UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of November 2022
Commission File Number: 001-41175
Sangoma Technologies Corporation
(Exact name of Registrant as specified in its charter)
N/A
(Translation of registrant's name into English)
100 Renfrew Drive
Suite 100
Markham, Ontario, Canada L3R 9R6
(905) 474-1990
(Address and telephone number of registrant’s principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F [ ] Form 40-F [ X ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
INCORPORATION BY REFERENCE
Exhibit 99.1 and 99.2 of this Form 6-K is incorporated by reference as an additional exhibit to the registrant's Registration Statement on Form F-10 (File No. 333-261071).
DOCUMENTS INCLUDED AS PART OF THIS REPORT
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Sangoma Technologies Corporation | |||
Date: November 10, 2022 | By: | /s/ Larry Stock | |
Name: Larry Stock | |||
Title: Chief Financial Officer | |||
Exhibit 99.1
SANGOMA TECHNOLOGIES CORPORATION
Condensed consolidated interim financial statements for
the three month periods ended September 30, 2022 and 2021
(Unaudited in thousands of US Dollars)
100 Renfrew Drive, Suite 100,
Markham, Ontario,
Canada L3R 9R6
Sangoma Technologies Corporation
September 30, 2022 and 2021
Table of contents
Condensed consolidated interim statements of financial position | 3 | |||
Condensed consolidated interim statements of income (loss) and comprehensive income (loss) | 4 | |||
Condensed consolidated interim statements of changes in shareholders’ equity | 5 | |||
Condensed consolidated interim statements of cash flows | 6 | |||
Notes to the condensed consolidated interim financial statements | 7-28 |
2 |
Sangoma Technologies Corporation
Condensed consolidated interim statements of financial position
As at September 30, 2022, and June 30, 2022
(Unaudited in thousands of US dollars, except per share data)
September 30, | June 30, | |||||||
2022 | 2022 | |||||||
$ | $ | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents (Note 4) | 8,286 | 12,702 | ||||||
Trade and other receivables (Note 4, 20) | 25,117 | 23,943 | ||||||
Inventories (Note 6) | 19,067 | 17,426 | ||||||
Income tax receivable | 653 | - | ||||||
Contract assets | 1,398 | 1,225 | ||||||
Derivative assets (Note 15) | 2,357 | 1,348 | ||||||
Other current assets | 3,183 | 4,364 | ||||||
60,061 | 61,008 | |||||||
Non-current assets | ||||||||
Property and equipment (Note 7) | 9,594 | 10,274 | ||||||
Right-of-use assets (Note 8) | 15,986 | 16,974 | ||||||
Intangible assets (Note 9) | 182,792 | 191,369 | ||||||
Development costs (Note 10) | 4,207 | 2,861 | ||||||
Deferred income tax assets | 2,790 | 2,762 | ||||||
Goodwill (Note 12) | 210,009 | 210,009 | ||||||
Contract assets | 2,827 | 2,567 | ||||||
Other non-current assets | 661 | 709 | ||||||
488,927 | 498,533 | |||||||
Liabilities | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities (Note 4) | 27,625 | 28,568 | ||||||
Provisions (Note 13) | 237 | 200 | ||||||
Sales tax payable | 5,636 | 5,895 | ||||||
Income tax payable | - | 1,885 | ||||||
Consideration payable (Note 14) | 7,579 | 8,986 | ||||||
Operating facility and loans (Note 15) | 17,700 | 17,700 | ||||||
Contract liabilities (Note 16) | 10,933 | 11,580 | ||||||
Lease obligations on right-of-use assets (Note 8) | 3,378 | 3,592 | ||||||
73,088 | 78,406 | |||||||
Long term liabilities | ||||||||
Consideration payable (Note 14) | 3,782 | 3,782 | ||||||
Operating facility and loans (Note 15) | 82,500 | 86,925 | ||||||
Contract liabilities (Note 16) | 3,718 | 3,487 | ||||||
Non-current lease obligations on right-of-use assets (Note 8) | 13,638 | 14,397 | ||||||
Deferred income tax liabilities | 18,085 | 16,657 | ||||||
Other non-current liabilities | 1,024 | 1,071 | ||||||
195,835 | 204,725 | |||||||
Shareholders’ equity | ||||||||
Share capital | 215,929 | 203,032 | ||||||
Shares to be issued | 166,162 | 179,132 | ||||||
Contributed surplus | 15,951 | 15,055 | ||||||
Accumulated other comprehensive income | 1,276 | 839 | ||||||
Retained earnings (deficit) | (106,226 | ) | (104,250 | ) | ||||
293,092 | 293,808 | |||||||
488,927 | 498,533 | |||||||
Subsequent events (Note 21) |
Approved by the Board | ||||||
(Signed) | Al Guarino | Director | ||||
(Signed) | Allan Brett | Director |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
3 |
Sangoma Technologies Corporation
Condensed consolidated interim statements of income (loss) and comprehensive income (loss)
For the three month periods ended September 30, 2022 and 2021
(Unaudited in thousands of US dollars, except per share data)
Three month periods ended September 30, | ||||||||
2022 | 2021 | |||||||
(Note 2) | ||||||||
$ | $ | |||||||
Revenue (Note 19) | 64,051 | 51,499 | ||||||
Cost of sales | 20,714 | 14,626 | ||||||
Gross profit | 43,337 | 36,873 | ||||||
Expenses | ||||||||
Sales and marketing | 15,648 | 12,107 | ||||||
Research and development | 9,429 | 8,360 | ||||||
General and administration | 19,293 | 17,267 | ||||||
Foreign currency exchange (gain) loss | 36 | (7 | ) | |||||
44,406 | 37,727 | |||||||
Income (loss) before interest expense (net), business integration costs, | ||||||||
gain on change in fair value of consideration payable | ||||||||
and income taxes | (1,069 | ) | (854 | ) | ||||
Interest expense (net) (Notes 4, 8, 14, 15) | 1,578 | 656 | ||||||
Business integration costs | 52 | 836 | ||||||
(Gain) loss on change in fair value of consideration payable (Note 14) | (1,581 | ) | 247 | |||||
49 | 1,739 | |||||||
Loss before income tax | (1,118 | ) | (2,593 | ) | ||||
Provision for income taxes | ||||||||
Current (Note 11) | 41 | 370 | ||||||
Deferred (Note 11) | 817 | (662 | ) | |||||
Net loss | (1,976 | ) | (2,301 | ) | ||||
Other comprehensive income (loss) | ||||||||
Items to be reclassified to net income (loss) | ||||||||
Change in fair value of interest rate | ||||||||
swaps, net of tax (Note 15) | 437 | 39 | ||||||
Comprehensive loss | (1,539 | ) | (2,262 | ) | ||||
Earnings (loss) per share | ||||||||
Basic (Note 17(iii)) | $ | (0.060 | ) | $ | (0.073 | ) | ||
Diluted (Note 17(iii)) | $ | (0.060 | ) | $ | (0.073 | ) | ||
Weighted average number | ||||||||
of shares outstanding (Note 17(iii)) | ||||||||
Basic | 32,952,999 | 31,717,214 | ||||||
Diluted | 32,952,999 | 31,717,214 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
4 |
Sangoma Technologies Corporation
Condensed consolidated interim statements of changes in shareholders' equity
For the three month periods ended September 30, 2022 and 2021
(Unaudited in thousands of US dollars, except per share data)
Number of | Shares | Accumulated other | Total | |||||||||||||||||||||||||
common | Share | to be | Contributed | comprehensive | Retained | shareholders' | ||||||||||||||||||||||
shares | capital | issued | surplus | income (loss) | earnings (deficit) | equity | ||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Balance, July 1, 2021 | 19,021,642 | 172,462 | 192,102 | 5,393 | (333 | ) | 6,530 | 376,154 | ||||||||||||||||||||
Net loss | - | - | - | - | - | (2,301 | ) | (2,301 | ) | |||||||||||||||||||
Change in fair value of interest rate swaps, | ||||||||||||||||||||||||||||
net of tax (Note 15) | - | - | - | - | 39 | - | 39 | |||||||||||||||||||||
Rounding of fractional shares | ||||||||||||||||||||||||||||
after share consolidation | (28 | ) | - | - | - | - | - | - | ||||||||||||||||||||
Share-based compensation expense (Note 17(ii)) | - | - | - | 2,119 | - | - | 2,119 | |||||||||||||||||||||
Balance, September 30, 2021 | 19,021,614 | 172,462 | 192,102 | 7,512 | (294 | ) | 4,229 | 376,011 | ||||||||||||||||||||
Balance, July 1, 2022 | 21,439,632 | 203,032 | 179,132 | 15,055 | 839 | (104,250 | ) | 293,808 | ||||||||||||||||||||
Net loss | - | - | - | - | - | (1,976 | ) | (1,976 | ) | |||||||||||||||||||
Change in fair value of interest rate swaps, | ||||||||||||||||||||||||||||
net of tax (Note 15) | - | - | - | - | 437 | - | 437 | |||||||||||||||||||||
Common shares issued | ||||||||||||||||||||||||||||
as instalment for shares to be issued (Note 17(i)) | 857,144 | 12,970 | (12,970 | ) | - | |||||||||||||||||||||||
Common shares issued | ||||||||||||||||||||||||||||
for options exercised (Note 17(i)) | 8,797 | 55 | - | (19 | ) | - | - | 36 | ||||||||||||||||||||
Common shares | ||||||||||||||||||||||||||||
purchased and cancelled (Note 17(i)) | (16,200 | ) | (128 | ) | - | - | - | - | (128 | ) | ||||||||||||||||||
Share-based compensation expense (Note 17(ii)) | - | - | - | 915 | - | - | 915 | |||||||||||||||||||||
Balance, September 30, 2022 | 22,289,373 | 215,929 | 166,162 | 15,951 | 1,276 | (106,226 | ) | 293,092 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
5 |
Sangoma Technologies Corporation
Condensed consolidated interim statements of cash flows
For the three month periods ended September 30, 2022 and 2021
(Unaudited in thousands of US dollars, except per share data)
Three month periods ended September 30, | ||||||||
2022 | 2021 | |||||||
Operating activities | $ | $ | ||||||
Net loss | (1,976 | ) | (2,301 | ) | ||||
Adjustments for: | ||||||||
Depreciation of property and equipment (Note 7) | 1,306 | 443 | ||||||
Depreciation of right-of-use assets (Note 8) | 996 | 730 | ||||||
Amortization of intangible assets (Note 9) | 8,577 | 7,655 | ||||||
Amortization of development costs (Note 10) | 422 | 175 | ||||||
Income tax expense (Note 11) | 858 | (662 | ) | |||||
Income tax paid | (2,532 | ) | (1,010 | ) | ||||
Share-based compensation expense (Note 17(ii)) | 915 | 2,119 | ||||||
Interest on obligation on right-of-use assets (Note 8) | 129 | 120 | ||||||
Unrealized foreign exchange gain (loss) | (46 | ) | 387 | |||||
Accretion expense (Note 14) | 174 | - | ||||||
Gain on lease modification (Note 8) | (34 | ) | - | |||||
Loss on disposal of property and equipment (Note 7) | 81 | - | ||||||
(Gain) loss on change in fair value of consideration payable (Note 14) | (1,581 | ) | 247 | |||||
Changes in working capital | ||||||||
Trade receivables | (1,174 | ) | 664 | |||||
Inventories | (1,641 | ) | (867 | ) | ||||
Income tax receivable | - | 10 | ||||||
Contract assets | (433 | ) | (511 | ) | ||||
Other assets | 1,229 | (897 | ) | |||||
Sales tax payable | (259 | ) | 25 | |||||
Accounts payable and accrued liabilities | (943 | ) | (1,519 | ) | ||||
Provisions | 37 | (51 | ) | |||||
Other non current liabilites | (47 | ) | - | |||||
Contract liabilities | (416 | ) | (749 | ) | ||||
Net cash flows from operating activities | 3,642 | 4,008 | ||||||
Investing activities | ||||||||
Purchase of property and equipment (Note 7) | (707 | ) | (197 | ) | ||||
Development costs (Note 10) | (1,768 | ) | (342 | ) | ||||
Business combinations, net of cash and cash | ||||||||
equivalents acquired (Note 20) | - | (2,000 | ) | |||||
Net cash flows used in investing activities | (2,475 | ) | (2,539 | ) | ||||
Financing activities | ||||||||
Repayments of operating facility and loan (Note 15) | (4,425 | ) | (3,638 | ) | ||||
Repayment of right-of-use lease obligation (Note 8) | (1,066 | ) | (798 | ) | ||||
Common shares purchased and cancelled (Note 17(i)) | (128 | ) | ||||||
Issuance of common shares for stock options exercised (net) (Note 17(i)) | 36 | - | ||||||
Net cash flows used in financing activities | (5,583 | ) | (4,436 | ) | ||||
Decrease in cash and cash equivalents | (4,416 | ) | (2,967 | ) | ||||
Cash and cash equivalents, beginning of the period | 12,702 | 22,096 | ||||||
Cash and cash equivalents, end of the period | 8,286 | 19,129 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
6 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
1. | General information |
Founded in 1984, Sangoma Technologies Corporation (“Sangoma” or the “Company”) is publicly traded on the Toronto Stock Exchange (TSX: STC) and NASDAQ (NASDAQ: SANG). The Company’s shares were traded on the TSX Venture Exchange under the symbol STC until November 1, 2021, at which point the Company’s shares commenced trading on the TSX. In conjunction with listing on the TSX, the Company’s shares were delisted from the TSX Venture Exchange. The Company’s shares commenced trading on NASDAQ on December 16, 2021. The Company was incorporated in Canada, its legal name is Sangoma Technologies Corporation and its primary operating subsidiaries for fiscal 2023 are Sangoma Technologies Inc., Sangoma US Inc., VoIP Supply LLC, Digium Inc., VoIP Innovations LLC, Star2Star Communications LLC, and NetFortris Corporation.
Sangoma is a leading provider of hardware and software components that enable or enhance Internet Protocol Communications Systems for both telecom and datacom applications. Enterprises, small to medium sized businesses (“SMBs”) and telecom operators in over 150 countries rely on Sangoma’s technology as part of their mission critical infrastructures. The product line includes data and telecom boards for media and signal processing, as well as gateway appliances and software.
The Company is domiciled in Ontario, Canada. The address of the Company’s registered office is 100 Renfrew Dr., Suite 100, Markham, Ontario, L3R 9R6 and the Company operates in multiple jurisdictions.
2. | Significant accounting policies |
Statement of compliance and basis of presentation
These interim financial statements for the three months ended September 30, 2022 and 2021 have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”).
These interim financial statements do not include all of the disclosures required by International Financial Reporting Standards (“IFRS”) for annual consolidated financial statements and accordingly should be read in conjunction with the Company’s audited consolidated financial statements for the year ended June 30, 2022 (“annual financial statements”) prepared in accordance with IFRS as issued by the IASB.
During the fourth quarter ended June 30, 2022, the Company identified an inconsistency in its treatment of certain revenues being recorded gross versus net. As a result, the Company corrected the presentation of revenue in its annual consolidated financial statements for the year ended June 30, 2022. As indicated in our management discussion & analysis for the fourth quarter ended June 30, 2022 (the “Fiscal 2022 MD&A”), the impacts of these immaterial changes to each quarter of fiscal 2022 were not material. In these unaudited condensed consolidated interim financial statements, the comparative period has been reclassified for this immaterial change. As a result, revenue and gross margin have been reduced by $980 and sales and marketing expense has been reduced by $980 in the three months ended September 30, 2021 as compared to amounts previously reported. The impact of this change had no impact on net loss or cash flow from operations for the comparative period.
The condensed consolidated interim financial statements were authorized for issue by the Board of Directors on November 10, 2022.
