TeraGo Inc Annual Report

Transcription

1 TeraGo Inc Annual Report INTERNET DATA NETWORKING VOICE

2 CONTENTS Letter to Shareholders 3 Management s Discussion and Analysis 6 Auditors Report 41 Consolidated Financial Statements Statement of Financial Position 42 Statements of Comprehensive Earnings (Loss) 43 Statements of Cash Flows 44 Statements of Changes in Equity 45 Notes to Financial Statements 46 Corporate Information 75

3 Letter to Shareholders April, 2012 Fellow shareholders, TeraGo s overall performance in 2011 underscores the strength of both our business and our strategic direction. We continued to effectively implement the growth strategy we introduced several years ago and were rewarded with record results and positive net income for the year. Two significant initiatives executed in the year, both enabled by our history of prudent fiscal management, allowed us to accelerate our growth. The first was the acquisition and subsequent successful integration of a major regional competitor; followed by a favourable debt restructuring. MetroBridge acquisition complete In May, we closed an asset purchase transaction to acquire the business customers, related network infrastructure and other selected assets of MetroBridge Networks International Inc., significantly strengthening our operations in the Greater Vancouver Market and eliminating a significant competitor. Following a recurring revenue calculation, the final purchase price was $5.7 million. The acquisition and integration of MetroBridge s network and customer base is now complete and it has proven to be as accretive as we anticipated, contributing seven months of revenue and EBITDA to our 2011 results. In the fourth quarter of 2011 we achieved our post integration objective of converting more than half the revenue from MetroBridge s customer base into EBITDA. Credit facilities improved Also in May, we established credit facilities totalling $19.0 million with the Royal Bank of Canada, essentially refinancing, at interest rates below 5%, a previous debt facility with the Business Development Bank of Canada. The RBC facilities added incremental financing for the MetroBridge asset purchase and makes funds available in pursuit of our continued growth. Record financial and operating results Our financial results in 2011 were outstanding. Revenue growth was strong but more important, as we did last year, we were able to convert a significant proportion into increased profitability. We achieved record revenue of $44.9 million in 2011, up 19% over 2010 as a result of both strong organic growth, the successful acquisition of the MetroBridge customer base, and Internet and data service upgrades by existing customers. The stability of our business model is illustrated by the fact that about 98% of our revenue continues to be service, or recurring in nature, and no single customer accounts for more than 6% of our revenues. 3

4 Combined with our gross margin, which was up two and a half percentage points over 2010 to 78.4%, this resulted in record EBITDA of $12.2 million, an increase of 82% from 2010 and reflecting the operating leverage of our business model. For the first time in TeraGo s history, we posted positive annual net earnings of $214,000 and annual earnings per share of 2 cents. We added 915 net new customer locations in 2011, 47.6% more than in Gross customer additions of 1,691 were also strong and included 588 from the MetroBridge acquisition. Our average monthly unit churn rate in 2011 was 1.08% compared with 0.99% in However, excluding former MetroBridge customer locations, the churn rate in 2011 was a comparable 1.01%, reflecting our satisfied customer base and quality network. Cellular backhaul In 2011 we experienced significant growth in the cellular backhaul segment of our business. We provided Ethernet-based wireless backhaul services to Public Mobile Inc. in the Greater Toronto and Montreal markets, and assisted with the launch of 3G data services. We also provided wireless backhaul services to Wind Mobile and Mobilicity for segments of their networks. We upgraded about 250 cellular backhaul sites during the last two quarters of 2011 and this will drive improvements in ARPU as well as overall revenue from this segment in TeraGo Voice TeraGo Voice TM is a first example of one of the pillars of our growth strategy -- introducing new revenue-generating services to our customers. During 2011, we launched voice services in Greater Vancouver and Winnipeg, and while it is still in the initial stages of market activation, TeraGo Voice TM is now available in major markets in Quebec, Ontario, Manitoba, Alberta and British Columbia. Strong financial position In addition to beneficially restructuring our financing agreements during 2011, we ended the year with cash, cash equivalents and short-term investments of $4.3 million as well as the $5.0 million undrawn portion of the RBC facilities. Our overall financial position is strong. We have the resources to meet our working capital and capital requirements for the foreseeable future and the capacity to continue our growth. In addition to financial strength, we have the core assets to facilitate future growth and increase the long term value of the company. TeraGo owns 76 spectrum licences in the 24 GHz and 38 GHz bands, covering Canadian markets with a population base of nearly 23 million. We use this spectrum to provide Ethernet-based broadband links for businesses, government and cellular backhaul, as part of our growth strategy. 4

5 Our strategy is paying off We continue to work towards our strategic objectives of increasing customer penetration in our existing markets, expanding the cellular backhaul segment of our business, introducing new revenue-generating services, and capitalizing on strategic growth opportunities through initiatives such as acquisitions. This strategy is clearly paying off. Since 2002, our annual revenue has increased at a compound annual growth rate of 28%. In 2011, TeraGo completed the transition of its financial reporting framework from Canadian GAAP (Generally Accepted Accounting Principles) to IFRS (International Financial Reporting Standards), as required by the Accounting Standards Board (AcSB) for publicly accountable enterprises. The rationale for the conversion is that the increased comparability of IFRS financial statements will improve accessibility to global capital markets and could reduce both the cost of capital and the cost of compliance for Canadian companies. During 2011 we were also fortunate enough to win two awards that reflect both the high regard in which we hold our employees and their importance to our success. We were named one of the Top Employers in the GTA and one of the 50 Most Engaged Workplaces in Canada. On behalf of the executive team, I wish to thank our employees for their dedication and commitment, the Board of Directors for their guidance, and our shareholders for their support. Building on our exceptional results in 2011, and with a proven and effective strategy, we are ideally positioned to deliver continued growth in 2012 and beyond. Bryan Boyd President and Chief Executive Officer 5

