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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
Commission file number 001-32600
Tucows Inc.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania
(State or Other Jurisdiction of Incorporation or Organization)
96 Mowat Avenue
Toronto, Ontario, Canada
(Address of Principal Executive Offices)
23-2707366
(I.R.S. Employer Identification No.)
M6K 3M1
(Zip Code)
Registrant’s telephone number, including area code: (416) 535-0123
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common stock, no par value
Trading Symbol
TCX
Name of Each Exchange on Which Registered
NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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 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.
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐
Smaller reporting
company ☐
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 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 Act). Yes ☐ No ☒
As of June 30, 2019, (the last day of our most recently completed second quarter), the aggregate market value of the common
stock held by non-affiliates of the registrant was approximately $577.2 million. Such aggregate market value was computed by
reference to the closing sale price per share of $61.02 as reported on the NASDAQ Capital Market on such date. For purposes of
making this calculation, the registrant has excluded each executive officer, each director and each beneficial owner of more than ten
percent of the outstanding shares of common stock of the Company. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares outstanding of the registrant’s common stock as of March 2, 2020, was 10,621,338
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Business
Item 1
Item 1A Risk Factors
Item 2
Item 3
Item 4 Mine Safety Disclosures
Properties
Legal Proceedings
TUCOWS INC.
ANNUAL REPORT ON FORM 10-K
For Fiscal Year Ended December 31, 2019
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PART I
PART II
Selected Financial Data
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A Controls and Procedures
Item 9B Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accountant Fees and Services
Item 15 Exhibits and Financial Statement Schedules
PART IV
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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 Annual Report on Form 10-K (this “Annual Report”). All other
service marks, trademarks and trade names referred to in this Annual Report are the property of their respective owners. Solely for
convenience, any trademarks referred to in this Annual 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.
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Information Concerning Forward-Looking Statements
This Annual Report on Form 10-K contains, in addition to historical information, forward-looking statements by Tucows
Inc. (the “Company”, “we”, “us” “Tucows” or “our”) 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 and Euro; Ting Mobile and fixed Internet access subscriber growth and retention rates, the number of new, renewed
and transferred-in domain names we register as our business develops and competes; the effect of a potential generic top level domain
(“gTLD”) expansion by the Internet Corporation for Assigned Names and Numbers (“ICANN”) on the number of domains we
register and the impact it may have on related revenues; our belief that the market for domain name registration will trend upward
gradually and may be affected by market volatility; our belief that, by increasing the number of services we offer, we will be able to
generate higher revenues; the effectiveness of our intellectual property protection, including our ability to license proprietary rights
to network partners and to register additional trademarks and service marks; the potential impact of current and pending claims on
our business; our expectation to collect our outstanding receivables, net of our allowance for doubtful accounts; our expecta tion
regarding fluctuations in certain expense and cost categories; our expectations regarding cash from operations to fund our
business; 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:
• Changes in the nature of key strategic relationships with our Mobile Virtual Network Operator ("MVNO") partners;
• 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;
• Our ability to manage any potential increase in subscriber churn or bad debt expense;
• Our ability to continue to generate sufficient working capital to meet our operating requirements;
• Our ability to service our debt commitments;
• Our ability to maintain a good working relationship with our vendors and customers;
• The ability of vendors to continue to supply our needs;
• Actions by our competitors;
• Our ability to attract and retain qualified personnel in our business;
• Our ability to effectively manage our business;
• The effects of any material impairment of our goodwill or other indefinite-lived intangible assets;
• 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;
• 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;
• 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;
•
•
Pending or new litigation; and
Factors set forth herein under the caption “Item 1A Risk Factors”.
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 Annual Report on Form 10-K by the foregoing cautionary
statements.
PART I
ITEM 1. BUSINESS
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.
Network Access Services
Network Access Services includes mobile, fixed high-speed Internet access services and other revenue sources, including
billing solutions to small Internet service providers (“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.
The Company also operates other MVNO brands, Zipsim and Always Online Wireless (collectively referred to as the
“Roam Mobility brands”). Roam Mobility brands operates as an MVNO on the same nationwide Global System for Mobile
communications (“GSM”) network as Ting Mobile and distributes through third-party retail stores and product branded websites.
The primary focus of the Roam Mobility brands is to offer affordable roaming service to international travelers.
The Company also derives revenue from the sale of fixed high-speed Internet access (“Ting Internet”) in select
communities, including towns in North Carolina, Maryland, Idaho, Colorado, and Virginia. Our primarily 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.
Revenues from Ting Mobile and Ting Internet are generated in the United States and are provided on a monthly basis with
no fixed contract term. Revenues from Roam Mobility brands are generated in the United States, and Canada on a prepaid usage
basis with no fixed contract terms.
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Recent Developments
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. The Cedar acquisition is discussed in more detail in Part II, Item 9B
of this Annual Report on Form 10-K.
Domain Services
Domain Services includes wholesale and retail domain name registration services, value added services and portfolio
services derived through our OpenSRS, eNom, Ascio 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,
primarily Canada and the United States.
