TUCOWS INC /PA/ - Quarter Report: 2020 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-32600
TUCOWS INC.
(Exact Name of Registrant as Specified in Its Charter)
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Pennsylvania |
23-2707366 |
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(State or Other Jurisdiction of |
(I.R.S. Employer |
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Incorporation or Organization) |
Identification No.) |
96 Mowat Avenue,
Toronto, Ontario M6K 3M1, Canada
(Address of Principal Executive Offices) (Zip Code)
(416) 535-0123
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Common Stock |
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TCX |
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NASDAQ |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T §232.405 of this chapter during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
Accelerated filer ☒ |
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Non-accelerated filer ☐ |
Smaller reporting company ☐ |
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Emerging Growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒
As of May 4, 2020, there were 10,567,675 outstanding shares of common stock, no par value, of the registrant.
Form 10-Q Quarterly Report
INDEX
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Item 1. |
3 |
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Consolidated Balance Sheets (unaudited) as of March 31, 2020 and December 31, 2019 |
3 |
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4 |
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Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2020 and 2019 |
5 |
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6 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
26 |
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Item 3. |
47 |
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Item 4. |
48 |
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Item 1. |
49 |
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Item 1A. |
49 |
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Item 2. |
50 |
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Item 3. |
50 |
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Item 4. |
50 |
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Item 5. |
50 |
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Item 6. |
51 |
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52 |
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TRADEMARKS, TRADE NAMES AND SERVICE MARKS
Tucows®, EPAG®, Hover®, OpenSRS®, Platypus®, Ting®, eNom®, Roam®, Roam Mobility®, Bulkregister®, Ascio®, Cedar®, and YummyNames® are registered trademarks of Tucows Inc. or its subsidiaries. Other service marks, trademarks and trade names of Tucows Inc. or its subsidiaries may be used in this Quarterly Report on Form 10-Q (this “Quarterly Report”). All other service marks, trademarks and trade names referred to in this Quarterly Report are the property of their respective owners. Solely for convenience, any trademarks referred to in this Quarterly Report may appear without the ® or TM symbol, but such references are not intended to indicate, in any way, that we or the owner of such trademark, as applicable, will not assert, to the fullest extent under applicable law, our or its rights, or the right of the applicable licensor, to these trademarks.
Item 1. Consolidated Financial Statements
Tucows Inc.
Consolidated Balance Sheets
(Dollar amounts in thousands of U.S. dollars)
(unaudited)
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March 31, |
December 31, |
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2020 |
2019 | |||||||
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Assets |
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Current assets: |
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| Cash and cash equivalents | $ | 12,446 | $ | 20,393 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $195 as of March 31, 2020 and $131 as of December 31, 2019 | 12,480 | 14,564 | ||||||
| Inventory | 2,553 | 3,457 | ||||||
| Prepaid expenses and deposits | 13,464 | 13,478 | ||||||
| Derivative instrument asset, current portion (note 5) | 172 | 731 | ||||||
| Prepaid domain name registry and ancillary services fees, current portion (note 11) | 93,893 | 91,252 | ||||||
| Income taxes recoverable | 1,460 | 1,800 | ||||||
| Total current assets | 136,468 | 145,675 | ||||||
| Prepaid domain name registry and ancillary services fees, long-term portion (note 11) | 18,127 | 17,915 | ||||||
| Derivative instrument asset, long-term portion (note 5) | 370 | - | ||||||
| Property and equipment | 94,289 | 82,121 | ||||||
| Right of use operating lease asset | 11,463 | 11,335 | ||||||
| Contract costs | 1,371 | 1,400 | ||||||
| Intangible assets (note 6) | 59,915 | 57,654 | ||||||
| Goodwill (note 6) | 115,837 | 109,818 | ||||||
| Total assets | $ | 437,840 | $ | 425,918 | ||||
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Liabilities and Stockholders' Equity |
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Current liabilities: |
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| Accounts payable | $ | 8,996 | $ | 6,671 | ||||
| Accrued liabilities | 7,838 | 9,373 | ||||||
| Customer deposits | 14,132 | 14,074 | ||||||
| Derivative instrument liability (note 5) | 1,718 | - | ||||||
| Operating lease liability, current portion (note 12) | 1,488 | 1,413 | ||||||
| Deferred revenue, current portion (note 10) | 126,152 | 123,101 | ||||||
| Accreditation fees payable, current portion | 1,045 | 952 | ||||||
| Income taxes payable | 1,302 | 1,324 | ||||||
| Total current liabilities | 162,671 | 156,908 | ||||||
| Deferred revenue, long-term portion (note 10) | 26,493 | 26,202 | ||||||
| Accreditation fees payable, long-term portion | 208 | 216 | ||||||
| Operating lease liability, long-term portion (note 12) | 9,293 | 9,424 | ||||||
| Loan payable, long-term portion (note 7) | 113,545 | 113,503 | ||||||
| Other long-term liability (note 4 (b)) | 3,152 | - | ||||||
| Deferred tax liability | 27,122 | 25,471 | ||||||
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Stockholders' equity (note 14) |
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Preferred stock - no par value, 1,250,000 shares authorized; none issued and outstanding |
- | - | ||||||
| Common stock - no par value, 250,000,000 shares authorized; 10,562,774 shares issued and outstanding as of March 31, 2020 and 10,585,159 shares issued and outstanding as of December 31, 2019 | 18,751 | 16,633 | ||||||
| Additional paid-in capital | - | 880 | ||||||
| Retained earnings | 77,323 | 76,208 | ||||||
| Accumulated other comprehensive income (loss) (note 5) | (718 | ) | 473 | |||||
| Total stockholders' equity | 95,356 | 94,194 | ||||||
| Total liabilities and stockholders' equity | $ | 437,840 | $ | 425,918 | ||||
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Contingencies (note 17) |
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See accompanying notes to consolidated financial statements
Consolidated Statements of Operations and Comprehensive Income
(Dollar amounts in thousands of U.S. dollars, except per share amounts)
(unaudited)
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For the Three Months Ended March 31, |
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2020 |
2019 | |||||||
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Net revenues (note 10) |
$ | 83,985 | $ | 78,953 | ||||
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Cost of revenues (note 10) |
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Cost of revenues |
53,188 | 51,932 | ||||||
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Network expenses |
2,416 | 2,395 | ||||||
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Depreciation of property and equipment |
2,877 | 1,801 | ||||||
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Amortization of intangible assets (note 6) |
354 | 174 | ||||||
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Total cost of revenues |
58,835 | 56,302 | ||||||
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Gross profit |
25,150 | 22,651 | ||||||
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Expenses: |
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Sales and marketing |
8,985 | 8,741 | ||||||
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Technical operations and development |
2,751 | 2,523 | ||||||
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General and administrative |
4,741 | 4,448 | ||||||
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Depreciation of property and equipment |
113 | 124 | ||||||
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Amortization of intangible assets (note 6) |
2,947 | 1,866 | ||||||
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Loss (gain) on currency forward contracts (note 5) |
441 | (79 | ) | |||||
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Total expenses |
19,978 | 17,623 | ||||||
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Income from operations |
5,172 | 5,028 | ||||||
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Other income (expenses): |
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Interest expense, net |
(1,150 | ) | (972 | ) | ||||
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Other income, net |
(87 | ) | - | |||||
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Total other income (expenses) |
(1,237 | ) | (972 | ) | ||||
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Income before provision for income taxes |
3,935 | 4,056 | ||||||
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Provision for income taxes (note 8) |
1,101 | 1,257 | ||||||
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Net income for the period |
2,834 | 2,799 | ||||||
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Other comprehensive income, net of tax |
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Unrealized income (loss) on hedging activities (note 5) |
(1,234 | ) | 549 | |||||
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Net amount reclassified to earnings (note 5) |
43 | 61 | ||||||
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Other comprehensive income (loss) net of tax (expense) recovery of $366 and ($194) for the periods ended March 31, 2020 and March 31, 2019, respectively (note 5) |
(1,191 | ) | 610 | |||||
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Comprehensive income, net of tax for the period |
$ | 1,643 | $ | 3,409 | ||||
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Basic earnings per common share (note 9) |
$ | 0.27 | $ | 0.26 | ||||
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Shares used in computing basic earnings per common share (note 9) |
10,612,230 | 10,634,842 | ||||||
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Diluted earnings per common share (note 9) |
$ | 0.26 | $ | 0.26 | ||||
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Shares used in computing diluted earnings per common share (note 9) |
10,713,678 | 10,835,897 | ||||||
See accompanying notes to consolidated financial statements
Consolidated Statements of Cash Flows
(Dollar amounts in thousands of U.S. dollars)
(unaudited)
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For the Three Months Ended March 31, |
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2020 |
2019 | |||||||
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Cash provided by: |
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Operating activities: |
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Net income for the period |
$ | 2,834 | $ | 2,799 | ||||
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Items not involving cash: |
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Depreciation of property and equipment |
2,990 | 1,925 | ||||||
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Loss on write off of property and equipment |
- | 22 | ||||||
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Amortization of debt discount and issuance costs |
67 | 78 | ||||||
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Amortization of intangible assets |
3,301 | 2,040 | ||||||
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Net amortization contract costs |
29 | 19 | ||||||
| Accretion of contingent consideration | 87 | - | ||||||
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Deferred income taxes (recovery) |
(190 | ) | 462 | |||||
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Excess tax benefits on share-based compensation expense |
(180 | ) | (356 | ) | ||||
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Net Right of use operating assets/Operating lease liability |
(179 | ) | (30 | ) | ||||
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Loss on disposal of domain names |
13 | 4 | ||||||
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Loss (gain) on change in the fair value of forward contracts |
348 | (118 | ) | |||||
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Stock-based compensation |
801 | 525 | ||||||
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Change in non-cash operating working capital: |
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Accounts receivable |
2,151 | (1,188 | ) | |||||
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Inventory |
904 | 408 | ||||||
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Prepaid expenses and deposits |
25 | (390 | ) | |||||
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Prepaid domain name registry and ancillary services fees |
(2,853 | ) | (1,716 | ) | ||||
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Income taxes recoverable |
500 | (1,236 | ) | |||||
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Accounts payable |
1,771 | 786 | ||||||
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Accrued liabilities |
(1,831 | ) | 1,321 | |||||
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Customer deposits |
58 | 287 | ||||||
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Deferred revenue |
3,342 | 3,269 | ||||||
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Accreditation fees payable |
85 | 80 | ||||||
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Net cash provided by operating activities |
14,073 | 8,991 | ||||||
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Financing activities: |
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Proceeds received on exercise of stock options |
17 | 71 | ||||||
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Payment of tax obligations resulting from net exercise of stock options |
(182 | ) | (340 | ) | ||||
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Repurchase of common stock |
(3,117 | ) | - | |||||
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Proceeds received on loan payable |
- | 32,940 | ||||||
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Repayment of loan payable |
(4,600 | ) | ||||||
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Payment of loan payable costs |
(25 | ) | (205 | ) | ||||
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Net cash (used in) provided by financing activities |
(3,307 | ) | 27,866 | |||||
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Investing activities: |
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Additions to property and equipment |
(9,943 | ) | (10,435 | ) | ||||
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Acquisition of Cedar Holdings Group, net of cash of $66 (note 4(b)) |
(8,770 | ) | - | |||||
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Acquisition of Ascio Technologies, net of cash of $1 (note 4(a)) |
- | (28,024 | ) | |||||
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Net cash used in investing activities |
(18,713 | ) | (38,459 | ) | ||||
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Increase (decrease) in cash and cash equivalents |
(7,947 | ) | (1,602 | ) | ||||
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Cash and cash equivalents, beginning of period |
20,393 | 12,637 | ||||||
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Cash and cash equivalents, end of period |
$ | 12,446 | $ | 11,035 | ||||
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Supplemental cash flow information: |
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Interest paid |
$ | 1,154 | $ | 976 | ||||
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Income taxes paid, net |
$ | 956 | $ | 2,118 | ||||
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Supplementary disclosure of non-cash investing and financing activities: |
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Property and equipment acquired during the period not yet paid for |
$ | 1,102 | $ | 392 | ||||
| Fair value of shares issued for acquisition of Cedar Holdings Group | $ | 2,000 | $ | - | ||||
| Fair value of contingent consideration for acquisition of Cedar Holdings Group | $ | 3,065 | $ | - | ||||
See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. Organization of the Company:
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.
2. Basis of presentation:
The accompanying unaudited interim consolidated balance sheets, and the related consolidated statements of operations and comprehensive income and cash flows reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of the financial position of Tucows and its subsidiaries as at March 31, 2020 and the results of operations and cash flows for the interim periods ended March 31, 2020 and 2019. The results of operations presented in this Quarterly Report on Form 10-Q are not necessarily indicative of the results of operations that may be expected for future periods.
The accompanying unaudited interim consolidated financial statements have been prepared by Tucows in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the Company's annual audited consolidated financial statements and accompanying notes have been condensed or omitted. Other than the exception noted below, these interim consolidated financial statements and accompanying notes follow the same accounting policies and methods of application used in the annual financial statements and should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in Tucows' 2019 Annual Report on Form 10-K filed with the SEC on March 4, 2020 (the “2019 Annual Report”). There have been no material changes to our significant accounting policies and estimates during the three months ended March 31, 2020 as compared to the significant accounting policies and estimates described in our 2019 Annual Report, except as described in Note 3 – Recent accounting pronouncements.
3. Recent accounting pronouncements:
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.
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:
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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. | |
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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 2019 Amended 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.
