TUCOWS INC /PA/ - Quarter Report: 2020 June (Form 10-Q)

 

Tucows Inc. (referred to throughout this report as the “Company”, “Tucows”, “we”, “us” or through similar expressions) provides simple useful services that help people unlock the power of the Internet. The Company provides US consumers and small businesses with mobile phone services nationally and high-speed fixed Internet access in selected towns. The Company is also a global distributor of Internet services, including domain name registration, digital certificates, and email. It provides these services primarily through a global Internet-based distribution network of Internet Service Providers, web hosting companies and other providers of Internet services to end-users.

 

Recent Accounting Pronouncements Adopted

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2018-15”). ASU 2018-15 helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance on accounting for implementation costs when the cloud computing arrangement does not include a license and is accounted for as a service contract. The amendments in ASU 2018-15 require an entity (customer) in a hosting arrangement to assess which implementation costs to capitalize vs expense as it relates to a service contract.  The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted ASU 2018-15 in the first quarter of 2020 to all implementation costs incurred after the date of adoption. The new guidance did not have a material impact on our consolidated financial statements.

 

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Recent Accounting Pronouncements Not Yet Adopted

 

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional guidance for a limited period of time to ease the potential burden of reference rate reform on financial reporting.  The amendments in ASU 2020-04 apply to contract modifications that replace a reference rate affected by reference rate reform and contemporaneous modifications of other contract terms related to the replacement of the reference rate. The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance:

 

	1.	Modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate.
	2.	Modifications of contracts within the scope of Topic 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required under those Topics for modifications not accounted for as separate contracts.
	3.	Modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives

 

The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently charged interest and standby fees associated with its Amended 2019 Credit Facility (as defined below) based on LIBOR, which will need to be amended when an alternative reference rate is chosen, at which time we may adopt some of the practical expedients provided by ASU 2020-04.

 

In the fourth quarter of 2019, the Company entered into a Stock Purchase Agreement to purchase all of the issued and outstanding shares of Cedar Holdings Group, Incorporated (“Cedar”), a fiber Internet provider business based in Durango, Colorado.  The transaction closed on January 1, 2020, following receipt of all regulatory approvals.  The purchase price was $14.1 million, less an estimated purchase price adjustment of approximately $0.2 million relating to a working capital deficit and assessment of the fair value of contingent consideration, for net purchase consideration of $13.9 million. In addition to $9.0 million cash consideration due at closing, the Company also issued 32,374 ($2.0 million) of Tucows Inc. shares with a two-year restriction period at closing.  Included in the agreement is contingent consideration totaling up to $4.0 million, due on the 24th and 36th month anniversaries of the closing of the transaction dependent upon the achievement of certain milestones as defined in the Share Purchase Agreement. The fair value of the contingent consideration was determined to be $3.1 million using a discount rate of 11.2%. The Company has prepared a preliminary purchase price allocation of the assets acquired and the liabilities assumed of Cedar based on management’s best estimates of fair value.  The final purchase price allocation may vary based on final appraisals, valuations and analyses of the fair value of the acquired assets and assumed liabilities. 

 

The amortization period for the customer relationships and network rights are 7 and 15 years, respectively.

 

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The following table shows the preliminary allocation of the purchase price for Cedar to the acquired identifiable assets and liabilities assumed ( thousands of U.S. dollars):

5. Derivative Instruments and Hedging Activities:

 

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are foreign exchange rate risk and interest rate risk.

 

Since October 2012, the Company has employed a hedging program with a Canadian chartered bank to limit the potential foreign exchange fluctuations incurred on its future cash flows related to a portion of payroll, taxes, rent and payments to Canadian domain name registry suppliers that are denominated in Canadian dollars and are expected to be paid by its Canadian operating subsidiary. In May 2020, the Company entered into a pay-fixed, receive-variable interest rate swap with a Canadian chartered bank to limit the potential interest rate fluctuations incurred on its future cash flows related to variable interest payments on the Credit facility. The notional value of the interest rate swap was $70 million. 

 

As part of its risk management strategy, the Company also uses derivative instruments to hedge a portion of the foreign exchange risk and interest rate risk associated with these costs. The Company does not use these forward contracts for trading or speculative purposes. The foreign exchange contracts typically mature between one and eighteen months, and the interest rate swap matures in June 2023.