Our primary distribution channel is a global network of approximately 36,000 resellers that operate in approximately 160
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 gTLD and the country code top-level domain (“ccTLD”) 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.
Our wholesale domain name registration services, primarily branded as OpenSRS, Ascio and eNom, derives revenue from
its Domain Service and from providing value-added services. The OpenSRS, Ascio and eNom Domain Services manage 23.8 million
domain names under the Tucows, eNom and Ascio ICANN registrar accreditations and for other registrars under their own
accreditations, which has increased by 0.5 million domain names since December 31, 2018. The increase from prior year is primarily
due to the acquisition of 1.9 million names acquired in the Ascio acquisition on March 18, 2019. The increase was offset by a
decrease of 0.9 million domain names related to the bulk transfer domain names in the third quarter of 2019, which were registered
to a single, low margin hosted customer. A further decrease of 0.5 million domain names was related to the erosion of registrations
related to non-core customers.
Our 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.
Our retail domain name registration services, 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. Our retail domain services 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.
Our portfolio services generate revenue by offering names in our domain portfolio for resale through a number of
distribution channels including our reseller network.
Additional information about segments can be found in “Note 19 – Segment Reporting” of the Notes to the Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report.
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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
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 offers standard talk, text and data mobile services. Roam customers prepay for their usage
through the Roam Mobility website. When prepayments are received the amount is deferred, and subsequently recognized as the
Company satisfies its obligation to provide mobile services. In addition, revenues associated with the sale of SIM cards are
recognized when title and risk of loss is transferred to the subscriber and shipment has occurred. Incentive marketing credits given
to customers are recorded as a reduction of revenue.
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 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.
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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.
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, website hosting
and hosted email 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 primarily from Internet hosting services, advertising from 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 the Company’s portfolio domains or names acquired through the Company’s domain
expiry stream. Revenue generated from sale of domain name contracts, containing a distinct performance obligation to transfer
the domain name rights under the Company’s control, is generally recognized once the rights have been transferred and payment
has been received in full. Domain portfolio names are sold through our premium domain name service, auctions or in negotiated
sales. The size of our domain name portfolio varies over time, as we acquire and sell domains on a regular basis to maximize the
overall value and revenue generation potential of our portfolio. In evaluating names for sale, we consider the potential foregone
revenue from pay-per-click advertising, as well as other factors. The name will be offered for sale if, based on our evaluation,
the name is deemed non-essential to our business and management believes that deriving proceeds from the sale is strategically
more beneficial to the Company. In Fiscal 2019, the Company sold the remaining names held in its non-surname domain
portfolio and portfolio revenue in Fiscal 2020 will only be derived from the sale of names from its surname portfolio. The
Company expects significantly lower portfolio revenues going forward.
For information about geographic areas, see “Note 19 – Segment Reporting” of the Notes to Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report.
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Intellectual Property
We believe that we are well positioned in the wholesale domain registration and email markets due in part to our highly-
recognized “Tucows”, “OpenSRS”, “Ascio” and “eNom” brands and the respect they confer on us as a defender of end-user rights
and reseller-friendly approaches to doing business. We were among the first group of 34 registrars to be accredited by ICANN in
1999, and we remain active in Internet governance issues.
Our success and ability to compete depend on our ability to develop and maintain the proprietary aspects of our brand name
and technology. We rely on a combination of trademark, trade secret and copyright laws, as well as contractual restrictions to protect
our intellectual property rights.
We have registered the Tucows trademark in the United States, Canada and the European Union and we register additional
service marks and trademarks as appropriate and where such protection is available.
We seek to limit disclosure of our intellectual property by requiring all employees and consultants with access to our
proprietary information to commit to confidentiality, non-disclosure and work-for-hire agreements. All of our employees are required
to sign confidentiality and non-use agreements, which provide that any rights they may have in copyrightable works or patentable
technologies accrue to us. Before entering into discussions with potential vendors and partners about our business and technologies,
we require them to enter into a non-disclosure agreement. If these discussions result in a license or other business relationship, we
also generally require that the agreement containing the parties’ rights and obligations include provisions for the protection of its
intellectual property rights.
Customers
The majority of the customers to whom we provide reseller services are generally either web hosts or ISPs. A small number
of customers are consultants and designers providing our services to their business clients. Both our Retail Domain Services and our
Network Access Services customers are a very broad mix of consumers, small businesses and corporations.
No customer represented more than 10% of our consolidated revenues in any of the last three fiscal years.
While web hosts and ISPs are capitalizing on the growth in Internet usage and the demand for new services, they also face
significant competition from numerous other service providers with competitive or comparable offerings. This has led such web
hosts and ISPs to focus on core competencies. As such resellers are increasingly seeking to outsource non-core services. Outsourcing
enables these resellers to better focus on customer acquisition and retention efforts by eliminating the need to own, develop and
support non-core applications in-house.
