognition of $ 1.1 million of deferred income taxes resulting from the expected utilization of deferred tax assets following the acquisition of RackForce, offset by higher restructuring, acquisition-related and integration costs in 2015 compared to the same period in 2014.
Summary of Quarterly Results
All financial results are in thousands, with the exception of earnings per share.
Seasonality
The Company–s net customer growth, with respect to its network 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.
The Company–s cash flow and earnings are typically impacted in the first quarter of the year due to several annual agreements requiring payments in the first quarter including annual rate increases in long-term contracts and the restart on January 1st of payroll taxes and other levies related to employee compensation.
LIQUIDITY AND CAPITAL RESOURCES
TeraGo has historically financed its growth and operations through cash generated by operations, the issuance of equity securities and long-term debt.
The table below is a summary of cash inflows and outflows by activity.
Operating Activities
For the three months and the year ended December 31, 2015, cash generated from operating activities was $5.2 million and $15.7 million, respectively, compared to cash generated of $3.9 million and $13.6 million for the same periods in 2014. The increase in cash from operating activities for both periods is due to higher earnings from operations and favourable changes to non-cash working capital compared to the prior year.
Investing Activities
Cash used in investing activities was $1.3 million and $41.1 million for the three months and year ended December 31, 2015, respectively, compared to cash used of $2.5 million and $11.6 million for the same periods in 2014. The decrease in cash used during the three month period vs. prior year is mainly due to higher network related capital expenditures in the prior year. The increase in cash used during the year vs. prior year is primarily due the acquisitions of RackForce in Q1 2015 ($30.3 million) and BoxFabric in Q3 2015, offset by lower network related capital expenditures
Financing Activities
Cash used in financing activities was $1.5 million and $1.8 million for the three months ended December 31, 2015 and the same period in 2014, respectively. Cash generated from financing activities was $35.6 million and cash used in financing activities was $1.3 million for the year ended December 31, 2015 and 2014, respectively. The decrease in cash used from financing activities during the three month period vs. prior year is mainly an increase in cash proceeds from the exercise of stock options. The increase in cash generated from financing activities during the year ended December 31, 2015 vs. prior year is primarily due to the $31.5 million in cash proceeds drawn from the Company–s amended credit facility in Q1 2015 along with the $9.2 million net cash proceeds received from the equity offering in Q2 2015.
Capital Resources
As at December 31, 2015, the Company had cash and cash equivalents of $13.1 million and access to the $34.3 million undrawn portion of its $85.0 million Credit Facilities.
The Company anticipates incurring additional capital expenditures for the purchase and installation of network, data centre and cloud assets and customer premise equipment. As economic conditions warrant, the Company may expand its network coverage into new Canadian markets using wireless or fibre optics and making additional investments in data centres, cloud and other IT services through acquisitions or expansion.
In June 2014, the Company entered into an agreement with a syndicate led by the National Bank of Canada (“NBC”) to provide a $50.0 million credit facility that is principally secured by a general security agreement over the Company–s assets.
In March 2015, the Company entered into an amended agreement with the syndicate led by NBC that increases the credit facility by $35.0 million ($30.0 million increase to the term debt facility and $5.0 million increase to the revolving facility) and extended the term from June 6, 2017 to June 30, 2018. Other terms are substantially consistent with the existing credit facilities.
The total $85.0 million facility that matures June 30, 2018 is made up of the following:
In connection with the amended agreement, the Company incurred financing fees of $0.4 million which have been deferred and amortized using the effective interest method over the term of the facility. The balance of previously incurred financing fees are amortized over the same amended term.
The NBC facility is subject to certain financial and non-financial covenants which the Company is in compliance with at December 31, 2015. Under this facility, the Company is also subject to a cash flow sweep that could accelerate principal repayments based on a detailed calculation outlined by NBC not later than 120 days after the end of each fiscal year. At December 31, 2015, the calculation resulted in the Company exceeding the ratio that triggers the cash flow sweep by 0.03. Based on these results, the Company requested the lenders to forego the $862 cash flow sweep for the year ended December 31, 2015, to which the lenders agreed to subsequent to year end.