The Company has designated certain of these foreign exchange transactions as cash flow hedges of forecasted transactions under ASU 2017- 12, Derivatives and Hedging (Topic 815) (“ASC Topic  815”). For certain contracts, as the critical terms of the hedging instrument, and of the entire hedged forecasted transaction, are the same, in accordance with ASC Topic 815, the Company has been able to conclude that changes in fair value and cash flows attributable to the risk of being hedged are expected to completely offset at inception and on an ongoing basis. The Company has also designated the interest rate swap as a cash flow hedge of expected future interest payments. Accordingly, for the foreign exchange and interest rate swap contracts, unrealized gains or losses on the effective portion of these contracts have been included within other comprehensive income and reclassified to earnings when the hedged transaction is recognized in earnings. Cash flows from hedging activities are classified under the same category as the cash flows from the hedged items in the consolidated statements of cash flows. The fair value of the contracts, as of June 30, 2020 and December 31, 2019, is recorded as derivative instrument assets or liabilities. For certain contracts where the hedged transactions are no longer probable to occur, the loss on the associated forward contract is recognized in earnings.

As of June 30, 2020, the notional amount of forward contracts that the Company held to sell U.S. dollars in exchange for Canadian dollars was $52.1 million, of which $44.2 million met the requirements of ASC Topic 815 and were designated as hedges.

As of December 31,  2019, the notional amount of forward contracts that the Company held to sell U.S. dollars in exchange for Canadian dollars wa s $30.5 million, of which $26.1 million met the requirements of ASC Topic 815 and were designated as hedges.

 

As of June 30, 2020, we had the following outstanding forward contracts to trade U.S. dollars in exchange for Canadian dollars:

 

Fair value of derivative instruments and effect of derivative instruments on financial performance

 

Fair value of derivative instruments in the consolidated balance sheets 

 

Movement in accumulated other comprehensive income (AOCI) balance for the three months ended June 30, 2020  (Dollar amounts in thousands of U.S. dollars)

 

		Gains and losses on cash flow hedges				Tax impact				Total AOCI
Opening AOCI balance - March 31, 2020		$	(932	)		$	214			$	(718	)
Other comprehensive income (loss) before reclassifications			1,453				(339	)			1,114
Amount reclassified from AOCI			259				(59	)			200
Other comprehensive income (loss) for the three months ended June 30, 2020			1,712				(398	)			1,314
Ending AOCI Balance - June 30, 2020		$	780			$	(184	)		$	596

 

Movement in accumulated other comprehensive income (AOCI) balance for the six months ended June 30, 2020 (Dollar amounts in thousands of U.S. dollars)

 

Effects of derivative instruments on income and other comprehensive income (OCI) for the three months ended June 30, 2020 are as follows (Dollar amounts in thousands of U.S. dollars) 

 

 

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6. Goodwill and Other Intangible Assets

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed in our acquisitions.

 

The Company's Goodwill balance is $116.3 million as of June 30, 2020 and $109.8 million as of December 31, 2019. The Company's goodwill relates 93% ( $107.7 million) to its Domain Services operating segment and 7% ( $8.6 million) to its Network Access Services operating segment.

 

Goodwill is not amortized, but is subject to an annual impairment test, or more frequently if impairment indicators are present. No impairment was recognized during the three and six months ended June 30, 2020 and 2019.

 

Other Intangible Assets:

 

Intangible assets consist of acquired brand, technology, customer relationships, surname domain names, direct navigation domain names and network rights. The Company considers its intangible assets consisting of surname domain names and direct navigation domain names as indefinite life intangible assets. The Company has the exclusive right to these domain names as long as the annual renewal fees are paid to the applicable registry. Renewals occur routinely and at a nominal cost. The indefinite life intangible assets are not amortized but are subject to impairment assessments performed throughout the year. As part of the normal renewal evaluation process during the periods ended June 30, 2020 and June 30, 2019, the Company assessed that certain domain names that were originally acquired in the June 2006 acquisition of Mailbank.com Inc. that were up for renewal, should not be renewed.   

 

Intangible assets, comprising brand, technology, customer relationships and network rights are being amortized on a straight-line basis over periods of two to fifteen years.

 

In June 2020, in light of developments in the economy and the business and leisure travel industries as a result of the novel strain of coronavirus (“COVID-19”) pandemic, the Company decided to discontinue the operation of Roam Mobility. As a consequence of the decision to shut down its Roam Mobility operations, the Company has recorded an impairment loss associated with Roam Mobility customer relationships of $1.4 million, as at June 30, 2020. 