6 TERAGO INC. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 The following Management s Discussion and Analysis ( MD&A ) is intended to help the reader understand the results of operations and financial condition of TeraGo Inc. All references in this MD&A to TeraGo, the Company, we, us, our and our company refer to TeraGo Inc. and its subsidiaries, unless the context requires otherwise. This MD&A is dated February 27, 2012 and should be read in conjunction with our audited consolidated financial statements and accompanying notes. Additional information relating to TeraGo, including our most recently filed Annual Information Form ( AIF ), can be found on SEDAR at and our website at For greater certainty, the information contained on our website is not incorporated by reference or otherwise into this MD&A. All dollar amounts included in this MD&A are in Canadian dollars unless otherwise indicated. Certain information included herein is forward-looking and based upon assumptions and anticipated results that are subject to uncertainties. Should one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected. See Forward-Looking Statements and Risk Factors. This MD&A also contains certain industry-related non-ifrs and additional GAAP measures that management uses to evaluate performance of the Company. These non-ifrs and additional GAAP measures are not standardized and the Company s calculation may differ from other issuers. See Definitions IFRS, Additional GAAP and Non-IFRS measures. FORWARD-LOOKING STATEMENTS This MD&A includes certain forward-looking statements that are made as of the date hereof and based upon current expectations, which involve risks and uncertainties associated with our business and the economic environment in which the business operates. All such statements are made pursuant to the safe harbour provisions of, and are intended to be forward-looking statements under, applicable Canadian securities laws. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, the words anticipate, believe, plan, estimate, expect, intend, should, may, could, objective and similar expressions are intended to identify forward-looking statements. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed with the forward-looking statements. When relying on forward-looking statements to make decisions with respect to the Company, you should carefully consider the risks set forth herein and other uncertainties and potential events. Except as may be required by applicable Canadian securities laws, we do not intend, and disclaim any obligation, to update or revise any forward-looking statements whether in words, oral or written as a result of new information, future events or otherwise. 6

7 EXECUTIVE OVERVIEW 2011 Financial and Operations Highlights Total revenue for the year ended December 31, 2011 was $44.9 million compared to $37.8 million, an increase of 18.9% compared to the same period in 2010; Total revenue for the three months ended December 31, 2011 was $12.0 million compared to $9.9 million, an increase of 20.7% compared to the same period in 2010; Gross profit margin for the three months and year ended December 31, 2011 increased to 78.3% and 78.4%, respectively, compared to 77.9% and 75.9% for the same periods in 2010; EBITDA for the year ended December 31, 2011 was $12.2 million compared to $6.7 million for 2010, an increase of 82%; EBITDA for the three months ended December 31, 2011 was $3.8 million compared to $2.5 million for 2010, an increase of 53%; Net earnings for the three months and year ended December 31, 2011 were $0.8 million and $0.2 million, respectively, compared to a net loss of $(1.1) million and $(5.8) million, respectively; The Company achieved its first annual positive earnings per share of $0.02 compared to a loss per share of $(0.52) for the same period in For the three months ended December 31, 2011, earnings per share was $0.07 compared to a loss per share of $(0.09) in the same period in 2010; Average monthly unit churn rate for the year ended December 31, 2011 was 1.08% compared to 0.99% for the same period in 2010; Added 915 net customer locations in 2011, ending the period with 6,278 customer locations in service compared to 620 net customer locations added in the same period in 2010; Average revenue per customer location ( ARPU ) for the three months and year ended December 31, 2011 was $622 and $618, respectively, compared to $607 and $610, respectively, in the same periods in 2010; Ended the period with $4.3 million of cash, cash equivalents and short-term investments as at December 31, 2011; and As at December 31, 2011, $5.0 million of the $19.0 million credit facilitites remains undrawn and available for future use Key Developments The Company entered into an asset purchase agreement with MetroBridge Networks International Inc. ( MetroBridge ) to acquire substantially all of MetroBridge s customers, related network infrastructure, real estate leases, and other assets. MetroBridge's broadband fixed wireless network, which covers the Lower Mainland of British Columbia and Vancouver, added 588 business customer locations to TeraGo's customer base as at the May 31, 2011 closing date. The purchase price was $5.716 million and integration efforts are nearing completion as planned. TeraGo completed an agreement to establish credit facilities totaling $19.0 million with the Royal Bank of Canada ( RBC ). The new facilities essentially refinanced at interest rates below 5%, a previous $10.0 million facility with the Business Development Bank of Canada ( BDC ), added incremental financing for the MetroBridge asset purchase, and makes available funds for general working capital purposes and continued growth. The Company was awarded additional orders from Public Mobile Inc. to provide Ethernet-based wireless backhaul services in the Greater Toronto and Montreal markets. The Company assisted Wind Mobile and Mobilicity by providing Ethernet-based wireless backhaul services in certain segments of their cellular networks. Over 250 cellular backhaul sites were upgraded in the second half of 2011 which will drive future ARPU increases in this segment. The Company continued its entry into the local voice market by launching TeraGoVoice TM in the Greater Vancouver area and Winnipeg Manitoba. The Company added Oshawa to its market footprint complementing existing network coverage in Durham region. The Company completed the transition of financial reporting frameworks from Canadian GAAP to IFRS. TeraGo has earned a ranking as one of the top employers in the GTA in the Canada s Top Employers competition and ranked among Canada s top technology companies on the Branham 300 list for the fourth consecutive year. TeraGo was named one of the 50 Most Engaged Workplaces in Canada, an award recognizing top employers that display leadership and innovation towards engaging their employees. 7