Management believes the Company–s current cash, anticipated cash from operations, access to the undrawn portion of debt facilities and its access to additional financing in the form of debt or equity will be sufficient to meet its working capital and capital expenditure requirements for the foreseeable future.
Equity Offering
On June 11, 2015, the Company completed an equity offering to issue and sell 1,755 common shares for gross proceeds of $10.0 million (the “Offering”). Proceeds net of commissions, legal, accounting and listing fees were $9.2 million. The Offering was carried out pursuant to an underwriting agreement with a syndicate of underwriters led by National Bank Financial Inc. and TD Securities Inc. and included Cormark Securities Inc., PI Financial Corp. and RBC Capital Markets.
The Company intends to allocate $9.2 million of the net proceeds from the equity offering as follows:
As of December 31, 2015, $1.1 million of the net proceeds from the equity offering were used to fund the acquisition of BoxFabric in Q3 2015. The Company–s intended use of these proceeds has not changed.
Contractual Obligations
The Company is committed to leases for premises, office equipment, network real estate access, automobiles, telecommunication facilities and radio spectrum licenses. Annual minimum payments over the next five years and thereafter are as follows:
Off-Balance Sheet Arrangements
As of December 31, 2015, the Company had no off-balance sheet arrangements apart from operating leases noted above.
Transactions with Related Parties
Two Directors of the Company also serve as Chairman of the Board and a Director of a customer of the Company. Revenue from this customer for the years ended December 31, 2015 and 2014 was $0.1 million and $0.1 million, respectively. Accounts receivable from this customer as at December 31, 2015 and 2014 was $0.01 million in both periods.
The terms governing these related party transactions are consistent with those negotiated on an arm–s length basis with non-related parties.
Share Capital
TeraGo–s authorized share capital consists of an unlimited number of Common Shares, an unlimited number of Class A Non-Voting Shares and two Class B Shares. A detailed description of the rights, privileges, restrictions and conditions attached to the authorized shares is included in the Company–s 2015 Annual Information Form, a copy of which can be found on SEDAR at .
As of March 17, 2016, there were 14,134 Common Shares issued and outstanding and two Class B Shares issued and outstanding. In addition, as of March 17, 2016, there were 682 Common Shares issuable upon exercise of TeraGo stock options.
Restricted Cash
(a) Indemnity
On June 18, 2007, two former officers exchanged 287 and 63 options respectively to purchase Common Shares, at an exercise price of $4 per share with options to purchase 189 and 41 Common Shares at nil exercise price. The exchanged options had a value equal to the original options on the date of the exchange. On June 18, 2007, these options were exercised to facilitate Common Share ownership and as a result, the two officers received 189 and 41 Common Shares, respectively, pursuant to such exercise. The Company provided the officers with an indemnity with a combined maximum coverage of $1.0 million to cover any potential negative personal tax consequences that might arise as a result of the early exercise of these options. Under the indemnity agreement, which expired June 2015, the restricted cash was to be segregated for the period of the indemnity and invested in a guaranteed investment certificate.
During the third quarter of 2009, the Company received notice of a claim from one of the former officers against the restricted cash balance relating to the sale of the 41 Common Shares. The notice of claim was settled in 2010 for $0.2 million.
In 2014, the Company received a notice of a claim against the tax indemnity from the other former officer relating to the sale of 189 Common Shares. The Company estimated the cost of the indemnity to be paid from the $0.8 million maximum allocated to the former officer and recorded stock-based compensation expense of $0.6 million related to this claim in the first quarter of 2014. During 2015, the Company settled the claim with the former officer for $0.6 million.
(b) Funds held in escrow
As at December 31, 2015, $0.2 million is held in escrow by the Company related to the acquisition of BoxFabric.