 

In June 2020, the Company committed to a plan to sell its Ting Mobile customer base and reclassified its mobile customer relationships totaling  $2.6 million as held-for-sale assets (Note 9). See Note 19 - Subsequent Events for more information on the Company’s sale of its Ting Mobile customer base.

 

Throughout the second quarter of 2020, the Company purchased several non-exclusive land easements, totaling $0.1 million, which are necessary for the Company to install fiber internet infrastructure in conjunction with its Fiber Internet business.   

 

		Surname domain names				Direct navigation domain names				Brand				Customer relationships				Technology				Network rights				Total
Amortization period		indefinite life				indefinite life				7 years				3 - 7 years				2 - 7 years				15 years
Balances, December 31, 2019		$	11,166			$	1,144			$	9,091			$	34,268			$	1,516			$	469			$	57,654
Cedar Networks acquisition (Note 4 (b))			-				-				-				4,640				-				750				5,390
Additions to/(disposals from) domain portfolio, net			(6	)			(9	)			-				-				-				-				(15	)
Impairment of definite life intangible asset			-				-				-				(1,431	)			-				-				(1,431	)
Other			-				-				-				(223	)			-				-				(223	)
Classifed as assets held for-sale			-				-				-				(2,581	)			-				-				(2,581	)
Acquisition of Network rights			-				-				-				-				-				69				69
Amortization expense			-				-				(1,035	)			(4,416	)			(632	)			(48	)			(6,131	)
Balances, June 30, 2020		$	11,160			$	1,135			$	8,056			$	30,257			$	884			$	1,240			$	52,732

 

		Year ending
		December 31,
Remainder of 2020		$	5,202
2021			11,783
2022			10,839
2023			8,811
2024			2,399
Thereafter			1,403
Total		$	40,437

 

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The Amended 2019 Credit Facility replaced a secured Credit Agreement dated January 20, 2017 with Bank of Montreal, RBC and Bank of Nova Scotia (as amended, the “2017 Amended Credit Facility”).

 

 

8. Income Taxes:

 

For the three months ended June 30, 2020, we recorded an income tax expense of $0.4 million on income before income taxes of $0.6 million, using an estimated effective tax rate for the fiscal year ending December 31, 2020 (“Fiscal 2020”) adjusted for certain minimum state taxes as well as the inclusion of a $0.1 million tax recovery related to ASU No. 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which requires all excess tax benefits and tax deficiencies related to employee share-based payments to be recognized through income tax expense. Our effective tax rate for the three months ended June 30, 2020 is also adversely affected by discrete losses of $3.7 million related to the impairment of Ting TV and Roam Mobility assets, the tax benefit of which has only been partially recognized.  

 

Comparatively, for the three months ended June 30, 2019, the Company recorded an income tax expense of $1.8 million on income before taxes of $4.4 million, using an estimated effective tax rate for the 2019 fiscal year and adjusted for the $0.3 million tax recovery impact related to ASU 2016-09. 

 

For the six months ended June 30, 2020, we recorded an income tax expense of $1.6 million on net income before income taxes of $4.5 million, using an estimated effective tax rate for Fiscal 2020 adjusted for certain minimum state taxes, as well as the inclusion of a $0.2 million tax recovery related to ASU No. 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which requires all excess tax benefits and tax deficiencies related to employee share-based payments to be recognized through income tax expense. Our effective tax rate for the six months ended June 30, 2020 is also adversely affected by discrete losses of $3.7 million related to the impairment of Ting TV and Roam Mobility assets, the tax benefit of which has only been partially recognized.  

 

Comparatively, for the six months ended June 30, 2019, the Company recorded an income tax expense of $3.1 million on income before taxes of $8.5 million, using an estimated effective tax rate for the 2019 fiscal year and adjusted for the $0.7 million tax recovery impact related to ASU 2016-09. 

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. Management considers projected future taxable income, uncertainties related to the industry in which the Company operates, and tax planning strategies in making this assessment.

