I am still trying to understand the reason for Sangoma's impairment. How I understood it, it happened because there are still shares to be issued to complete Star2Star acquisition, but now their price is significantly less. In effect, they will buy Star2Star for a lower cash equivalent of issued, than expected in 2021, hence initially booked goodwill needs to be decreased.
Would this impairment be tax-deductible in Canada?
thanks for the comment. the way i understand the impairment charge is mainly due to the decline in share price (which most UCaaS and software companies have experienced. The value was based on a 4 year projection in cash flow with a pre-tax discount rate of 16.1% then comparing the terminal value to industry peers. The good news was stated in the financials
"The cash flow projections used in estimating the recoverable amount were generally consistent with results achieved historically adjusted for anticipated growth"
There was a statement of material weakness in the MD&A which I think really spooked investors as well.
The amortization of the intangible asset from Star2Star was not tax deductible so I don't believe the impairment will also be tax deductible.
The purchase price of S2S doesn't change and they still own them about 11 mil shares that will be issued over the next 4 years. They picked pretty much the top in tech stocks with the acquisition unfortunately.
Actually, goodwill amortization is a tax-deductible expense in their case. Only they show it under their general and administration expenses and not as a separate item in the income statement. You will find it in one of the footnotes.
What I meant with that they are paying for Star2Star less is that they initially paid some CAD 130 million in cash, and 3 million in Sangoma shares (post consolidation) that were then trading at CAD 25 per share (again post). So on these CAD 205 million they promised to issue additional ~11 million shares at then prevailing CAD 25. At the time, this meant that the total price was roughly CAD 480 million. Since then and now, they issued additional 2 million shares as a part of this arrangement, but price fell to CAD 7, reducing the value of the deal to effectively CAD 318 million (hope I did not mess up with converting the prices and share counts). In the same time, Star2Star has brought them the same amount of revenue, gross profit and EBITDA as they expected from beginning. They might have paid at the top prices, but they pad with an overpriced stock at the time.
thanks for replying so quickly and getting me to dig deeper. I was a looking at this wrong. I was going off this statement in the most recent MD&A under Tax
"Taxable income is impacted by the intangible asset amortization arising from the Star2Star acquisition which is not tax deductible."
In the S2S acquisition there was 235 mil in goodwill and 169.2 mil in intangible. I'm thinking the goodwill is tax deductible like you said although the intangible amortization is not. I think this is a good question to get some clarification on the next call.
To you point regarding the price paid... you're correct. Since the share price dropped so much the shares issued (at the time and ongoing each quarter) are worth less and therefore the price paid is worth less. Using their stock as currency definitely gave them a hedge to falling industry valuations given how hot software was at the time. I would be curious if the private market transactions have seen the same fall in valuation as public market comparibles.
Your are welcome. It made me also look deeper. I assumed this for a year after remembering reading it. You are right for the impairment, its not tax deductible (if you take their impairment, multiply it with tax rate of 26.15% you will get the exact amount that went into their tax expense). Thank you for following Sangoma and others. I enjoy your articles!
I am still trying to understand the reason for Sangoma's impairment. How I understood it, it happened because there are still shares to be issued to complete Star2Star acquisition, but now their price is significantly less. In effect, they will buy Star2Star for a lower cash equivalent of issued, than expected in 2021, hence initially booked goodwill needs to be decreased.
Would this impairment be tax-deductible in Canada?
thanks for the comment. the way i understand the impairment charge is mainly due to the decline in share price (which most UCaaS and software companies have experienced. The value was based on a 4 year projection in cash flow with a pre-tax discount rate of 16.1% then comparing the terminal value to industry peers. The good news was stated in the financials
"The cash flow projections used in estimating the recoverable amount were generally consistent with results achieved historically adjusted for anticipated growth"
There was a statement of material weakness in the MD&A which I think really spooked investors as well.
The amortization of the intangible asset from Star2Star was not tax deductible so I don't believe the impairment will also be tax deductible.
The purchase price of S2S doesn't change and they still own them about 11 mil shares that will be issued over the next 4 years. They picked pretty much the top in tech stocks with the acquisition unfortunately.
Hope that helps.
Actually, goodwill amortization is a tax-deductible expense in their case. Only they show it under their general and administration expenses and not as a separate item in the income statement. You will find it in one of the footnotes.
What I meant with that they are paying for Star2Star less is that they initially paid some CAD 130 million in cash, and 3 million in Sangoma shares (post consolidation) that were then trading at CAD 25 per share (again post). So on these CAD 205 million they promised to issue additional ~11 million shares at then prevailing CAD 25. At the time, this meant that the total price was roughly CAD 480 million. Since then and now, they issued additional 2 million shares as a part of this arrangement, but price fell to CAD 7, reducing the value of the deal to effectively CAD 318 million (hope I did not mess up with converting the prices and share counts). In the same time, Star2Star has brought them the same amount of revenue, gross profit and EBITDA as they expected from beginning. They might have paid at the top prices, but they pad with an overpriced stock at the time.
thanks for replying so quickly and getting me to dig deeper. I was a looking at this wrong. I was going off this statement in the most recent MD&A under Tax
"Taxable income is impacted by the intangible asset amortization arising from the Star2Star acquisition which is not tax deductible."
In the S2S acquisition there was 235 mil in goodwill and 169.2 mil in intangible. I'm thinking the goodwill is tax deductible like you said although the intangible amortization is not. I think this is a good question to get some clarification on the next call.
To you point regarding the price paid... you're correct. Since the share price dropped so much the shares issued (at the time and ongoing each quarter) are worth less and therefore the price paid is worth less. Using their stock as currency definitely gave them a hedge to falling industry valuations given how hot software was at the time. I would be curious if the private market transactions have seen the same fall in valuation as public market comparibles.
Thanks again for following
Dean
Your are welcome. It made me also look deeper. I assumed this for a year after remembering reading it. You are right for the impairment, its not tax deductible (if you take their impairment, multiply it with tax rate of 26.15% you will get the exact amount that went into their tax expense). Thank you for following Sangoma and others. I enjoy your articles!