7 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
3. | Significant accounting judgments, estimates and uncertainties |
These unaudited condensed consolidated interim financial statements were prepared using the same basis of presentation, accounting policies and methods of computation as those of the audited consolidated financial statements for the year ended June 30, 2022 and which are available at www.sedar.com. They were prepared using the same critical estimates and judgments in applying the accounting policies as those of the audited consolidated financial statements for the year ended June 30, 2022.
The preparation of the interim financial statements requires Management to make judgments, estimates and assumptions that affect the application of accounting policies and reported assets, liabilities, revenue and expenses, consistent with those described in the Company’s annual financial statements and as described in these interim financial statements. Estimates and underlying assumptions are reviewed on an ongoing basis. Estimates are based on historical experience and other assumptions that are considered reasonable in the circumstances. The actual amount or values may vary in certain instances from the assumptions and estimates made. Changes will be recorded, with the corresponding effect on profit or loss, when, and if, better information is obtained.
8 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
4. | Financial instruments |
The fair values of the cash and cash equivalents, trade and other receivables, derivative assets, contract assets, other current assets, accounts payable and accrued liabilities, consideration payable and derivative liabilities approximate their carrying values due to the relatively short-term nature of these financial instruments or as these financial instruments are fair valued at each reporting period. The fair values of operating facility and loans approximate their carrying values due to variable interest loans or fixed rate loan, which represent market rate.
Cash and cash equivalents are comprised of:
September 30, | June 30, | |||||||
2022 | 2022 | |||||||
$ | $ | |||||||
Cash at bank and on hand | 8,286 | 12,702 |
Cash includes demand deposits with financial institutions and cash equivalents consist of short-term, highly liquid investments purchased with original maturities of three months or less. As at September 30, 2022 and June 30, 2022 the Company had no cash equivalents.
Total interest income and interest expense for financial assets or financial liabilities that are not at fair value through profit or loss can be summarized as follows:
Three month periods | ||||||||
ended September 30, | ||||||||
2022 | 2021 | |||||||
$ | $ | |||||||
Interest expense (Note 15) | 1,275 | 536 | ||||||
Accretion expense (Notes 8, 14) | 303 | 120 | ||||||
Interest expense (net) | 1,578 | 656 |
The Company examines the various financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity risk, foreign currency risk, interest rate risk and market risk.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its obligations. Where possible, the Company uses an insurance policy with Export Development Canada (“EDC”) for its trade receivables to manage this risk and minimize any exposure.
September 30, | June 30, | |||||||
2022 | 2022 | |||||||
$ | $ | |||||||
Trade receivables | 17,219 | 16,045 | ||||||
Receivable related to working capital adjustment (Note 20) | 7,898 | 7,898 | ||||||
Trade and other receivables | 25,117 | 23,943 |
During the period ended September 30, 2022, working capital adjustment received $nil (June 30, 2022-$1,044). The remaining balance as at September 30,2022 was $7,898 (June 30, 2022-$7,898) of which certain balances have been received subsequent to period-end (note 21)
9 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
4. | Financial instruments (continued) |
Credit risk (continued)
The Company’s maximum exposure to credit risk for its trade receivables is summarized as follows with some of the over 90-day receivable not being covered by EDC:
September 30, | June 30, | |||||||
2022 | 2022 | |||||||
$ | $ | |||||||
Trade receivables aging: | ||||||||
0-30 days | 14,014 | 12,809 | ||||||
31-90 days | 2,547 | 2,541 | ||||||
Greater than 90 days | 2,949 | 2,976 | ||||||
19,510 | 18,326 | |||||||
Expected credit loss provision | (2,291 | ) | (2,281 | ) | ||||
17,219 | 16,045 |
The movement in the provision for expected credit losses can be reconciled as follows:
September 30, | June 30, | |||||||
2022 | 2022 | |||||||
$ | $ | |||||||
Expected credit loss provision: | ||||||||
Expected credit loss provision, beginning balance | (2,281 | ) | (1,096 | ) | ||||
Net change in expected credit loss provision during the period | (10 | ) | (1,185 | ) | ||||
Expected credit loss provision, ending balance | (2,291 | ) | (2,281 | ) |
The Company applies the simplified approach to provide for expected credit losses as prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables and contract assets. The expected credit loss provision is based on the Company’s historical collections and loss experience and incorporates forward-looking factors, where appropriate.
Substantially all of the Company’s cash and cash equivalents are held with major Canadian or US financial institutions and thus the exposure to credit risk is considered insignificant. Management actively monitors the Company’s exposure to credit risk under its financial instruments, including with respect to trade receivables.
10 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
4. | Financial instruments (continued) |
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its obligations associated with financial liabilities. The Company has a planning and budgeting process in place by which it anticipates and determines the funds required to support its normal operating requirements. The Company coordinates this planning and budgeting process with its financing activities through its capital management process.
The Company holds sufficient cash and cash equivalents and working capital, maintained through stringent cash flow management, to ensure sufficient liquidity is maintained. The following are the undiscounted contractual maturities of significant financial liabilities of the Company as at September 30, 2022:
For the twelve-month periods ended | ||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||
2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
Accounts payable and accrued liabilities | 27,625 | - | - | - | - | 27,625 | ||||||||||||||||||
Sales tax payable | 5,636 | - | - | - | - | 5,636 | ||||||||||||||||||
Consideration payable | 9,995 | 695 | 695 | 290 | - | 11,675 | ||||||||||||||||||
Operating facility and loans | 17,700 | 17,700 | 22,050 | 20,600 | 22,150 | 100,200 | ||||||||||||||||||
Lease obligations on right of use assets | 3,933 | 3,113 | 2,958 | 2,185 | 7,154 | 19,343 | ||||||||||||||||||
Other non-current liabilities | - | - | - | - | 1,024 | 1,024 | ||||||||||||||||||
64,889 | 21,508 | 25,703 | 23,075 | 30,328 | 165,503 |
Foreign currency risk
A portion of the Company’s transactions occur in a foreign currency (Canadian dollars (CAD), Euros (EUR), and Great British Pounds (GBP), Hong Kong dollars (HKD), Indian Rupees (INR), Philippine Peso (PHP), Australian Dollar (AUD)) and, therefore, the Company is exposed to foreign currency risk at the end of the reporting period through its foreign denominated cash, trade receivables, contract assets, accounts payable and accrued liabilities, and operating facility and loans. As at September 30, 2022, a 10% depreciation or appreciation of the CAD, EUR, GBP, HKD, INR, PHP, and AUD currencies against the U.S. dollar would have resulted in an approximate $16 (June 30, 2022 - $59) increase or decrease, respectively, in total comprehensive income (loss).
Interest rate risk
The Company’s exposure to interest rate fluctuations is with its credit facility (Note 15) which bears interest at a floating rate. As at September 30, 2022, a change in the interest rate of 1% per annum would have an impact of approximately $493 (September 30, 2021 - $597) per annum in finance costs. The Company also entered an interest rate swap arrangement for its loan facility (Note 15) to manage the exposure to changes in LIBOR-rate based interest rate. The fair value of the interest rate swaps was estimated based on the present value of projected future cash flows using the LIBOR forward rate curve. The model used to value the interest rate swaps included inputs of readily observable market data, a Level 2 input. As described in detail in Note 15, the fair value of the interest rate swaps was an asset of $2,357 on September 30, 2022 (June 30, 2022-$1,348).
11 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
5. | Capital management |
The Company’s objectives in managing capital are to safeguard the Company’s assets, to ensure sufficient liquidity to sustain the future development of the business via advancement of its significant research and development efforts, to conservatively manage financial risk and to maximize investor, creditor, and market confidence. The Company considers its capital structure to include its shareholders’ equity and operating facilities and loans. Working capital is optimized via stringent cash flow policies surrounding disbursement, foreign currency exchange and investment decision-making. There have been no changes in the Company’s approach to capital management during the year and apart from the financial covenants as discussed in Note 15, the Company is not subject to any other capital requirements imposed by external parties.
6. | Inventories |
Inventories recognized in the condensed consolidated interim statements of financial position are comprised of:
September 30, | June 30, | |||||||
2022 | 2022 | |||||||
$ | $ | |||||||
Finished goods | 14,545 | 13,190 | ||||||
Parts | 5,471 | 5,155 | ||||||
20,016 | 18,345 | |||||||
Provision for obsolescence | (949 | ) | (919 | ) | ||||
Net inventory carrying value | 19,067 | 17,426 |
12 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
7. | Property and equipment |
Office furniture and computer equipment | Software and books | Stockroom and production equipment | Tradeshow equipment | Leasehold improvements | Total | |||||||||||||||||||
Cost | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Balance at July 1, 2021 | 3,329 | 417 | 6,255 | 47 | 348 | 10,396 | ||||||||||||||||||
Additions through business combinations (Note 20) | 540 | 2 | 3,619 | - | 11 | 4,172 | ||||||||||||||||||
Additions | 893 | 41 | 808 | - | 126 | 1,868 | ||||||||||||||||||
Disposals | (25 | ) | (2 | ) | (231 | ) | - | (10 | ) | (268 | ) | |||||||||||||
Balance at June 30, 2022 | 4,737 | 458 | 10,451 | 47 | 475 | 16,168 | ||||||||||||||||||
Additions | 200 | - | 507 | - | - | 707 | ||||||||||||||||||
Disposals | - | - | (81 | ) | - | - | (81 | ) | ||||||||||||||||
Balance at September 30, 2022 | 4,937 | 458 | 10,877 | 47 | 475 | 16,794 | ||||||||||||||||||
Accumulated depreciation | ||||||||||||||||||||||||
Balance at July 1, 2021 | 1,371 | 314 | 872 | 41 | 146 | 2,744 | ||||||||||||||||||
Depreciation expense | 1,081 | 99 | 1,888 | 6 | 78 | 3,152 | ||||||||||||||||||
Disposals | - | - | (1 | ) | - | (1 | ) | (2 | ) | |||||||||||||||
Balance at June 30, 2022 | 2,452 | 413 | 2,759 | 47 | 223 | 5,894 | ||||||||||||||||||
Depreciation expense | 324 | 6 | 960 | - | 16 | 1,306 | ||||||||||||||||||
Balance at September 30, 2022 | 2,776 | 419 | 3,719 | 47 | 239 | 7,200 | ||||||||||||||||||
Net book value as at: | ||||||||||||||||||||||||
Balance at June 30, 2022 | 2,285 | 45 | 7,692 | - | 252 | 10,274 | ||||||||||||||||||
Balance at September 30, 2022 | 2,161 | 39 | 7,158 | - | 236 | 9,594 |
For the three month period ended September 30, 2022, depreciation expense of $263 (September 30, 2021 - $248) was recorded in general and administration expense in the condensed consolidated interim statements of income (loss) and comprehensive income (loss). Depreciation expense in the amount of $1,043 was included in cost of sales for the three month ended September 30, 2022 (September 30, 2021 - $194).
13 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
8. | Leases: Right-of-use assets and lease obligations |
The Company’s lease obligations and right-of-use assets are presented below:
Right-of-use assets | ||||
$ | ||||
Opening IFRS 16 value as at July 1, 2021 | 17,955 | |||
Additions | 5,536 | |||
Addition through business combination (Note 20) | 3,277 | |||
Terminations | (1,536 | ) | ||
Adjustments due to lease modification | (2,002 | ) | ||
Balance at June 30, 2022 | 23,230 | |||
Additions | 41 | |||
Terminations | (106 | ) | ||
Balance at September 30, 2022 | 23,165 | |||
Accumulated depreciation and repayments | ||||
Opening IFRS 16 value as at July 1, 2021 | 4,425 | |||
Depreciation expense | 3,308 | |||
Terminations | (1,477 | ) | ||
Balance at June 30, 2022 | 6,256 | |||
Depreciation expense | 996 | |||
Terminations | (73 | ) | ||
Balance at September 30, 2022 | 7,179 | |||
Net book value as at: | ||||
June 30, 2022 | 16,974 | |||
September 30, 2022 | 15,986 |
Lease Obligations | ||||
$ | ||||
Opening IFRS 16 value as at July 1, 2021 | 14,243 | |||
Additions | 5,535 | |||
Addition through business combination (Note 20) | 3,277 | |||
Adjustments due to lease modification | (2,107 | ) | ||
Repayments | (3,407 | ) | ||
Accretion expense | 442 | |||
Effects of movements on exchange rates | 6 | |||
Balance at June 30, 2022 | 17,989 | |||
Additions | 41 | |||
Adjustments due to lease modification | (34 | ) | ||
Repayments | (1,066 | ) | ||
Accretion expense | 129 | |||
Effects of movements on exchange rates | (43 | ) | ||
Balance at September 30, 2022 | 17,016 | |||
Lease Obligations - Current | 3,378 | |||
Lease Obligations - Non-current | 13,638 | |||
17,016 |
14 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
9. | Intangible assets |
Other | ||||||||||||||||||||
Purchased | Customer | purchased | ||||||||||||||||||
technology | relationships | Brand | intangibles | Total | ||||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
Cost | ||||||||||||||||||||
Balance at July 1, 2021 | 95,323 | 112,256 | 6,787 | 2,748 | 217,114 | |||||||||||||||
Business combinations (Note 20) | 14,800 | 14,200 | - | - | 29,000 | |||||||||||||||
Balance at June 30, 2022 | 110,123 | 126,456 | 6,787 | 2,748 | 246,114 | |||||||||||||||
Balance at September 30, 2022 | 110,123 | 126,456 | 6,787 | 2,748 | 246,114 | |||||||||||||||
Accumulated amortization | ||||||||||||||||||||
Balance at July 1, 2021 | 7,809 | 11,336 | 2,135 | 1,856 | 23,136 | |||||||||||||||
Amortization expense | 16,097 | 14,128 | 685 | 699 | 31,609 | |||||||||||||||
Balance at June 30, 2022 | 23,906 | 25,464 | 2,820 | 2,555 | 54,745 | |||||||||||||||
Amortization expense | 4,451 | 3,887 | 203 | 36 | 8,577 | |||||||||||||||
Balance at September 30, 2022 | 28,357 | 29,351 | 3,023 | 2,591 | 63,322 | |||||||||||||||
Net book value as at: | ||||||||||||||||||||
Balance at June 30, 2022 | 86,217 | 100,992 | 3,967 | 193 | 191,369 | |||||||||||||||
Balance at September 30, 2022 | 81,766 | 97,105 | 3,764 | 157 | 182,792 |
Amortization expense is included in general and administration expense in the consolidated interim statements of income (loss) and comprehensive income (loss). For the three month period ended September 30, 2022, amortization expenses was $8,577 (September 30, 2021 - $7,655).
15 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
10. | Development costs |
Cost | $ | |||||||
Balance at July 1, 2021 | 3,360 | |||||||
Additions | 3,237 | |||||||
Investment tax credits | (628 | ) | ||||||
Balance at June 30, 2022 | 5,969 | |||||||
Additions | 1,768 | |||||||
Balance at September 30, 2022 | 7,737 | |||||||
Accumulated amortization | ||||||||
Balance at July 1, 2021 | (1,827 | ) | ||||||
Amortization | (1,281 | ) | ||||||
Balance at June 30, 2022 | (3,108 | ) | ||||||
Amortization | (422 | ) | ||||||
Balance at September 30, 2022 | (3,530 | ) | ||||||
September 30, 2022 | June 30, 2022 | |||||||
$ | $ | |||||||
Net capitalized development costs | 4,207 | 2,861 |
Each period, additions to development costs are recognized net of investment tax credits accrued. In addition to the above amortization, the Company has recognized $9,007 of engineering expenditures as an expense during the three month period ended September 30, 2022 (September 30, 2021 - $8,185).