Seasonality
During the summer months and certain other times of the year, such as major holidays, Internet usage often declines. As a
result, many of our services (OpenSRS, eNom, Ascio, Hover, Ting and Roam Mobility) may experience reduced demand during
these times. For example, our experience shows that new domain registrations decline during the summer months and around the
year-end holidays. Seasonality may also affect advertising, which may have a slight impact on advertisement-based revenue. These
seasonal effects could cause fluctuations in our financial results. For Ting Mobile, we see increased gross activation and churn
activity in late summer as part of back-to-school activities as well as the holiday season in December. For Roam Mobility, we see
increased roaming sales as consumers travel to warmer regions of the United Sates for extended periods of time.
Competition
Our competitors may be divided into the following groups:
• US Mobile Phone Service providers such as AT&T, Verizon, T-Mobile and Sprint, who primarily compete with Ting
Mobile Services.
• US Broadband providers such as AT&T, Comcast, Verizon and CenturyLink, who primarily compete with Ting Internet
Services.
• Retail-oriented domain registrars, such as GoDaddy and Web.com who compete with our Reseller customers in wholesale
domain services and with Hover.
• Wholesale-oriented domain registrars, such as GoDaddy, who market services to resellers such as our customers.
• Wholesale Email Service providers, such as Google, Microsoft, Bluetie and MailTrust.
We expect to continue to experience significant competition from the competitors identified above and, as our business
continues to develop, we expect to encounter competition from other providers. Service providers, Internet portals, web hosting
companies, email hosting companies, outsourced application companies, country code registries and major telecommunication firms
may broaden their services to include services we offer.
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We believe the primary competitive factors in our Network Access Services are:
•
•
Providing a superior customer service experience
Providing a simple and friendly user experience through more usable web and application interfaces and more fair and
transparent pricing;
• Being agnostic on telephony and internet hardware, including phones and network routers; and
•
Providing superior technology, speed and reliability with fiber to the home services.
We believe the primary competitive factors in our Domain Services are:
•
•
Providing superior customer service by anticipating the technical requirements and business objectives of resellers and
providing them with technical advice to help them understand how our services can be customized to meet their particular
needs;
Providing cost savings over in-house solutions by relieving resellers of the expense of acquiring and maintaining hardware
and software and the associated administrative burden;
• Enabling resellers to better manage their relationships with their end-users;
•
•
Facilitating scalability through an infrastructure designed to support millions of transactions across millions of end-users;
and
Providing superior technology and infrastructure, consisting of industry-leading software and hardware that allow
resellers to provide these services to their customers without having to make substantial investments in their own
software or hardware.
Although we encounter pricing pressure in many markets in which we compete, we believe the effects of that pressure are
mitigated by the fact that we deliver a high degree of value to our customers through our business and technical practices. We believe
our status as a trusted supplier also allows us to mitigate the effects of this type of competition. We believe that the long-term
relationships we have made with many customers results in a sense of certainty that would not be available to those customers
through a competitor.
Employees
As of December 31, 2019, we had approximately 633 full-time employees. None of our employees are currently represented
by a labor union. We consider our relations with our employees to be good.
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Corporate Information
Our principal place of business is located in Canada.
We were incorporated under the laws of the Commonwealth of Pennsylvania in November 1992 under the name
Infonautics, Inc. In August 2001, we completed our acquisition of Tucows Inc., a Delaware corporation, and we changed our name
from Infonautics, Inc. to Tucows Inc. Our principal executive offices are located at 96 Mowat Avenue, Toronto, Ontario, M6K 3M1
Canada. Our telephone number is (416) 535-0123. We also have offices in Germany, Denmark and the United States of America.
We are subject to the filing requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). Therefore, we file
annual reports, periodic reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. The
SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that
file electronically at www.sec.gov.
Our website address is tucows.com. We make available through our website, free of charge, copies of our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act, as amended as soon as reasonably practicable after filing such material
electronically or otherwise furnishing it to the SEC. The information on the website listed above is not and should not be considered
part of this Annual Report and is not incorporated by reference in this document.
Executive Officers and Key Employees of the Registrant
The following table sets forth the names, ages and titles of persons currently serving as our executive officers and key
employees.
Name
Elliot Noss
Davinder Singh
Dave Woroch
Bret Fausett
Hanno Liem
Jessica Johannson
Justin Reilly
Michael Goldstein
Ross Rader
Age
57
45
57
56
46
47
32
48
48
Title
President and Chief Executive Officer
Chief Financial Officer
Executive Vice President, Domains
Chief Legal Officer
Chief Technology Officer
Chief People Officer
Chief Product Officer
Chief Revenue Officer, Ting
Chief Customer Officer
Elliot Noss has served as our President and Chief Executive Officer since May 1999 and served as Vice President of
Corporate Services for Tucows Interactive Limited, which was acquired by Tucows in May 1999, from April 1997 to May 1999.
Davinder Singh has served as our Chief Financial Officer since 2017, having previously served as Vice President Finance
since joining the Company in 2016. Prior to joining the Company, Mr. Singh spent eight years at KPMG LLP primarily focusing on
public company audits in the technology field. After leaving KPMG LLP, Mr. Singh joined TELUS and held progressive roles,
including Chief Financial Officer of TELUS International, TELUS’ outsourcing division. Mr. Singh is a Chartered Professional
Accountant with the Institute of Chartered Professional Accountants of British Columbia.