8 Events Subsequent to December 31, 2011 On January 1, 2012, National Online Inc. was amalgamated with TeraGo Networks Inc. The Company received a final release from the vendor related to the acquisition of MetroBridge and the final payment of $1.516 million was made in January Company Overview TeraGo is a leading wireless broadband communications service provider to businesses in Canada. The Company owns and operates a carrier-grade Multi-Protocol Label Switching ( MPLS ) enabled, fixed wireless, Internet Protocol ( IP ) communications network in Canada, providing businesses with high performance, scalable, and secure Internet access and data connectivity services. The Company also serves an important and growing demand among enterprise businesses in Canada for network access diversity by offering wireless services that are redundant to their existing wireline broadband connections. In addition, the Company is a provider of facilities-based backhaul services to Canadian wireless carriers and local voice access services. Services offered by the Company are delivered on a wireless broadband IP network that has been designed to eliminate single points of failure. TeraGo backs its services by providing its customers with service level commitments including 99.9% service availability, industry leading mean time to repair, 24 x 7 telephone and access to technical support specialists, and an industry leading three-month satisfaction guarantee. TeraGo s next generation, carrier-class, broadband IP network has been built using a combination of licenced spectrum bands which the Company owns and leases, and licence-exempt spectrum. See Radio Spectrum. In each of our geographic markets, TeraGo owns and controls wireless networks that aggregate customer data traffic and interconnect with intercity leased fiber-optic facilities. The Company uses commercially available equipment for the delivery of our broadband wireless services. Since inception, TeraGo has experienced strong growth, in both the number of customers and locations serviced. The number of customer locations serviced has grown every quarter since commercial operations were launched in 2000 and revenue has grown at a compound annual growth rate of 28% from the year ended December 31, 2002 to the year ended December 31, We have successfully launched our wireless broadband network across major geographic markets in Canada, including the six largest Canadian cities. As at December 31, 2011, the Company offered its services in 46 geographic markets across Canada serving 6,278 business locations. Business Model TeraGo s subscription-based business model generates stable and predictable recurring revenue from internet, data and voice services. Our customers typically sign one, two or three year contracts, which include automatic renewal provisions for the initial term. In 2011, approximately 85% of our new customers signed contracts for three years or more. Services are billed monthly over the term of the contract. In addition, we typically charge a one-time installation fee per customer location. For the year ended December 31, 2011 approximately 98% of our total revenue was service revenue substantially all of which is recurring in nature. Once a customer is installed, we have an opportunity to generate incremental recurring revenue from a customer through the addition of new customer locations and increased service capacity supplied to existing locations and through the provisioning of additional value-added services. Company Strategy The Company intends to leverage its strategic strengths to become a leading network service alternative for business customers in Canada, enabling their businesses to connect to the world. Our growth strategy includes the following key components: Increase customer penetration in our existing markets; Expand and enhance our wireless broadband network; Leverage our IP enabled network infrastructure to service new categories of customers; Continue to expand our service offering to include value-added IP services that complement our current broadband Internet access and data connectivity services starting with local voice access service; and Pursue strategic initiatives including acquisitions on an opportunistic basis. 8

9 Our Network The Company has built and operates a next generation, carrier-grade, broadband IP network. It utilizes licensed and license-exempt spectrum that supports commercially available equipment for the delivery of broadband wireless services. The Company can quickly offer a range of diverse Ethernet-based services over a 128 bit encrypted secured wireless connection, to customer locations up to 20 kilometres from a hub, provided line of sight exists. The Company owns and controls a national MPLS distribution network from Vancouver to Montreal that aggregates customer voice and data traffic and interconnects when necessary with carrier diverse leased fiber-optic facilities. Major Internet peering and core locations are centralized in Vancouver, Calgary and Toronto although Internet access is also available in all regional markets for further redundancy. TeraGo has enabled end-to-end Quality of Service ( QoS ) capabilities in all of its major national markets to ensure the foundation to support voice traffic and other potential future applications. In each regional market, the Company s network is composed of three main components: a core hub, multiple hub sites and customer locations: Core Hub Sites - are the main point of interconnection of our regional wireless system and national MPLS fiber-optic facilities. They are equipped with redundant fiber-optic equipment, high performance MPLS routers, uninterruptible power supplies, and server equipment. Core hub sites are configured in MPLS ring architecture to avoid service disruption in the event of any single point of failure. The MPLS network has been equipped with QoS capabilities to improve network performance and traffic management. Hub Sites - are generally equipped with broadband wireless base stations, high performance Ethernet switches and routers, high capacity licensed backhaul radios and uninterruptible power supplies. Base stations are matched with broadband wireless radios deployed at the customer locations, and selected from the same supplier. Licensed backhaul radios are used to connect the Hub site to one or more adjacent hub sites. The benefits (mentioned above) of MPLS, QoS, and ring architectures have been extended to key high traffic hub sites. Customer Locations - are typically equipped with a broadband wireless radio and, depending upon the services deployed, can include a managed Ethernet switch, router, or voice demarcation device (which will be QoS-enabled). Broadband wireless radios are available from a variety of leading manufacturers and selected to match the performance requirements of the customer. The customer premise equipment is industry standard and sourced from leading manufacturers. The customer interface to our services is an industry standard RJ45 Ethernet or PRI jack. Radio Spectrum The Company owns a national spectrum portfolio of 24 GHz and 38 GHz wide-area spectrum licences, including 1,160 MHz in the top 6 Canadian cities. Our spectrum portfolio includes 76 licences in the 24 GHz and 38 GHz spectrum bands, and covers geographic regions in Canada with a population base of nearly 23 million. The Company utilizes its 24 GHz spectrum for point-to-point and point-to-multipoint deployments. In 1999, the Company acquired 70 licences in the 24 GHz and 38 GHz bands in Industry Canada s first spectrum auction for this spectrum. The licences range in bandwidth from 200 MHz to 600 MHz. In September, 2010, the Company completed the purchase of six 24 GHz licences for a gross purchase price of $5 million (subject to certain deductions). The purchased 24 GHz spectrum includes 240 MHz in each of Toronto, Montreal and Ottawa, as well as 80 MHz in each of Calgary, Vancouver and Edmonton. This transaction was subject to Industry Canada approval which the Company received on July 26,