16 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
11. | Income tax |
The Company income tax expense is determined as follows:
Three month periods | ||||||||
ended September 30, | ||||||||
2022 | 2021 | |||||||
Statutory income tax rate | 26.37 | % | 26.30 | % | ||||
$ | $ | |||||||
Net loss before income taxes | (1,118 | ) | (2,593 | ) | ||||
Expected income tax expense | (292 | ) | (684 | ) | ||||
Difference in foreign tax rates | (8 | ) | (7 | ) | ||||
Share based compensation | 239 | 596 | ||||||
Other non deductible expenses | 19 | 21 | ||||||
Sec 481(a) adjustment | 34 | - | ||||||
Gain on consideration payable | (415 | ) | 61 | |||||
Stock options deduction revaluation adjustment | 1,167 | (279 | ) | |||||
Earn-out amortization | 46 | - | ||||||
Changes in tax benefits not recognized | 68 | - | ||||||
Income tax expense | 858 | (292 | ) | |||||
The Company's income tax expense is allocated as follows: | $ | $ | ||||||
Current tax expense | 41 | 370 | ||||||
Deferred income tax expense | 817 | (662 | ) | |||||
Income tax expense | 858 | (292 | ) |
17 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
12. | Goodwill |
The carrying amount and movements of goodwill was as follows:
$ | ||||
Balance at July 1, 2021 | 267,398 | |||
Addition through business combinations (Note 20) | 34,296 | |||
Goodwill Impairment | (91,685 | ) | ||
Balance at June 30, 2022 | 210,009 | |||
Balance at September 30, 2022 | 210,009 |
For the three month period ended September 30, 2022, there is no addition to goodwill.
13. | Provisions |
Sales returns | Stock | |||||||||||||||
Warranty | & allowances | rotation | ||||||||||||||
provision | provision | provision | Total | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Balance at July 1, 2021 | 241 | 175 | 26 | 442 | ||||||||||||
Additional provision recognized (reversed) | (168 | ) | (48 | ) | (26 | ) | (242 | ) | ||||||||
Balance at June 30, 2022 | 73 | 127 | - | 200 | ||||||||||||
Additional provision recognized (reversed) | (12 | ) | (42 | ) | 91 | 37 | ||||||||||
Balance at September 30, 2022 | 61 | 85 | 91 | 237 |
The provision for warranty obligations represents the Company’s best estimate of repair and/or replacement costs to correct product failures. The sales returns and allowances provision represent the Company’s best estimate of the value of the products sold in the current financial period that may be returned in a future period. The stock rotation provision represents the Company’s best estimate of the value of the products sold in the current financial period that may be exchanged for alternative products in a future period. The Company accrues for product warranties, stock rotation, and sales returns and allowances at the time the product is delivered.
18 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
14. | Consideration payable |
As described in the annual consolidated financial statements, additional consideration in the amount of $13,269 could be payable as part of the acquisition of Star2Star on March 31, 2021. The fair value of consideration payable as of September 30, 2022 in the amount of $4,494 (June 30, 2022 - $6,017) was determined using an effective tax rate of 26.22% (June 30, 2022 – 26.22%) and a discount rate of 4.9% (June 30, 2022 – 4.9%). The fair value of the consideration payable is dependent upon the Company’s share price, foreign exchange rates and Company’s ability to utilize the underlying tax losses as they become available in each reporting period. During the period ended September 30, 2022, the Company made payments of $nil (September 30, 2021-$nil), recognized accretion expense of $59 (September 30, 2021-$nil), and recognized a gain on change in fair value of $1,581 (September 30, 2021 - $247).
As described in Note 20, additional consideration of up to $12,000 could be payable as part of the acquisition of NetFortris Corporation. The fair value of consideration payable as of September 30, 2022 in the amount of $6,867 (June 30, 2022-$6,751) was determined using a discount rate of 13.0% (June 30, 2022-13.0%). The fair value of the consideration payable is dependent upon the Company’s ability to meet certain operating targets as specified in the acquisition agreement. During the period ended September 30, 2022, the Company made payments of $nil (September 30, 2021- $nil), recognized accretion expense of $115 (September 30, 2021-$nil), and recognized a loss on change in fair value of $nil (September 30, 2021 - $nil).
The fair value of consideration payable as at September 30, 2022 is summarized below:
$ | ||||
Opening balance, July 1, 2021 | 9,102 | |||
Additions through business combination (Note 20) | 6,543 | |||
Payments | (1,421 | ) | ||
Accretion value of earn out (Note 4) | 798 | |||
Gain on change in fair value | (2,254 | ) | ||
Ending balance, June 30, 2022 | 12,768 | |||
Accretion value of earn out (Note 4) | 174 | |||
Gain on change in fair value | (1,581 | ) | ||
Ending balance, September 30, 2022 | 11,361 | |||
Consideration payable - Current | 7,579 | |||
Consideration payable - Non-current | 3,782 | |||
11,361 |
19 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
15. | Operating facility and loan and derivative assets and liabilities |
(a) | Operating facility and loan |
(i) | The Company entered into a new loan facility with two banks and drew down the first tranche of $34,800 (CAD$45,699) on October 18, 2019. This new loan facility was used to pay down and close all existing loans and to fund part of the purchase of VoIP Innovations LLC. This term facility is repayable over six years on a straight-line basis. |
The interest rates charged are based on Prime rate, US Base rate, London Inter-Bank Offered Rate (LIBOR) or Canadian Dollar Offered Rate (CDOR) plus the applicable margin. Under the terms of these term facilities, the Company may convert the loans from variable to a fixed loan. The Company is required to lock in the interest rate on one half of the term loan within three months of each draw down. On January 21, 2020, the Company converted its US Base Rate loan to a one-month LIBOR loan plus the credit spread based on the syndicated loan agreement entered on October 18, 2019. Separately, as required under the agreement, the Company locked in half of the original loan amount by entering a 5-year interest rate credit swap with the two banks for $8,700 each. On March 28, 2022 the credit agreement was amended and the LIBOR rate was replaced with the Secured Overnight Financing Rate (SOFR). The repayment schedule for the loan has not been impacted by these changes. The balance outstanding against this term loan facility as of September 30, 2022 is $17,400 (June 30, 2022- $18,850). As at September 30, 2022, term loan facility balance of $5,800 (June 30, 2022- $5,800) is classified as current and $11,600 (June 30, 2022 - $13,050) as long-term in the condensed consolidated interim statements of financial position.
(ii) | The Company also had revolving credit facilities which included a committed revolving credit facility for up to CAD $8,000 and a committed swingline credit facility for up to CAD $2,000 both of which may be used for general business purposes. On April 3, 2020, the Company drew down $1,300 (CAD $1,838) on the swingline credit facility available under the Credit Agreement. On April 17, 2020, the Company drew down $5,300 (CAD $7,440) from the revolving credit facility. During August 2020, the Company paid back in full the outstanding amounts on the swingline credit facility and the revolving credit facility. Both facilities remain fully available to the Company. |
(iii) | On March 31, 2021, the Company amended its term loan facility with its lenders and drew down an additional $52,500 to fund part of the acquisition of StarBlue Inc. At the time of the draw down of the additional amounts, the following amendments were made to the agreement: |
· | The provision for additional funding related to VoIP Innovations under the original agreement was no longer necessary and has been cancelled. |
· | The swingline facility was converted from CAD $2,000 to USD $1,500 |
· | The revolver facility was converted from CAD $8,000 to USD $6,000 |
· | The debt to equity ratio calculation now allows the Company to offset up to $10,000 of unrestrained funds against the outstanding amount of the debt. |
The interest rates charged continue to be based on Prime rate, US Base rate, London Inter-Bank Offered Rate (LIBOR) or Canadian Dollar Offered Rate (CDOR) plus the applicable margin until March 28, 2022 when the LIBOR rate was replaced with the Secured Overnight Financing Rate (SOFR). The incremental draw is repayable, on a straight-line basis, through quarterly payments of $2,188 and is due to mature on October 18, 2024. As at September 30, 2022, $8,750 (June 30, 2022 - $8,750) of the incremental facility is classified as current and $30,625 (June 30, 2022 - $32,812) is classified as long-term in the condensed consolidated interim statements of financial position.
20 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
15. | Operating facility and loan and derivative assets and liabilities (continued) |
(a) | Operating facility and loan (continued) |
(iv) | On March 28, 2022, the Company amended its term loan facility with its lenders and drew down an additional $45,000 to fund part of the acquisition of NetFortris Corporation. At the time of the draw down of the additional amounts, the following amendments were made to the agreement: |
The interest rates charged is based on Prime Rate Loans, US Base Rate Loans, US Prime Rate Loans, Secured Overnight Financing Rate (SOFR) or Canadian Dollar Offered Rate (CDOR) plus the applicable margin. The incremental draw is repayable, on a straight-line basis, through quarterly payments of $1,875 and is due to mature on March 28, 2027. On June 28, 2022, the Company amended its term loan facility with its lenders, the amended repayment for the first twelve quarterly payments of $788 and $2,963 thereafter. As at September 30, 2022, $3,150 (June 30, 2022-$3,150) of the incremental facility is classified as current and $40,275 (June 30, 2022-$41,063) is classified as long-term in the condensed consolidated interim statements of financial position.
For the three month ended September 30, 2022, the Company incurred interest costs to service the borrowing facilities in the amount of $1,275 (September 30, 2021 - $536). During the three month ended September 30, 2022, the Company borrowed $nil (September 30, 2021 - $nil) in operating facility and loans and repaid $4,425 (September 30, 2021 - $3,638).
Under its credit agreements with its lenders, the Company must satisfy certain financial covenants, principally in respect of total funded debt to earnings before interest, taxes and amortization (“EBITDA”), and debt service coverage ratio. As at September 30, 2022 and June 30, 2022 the Company was in compliance with all covenants related to its credit agreements.
(b) | Derivative assets and liabilities |
The Company uses derivative financial instruments to hedge its exposure to interest rate risks. All derivative financial instruments are recognized as either assets or liabilities at fair value on the condensed consolidated interim statements of financial position. Upon entering into a hedging arrangement with an intent to apply hedge accounting, the Company formally documents the hedge relationship and designates the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge. When the Company determines that a derivative financial instrument qualifies as a cash flow hedge and is effective, the changes in fair value of the instrument are recorded in accumulated other comprehensive income (loss), net of tax in the condensed consolidated interim statements of financial position and will be reclassified to earnings when the hedged item affects earnings.
On January 21, 2020, the Company converted its US Base Rate loan to a one-month LIBOR loan plus the credit spread based on the syndicated loan agreement entered into on October 18, 2019. Separately, as required under the agreement, the Company locked in half of the original loan amount by entering into a 5-year interest rate credit swap with the two banks for $8,700 each to manage its exposure to changes in LIBOR-based interest rates. The interest rate swap hedges the variable cash flows associated with the borrowings under the loan facility, effectively providing a fixed rate of interest for five years of the six-year loan term.
The interest rate swap arrangement with two banks became effective on January 31, 2020, with a maturity date of December 31, 2024. The notional amount of the swap agreement at inception was $17,400 and decreases in line with the term of the loan facility. Effective March 31, 2022, Sangoma US Inc. entered into a fixed rate swap transaction worth $43,750 over a five year period and terminating on February 28, 2027. As of September 30, 2022, the notional amount of the interest rate swap was $48,453 (June 30, 2022 – $51,397). The interest rate swap has a weighted average fixed rate of 1.80% (June 30, 2022 – 1.65%) and have been designated as an effective cash flow hedge and therefore qualifies for hedge accounting.
21 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
15. | Operating facility and loan and derivative assets and liabilities (continued) |
(b) | Derivative assets and liabilities |
As at September 30, 2022, the fair value of the interest rate swap assets were valued at $2,357 (June 30, 2022-$1,348) and were recorded as derivative assets in the condensed consolidated interim statements of financial position.
For the three month period ended September 30, 2022, the change in fair value of the interest rate swaps, net of tax, was a gain of $437 (September 30, 2021 – $39) was recorded in other comprehensive income (loss) in the condensed consolidated interim statements of income (loss) and comprehensive income (loss). The fair value of interest rate swap is determined based on the market conditions and the terms of the interest rate swap agreement using the discounted cash flow methodology. Any differences between the hedged SOFR rate and the fixed rate are recorded as interest expense on the same period that the related interest is recorded for the loan facility based on the SOFR rate.
16. | Contract liabilities |
Contract liabilities, which includes deferred revenues, represent the future performance obligations to customers in respect of services or customer activation fees for which consideration has been received upfront and is recognized over the expected term of the customer relationship.
Contract liabilities as at September 30, 2022 and June 30, 2022 are below:
$ | ||||
Opening balance, July 1 , 2021 | 15,754 | |||
Revenue deferred during the period | 40,272 | |||
Deferred revenue recognized as revenue during the period | (42,625 | ) | ||
Additions through business combination (Note 20) | 1,666 | |||
Ending balance, June 30, 2022 | 15,067 | |||
Revenue deferred during the period | 10,163 | |||
Deferred revenue recognized as revenue during the period | (10,579 | ) | ||
Ending balance, September 30, 2022 | 14,651 | |||
Contract liabilities - Current | 10,933 | |||
Contract liabilities - Non-current | 3,718 | |||
14,651 |
22 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
17. | Shareholders’ equity |
(i) | Share capital |
The Company’s authorized share capital consists of an unlimited number of common shares without par value. As at September 30, 2022 and 2021, the Company’s issued and outstanding common shares consist of the following:
Three month periods | ||||||||
ended September 30, | ||||||||
2022 | 2021 | |||||||
# | # | |||||||
Shares issued and outstanding: | ||||||||
Outstanding, beginning of the period | 21,439,632 | 19,021,642 | ||||||
Shares issued as instalment for shares to be issued | 857,144 | - | ||||||
Shares purchased and cancelled | (16,200 | ) | - | |||||
Shares issued upon exercise of options | 8,797 | - | ||||||
Rounding of fractional shares in 2021 after share consolidation | - | (28 | ) | |||||
Outstanding, end of the period | 22,289,373 | 19,021,614 |
On March 31, 2021, the Company acquired StarBlue Inc. and issued 3,018,685 common shares valued in the amount of $66,873 as part of the consideration, and 18,456 common shares valued in the amount of $330 as part of the acquisition costs. Under the terms of the agreement, a further 12,695,600 common shares valued in the amount of $192,102 are to be issued in instalments commencing on April 1, 2022. On August 3, 2022, 857,144 common shares were issued to StarBlue sellers in accordance with the instalment schedule defined in the share purchase agreement. Following these issuances 10,981,314 common shares remain to be issued and the remaining $166,162 discounted value of the common shares is recorded as shares to be issued in the condensed consolidated interim statements of changes in shareholders’ equity.
During the three month period ended September 30, 2022, a total of 8,797 (September 30, 2021 – nil) options were exercised for cash consideration of $36 (September 30, 2021 - $nil), and the Company recorded a charge of $19 (September 30, 2021 – $nil) from contributed surplus to share capital.
Under the term of the Normal Course Issuer Bid (“NCIB”), during the three month period ended September 30, 2022, the Company purchased a total of 40,922 common shares (September 30, 2021 -nil) at an average price of $6.52 per share, for total consideration of $267. During the quarter 10,700 of those common shares were settled and cancelled along with 5,500 common shares that were purchased in the fourth fiscal quarter of 2022, and the company recorded a total reduction of $128 (September 30, 2021-nil) in share capital for the value of share repurchased. The remaining 30,222 common shares of the 40,922 common shares purchased during the first fiscal quarter of 2023 were settled and cancelled on October 5, 2022.