4. Acquisitions:
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(a) |
Ascio |
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(b) |
Cedar |
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 11.3%. 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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Cash Consideration, including working capital adjustment |
$ | 8,836 | ||
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Share-based payment |
2,000 | |||
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Fair value of contingent consideration |
3,065 | |||
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Total estimated purchase price |
13,901 | |||
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Cash and Cash Equivalents |
66 | |||
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Accounts Receivables, net |
67 | |||
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Other current assets |
22 | |||
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Property and equipment |
4,661 | |||
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Right of use operating lease |
18 | |||
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Intangible assets, consisting of customer relationships and network rights |
5,575 | |||
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Total identifiable assets |
10,409 | |||
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Accounts payable and accrued liabilities |
(307 | ) | ||
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Deferred tax liability |
(2,207 | ) | ||
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Operating lease liability |
(13 | ) | ||
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Total liabilities assumed |
(2,527 | ) | ||
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Total net assets (liabilities) assumed |
7,882 | |||
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Total goodwill |
$ | 6,019 |
In connection with this acquisition, the Company incurred total acquisition related costs of $0.1 million, of which nil were included in General & Administrative expenses in the consolidated statements of Operations and comprehensive Income for the three months ended March 31, 2020.
The following table presents selected unaudited pro forma information for the Company assuming the acquisition of Cedar had occurred as of January 1, 2019. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what results would be for any future periods.
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Unaudited |
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For the Three Months Ended March 31, |
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2019 |
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Net revenues |
$ | 80,181 | ||
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Net income |
2,700 | |||
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Basic earnings per common share |
0.25 | |||
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Diluted earnings per common share |
$ | 0.25 | ||
The amount of revenue recognized since the acquisition date included in the consolidated statements of operations and comprehensive income statement for the three months ended March 31, 2020 is $1.2 million.
The net income recognized since the acquisition date included in the consolidated statements of operations and comprehensive income for the three months ended March 31, 2020 is a loss of $0.3 million.
| Maturity date (Dollar amounts in thousands of U.S. dollars) | Notional amount of U.S. dollars | Weighted average exchange rate of U.S. dollars | Fair value | |||||||||
| April - June 2020 | 9,653 | 1.3296 | (526 | ) | ||||||||
| July - September 2020 | 10,656 | 1.3227 | (627 | ) | ||||||||
| October - December 2020 | 9,658 | 1.3227 | (565 | ) | ||||||||
| January - March 2021 | 11,124 | 1.4283 | 172 | |||||||||
| April - June 2021 | 9,878 | 1.4283 | 150 | |||||||||
| July - September 2021 | 10,782 | 1.4362 | 220 | |||||||||
| $ | 61,751 | 1.3795 | $ | (1,176 | ) | |||||||
The effect of these derivative instruments on our consolidated financial statements were as follows (amounts presented do not include any income tax effects).
| Derivatives (Dollar amounts in thousands of U.S. dollars) | Balance Sheet Location | As of March 31, 2020 Fair Value Liability | As of December 31, 2019 Fair Value Asset | |||||||
| Foreign Currency forward contracts designated as cash flow hedges (net) | Derivative instruments | $ | (932 | ) | $ | 626 | ||||
| Foreign Currency forward contracts not designated as cash flow hedges (net) | Derivative instruments | (244 | ) | 105 | ||||||
| Total foreign currency forward contracts (net) | Derivative instruments | $ | (1,176 | ) | $ | 731 | ||||
| Gains and losses on cash flow hedges | Tax impact | Total AOCI | ||||||||||
| Opening AOCI balance - December 31, 2019 | $ | 625 | $ | (152 | ) | $ | 473 | |||||
| Other comprehensive income (loss) before reclassifications | (1,615 | ) | 381 | (1,234 | ) | |||||||
| Amount reclassified from AOCI | 58 | (15 | ) | 43 | ||||||||
| Other comprehensive income (loss) for the three months ended March 31, 2020 | (1,557 | ) | 366 | (1,191 | ) | |||||||
| Ending AOCI Balance - March 31, 2020 | $ | (932 | ) | $ | 214 | $ | (718 | ) | ||||
| Derivatives in Cash Flow Hedging Relationship | Amount of Gain or (Loss) Recognized in OCI, net of tax, on Derivative | Location of Gain or (Loss) Reclassified from AOCI into Income | Amount of Gain or (Loss) Reclassified from AOCI into Income | ||||||
| Operating expenses | $ | (45 | ) | ||||||
| Foreign currency forward contracts for the three months ended March 31, 2020 | $ | (1,191 | ) | Cost of revenues | $ | (13 | ) | ||
| Operating expenses | $ | (64 | ) | ||||||
| Foreign currency forward contracts for the three months ended March 31, 2019 | $ | 610 | Cost of revenues | $ | (15 | ) | |||
In addition to the above, for those foreign currency forward contracts not designated as hedges, the Company recorded the following fair value adjustments on settled and outstanding contracts (Dollar amounts in thousands of U.S. dollars):
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March 31, 2020 |
March 31, 2019 |
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Forward currency contracts not designated as hedges: |
Three months ended |
Three months ended |
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Gain (loss) on settlement |
$ | (93 | ) | $ | (39 | ) | ||
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Gain (loss) on change in fair value |
$ | (348 | ) | $ | 118 | |||
| 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)) | - | - | - | 4,630 | - | 945 | 5,575 | |||||||||||||||||||||
| Additions to/(disposals from) domain portfolio, net | (4 | ) | (9 | ) | - | - | - | - | (13 | ) | ||||||||||||||||||
| Amortization expense | - | - | (518 | ) | (2,429 | ) | (327 | ) | (27 | ) | (3,301 | ) | ||||||||||||||||
| Balances, March 31, 2020 | $ | 11,162 | $ | 1,135 | $ | 8,573 | $ | 36,469 | $ | 1,189 | $ | 1,387 | $ | 59,915 | ||||||||||||||
| Year ending | ||||
| December 31, | ||||
| Remainder of 2020 | $ | 8,054 | ||
| 2021 | 12,152 | |||
| 2022 | 11,208 | |||
| 2023 | 9,180 | |||
| 2024 | 2,644 | |||
| Thereafter | 4,380 | |||
| Total | $ | 47,618 | ||
7. Loan Payable:
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”).
| If Total Funded Debt to EBITDA is: | ||||||||||||||||
| Availment type or fee | Less than 1.00 | Greater than or equal to 1.00 and less than 2.00 | Greater than or equal to 2.00 and less than 2.50 | Greater than or equal to 2.50 | ||||||||||||
| Canadian dollar borrowings based on Bankers’ Acceptance or U.S. dollar borrowings based on LIBOR (Margin) | 1.50 | % | 1.85 | % | 2.35 | % | 2.85 | % | ||||||||
| Canadian or U.S. dollar borrowings based on Prime Rate or U.S. dollar borrowings based on Base Rate (Margin) | 0.25 | % | 0.60 | % | 1.10 | % | 1.60 | % | ||||||||
| Standby fees | 0.30 | % | 0.37 | % | 0.47 | % | 0.57 | % | ||||||||
|
March 31, 2020 |
December 31, 2019 |
|||||||
|
Revolver |
$ | 114,400 | $ | 114,400 | ||||
|
Less: unamortized debt discount and issuance costs |
(855 | ) | (897 | ) | ||||
|
Total loan payable |
113,545 | 113,503 | ||||||
|
Less: loan payable, current portion |
- | - | ||||||
|
Loan payable, long-term portion |
$ | 113,545 | $ | 113,503 | ||||
|
Remainder of 2020 |
$ | - | ||
|
2021 |
- | |||
|
2022 |
- | |||
|
2023 |
114,400 | |||
| $ | 114,400 |
Prior to the Company entering into the Amended 2019 Credit Facility and the 2017 Amended Credit Facility, the Company had credit agreements (collectively the “Prior Credit Facilities”) with BMO, which provided the Company with access to a treasury risk management facility and a credit card facility. All remaining credit facilities under the 2017 Amended Credit Facility and the Prior Credit Facilities have been terminated.
For the three months ended March 31, 2020, we recorded an income tax expense of $1.1 million on income before income taxes of $3.9 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 $0.2 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. Comparatively, for the three months ended March 31, 2019, the Company recorded an income tax expense of $1.3 million on income before taxes of $4.1 million, using an estimated effective tax rate for the 2019 fiscal year and adjusted for the $0.4 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 March 31, 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 March 31, 2020 and December 31, 2019, respectively.
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Numerator for basic and diluted earnings per common share: | ||||||||
| Net income for the period | $ | 2,834 | $ | 2,799 | ||||
| Denominator for basic and diluted earnings per common share: | ||||||||
| Basic weighted average number of common shares outstanding | 10,612,230 | 10,634,842 | ||||||
| Effect of outstanding stock options | 101,448 | 201,055 | ||||||
| Diluted weighted average number of shares outstanding | 10,713,678 | 10,835,897 | ||||||
| Basic earnings per common share | $ | 0.27 | $ | 0.26 | ||||
| Diluted earnings per common share | $ | 0.26 | $ | 0.26 | ||||
For the three months ended March 31, 2020, options to purchase 138,506 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 March 31, 2019, where 121,300 outstanding options were not included in the computation.
10. Revenue:
|
(a) |
Network Access Services |
|
(b) |
Domain Services |
|
Three Months Ended March 31, 2020 |
Three Months Ended March 31, 2019 | |||||||
|
Network Access Services: |
||||||||
|
Mobile Services |
$ | 20,148 | $ | 20,809 | ||||
|
Other Services |
4,308 | 2,443 | ||||||
|
Total Network Access Services |
24,456 | 23,252 | ||||||
|
Domain Services: |
||||||||
|
Wholesale |
||||||||
|
Domain Services |
45,964 | 42,591 | ||||||
|
Value Added Services |
4,707 | 4,184 | ||||||
|
Total Wholesale |
50,671 | 46,775 | ||||||
|
Retail |
8,449 | 8,642 | ||||||
|
Portfolio |
409 | 284 | ||||||
|
Total Domain Services |
59,529 | 55,701 | ||||||
| $ | 83,985 | $ | 78,953 | |||||
|
Three Months Ended March 31, 2020 |
Three Months Ended March 31, 2019 | |||||||
|
Network Access Services: |
||||||||
|
Mobile Services |
$ | 9,857 | $ | 10,743 | ||||
|
Other Services |
1,716 | 1,069 | ||||||
|
Total Network Access Services |
11,573 | 11,812 | ||||||
|
Domain Services: |
||||||||
|
Wholesale |
||||||||
|
Domain Services |
36,469 | 34,839 | ||||||
|
Value Added Services |
785 | 794 | ||||||
|
Total Wholesale |
37,254 | 35,633 | ||||||
|
Retail |
4,234 | 4,359 | ||||||
|
Portfolio |
127 | 128 | ||||||
|
Total Domain Services |
41,615 | 40,120 | ||||||
|
Network Expenses: |
||||||||
|
Network, other costs |
2,416 | 2,395 | ||||||
|
Network, depreciation and amortization costs |
3,231 | 1,975 | ||||||
|
Total Network Expenses |
5,647 | 4,370 | ||||||
| $ | 58,835 | $ | 56,302 | |||||
| March 31, 2020 | ||||
| Balance, beginning of period | $ | 149,303 | ||
| Deferred revenue | 62,871 | |||
| Recognized revenue | (59,529 | ) | ||
| Balance, end of period | $ | 152,645 | ||
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 Roam Mobility and [Exact] hosting contracts are also deferred over the lives of the individual contracts, which are expected to be fully recognized within the next twelve months.