10 The following table summarizes our ownership of 24 GHz and 38 GHz wide area licences: Tier Area Owned 24/38 GHz Spectrum (in MHz) Population (2006 Census) Abitibi ,761 Barrie ,962 Belleville ,723 Brandon ,054 Brockville ,243 Calgary 280 1,235,692 Chatham ,300 Cobourg ,477 Cornwall ,426 Edmonton 80 1,316,455 Huntsville ,020 Kingston ,774 Lethbridge ,665 Listowel/Goderich/Stratford ,845 London/Woodstock/St. Thomas ,331 Medicine Hat/Brooks ,253 Montreal 240 3,990,036 Nanaimo ,019 Niagara-St. Catharines ,063 Okanagan/Columbia ,028 Ottawa 240 1,334,081 Pembroke ,968 Peterborough ,182 Red Deer ,784 Strathroy ,442 Toronto 240 6,128,278 Vancouver 80 2,463,413 Victoria ,325 Windsor/Leamington ,102 Winnipeg ,059 Total 14,260 22,941,761 Using radios operating in 24 GHz and 38 GHz spectrum, we can deliver our broadband services to our customers at speeds of 10 to 1,000 Mbps. We use our licenced spectrum to connect our core hubs together to create a wireless backbone, often in a ring configuration, to avoid any points of failure. We also use our 24 GHz and 38 GHz licenced spectrum in the access network or last mile to deliver high capacity Ethernet-based broadband links for business, government and cellular backhaul. The Company has also applied for and received licences in the 38 GHz band which the Company uses for point-topoint deployments. These licences are issued on an as needed and user defined basis. Industry Canada uses the spectrum grid concept to define service areas, based on hexagonal grid cells, each with an area of 25 square kilometres. These licences are issued in paired frequency blocks, each with a bandwidth of 50 MHz. The following table summarizes the 38 GHz user defined licences that we currently hold: Area 38 GHz Spectrum (in MHz) Licenced Cells (#) Cell Coverage (sq/km) Abbotsford Calgary Edmonton Montreal Ottawa Toronto ,000 Vancouver ,000 Waterloo Total 1, ,275 10

11 In addition to our 24 GHz and 38 GHz wide-area licences, we also utilize point-to-point spectrum in the 11 and 18 GHz bands. The 11 GHz and 18 GHz spectrum is licensed to us by Industry Canada on a site-by-site basis. These spectrum resources are utilized by the Company to deploy point-to-point radio links. The Company currently holds over 283 point-to-point licences in the 11 and 18 GHz bands. In 2010, the Company applied for and received 16 licences in the 3.65 GHz band provided on a shared use basis. Each licence consists of 50 MHz of spectrum which is available for the entire serving area and enables the Company to provide services up to 10 Mbps using point-to-point and point-to-multipoint deployments. The following table summarizes our 3.65 GHz licence holdings: Our Services Tier 4 Area 3.65 GHz Spectrum (in MHz) Barrie 50 Calgary 50 Edmonton 50 Guelph/Kitchener 50 Kelowna 50 London/Woodstock/St. Thomas 50 Montreal 50 Niagara-St. Catharines 50 Ottawa 50 Red Deer 50 Steinbach 50 Toronto 50 Vancouver 50 Victoria 50 Windsor/Leamington 50 Winnipeg 50 Internet Services The Company s wireless broadband network provides Canadian businesses with high performance Internet access with upload and download speeds from 1.5 megabytes per second ( Mbps ) to 100 Mbps. To enhance the performance of TeraGo s service, we minimize the number of networks between our customers and their audience by connecting to the Internet through peering arrangements with multiple tier-one carriers. The table below lists the Internet access services that the Company offers. All of our services are symmetrical (allowing customers to experience the same high speed broadband performance when uploading or downloading) unlike DSL services offered by many of our competitors, which are asymmetrical. Service Speed (Mbps) TSL (Burstable) E (Burstable) E (Burstable) Dedicated Internet Access Benefits Symmetrical bandwidth with standard service level agreement Committed minimum symmetrical bandwidth with 5x on-demand scalability Premium service level agreement Committed symmetrical bandwidth Premium service level agreement Guaranteed symmetrical bandwidth Premium service level agreement Customer Profile Businesses looking for higher performance than DSL Businesses looking for an alternative to legacy T1 services and requiring additional speed on an as-needed basis Businesses and enterprise organizations that require higher dedicated bandwidth with the capability to burst on an asneeded basis Businesses and enterprise organizations that require dedicated bandwidth to support mission critical applications 11

12 Data Services The Company s data connectivity services provide businesses with the ability to connect their multiple sites within a city or across our geographic footprint through a Private Virtual Local Area Network ( VLAN ). Our VLAN services are available with speeds from 1.5 Mbps to 100 Mbps and are ideal for companies with multiple offices and large interoffice data requirements. Our data services are symmetrical, allowing communication between parties in both directions simultaneously, and include our premium service level agreement. The Company s data services run across our recently installed MPLS core network. TeraGo uses Ethernet over MPLS ( EoMPLS ) technology to enhance the performance of its VLAN services. The enhancement of this service enables TeraGo s VLAN customers to experience the higher reliability, easier provisioning, and improved performance of the MPLS network for the portion of their VLAN service that traverses either TeraGo s inter-city or Greater Toronto Area IP backbones. Cellular Backhaul The Company is a provider of facilities-based backhaul services to Canadian wireless carriers. Backhaul is the transport of voice and data traffic from a wireless carrier s cell sites to its mobile switching centre or other exchange point. The Company utilizes its spectrum assets to provide backhaul services through its national network architecture. Our wireless backhaul services allow wireless carriers to optimize their networks, offering a high capacity, scalable and cost competitive alternative to other backhaul options and providing a long-term solution to address the demand for backhaul capacity. Initial cellular backhaul sites are often upgraded periodically to accommodate increasing customer traffic. Voice Services The Company s voice access service provides businesses with a cost effective, flexible and high quality connection from their private branch exchange (PBX) to the public switched telephone network (PSTN). The service provides features and capabilities generally consistent with those provided by incumbent local exchange carriers (ILECs) while offering greater value for our customers. TeraGo received approval from the Canadian Radio-television and Telecommunications Commission ( CRTC ) to operate as a Type IV competitive local exchange carrier ( CLEC ) to offer voice services. 12