23 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
17. | Shareholders’ equity (continued) |
(ii) | Stock options |
During the year ended June 30, 2020, the shareholders of the Company amended the stock option plan (the “plan”) for officers, employees and consultants of the Company. The number of common shares that may be set aside for issuance under the plan (and under all other management stock option and employee stock option plans) is limited to 10% of the outstanding common shares of the corporation provided that the Company complies with the provisions of policies, rules and regulations of applicable securities legislation. The maximum number of common shares that may be reserved for issuance to any one person under the plan is 5% of the common shares outstanding at the time of grant (calculated on a non-diluted basis) less the number of common shares reserved for issuance to such person under any stock option to purchase common shares granted as a compensation or incentive mechanism. Any common shares subject to a stock option, which for any reason are terminated, cancelled, exercised, expired, or surrendered will be available for a subsequent grant under the plan, subject to regulatory requirements.
The stock option price of any common shares cannot be less than the closing price or the minimum price as determined by applicable regulatory authorities of the relevant class or series of shares, on the day immediately preceding the day on which the stock option is granted.
Stock options granted under the plan may be exercised during a period not exceeding five years from the date of grant, subject to earlier termination on the termination of the optionee’s employment, on the optionee’s ceasing to be an employee, officer or director of the Company or any of its subsidiaries, as applicable, or on the optionee’s retiring, becoming permanently disabled or dying, subject to certain grace periods to allow the optionee or his or her personal representative time to exercise such stock options. The stock options are non-transferable. The plan contains provisions for adjustment in the number of common shares issuable thereunder in the event of the subdivision, consolidation, reclassification or change of the common shares, a merger, or other relevant changes in the Company’s capitalization. The board of directors may, from time to time, amend or revise the terms of the plan or may terminate the plan at any time.
The following table shows the movement in the stock option plan:
Number | Weighted | |||||||
Measurement date | of options | average price | ||||||
# | $ | |||||||
Balance, July 1, 2021 | 1,587,310 | 19.55 | ||||||
Granted | 285,714 | 18.62 | ||||||
Expired | (60 | ) | (6.37 | ) | ||||
Forfeited | (84,069 | ) | (19.12 | ) | ||||
Balance, September 30,2021 | 1,788,895 | 19.42 | ||||||
Balance, July 1, 2022 | 1,207,908 | 14.02 | ||||||
Exercised | (8,797 | ) | (4.04 | ) | ||||
Expired | (21,332 | ) | (11.60 | ) | ||||
Forfeited | (14,226 | ) | (12.86 | ) | ||||
Balance, September 30, 2022 | 1,163,553 | 14.15 |
The Company uses the fair value method to account for all share-based awards granted to employees, officers, and directors. The estimated fair value of most stock options granted is determined using the Black-Scholes option pricing model and is recorded as a charge to the condensed consolidated interim statement of income (loss) and comprehensive income (loss) over the vesting period of the stock options, with a corresponding increase to contributed surplus. Stock options are granted at a price equal to or above the fair value of the common shares on the day immediately preceding the date of the grant. The consideration received on the exercise of stock options is added to stated capital at the time of exercise.
24 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
17. | Shareholders’ equity (continued) |
(ii) | Stock options (continued) |
No options were granted in the three month ended September 30, 2022 (September 2021-285,714). The key assumptions used to fair value the grants were as follows:
September 30, | September 30, | |||||||
2022 | 2021 | |||||||
Share price | - | $ | 18.62 | |||||
Exercise price | - | $ | 18.62 | |||||
Expected volatility | - | 59.82 | % | |||||
Expected option life (years) | - | 5 | ||||||
Risk-free interest rate | - | 0,78 | % |
The following table summarizes information about the stock options outstanding and exercisable at the end of each period:
September 30, 2022 | September 30, 2021 | |||||||||||||||||
Exercise price | Number of stock options outstanding and exercisable | Weighted average remaining contractual life | Number of stock options outstanding and exercisable | Weighted average remaining contractual life | ||||||||||||||
$3.01 - $5.00 | 17,112 | 0.24 | 25,849 | 1.24 | ||||||||||||||
$5.01 - $8.00 | 52,139 | 1.24 | 66,906 | 2.24 | ||||||||||||||
$8.01 - $10.00 | - | - | 8,650 | 2.67 | ||||||||||||||
$10.01 - $15.00 | 95,145 | 2.68 | 89,965 | 3.68 | ||||||||||||||
$15.01 - $18.00 | 56,617 | 3.75 | - | - | ||||||||||||||
$18.01 - $20.00 | 71,431 | 3.98 | - | - | ||||||||||||||
$20.01 - $27.00 | 42,755 | 3.36 | - | - | ||||||||||||||
335,199 | 2.88 | 191,370 | 2.80 |
For the three month period ended September 30, 2022, the Company recognized share-based compensation expense in the amount of $915 (September 30, 2021 - $2,119).
(iii) | Earnings (loss) per share |
Both the basic and diluted earnings (loss) per share have been calculated using the net income (loss) attributable to the shareholders of the Company as the numerator.
Three month periods | ||||||||
ended September 30, | ||||||||
2022 | 2021 | |||||||
Number of shares: | ||||||||
Weighted average number of shares outstanding | 21,971,685 | 19,021,614 | ||||||
Shares to be issued | 10,981,314 | 12,695,600 | ||||||
Weighted average number of shares used in diluted earnings per share | 32,952,999 | 31,717,214 | ||||||
Net loss for the period | (1,976 | ) | (2,301 | ) | ||||
Earnings (loss) per share: | ||||||||
Basic earnings (loss) per share | $ | (0.060 | ) | $ | (0.073 | ) | ||
Diluted earings (loss) per share | $ | (0.060 | ) | $ | (0.073 | ) |
25 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
18. | Related parties |
The Company’s related parties include key management personnel and directors. Unless otherwise stated, none of the transactions incorporated special terms and conditions and no guarantees were given or received. Outstanding balances payable are usually settled in cash and relate to director fees.
The Company had incurred no related party transactions and had no outstanding balance with related parties for the three month period ended September 30, 2022 and 2021.
19. | Segment disclosures |
The Company operates in one operating segment; development, manufacturing, distribution and support of voice and data connectivity components for software-based communication applications. The majority of the Company’s assets are located in Canada and the United States of America (“USA”). The Company sells into three major geographic centers: USA, Canada and other foreign countries. The Company has determined that it has a single reportable segment as the Company’s decision makers review information on a consolidated basis.
Revenues for group of similar products and services can be summarized for the three month period ended September 30, 2022 and 2021 as follows:
Three month periods | ||||||||
ended September 30, | ||||||||
2022 | 2021 | |||||||
(Note 2) | ||||||||
$ | $ | |||||||
Products | 15,727 | 15,641 | ||||||
Services | 48,324 | 35,858 | ||||||
Total revenues | 64,051 | 51,499 |
The sales, in US dollars, in each of these geographic locations for the three month periods ended September 30, 2022 and 2021 as follows:
Three month periods | ||||||||
ended September 30, | ||||||||
2022 | 2021 | |||||||
(Note 2) | ||||||||
$ | $ | |||||||
USA | 59,682 | 46,071 | ||||||
Canada | 1,008 | 1,341 | ||||||
All other countries | 3,361 | 4,087 | ||||||
Total revenues | 64,051 | 51,499 |
The non-current assets, in US dollars, in each of the geographic locations as at September 30, 2022 and June 30, 2022 are below:
September 30, | June 30, | |||||||
2022 | 2022 | |||||||
$ | $ | |||||||
Canada | 6,638 | 7,000 | ||||||
USA | 422,228 | 430,525 | ||||||
Total non-current assets | 428,866 | 437,525 |
26 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
20. | Business combinations |
On March 28, 2022, the Company acquired all the shares of NetFortris Corporation. The Company paid an aggregate purchase price of $64,820, net of a net working capital adjustment of ($8,942), and comprised of $50,418 cash consideration, 1,494,536 common shares at a fair value of $16,801. The Company issued 1,494,536 common shares including 327,241 shares representing a holdback for indemnification purposes on closing of the acquisition. The Company estimates that a further payment of $6,543 will be paid as part of an earn out that is up to $12,000 if certain operating targets are met. The Company incurred estimated transaction costs in the amount of $2,939 which were expensed and included in the condensed consolidated interim statements of income (loss) and comprehensive income (loss) for the three month period ended March 31, 2022. The acquisition has been accounted for using the acquisition method under IFRS 3, Business Combinations.
The following table summarizes the fair value of consideration paid on the acquisition date and the preliminary allocation of the purchase price to the assets and liabilities acquired.
Consideration | $ | |||
Cash consideration on closing | 43,868 | |||
Net working capital adjustment | (8,942 | ) | ||
Cash held in escrow for working capital | 350 | |||
Cash held in escrow for telecom taxes | 3,400 | |||
Cash held in escrow for indemnification | 2,800 | |||
Additional consideration for earn out | 6,543 | |||
Common shares issued on closing | 13,122 | |||
Common shares reserved in escrow for indemnification | 3,679 | |||
64,820 | ||||
Purchase price allocation | $ | |||
Cash | 1,706 | |||
Trade receivables | 1,822 | |||
Inventories | 416 | |||
Property and equipment | 4,172 | |||
Right-of-use assets | 3,277 | |||
Other current assets | 796 | |||
Other non-current assets | 370 | |||
Deferred income tax asset | 11,091 | |||
Accounts payable and accrued liabilities | (9,442 | ) | ||
Sales tax payable | (5,506 | ) | ||
Contract liabilities | (1,666 | ) | ||
Lease obligations on right-of-use assets | (3,277 | ) | ||
Other non-current liabilities | (235 | ) | ||
Intangible assets | 29,000 | |||
Goodwill | 32,296 | |||
64,820 |
27 |
Sangoma Technologies Corporation Notes to the condensed consolidated interim financial statements For the three months period ended September 30, 2022 and 2021 (Unaudited in thousands of US dollars, except per share data) |
21. | Subsequent events |
On September 30, 2022 the parties to the NetFortris stock purchase agreement submitted a joint written direction to the escrow agent to release to the Company an aggregate total of $2,052 from the escrow account, consisting of $350 in cash and the remainder in the form of 142,124 common shares. The cash portion was received on October 6, 2022 and the transfer and cancellation of the common shares was completed on October 28, 2022. Additionally, the parties agreed to amend the terms of the stock purchase agreement to decrease the maximum additional consideration payable from $12,000 to $11,500.
On November 8, 2022, a total of 981,314 shares were issued to StarBlue seller in accordance with the share purchase agreement. Following this issuance, 10,000,000 shares remain to be issued over the next four years.
Under the terms of the Normal Course Issuer Bid (“NCIB”), from October 1, 2022 to October 31, 2022, the Company’s agent purchased 13,600 common shares at an average price of $5.11 per share for total consideration of $70, which were settled and cancelled on November 2, 2022. As of the date hereof, the Company’s agent purchased additional 13,800 common shares. These common shares have not yet been settled and cancelled.
22. | Authorization of the condensed consolidated interim financial statements |
The condensed consolidated interim financial statements were authorized for issuance by the Board of Directors on November 10, 2022.
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Exhibit 99.2
Management discussion and analysis of financial
condition and results of operations for the
three months ended September 30, 2022
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TABLE OF CONTENTS
INTRODUCTION | 3 |
OVERVIEW | 4 |
RESULTS OF OPERATIONS | 13 |
QUARTERLY RESULTS OF OPERATIONS | 17 |
LIQUIDITY AND CAPITAL RESOURCES | 18 |
CONTRACTUAL OBLIGATIONS | 19 |
USE OF PROCEEDS FROM EQUITY FINANCINGS | 20 |
OFF-BALANCE SHEET ARRANGEMENTS | 20 |
RELATED PARTY TRANSACTIONS | 20 |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES | 20 |
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS | 21 |
SIGNIFICANT EVENTS | 21 |
OUTSTANDING SHARE INFORMATION | 21 |
GUIDANCE | 22 |
Controls and Procedures | 23 |
GLOSSARY OF TERMS | 24 |
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INTRODUCTION
As used in this Management Discussion and Analysis (“MD&A”), unless the context indicates or requires otherwise, all references to the “Company”, “Sangoma”, “we”, “us”, or “our” refer to Sangoma Technologies Corporation, together with our subsidiaries, on a consolidated basis as constituted on September 30, 2022. The MD&A compares the financial results for the fiscal first quarter of 2023 with those of the same period in the previous year. This MD&A should be read in conjunction with Sangoma’s audited annual consolidated financial statements and related notes for the year ended June 30, 2022 (“Financial Statements”), which have been prepared in accordance with International Financial Reporting Standards (“IFRS”). All amounts are in millions of United States dollars except where otherwise indicated.
Additional information about us, including copies of our continuous disclosure materials, is available on our website at www.sangoma.com, through the EDGAR website at www.sec.gov or through the SEDAR website at www.sedar.com.
This MD&A is dated as of November 10, 2022.
NON-IFRS MEASURES
This MD&A contains references to certain non-IFRS financial measures such as Adjusted Operating Income, Adjusted EBITDA and Adjusted Cash Flow. Non-IFRS financial measures are used by management to evaluate the performance of the Company and do not have any meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other reporting issuers. Non-IFRS financial measures used herein have been applied on a consistent basis. “Adjusted Operating Income (Loss)” means IFRS income (loss) before interest expense (net), business integration costs, exchange listing expense, change in fair value of consideration payable, business acquisition costs, goodwill impairment and income taxes. “Adjusted EBITDA” means earnings before income taxes, interest expense (net), share-based compensation, depreciation (including for right-of-use assets), amortization, business integration costs, exchange listing expense, business acquisition costs, goodwill impairment and change in fair value of consideration payable. Adjusted EBITDA is a measure used by many investors to compare issuers. “Adjusted Cash Flow” means net cash flows from operating activities as defined by IFRS less the capitalized development costs that Sangoma amortized during the period, plus interest expense (net), business acquisition costs paid, business integration costs, and exchange listing expense. We believe that Adjusted Operating Income (Loss), Adjusted EBITDA and Adjusted Cash Flow are useful supplemental information as they provide an indication of the results generated by the Company's main business activities before taking into consideration how they are financed, taxed, depreciated or amortized. Investors are cautioned that non-IFRS financial measures, such as those presented herein, should not be construed as an alternative to net income or cash flow determined in accordance with IFRS. The reconciliation of the closest IFRS measure to each non-IFRS measure is set out on pages 13, 17, and 18 herein.
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements, including statements regarding the expected fiscal 2023 financial results and the future success of our business, development strategies and future opportunities.
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Forward-looking statements are provided for the purpose of presenting information about management’s current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes. Forward-looking statements include, but are not limited to, statements relating to management’s guidance on revenue and Adjusted EBITDA, statements relating to expected inventory levels, statements relating to future lease and interest payments, statements relating to the impact of the continuing COVID-19 pandemic, statements concerning estimates of expected expenditures, statements relating to expected future production and cash flows, and other statements which are not historical facts. When used in this document, the words such as “could”, “plan”, “estimate”, “expect”, “intend”, “may”, “potential”, “should” and similar expressions indicate forward-looking statements.
Although Sangoma believes that its expectations reflected in these forward-looking statements are reasonable, such statements involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements. Forward-looking statements are based on the opinions and estimates of management at the date that the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other events contemplated by the forward-looking statements will not occur. Although Sangoma believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct as these expectations are inherently subject to business, economic and competitive uncertainties and contingencies. Some of the risks and other factors which could cause results to differ materially from those expressed in the forward-looking statements contained herein include, but are not limited to, risks and uncertainties associated with the integration of NetFortris Corporation (“NetFortris”), the remediation of material weakness identified in our internal control over financial reporting, the impact of the continuing COVID-19 pandemic, changes in exchange rate between the United States dollar and other currencies, expectations regarding the amount of frequency of impairment losses, including as a result of the write-down of intangible assets, including changes in technology, changes in the business climate, changes in the regulatory environment, the decline in the importance of the PSTN, new competitive pressures, the impact of global supply chain delays, the retention of key staff, the increase in cost and availability of our components and materials, and the impact of changes to interest rates and the other risk factors described in our most recently filed Annual Information Form for the fiscal year ended June 30, 2022. See also “Guidance” and “Controls and Procedures” below for more information on certain of these risks and uncertainties.