| March 31, 2020 | ||||
| Balance, beginning of period | $ | 109,167 | ||
| Deferral of costs | 44,436 | |||
| Recognized costs | (41,583 | ) | ||
| Balance, end of period | $ | 112,020 | ||
|
For the three months ended |
For the three months ended |
|||||||
|
March 31, 2020 |
March 31, 2019 |
|||||||
|
Operating Lease Cost (leases with a total term greater than 12 months) |
$ | 547 | $ | 1,071 | ||||
|
Short-term Lease Cost (leases with a total term of 12 months or less) |
244 | 124 | ||||||
|
Variable Lease Cost |
128 | 171 | ||||||
|
Total Lease Cost |
$ | 919 | $ | 1,366 | ||||
|
For the three months ended |
For the three months ended |
|||||||
|
Supplemental cashflow information: |
March 31, 2020 |
March 31, 2019 |
||||||
|
Operating Lease - Operating Cash Flows (Fixed Payments) |
$ | 559 | $ | 1,051 | ||||
|
Operating Lease - Operating Cash Flows (Liability Reduction) |
$ | 438 | $ | 948 | ||||
|
New ROU Assets - Operating Leases |
$ | 875 | $ | 4,427 | ||||
| Supplemental balance sheet information related to leases: | March 31, 2020 | March 31, 2019 | ||||||
| Weighted Average Discount Rate | 4.03 | % | 5.24 | % | ||||
| Weighted Average Remaining Lease Term | 8.60 yrs | 8.55 yrs | ||||||
| March 31, 2020 | ||||
| Remaining of 2020 | $ | 1,384 | ||
| 2021 | 1,741 | |||
| 2022 | 1,662 | |||
| 2023 | 1,624 | |||
| 2024 | 1,353 | |||
| Thereafter | 4,954 | |||
| Total future lease payments | 12,718 | |||
| Less imputed interest | 1,937 | |||
| Total | $ | 10,781 | ||
| Network Access Services | Domain Services | Consolidated Totals | ||||||||||
| Three Months Ended March 31, 2020 | ||||||||||||
| Net Revenues | $ | 24,456 | $ | 59,529 | $ | 83,985 | ||||||
| Cost of revenues | ||||||||||||
| Cost of revenues | 11,573 | 41,615 | 53,188 | |||||||||
| Network expenses | 538 | 1,878 | 2,416 | |||||||||
| Depreciation of property and equipment | 2,414 | 463 | 2,877 | |||||||||
| Amortization of intangible assets | 27 | 327 | 354 | |||||||||
| Total cost of revenues | 14,552 | 44,283 | 58,835 | |||||||||
| Gross Profit | 9,904 | 15,246 | 25,150 | |||||||||
| Expenses: | ||||||||||||
| Sales and marketing | 8,985 | |||||||||||
| Technical operations and development | 2,751 | |||||||||||
| General and administrative | 4,741 | |||||||||||
| Depreciation of property and equipment | 113 | |||||||||||
| Amortization of intangible assets | 2,947 | |||||||||||
| Loss (gain) on currency forward contracts | 441 | |||||||||||
| Income from operations | 5,172 | |||||||||||
| Other income (expenses), net | (1,237 | ) | ||||||||||
| Income before provision for income taxes | $ | 3,935 | ||||||||||
| Network Access Services | Domain Services | Consolidated Totals | ||||||||||
| Three Months Ended March 31, 2019 | ||||||||||||
| Net Revenues | $ | 23,252 | $ | 55,701 | $ | 78,953 | ||||||
| Cost of revenues | ||||||||||||
| Cost of revenues | 11,812 | 40,120 | 51,932 | |||||||||
| Network expenses | 521 | 1,874 | 2,395 | |||||||||
| Depreciation of property and equipment | 1,454 | 347 | 1,801 | |||||||||
| Amortization of intangible assets | 11 | 163 | 174 | |||||||||
| Total cost of revenues | 13,798 | 42,504 | 56,302 | |||||||||
| Gross Profit | 9,454 | 13,197 | 22,651 | |||||||||
| Expenses: | ||||||||||||
| Sales and marketing | 8,741 | |||||||||||
| Technical operations and development | 2,523 | |||||||||||
| General and administrative | 4,448 | |||||||||||
| Depreciation of property and equipment | 124 | |||||||||||
| Amortization of intangible assets | 1,866 | |||||||||||
| Loss (gain) on currency forward contracts | (79 | ) | ||||||||||
| Income from operations | 5,028 | |||||||||||
| Other income (expenses), net | (972 | ) | ||||||||||
| Income before provision for income taxes | $ | 4,056 | ||||||||||
| March 31, 2020 | December 31, 2019 | |||||||
| Canada | $ | 2,157 | $ | 2,319 | ||||
| United States | 91,724 | 79,758 | ||||||
| Europe | 408 | 44 | ||||||
| $ | 94,289 | $ | 82,121 | |||||
| March 31, 2020 | December 31, 2019 | |||||||
| Canada | $ | 4,873 | $ | 5,207 | ||||
| United States | 42,745 | 40,137 | ||||||
| $ | 47,618 | $ | 45,344 | |||||
| March 31, 2020 | December 31, 2019 | |||||||
| Canada | $ | - | $ | - | ||||
| $ | - | $ | - | |||||
| Allowance for doubtful accounts | Balance at beginning of period | Charged to costs and expenses | Write-offs during period | Balance at end of period | ||||||||||||
| Three Months Ended March 31, 2020 | $ | 131 | $ | 64 | $ | - | $ | 195 | ||||||||
| Twelve months ended December 31, 2019 | $ | 132 | $ | (1 | ) | $ | - | $ | 131 | |||||||
The following table summarizes stockholders' equity transactions for the three-month period ended March 31, 2020 (Dollar amounts in thousands of U.S. dollars):
|
Accumulated |
||||||||||||||||||||||||
|
Additional |
other |
Total |
||||||||||||||||||||||
|
Common stock |
paid in |
Retained |
comprehensive |
stockholders' |
||||||||||||||||||||
|
Number |
Amount |
capital |
earnings |
income (loss) |
equity |
|||||||||||||||||||
|
Balances, December 31, 2019 |
10,585,159 | 16,633 | 880 | 76,208 | 473 | 94,194 | ||||||||||||||||||
|
Exercise of stock options |
25,013 | 236 | (219 | ) | - | - | 17 | |||||||||||||||||
|
Shares deducted from exercise of stock options for payment of withholding taxes and exercise consideration |
(13,034 | ) | - | (182 | ) | - | - | (182 | ) | |||||||||||||||
|
Acquisition of Cedar Holdings Group |
32,374 | 2,000 | - | - | - | 2,000 | ||||||||||||||||||
|
Repurchase and retirement of shares |
(66,738 | ) | (118 | ) | (1,280 | ) | (1,719 | ) | - | (3,117 | ) | |||||||||||||
|
Stock-based compensation |
- | - | 801 | - | - | 801 | ||||||||||||||||||
|
Net income |
- | - | - | 2,834 | - | 2,834 | ||||||||||||||||||
|
Other comprehensive income (loss) |
- | - | - | - | (1,191 | ) | (1,191 | ) | ||||||||||||||||
|
Balances, March 31, 2020 |
10,562,774 | $ | 18,751 | $ | - | $ | 77,323 | $ | (718 | ) | $ | 95,356 | ||||||||||||
2020 Stock Buyback Program
On February 12, 2020, the Company announced that its Board had approved a stock buyback program to repurchase up to $40 million of its common stock in the open market. The $40 million buyback program commenced on February 13, 2020 and is expected to terminate on February 12, 2021. For the three months ended March 31, 2020 the Company repurchased 66,738 shares under this program for total consideration of $3.1 million.
2019 Stock Buyback Program
On February 13, 2019, the Company announced that its Board had approved a stock buyback program to repurchase up to $40 million of its common stock in the open market. The $40 million buyback program commenced on February 14, 2019 and terminated on February 13, 2020. During the three months ended March 31, 2019 the Company did not repurchase any shares under this program.
2018 Stock Buyback Program
On February 14, 2018, the Company announced that its Board of Directors has approved a stock buyback program to repurchase up to $40 million of its common stock in the open market. Purchases were to be made exclusively through the facilities of the NASDAQ Capital Market. The stock buyback program commenced on February 14, 2018 and terminated on February 13, 2019. During the three months ended March 31, 2019, the Company did not repurchase any shares under this program.
Stock options
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Because option-pricing models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options. The assumptions presented in the table below represent the weighted average of the applicable assumption used to value stock options at their grant date. The Company calculates expected volatility based on historical volatility of the Company's common shares. The expected term, which represents the period of time that options granted are expected to be outstanding, is estimated based on historical exercise experience. The Company evaluated historical exercise behavior when determining the expected term assumptions. The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The Company determines the expected dividend yield percentage by dividing the expected annual dividend by the market price of Tucows Inc. common shares at the date of grant.
Details of stock option transactions for the three months ended March 31, 2020 and March 31, 2019 are as follows (Dollar amounts in thousands of U.S. dollars, except per share amounts):
|
Three Months Ended Mar 31, 2020 |
Three Months Ended March 31, 2019 |
|||||||||||||||
|
Number of shares |
Weighted average exercise price per share |
Number of shares |
Weighted average exercise price per share |
|||||||||||||
|
Outstanding, beginning of period |
754,497 | $ | 49.94 | 702,337 | $ | 43.80 | ||||||||||
|
Granted |
5,500 | 47.35 | - | - | ||||||||||||
|
Exercised |
(25,013 | ) | 20.59 | (29,043 | ) | 24.63 | ||||||||||
|
Forfeited |
(3,489 | ) | 61.73 | (6,751 | ) | 59.40 | ||||||||||
|
Expired |
(1,458 | ) | 60.91 | (1,387 | ) | 60.82 | ||||||||||
|
Outstanding, end of period |
730,037 | 50.85 | 665,156 | 44.46 | ||||||||||||
|
Options exercisable, end of period |
349,845 | $ | 41.65 | 304,007 | $ | 29.52 | ||||||||||
As of March 31, 2020, the exercise prices, weighted average remaining contractual life of outstanding options and intrinsic values were as follows:
| Options outstanding | Options exercisable | |||||||||||||||||||||||||||||||
| Exercise price | Number outstanding | Weighted average exercise price per share | Weighted average remaining contractual life (years) | Aggregate intrinsic value | Number exercisable | Weighted average exercise price per share | Weighted average remaining contractual life (years) | Aggregate intrinsic value | ||||||||||||||||||||||||
| $ 8.56 - $ 8.56 | 15,722 | $ | 8.56 | 0.1 | $ | 624 | 15,722 | $ | 8.56 | 0.1 | $ | 624 | ||||||||||||||||||||
| $10.16 - $19.95 | 62,990 | 16.23 | 1.5 | 2,018 | 62,990 | 16.23 | 1.5 | 2,018 | ||||||||||||||||||||||||
| $21.10 - $27.53 | 51,250 | 24.11 | 1.7 | 1,237 | 51,250 | 24.11 | 1.7 | 1,237 | ||||||||||||||||||||||||
| $35.25 - $37.35 | 14,375 | 35.89 | 3.2 | 178 | 13,125 | 35.95 | 3.1 | 162 | ||||||||||||||||||||||||
| $44.90 - $47.00 | 10,000 | 46.95 | 5.4 | 13 | 3,750 | 47.00 | 4.0 | 5 | ||||||||||||||||||||||||
| $51.82 - $58.65 | 337,353 | 55.53 | 4.2 | - | 176,527 | 55.69 | 4.0 | - | ||||||||||||||||||||||||
| $61.33 - $64.10 | 238,347 | 62.99 | 5.7 | - | 26,481 | 64.10 | 5.2 | - | ||||||||||||||||||||||||
| 730,037 | $ | 50.85 | 4.2 | $ | 4,070 | 349,845 | $ | 41.65 | 3.1 | $ | 4,046 | |||||||||||||||||||||
| March 31, 2020 | ||||||||||||||||
| Fair Value Measurement Using | Assets (Liabilities) | |||||||||||||||
| Level 1 | Level 2 | Level 3 | at Fair value | |||||||||||||
| Derivative instrument asset | $ | - | $ | 542 | $ | - | $ | 542 | ||||||||
| Derivative instrument liability | $ | - | $ | (1,718) | $ | - | $ | (1,718) | ||||||||
| Total assets (liability) | $ | - | $ | (1,176) | $ | - | $ | (1,176) | ||||||||
| December 31, 2019 | ||||||||||||||||
| Fair Value Measurement Using | Assets (Liabilities) | |||||||||||||||
| Level 1 | Level 2 | Level 3 | at Fair value | |||||||||||||
| Derivative instrument liability | $ | - | $ | 731 | $ | - | $ | 731 | ||||||||
| Total liabilities | $ | - | $ | 731 | $ | - | $ | 731 | ||||||||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains, in addition to historical information, forward-looking statements by us with regard to our expectations as to financial results and other aspects of our business that involve risks and uncertainties and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “should,” “anticipate,” “believe,” “plan,” “estimate,” “expect” and “intend,” and other similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this report include statements regarding, among other things: the competition we expect to encounter as our business develops and competes in a broader range of Internet services; the Company's foreign currency requirements, specifically for the Canadian dollar; Ting mobile, Roam mobile and fixed Internet access subscriber growth and retention rates; our belief regarding the underlying platform for our domain services, our expectation regarding the trend of sales of domain names and advertising; our expectations regarding portfolio revenue, our belief that, by increasing the number of services we offer, we will be able to generate higher revenues; the revenue that our parked page vendor relationships may generate in the future; our expectation regarding litigation; the potential impact of current and pending claims on our business; our valuations of certain deferred tax assets; our expectation to collect our outstanding receivables, net of our allowance for doubtful accounts; our expectation regarding fluctuations in certain expense and cost categories; our expectations regarding our unrecognized tax; our expectations regarding cash from operations to fund our business; the impact of cancellations of or amendments to market development fund programs under which we receive funds, our expectation regarding our ability to manage realized gains/losses from foreign currency contracts; our expectations regarding increased price competition among MVNO; our expectations regarding costs associated with migrating Ting customers using the T-Mobile platform to an alternative platform, including Verizon; our expectations regarding our ability to complete the migration of customers from the T-Mobile platform in a timely manner; the impact of the COVID-19 outbreak on our business, operations and financial performance; and general business conditions and economic uncertainty. These statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Many factors affect our ability to achieve our objectives and to successfully develop and commercialize our services including:
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Changes in the nature of key strategic relationships with our MVNO partners; |
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• |
The effects of vigorous competition on a highly penetrated mobile telephony market, including the impact of competition on the price we are able to charge subscribers for services and devices and on the geographic areas served by our MVNO partner wireless networks; |
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Our ability to manage any potential increase in subscriber churn or bad debt expense; |
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Our ability to continue to generate sufficient working capital to meet our operating requirements; |
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Our ability to service our debt commitments; |
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Our ability to maintain a good working relationship with our vendors and customers; |
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The ability of vendors to continue to supply our needs; |
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Actions by our competitors; |
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Our ability to attract and retain qualified personnel in our business; |
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Our ability to effectively manage our business; |
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The effects of any material impairment of our goodwill or other indefinite-lived intangible assets; |
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Our ability to obtain and maintain approvals from regulatory authorities on regulatory issues; |
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Our ability to invest in the build-out of fiber networks into selected towns and cities to provide Internet access services to residential and commercial customers while maintaining the development and sales of our established services;
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• |
Adverse tax consequences such as those related to changes in tax laws or tax rates or their interpretations, including with respect to the impact of the Tax Cuts and Jobs Act of 2017;
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The application of judgment in determining our global provision for income taxes, deferred tax assets or liabilities or other tax liabilities given the ultimate tax determination is uncertain; |
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Our ability to effectively integrate acquisitions; |
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Our ability to attract and retain customers by securing access to the latest mobile network technology, and migrating existing customers when necessary; |
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Our ability to migrate existing T-Mobile customers to one of our MVNO partners, in an efficient and cost-effective manner; |
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Our ability to monitor, assess and respond to the rapidly changing impacts of the COVID-19 pandemic. Our current assessment of expected impacts has been included below as part of the Opportunities, Challenges & Risks section |
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Pending or new litigation; and |
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Factors set forth under the caption “Item 1A Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 4, 2020 (the “2019 Annual Report”). |
As previously disclosed the under the caption “Item 1A Risk Factors” in our 2019 Annual Report, data protection regulations may impose legal obligations on us that we cannot meet or that conflict with our ICANN contractual requirements.