13 SELECTED ANNUAL INFORMATION The following table displays a summary of our Consolidated Statements of Operations for the three months ended December 31, 2011 and 2010 and the years ended December 31, 2011, 2010 and 2009 and a summary of select Balance Sheet data as at December 31, 2011, 2010 and Revenue Service Installation Expenses Operating expenses Salaries and related costs - Cost of services Salaries and related costs - Direct Other Operating items Stock-based compensation Amortization of intangibles Three months ended December 31 Years ended December (as recast) $ 11,677 $ 9,678 $ 43,841 $ 37,002 $ 33, , ,966 9,911 44,923 37,768 34,772 2,206 1,846 8,258 7,725 7, ,440 1,365 1,384 3,945 3,757 16,354 15,922 14,411 1,638 1,617 6,961 6,370 6, ,695 1, , Depreciation of network assets, property and equipment 2,060 2,668 7,486 10,507 9,041 10,967 10,813 43,535 43,385 40,843 Earnings (loss) from operating items Foreign exchange gain (loss) Finance costs Finance income Net earnings (loss) and comprehensive earnings (loss) Deficit, beginning of period Deficit, end of period 999 (902) 1,388 (5,617) (6,071) (26) (222) (185) (1,167) (306) (2) $ 811 $ (1,059) $ 214 $ (5,831) $ (5,786) (62,069) (60,413) (61,472) (55,641) (49,855) $ (61,258) $ (61,472) $ (61,258) $ (61,472) $ (55,641) Basic earnings (loss) per share Diluted earnings (loss) per share Basic weighted average number of shares outstanding Diluted weighted average number of shares outstanding $ 0.07 $ (0.09) $ 0.02 $ (0.52) $ (0.52) $ 0.06 $ (0.09) $ 0.02 $ (0.52) $ (0.52) 11,286 11,239 11,273 11,198 11,136 12,796 11,239 12,783 11,198 11,136 Selected Balance Sheet Data Years ended December (as recast) Cash and cash equivalents $ 3,224 $ 1,083 $ 1,074 Short term investments $ 1,096 $ 1,071 $ 7,121 Accounts receivable $ 3,318 $ 3,175 $ 2,491 Network assets, property and equipment $ 37,097 $ 33,545 $ 30,737 Total Assets $ 58,556 $ 48,600 $ 45,564 Accounts payable and accrued liabilities $ 6,991 $ 5,506 $ 5,805 Long-term debt $ 13,582 $ 6,817 $ - Other long-term liabilities $ 2,625 $ 1,622 $ 413 Shareholders'equity $ 33,383 $ 32,849 $ 38, data are in accordance with Canadian GAAP 13

14 RESULTS OF OPERATIONS Comparison of the three months and year ended December 31, 2011 and 2010 (in thousands of dollars, except with respect to gross profit margin, earnings (loss) per share and operating metrics) Three months ended December 31 Year ended December Financial Revenue $ 11,966 $ 9,911 $ 44,923 $ 37,768 Cost of Services (1) 2,593 2,191 9,698 9,090 Gross profit margin (1) 78.3% 77.9% 78.4% 75.9% EBITDA (1)(2) $ 3,833 $ 2,506 $ 12,234 $ 6,716 Earnings (loss) from operations (3) $ 999 $ (902) $ 1,388 $ (5,617) Net earnings (loss) $ 811 $ (1,059) $ 214 $ (5,831) Basic earnings (loss) per share $ 0.07 $ (0.09) $ 0.02 $ (0.52) Diluted earnings (loss) per share $ 0.06 $ (0.09) $ 0.02 $ (0.52) Operating Churn rate (1) 1.18% 1.13% 1.08% 0.99% Customer locations in service 6,278 5,363 6,278 5,363 ARPU (1) $ 622 $ 607 $ 618 $ 610 Number of employees (1) See "DEFINITIONS - IFRS, Additional GAAP and NON-IFRS Measures" for descriptions of Cost of Services, Gross profit margin %, EBITDA, Churn and ARPU. (2) See "EBITDA" for a reconciliation of net earnings (loss) to EBITDA. (3) Earnings (Loss) from operations is defined as earnings (loss) before interest and taxes. Refer to Definitions IFRS, Additional GAAP and Non-IFRS measures for a description of the components of relevant line items below. Revenue Total revenue increased 18.9% to $44.9 million for the year ended December 31, 2011 compared to $37.8 million for the same period in For the three months ended December 31, 2011, total revenue increased 20.7% to $12.0 million compared to $9.9 million for the same period in The increase in revenue was the result of a greater number of customer locations in service, including the acquisition of 588 new customer locations added in the second quarter of 2011 from the MetroBridge acquisition, and existing customers upgrading their Internet and data connections. For the three months and year ended December 31, 2011, the MetroBridge acquisition contributed incremental revenue of $1.0 million and $2.5 million, respectively. Service revenue increased by 18.5% to $43.8 million for the year ended December 31, 2011 compared to $37.0 million for the same period in For the three months ended December 31, 2011, service revenue increased 20.7% to $11.7 million compared to $9.7 million for the same period in The increase in service revenue was driven primarily by the addition of 915 net new customer locations in service during the year ended December 31, 2011, including 585 in the second quarter of 2011 from the acquisition of MetroBridge, and existing customers upgrading their internet and data connections. Total customer locations in service increased 17% to 6,278 as at December 31, 2011 compared to 5,363 as at December 31, For the year ended December 31, 2011, approximately 98% of our total revenue was service revenue. Installation revenue increased to $1.1 million for the year ended December 31, 2011 compared to the $0.8 million for the same period in For the three months ended December 31, 2011 installation revenue was $0.3 million compared to $0.2 million for the same period in This increase is primarily due to the recognition of revenue relating to installations that were completed in prior periods. ARPU increased to $618 for the year ended December 31, 2011 compared to $610 for the same period in ARPU increased to $622 for the three months ended December 31, 2011 compared to $607 for the same period in The increase in ARPU was driven primarily by existing customers upgrading the capacity of their services, an increase in the number of new customers requiring higher capacity services or voice services, early termination fees 14