David Woroch has served as our Executive Vice President, Domains since 2014 and oversees the Domains business at
Tucows, including OpenSRS, eNom, Ascio and EPAG (wholesale), Hover (retail) and the premium domain portfolio. Mr. Woroch
joined Tucows in March 2000 after thirteen years at IBM and has helped build Tucows’ sales, marketing, business development,
product management and technical support capabilities.
Bret Fausett joined Tucows in September 2017 as our Chief Legal Officer. Prior to joining Tucows, Mr. Fausett worked for
Uniregistry, where he had served as General Counsel for six years. Prior to Uniregistry, Mr. Fausett worked as outside legal counsel
to a number of domain industry related companies.
Hanno Liem joined Tucows in January 2018 as our Chief Technology Officer. Prior to joining Tucows, Mr. Liem worked
for Rakuten Kobo since 2012 where he served as their Vice President of Global Operations and focused on site operations and
engineering.
Jessica Johannson has served as our Chief People Officer since January 2017. Prior to joining Tucows, Ms. Johannson held
executive level HR roles at Johnson Controls, Inc. since 2008, Brookfield Renewable Energy Group and Capgemini.
Michael Goldstein has served as our Chief Revenue Officer since September 2009. Before joining us, Mr. Goldstein spent
five years at Ogilvy, NY as a Partner and, Marketing Director managing advertising, brand identity, digital and public relations
campaigns for clients such as TD Ameritrade, Kraft, GlaxoSmithKline and DoubleClick.
Ross Rader has served as Chief Customer Officer since 2012, where he leads our customer service and support organization.
In 2000, as our Director of Assigned Names, Ross helped launch Tucows OpenSRS service. In 2005, as General Manager, Retail
Services he oversaw Tucows’ retail domain operations, including the development and launch of Hover in 2008.
Justin Reilly joined Tucows in September 2019 as our Chief Product Officer. Prior to joining Tucows, Justin was Head of
Product & Customer Experience Innovation at Verizon, as well as founder of a number of companies with consumer grade
product and machine learning at their core.
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ITEM 1A. RISK FACTORS
Our business faces significant risks. Some of the following risks relate principally to our business and the industry and
statutory and regulatory environment in which we operate. Other risks relate principally to the securities markets and ownership of
our stock. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we
currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the
following risk factors actually occur, our business, financial condition or results of operations could suffer, and the trading price of
our common stock could decline.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
We face intense competition and consolidation in the industries and markets we serve. If we do not continue to provide services
that are useful to users, we may not remain competitive and be forced to reduce our prices, and our revenues and operating
results could be adversely affected.
Network Access Services
The U.S. wireless communications & Internet services industry has become extremely competitive. We expect competition
to continue to intensify as a result of the entrance of new competitors or the expansion of services offered by existing competitors.
If we cannot compete effectively, our revenues, growth and profitability may be materially adversely affected. Our brands compete
with (1) incumbent facilities-based wireless communication and Internet service providers and their prepaid affiliate brands and (2)
other MVNOs. Most of our competitors have substantially greater financial, technical, personnel and marketing resources and a
larger market share than we do, and we may not be able to compete successfully against them. Due to their size and bargaining
power, they may obtain discounts for facilities, equipment, devices (including cellular handsets, IoT enabled devices and ONTs),
content, and services, potentially placing us at a competitive disadvantage. As consolidation in the industry creates even larger
competitors, our competitors’ purchasing advantages may increase further, hampering our efforts to attract and retain customers.
They may use their significant market power to introduce additional products and service features (or lower prices) that we are
unable to offer at similar cost or price to the customer. This may impact our ability to gain significant market share from these
competitors. To remain competitive, we may be compelled to offer greater subsidies for our devices, reduce the prices for our
wireless or gigabit services or augment our service offerings. Any subsidies or price reductions that we offer in order to remain
competitive may reduce our margins and revenues, and may adversely affect our profitability and cash flows. Lower prices may also
make our services more accessible to new, lower-value customers with less disposable income available to spend on our services. In
addition, if prices decline, customers without long-term contracts may change their service providers more frequently, thereby
increasing our churn and resulting in higher acquisition costs to replace those customers. A shift to lower value or less loyal customers
could have an adverse impact on our results of operations and cash flows.
Domain Services
The market for Internet services generally and domain registrations in particular is intensely competitive and rapidly
evolving as participants strive to protect their current market share and improve their competitive position, and we expect competition
to intensify in the future. If any of our competitors merge with one another, or existing suppliers (Registries) decide to begin
competing in our core business areas, they will present a stronger force in the market and may attract the business of both existing
and prospective resellers. In addition, our resellers may opt to build their own technical systems and seek ICANN accreditation in
order to process domain applications themselves. Currently ICANN has over 2,500 active registrars who register domain names in
one or more of the gTLDs that it oversees. Not all of these accredited registrars, however, are operational. There are relatively few
barriers of entry to this market, so as this market continues to develop we expect the number of competitors to increase. The continued
entry into the domain registration industry and the rapid growth of some competitive registrars and service providers who have
already entered the industry may make it difficult for us to maintain our current market share. As a result, we may not be able to
compete effectively and our sales may decrease materially. To remain competitive, competitors may offer aggressive price discounts
on the services they offer. At the same time, registries may increase their prices, increasing the cost of the services we sell. These
pricing pressures may require us to match these discounts or absorb price increases in order to remain competitive, which would
reduce our margins, or cause us to lose customers who decide to purchase the discounted service offerings of our competitors or
forego a purchase because of pricing. Most of our existing competitors are also expanding the variety of services that they offer.