The forward-looking statements contained in this management’s discussion and analysis are expressly qualified by this cautionary statement. Sangoma undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by law.
OVERVIEW
Sangoma’s products and services are used by leading companies throughout the world and in leading UC, PBX, IVR, contact center, carrier networks, and data communication applications worldwide. Sangoma’s portfolio of products also enable service providers, carriers, enterprises, SMBs, and OEMs alike to leverage their existing infrastructure for maximum financial return, while still delivering the most advanced applications and services from the latest technologies available. Please refer to the Glossary of Terms for detailed definitions of terms used throughout this MD&A.
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Communications as a Service (CaaS) Portfolio
Sangoma is a trusted leader in delivering value-based Communications as a Service solutions for businesses of all sizes. The value-based communications segment includes small businesses to large enterprises who are looking for all the advantages of cloud-based communications at a fair price. Sangoma’s current Communications as a Service offerings are typically offered with monthly, yearly, or multi-year contracts and include:
Unified Communications as a Service (“UCcaS”)
Trunking as a Service (“TaaS”)
Contact Center as a Service (“CCaaS”)
Communications Platform as a Service (“CPaaS”)
Video Meetings as a Service (“MaaS”)
Collaboration as a Service (“Collab aaS”)
Desktop as a Service (“DaaS”)
Access Control as a Service (“ACaaS”)
Unified Communications as a Service (UCaaS)
Sangoma’s UC solutions are business communication systems (PBX’s with advanced UC features, such as presence/chat, conferencing, mobility, fax, and more) that can be deployed on-premise or hosted in the Cloud, allowing businesses to select the best option for their needs. Unified Communication systems, because of their mobility features such as having the business phone number ring on an app on your smartphone and/or desktop and instant messaging capability, enable remote work and work from home much more efficiently. Sangoma’s Unified Communication solutions fully integrate with our phones, soft clients, and network interoperability products to provide a fully interoperable solution from a single vendor.
Cloud-Based Business Phone Solution
Sangoma offers its customers full-scale cloud-based Unified Communications solutions. With Sangoma, businesses can get contact center, mobility, softphone, call control, and productivity features included for every user at a reasonable price. Sangoma’s hosted phone service delivers the customer experience businesses demand at an affordable price point. Customers can also choose pre-provisioned phones that customers simply plug into their network.
On-Premise Business Phone Solution
Sangoma also offers the more traditional on-premise UC phone system, for businesses still wanting to deploy their business phone system on premise. Whether deployed on a dedicated appliance or in the customer’s virtual environment, Sangoma provides the power and connectivity necessary.
IP Deskphones, Headsets and UC Clients: Sangoma provides desktop and softphone collaboration clients that integrate seamlessly with our UC solution offerings and deliver UC features (presence, contacts, chat, calling, audio and video conferencing, etc.) from a single application, on any device, at any location.
IP Deskphones: Sangoma offers a full line of phones that work with both our cloud and on-premise systems that are perfect for every user type, from casual to call center to managers and executives. Sangoma’s product line includes entry-level, mid-range, and executive-level phones. All models include HD Voice and plug-and-play deployment. Sangoma’s range of IP phones are customized to seamlessly integrate with all of our UC Systems and provide zero touch installation, simplified system management, and instant access to a wide range of features.
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Headsets: Sangoma also offers headsets that either work in conjunction with the desktop phones (by plugging into the phone) or work in conjunction to our desktop soft client (by plugging directly into the computer). These headsets enable roaming of up to 325 feet from the phone or desk computer.
UC Clients and Softphones: Unified Communication Clients (or softphones) are used to make or receive phone calls with your business phone number and can be used as your main phone or as an extension of your desk phone. They are available as an app on your smartphone or computer. These UC clients have enabled employees to work remote seamlessly by enabling phone calls to customers and other employees as if they were in a physical office. Sangoma offers UC clients with all of our Unified Communication / Business phone system product lines.
Trunking as a Service (TaaS)
SIP trunks deliver Internet-based telephony services to businesses using their existing internet connection, eliminating the need for separate traditional PSTN or digital telecom connections. SIP trunking is fast becoming the technology of choice to interconnect an IP PBX system to a telephone company. The main drivers are cost efficiencies (over fixed lines such as ISDN or analog lines from incumbent telcos) and end-to-end UC features/transparency. Cost efficiencies are realized because SIP trunking uses already-available broadband connections at customer premises. Sangoma offers both retail and wholesale SIP Trunking which allows our customers to choose the service that best meets their needs. Either service offers DIDs and number porting.
Retail SIP Trunking
Retail SIP trunking offers predictable monthly expenses with pricing based per trunk. SIPStation, Sangoma’s retail SIP trunking service, is seamlessly integrated into our various UC platforms, making it easy to get up and running. It also includes an integrated fax service option, enabling a business to send and receive faxes from a web interface or from a local fax machine. Typically, small to mid-sized businesses and enterprises would utilize this type of service.
Wholesale SIP Trunking
Sangoma’s wholesale SIP trunking offer is now available following the acquisition of VoIP Innovations. Pricing for wholesale SIP trunking is usage-based but with a larger monthly minimum commitment. This includes origination, termination, SMS/MMS, e911, and fraud mitigation. Typically, very large businesses or service providers who resell SIP trunks would utilize this type of service.
Fax as a Service
Faxing remains an important communications tool, yet VoIP networks are sometimes unable to send faxes reliably because fax standards are based on very specific timing that can be interrupted in VoIP systems, especially where there is substantial latency. Sangoma’s FoIP service, FaxStation, is a hosted service to remedy this problem, available with our TaaS. It features a telecom appliance with up to four analog connections for fax machines and operates in concert with Sangoma’s fax server data center to encrypt and package the fax communication to make it fail-safe. This is particularly useful for small businesses that rely on fax communications but also for industries with challenging network conditions, such as mining, oil rigs, and ship-to-shore over satellite.
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Contact Center as a Service (CCaaS)
Contact Center as a Service (CCaaS) is our cloud-based contact center, or customer experience, offering. It provides robust contact center capabilities running in various ways: either standalone, in conjunction with our other cloud services (such as UCaaS), or integrated “inside” our UCaaS product in a simplified version. This latter solution is intended for ‘departmental’ type usage, by companies that are not pure-play contact centers, but that might have a department such as customer service or technical support that operate inside that company almost like a mini contact center.
Communications Platform as a Service (CPaaS)
Communications Platform as a Service (CPaaS) allows developers to easily build services and applications using real-time communication features, such as voice, video, chat, and SMS, via the cloud. Our platform enables Sangoma, our integrator/developer partners, and advanced customers to build new communications services based on voice, rest APIs, WebRTC, and SMS. When running an application on a CPaaS platform, performance is critical. To ensure peak performance, Sangoma offers its own SIP trunking service, providing optimized connectivity in addition to easy access to phone numbers. Sangoma also sells a series of ‘applications’ (or Apps) based upon our CPaaS product that customers can purchase.
Video Meetings as a Service (MaaS)
Sangoma Meet is our video meetings, cloud-based service accessible from any device, be it desktop or mobile. It enables file sharing on screen so collaboration with co-workers is enhanced, integrates seamlessly with your calendar, and enables PSTN phone calls. Sangoma Meet is available in free and chargeable tiers.
Collaboration as a Service (Collab aaS)
Collaboration as a Service (Collab aaS) is Sangoma’s cloud-based offering for enabling people to work together more productively. This service is called TeamHub. It allows users to interact using any of the various forms of communications, including chatting, calling, and video. TeamHub integrates Sangoma’s softphone client software applications (desktop and mobile) and is designed to allow communications to start in one mode (such as chat), and move through different modes very elegantly, in effect ‘upgrading’ that mode of communications to a voice call in real time, and/or upgrading that voice call to a video meeting.
Desktop as a Service (DaaS)
Sangoma’s Desktop as a Service helps companies adapt to today’s modern, flexible, and remote workforce. It is the most secure method for staff to access their tools and applications from any location to do their work, delivers simplified IT administration and cuts down on the CapEx of deploying PCs. Sangoma is one of the only companies that can offer communications capability inside a DaaS product.
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Access Control as a Service (ACaaS)
At Sangoma, this product offering is called SmartOffice Access. The SmartOffice product line is to be a family of IoT based services, and it was launched first with Access Control. Access Control is a means of controlling access to one’s office or parts of an office and was traditionally done via the well-known white ‘swipe cards’ or fobs. Sangoma is innovating in that space by eliminating the need for such older technologies and extending our experience with mobile apps that so many of our customers and their employees already get from us, as a Softphone. This new mobile allows one to open doors using your smartphone and the app from Sangoma, wirelessly using IoT protocols. No more swipe cards, no more readers, no more wiring behind the walls. This is one of Sangoma’s first forays into cloud services that extend our CaaS suite beyond the strict definition of ‘communications’.
MSP Portfolio
Sangoma’s cloud-based Managed Service Provider (“MSP”) offerings deliver mission critical communication services that businesses need and complement our full line of Communications as a Service solutions. The MSP product line is built upon a tightly integrated, enterprise grade, and end-to-end managed network, which is all supported by an expert 24/7 network engineering team. The current MSP offering includes three primary services:
Managed Security: Sangoma provides a cloud-based service, sometimes called Unified Threat Management (“UTM”), whereby the customers network, including voice and data traffic, are secured by intrusion prevention and detection capabilities. The network security service helps protect customers against attacks and data losses from spam, viruses, ransomware, botnets, etc.
Managed SD-WAN: Sangoma offers a cloud-based software-defined approach to managing a customers wide area network. The SD-WAN service enables network redundancy through the ability to manage multiple internet connections from multiple providers, which is seen as one seamless connection for the customer. If one connection fails, the customer does not lose connectivity and has uninterrupted uptime. The service also provides traffic shaping whereby certain types of traffic can be given priority or forced in priority.
Managed Access: Sangoma also provides a robust broadband connectivity solution, including network monitoring, analytics, backup, and a fully PCI-compliant offering for payment card and credit card transactions. Additionally, our Managed Access solution integrates with Managed Security and Managed SD-WAN services, delivering unique capabilities such as secure, end-to-end peering connections to critical destinations (such as Public Cloud sites like AWS and Azure) and Quality of Service commitments.
Network Interconnection Products
In addition to the CaaS and MSP offerings described above, Sangoma also offers network interconnection products. These products connect different types of networks together, such as VoIP networks to PSTN networks, or VoIP networks to mobile networks or different types of VoIP networks.
Session Border Controllers (SBCs)
Anytime two VoIP networks interconnect, issues of security and interoperability arise. SBCs can manage these issues, including provider-to-provider connections, provider-to-enterprise connections, and enterprise-to-enterprise connections. Sangoma’s SBCs are available as hardware appliances, as software-only solutions running on a virtual machine in hosted environments, or as a hybrid of both. The hybrid solution is unique to Sangoma and provides all the flexibility expected from virtual machine capability coupled with the scalability that is found in hardware-based solutions. Sangoma’s SBCs have broad interoperability certifications.
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VoIP Gateways
VoIP gateways are needed any time voice traffic moves from a VoIP network to a traditional PSTN telephone network. As the traffic traverses these networks, there are issues that need to be resolved regarding both the media (the sound of the caller’s voice) and the signaling (the method used to control the media traveling over that connection).
In a service provider or carrier network, much larger gateways perform these same tasks. In addition, there are signaling protocols that are only used when carrier networks communicate with other carrier networks that are not included in the enterprise product line.
All Sangoma’s gateways have broad interoperability certifications.
PSTN Interface and Media Processing Boards
Sangoma’s complete line of boards connect and interface to the PSTN. Even though IP networks are growing and quickly becoming the standard, the PSTN still exists, and new communication solutions often need to connect to the PSTN. These boards are primarily used by communications solution developers in PC/Server based telecommunications systems that connect to the PSTN. They perform a very similar task to VoIP gateways, but are installed inside the server rather than being stand-alone devices. By providing customers with the option of using a PSTN interface board or a VoIP gateway, Sangoma maximizes flexibility based on installation requirements, particularly when space and power are at a premium. They may also be used in harsh conditions that require ruggedized servers.
Open-Source Software Products
Asterisk and FreePBX
Sangoma is the primary developer and sponsor of the Asterisk project, the world’s most widely used open-source communications software, and the FreePBX project, the world’s most widely used open-source PBX software.
Sangoma also offers revenue-generating products and services, beyond the open-source Asterisk or FreePBX software, to users of these open-source software projects. The types of products and services Sangoma offers includes software add-ons to Asterisk or FreePBX, IP phones, SIP trunking, cloud-based fax, training, technical support, maintenance, PSTN cards, VoIP gateways, session border controllers, and commercial/hardened versions of the PBX/UC software.
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OVERALL PERFORMANCE
Operational
Sangoma Technologies is a trusted leader in delivering cloud-based CaaS and MSP solutions for businesses of all sizes. Customers include companies from small/medium businesses (SMB’s) right up to large enterprises who are looking for all the advantages of cloud-based communications and managed network services at a fair price. In addition to those cloud-based Services, Sangoma also has a broad suite of Products to complement its Services.
Enterprises, SMBs and carriers in over 150 countries rely on Sangoma’s technology as part of their mission-critical infrastructures. Through a worldwide network of distribution partners, Sangoma delivers high-quality services and products, some of which carry the industry’s first lifetime warranty.
Sangoma has always been operated and managed as a single economic entity. There is one management team that directs the activities of all aspects of the Company and it is managed globally by our executive team. As a result, we believe that we have one reporting segment, being the consolidated Company. Over time, this may change as the Company grows and when this occurs, we will reflect the change in our reporting practice.
Revenue
Sangoma primarily generates revenue from Services and Products. Our Services revenue is generated primarily from customers entering recurring revenue agreements. Product revenues are comprised of the sale of products and services that generate non-recurring revenue.
Innovation
As a technology company, Sangoma is continuously working on a large number of projects across its broad portfolio of existing products and services. While the Company has introduced several new additions to its portfolio over the last few years, the majority of the Company’s investment in Research and Development (“R&D”) is dedicated to sustaining, improving on and enhancing its broad portfolio of existing products and services. Sangoma believes that innovation is essential to a technology company’s future. The Company also believes that R&D investment is necessary in order to address the needs of the Company’s wide-ranging group of customers (which include business of all sizes including service providers, enterprises, small-medium sized businesses, and original equipment manufacturers) in over 150 countries, to keep pace with technology developments in the cloud communications industry, to meaningfully compete in that industry, and to achieve and maintain market acceptance.
The Company focuses on creating and introducing products to the market as soon as commercially practical and, thereafter, focuses on enhancements to further improve its products. Such product introductions enable the Company to validate product acceptance to some degree, and to get products to market efficiently to start generating revenue. Furthermore, the Company focuses on keeping its product development costs for new projects under control in a number of ways, including by reusing its existing code base where applicable and by leveraging open-source software.
Sangoma continues to invest in R&D to develop new products and to improve existing offerings with spending on R&D increasing each year.
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Sales and marketing
R&D is important, but without Sales and Marketing, customers can be too unaware of the advancements that Sangoma has made in innovation. So, Sangoma continues to increase its investment in both Sales and in Marketing, to promote awareness of the Company, to communicate the critical shift from single products to full solutions to cloud, and to drive customer acquisition.
Sales
Sangoma uses a dual sales path ‘go to market’ approach: direct sales to some of our largest customers and indirect distribution to most of our other clients.
Service Providers is a broad category of customers that included telcos, ISPs, ITSPs, wireless/mobile operators, MSPs, UCaaS operators, etc. These types of organizations are potential customers for Sangoma.