15 and lower credits partially offset by lower usage revenue. The average monthly churn rate was 1.08% for the year ended December 31, 2011 compared to 0.99% for the same period in The average monthly churn rate was 1.18% for the three months ended December 31, 2011 compared to 1.13% for the same period in The average monthly churn rate increased in 2011 primarily due to the churn from customers acquired as part of the MetroBridge acquisition including the cancellation of low value DSL resale customer locations. Excluding former MetroBridge customer locations, the average monthly churn rate is 1.11% and 1.01% for the three months and year ended December 31, 2011, respectively, consistent with recent experience. Management continues to focus on network quality and customer service in addition to monitoring customer creditworthiness and churn levels. Gross profit margin For the year ended December 31, 2011, gross profit margin increased to 78.4% compared to 75.9% for the same period in For the three months ended December 31, 2011, gross profit margin increased to 78.3% compared to 77.9% for the same period in This increase is primarily due to savings from lower telecommunications and maintenance costs in addition to reduced spectrum lease payments as a result of the purchase of 24 GHz licences. Salaries and related costs-other and other operating items ( SG&A ) For the year ended December 31, 2011, SG&A expenses increased 4.6% to $23.3 million compared to $22.3 million for the same period in For the three months ended December 31, 2011, SG&A expenses increased 3.9% to $5.6 million compared to $5.4 million for the same period in The increase in 2011 was largely a result of increased marketing capacity building on investments made in 2010 in pursuit of our strategic growth objectives, increased travel costs and professional fees related to the MetroBridge acquisition and to a lesser extent additional operations personnel. As of December 31, 2011, the number of direct sales personnel was 33 compared to 34 as of December 31, EBITDA For the year ended December 31, 2011, EBITDA increased to $12.2 million compared to $6.7 million for the same period in For the three months ended December 31, 2011, EBITDA increased to $3.8 million compared to $2.5 million for the same period in The increase in EBITDA is in line with management s expectation as the Company continued to grow revenue while focusing on cost management. Consistent with prior years, EBITDA for the quarter ended March 31, 2012, is expected to decline by up to $0.5 million due to the seasonal nature of certain expenses. See Seasonality. For the three months and year ended December 31, 2010, the Company reclassified $77 thousand and $240 thousand, respectively, of Directors Fees paid by issuance of shares to Stock-Based Compensation previously included in SG&A. The table below reconciles net earnings (loss) to EBITDA for the three months and year ended December 31, 2011 and (in thousands of dollars) Three months ended December 31 Year ended December Net earnings (loss) for the period $ 811 $ (1,059) $ 214 $ (5,831) Foreign exchange loss (gain) (25) (21) 26 (60) Finance costs , Finance income (9) (7) (19) (32) Earnings (loss) from operations 999 (902) 1,388 (5,617) Add: Depreciation of network assets, property and equipment and amortization of intangibles 2,499 2,767 8,827 11,000 Loss on disposal of network assets Stock-based compensation ,695 1,003 EBITDA $ 3,833 $ 2,506 $ 12,234 $ 6,716 15

16 Depreciation and amortization For the year ended December 31, 2011, depreciation of network assets, property and equipment and amortization of intangibles decreased by 19.8% to $8.8 million compared to $11.0 million for the same period in For the three months ended December 31, 2011, depreciation of network assets, property and equipment and amortization of intangibles decreased by 9.7% to $2.5 million compared to $2.8 million for the same period in The decrease in depreciation expense relates primarily to the change in the useful life of network assets starting from January 1, 2011 from 4 and 7 years to 6 and 9 years based on actual experience. Deferred income taxes The Company reviewed and updated the assumptions and projections regarding future profitability as at December 31, Based on management s analysis, no additional deferred income taxes resulting from temporary tax differences were recognized in the three months and year ended December 31, Net earnings (loss) For the year ended December 31, 2011, net earnings were $0.2 million compared to a net loss of $(5.8) million for the same period in For the three months ended December 31, 2011, net earnings was $0.8 million compared to a net loss of $(1.1) million for the same period in Summary of Quarterly Results All financial results are in thousands, with the exception of earnings (loss) per share. Q4-11 Q3-11 Q2-11 Q1-11 Q4-10 Q3-10 Q2-10 Q1-10 Revenue $ 11,966 $ 11,858 $ 10,769 $ 10,330 $ 9,911 $ 9,699 $ 9,230 $ 8,928 Gross Profit Margin % 78.3% 78.3% 78.7% 78.3% 77.9% 76.2% 75.8% 73.6% EBITDA $ 3,833 $ 3,441 $ 2,721 $ 2,239 $ 2,506 $ 1,610 $ 1,344 $ 1,256 Net earnings (loss) $ 811 $ 131 $ (398) $ (330) $ (1,059) $ (1,455) $ (1,876) $ (1,441) Basic earnings (loss) per share $ 0.07 $ 0.01 $ (0.04) $ (0.03) $ (0.09) $ (0.13) $ (0.17) $ (0.13) Diluted earnings (loss) per share $ 0.06 $ 0.01 $ (0.04) $ (0.03) $ (0.09) $ (0.13) $ (0.17) $ (0.13) Basic weighted average number of shares oustanding 11,286 11,277 11,269 11,258 11,239 11,198 11,185 11,170 Diluted weighted average number of shares oustanding 12,796 12,795 11,269 11,258 11,239 11,198 11,185 11,170 Seasonality The Company s net customer growth is typically lower in the first quarter of the year primarily due to weather conditions. The majority of new customer locations require the installation of rooftop equipment. Typically, harsher weather in the first quarter of the year results in a reduction in productive installation days. In addition, the Company s cash flow and earnings is typically impacted in the first quarter of the year due to several annual programs requiring payments in the first quarter, annual rate increases in the long-term contracts and the restart on January 1 st of payroll taxes and other levies related to employee compensation. 16