These competitors include, among others, domain name registrars, hosting companies and Internet service providers, as well as other
large Internet companies, who have the ability to offer these services for free or at a reduced price as part of a bundle with other
service offerings. If these companies decide to devote greater resources to the development, promotion and sale of these new products
and services, greater numbers of individuals and businesses may choose to use these competitors as their starting point for creating
an online presence and as a general platform for running their online business operations.
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Our service offerings both in Network Access Services and Domain Services may not be successful if we are unable to maintain
existing customer relationships or establish new relationships.
Network Access Services
Ting services, both mobile and fiber businesses may not prove to be successful or profitable in the long term. Ting’s
long-term success is dependent upon its sustained ability to generate sufficient revenue from its subscribers based on their use
of its services and its ability to respond to churn by retaining existing customers and adding new customers. In Q2’19, the
Company announced that it would not renew its agreement with T-Mobile effective December 19, 2019, whom operate on a
GSM (“Global System for Mobile”) platform. The Company therefore must incentivize current customers who use GSM
devices to migrate to devices which are compatible with Ting Mobile’s other MNOs – Sprint & Verizon. To mitigate transition
effects, the Company has entered into a 3-year agreement with Prepaid Wireless Wholesale, LLC (PWW), a Mobile Virtual
Network Enabler to provide wireless voice minutes and data services via the GSM standard on the T-Mobile network via a
reseller arrangement with PWW. Due to the difficulty of identifying which inducements will be most effective, some
customers may refuse or fail to migrate to compatible devices. This would result in increased customer churn, increased
customer retention costs and/or significant shortfall penalties, if slow subscriber migration resulted in revenues below the
minimum revenue commitments the Company has with the MNOs. If any of these events occur, our operational performance
and financial results may be adversely affected.
Domain Services
Our network of resellers is our principal source for distributing domain services. We also rely on our resellers to market,
promote and sell our services. Our ability to increase revenues in the future will depend significantly on our ability to maintain our
reseller network, to sell more services through existing resellers and to develop our relationships with existing resellers by providing
customer and sales support and additional products. Resellers have no obligations to distribute our services and may stop doing so
at any time. If we are not able to maintain our relationships with resellers, our ability to distribute our services will be harmed, and
our revenue may decline.
Our service offerings both in Network Access Services and Domain Services may be limited in ability to grow their respective
businesses and customer base unless we can continue to manage vendor relationships and obtain both valuable network capacity
and a multitude of domain name registration options. If these rates increase or product mix lags in comparison to our competitors,
this have a significant impact upon our operating results.
Network Access Services
In order to remain competitive and to further expand our MVNO business, we must continue to obtain valuable wireless
network capacity at favorable rates and terms, provide adequate customer service and acquire and market a sufficient quantity and
mix of handsets and related accessories. Our operating performance and ability to attract new customers may be adversely affected
if we are unable to meet the increasing demands for our services in a timely and efficient manner, while adequately addressing the
growing demands on our customer service, billing, and other back-office functions. Any change in our ability, or the ability of third
parties with whom we contract, to provide these services also could adversely affect our operations and financial performance. On
June 6, 2018, two of our current Network Operators, T-Mobile and Sprint submitted a formal merger application to the Federal
Communications Commission (“FCC”), which has since been approved. As of February 11, 2020, the merger between T-Mobile
and Sprint is expected to be finalized as early as April 1, 2020, subject also to resolution of a lawsuit filed by certain state attorneys
general. If the merger is successful, the consolidation of our Network Operators could hinder our ability in the future to negotiate
favorable rates and access to the mobile services mentioned above. We also have added Verizon as a Network Operator but have not
yet integrated with their systems or made this service available to our customers on our Ting MVNO platform. Our integration
may not be successful or profitable.
Domain Services
In order to remain competitive, we must provide a multitude of domain name registration options (TLDs, ccTLDs) to our
resellers. Any failure on our part to offer domain registrations in a significant number of TLDs/ccTLDs or in a popular TLD/ccTLD
would cause us to lose a competitive advantage and could cause resellers to elect to take their business to a registrar that does offer
these services. Each registry typically imposes a fee in association with the registration of each domain. For example, Verisign, the
registry for .com, presently charges a $7.85 fee for each .com registration and ICANN currently charges a $0.18 fee for each .com
domain name registered in the gTLDs that fall within its purview. We have no control over these agencies and cannot predict when
they may increase their respective fees. An amendment to the registry agreement between ICANN and Verisign was approved by
the U.S. Department of Commerce in November 2018. The amendment confirms that Verisign will operate the .com registry until
2024. The amendment also repeals price controls and provides Verisign the pricing flexibility to change its .com Registry Agreement
with ICANN to increase wholesale .com prices. Specifically, the flexibility permits Verisign to pursue with ICANN an up to 7
percent increase in the prices for .com domain names, in each of the last four years of the six-year term of the .com Registry
Agreement. The changes also affirm that Verisign may not vertically integrate or operate as a registrar in the .com top level domain.