This list of factors that may affect our future performance and financial and competitive position and the accuracy of forward-looking statements is illustrative, but it is by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All forward-looking statements included in this document are based on information available to us as of the date of this document, and we assume no obligation to update these cautionary statements or any forward-looking statements, except as required by law. These statements are not guarantees of future performance.
We qualify all the forward-looking statements contained in this Quarterly Report on Form 10-Q by the foregoing cautionary statements.
OVERVIEW
Our mission is to provide simple useful services that help people unlock the power of the Internet.
We accomplish this by reducing the complexity of our customers’ experience as they access the Internet (at home or on the go) and while using Internet services such as domain name registration, email and other Internet services. We are organized, managed and report our financial results as two segments, Network Access Services and Domain Services, which are differentiated primarily by their services, the markets they serve and the regulatory environments in which they operate.
Our management regularly reviews our operating results on a consolidated basis, principally to make decisions about how we utilize our resources and to measure our consolidated operating performance. To assist us in forecasting growth and to help us monitor the effectiveness of our operational strategies, our management regularly reviews revenue for each of our service offerings in order to gain more depth and understanding of the key business metrics driving our business. Accordingly, we report Network Access Services and Domain Services revenue separately
For the three months ended March 31, 2020 and March 31, 2019, we reported revenue of $84.0 million and $79.0 million, respectively.
Network Access Services
Network Access Services includes mobile, fixed high-speed Internet access services and other revenues, including, billing solutions to small ISPs.
Our primary mobile service offering (“Ting Mobile”) is mainly distributed through the Ting website and to a lesser extent certain third-party retail stores and on-line retailers. We generate revenues from the sale of retail telephony services, mobile phone hardware and related accessories to individuals and small businesses through the Ting website. Ting Mobile’s primary focus is providing simple and easy to use services, including simple value pricing, in particular for multi-line accounts, and superior customer care. Our Roam Mobility, Zipsim and Always Online Wireless brands (collectively “Roam Mobility brands”) operate as a MVNO on the same nationwide Global System for Mobile communications network as Ting Mobile. Roam Mobility brands cater to international travelers and distribute products through third-party retail stores and product branded websites.
The Company also derives revenue from the sale of fixed high-speed Internet access (“Ting Internet”) in select towns throughout the United States, with further expansion underway to both new and existing Ting towns. Our primary sales channel of Ting Internet is through the Ting website. The primary focus of Ting Internet is to provide reliable Gigabit Internet services to consumer and business customers. On January 1, 2020, the Company closed its previously disclosed acquisition of Cedar Holdings Group, Incorporated (“Cedar”), a fiber Internet provider business based in Durango, Colorado. Cedar is a telecommunications provider serving multiple markets in the Western Slope of Colorado and northwestern New Mexico. Cedar has focused the last several years on building fiber to enterprise, anchor institution, and residential customers.
Revenues from Ting Mobile and Ting Internet are generated in the U.S. and are provided on a monthly basis with no fixed contract term. Revenues from Roam Mobility brands are generated in the U.S. and Canada on a prepaid usage basis with no fixed contract terms.
As of March 31, 2020, Ting managed mobile telephony services for approximately 272,000 subscribers and 154,000 accounts. For a discussion of subscribers and how they impacted our financial results, see the Net Revenue discussion below.
Domain Services
Domain Services includes wholesale and retail domain name registration services, value added services and portfolio services derived through our OpenSRS, eNom, Ascio, EPAG and Hover brands. We earn revenues primarily from the registration fees charged to resellers in connection with new, renewed and transferred domain name registrations. In addition, we earn revenues from the sale of retail domain name registration and email services to individuals and small businesses; and by making our portfolio of domain names available for sale or lease. Domain Services revenues are attributed to the country in which the contract originates, mainly the Canadian and the U.S. Ascio domain services contracts, which were acquired by the Company on March 18, 2019, and EPAG primarily originate in Europe.
Our primary distribution channel is a global network of approximately 36,000 resellers that operate in over 150 countries and who typically provide their customers, the end-users of Internet-based services, with solutions for establishing and maintaining an online presence. Our primary focus is serving the needs of this network of resellers by providing the broadest portfolio of generic top-level domain (“gTLD”) and the country code top-level domain options and related services, a white-label platform that facilitates the provisioning and management of domain names, a powerful Application Program Interface, easy-to-use interfaces, comprehensive management and reporting tools, and proactive and attentive customer service. Our services are integral to the solutions that our resellers deliver to their customers. We provide “second tier” support to our resellers by email, chat and phone in the event resellers experience issues or problems with our services. In addition, our Network Operating Center proactively monitors all services and network infrastructure to address deficiencies before customer services are impacted.
We believe that the underlying platforms for our services are among the most mature, reliable and functional reseller-oriented provisioning and management platforms in our industry, and we continue to refine, evolve and improve these services for both resellers and end-users. Our business model is characterized primarily by non-refundable, up-front payments, which lead to recurring revenue and positive operating cash flow.
Wholesale, primarily branded as OpenSRS, eNom, EPAG and Ascio, derives revenue from its domain service and from providing value-added services. The OpenSRS, eNom, EPAG and Ascio domain services manage 23.9 million domain names under the Tucows, eNom, EPAG and Ascio ICANN registrar accreditations and for other registrars under their own accreditations, which has decreased by 1.3 million domain names since March 31, 2019. The decrease is driven by the continued erosion of registrations related to non-core customers from our Enom brand.
Value-Added Services include hosted email which provides email delivery and webmail access to millions of mailboxes, Internet security services, Internet hosting, WHOIS privacy, publishing tools and other value-added services. All of these services are made available to end-users through a network of 36,000 web hosts, ISPs, and other resellers around the world. In addition, we also derive revenue by monetizing domain names which are near the end of their lifecycle through advertising revenue or auction sale.
Retail, primarily the Hover and eNom portfolio of websites, including eNom, eNom Central and Bulkregister, derive revenues from the sale of domain name registration and email services to individuals and small businesses. Retail also includes our Personal Names Service – based on over 36,000 surname domains – that allows roughly two-thirds of Americans to purchase an email address based on their last name.
Portfolio generates revenue by offering names in our domain portfolio for resale through a number of distribution channels including our reseller network.
KEY BUSINESS METRICS AND NON-GAAP MEASURES
We regularly review a number of business metrics, including the following key metrics and non-GAAP measures, to assist us in evaluating our business, measure the performance of our business model, identify trends impacting our business, determine resource allocations, formulate financial projections and make strategic business decisions. The following tables set forth the key business metrics which we believe are the primary indicators of our performance for the periods presented:
Adjusted EBITDA
Tucows reports all financial information in accordance with United States generally accepted accounting principles (“GAAP”). Along with this information, to assist financial statement users in an assessment of our historical performance, we typically disclose and discuss a non-GAAP financial measure, adjusted EBITDA, on investor conference calls and related events that exclude certain non-cash and other charges as we believe that the non-GAAP information enhances investors’ overall understanding of our financial performance. Please see discussion of adjusted EBITDA in the Results of Operations section below.
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Ting Mobile |
For the Three Months Ended March 31, |
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2020 |
2019 |
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Ting mobile accounts under management |
154 | 160 | |||||
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Ting mobile subscribers under management |
272 | 284 | |||||
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(1) |
For a discussion of these period-to-period changes in subscribers and devices under management and how they impacted our financial results, see the Net Revenues discussion below. |
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Ting Internet |
For the Three Months Ended March 31, |
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2019 |
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Ting Internet accounts under management |
12 | 8 | |||||
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Ting Internet serviceable addresses (1) |
45 | 32 | |||||
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Defined as premises to which Ting has the capability to provide a customer connection in a service area. |
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Domain Services |
For the Three Months Ended March 31,(1) |
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2019 |
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Total new, renewed and transferred-in domain name registrations provisioned |
4,756 | 4,562 | |||||
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Domains under management |
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Registered using Registrar Accreditation belonging to the Tucows Group |
19,145 | 20,208 | |||||
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Registered using Registrar Accreditation belonging to Resellers |
4,750 | 4,999 | |||||
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Total domain names under management |
23,895 | 25,207 | |||||
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For a discussion of these period-to-period changes in the domains provisioned and domains under management and how they impacted our financial results see the Net Revenues discussion below. |
OPPORTUNITIES, CHALLENGES AND RISKS
Our revenue is primarily realized in U.S. dollars and a major portion of our operating expenses are paid in Canadian dollars. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar may have a material effect on our business, financial condition and results from operations. In particular, we may be adversely affected by a significant weakening of the U.S. dollar against the Canadian dollar on a quarterly and an annual basis. Our policy with respect to foreign currency exposure is to manage our financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some or all of the impact of foreign currency exchange movements by entering into foreign exchange forward contracts to mitigate the exchange risk on a portion of our Canadian dollar exposure. We may not always enter into such forward contracts and such contracts may not always be available and economical for us. Additionally, the forward rates established by the contracts may be less advantageous than the market rate upon settlement.
Network Access Services
As a MVNO our Ting Mobile service is reliant on our Mobile Network Operators (“MNOs”) providing competitive networks. Our MNOs each continue to invest in network expansion and modernization to improve their competitive positions. Deployment of new and sophisticated technology on a very large-scale entails risks. Should they fail to implement, maintain and expand their network capacity and coverage, adapt to future changes in technologies and continued access to and deployment of adequate spectrum successfully, our ability to provide wireless services to our subscribers, to retain and attract subscribers and to maintain and grow our subscriber revenues could be adversely affected, which would negatively impact our operating margins.
Ting Mobile enjoyed rapid growth in its first four years of operation with the growth slowing for the past two years. During the rapid growth phase, we were able to continue to grow gross customer additions and maintain a consistent churn rate, which allowed us to maintain net new customer additions despite the impact of churn on a fast-growing customer base. We have also been able to supplement organic growth with bulk migrations of customer bases of other MVNOs. We expect price competition to grow more intense in the industry which could result in increased customer churn or reductions of customer acquisition rates either of which could result in a further slowing growth rate or in certain cases, our ability to maintain growth.
Two of our current MNOs, T-Mobile and Sprint, submitted a formal merger application to the Federal Communications Commission ("FCC") in 2018, which has since been approved. In February 2020, the lawsuit filed by certain state attorneys general opposing the merger was overruled in favour of the merger. T-Mobile and Sprint successfully completed the merger on April 1, 2020. This consolidation of our MNOs could hinder our ability in the future to negotiate favourable rates and access to mobile services. On February 17, 2020, the Company launched its mobile services with a new MNO partner, Verizon.
As an ISP, we have invested and expect to continue to invest in new fiber to the home (“FTTH”) deployments in select markets in the United States. The investments are a reflection of our ongoing efforts to build FTTH network via public-private partnerships in communities we identify as having strong, unmet demand for FTTH services. Given the significant upfront build and operational investments for these FTTH deployments, there is risk that future technological and regulatory changes as well as competitive responses from incumbent local providers, may result in us not fully recovering these investments.
The communications industry continues to compete on the basis of network reach and performance, types of services and devices offered, and price.
Domain Services
The increased competition in the market for Internet services in recent years, which we expect will continue to intensify in the short and long term, poses a material risk for us. As new registrars are introduced, existing competitors expand service offerings and competitors offer price discounts to gain market share, we face pricing pressure, which can adversely impact our revenues and profitability. To address these risks, we have focused on leveraging the scalability of our infrastructure and our ability to provide proactive and attentive customer service to aggressively compete to attract new customers and to maintain existing customers.
Substantially all of our Domain Services revenue is derived from domain name registrations and related value-added services from wholesale and retail customers using our provisioning and management platforms. The market for wholesale registrar services is both price sensitive and competitive and is evolving with the introduction of new gTLDs, particularly for large volume customers, such as large web hosting companies and owners of large portfolios of domain names. We have a relatively limited ability to increase the pricing of domain name registrations without negatively impacting our ability to maintain or grow our customer base. Growth in our Domain Services revenue is dependent upon our ability to continue to attract and retain customers by maintaining consistent domain name registration and value-added service renewal rates and to grow our customer relationships through refining, evolving and improving our provisioning platforms and customer service for both resellers and end-users. In addition, we also generate revenue through pay-per-click advertising and the sale of names from our portfolio of domain names and through the OpenSRS Domain Expiry Stream. The revenue associated with names sales and advertising has recently experienced flat to declining trends due to the uncertainty around the implementation of ICANN’s New gTLD Program, lower traffic and advertising yields in the marketplace, which we expect to continue.
From time-to-time certain of our vendors provide us with market development funds to expand or maintain the market position for their services. Any decision by these vendors to cancel or amend these programs for any reason may result in payments in future periods not being commensurate with what we have achieved during past periods.
Sales of domain names from our domain portfolio have a negative impact on our advertising revenue as these names are no longer available for advertising purposes. In addition, the timing of larger domain names portfolio sales is unpredictable and may lead to significant quarterly fluctuations in our Portfolio revenue. In the fourth quarter of 2019, the Company disposed of its remaining domain portfolio, excluding surname domains used in the Realnames email service. The Company expects portfolio revenue to materially decline in Fiscal 2020 and thereafter.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. There have been no material changes to the critical accounting policies and estimates as previously disclosed in Part II, Item 7 of our 2019 Annual Report. For further information on our critical accounting policies and estimates, see Note 3 – Recent accounting pronouncements to the consolidated financial statements of the Company in Part I, Item 1 in this Quarterly Report on Form 10-Q.