17 LIQUIDITY AND CAPITAL RESOURCES TeraGo has historically financed its growth and operations through the issuance of equity securities and long-term debt. The table below outlines selected balance sheet accounts, and a summary of cash inflows and outflows by activity. (in thousands of dollars, except with respect to Working capital ratio and Days sales outstanding) Three months ended December 31 Year ended December Statement of Cash Flows Summary Cash inflows and (outflows) by activity: Operating activites $ 4,991 $ 2,532 $ 12,108 $ 6,087 Investing activities (2,930) (3,210) (15,212) (12,493) Financing activities 433 1,233 5,245 6,415 Net cash inflows 2, ,141 9 Cash and cash equivalents, beginning of period ,083 1,074 Cash and cash equivalents, end of period $ 3,224 $ 1,083 $ 3,224 $ 1,083 Year ended December 31 Key Ratios Working Capital (deficiency) $ (3,622) $ 242 Working capital ratio Days sales outstanding Cash from Operations For the three months ended December 31, 2011, cash generated from operating activities was $5.0 million compared to $2.5 million for the same period in For the year ended December 31, 2011, cash generated from operating activities was $12.1 million compared to $6.1 million for the same period in The increase in cash generated from operating activities for the three months and year ended December 31, 2011 is principally from a decrease in net loss driven primarily by increased revenue and improved gross margin. It was also partially due to a decrease in working capital changes, in particular accounts receivable and accounts payable and accrued liabilities. Cash used in Investing Cash used in investing activities includes the acquisition of the MetroBridge assets described in further details below, purchase and installation of equipment related to our network build, upgrade and sparing activity, the purchase and installation of customer premise equipment, the purchase of property and equipment such as computer hardware and software, and the redemption of short-term investments. For the three months ended December 31, 2011, cash used for the purchase and installation of network assets, property and equipment was $2.6 million compared to $1.8 million for the same period in For the year ended December 31, 2011, cash used for the purchase and installation of network assets, property and equipment was $9.7 million compared to $13.7 million for the same period in For the three months ended December 31, 2011, cash used for the purchase of intangibles and other assets was $0.4 million compared to $1.5 million for the same period in For the year ended December 31, 2011, cash used for the purchase of intangibles and other assets was $1.3 million compared to $1.5 million for the same period in The capital expenditures in the year ended December 31, 2011 decreased compared to the same period in 2010 as the upgrade and testing of infrastructure including the implementation of QoS capabilities to support local voice access service was completed in

18 On May 31, 2011, the Company closed an asset purchase with MetroBridge and acquired substantially all of MetroBridge s customers, related network infrastructure, real estate leases, and other assets. MetroBridge provided small and medium-sized businesses with wireless broadband services. The acquisition further accelerated the Company s growth plan as it acquired network in the lower mainland of British Columbia and Vancouver and a customer base of 588 customer locations at closing. The final purchase price is comprised of $4.2 million paid on the closing date of May 31, 2011 and the remaining balance to be paid following a final recurring revenue calculation to be completed for the 180 day period following the closing date. The fair value of the contingent consideration was estimated on the date of acquisition using best estimates of discounted future cash flows and resulted in $1.498 million in contingent consideration being included as part of the purchase price for accounting purposes. The Company received a final release from the vendor and the final cash payment of $1.516 million for the contingent consideration was made in January The difference of $18 thousand from the initial fair value estimate of $1.498 million was recorded as finance costs with a corresponding credit to accounts payable and accrued liabilities as of December 31, The acquisition was accounted for using the acquisition method in accordance with IFRS 3 with the results of operations consolidated with those of the Company effective June 1, 2011 and has contributed incremental revenue of $2.5 million and net earnings of $0.5 million for the year ended December 31, Management estimates that if the acquisition had occurred on January 1, 2011, total consolidated revenue for the Company would have been $46.7 million and consolidated net earnings for the year would have been $0.6 million. The total acquisition related costs were $0.3 million of which $69 thousand was included in other operating items and the remaining amount was included in finance costs (Note 11). The fair values of the assets acquired in the acquisition are as follows (in thousands): Network assets, property and equipment $1,674 Customer relationships 3,330 Brand 254 Acquired real estate leases 173 Prepaid Expenses 21 Goodwill 246 $5,698 Fair value of consideration Cash consideration $4,200 Contingent consideration 1,498 $5,698 Contingent consideration Contingent consideration at closing $1,498 Subsequent adjustment recorded as finance costs 18 $1,516 Goodwill represents the expected operational synergies with the acquiree including intangible assets that do not qualify for separate recognition. Under the current income tax act, goodwill and other intangible assets are deductible for tax purposes to the extent of 75% of the cost incurred. For tax purposes, 75% of eligible capital expenditures are added to the cumulative eligible capital amount, which is deductible for tax purposes at the rate of 7% per year on a declining balance method. The customer relationships, brand and acquired real estate leases are recorded as Intangibles and other assets and are being amortized over a period of 5 years. The acquired assets, including other intangibles and goodwill, have been integrated into the Company s single CGU. For the three months ended December 31, 2011 and December 31, 2010, the Company had minimal transactions in short-term investments. For the year ended December 31, 2011, the Company had net purchase of $25 thousand in short-term investments compared to net redemption of $6.2 million for use in business operations for the same period in Cash from Financing For the three months and year ended December 31, 2011, cash generated from financing activities was primarily due to the net drawdown of $0.6 million and $6.3 million, respectively, of which $5.5 million was used to finance the MetroBridge asset purchase and the remainder was for repayment of the term debt facility and capital lease obligations. The final payment of $1.5 million for the MetroBridge asset purchase was completed in January