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Our service offerings both in Network Access Services and Domain Services may experience a material adverse effect should the
nature of the Internet fundamentally change or fail to grow and expand internationally as a viable medium for commerce. This
includes changes in current navigation practices, technologies or marketing practices.
Network Access Services
The success of our Network Access Services, primarily Ting Fiber depends on the continued development and acceptance
of symmetrical gigabyte Internet infrastructure and service as a medium for faster Internet communication. A number of factors
could prevent continued growth and acceptance, including:
-
-
-
the unwillingness of companies and customers to shift their purchasing from traditional ISP vendors to alternative vendors
like Ting Fiber;
the Fiber infrastructure may not be able to support the demands placed on it, and its performance and reliability may
decline as usage grows;
the development of alternative, wireless technologies (such as 5G) that could provide a similar Internet speed and service
without a fixed connection/physical network.
- Any of these issues could slow the growth of the adoption of Fiber Internet, which could limit our growth and revenues.
Domain Services
The domain name registration industry continues to develop and adapt to changing technology and the demands of
individual governments. These developments may include changes in the administration or operation of the Internet, including (a) the
creation and institution of alternate systems for directing Internet traffic without the use of the existing domain system or (b) systems
under local government control that splinter from, or thwart the operation of, the Internet. Systems existing outside the domain name
system are not subject to ICANN accreditation requirements and restrictions. Other competitors have attempted to introduce naming
systems that use keywords rather than traditional domains. The widespread acceptance of any alternative systems and Internet
navigation practices could eliminate the need to register a domain to establish an online presence and could materially adversely
affect our business, financial condition and results of operations.
Additionally, we believe that a major source of growth for Internet-based companies will come from individuals and
businesses outside the United States where Internet access and use is currently less prevalent. A substantial number of our resellers
are currently based outside the United States and we plan to grow our business in other countries. If Internet usage in these
jurisdictions does not increase as anticipated, or if governments prohibit the registration and use of domain names or certain classes
of domain names, our revenues may not grow as anticipated.
Our ongoing investment in new businesses, services and technologies is inherently risky, and could disrupt our current
operations. We may not be able to realize the intended and anticipated benefits from our investments and acquisitions, which
could affect the value of these investments to our business and our ability to meet our financial obligations and targets in the
short or medium term.
Network Access Services
We have invested and expect to continue to invest in our new fiber to the home (“FTTH”) deployments in select markets
in the United States (Ting Fiber) both organically and inorganically through acquisitions like the purchase of Cedar Holdings
Group, a telecommunications provider serving multiple markets in the Western Slope of Colorado and northwestern New Mexico.
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. Such FTTH investments may involve risks and uncertainties, including:
insufficient revenues from such investments and acquisitions, in the short and medium term to offset any new commitments assumed
and expenses associated with these new investments; inadequate return of capital on our investments; inability to obtain the
appropriate technical and operational resources; and unanticipated local or federal regulatory changes that could cause us to fail to
realize the anticipated benefits of such investments. Because these new FTTH deployments are inherently risky, no assurance can
be given that such investments will be successful and will not adversely affect our financial condition and operating results.
Domain Services
We may acquire companies, assets or the rights to technologies in the future in order to develop new services or enhance
existing services, to enhance our operating infrastructure, to fund expansion, to respond to competitive pressures or to acquire
complementary businesses in the Domain Services industry. Entering into these types of arrangements entails many risks, any of
which could materially harm our business, including: the diversion of management’s attention from other business concerns; the
failure to effectively integrate the acquired technology or company into our business; the incurring of significant acquisition costs;
the loss of key employees from either our current business or the acquired business; and the assumption of significant liabilities of
the acquired company. Any of the foregoing or other factors could harm our ability to achieve anticipated levels of profitability from
acquired businesses or to realize other anticipated benefits of acquisitions. We may not be able to identify or consummate any future
acquisitions on favorable terms, or at all. If we do effect an acquisition, it is possible that the financial markets or investors will view
the acquisition negatively.
The Company's success depends on our ability to keep pace with technological advances. Failure to respond to rapid
technological changes in the industries we serve or difficulty in scaling or adapting existing architecture could result in the loss
of customers and cause us to incur additional expenses.
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Network Access Services
The U.S. wireless communications industry is experiencing rapid growth of new technologies, products and services. We
cannot predict which of many possible future technologies, products, or services will be important to maintain our competitive
position or what expenditures we will be required to make in order to develop and provide these technologies, products or services.