 

In connection with the eNom acquisition in 2017, we acquired deferred tax liabilities primarily composed of prepaid registry fees. As a result, we aligned our tax methodology pertaining to the deductibility of prepaid registry fees for our other subsidiaries. In the first quarter of 2019, we determined that we were in technical violation with respect to the administrative application of the accounting method change relating to the deductibility of prepaid registry fees for these additional subsidiaries. In February 2019, the Company filed an application for relief ("9100 Relief") to correct the issue. In November 2019, the Company was granted 9100 Relief and was given 30 days to file the appropriate forms based on prescribed instructions. The Company filed the forms in December 2019 and now awaits the final IRS response and acceptance of the change in accounting method. Management is of the view that it is more likely than not that the IRS will accept the 9100 Relief and filing of the prescribed forms. As such, no additional tax uncertainties or related interest or penalties have been recorded as at June 30, 2020.

 

The Company recognizes accrued interest and penalties related to income taxes in income tax expense. The Company did not have significant interest and penalties accrued at June 30, 2020 and December 31, 2019, respectively.

 

 

9. Assets and liabilities held-for-sale:

 

Accounting Policy:

 

When the Company initiates the sale of long-lived assets, it assesses whether the assets meet the criteria to be considered assets held-for-sale. The review is based on whether the following criteria are met:

 

- Management and the Company's board of directors have committed to a plan to sell the asset;

 

- The subject assets are available for immediate sale in their present condition;

 

- The Company is actively locating buyers as well as other initiatives required to complete the sale;

 

- The sale is probable and the transfer is expected to qualify for recognition as a complete sale in one year;

 

- The long-lived asset is being actively marketed for sale at a price that is reasonable in relation to fair value; and

 

- Actions necessary to complete the plan indicate it is unlikely significant changes will be made to the plan or the plan will be withdrawn.

 

Description of asset groups held-for-sale:

 

If all the criteria are met, a long-lived asset or liabilities held for sale is measured at the lower of its carrying amount or fair value less cost to sell, and the Company will cease recording depreciation. Any adjustment to the carrying amount is recorded as an impairment loss. 

 

In June 2020, the Company committed to a plan to sell the Ting Mobile customer base and the Company's mobile inventory. Accordingly, any capitalized costs associated with the Ting Mobile customer base have been presented as a disposal group held for sale at June 30, 2020. The sale of Tucows' mobile customer base was completed on August 1, 2020 pursuant to an asset sale transaction with Dish Wireless L.L.C. (“DISH”). See Note 19 - Subsequent Events for more information on the details on the transaction with DISH. 

 

As at June 30, 2020 the disposal group comprised assets of $9.0 million and liabilities of $0.8 million comprised of the following assets and liabilities:

 

		June 30, 2020
Device credits		$	99
Accounts receivable			4,554
Mobile inventory			861
Capitalized contract costs (net)			932
Customer relationship intangible assets (net)			2,581
Assets held for sale		$	9,027
Accounts payable		$	594
Accrued liabilities			157
Liabilities held for sale		$	751

No impairment loss was recorded in the consolidated statements of operations and comprehensive income as a result of classifying the aforementioned assets as held for sale during the three and six months ended June 30, 2020.  

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2020				2019				2020				2019
Numerator for basic and diluted earnings per common share:
Net income for the period		$	157			$	2,616			$	2,991			$	5,415
Denominator for basic and diluted earnings per common share:
Basic weighted average number of common shares outstanding			10,567,382				10,657,124				10,589,806				10,646,045
Effect of outstanding stock options			86,145				182,881				94,498				191,411
Diluted weighted average number of shares outstanding			10,653,527				10,840,005				10,684,304				10,837,456
Basic earnings per common share		$	0.01			$	0.25			$	0.28			$	0.51
Diluted earnings per common share		$	0.01			$	0.24			$	0.28			$	0.50

 

For the three months ended  June 30, 2020, options to purchase 734,388 common shares were not included in the computation of diluted income per common share because the options’ exercise price was greater than the average market price of the common shares for the period as compared to the three months ended  June 30, 2019, where 260,700 outstanding options were not included in the computation.

11. Revenue:

 

Significant accounting policy

 

The Company’s revenues are derived from (a) the provisioning of mobile and fiber Internet services; and from (b) domain name registration contracts, other domain related value-added services, domain sale contracts, and other advertising revenue. Amounts received in advance of meeting the revenue recognition criteria described below are recorded as deferred revenue. All products are generally sold without the right of return or refund.

 

Revenue is measured based on consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.