19 For the year ended December 31, 2010, cash generated from financing activities was primarily due to the drawdown of $6.5 million from the senior term-debt facility partially used to purchase the 24 GHz spectrum covering six of the largest markets in Canada and the repayment of capital lease obligations. Capital Resources As at December 31, 2011, the Company had cash and cash equivalents and short-term investments of $4.3 million and access to the $5.0 million undrawn portion of its $19.0 million credit facility. The Company anticipates incurring additional capital expenditures for the purchase and installation of network assets and customer premise equipment. As economic conditions warrant, the Company may expand its network coverage into new Canadian markets and into strategic centres around existing markets. The Company expanded its product portfolio and also invested in its sales and marketing and support organizations as economic conditions improved. The Company entered into a new agreement in May 2011 with the Royal Bank of Canada that provides credit facilities totaling $19.0 million that are principally secured by a general security agreement over the Company s assets. The new facilities essentially refinanced, at lower interest rates, an existing $10.0 million facility with the BDC and added incremental financing for the asset purchase of MetroBridge. The agreement includes three new senior term debt facilities totalling $16.0 million and also includes a $3.0 million operating line of credit that replaced an existing $3.5 million operating line of credit on similar terms and bears interest at a floating rate of prime plus 1.65%. The outstanding long-term debt of $7.5 million with the BDC was repaid using proceeds from the new debt facility and the related deferred financing fees of $71 thousand were written off to finance costs. The additional $16.0 million in senior term debt is available to the Company in 3 facilities: $7.5 million to repay the drawn portion of TeraGo s senior term credit facility with BDC bearing interest at 4.74% and is repayable in monthly principal installments of $125 thousand starting October 2011 and matures September 2014; $5.5 million to finance the MetroBridge purchase of which $4.2 million bears interest at 4.61% and $1.3 million bears interest at 3.97% and is repayable in monthly principal installments of $92 thousand starting June 2011 and matures September As of December 31, 2011, this facility has been fully drawn; and $3.0 million available for general working capital purposes to fund continued growth bears interest at 4.31% and is repayable in monthly principal installments of $75 thousand starting April 2012 once fully drawn. As of December 31, 2011, $2.0 million of this facility remains undrawn. The Company incurred financing fees of $256 thousand in the second quarter of 2011 which are being amortized using the effective interest method over the term of the debt. Management believes the Company s current cash, short-term investments, anticipated cash from operations, access to the undrawn portion of debt facilities and its access to additional financing in the form of debt or equity will be sufficient to meet its working capital and capital expenditure requirements for the foreseeable future. Contractual Obligations The following table is a summary of our contractual obligations at December 31, 2011 that are due in each of the next five years and thereafter. Less than 1 year 1-3 years 4-5 years After 5 years Long-term debt including financing fees $ 3,606 $ 5,913 $ 4,308 $ - $ 13,827 Finance leases Operating leases 6,264 7,249 5, ,809 Metrobridge contingent payment 1, ,516 Purchase Obligations 2, ,109 Stock-based compensation 1, ,304 Total $ 15,413 $ 13,869 $ 9,432 $ 172 $ 38,886 Off-Balance Sheet Arrangements As of December 31, 2011, the Company had no off-balance sheet arrangements. Total 19

20 Transactions with Related Parties The Company provides services to one customer whose Chairman of the Board of Directors is one of the Directors of the Company. Revenue from this customer for the years ended December 31, 2011 and 2010 was $41 thousand and $40 thousand, respectively. Accounts receivable from this customer both as at December 31, 2011 and 2010 was $1 thousand and $3 thousand, respectively. The Company provides services to one customer whose Chairman of the Board of Directors is the Chairman of the Board of Directors of the Company. Revenue from this customer for both the years ended December 31, 2011 and 2010 was $31 thousand. Accounts receivable from this customer as at December 31, 2011 and 2010 was $nil and $3 thousand, respectively. The terms governing these related party transactions reflect those negotiated at arm s length. Share Capital As of February 27, 2012, there were 7,662,148 Common Shares, 3,633,474 Class A Non-Voting Shares and two Class B Shares outstanding. Restricted Cash On June 18, 2007, two officers (one current and one former) exchanged 287,300 and 62,700 options respectively to purchase Common Shares, at an exercise price of $4 per share with options to purchase 189,496 and 41,355 Common Shares at $0 exercise price. The exchanged options had a value equal to the original options. On June 18, 2007, these options were exercised to facilitate Common Share ownership and as a result, the two officers received 189,496 and 41,355 Common Shares, respectively, pursuant to such exercise. The Company provided the officers with an indemnity with a combined maximum coverage of $1.0 million to cover any potential negative personal tax consequences that might arise as a result of the early exercise of these options. The indemnity period for the current officer expires in June The restricted cash is segregated for the period of the indemnity and is invested in a guaranteed investment certificate. The related accrued interest is included in short-term investments. During the third quarter of 2009, the Company received notice of a claim from the former officer against the restricted cash balance relating to the sale of the 41,355 Common Shares. The notice of claim was settled in the second quarter of 2010 for $0.2 million and an additional stock-based compensation expense of $50 thousand was recorded in that quarter. Financial Instruments The Company initially measures financial instruments at fair value. Transaction costs that are directly attributable to the issuance of financial assets or liabilities are accounted for as part of the carrying value at inception (except for transaction costs related to financial instruments related to FVTPL financial assets which are expensed as incurred), and are recognized over the term of the assets or liabilities using the effective interest method. Subsequent measurement and treatment of any gain or loss is recorded as follows: (a) Financial assets at FVTPL are measured at fair value at the balance sheet date with any gain or loss recognized immediately in net earnings (loss). Interest and dividends earned from these assets are also included in net earnings (loss) for the period. (b) Loans and receivables are measured at amortized cost using the effective interest method. Any gains or losses are recognized in net earnings (loss) for the period. (c) Other financial liabilities are measured at amortized cost using the effective interest method. Any gains or losses are recognized in net earnings (loss) for the period. The following is a summary of the Company s significant categories of financial instruments as at December 31, 2011: Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets currently are comprised of cash and cash equivalents, investments, trade and other receivables. Restricted cash is classified as loans and receivables. Cash and Cash Equivalents Cash and cash equivalents consists of bank balances, cash on hand, demand deposits that can be withdrawn without penalty, and short-term, highly liquid securities such as debt securities with an initial maturity date of not more than three months from the date of acquisition, that can readily be converted into known amounts of cash and are subject to an insignificant risk of change in value. Bank overdrafts that are repayable upon demand and form an integral part of the Company s cash management are included as a component of cash and cash equivalents. Cash and cash equivalents are carried at amortized cost. 20