OEM partners are companies that ‘design in’ Sangoma products as a component of their solutions. OEM customers tend to be committed participants in their given markets and have longer-term focus. It is important to reach these potential customers in the early days of any project to secure ‘design wins’ and to have sales and marketing programs that will ensure close collaboration during product and sales development cycles.
Enterprise customers are the classic ‘larger’ companies who buy products or services for their own use. This type of customer has similar ‘use cases’ to a SMB type customer but is large enough that some prefer to do business directly with Sangoma, the Company often wants a direct relationship with them as well, and they are buying enough for Sangoma to cost effectively service them directly.
The ‘upper tier’ of the indirect model is typically made up of Distributors or Master Agents, who normally sell not to the end customer, but to the ‘second tier’ of the channel. Master Agents are now sometimes called Technology Service Brokers or Telecom Solution Distributors. This upper tier of the channel tends to be larger organizations and cover broader geographic regions.
The ‘second tier’ of the indirect model is normally made up of Resellers and Agents. Distributors typically sell to resellers, and Master Agents typically sell to Agents. The Resellers and Agents then sell to end users (with some performing other ancillary services such as installation and/or support). The second tier tend to be smaller organizations (though not always) and are usually more ‘local’ in nature.
Sangoma has parts of its sales team that focus on Direct customers, whereas the majority focuses on the Channel. In the Channel, partners require frequent attention to keep Sangoma ‘on their mind’ in a crowded product marketplace. Therefore, a portion of the Channel sales team services the distributors and master agents as the upper tier of the channel, while a different part of the team focuses on the resellers/agents. Finally, Sangoma has professional sales teams across all our key geographic regions as well.
11
Marketing
Sangoma also continues to increase its efforts in marketing. The Company has assembled corporate marketing programs with two key objectives in mind:
Sangoma is now using various marketing techniques typical of technology firms to accomplish those two objectives. This includes participation in tradeshows, speaking at selected industry events, attending specialized seminars run by Sangoma’s distribution channel and other partners, investing in electronic marketing strategies (e.g., web presence, social media and blogging, online advertising, search engine campaigns, etc.), conducting lead generation campaigns via email/social media/etc., webinars, creating thought leadership pieces, PR, etc.
In addition to the overall corporate messaging, in support of the above two objectives, Sangoma has developed a comprehensive set of channel promotion programs, aimed at the Company’s indirect partners described above, both distributors/master agents as well as resellers/agents. The Company seeks to attract new channel partners and to grow the business with existing partners. Sangoma has implemented several incentive programs to reward its channel partners for performance and behaviours that Sangoma believes will grow revenues.
12
RESULTS OF OPERATIONS
All amounts are in millions of United States dollars except where otherwise indicated.
SUMMARY
The following table outlines our unaudited consolidated interim statements of income (loss) and comprehensive income (loss) for the periods indicated:
Three month periods ended | ||||||||||||||||
September 30, | ||||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
$ | $ | $ | % | |||||||||||||
Revenue | 64.05 | 51.50 | 12.55 | 24 | % | |||||||||||
Cost of sales | 20.71 | 14.63 | 6.08 | 42 | % | |||||||||||
Gross profit | 43.34 | 36.87 | 6.47 | 18 | % | |||||||||||
Expenses | ||||||||||||||||
Sales and marketing | 15.65 | 12.11 | 3.54 | 29 | % | |||||||||||
Research and development | 9.43 | 8.36 | 1.07 | 13 | % | |||||||||||
General and administration | 19.29 | 17.27 | 2.02 | 12 | % | |||||||||||
Foreign currency exchange (gain) loss | 0.04 | (0.01 | ) | 0.05 | -500 | % | ||||||||||
44.41 | 37.73 | 6.68 | 18 | % | ||||||||||||
Income (loss) before interest expense (net), business integration costs, gain on change in fair value of consideration payable and income taxes | (1.07 | ) | (0.86 | ) | (0.21 | ) | 24 | % | ||||||||
Interest expense (net) | 1.58 | 0.65 | 0.93 | 143 | % | |||||||||||
Business integration costs | 0.05 | 0.84 | (0.79 | ) | -94 | % | ||||||||||
(Gain) loss on change in fair value of consideration payable | (1.58 | ) | 0.25 | (1.83 | ) | -732 | % | |||||||||
0.05 | 1.74 | (1.69 | ) | -97 | % | |||||||||||
Loss before income tax | (1.12 | ) | (2.60 | ) | 1.48 | -57 | % | |||||||||
Provision for income taxes | - | 0 | % | |||||||||||||
Current | 0.04 | 0.37 | (0.33 | ) | -89 | % | ||||||||||
Deferred | 0.82 | (0.67 | ) | 1.49 | -222 | % | ||||||||||
Net loss | (1.98 | ) | (2.30 | ) | 0.32 | -14 | % | |||||||||
Other comprehensive income (loss) | ||||||||||||||||
Items to be reclassified to net income (loss) | ||||||||||||||||
Change in fair value of interest rate swaps, net of tax | 0.44 | 0.04 | 0.40 | 1000 | % | |||||||||||
Comprehensive loss | (1.54 | ) | (2.26 | ) | 0.72 | -32 | % | |||||||||
Earnings (loss) per share | ||||||||||||||||
Basic | $ | (0.060 | ) | $ | (0.073 | ) | $ | 0.013 | -18 | % | ||||||
Diluted | $ | (0.060 | ) | $ | (0.073 | ) | $ | 0.013 | -18 | % | ||||||
Weighted average number (thousands) | ||||||||||||||||
Basic | 32,953 | 31,717 | 1,236 | 4 | % | |||||||||||
Diluted | 32,953 | 31,717 | 1,236 | 4 | % | |||||||||||
Other pertinent information | ||||||||||||||||
Total assets | 488.93 | 498.53 | (9.60 | ) | -2 | % |
13
REVIEW OF OPERATIONS
Revenue
Sales for the first quarter of fiscal 2023 ended September 30, 2022 were $64.05 million, up 24% from the $51.50 million in the comparable first quarter of fiscal 2022.
2022 | 2021 | Change | Change | |||||||||||||
$ | $ | $ | % | |||||||||||||
Service revenues | 48.32 | 35.86 | 12.46 | 35 | % | |||||||||||
Percentage of total revenues | 75 | % | 70 | % | 5 | % | ||||||||||
Product revenues | 15.73 | 15.64 | 0.09 | 1 | % | |||||||||||
Percentage of total revenues | 25 | % | 30 | % | -5 | % | ||||||||||
Total revenues | 64.05 | 51.50 | 12.55 | 24 | % |
The year-over-year increase in quarterly revenue primarily resulted from the NetFortris acquisition and our existing Services business continuing to grow and compound. As a result, our Services revenue represented 75% of total revenue this quarter, up from 70% in the same quarter of the prior year, and consistent with our strategic objective.
When compared sequentially, our revenue was down 3% from $66.3 million in the fourth quarter of fiscal 2022. This decrease is due primarily to typical seasonality effects in the first quarter, the impact of a strong US dollar exchange rate on some international order flow, and some modest softness in Product sales as customers become more sensitive to Capex purchases given current economic headwinds.
Cost of revenue and gross profit
Three month periods ended | ||||||||||||||||
September 30, | ||||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
$ | $ | $ | % | |||||||||||||
Cost of sales | 20.71 | 14.63 | 6.08 | 42 | % | |||||||||||
Gross profit | 43.34 | 36.87 | 6.47 | 18 | % |
The cost of sales for the quarter ended September 30, 2022 was $20.71 million compared to $14.63 million last year, driven primarily by the addition of the NetFortris business and by the continuing supply chain pressures. Sangoma’s cost of sales has been impacted by global supply chain disruptions, for both electronic components and for shipping. In some cases, Sangoma has needed to order further ahead, pay more for electronic components, and to ship product by air versus by sea (at higher cost). Nevertheless, Sangoma was able to fill most customer orders in the first quarter, despite these supply chain pressures.
Gross profit for the quarter ended September 30, 2022 was $43.34 million, up 18% from the $36.87 million realized in the quarter ended September 30, 2021. Gross margin for the first quarter of fiscal 2023 was approximately 68% of revenue. This is down slightly from the same quarter last year partly because of the global supply chain pressures referenced and partly due to the slightly lower average margin from the Managed Services products. This level of gross margin is consistent with our expectations for fiscal year 2023.
14
Operational expense
As permitted under IFRS, costs are allocated by function except for the impact of foreign exchange, which can result in swings between time periods.
Three month periods ended | ||||||||||||||||
September 30, | ||||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
$ | $ | $ | % | |||||||||||||
Sales and marketing | 15.65 | 12.11 | 3.54 | 29 | % | |||||||||||
Research and development | 9.43 | 8.36 | 1.07 | 13 | % | |||||||||||
General and administration | 19.29 | 17.27 | 2.02 | 12 | % | |||||||||||
Foreign currency exchange (gain) loss | 0.04 | (0.01 | ) | 0.05 | -500 | % | ||||||||||
Total Expense | 44.41 | 37.73 | 6.68 | 18 | % |
Sales and marketing
Sales and marketing expense was $15.65 million for the first quarter of fiscal 2023, an increase from the $12.11 million incurred in the same quarter of fiscal 2022. This was primarily the impact of the addition of the NetFortris sales and marketing expense.
Research and development
A portion of the Company’s R&D costs are capitalized each period and amortized on a straight-line basis over three years (see the audited consolidated financial statements and related notes for the fiscal year ended June 30, 2022, available at www.sedar.com and www.sec.gov).
The engineering expenses incurred, and the development costs amortized during the first quarter of fiscal 2023 were $9.43 million. This was higher than the $8.36 million incurred in the same quarter last year, mostly as a result of the addition of the NetFortris development team, but lower as a percentage of revenue at approximately 15% compared to approximately 16%. For the quarter ended September 30, 2022, the Company did not have any significant projects that have not yet generated revenue, nor did it have any products or services that are not fully developed, and which are material to the Company.
General and administration
General and administration expenses were $19.29 million for the quarter ended September 30, 2022, compared to $17.27 million in the same period of fiscal 2022. The increased spending is driven primarily by the addition of the NetFortris team and the non-cash expense of the additional amortization of the intangible assets acquired.
Foreign exchange
Foreign exchange loss for the quarter ended September 30, 2022 was $0.04 million, compared to a gain of $0.02 million in the same period of fiscal 2022.
Total expenses
Total operating expense for the first quarter of fiscal 2023 was $44.41 million versus $37.73 million during the same period last year. The primary driver of the increase was the incremental expense associated with the addition of the NetFortris business, partly offset by cost savings from the integration which began in the fourth quarter of fiscal 2022 and carried through the first quarter of fiscal 2023. Overall, total operating expenses increased by 18% year-over-year this quarter, whereas revenue was up by 24%, consistent with Sangoma’s long term approach of growing expenses slightly more slowly than growing revenue, demonstrating our operating leverage.
15
Adjusted Operating Income (Loss)
Adjusted Operating Loss for the quarter ended September 30, 2022 was $1.07 million, higher than the loss of $0.86 million loss in the same period last year, due to the above factors.
Interest
Net interest expense for the quarter ended September 30, 2022 was $1.58 million, higher than the $0.66 million in the same period last year, primarily due to the additional interest expense on the new debt from the acquisition of NetFortris, the non-cash accretion expense associated with the consideration payable and from the increases in prevailing interest rates.
Business acquisition costs
There were no business acquisition costs incurred in the quarter ended September 30, 2022 or in the same period last year.
Business integration costs
For the first quarter of fiscal year 2023, Sangoma recorded $0.05 million of costs directly associated with the reduction of staff between the two companies following the NetFortris acquisition compared to $0.84 million of integration costs in the same period last year for the Star2Star acquisition. The Company anticipates additional costs in the second quarter of fiscal year 2023 as it continues to finalize the integration.
Consideration payable
As part of the agreement for the purchase of Star2Star, Sangoma processes certain payroll transactions for Star2Star Holdings (“Holdings”) option holders each time an instalment of the remaining share consideration is distributed. This gives rise to a tax deduction for Sangoma, the benefit of which is paid to Holdings when it is realized by Sangoma. To account for this, the estimated amount is calculated each quarter and recorded as a deferred tax asset, with the associated liability to Holdings recorded as consideration payable. The amount of the potential payment is tied to Sangoma’s share price, the US to Canadian dollar exchange rate and the current US tax rate. As this changes, the Company will update the potential payout. As of September 30, 2022, the changes in these factors gave rise to a gain versus the amount established in the same period of fiscal 2022. An offset equivalent to the gain was included in deferred tax expense. There is no cash exposure to Sangoma since the payment is only due when the tax benefit is actually realized, and the two balances will largely offset each other over time.
Net income (loss)
Net loss for the first quarter was $1.98 million ($0.060 loss per share fully diluted), compared to a net loss of $2.30 million ($0.073 loss per share fully diluted) for the equivalent quarter ended September 30, 2022.
16
Adjusted EBITDA
The derivation of Adjusted EBITDA and the reconciliation of net income to Adjusted EBITDA for the comparable quarter and each fiscal year is shown in the table below.
Three month periods ended | ||||||||||||||||
September 30, | ||||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
$ | $ | $ | % | |||||||||||||
Net income (loss) | (1.98 | ) | (2.30 | ) | 0.32 | -14 | % | |||||||||
Tax | 0.86 | (0.30 | ) | 1.16 | -387 | % | ||||||||||
Interest expense (net) | 1.58 | 0.65 | 0.93 | 143 | % | |||||||||||
Share-based compensation | 0.92 | 2.12 | (1.20 | ) | -57 | % | ||||||||||
Depreciation of property and equipment | 1.31 | 0.44 | 0.87 | 198 | % | |||||||||||
Depreciation of right-of-use assets | 1.00 | 0.73 | 0.27 | 37 | % | |||||||||||
Amortization of intangibles | 8.58 | 7.66 | 0.92 | 12 | % | |||||||||||
Business integration costs | 0.05 | 0.84 | (0.79 | ) | -94 | % | ||||||||||
Change in fair value of consideration payable | (1.58 | ) | 0.25 | (1.83 | ) | -732 | % | |||||||||
Adjusted EBITDA | 10.74 | 10.09 | 0.65 | 6 | % | |||||||||||
Percentage of revenue | 17 | % | 20 | % | -3 | % | -14 | % |
For the first quarter of fiscal 2023, Adjusted EBITDA at $10.74 million, was up from $10.09 million of the same quarter last year, primarily resulting from the addition of NetFortris, the underlying growth in our Services business, and the cost restructuring as part of the integration of NetFortris.
QUARTERLY RESULTS OF OPERATIONS
Sangoma’s quarterly revenue has now exceeded the same period in the prior year for each of the last 28 quarters. Selected financial information over the prior eight quarters is shown in the table below.