To the extent we do not keep pace with technological advances or fail to timely respond to changes in the competitive environment
affecting our industry, we could lose market share or experience a decline in revenue, cash flows and net income from our
telecommunications brands (Ting Mobile, Roam). As a result of the financial strength and benefits of scale enjoyed by some of our
competitors, they may be able to offer services at lower prices than we can, thereby adversely affecting our revenues, growth and
profitability.
Currently there is no Internet access technology that comes close to the speed, reliability, scalability and value of fiber-
optics. However, it’s possible that another medium that’s either better or more economically/easily deployed could be developed in
the longer term, or wireless could be improved enough to supplant the need for fiber in certain types of installations, like multi-
family units, that would impact Ting Fiber’s ability to grow. To be successful as we continue to build out the Ting Fiber network in
communities across the U.S. and bring customers onto the network we must ensure that our network infrastructure performs well
and is reliable. The greater the user traffic and the greater the complexity of our services, the more computing power we will need.
We have spent and expect to continue to spend substantial amounts on the purchase of equipment to enable our network infrastructure
to handle increased traffic. This expansion is expensive and complex and could result in inefficiencies or operational failures. If we
do not expand successfully, or if we experience inefficiencies and operational failures, the quality of our services and our customers’
experience could decline. This could damage our reputation and lead us to lose current and potential customers. Cost increases, loss
of traffic or failure to accommodate new technologies or changing business requirements could harm our operating results and
financial condition.
Domain Services
The Internet and e-commerce are characterized by rapid technological change. Sudden changes in user and customer
requirements and preferences, the frequent introduction of new applications and services embodying new technologies and the
emergence of new industry standards and practices could make our applications, services and systems obsolete. The emerging nature
of applications and services in the Internet application and services industry and their rapid evolution will require that we continually
improve the performance, features and reliability of our applications and services. Our success will depend, in part, on our ability:
to develop and license new applications, services and technologies that address the increasingly sophisticated and varied needs of
our current and prospective customers; and to respond to technological advances and emerging industry standards and practices on
a cost-effective and timely basis.
The development of applications and services and other proprietary technology involves significant technological and
business risks and requires substantial expenditures and lead-time. We may be unable to use new technologies effectively or adapt
our internally developed technology and transaction-processing systems to customer requirements or emerging industry standards
in a timely manner, or at all. Our internal development teams may also be unable to keep pace with new technological developments
that affect the marketplace for our services. In addition, as we offer new services and functionality, we will need to ensure that any
new services and functionality are well integrated with our current services, particularly as we offer an increasing number of our
services as part of bundled suites. To the extent that any new services offered by us do not interoperate well with our existing
services, our ability to market and sell those new services would be adversely affected and our revenue level and ability to achieve
and sustain profitability might be harmed. Updating technology internally and licensing new technology from third parties may
require us to incur significant additional capital expenditures.
Corporate Systems
For our fiber, MVNO, and domain services businesses, we use data centers, some provided by third-parties and some provided by
ourselves, for the storage and exchange of corporate and customer data. Any damage to or failure of our data center systems could
result in interruptions in our service, which could reduce our revenues and profits, and damage our brands.
We rely on network operators, bandwidth providers, data centers and other vendors in providing services to our customers, and
any system failure or interruption in the services provided by either our Company or third parties could harm our ability to
operate our business and damage our reputation.
Network Access Services
As an MVNO, our telecommunications brands (Ting Mobile & Roam) do not own or operate a physical network, but rather
utilize the nationwide wireless communication networks of our Network Operators. We rely on them and their third-party affiliates
to maintain their wireless facilities and government authorizations and to comply with government policies and regulations. If they
fail to do so, we may incur substantial losses. Some of the risks related to their nationwide wireless communication networks and
infrastructure include: major equipment failures, breaches of network or information technology security that affect their wireless
networks, including transport facilities, communications switches, routers, microwave links, cell sites or other equipment or third-
party owned local and long-distance networks on which we rely, power surges or outages, software defects and disruptions beyond
their control, such as natural disasters and acts of terrorism, among others. The Master Services Agreements with our Network
Operators do not contain any contractual indemnification provisions relating to network outages or other disruptions. Any impact on
their nationwide wireless communication networks could disrupt our operations, require significant resources, result in a loss of
subscribers or impair our ability to attract new subscribers, which in turn could have a material adverse effect on our business, results
of operations and financial condition. Delays or failure to add network capacity, or increased costs of adding capacity or operating
the network, could limit our ability to increase our customer base, limit our ability to increase our revenues, or cause a deterioration
of our operating margin.
Domain Services
The availability of our Domain Name services depends on the continuing operation of our information technology and
communications systems. Any damage to or failure of our systems could result in interruptions in our service, which could reduce
our revenues and profits, and damage our brands. Our systems are vulnerable to damage or interruption from earthquakes, terrorist
attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts
to harm our systems. Some of our data centers are located in areas with a high risk of major earthquakes. Our data centers are also
subject to break-ins, sabotage and intentional acts of vandalism, and to potential disruptions if the operators of these facilities have
financial difficulties. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all
eventualities. The occurrence of a natural disaster, a decision to close a facility without adequate notice or other unanticipated
problems at our data centers could result in lengthy interruptions in our service.