Current COVID-19 Response
Our Employees
Tucows is a global business. Our first consideration during the global pandemic as a result of the disease caused by the novel strain of coronavirus (“COVID-19”) outbreak is for the health and safety of our employees, our customers and their communities, all around the world. Tucows has long encouraged a culture of remote work even prior to this global pandemic, and on Sunday March 8, 2020 Tucows’ executive leadership announced that all employees who could conceivably work from home were encouraged to do so. Tucows is actively and strongly encouraging its workforce to heed travel and all other emergency advisories, including social distancing and where appropriate, self-isolation. We expect our work from home policy to remain in effect until emergency state and governmental declarations where we have physical offices have ended and we believe the risk of community spread of the disease has subsided. Given our experience with remote work prior to COVID-19, we do not expect to have productivity issues while the overwhelming majority of our office based workforce is dispersed.
For the small group of employees who are unable work from home during this time, including our order fulfillment and Fiber installation teams, many of whom work in the field, they are encouraged to practice social distancing and to continue to follow hygiene best practices and safety protocols as outlined by the Centers for Disease Control and Prevention. At the initial stage of the COVID-19 outbreak, we took steps to cancel and reschedule all in-home installation and service appointments across our Ting Fiber footprint. Since then, the Ting Internet team has begun to rollout a install solution for our employees and customers that minimizes risks associated with person-to-person contact.
Our Customers
We recognize the important role we play within the Internet space and are committed to continue providing quality service during the COVID-19 outbreak. Services like individual and wholesale domain names, email and hosting do not rely on in-person interaction or the supply chain in the same way physical products and services do. We are providing uninterrupted services for all Domains related services, across our OpenSRS, Enom, Ascio, EPAG & Hover brands.
Our Mobile services businesses are both without any physical storefronts, are similarly well-positioned to weather this event. We are fully prepared to continue providing uninterrupted services for all Mobile related services, across our Ting Mobile and Roam Mobility brands. We are committed to making sure no customer who is in need is without access to core mobile service while we work through this unprecedented situation together.
Our Fiber Internet business does not have bandwidth caps or other such limitations. Likewise, our networks are built with the capacity to accommodate future needs. To help our customers remain connected at home during this time, we upgraded all our lower-tier fiber customers to symmetrical gigabit access at no charge. Any additional traffic from our customers working from home has not had and is not expected to have any negative impact on connectivity. As discussed above, our install solution was implemented in early May 2020. With this service limitation, new customer acquisition will remain slower than pre-pandemic levels of growth and installation. Even with an install solution that minimizes risks, customers may be unwilling to have service personnel visit their homes or offices.
Our Community
Tucows believes the Internet is essential infrastructure and an immensely powerful tool, especially in times of crises where coordination is essential.
From an early point in the current global crisis, it was clear to us that we were going to need to do something new and different in how we responded to COVID-19 related domain registrations. Many of these domains are registered for good, helpful purposes, such as community organization, dissemination of healthcare information, and recording people’s experiences through this pandemic. Others, however, purport to sell COVID-19 cures, vaccines, or tests, none of which are legitimately available on the market at the time of the registration and many of which pose a significant health risk to the general public. There are three major components to our COVID-19 activities related to domain registrations: (i) identification, (ii) assessment for harm, and (iii) stakeholder engagement. It is important to note that our response to each and every issue that we find is contextual and dependent on the specific circumstances. We expect to return to our regular procedures as the pandemic and corresponding risks subsides. Although this approach vastly increases the burden on our compliance staff and puts us in the uncomfortable position of having to assess the level of harm represented by a COVID-related domain and the website to which it resolves - we feel these circumstances are exceptional and are determined to do our part.
In order to provide Internet access and assistance to residents of cities and towns that are part of the Ting Fiber network, we have set up free, fiber-fed, drive-up Wi-Fi hotspots. These hotspots enable those with no home Internet access, or insufficient access, to access critical services like online learning and telehealth services, work remotely, check in on and access vital health, government and other services and generally access information. These hotspots will remain in operation as long as they are needed and as long as it is safe and prudent to do so.
We have not experienced any material resource constraints nor do we foresee requiring any material expenditures to continue to implement our business continuity plans described above.
Current and expected COVID-19 Impacts
Financial & Operational Impacts
Further to the below discussion within this Quarterly Report around the financial condition and results of operations for the current period financial results, the current impact from COVID-19 has been quite limited given the outbreak came late into the first quarter of 2020. Management continues to assess the impact on a daily basis and expects greater impact through the second quarter of 2020, should the COVID-19 pandemic persist. On a segment basis, our current assessment is as follows:
Network Access – Mobile Services:
Both our Mobile Services businesses are completely online and do not rely on physical storefronts to attract or service customers’ needs. We are fully prepared to continue to provide uninterrupted services to our customers both now and into the future. Although COVID-19 has impacted the demand for our Mobile services, the overall impact on our financial results is not material, nor do we expect it to substantially worsen over the coming months.
Ting Mobile, our primary post-paid Mobile Services brand is an MVNO operating across the United States. Through the end of March 2020, we saw a moderate drop in data usage by our customers, with some small uptake in voice and messaging usage. This is a direct result of social distancing measures enacted by state and local authorities across the United States. With our customers staying indoors and working from home, they now rely on an increased use of home Wi-Fi networks rather than mobile data services. This reduced usage has since stabilized and we expect it to only return to pre-pandemic usage levels once social distancing measures are relaxed. Additionally, nearing the end of March 2020, we saw an increased churn rate of low-margin business accounts as their own businesses came to a halt. Our core consumer customer base remains intact and experiencing normal levels of growth and churn. We do not foresee any increased risk of churn or collection risk given our current situation. Although we maintain minimum purchase guarantees with our MNOs, we do not expect any material shortfalls with respect to reduced usage from COVID-19.
Roam Mobility, our niche prepaid Mobile Services brand that provides Mobile Services for people travelling within the United States and Worldwide has accounted for the majority of the negative financial impact caused by COVID-19. The business relies on global travel as a key factor in its success. With travel restrictions and border closures essentially resulting in the halt of business and leisure travel, we have seen new revenues for Roam Mobility trend toward zero through the end of March 2020. We will continue to refund or defer service plan start dates for existing customers. Management has taken substantial measures to reduce and eliminate any unnecessary costs within that business. The assets associated with Roam are insignificant to the consolidated Company total. We continue to employ the small group of employees focused on the Roam Mobility brands. Given the current uncertainty around reopening of borders, easing of travel restrictions and consumers’ level of comfort with business and leisure travel in a post pandemic world, we believe we will earn little to none of the $1.0 million of the second quarter 2020 revenues that we had previously forecasted for this business prior to onset of the COVID-19 pandemic.
Network Access – Other Services:
As discussed above, upon news of the COVID-19 outbreak, we took the major step to cancel and reschedule all in-home installation and service appointments across our Ting Fiber footprint. Since then, the Ting Internet team has begun to rollout a smart-install solution for our employees and customers alike. Although new customer installations have slowed, our existing customer base continues to provide recurring revenue for us to support this business. This is aided by our most recent acquisition of Cedar, which increased our revenues significantly in period. The negative impact posed by the COVID-19 outbreak is largely operational in nature as we have experienced delayed construction in parts of our Ting Fiber footprint and a halting of new installations for a period of time across our entire footprint. Those towns and cities that are serviceable for new customers’ addresses will now have a reduced level of installation and setup relative to pre-pandemic conditions. We expect this segment to grow at a reduced rate until such time that this pandemic subsides and social distancing measures are relaxed.
Domain Services:
Domain Services are foundational to the functioning of the Internet. As discussed above, services like individual and wholesale domain names, email and hosting do not rely on in-person interaction or the supply chain in the same way physical products and services do. We have not experienced any COVID-19 related impacts, either financially or operationally for Domains related services, across our OpenSRS, Enom, Ascio, EPAG & Hover brands. Our results of operations for the current period financial results are in line with management’s expectation for the period given product, customer mix and current brand trajectories. We will continue to monitor the impact but do not foresee any negative financial or operational impacts associated with this segment.
Liquidity & Financial Resource Impacts
For a complete assessment of our liquidity and covenant positions please reference the relevant discussions within this Quarterly Report. We have experienced no significant change to our liquidity position or credit risk as a result of the financial and operational impacts related to COVID-19, as discussed above. Our cost or access to funding sources has not changed and is not reasonably likely to change in the near future as a result of the pandemic. Our sources and uses of cash have not been materially impacted and there is no known material uncertainty about our ongoing ability meet covenants or repayment terms of our credit agreements at this time.
Internal Controls over Financial Reporting
Tucows has long encouraged a culture of remote work even prior to COVID-19. Our financial reporting systems and our internal controls over financial reporting and disclosure controls and procedures are already adapted for a remote work environment. There have been no changes during the current period that as a result of COVID-19 would affect our ability to maintain these systems and controls.
COVID-19 Related Assistance & Support
Currently, Tucows has not received any form of financial or resource related assistance from any government or local authority. There do exist programs in the regions in which we operate that have been developed to support corporations like Tucows during this time, primarily in the form employee wage subsidization. Tucows will continue to investigate these programs as their details are refined and seek out application for any that make sense for our businesses.
Across our businesses, we have been able to defer portions of installment taxes payable to various Government bodies as payment timelines have been extended in response to the pandemic.
Accounting Policy Impacts
Given the rapidly changing nature of COVID-19 developments and the current uncertainty around the length and severity these developments could create, Tucows does not have sufficient evidence to anticipate a material impairment with respect to goodwill, intangible assets, long-lived assets, or right of use assets. We will continue to monitor the impacts closely and as more information becomes available. We do not foresee any changes in accounting judgements in relation to COVID-19 that will have a material impact on our financial statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2019
NET REVENUES
Network Access Services
The Company generates Network Access Services revenues primarily through the provisioning of mobile services. Other sources of revenue include the provisioning of fixed high-speed Internet access as well as billing solutions to ISPs.
Mobile Services
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.
Ting Mobile 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 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 are recognized when title and risk of loss is transferred to the customer and shipment has occurred. Incentive marketing credits given to customers are recorded as a reduction of revenue.
Our Roam Mobility brands also offer 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.
Other services
Other services derive revenues from providing Ting Internet to individuals and small businesses in select cities. In addition, we provide billing, provisioning and customer care software solutions to Internet Service Providers (“ISPs”) through our Platypus billing software. Ting Internet access 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. Since consideration is collected before the service period, revenue is initially deferred and recognized as the Company performs its obligation to provide Internet access.
Ting Internet 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 Internet access 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 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.
In those cases, where payment is not received at the time of sale, revenue is not recognized until 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 Services
Wholesale
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.
Historically, our wholesale domain service has constituted the largest portion of our business and encompasses all of our services as an accredited registrar related to the registration, renewal, transfer and management of domain names. In addition, this service fuels other revenue categories as it often is the initial service for which a reseller will engage us, enabling us to follow on with other services and allowing us to add to our portfolio by purchasing names registered through us upon their expiration. Domain services will continue to be the largest portion of our business and will further fuel our ability to sell add-on services.
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.
Wholesale – Value-Added Services
We derive revenue from domain related value-added services like digital certifications, WHOIS privacy and hosted email and by providing 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.
We also derive revenue from other value-added services, which primarily consists of Internet hosting services on the OpenSRS and eNom domain expiry streams.
Retail
We derive revenues from Hover and eNom’s retail properties through the sale of retail domain name registration and email services to individuals and small businesses.
Portfolio
The Company sells the rights to its 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. Domain portfolio names are sold through our premium domain name service, auctions or in negotiated sales. In the fourth quarter of 2019, the Company disposed of its entire domain portfolio, excluding surname domains used in the Realnames email service. The Company expects portfolio revenue to materially decline in Fiscal 2020 and thereafter.
The following table presents our net revenues, by revenue source (Dollar amounts in thousands of U.S. dollars):
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(Dollar amounts in thousands of U.S. dollars) |
For the Three Months Ended March 31, |
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2020 |
2019 |
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Network Access Services: |
||||||||
|
Mobile Services |
$ | 20,148 | $ | 20,809 | ||||
|
Other Services |
4,308 | 2,443 | ||||||
|
Total Network Access Services |
24,456 | 23,252 | ||||||
|
Domain Services: |
||||||||
|
Wholesale |
||||||||
|
Domain Services |
45,964 | 42,591 | ||||||
|
Value Added Services |
4,707 | 4,184 | ||||||
|
Total Wholesale |
50,671 | 46,775 | ||||||
|
Retail |
8,449 | 8,642 | ||||||
|
Portfolio |
409 | 284 | ||||||
|
Total Domain Services |
59,529 | 55,701 | ||||||
| $ | 83,985 | $ | 78,953 | |||||
|
Increase over prior period |
$ | 5,032 | ||||||
|
Increase - percentage |
6 | % | ||||||
The following table presents our revenues, by revenue source, as a percentage of total revenues (Dollar amounts in thousands of U.S. dollars):
|
For the Three Months Ended March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
Network Access Services: |
||||||||
|
Mobile Services |
24 | % | 27 | % | ||||
|
Other Services |
5 | % | 3 | % | ||||
|
Total Network Access Services |
29 | % | 30 | % | ||||
|
Domain Services: |
||||||||
|
Wholesale |
||||||||
|
Domain Services |
55 | % | 54 | % | ||||
|
Value Added Services |
6 | % | 5 | % | ||||
|
Total Wholesale |
61 | % | 59 | % | ||||
|
Retail |
10 | % | 11 | % | ||||
|
Portfolio |
0 | % | 0 | % | ||||
|
Total Domain Services |
71 | % | 70 | % | ||||
| 100 | % | 100 | % | |||||
Total net revenues for the three months ended March 31, 2020 increased by $5.0 million, or 6%, to $84.0 million from $79.0 million when compared to the three months ended March 31, 2019. The three-month increase in revenue was primarily driven by the $4.6 million of revenues attributable to our prior year acquisition of Ascio. Ascio revenues, which now represent a full quarter of earned revenue compared to the stub period of attributable revenue during the three months ended March 31, 2019. Fiber access revenues increased $1.9 million driven by our current period acquisition of Cedar, a fiber Internet provider business based in Durango, Colorado as well as through the expansion of our existing Ting Internet footprint. The increases in revenues were offset by a further decrease in domain name services revenue of $0.8 million, related to a continued erosion in Wholesale domain registrations by non-core customer primarily from our existing Domain Services brands. Additionally, Mobile Services revenue decreased by $0.7 million due to a decrease in mobile subscribers and reduced usage related to COVID-19.