Sales and Net Income by Quarter
Second | Third | Fourth | First | Second | Third | Fourth | First | |||||||||||||||||||||||||
quarter | quarter | quarter | quarter | quarter | quarter | quarter | quarter | |||||||||||||||||||||||||
2020-2021 | 2020-2021 | 2020-2021 | 2021-2022 | 2021-2022 | 2021-2022 | 2021-2022 | 2022-2023 | |||||||||||||||||||||||||
Sales | $ | 27.09 | $ | 27.95 | $ | 50.12 | $ | 51.50 | $ | 53.19 | $ | 53.37 | $ | 66.29 | $ | 64.05 | ||||||||||||||||
Gross Profit | $ | 17.93 | $ | 18.32 | $ | 35.88 | $ | 36.87 | $ | 38.35 | $ | 37.20 | $ | 44.47 | $ | 43.34 | ||||||||||||||||
Expenses | $ | 15.13 | $ | 15.76 | $ | 37.78 | $ | 37.73 | $ | 39.19 | $ | 40.14 | $ | 45.71 | $ | 44.41 | ||||||||||||||||
Adjusted operating income (loss) | $ | 2.80 | $ | 2.56 | $ | (1.90 | ) | $ | (0.86 | ) | $ | (0.84 | ) | $ | (2.94 | ) | $ | (1.24 | ) | $ | (1.07 | ) | ||||||||||
Net income (loss) | $ | 1.77 | $ | (1.78 | ) | $ | (1.29 | ) | $ | (2.30 | ) | $ | (2.48 | ) | $ | (6.76 | ) | $ | (99.25 | ) | $ | (1.98 | ) | |||||||||
Net earnings (loss) per share | ||||||||||||||||||||||||||||||||
Non-diluted basis | $ | 0.112 | $ | (0.112 | ) | $ | (0.041 | ) | $ | (0.073 | ) | $ | (0.078 | ) | $ | (0.212 | ) | $ | (2.987 | ) | $ | (0.060 | ) | |||||||||
Fully diluted basis | $ | 0.110 | $ | (0.112 | ) | $ | (0.041 | ) | $ | (0.073 | ) | $ | (0.078 | ) | $ | (0.212 | ) | $ | (2.987 | ) | $ | (0.060 | ) | |||||||||
Adjusted EBITDA | $ | 5.14 | $ | 5.35 | $ | 9.78 | $ | 10.09 | $ | 10.43 | $ | 10.47 | $ | 11.13 | $ | 10.74 |
Revenues over the comparative periods have been positively impacted by the acquisitions of NetFortris in March 2022, the acquisition of Star2Star in March 2021, the organic growth within the existing Services business, as well as an uptick in some quarters for the Product business. Revenue streams continue to exhibit some modest seasonal trends with the first quarter often having been down slightly from the immediately preceding fourth quarter.
In line with revenue, cost of goods sold, gross profit, operating expenses, and Adjusted EBITDA have all increased over the comparable periods. In addition, cost of goods has been impacted by the related global supply chain pressures, for both electronic components and for shipping. In some cases, Sangoma has needed to order further ahead, pay more for electronic components, and to ship product by air versus by sea at higher cost.
17
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2022, Sangoma had current assets of $60.06 million and current liabilities of $73.09 million, compared with $61.01 million and $78.41 million at June 30, 2022, respectively. The decrease in assets is primarily a result of the repayment of debt and certain tax payments which were made in the first quarter, while the decrease in liabilities is primarily a result of the repayment of debt.
The Company closed the first quarter with $8.29 million of cash compared to $12.70 million at June 30, 2022. The Company used a portion of its cash to fund the NetFortris acquisition, to continue paying down the debt associated with its most recent acquisition, and in the share buyback program under our normal course issuer bid (the “NCIB”).
Trade receivables of $17.22 million on September 30, 2022, were higher than the $16.05 million on June 30, 2022, primarily as a result of the addition of NetFortris and from the growth in our business.
Inventories were $19.07 million on September 30, 2022, $1.64 million higher than the $17.43 million at June 30, 2022, primarily reflecting the addition of NetFortris, as well as the inventory build undertaken to offset potential supply chain delays described earlier. As indicated in our fiscal 2022 results, Sangoma expects this elevated inventory level to continue for the next few quarters until the supply chain stabilizes.
Sangoma generated $3.20 million of Adjusted Cash Flow from operations during the first fiscal quarter of 2023 ended September 30, 2022, compared to $5.04 million in the same quarter last year. The reconciliation of net cash flows from operating activities to Adjusted Cash Flow for the first quarters of fiscal 2022 and 2023 are shown in the table below.
Three month periods ended | ||||||||||||||||
September 30, | ||||||||||||||||
2022 | 2021 | Change | Change | |||||||||||||
$ | $ | $ | % | |||||||||||||
Net cash flows from operating activities | 3.64 | 4.01 | (0.37 | ) | -9 | % | ||||||||||
Less capitalization of development costs | (1.77 | ) | (0.34 | ) | (1.43 | ) | 421 | % | ||||||||
Interest expense | 1.28 | 0.53 | 0.75 | 142 | % | |||||||||||
Business acquisition costs paid | - | - | - | 0 | % | |||||||||||
Business integration costs | 0.05 | 0.84 | (0.79 | ) | -94 | % | ||||||||||
Exchange listing expense | - | - | - | 0 | % | |||||||||||
Adjusted cash flow from operations | 3.20 | 5.04 | (1.84 | ) | -37 | % |
There are no existing or anticipated defaults or arrears on lease payments or interest payments and Sangoma is in full compliance with all debt covenants. Management of the Company believes that the current working capital and expected funds generated from operations will be sufficient to meet the operating and planned capital expenditures of the Company for the foreseeable future.
Credit Facility
On October 18, 2019, the Company entered into a new credit agreement (the “Original Credit Agreement”) in favour of its subsidiaries, Sangoma Technologies Inc. and Sangoma US Inc. (the “Borrowers”) with inter alia The Toronto-Dominion Bank and The Bank of Montreal, as lenders (the “Lenders”). Under the terms of the Original Credit Agreement, the Lenders provided the Borrowers with a term loan facility to refinance the Company’s existing credit facilities and to fund part of the purchase of VI Acquisition.
18
On March 31, 2021, the Company entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) which amended and restated the Original Credit Agreement to allow the Company to fund part of the StarBlue Acquisition.
On March 28, 2022, the Company entered into the Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) which amended and restated the Amended and Restated Credit Agreement to allow the Company to fund part of the NetFortris Acquisition. The Second Amended and Restated Credit Agreement is comprised of: (i) a $6,000,000 revolving credit facility, (ii) a $21,750,000 term credit facility, which was used to partially fund the VI Acquisition (iii) a $45,937,500 term credit facility, which was used to partially fund the StarBlue Acquisition, (iv) a $45,000,000 term credit facility, which was used to partially fund the NetFortris Acquisition (the “Term 3 Facility”), and (v) a $1,500,000 swingline credit facility.
On June 28, 2022, the Company entered into the first amendment to the Second Amended and Restated Credit Agreement to reflect certain administrative amendments and to amend the amount of the Term 3 Facility quarterly principal installments.
Under its Second Amended and Restated Credit Agreement with its lenders, the Company must satisfy certain financial covenants, principally in respect of total funded debt to earnings before interest, taxes and amortization, and debt service coverage ratio. As at September 30, 2022, the Company was in compliance with all covenants related to its Credit Agreement.
CONTRACTUAL OBLIGATIONS
The following table shows the movement in contractual liabilities from July 1, 2022 to September 30, 2022:
$ | ||||
Opening balance, July 1 , 2021 | 15,754 | |||
Revenue deferred during the period | 40,272 | |||
Deferred revenue recognized as revenue during the period | (42,625 | ) | ||
Additions through business combination (Note 20) | 1,666 | |||
Ending balance, June 30, 2022 | 15,067 | |||
Revenue deferred during the period | 10,163 | |||
Deferred revenue recognized as revenue during the period | (10,579 | ) | ||
Ending balance, September 30, 2022 | 14,651 | |||
Contract liabilities - Current | 10,933 | |||
Contract liabilities - Non-current | 3,718 | |||
14,651 |
19
Commitments
The table below outlines our contractual commitments as of September 30, 2022:
For the twelve-month periods ended | ||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||
2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
Accounts payable and accrued liabilities | 27,625 | - | - | - | - | 27,625 | ||||||||||||||||||
Sales tax payable | 5,636 | - | - | - | - | 5,636 | ||||||||||||||||||
Consideration payable | 9,995 | 695 | 695 | 290 | - | 11,675 | ||||||||||||||||||
Operating facility and loans | 17,700 | 17,700 | 22,050 | 20,600 | 22,150 | 100,200 | ||||||||||||||||||
Lease obligations on right of use assets | 3,933 | 3,113 | 2,958 | 2,185 | 7,154 | 19,343 | ||||||||||||||||||
Other non-current liabilities | - | - | - | - | 1,024 | 1,024 | ||||||||||||||||||
64,889 | 21,508 | 25,703 | 23,075 | 30,328 | 165,503 |
USE OF PROCEEDS FROM EQUITY FINANCINGS
As of the date of this MD&A, there has not been, and the Company does not anticipate, any changes to its previously made disclosure about the Company’s intended use of proceeds from the Offerings.
Offering | Previously Disclosed Proposed Use of Proceeds | Actual Use of Proceeds and Explanation of Variances | ||
Prospectus Supplement dated July 24, 2020 to the Short Form Base Shelf Prospectus Dated June 29, 2020
|
The Company intends to use net proceeds of the Offering for future acquisitions, with any unused net proceeds to be used for working capital and other general corporate purposes, including to reduce debt. The Company will have discretion in the actual application of Net Proceeds. |
Substantially all of the proceeds were used in the Company’s acquisition of StarBlue Inc. and its wholly-owned operating subsidiary Star2Star Communications, LLC completed on March 31, 2021.
|
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of Sangoma.
RELATED PARTY TRANSACTIONS
Except as disclosed in the notes to the consolidated financial statements, the Company is not party to any material transactions with related parties.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We review these estimates on an ongoing basis based on management’s best knowledge of current events and actions that we may undertake in the future. Actual results could differ from these estimates. All significant estimates and critical judgments, estimates, and assumptions are described in Note 3 of the Company’s Financial Statements.
20
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
The fair values of the cash and cash equivalents, trade and other receivables, derivative assets, contract assets, other current assets, accounts payable and accrued liabilities, consideration payable and derivative liabilities approximate their carrying values due to the relatively short-term nature of these financial instruments or as these financial instruments are fair valued at each reporting period. The fair values of operating facility and loans approximate their carrying values due to variable interest loans or fixed rate loan, which represent market rate. Further details relating to our financial instruments, the risks associated with the financial instruments and how we manage those risks, are described in Note 4 of the Company’s Financial Statements.
SIGNIFICANT EVENTS
Normal Course Issuer Bid
In the fourth quarter of fiscal 2022, the Company announced its intention to make an NCIB with respect to its Shares. Pursuant to the NCIB, Sangoma may, during the 12-month period commencing June 23, 2022 and ending no later than June 22, 2023, purchase up to 1,071,981 Shares, representing 5% of the total number of 21,439,632 Shares outstanding, through the facilities of the TSX, the Nasdaq Global Select Market or alternative Canadian trading systems. Sangoma also entered into an automatic share purchase plan with a designated broker to allow for the purchase of Shares under the NCIB at times when the Company would ordinarily not be permitted to purchase Shares due to self-imposed blackout periods, insider trading rules or otherwise.
Under the term of the NCIB, during the three-month period ended September 30, 2022, the Company purchased a total of 40,922 common shares at an average price of $6.52 per share, for total consideration of $267,000. During the quarter 10,700 of those common shares were settled and cancelled along with 5,500 common shares that were purchased in the fourth fiscal quarter of 2022. The remaining 30,222 common shares were settled and cancelled on October 5, 2022. In addition, from October 1, 2022 to October 31, 2022, the Company’s agent purchased 13,600 common shares at an average price of $5.11 per share for total consideration of $70,000, which were settled and cancelled on November 2, 2022. As of the date hereof, the Company’s agent purchased an additional 13,800 common shares. These common shares have not yet been settled and cancelled.
OUTSTANDING SHARE INFORMATION
We are currently authorized to issue an unlimited number of common shares. As of the date hereof, 22,103,407 common shares and 1,150,929 stock options are issued and outstanding.
On November 8, 2022, a total of 981,314 shares were issued to the StarBlue sellers in accordance with the share purchase agreement. Following this issuance, 10,000,000 shares remain to be issued over the next three years.
21
GUIDANCE
On September 26, 2022, the Company provided guidance for fiscal 2023. The Company is maintaining its guidance of revenue between $275 - $285 million and Adjusted EBITDA of $48 - $52 million.
The above outlook constitutes forward-looking information and is based on the Company’s assessment of many material assumptions, including:
• | The Company’s ability to manage current supply chain constraints, including our ability to secure electronic components and parts, manufacturers being able to deliver ongoing quantities of finished products on schedule, no further material increases in cost for electronic components, and no significant delay or material increases in cost for shipping |
• | The revenue trends the Company experienced in fiscal year 2022 and the trends we expect going forward in fiscal 2023 and not negatively impacted by growing economic headwinds globally |
• | The continuing recovery of the global economy from the impact of COVID-19, including decreased government restrictions and increased customer demand, all of which would not be materially negatively affected by more recent macro factors such as inflation, interest rates, or recessions |
• | The successful integration of NetFortris, the achievement of post-closing synergies, and the ability to cross-sell NetFortris and Sangoma’s products and services to the other’s customer base |
• | The NetFortris business continuing to operate and generate results in a manner consistent with its business preceding its acquisition by the Company and as anticipated by us |
• | There being continuing growth in the global UCaaS and cloud communications markets more generally |
• | There being continuing demand and subscriber growth for our Services and continuing demand as anticipated for our Products |
• | Changes in global exchange rates do not disrupt demand for the Company’s Products and Services |
• | The ability of the Company’s customers to continue their business operations without any material impact on their requirements for the Company’s Products and Services |
• | The Company’s forecasted revenue from its internal sales teams and via channel partners will meet expectations, which is based on certain management assumptions, including continuing demand for the Company’s products and services, no material delays in receipt of products from its contract manufacturers, no further material increase to the Company’s manufacturing, labour or shipping costs |
• | There are no additional revenue reclassifications |
• | The Company is able to remediate the material weaknesses identified in its internal control over financial reporting |
• | That the Company is able to attract and keep the employees needed to maintain the current momentum |
• | The continued ability for the Company’s operational employees to work at the Company’s internal and outsourced facilities |
• | Other employees being able to work from home as required without any material impact on productivity |
22
Controls and Procedures
Management of the Company, under the supervision of the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) (as defined under applicable Canadian securities laws and by the United States Securities and Exchange Commission (“SEC”) in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for the company to ensure that (i) material information relating to the Company is made known to management by others, particularly during the period in which the annual and interim filings are being prepared; and (ii) information required to be disclosed by the Company in its annual and interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time period specified in securities legislation.
Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer and oversight of the Board of Directors evaluated the effectiveness of our ICFR as of September 30, 2022 against the criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon the evaluation, management has concluded that, because of the material weakness described in our management discussion & analysis for the year ended June 30, 2022 (the “Fiscal 2022 Annual MD&A”), as of such date, the Company’s disclosure controls and procedures were not effective.
Remediation of Material Weakness in ICFR
As previously described in our Fiscal 2022 Annual MD&A, management, has initiated remediation efforts to address the material weakness identified in its Fiscal 2022 Annual MD&A, as well as to foster improvement in the Company’s internal control and enhance the overall financial control environment.
While we believe that the efforts taken to date and those planned for remediation will improve the effectiveness of our internal control over financial reporting, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
23
GLOSSARY OF TERMS
Analog
Analog telephony is the telephone system that dates back to the original experiments by Alexander Graham Bell. The voice signal is picked up by a microphone and transmitted to the central office. Voice signals from the central office consist of voltages that drive a headset to produce sound. Analog means that the voice pressure signals are represented by voltages levels on the line.
API
Application Program Interface: An API is a purpose-built interface that allows fourth party software to interact with a particular application. A typical API is the user interface for Windows that allows programmers to write programs for Windows that use all its built-in utilities. APIs do not depend on revealing source code, in general. They are usually well documented and include sample programs that make development easy.
Codec
In the telephony context a codec is a mechanism of digitally encoding voice. On the PSTN a voice channel takes up 64kbps in a codec standard called G.711. Cell phones use a codec called GSM that compresses the voice further so that a GSM call consumes about 24kbps. Other compressed codecs are used in VoIP to conserve bandwidth. These include standards such as G.729, G.723. Most audio codecs are lossy, in that some of the voice quality is degraded by the compression. On the other hand, as bandwidth becomes cheaper, VoIP allows one to use other codecs that in fact use more bandwidth than the PSTN, the so-called broadband codecs that have DVD-like voice quality.