 

Nature of goods and services

The following is a description of principal activities – separated by reportable segments – from which the Company generates its revenue. For more detailed information about reportable segments, see Note 14 – Segment Reporting.

 

The Company generates Network Access Services revenues primarily through the provisioning of mobile services, Ting Mobile. Other sources of revenue include the provisioning of fixed high-speed Internet access, Ting Internet, as well as billing solutions to Internet Service Providers (“ISPs”).

 

Ting Mobile wireless usage contracts grant customers access to standard talk, text and data mobile services. Ting Mobile contracts are billed based on the actual amount of monthly services utilized by each customer during their billing cycle and charged to customers on a postpaid basis. Voice minutes, text messages and megabytes of data are each billed separately based on a tiered pricing program. The Company recognizes revenue for Ting Mobile usage based on the actual amount of monthly services utilized by each customer.

 

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Ting Internet contracts provide customers Internet access at their home or business through the installation and use of our fiber optic network. Ting Internet contracts are generally prepaid and grant customers with unlimited bandwidth based on a fixed price per month basis. Because consideration is collected before the service period, revenue is initially deferred and recognized as the Company performs its obligation to provide Internet access. Though the Company does not consider the installation of fixed Internet access to be a distinct performance obligation, the fees related to installation are immaterial and therefore revenue is recognized as billed.

 

Both Ting Mobile and Ting Internet access services are primarily contracted through the Ting website, for one month at a time and contain no commitment to renew the contract following each customer’s monthly billing cycle. The Company’s billing cycle for all Ting Mobile and Ting Internet customers is computed based on the customer’s activation date. In order to recognize revenue as the Company satisfies its obligations, we compute the amount of revenues earned but not billed from the end of each billing cycle to the end of each reporting period. In addition, revenues associated with the sale of wireless devices and accessories and Internet hardware to subscribers are recognized when title and risk of loss is transferred to the subscriber and shipment has occurred. Incentive marketing credits given to customers are recorded as a reduction of revenue.

 

Our Roam Mobility brands also offers standard talk, text and data mobile services. Roam customers prepay for their usage through the Roam Mobility website. When prepayments are received the amount is deferred, and subsequently recognized as the Company satisfies its obligation to provide mobile services. In addition, revenues associated with the sale of SIM cards are recognized when title and risk of loss is transferred to the subscriber and shipment has occurred. Incentive marketing credits given to customers are recorded as a reduction of revenue.

 

In those cases, where payment is not received at the time of sale, revenue is not recognized at contract inception unless the collection of the related accounts receivable is reasonably assured. The Company records costs that reflect expected refunds, rebates and credit card charge-backs as a reduction of revenues at the time of the sale based on historical experiences and current expectations.

 

Domain registration contracts, which can be purchased for terms of one to ten years, provide our resellers and retail registrant customers with the exclusive right to a personalized internet address from which to build an online presence. The Company enters into domain registration contracts in connection with each new, renewed and transferred-in domain registration. At the inception of the contract, the Company charges and collects the registration fee for the entire registration period. Though fees are collected upfront, revenue from domain registrations are recognized rateably over the registration period as domain registration contracts contain a ‘right to access’ license of IP, which is a distinct performance obligation measured over time. The registration period begins once the Company has confirmed that the requested domain name has been appropriately recorded in the registry under contractual performance standards.

 

Domain related value-added services like digital certifications, WHOIS privacy, website hosting and hosted email provide our resellers and retail registrant customers with tools and additional functionality to be used in conjunction with domain registrations. All domain related value-added services are considered distinct performance obligations which transfer the promised service to the customer over the contracted term. Fees charged to customers for domain related value-added services are collected at the inception of the contract, and revenue is recognized on a straight-line basis over the contracted term, consistent with the satisfaction of the performance obligations.

 

The Company is an ICANN accredited registrar. Thus, the Company is the primary obligor with our reseller and retail registrant customers and is responsible for the fulfillment of our registrar services to those parties. As a result, the Company reports revenue in the amount of the fees we receive directly from our reseller and retail registrant customers. Our reseller customers maintain the primary obligor relationship with their retail customers, establish pricing and retain credit risk to those customers. Accordingly, the Company does not recognize any revenue related to transactions between our reseller customers and their ultimate retail customers.

 

The Company also sells the rights to the Company’s portfolio domains or names acquired through the Company’s domain expiry stream. Revenue generated from sale of domain name contracts, containing a distinct performance obligation to transfer the domain name rights under the Company’s control, is generally recognized once the rights have been transferred and payment has been received in full.