Deferred revenue from domain name registrations and other Internet services at March 31, 2020 increased to $152.6 million from $149.3 million at December 31, 2019 primarily due to current period billings for domain name registration and service renewals.
During the three months ended March 31, 2020, no customer accounted for more than 10% of total revenue. For the three months ended March 31, 2019, no customer accounted for more than 10% of total revenue. As at March 31, 2020 and December 31, 2019, no customer accounted for more than 10% of accounts receivable. Though a significant portion of the Company’s domain services revenues are prepaid by our customers, where the Company does collect receivables, significant management judgment is required at the time revenue is recorded to assess whether the collection of the resulting receivables is reasonably assured. On an ongoing basis, we assess the ability of our customers to make required payments. Based on this assessment, we expect the carrying amount of our outstanding receivables, net of allowance for doubtful accounts, to be fully collected.
Network Access Services
Mobile Services
Net revenues from mobile phone equipment and services for the three months ended March 31, 2020 decreased by $0.7 million or 3% to $20.1 million as compared to the three months ended March 31, 2019. This decrease reflects a decline in mobile service revenue, which decreased by $0.8 million compared to March 31, 2019, to $18.6 million, as a result of a decline in mobile subscribers and reduced usage related to the COVID-19 pandemic. Revenues from the sale of mobile hardware and related accessories increased by $0.1 million compared to March 31, 2019, to $1.6 million. The increase in device revenue was primarily driven by strong sales and refreshed product mix for devices compared to the three months ended March 31, 2019.
As of March 31, 2020, Ting Mobile, our primary post-paid Mobile Services brand had 154,000 mobile subscribers and 272,000 mobile devices under its management compared to 160,000 subscribers and 284,000 devices under its management as of March 31, 2019.
Other Services
Other revenues from Ting Internet and billing solutions generated $4.3 million in revenue during the three months ended March 31, 2020, up $1.9 million or 79% compared to the three months ended March 31, 2019. This growth is driven by the current period acquisition of Cedar, a fiber Internet provider business based in Durango, Colorado. Cedar contributed $1.2 million of revenue in the current period, with $0.7 million related to the continued expansion of our Ting Internet footprint in existing Ting towns throughout the United States.
As of March 31, 2020, Ting Internet had access to 45,000 serviceable addresses and 12,000 active accounts under its management compared to having access to 32,000 serviceable addresses and 8,000 active accounts under its management as of March 31, 2019. These figures include the increase in accounts and serviceable addresses attributable to the current period Cedar acquisition.
Domain Services
Wholesale
During the three months ended March 31, 2020, Wholesale domain services revenue increased by $3.4 million or 8% to $46.0 million, when compared to the three months ended March 31, 2019. The three-month increase was primarily driven by a $4.6 million increase in revenue related to the prior year acquisition of Ascio. Ascio revenues now represent a full quarter of earned revenue compared to the stub period of attributable revenue during the three months ended March 31, 2019. The increase was partially offset by a $1.2 million decrease in Wholesale domain revenue, driven by a decline in domain registrations by non-core customers from our eNom brand.
Total domains that were managed under the OpenSRS, eNom, EPAG, and Ascio domain services decreased by 1.3 million domain names to 23.9 million as of March 31, 2020, when compared to 25.2 million at March 31, 2019. The decrease is a driven by the continued erosion of registrations related to non-core customers from our eNom brand.
During the three months ended March 31, 2020, value-added services increased by $0.5 million to $4.7 million compared to the three months ended March 31, 2019. The three-month increases were primarily driven by an increase in expiry revenue of $0.7 million, offset by a decrease in hosting revenue of $0.1 million.
Retail
Net revenues from retail for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, decreased by less than $0.2 million to $8.4 million. Revenue decreased as a result of a shrinking eNom customer base.
Portfolio
Net revenues from portfolio for the three months ended March 31, 2020, increased by $0.1 million to $0.4 million, as compared to the three months ended March 31, 2019, due to higher proceeds from individual portfolio sales compared to the three months ended March 31, 2019. In the fourth quarter of 2019, the Company disposed of its entire domain portfolio, excluding surname domains used in the Realnames email service. The Company expects portfolio revenue to materially decline in Fiscal 2020 and thereafter.
COST OF REVENUES
Network Access Services
Mobile Services
Cost of revenues for mobile services includes the costs of provisioning mobile services, which is primarily our customers' voice, messaging, data usage provided by our Network Operators, and the costs of providing mobile phone hardware, which is the cost of mobile phone devices and SIM cards sold to our customers, order fulfillment related expenses, and inventory write-downs.
Other Services
Cost of revenues for other services primarily includes the costs for provisioning high speed Internet access, which is comprised of network access fees and software licenses and the costs of providing hardware. Hardware costs are comprised of network routers sold to our customers, order fulfillment related expenses, inventory write-downs and fees paid to third-party service providers primarily for printing services in connection with billing services to ISPs.
Domain Services
Wholesale
Domain Service
Cost of revenues for domain registrations represents the amortization of registry and accreditation fees on a basis consistent with the recognition of revenues from our customers, namely rateably over the term of provision of the service. Registry fees, the primary component of cost of revenues, are paid in full when the domain is registered, and are initially recorded as prepaid domain registry fees. This accounting treatment reasonably approximates a recognition pattern that corresponds with the provision of the services during the period. Market development funds that do not represent a payment for distinct goods or services provided by the Company, and thus do not meet the criteria for revenue recognition under ASU 2014-09, are reflected as cost of goods sold and are recognized as earned.
Value-Added Services
Costs of revenues for value-added services include licensing and royalty costs related to the provisioning of certain components of related to hosted email and fees paid to third-party hosting services. Fees payable for trust certificates are amortized on a basis consistent with the provision of service, generally one year, while email hosting fees and monthly printing fees are included in cost of revenues in the month they are incurred.
Retail
Costs of revenues for our provision and management of Internet services through our retail sites, Hover.com and the eNom branded sites, include the amortization of registry fees on a basis consistent with the recognition of revenues from our customers, namely rateably over the term of provision of the service. Registry fees, the primary component of cost of revenues, are paid in full when the domain is registered, and are recorded as prepaid domain registry fees.
Portfolio
Costs of revenues for our portfolio represent the amortization of registry fees for domains added to our portfolio over the renewal period, which is generally one year, the value attributed under intangible assets to any domain name sold and any impairment charges that may arise from our assessment of our domain name intangible assets. Payments for domain registrations are payable for the full term of service at the time of activation of service and are recorded as prepaid domain registry fees and are expensed rateably over the renewal term.
Network expenses
Network expenses include personnel and related expenses, depreciation and amortization, communication costs, equipment maintenance, stock-based compensation and employee and related costs directly associated with the management and maintenance of our network. Communication costs include bandwidth, co-location and provisioning costs we incur to support the supply of all our services.
The following table presents our cost of revenues, by revenue source:
|
(Dollar amounts in thousands of U.S. dollars) |
For the Three Months Ended March 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Network Access Services: |
||||||||
|
Mobile Services |
$ | 9,857 | $ | 10,743 | ||||
|
Other Services |
1,716 | 1,069 | ||||||
|
Total Network Access Services |
11,573 | 11,812 | ||||||
|
Domain Services: |
||||||||
|
Wholesale |
||||||||
|
Domain Services |
36,469 | 34,839 | ||||||
|
Value Added Services |
785 | 794 | ||||||
|
Total Wholesale |
37,254 | 35,633 | ||||||
|
Retail |
4,234 | 4,359 | ||||||
|
Portfolio |
127 | 128 | ||||||
|
Total Domain Services |
41,615 | 40,120 | ||||||
|
Network Expenses: |
||||||||
|
Network, other costs |
2,416 | 2,395 | ||||||
|
Network, depreciation and amortization costs |
3,231 | 1,975 | ||||||
| 5,647 | 4,370 | |||||||
| $ | 58,835 | $ | 56,302 | |||||
|
Increase over prior period |
$ | 2,533 | ||||||
|
Increase - percentage |
4 | % | ||||||
The following table presents our cost of revenues, as a percentage of total cost of revenues for the periods presented:
|
For the Three Months Ended March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
Network Access Services: |
||||||||
|
Mobile Services |
17 | % | 19 | % | ||||
|
Other Services |
3 | % | 2 | % | ||||
|
Total Network Access Services |
20 | % | 21 | % | ||||
|
Domain Services: |
||||||||
|
Wholesale |
||||||||
|
Domain Services |
63 | % | 62 | % | ||||
|
Value Added Services |
1 | % | 1 | % | ||||
|
Total Wholesale |
64 | % | 63 | % | ||||
|
Retail |
7 | % | 8 | % | ||||
|
Portfolio |
0 | % | 0 | % | ||||
|
Total Domain Services |
71 | % | 71 | % | ||||
|
Network Expenses: |
||||||||
|
Network, other costs |
4 | % | 4 | % | ||||
|
Network, depreciation and amortization costs |
5 | % | 4 | % | ||||
| 9 | % | 8 | % | |||||
| 100 | % | 100 | % | |||||
Total cost of revenues for the three months ended March 31, 2020, increased by $2.5 million, or 4%, to $58.8 million from $56.3 million in the three months ended March 31, 2019. The three-month increase was driven by the $3.4 million increase in costs attributable to our prior year acquisition of Ascio. Ascio costs now represent a full quarter compared to the stub period of attributable costs during the three months ended March 31, 2019. The increase in cost of revenue was also related to a $1.3 million increase in Network, depreciation and amortization as well as a $0.6 million increase in direct Fiber Access costs, both associated with the expanding Ting Internet footprint and the acquisition of Cedar. These increases in cost of revenue were offset by a $1.9 million decrease in domain services costs driven by the erosion in registrations by non-core customers for our eNom brand, as well as a decrease of $0.9 million in Mobile Services costs. Prepaid domain registration and other Internet services fees as of March 31, 2020 increased by $2.8 million, or 3%, to $112.0 million from $109.2 million at December 31, 2019 primarily due to current period domain name registration and annual service renewals.
Network Access Services
Mobile Services
Cost of revenues from mobile phone equipment and services for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, decreased by $0.9 million or 8% to $9.9 million. The decrease was primarily driven by reduced minimum commitment charges with network operators, which decreased by $0.9 million as compared to the three months ended March 31, 2019. Furthermore, Mobile services across both Ting Mobile and Roam Mobility brands experienced a decline in mobile subscribers and reduced usage related to the COVID-19 pandemic, attributable to a decrease in costs of $0.4 million. These decreases in costs of revenue were offset by a $0.4 million increase in network set-up and international long distance charges incurred by Ting Mobile in the period as well as a $0.1 million increase in device costs.
Other Services
During the three months ended March 31, 2020, costs related to provisioning high speed Internet access and billing solutions increased $0.6 million or 55%, to $1.7 million as compared to $1.1 million during three months ended March 31, 2019. The increase in costs were primarily driven by increased direct costs and bandwidth costs related to the continued expansion of the Ting Fiber network, for both existing towns and cities as well as those acquired via the Cedar acquisition.
Domain Services
Wholesale
Domain Service
Costs for Wholesale domain services for the three months ended March 31, 2020 increased by $1.7 million to $36.5 million, when compared to the three months ended March 31, 2019. The increase was primarily driven by $3.4 million increase related to the acquisition of Ascio. Ascio costs now represent a full quarter compared to the stub period of attributable costs during the three months ended March 31, 2019. This increase was offset by a $1.8 million decrease in wholesale domain services costs driven by the erosion in registrations by non-core customers for our eNom brand.
Value-Added Services
Costs for wholesale value-added services for the three months ended March 31, 2020 remained flat at $0.8 million, when compared to the three months ended March 31, 2019.
Retail
Costs for retail for the three months ended March 31, 2020 decreased by $0.2 million, to $4.2 million as compared to the three months ended March 31, 2019. The decrease was a result of an overall declining volume of transactions related to the eNom retail brands.
Portfolio
Costs for portfolio for the three months ended March 31, 2020 remained flat at $0.1 million when compared to the three months ended March 31, 2019. In the fourth quarter of 2019, the Company disposed of its entire domain portfolio, excluding surname domains used in the Realnames email service. The Company expects portfolio cost of revenue to materially decline in Fiscal 2020.
Network Expenses
Network costs for the three months ended March 31, 2020 increased by $1.2 million to $5.6 million when compared to the three months ended March 31, 2019. The three-month increase was driven by depreciation as a result of the expansion of the Company’s increased network infrastructure associated with the continuing expansion of the Ting Fiber footprint.
SALES AND MARKETING
Sales and marketing expenses consist primarily of personnel costs. These costs include commissions and related expenses of our sales, product management, public relations, call center, support and marketing personnel. Other sales and marketing expenses include customer acquisition costs, advertising and other promotional costs.
|
(Dollar amounts in thousands of U.S. dollars) |
For the Three Months Ended March 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Sales and marketing |
$ | 8,985 | $ | 8,741 | ||||
|
Increase over prior period |
$ | 244 | ||||||
|
Increase - percentage |
3 |
% |
||||||
|
Percentage of net revenues |
11 |
% |
11 |
% |
||||
Sales and marketing expenses for the three months ended March 31, 2020 increased by $0.2 million, or 3%, to $9.0 million as compared to the three months ended March 31, 2019. This three-month increase primarily related to a $0.7 million increase in people costs driven by the acquisition of Cedar in the first quarter of 2020 and inclusion of a full quarter of people costs related to workforce acquired in the Ascio acquisition on March 18, 2019. Stock-based compensation expenses also increased $0.2 million in 2020 to attract and retain labor. The overall increase in sales and marketing expense was partially offset by a decrease in other marketing expenses of $0.5 million.