Financial Instruments
The Company initially measures financial instruments at fair value. Transaction costs that are directly attributable to the issuance of financial assets or liabilities are accounted for as part of the carrying value at inception (except for transaction costs related to financial instruments recorded as FVTPL financial assets which are expensed as incurred), and are recognized over the term of the assets or liabilities using the effective interest method.
Subsequent measurement and treatment of any gain or loss is recorded as follows:
The following is a summary of the Company–s significant categories of financial instruments as at December 31, 2015:
Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets currently are comprised of cash and cash equivalents, accounts receivable and restricted cash.
Impairment of Financial Assets
A financial asset carried at amortized cost is considered impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flow of that asset that can be estimated reliably. An impairment loss is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset–s original effective interest rate.
In assessing impairment, the Company uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management–s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. Losses are recognized in the consolidated statements of loss and reflected in an allowance account against the financial asset.
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 and 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 reporting period.
Derivative instruments
The Company uses an interest rate swap contract to manage the risk associated with the fluctuations of interest rates on its long-term debt. Management does not apply hedge accounting on the interest rate swap contract. As a result, the interest rate swap contract is marked to market each period, resulting in a gain or loss in net loss for the year.
Financial Instrument Risks
Fair value of financial instruments
The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies. Where quoted market values are not readily available, the Company may use considerable judgment to develop estimates of fair value. Accordingly, any estimated values are not necessarily indicative of the amounts the Company could realize in a current market exchange and could be materially affected by the use of different assumptions or methodologies. The Company classifies its fair value measurements within a fair value hierarchy, which reflects the significance of the inputs used in making the measurements as defined in IFRS 7 – Financial Instruments – Disclosures.
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly; and
Level 3 – Unobservable inputs for the asset or liability which are supported by little or no market activity
The fair values of cash and cash equivalents and restricted cash, which are primarily money market and fixed income securities, are based on quoted market values. The fair values of short-term financial assets and liabilities, including accounts receivable, accounts payable and accrued liabilities, as presented in the consolidated statements of financial position, approximate their carrying amounts due to their short-term maturities. The fair value of long-term debt approximates its carrying value because management believes the interest rates approximate the market interest rate for similar debt with similar security. The fair value of the interest rate swap contract is based on broker quotes and therefore, these contracts are measured using Level 2 inputs. Similar contracts are traded in an active market and the quotes reflect the actual transactions in similar instruments.
Credit risk
The Company–s cash and cash equivalents and restricted cash subject the Company to credit risk. The Company holds low risk money market and fixed income securities, as per its practice of protecting its capital rather than maximizing investment yield. The Company maintains cash and investment balances at Tier 1 Canadian financial institutions. The Company–s maximum exposure to credit risk is limited to the amount of cash and cash equivalents and short-term investments.
Credit risk related to the interest rate swap contract arises from the possibility that the counter party to the agreement may default on their obligation. The Company assesses the creditworthiness of the counterparty to minimize the risk of counterparty default. The interest rate swap is held by a financial institution with a Standard & Poor–s rating of A.
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, 2015 and 2014, the Company had no material past due trade accounts receivable.
Interest rate risk
The Company is subject to interest rate risk on its cash and cash equivalents and long-term debt. The Company is exposed to interest rate risk on its operating line of credit since the interest rates applicable are variable and is, therefore, exposed to cash flow risks resulting from interest rate fluctuations. As at December 31, 2015, the operating line of credit balance was $nil. The drawn term facility as at December 31, 2015 was $46.3 million, $46.2 million of which was held in a Bankers Acceptance. During the year, the Company entered into amended interest rate swap contracts that mature June 29, 2018 to fix the interest rate on the Banker–s Acceptance at an average rate of 4.24%. The remaining $0.1 million drawn under this facility bears interest for the period at prime rate plus a margin.
Liquidity risk
The Company believes that its current cash and cash equivalents and anticipated cash from operations will be sufficient to meet its working capital and capital expenditure requirements for the foreseeable future. As at December 31, 2015, the Company had cash and cash equivalents of $13.1 million. The Company has access to the $34.3 million undrawn portion of its $85 million credit facilities after consideration of outstanding letters of credit.