 

Advertising revenue is derived through domain parking monetization, whereby the Company contracts with third-party Internet advertising publishers to direct web traffic from the Company’s domain expiry stream domains and Internet portfolio domains to advertising websites. Compensation from Internet advertising publishers is calculated variably on a cost-per-action basis based on the number of advertising links that have been visited in a given month. Given that the variable consideration is calculated and paid on a monthly basis, no estimation of variable consideration is required.

 

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Disaggregation of Revenue

The following is a summary of the Company’s revenue earned from each significant revenue stream (Dollar amounts in thousands of U.S. dollars):

During the  three and six months ended June 30, 2020 and the three and six months ended June 30, 2019 no customer accounted for more than 10% of total revenue and no customer accounted for more than 10% of accounts receivable.

 

The following is a summary of the Company’s cost of revenue from each significant revenue stream (Dollar amounts in thousands of U.S. dollars): 

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2020				2019				2020				2019
Network Access Services:
Mobile Services		$	8,660			$	10,806			$	18,517			$	21,549
Other Services			1,665				956				3,381				2,025
Total Network Access Services			10,325				11,762				21,898				23,574
Domain Services:
Wholesale
Domain Services			36,354				37,817				72,823				72,656
Value Added Services			762				738				1,547				1,531
Total Wholesale			37,116				38,555				74,370				74,187
Retail			4,219				4,409				8,453				8,768
Portfolio			130				147				257				276
Total Domain Services			41,465				43,111				83,080				83,231
Network Expenses:
Network, other costs			2,485				2,385				4,901				4,780
Network, depreciation and amortization costs			3,356				2,352				6,587				4,327
Network, impairment			1,525				-				1,525				-
Total Network Expenses			7,366				4,737				13,013				9,107
		$	59,156			$	59,610			$	117,991			$	115,912

 

 

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Contract Balances

 

The following table provides information about contract liabilities (deferred revenue) from contracts with customers. The Company accounts for contract assets and liabilities on a contract-by-contract basis, with each contract presented as either a net contract asset or a net contract liability accordingly.

Given that Company’s long-term contracts with customers are billed in advance of service, the Company’s contract liabilities relate to amounts recorded as deferred revenues. The Company does not have material streams of contracted revenue that have not been billed.

Deferred revenue primarily relates to the portion of the transaction price received in advance related to the unexpired term of domain name registrations and other domain related value-added services, on both a wholesale and retail basis, net of external commissions.

Significant changes in deferred revenue for the six months ended June 30, 2020 were as follows (Dollar amounts in thousands of U.S. dollars): 

Remaining Performance Obligations:

For mobile and internet access services, where the performance obligation is part of contracts that have an original expected duration of one year or less (typically one month), the Company has elected to apply a practical expedient to not disclose revenues expected to be recognized in the future related performance obligations that are unsatisfied (or partially unsatisfied) (Dollar amounts in thousands of US dollars).

 

Although domain registration contracts are deferred over the lives of the individual contracts, which can range from one to ten years, approximately 80 percent of our deferred revenue balance related to domain contracts is expected to be recognized within the next twelve months.

 

Deferred revenue related to Exact hosting contracts is also deferred over the lives of the individual contracts, which are expected to be fully recognized within the next twelve months. In connection with the shutdown of the Roam Mobility operations, all previously deferred revenue associated with the Roam Mobility operations has been recognized as of June 30, 2020. 

 

13. Leases

 

We lease datacenters, corporate offices and fiber-optic cables under operating leases. The Company does not have any leases classified as finance leases.

Our leases have remaining lease terms of 1 year to 20 years, some of which may include options to extend the leases for up to 5 years, and some of which may include options to terminate the leases within 1 year.

The components of lease expense were as follows (Dollar amounts in thousands of U.S. dollars): 

 

		For the three months ended				For the three months ended				For the six months ended				For the six months ended
		June 30, 2020				June 30, 2019				June 30, 2020				June 30, 2019
Operating Lease Cost (leases with a total term greater than 12 months)		$	527			$	826			$	1,074			$	1,897
Short-term Lease Cost (leases with a total term of 12 months or less)			130				279				374				403
Variable Lease Cost			145				193				273				364
Total Lease Cost		$	802			$	1,298			$	1,721			$	2,664