TECHNICAL OPERATIONS AND DEVELOPMENT
Technical operations and development expenses consist primarily of personnel costs and related expenses required to support the development of new or enhanced service offerings and the maintenance and upgrading of existing infrastructure. This includes expenses incurred in the research, design and development of technology that we use to register domain names, network access services, email, retail, domain portfolio and other Internet services, as well as to distribute our digital content services. Editorial costs relating to the rating and review of the software content libraries are included in the costs of product development. All technical operations and development costs are expensed as incurred.
|
(Dollar amounts in thousands of U.S. dollars) |
For the Three Months Ended March 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Technical operations and development |
$ | 2,751 | $ | 2,523 | ||||
|
Increase over prior period |
$ | 228 | ||||||
|
Increase - percentage |
9 |
% |
||||||
|
Percentage of net revenues |
3 |
% |
3 |
% |
||||
Technical operations and development expenses for the three months ended March 31, 2020 increased by $0.2 million, or 9%, to $2.8 million when compared to the three months ended March 31, 2019. The increase in costs relates primarily to increased salaries and benefits driven by an expanding workforce and wage inflation, including the workforce acquired in the Ascio acquisition on March 18, 2019.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of compensation and related costs for managerial and administrative personnel, fees for professional services, public listing expenses, rent, foreign exchange and other general corporate expenses.
|
(Dollar amounts in thousands of U.S. dollars) |
For the Three Months Ended March 31, |
|||||||
|
2020 |
2019 |
|||||||
|
General and administrative |
$ | 4,741 | $ | 4,448 | ||||
|
Increase over prior period |
$ | 293 | ||||||
|
Increase - percentage |
7 |
% |
||||||
|
Percentage of net revenues |
6 |
% |
6 |
% |
||||
General and administrative expenses for the three months ended March 31, 2020 increased by $0.3 million, or 7%, to $4.7 million as compared to the three months ended March 31, 2019. The increase was primarily driven by a $0.1 million increase related to the acquisition of Cedar and Ascio, an increase in foreign exchange expense of $0.3 million and an increase in people costs of $0.2 million. The increase in general and administrative expenses was offset by a decrease in facility and transitional costs of $0.2 million.
DEPRECIATION OF PROPERTY AND EQUIPMENT
|
(Dollar amounts in thousands of U.S. dollars) |
For the Three Months Ended March 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Depreciation of property and equipment |
$ | 113 | $ | 124 | ||||
|
Decrease over prior period |
$ | (11 | ) | |||||
|
Decrease - percentage |
(9 |
)% |
||||||
|
Percentage of net revenues |
0 |
% |
0 |
% |
||||
Depreciation costs remained flat for the three months ended March 31, 2020 at $0.1 million when compared to the three months ended March 31, 2019.
LOSS ON DISPOSAL OF PROPERTY AND EQUIPMENT
|
(Dollar amounts in thousands of U.S. dollars) |
For the Three Months Ended March 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Loss on disposition of property and equipment |
$ | - | $ | - | ||||
|
Decrease over prior period |
$ | - | ||||||
|
Decrease - percentage |
N/A |
|
||||||
|
Percentage of net revenues |
- |
% |
- |
% |
||||
There were no losses on disposal costs during the three months ended March 31, 2020 and March 31, 2019.
AMORTIZATION OF INTANGIBLE ASSETS
|
(Dollar amounts in thousands of U.S. dollars) |
For the Three Months Ended March 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Amortization of intangible assets |
$ | 2,947 | $ | 1,866 | ||||
|
Increase over prior period |
$ | 1,081 | ||||||
|
Increase - percentage |
58 |
% |
||||||
|
Percentage of net revenues |
4 |
% |
2 |
% |
||||
Amortization of intangible assets for the three months ended March 31, 2020 increased $1.1 million to $2.9 million as compared to the three months ended March 31, 2019. The increase is driven by a full quarter of amortization related to the acquisition of Ascio of $0.4 million, amortization of $0.4 million related to the current period acquisition of Cedar and $0.3 million in amortization related to FreedomPop customer acquisition that closed in July 2019. Network rights, brand and customer relationships acquired in connection with the following acquisitions are amortized on a straight-line basis over a range of two to seven years: eNom in January 2017, Roam Mobility brands in September of 2017, Ascio in March of 2019, FreedomPop in July 2019, and Cedar in January 2020.
LOSS (GAIN) ON CURRENCY FORWARD CONTRACTS
Although our functional currency is the U.S. dollar, a major portion of our fixed expenses are incurred in Canadian dollars. Our goal with regard to foreign currency exposure is, to the extent possible, to achieve operational cost certainty, manage financial exposure to certain foreign exchange fluctuations and to neutralize some of the impact of foreign currency exchange movements. Accordingly, we enter into foreign exchange contracts to mitigate the exchange rate risk on portions of our Canadian dollar exposure.
|
(Dollar amounts in thousands of U.S. dollars) |
For the Three Months Ended March 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Loss (gain) on currency forward contracts |
$ | 441 | $ | (79 | ) | |||
|
Increase over prior period |
$ | 520 | ||||||
|
Increase - percentage |
658 |
% |
||||||
|
Percentage of net revenues |
1 |
% |
0 |
% |
||||
The Company recorded a net loss of $0.4 million on the change in fair value of outstanding contracts as well as realized on matured contracts during the three months ended March 31, 2020.
At March 31, 2020, our balance sheet reflects a derivative instrument asset of $0.5 million and a liability of $1.7 million as a result of our existing foreign exchange contracts. Until their respective maturity dates, these contracts will fluctuate in value in line with movements in the Canadian dollar relative to the U.S. dollar.
OTHER INCOME (EXPENSES)
|
(Dollar amounts in thousands of U.S. dollars) |
For the Three Months Ended March 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Other income (expense), net |
$ | (1,237 | ) | $ | (972 | ) | ||
|
Increase over prior period |
$ | (265 | ) | |||||
|
Increase - percentage |
27 |
% |
||||||
|
Percentage of net revenues |
1 |
% |
1 |
% |
||||
Other expenses during the three months ended March 31, 2020 increased by $0.3 million when compared to the three months ended March 31, 2019. This was primarily due to interest incurred on our credit facility with the majority of the borrowings on the credit facility to support the build-out of the Ting Fiber network. Other expense consists primarily of the interest we incur in connection with our Amended 2019 Credit Facility. The interest incurred primarily relates to our loan balances obtained to fund the acquisition of eNom, Ascio and Cedar and funding for expenditures associated with the Company’s Fiber to the Home program.
INCOME TAXES
The following table presents our provision for income taxes for the periods presented:
|
(Dollar amounts in thousands of U.S. dollars) |
For the Three Months Ended March 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Provision for income taxes |
$ | 1,101 | $ | 1,257 | ||||
|
Decrease in provision over prior period |
$ | (156 | ) | |||||
|
Decrease - percentage |
(12 |
)% |
||||||
|
Effective tax rate |
28 |
% |
31 |
% |
||||
We operate in various tax jurisdictions, and accordingly, our income is subject to varying rates of tax. Losses incurred in one jurisdiction cannot be used to offset income taxes payable in another jurisdiction. Our ability to use income tax loss carry forwards and future income tax deductions is dependent upon our operations in the tax jurisdictions in which such losses or deductions arise. Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement carrying values and tax base of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
For the three months ended March 31, 2020, we recorded an income tax expense of $1.1 million on income before income taxes of $3.9 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 2016-09, which requires all excess tax benefits and tax deficiencies related to employee share-based payments to be recognized through income tax expense. Comparatively, for the three months ended March 31, 2019, we recorded an income tax expense of $1.3 million on income before taxes of $4.1 million, using an estimated effective tax rate for the 2019 fiscal year and reflecting the $0.4 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 projected future taxable income, uncertainties related to the industry in which the Company operates, and tax planning strategies in making this assessment.
We recognize accrued interest and penalties related to income taxes in income tax expense. We did not have significant interest and penalties accrued at March 31, 2020 and December 31, 2019, respectively.
ADJUSTED EBITDA
We believe that the provision of this supplemental non-GAAP measure allows investors to evaluate the operational and financial performance of our core business using similar evaluation measures to those used by management. We use adjusted EBITDA to measure our performance and prepare our budgets. Since adjusted EBITDA is a non-GAAP financial performance measure, our calculation of adjusted EBITDA may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. Because adjusted EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a liquidity measure. See the Consolidated Statements of Cash Flows included in the attached financial statements. Non-GAAP financial measures do not reflect a comprehensive system of accounting and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies and/or analysts and may differ from period to period. We endeavor to compensate for these limitations by providing the relevant disclosure of the items excluded in the calculation of adjusted EBITDA to net income based on U.S. GAAP, which should be considered when evaluating the Company's results. Tucows strongly encourages investors to review its financial information in its entirety and not to rely on a single financial measure.
Our adjusted EBITDA definition excludes depreciation, amortization of intangible assets, income tax provision, interest expense (net), accretion of contingent consideration, stock-based compensation, asset impairment, gains and losses from unrealized foreign currency transactions and infrequently occurring items. Gains and losses from unrealized foreign currency transactions removes the unrealized effect of the change in the mark-to-market values on outstanding unhedged foreign currency contracts, as well as the unrealized effect from the translation of monetary accounts denominated in non-U.S. dollars to U.S. dollars.
The following table reconciles net income to adjusted EBITDA:
|
Reconciliation of Net income to Adjusted EBITDA |
Three Months Ended March 31, |
|||||||
|
(In Thousands of US Dollars) |
2020 |
2019 |
||||||
|
(unaudited) |
(unaudited) |
(unaudited) |
||||||
|
Net income for the period |
$ | 2,834 | $ | 2,799 | ||||
|
Depreciation of property and equipment |
2,990 | 1,925 | ||||||
|
Amortization of intangible assets |
3,301 | 2,040 | ||||||
|
Interest expense, net |
1,150 | 972 | ||||||
| Accretion of contingent consideration | 87 | - | ||||||
|
Provision for income taxes |
1,101 | 1,257 | ||||||
|
Stock-based compensation |
801 | 525 | ||||||
|
Unrealized loss (gain) on change in fair value of forward contracts |
348 | (118 | ) | |||||
|
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities |
(42 | ) | (328 | ) | ||||
|
Acquisition and other costs1 |
111 | 359 | ||||||
|
Adjusted EBITDA |
$ | 12,681 | $ | 9,431 | ||||
|
1Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to our acquisition of eNom in January 2017, Ascio in March 2019, and Cedar in January 2020. Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments. |
Adjusted EBITDA increased by $3.3 million, or 35% to $12.7 million for the three months ended March 31, 2020 when compared to the three months ended March 31, 2019. The increase in adjusted EBITDA from period-to-period was primarily driven by an increased contribution from Ascio, which is the result of increased operating cost synergies realized during the first quarter of 2020, as well as an increased contribution from Ting Fiber. The overall increase in EBITDA was partially offset by decreased contribution from the erosion of wholesale and retail registrations from our eNom brand as well as lower contribution from Ting Mobile, related to a decreasing subscriber base and lower usage related to COVID-19.
OTHER COMPREHENSIVE INCOME (LOSS)
To mitigate the impact of the change in fair value of our foreign exchange contracts on our financial results, in October 2012 we begun applying hedge accounting for the majority of the contracts we need to meet our Canadian dollar requirements on a prospective basis.
The following table presents other comprehensive income for the periods presented:
|
(Dollar amounts in thousands of U.S. dollars) |
For the Three Months Ended March 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Other comprehensive income (loss) |
$ | (1,191 | ) | $ | 610 | |||
|
Decrease over prior period |
$ | (1,801 | ) | |||||
|
Decrease - percentage |
(295 |
)% |
||||||
|
Percentage of net revenues |
(1 |
)% |
1 |
% |
||||
The impact of the fair value adjustments on outstanding hedged contracts for the three months ended March 31, 2020 was a loss in OCI of $1.2 million as compared to a gain of $0.6 million for the three months ended March 31, 2019.
The net amount reclassified to earnings during the three months ended March 31, 2020 was a loss of $0.0 million compared to a loss of $0.1 million during the three months ended March 31, 2019.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2020, our cash and cash equivalents balance decreased $8.0 million when compared to December 31, 2019. Our principal uses of cash were $9.9 million for the continued investment in property and equipment, $8.8 million for the Acquisition of Cedar Holdings Group, Incorporated (“Cedar”), $3.1 million in stock repurchases, and $0.2 million of other costs, including tax payment associated with stock option exercises. These uses of cash were offset by cash provided by operating activities of $14.1 million.
Amended 2019 Credit Facility
On June 14, 2019, the Company and its wholly-owned subsidiaries, Tucows.com Co., Ting Fiber, Inc., Ting Inc., Tucows (Delaware) Inc. and Tucows (Emerald), LLC, entered into an Amended and Restated Senior Secured Credit Agreement with Royal Bank of Canada (“RBC”), as administrative agent, and lenders party thereto (collectively with RBC, the “Lenders”) under which the Company has access to an aggregate of up to $240 million in funds, inclusive of a $60 million accordion facility. 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”).
On November 27, 2019, the Company entered into Amending Agreement No. 1 to the Amended and Restated Senior Secured Credit Agreement (collectively with the Amended and Restated Senior Secured Credit Agreement, the “Amended 2019 Credit Facility”) to amend certain defined terms in connection with the Cedar acquisition.