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 U.S. dollar. The Company believes this risk is minimal and does not use financial instruments to hedge these risks. A one cent appreciation in the U.S dollar to Canadian dollar foreign exchange rate would have resulted in a decrease in income of $34 for the year end December 31, 2015.
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:
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.
Judgments and estimates are used in assessing the direct labour and other costs capitalized to network assets, property and equipment.
Judgment is required to assess the Company–s determination of cash generating units for the purpose of impairment testing.
The process to calculate the recoverable amount of our cash generating unit requires use of valuation methods such as the discounted cash flow method which uses assumptions of key variables including future cash flows, discount rate and terminal growth rates.
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 earnings for the period.
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.
The amount of goodwill initially recognized as a result of a business combination, the fair value estimate of any contingent consideration and the determination of the fair value of the identifiable assets acquired and the liabilities assumed is based, to a considerable extent, on management–s estimate of future cash flows expected to be derived from the assets acquired.
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.
Judgment is required to assess the likelihood of an outflow of the economic benefits to settle contingencies, such as litigation or decommissioning and restoration obligations, which may require a liability to be recognized. Significant judgments include assessing estimates of future cash flows, selection of discount rates and the probability of the occurrence of future events.
RISK FACTORS
TeraGo is exposed to a number of risks and uncertainties that are common to other companies engaged in the same or similar businesses. The following is a summary of the material risks that could significantly affect the financial condition, operating results or business of TeraGo.
Revenues and Operating Results Can Fluctuate
Our revenue in past periods may not be indicative of future performance from quarter to quarter or year to year. In addition, our operating results may not follow any past trends. The factors affecting our revenue and results, many of which are outside of our control, include:
Transition of the Company to a Multi-Product IT Services Company
In the past, the core business of the Company was to provide internet access services. The Company is currently transitioning to a multi-product IT services company focused on the management of its customer–s data flow. In doing so, TeraGo has begun to offer colocation services through its data centres and is offering cloud storage and cloud computing services. If TeraGo is unable to execute on its new business strategy and to grow the business, either as a result of the risks identified in this section or for any other reason, the business, prospects, financial condition and results of operations will be materially and adversely affected. There is no assurance that such objectives can be obtained and there could be a risk that there may be future delays in the transition process of the Company to a multi-product IT services company that is profitable.
Integration and Anticipated Benefits Pursuant to the Acquisition of RackForce and BoxFabric
On March 27, 2015, the Company completed the acquisition of RackForce and on September 18, 2015, the Company completed the acquisition of BoxFabric (collectively the “Acquisitions”). The Company may not be able to fully realize the anticipated future benefits and synergies of the Acquisitions on a timely basis or at all. The Acquisitions involve challenges and risks, including risks that the transactions do not advance TeraGo–s business strategy or that the Company will not realize a satisfactory return. The potential failure of the due diligence processes to identify significant problems, liabilities or other shortcomings or challenges with respect to assets of RackForce and BoxFabric including customer contracts, condition of the equipment acquired, intellectual property, revenue recognition or other accounting practices, taxes, corporate governance and internal controls, regulatory compliance, employee, supplier or partner disputes or issues and other legal and financial contingencies could decrease or eliminate the anticipated benefits and synergies of the Acquisitions and could negatively affect the Company–s future business and financial results.
The overall success of the Acquisitions will depend, in part, on the Company–s ability to realize the anticipated benefits and synergies from combining and integrating the RackForce and BoxFabric businesses into TeraGo–s existing business. In particular, the Company–s offering of cloud services is relatively new and the limited experience of management in providing cloud services prior to the Acquisitions may limit the full benefits or continued growth of such business. Integration of RackForce and BoxFabric requires significant management attention and expansion of TeraGo–s staff in operations, marketing, sales and general and administrative functions. The Company may have difficulties in the integration of the acquired company–s departments, systems, including accounting, human resource and other administrative systems, technologies, books and records, and procedures, as well as in maintaining uniform standards, controls, including internal control over financial reporting required by Canadian securities laws and related procedures and policies. If we cannot integrate the Acquisitions successfully, it could have a material adverse impact on our business, financial condition and results of operations.