Digital telephony
In the modern PSTN only the “last mile” line to the customer is still analog, all other internal parts of the network are digital. Digital in this case means that at the central office the analog signal from the subscriber’s telephone is sampled digitally, converting the line voltages to a series of numbers that can be easily transmitted error free over long distances. See T1, E1 below.
DID
Direct Inward Dialing (“DID”) is a virtual phone number that uses the existing phone lines to route incoming calls. Callers can connect to a phone extension directly without an operator. This offers convenience for both employees and callers alike. DID offers a cost saving on its own and is less expensive when purchased with a SIP trunk.
Gateway
In the telephony context this is typically a separate unit with its own case and power supply that provides VoIP-to-PSTN services for a VoIP network. Almost all gateway devices use SIP interfaces to the VoIP system over Ethernet and have analog or digital telephony interfaces that connect to the PSTN. VoIP gateways are available from many manufacturers including Audiocodes, Cisco, Grandstream, Patton Electronics and many others.
ISDN
Integrated Services Digital Network (“ISDN”) is a set of communications standards for simultaneous digital transmission of voice, video, data, and other network services over the traditional circuits of the public switched telephone network. Of the many variations of ISDN, Sangoma supports BRI (Basic Rate Interface) which is essentially an all-digital replacement for ordinary analog lines and PRI (Primary Rate Interface) which is used over T1 and E1 lines. BRI is very popular outside of North America. PRI is used worldwide.
IoT
Internet of Things (“IoT”) refers to a system of interrelated, internet-connected objects that are able to collect and transfer data over a wireless network without human intervention.
IP
The Internet Protocol (“IP”) is the primary protocol in the internet layer of the Internet protocol suite, and delivers data packets from the source host to the destination host solely based on the IP address.
ISP
Internet Service Provider
ITSP
Internet Telephony Service Provider who offer telecommunications service including voice over internet type connections.
24
IVR
Interactive Voice Response: IVR systems use the phone to navigate a menu, for example those used by banks to allow access to customer’s account information. IVR systems have typically been driven by dial tones as the buttons on your phone are pressed, but increasingly they are using voice recognition for navigation.
Open Source
Open Source software is distributed free subject to certain conditions. Open Source licenses usually stipulate that source code must always be distributed or made available, and any improvements in the code have to be donated back to the community. It is possible to have dual licensing: Open Source to the community and also a closed, commercial license of the same or similar software.
NetBorder
This is the trade name of a Sangoma SIP to PSTN gateway product. It includes several other functions in addition to the PSTN gateway function. The mass marketed version is known as NetBorder Express or NBE.
PBX
Private branch exchange. A PBX is a premised basis device to deliver calls from the PSTN or VOIP network to phones in a single or multiple locations.
PSTN
Public Switched Telephone Network: This is the standard telephone network that has been in operation for many decades. A telephone or FAX or PBX or other telephony device is generally connected to an analog line at a wall plug, which is connected by “last mile” cabling to the central office. The analog signal from the device is converted to a digital signal at the Telco central office and is multiplexed, 24 simultaneous voice channels per line (in North America) onto a T1 for onward transmission. At the other end of the line the digital channel is reconverted to analog for transmission over the “last mile” to the receiving phone or other device.
SBC
A Session Border Controller (“SBC”) is a device deployed in Voice over Internet Protocol (“VoIP”) networks to exert control over the signaling and usually also the media streams involved in setting up, conducting, and tearing down telephone calls or other interactive media communications. SBCs are deployed as demarcation points between enterprises and service providers and between service provider networks.
SD-WAN
A Software-defined Wide Area Network (“SD-WAN”) uses software to control and manage connectivity across a customers wide area network. While traditional wide area networks rely on physical routers to connect remote users, this centralized software solution can help customers monitor their performance of the network and manage traffic.
Signalling
Call setup and tear down is remarkably complicated, involving such things as responding to the different tones as well as generating them, caller identification and handling the different features like hook-flash and voicemail properly. There are different signalling mechanisms for different types of circuits. Analog circuits use tones such as out-of-order, busy, ringing as well as the dialling tones. T1 lines often use a data protocol called ISDN PRI, where packets of control data are exchanged on a separate data channel. ISDN PRI is a simplification of the general signalling protocol used internally by the telecommunications networks known as SS7. In all cases signalling has to be exactly compatible with what the Telco expects, so interoperability and standards are important.
SIP
Session Initiation Protocol: SIP is the emerging standard signalling protocol for VoIP, though it has much broader applications. SIP is responsible for setting up and teardown of two party and multiparty calls, as well as a host of management features. To a great and increasing extent, VoIP calls are SIP based. The term SIP Trunk is used to describe the provision of a SIP line to an end customer.
T1, E1
A T1 line is a circuit that carries 24 digital telephone calls simultaneously. At higher densities, 28 T1s are aggregated into a T3 line carrying 672 calls. Larger offices can also connect to the central office via T1 directly, so as to have only one circuit for up to 24 calls. T1 is standard in North America and Japan while E1 is the standard in the rest of the world. E1 carries 30 channels of digitized voice per line.
TDM
Time Division Multiplexing (“TDM”) is used in circuit switched networks to increase the number of calls carried simultaneously on any one circuit and formed the basis for the digital telephony networks.
25
Unified Communications
Unified communications is a concept in which voice, email, messaging, video and any other type of communication are all considered forms of data that can be combined, manipulated and used in intelligent applications in a seamless way.
VoIP
Voice over IP: The transfer of voice traffic over the Internet Protocol. IP is used universally for all networking including local area networks and private networks, not just the Internet. VoIP is not necessarily voice over the Internet, but voice over general data networks.
26
EXHIBIT 99.3
Sangoma Announces First Quarter Fiscal 2023 Results
Sales grow 24% year-over-year and Services Revenue Exceeds 75% of Total Sales for the First Time
MARKHAM, Ontario, Nov. 10, 2022 (GLOBE NEWSWIRE) -- Sangoma Technologies Corporation (TSX: STC; Nasdaq: SANG) (“Sangoma” or the “Company”), a trusted leader in delivering cloud-based Communications as a Service solutions for companies of all sizes, today announced its first quarter financial results and unaudited consolidated financial statements for the fiscal quarter ended September 30, 2022.
Revenue for the first quarter of fiscal 2023 was $64.05 million, an increase from the prior year of 24%.
US $m | Q1 FY2023 | Q1 FY2022 | Change | Q4 FY2022 | Change | |||
Sales | $64.05 | $51.50 | 24% | $66.29 | (3%) | |||
Gross profit | $43.34 | $36.87 | 18% | $44.47 | (3%) | |||
Operating expense | $44.41 | $37.73 | 18% | $45.71 | (3%) | |||
Adjusted operating income1 (loss) | ($1.07) | ($0.86) | ($1.24) | |||||
Net income (loss) | ($1.98) | ($2.30) | ($99.25) | |||||
Net earnings/(loss) per share2 (fully diluted) | ($0.060) | ($0.073) | ($2.987) | |||||
Adjusted EBITDA1 | $10.74 | $10.09 | 6% | $11.13 | (4%) |
“I’m pleased with another solid quarter on both the top and bottom line, especially given the seasonality of our first quarter, which covers the historically slower summer months,” said Bill Wignall, President and CEO. “It is very encouraging to see our Services revenue hit 75% of total sales for the first time, up from 71% in our fiscal year 2022 and 62% in fiscal 2021. This once again demonstrates our successful transition to recurring SaaS revenue streams, and is consistent with our expectation for this fiscal year. While we are focused on executing our plan and the team is confident we will see a successful fiscal 2023, we also remain very aware of the economic headwinds across the globe these days. Sangoma has a resilient business and given the inherent flexibility in our business model, we will be vigilant in protecting our profitability.”
Revenue for the fiscal first quarter was $64.05 million, up from $51.50 million in the first quarter last year by 24%, and down by approximately 3% from the immediately preceding fourth quarter of fiscal 2022, due to typical seasonality effects, the impact of a strong US dollar exchange rate on some international order flow, and some modest softness in Product sales as customers become more sensitive to Capex purchases given current economic headwinds. Services revenue exceeded 75% of total sales for the first time this quarter.
Gross profit for the quarter was $43.34 million, up from $36.87 million in the same period last year by about 18%. Gross margin at 68% of revenue for the quarter was slightly above the gross margin in the fourth quarter of fiscal 2022, and around the level the Company anticipates for fiscal 2023.
Operating expenses were $44.41 million for the quarter compared $37.73 million in the first quarter of fiscal year 2022. The year over year increases reflect the addition of the NetFortris team, the associated spending, and the non-cash intangible asset amortization arising from the acquisition. Our operating expenses have decreased by $1.30 million sequentially versus the most recent fourth quarter, reflecting the cost savings and integration synergies we have previously identified.
Adjusted EBITDA1 was $10.74 million in the first fiscal quarter of 2023, compared to $10.09 million for the same period of the prior year, and was approximately 17% of sales, the same ratio as existed in the most recently completed quarter
Net loss for the first quarter was $1.98 million as compared to $2.30 million for the first quarter of fiscal 2022.
Sangoma continues to maintain a healthy balance sheet, finishing the quarter with a cash balance of $8.29 million on September 30, 2022, generates positive Adjusted Cash Flow1, and remains comfortably within its debt covenants.
Outlook for fiscal year 2023
The Company is maintaining its outlook for the fiscal 2023 year. We expect to generate revenue of between $275 and $285 million, and Adjusted EBITDA to be in a range of $48 to $52 million.
The above outlook and guidance constitute forward-looking information and are based on the Company’s assessment of many material assumptions, including:
Conference call
Sangoma will host a conference call on Friday, November 11, 2022, at 8:00 am EST to discuss these results. The dial-in number for the call is 1-800-319-4610 (International 1-604-638-5340). Participants are requested to dial in 5 before the scheduled start time and ask to join the Sangoma call.
1 Adjusted Operating Income, Adjusted EBITDA and Adjusted Cash Flow are non-IFRS financial measures used by the Company to monitor its performance and definitions of these terms along with reconciliation to the closest IFRS measure may be found in the accompanying MD&A on pages 3, 13, 17 and 18 posted today at www.sedar.com and www.sec.gov.
About Sangoma Technologies Corporation
Sangoma Technologies is a trusted leader in delivering value-based Communications as a Service (CaaS) and Managed Service Provider (MSP) solutions for businesses of all sizes, including Managed Security, Managed SD-WAN and Managed Access. Sangoma’s cloud-based communication services include Unified Communication (UCaaS) business communications, Contact Center as a Service (CCaaS), Video Meetings as a Service (MaaS), Collaboration as a Service (Collab aaS), Communications Platform as a Service (CPaaS), Trunking as a Service (TaaS), Fax as a Service (FaaS), Device as a Service (DaaS), and Access Control as a Service (ACaaS). In addition, Sangoma offers a full line of communications Products, including premise-based UC systems, a full line of desk phones and headsets, and a complete connectivity suite (gateways/SBCs/telephony cards). Sangoma’s products and services are used in leading UC, PBX, IVR, contact center, carrier networks, office productivity, and data communication applications worldwide. Sangoma is also the primary developer and sponsor of Asterisk and FreePBX, the world’s two most widely used open-source communication software projects.
Sangoma Technologies Corporation is publicly traded on the Toronto Stock Exchange (TSX: STC) and Nasdaq (Nasdaq: SANG). Additional information on Sangoma can be found at: www.sangoma.com.
Cautionary Statement Regarding Forward Looking Statements
This press release contains forward-looking statements, including statements regarding the expected fiscal 2023 financial results and the future success of our business, development strategies and future opportunities.
Forward-looking statements are provided for the purpose of presenting information about management’s current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes. Forward-looking statements include, but are not limited to, statements relating to management’s guidance on revenue and Adjusted EBITDA, and other statements which are not historical facts. When used in this document, the words such as "could", "plan", "estimate", "expect", "intend", "may", "potential", "should" and similar expressions indicate forward-looking statements.
Although Sangoma believes that its expectations reflected in these forward-looking statements are reasonable, such statements involve inherent risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements, if at all. Forward-looking statements are based on the opinions and estimates of management at the date that the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected, estimated or anticipated in forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other events contemplated by the forward-looking statements will not occur. Although Sangoma believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct as these expectations are, therefore, inherently subject to business, economic and competitive uncertainties and contingencies. Some of the risks and other factors which could cause actual results to differ materially from those expressed or implied in the forward-looking statements contained in its management's discussion and analysis, annual information form and management information circular (each available on www.sedar.com) include, but are not limited to, risks and uncertainties associated with the integration of NetFortris, the remediation of material weaknesses, the impact of the continuing COVID-19 pandemic, changes in exchange rate between the United States dollar and other currencies, expectations regarding the amount of frequency of impairment losses, including as a result of the write-down of intangible assets, including goodwill, delay in project deliveries, changes in technology, changes in the business climate, , changes to macroeconomic conditions, including rising interest rates and the occurrence of (or fears of an impending) of economic recession, risks related to the COVID-19 (coronavirus) pandemic, changes in the regulatory environment, the imposition of tariffs, the decline in the importance of the PSTN (as hereinafter defined), impairment of goodwill and new competitive pressures, and acts of terrorism and war, hostilities and conflicts, including, but not limited to, Russia’s invasion of Ukraine in February 2022. The forward-looking statements contained in this press release are expressly qualified by this cautionary statement. Sangoma undertakes no obligation to update forward-looking statements if circumstances or management's estimates or opinions should change except as required by law.
Sangoma Technologies Corporation
Larry Stock
Chief Financial Officer
investorrelations@sangoma.com
Exhibit 99.4
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, William Wignall, President and Chief Executive Officer of Sangoma Technologies Corporation, certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”)
of Sangoma Technologies Corporation (the “issuer”) for the interim period ended September 30, 2022.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do
not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make
a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report
together with the other financial information included in the interim filings fairly present in all material respects the financial condition,
financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National
Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying
officer(s) and I have, as at the end of the period covered by the interim filings
1. | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that | ||
1. | material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and | ||
2. | information required to be disclosed by the issuer 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; and | ||
2. | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
5.1 Control
framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s
ICFR is Internal Control – Integrated Framework (COSO 2013 Framework) published by The Committee of Sponsoring
Organizations of the Treadway Commission.
5.2 ICFR – material
weakness relating to design: The issuer has disclosed in its interim MD&A for each material weakness relating to design existing
at the interim period:
(a) a description of the material weakness;
(b) the impact of the material weakness on the issuer’s financial reporting and its ICFR; and
(c) the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness.
5.3 N/A
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2022 and ended on September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
Date: November 10, 2022
“William Wignall”____________________
President and Chief Executive Officer
Exhibit 99.5
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, Larry Stock, Chief Financial Officer of Sangoma Technologies Corporation, certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”)
of Sangoma Technologies Corporation (the “issuer”) for the interim period ended September 30, 2022.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do
not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make
a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report
together with the other financial information included in the interim filings fairly present in all material respects the financial condition,
financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National
Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying
officer(s) and I have, as at the end of the period covered by the interim filings
1. | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that | ||
1. | material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and | ||
2. | information required to be disclosed by the issuer 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; and | ||
2. | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
5.1 Control framework: The
control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control
– Integrated Framework (COSO 2013 Framework) published by The Committee of Sponsoring Organizations of the Treadway Commission.
5.2 ICFR –
material weakness relating to design: The issuer has disclosed in its interim MD&A for each material weakness relating to
design existing at the interim period:
(a) a description of the material weakness;
(b) the impact of the material weakness on the issuer’s financial reporting and its ICFR; and
(c) the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness.
5.3 N/A
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2022 and ended on September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
Date: November 10, 2022
“Larry Stock”____________________
Chief Financial Officer