In connection with the Amended 2019 Credit Facility, the Company incurred an additional $0.3 million of fees paid to lenders and $0.2 million of legal fees related to the debt issuance. Of these fees, $0.4 million are debt issuance costs, which have been reflected as a reduction to the carrying amount of the loan payable and will be amortized over the term of the credit facility agreement and $0.1 million have been recorded in General and administrative expenses.
The obligations of the Company under the Amended 2019 Credit Agreement are secured by a first priority lien on substantially all of the personal property and assets of the Company and has a four-year term.
Other Credit Facilities
Prior to the Company entering into the Amended 2019 Credit Facility and the 2017 Amended Credit Facility, the Company had credit agreements (collectively the “Prior Credit Facilities”) with BMO, which provided the Company with continued access to a treasury risk management facility and a credit card facility. All remaining credit facilities under the 2017 Amended Credit Facility and the Prior Credit Facilities have been terminated.
The treasury risk management facility under the Prior Credit Facilities provides for a $3.5 million settlement risk line to assist the Company with hedging Canadian dollar exposure through foreign exchange forward contracts and/or currency options. Under the terms of the Prior Credit Facilities, the Company may enter into such agreements at market rates with terms not to exceed 18 months. As of March 31, 2020, the Company held contracts in the amount of $61.8 million to trade U.S. dollars in exchange for Canadian dollars.
Net cash inflows from operating activities during the three months ended March 31, 2020 was $14.1 million, an increase of 57% when compared to the three months ended March 31, 2019.
Net income, after adjusting for non-cash charges, during the three months ended March 31, 2020 was $9.9 million, an increase of 34% when compared to the prior year. Net income included non-cash charges and recoveries of $7.1 million such as depreciation, amortization, stock-based compensation, deferred income taxes, excess tax benefits on stock-based compensation, other income, unrealized gains on currency forward contracts, and disposal of domain names. In addition, changes in our working capital provided $4.2 million. Positive contributions of $8.8 million from movements in deferred revenue, accounts receivable, accounts payable, inventory, income taxes recoverable, accreditation fees payable, customer deposits and prepaid expenses and deposits were offset by $4.6 million utilized in changes from prepaid domain name fees and accrued liabilities.
Cash Flow from Financing Activities
Net cash outflows from financing activities during the three months ended March 31, 2020 totaled $3.3 million as compared to cash inflows of $27.9 million during the three months ended March 31, 2019. Total cash outflows of $3.3 million were driven by $3.1 million related to the stock repurchases, in addition to a $0.2 million outflow for the payment of tax obligations resulting from the net exercise of stock options and loan payable costs. These cash outflows were offset by minor cash inflows related to the proceeds received on exercise of stock options.
Cash Flow from Investing Activities
Investing activities during the three months ended March 31, 2020 used net cash of $18.7 million as compared to using $38.5 million during the three months ended March 31, 2019. Cash outflows of $8.8 million related to the acquisition of Cedar, in addition to $9.9 million invested in property and equipment, primarily to support the continued expansion of our fiber footprint. The Company continues to invest in our existing Ting Towns of Centennial, CO, Charlottesville, VA, Fuquay-Varina, NC, Holly Springs, NC, Sandpoint, ID and Westminster, MD as well ramping construction in Fullerton, CA, Roaring Fork, CO, Rolesville, NC, Solana Beach, CA and Wake Forest, NC, as we seek to extend both our current network and expand to new towns. We expect our capital expenditures on building and expanding our fiber network to continue to increase during Fiscal 2020.
Based on our operations, we believe that our cash flow from operations will be adequate to meet our anticipated requirements for working capital, capital expenditures and our loan repayments for at least the next 12 months.
We may need additional funds or seek other financing arrangements to facilitate more rapid expansion, develop new or enhance existing products or services, respond to competitive pressures or acquire or invest in complementary businesses, technologies, services or products. We may also evaluate potential acquisitions of other businesses, products and technologies. We currently have no commitments or agreements regarding the acquisition of other businesses. If additional financing is required, we may need additional equity or debt financing and any additional financing may be dilutive to existing investors. We may not be able to raise funds on acceptable terms, or at all.
Off Balance Sheet Arrangements
As of March 31, 2020 we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Contractual Obligations
In our Annual Report on Form 10-K for the year ended December 31, 2019, we disclosed our contractual obligations. As of March 31, 2020, other than the items mentioned above, there have been no other material changes to those contractual obligations outside the ordinary course of business.
As of March 31, 2020, we had the following outstanding foreign exchange forward contracts to trade U.S. dollars in exchange for Canada dollars:
|
Maturity date (Dollar amounts in thousands of U.S. dollars) |
Notional amount of U.S. dollars |
Weighted average exchange rate of U.S. dollars |
Fair value |
|||||||||
| April - June 2020 | 9,653 | 1.3296 | (526 | ) | ||||||||
| July - September 2020 | 10,656 | 1.3227 | (627 | ) | ||||||||
|
October - December 2020 |
9,658 | 1.3227 | (565 | ) | ||||||||
|
January - March 2021 |
11,124 | 1.4283 | 172 | |||||||||
|
April - June 2021 |
9,878 | 1.4283 | 150 | |||||||||
|
July - September 2021 |
10,782 | 1.4362 | 220 | |||||||||
| $ | 61,751 | 1.3795 | $ | (1,176 | ) | |||||||
As of March 31, 2020, the Company had $61.8 million of outstanding foreign exchange forward contracts which will convert to CDN $85.2 million. Of these contracts, $51.0 million met the requirements for hedge accounting. As of December 31, 2019, the Company held contracts in the amount of $30.5 million to trade U.S. dollars in exchange for $40.5 million Canadian dollars. Of these contracts, $26.1 million met the requirements for hedge accounting.
We have performed a sensitivity analysis model for foreign exchange exposure over the three months ended March 31, 2020. The analysis used a modeling technique that compares the U.S. dollar equivalent of all expenses incurred in Canadian dollars, at the actual exchange rate, to a hypothetical 10% adverse movement in the foreign currency exchange rates against the U.S. dollar, with all other variables held constant. Foreign currency exchange rates used were based on the market rates in effect during the three months ended March 31, 2020. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a decrease in net income for the three months ended March 31, 2020 of approximately $1.0 million, before the effects of hedging. Fluctuations of exchange rates are beyond our control. We will continue to monitor and assess the risk associated with these exposures and may take additional actions in the future to hedge or mitigate these risks.
Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, marketable securities, foreign exchange contracts and accounts receivable. Our cash, cash equivalents and short-term investments are in high-quality securities placed with major banks and financial institutions whom we have evaluated as highly creditworthy and commercial paper. Similarly, we enter into our foreign exchange contracts with major banks and financial institutions. With respect to accounts receivable, we perform ongoing evaluations of our customers, generally granting uncollateralized credit terms to our customers, and maintaining an allowance for doubtful accounts based on historical experience and our expectation of future losses.
Interest rate risk
Our exposure to interest rate fluctuations relate primarily to our 2019 Amended Credit Facility.
As of March 31, 2020, we had an outstanding balance of $114.4 million on the 2019 Amended Credit Facility. The 2019 Amended Credit Facility bears a base interest rate based on borrowing elections by the Company and the Company’s total Funded Debt to EBITDA plus LIBOR. As of March 31, 2020, an adverse change of one percent on the interest rate would have the effect of increasing our annual interest payment on 2019 Amended Credit Facility by approximately $1.1 million, assuming that the loan balance as of March 31, 2020 is outstanding for the entire period.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this report, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly report, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2020 our disclosure controls and procedures were effective at the reasonable assurance level. Management’s assessment of disclosure controls and procedures excluded consideration of Cedar’s internal control over financial reporting. Cedar was acquired during the first quarter of 2020, and the exclusion is consistent with guidance provided by the SEC staff that an assessment of a recently acquired business may be omitted from management’s report on internal control over financial reporting for up to one year from the date of acquisition, subject to specified conditions. Cedar’s total assets were approximately $14.8 million as March 31, 2020; its revenues during the three months ended March 31, 2020 were approximately $1.2 million.
(b) Changes in Internal Control over Financial Reporting
There were no changes made in our internal controls over financial reporting during the three months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As a result of our acquisition of Cedar, we are in the process of evaluating Cedar’s internal controls to determine the extent to which modifications to Cedar’s internal controls would be appropriate.
OTHER INFORMATION
We are involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, individually or in the aggregate, in our opinion, will materially harm our business. We cannot assure that we will prevail in any litigation. Regardless of the outcome, any litigation may require us to incur significant litigation expense and may result in significant diversion of our attention.
The following risk factor is provided to update the risk factors previously disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. The risks described in this Quarterly Report and in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or operating results.
Health epidemics, including the recent COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business, operations and financial results, and the markets and communities in which we and our employees, Mobile Network Operators (“MNOs”), vendors and customers operate.
Our business, operations and financial results could be adversely affected by health epidemics, including the recent COVID-19 pandemic, impacting the markets and communities in which we and our employees, MNOs, vendors and customers operate. In December 2019, a disease referred to as COVID-19 was reported and has spread to many countries worldwide, including the United States and Canada.
The ongoing global COVID-19 pandemic has adversely impacted, and may continue to adversely impact, many aspects of our business. With respect to our Network Access business segment, Roam Mobility, our niche prepaid Mobile Services brand that relies on global travel as a key factor in its success, has accounted for the majority of the negative financial impact caused by COVID-19. With travel restrictions and border closures halting business and leisure travel, we have seen new revenues for Roam Mobility trend toward zero through the end of March 2020. Given the current uncertainty around reopening of borders, easing of travel restrictions and consumers’ level of comfortability with business and leisure travel in a post pandemic world, we do not know when revenues for Roam Mobility will return to pre-pandemic levels, if ever. A continued decline in Roam Mobility revenue could harm our Network Access business. Ting Mobile, our primary post-paid Mobile Services brand, has experienced a drop in customer data usage and an increased churn rate of low-margin business accounts. We do not know when Ting Mobile customer data usage and business account churn rates will return to pre-pandemic levels, if ever, and continued declines and increases, respectively, could harm our Network Access business. Also within our Network Access business segment, we cancelled and rescheduled all in-home installation and service appointments across our Ting Fiber footprint. While we are implementing certain smart, reduced risk installs for our Ting Fiber customers, we do not expect new customer installations to return to pre-pandemic levels in the near term. A continued decline in new customer growth and installations could harm our Network Access business.
In response to the COVID-19 pandemic, many state, local, and foreign governments have put in place, and others in the future may put in place, quarantines, executive orders, shelter-in-place orders, and similar government orders and restrictions in order to control the spread of the disease. Such orders or restrictions, or the perception that such orders or restrictions could occur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, and cancellation or postponement of events, among other effects that could negatively impact productivity and disrupt our operations and those of our MNOs, vendors and customers. We have implemented a work-from-home policy for substantially all of our employees, and we may take further actions that alter our operations as may be required by federal, state, or local authorities, or which we determine are in our best interests. While most of our operations can be performed remotely, there is no guarantee that we will be as effective while working remotely because our team is dispersed, many employees may have additional personal needs to attend to (such as looking after children as a result of school closures or family who become sick), and employees may become sick themselves and be unable to work. Decreased effectiveness of our team could adversely affect our results due to our inability to meet in person with vendors and service providers, longer time periods to provide services related to domain registrations, longer time to respond to Network Access customer service issues, extended timelines for Network Access customer installations and repairs, or other decreases in productivity that could harm our business.
The global impact of COVID-19 continues to rapidly evolve, and we will continue to monitor the situation closely. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, operations, financial results or the global economy as a whole. While the spread of COVID-19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could seriously harm our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
|
(Dollar amounts in thousands of U.S. dollars, except per share amounts) |
|
Period |
Total Number of Shares Repurchased |
Average Price Paid per share |
Total Number of Shares repurchased as part of a publicly announced program(1) |
Approximate Dollar value of shares that may yet be purchased under the program |
||||||||||||
|
January 1-31, 2020 |
- | $ | - | - | $ | 35,016 | ||||||||||
|
February 1-29, 2020 |
- | $ | - | - | $ | 40,000 | ||||||||||
|
March 1-31, 2020 |
66,738 | $ | 46.71 | 66,738 | $ | 36,883 | ||||||||||
(1) On February 12, 2020, the Company announced that its Board has approved a stock buyback program to repurchase up to $40 million of its common stock in the open market. Purchases are to be made exclusively through the facilities of the NASDAQ Capital Market. The $40 million buyback program commenced on February 12, 2020 and is expected to terminate on February 12, 2021. During the three months ended March 31, 2020, the Company repurchased and cancelled 66,738 shares under the terms of this program for a total of $3.1 million.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
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No. |
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Description |
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3.1.1 |
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3.1.2 |
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3.2 |
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3.3 |
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31.1 |
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Chief Executive Officer's Rule 13a-14(a)/15d-14(a) Certification * |
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31.2 |
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Chief Financial Officer's Rule 13a-14(a)/15d-14(a) Certification * |
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32.1 |
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32.2 |
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101.INS |
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XBRL Instance * |
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101.SCH |
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XBRL Taxonomy Extension Schema * |
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101.CAL |
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XBRL Taxonomy Extension Calculation * |
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101.DEF |
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XBRL Taxonomy Extension Definition * |
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101.LAB |
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XBRL Taxonomy Extension Labels * |
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101.PRE |
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XBRL Taxonomy Extension Presentation * |
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* |
Management or compensatory contract. |
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# |
Filed herewith. |
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† |
Furnished herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: May 7, 2020 |
TUCOWS INC. |
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By: |
/s/ ELLIOT NOSS |
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Elliot Noss |
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President and Chief Executive Officer |
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By: |
/s/ DAVINDER SINGH |
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Davinder Singh Chief Financial Officer |
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(Principal Financial and Accounting Officer) |