As part of the Company–s business strategy, TeraGo may also continue to acquire additional companies, assets or technologies principally related to, or complementary to, our current operations. Any such acquisitions will be accompanied by certain risks including but not limited to exposure to unknown liabilities of acquired companies, higher than anticipated acquisition costs and expenses, the difficulty and expense of integrating operations, systems, and personnel of acquired companies, disruption of the Company–s ongoing business, inability to retain key customers, distributors, vendors and other business partners of the acquired company, diversion of management–s time and attention; and possible dilution to shareholders.
Price Sensitive Market
The competitive market in which the Company conducts its business could require the Company to reduce its prices. If competitors offer discounts on certain products or services in an effort to recapture or gain market share or to sell other products, the Company may be required to lower prices or offer other favourable terms to compete successfully. Any such changes would likely reduce the Company–s margins and could adversely affect operating results. Some of the Company–s competitors may bundle services that compete with the Company for promotional purposes or as a long-term pricing strategy or provide guarantees of prices and product implementations. These practices could, over time, limit the prices that the Company can charge for its products. If the Company cannot offset price reductions with a corresponding increase in volume, bundling of services or with lower spending, then the reduced revenues resulting from lower prices would adversely affect the Company–s margins and operating results.
Market Demand for Available Capacity
The Company currently has available capacity in its data centres and intends to expand its footprint in the cloud and data centre market. There can be no assurance that the existing or future market demand will be sufficient to fill this capacity. Should the demand for the Company–s cloud and data centre services decline or fail to increase, this may negatively affect the Company–s ability to capitalize on its high operating leverage and may adversely affect the Company–s future financial performance.
Reductions in the amount or cancellations of customers– orders would adversely affect our business, results of operations and financial condition.
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 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 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 prospects.
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:
An increase in customer churn can lead to slower customer growth, increased costs and a reduction in revenue. Given the current economic environment, there is risk that churn levels could increase in the future.
Insufficient Capital
The continued growth and operation of our business may require additional funding for working capital, debt service, the enhancement and upgrade of our network, the build-out of infrastructure to expand the coverage area of our services, possible acquisitions and possible bids to acquire spectrum licences. We may be unable to secure such funding when needed in adequate amounts or on acceptable terms, if at all.
To execute our business strategy, we may issue additional equity securities in public or private offerings, potentially at a price lower than the market price at the time of such issuance. Similarly, we may seek debt financing and we may be forced to incur significant interest expense. If we cannot secure sufficient funding, we may be forced to forego strategic opportunities or delay, scale back or eliminate network deployments, operations, acquisitions, spectrum acquisitions and other investments.
Reliance on Credit Facilities and Restrictive Debt Covenants
The Company relies on its Credit Facilities to operate its business, including for the maintenance of a certain level of liquidity and to carry out its strategy. There can be no assurance that the Company will continue to have access to appropriate Credit Facilities on reasonable terms and conditions, if at all. An inability to draw down upon the Credit Facilities could have a material adverse effect on the Company–s business, liquidity, financial condition and results of operations.
Covenants in our Credit Facilities with our lenders impose operating and financial restrictions on us. A breach of any of these covenants could result in a default under our Credit Facilities. These restrictions may limit our ability to obtain additional financing, withstand downturns in our business and take advantage of business opportunities. Moreover, we may be required to seek additional debt financing on terms that include more restrictive covenants, may require repayment on an accelerated schedule or may impose other obligations that limit our ability to grow our business, acquire needed assets, or take other actions we might otherwise consider appropriate or desirable.
Key Competitors are More Established and Have More Resources
The market for internet access, data connectivity, cloud and data centre services is highly competitive and we compete with several other companies within each of our markets. Many of our competitors are better established or have greater financial resources than we have. Our competitors include:
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 a
You must be logged in to post a comment Login