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We have currently entered into agreements with unrelated parties for certain business operations and to license third-party
technologies. Any claims against these unrelated parties to which we rely for business operations and/or licensed technology
could result in the need to incur substantial costs to replace the technology or services which could delay and increase the cost
of product and service developments.
Network Access Services
We have entered into agreements with unrelated parties for the day-to-day execution of certain services, the development
and maintenance of certain systems necessary for the operation of our business, and for network equipment, handsets, devices, and
other equipment. We expect our dependence on key suppliers to continue as more advanced technologies are developed. If we
experience difficulties with regard to these arrangements, it could result in additional expense, loss of subscribers and revenue,
interruption of our services or a delay in the roll-out of new technology.
Domain Services
We currently license certain technologies from third parties and incorporate them into certain of our services including
email, security certificates, anti-spam and anti-virus. The Internet services market is evolving and we may need to license additional
technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms or at all
(should these third-party technology licenses infringe on the proprietary rights of others). To the extent we cannot license necessary
solutions, we may have to devote our resources to development of such technologies, which could delay and increase the cost of
product and service developments overall.
Our systems face security risks, and any compromise of the security of these systems could disrupt our business, damage our
reputation and result in the disclosure of confidential information, legal liability for damages and loss of customers.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary
business information and that of our customers, suppliers and business partners, and personally identifiable information of our
customers and employees. Due to the fact that all of our services are Internet based, the amount of data we store for our users on our
servers (including personal information) has been increasing. We make extensive use of online services and centralized data
processing, including through third-party service providers. The secure maintenance and transmission of customer information is an
important element of our operations.
From time to time, concerns have been expressed about whether our services compromise the privacy of our users and
others. Concerns about our practices with regard to the collection, use, disclosure or security of personal information or other privacy-
related matters, even if unfounded, could damage our reputation and operating results and expose us to litigation and possible
liability, including claims for unauthorized purchases with credit card information, impersonation, or fraud claims and other claims
relating to the misuse of personal information and unauthorized marketing purposes. While we strive to comply with all applicable
data protection laws and regulations, as well as our own privacy policies, any failure or perceived failure to comply may result in
proceedings or actions against us by government entities or others, which could potentially have an adverse effect on our business.
We have previously been the target of attempted attacks and must monitor and develop our systems to protect this data from
misappropriation. Our information technology and other systems that maintain and transmit customer information, including location
or personal information, or those of service providers, may be compromised by a malicious third-party penetration of our network
security, or that of a third-party service provider, or impacted by advertent or inadvertent actions or inactions by our employees, or
those of a third-party service provider. Cyber-attacks, which include the use of malware, computer viruses and other means for
disruption or unauthorized access, have increased in frequency, scope and potential harm in recent years. While, to date, we have
not been subject to any successful cyber-attacks or other cyber incidents which, individually or in the aggregate, have been material
to our operations or financial condition, the preventive actions we take to reduce the risk of cyber incidents and protect our
information technology and networks may be insufficient to repel a major cyber-attack in the future. As a result, our subscribers’
information may be lost, disclosed, accessed, used, corrupted, destroyed or taken without the subscribers’ consent.
Any major compromise of our data or network security, failure to prevent or mitigate the loss of our services or customer
information and delays in detecting any such compromise or loss could disrupt our operations, impact our reputation and subscribers'
willingness to purchase our services and subject us to additional costs and liabilities, including litigation, which could be material.
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Disputes concerning the ownership or rights to use intellectual property and litigation involving other rights of third parties could
be costly and time-consuming to litigate, may distract management from operating the business, and may result in us paying
significant damage awards, losing significant rights and our ability to operate all or a portion of our business.
We rely upon copyright, trade secret and trademark law, confidentiality and nondisclosure agreements, invention
assignment agreements and work-for-hire agreements to protect our proprietary technology, all of which offer only limited
protection. Due to the global nature of our web-based businesses and services, we cannot ensure that our efforts to protect our
proprietary information will be adequate to protect against infringement and misappropriation by third parties, particularly in foreign
countries where laws or law enforcement practices may not protect proprietary rights as fully as in the United States of America and
Canada.
We have licensed, and may in the future license, some of our trademarks and other proprietary rights to others. Third parties
may also reproduce or use our intellectual property rights without seeking a license and thus benefit from our technology without
paying for it. Third parties could also independently develop technology, processes or other intellectual property that are similar to
or superior to those used by us. Actions by licensees, misappropriation of the intellectual property rights or independent development
by others of similar or superior technology might diminish the value of our proprietary rights or damage our reputation. The
unauthorized reproduction or other misappropriation of our intellectual property rights, including copying the look, feel and
functionality of our website could enable third parties to benefit from our technology without us receiving any compensation. The
enforcement of our intellectual property rights may depend on our taking legal action against these infringing parties, and we cannot
be sure that these actions will be successful.
Defense of claims of infringement of intellectual property or other rights of third parties against us would require the
resources of both our time and money. Third parties may assert claims of infringement of patents or other intellectual property rights
against us concerning past, current or future technologies. Content obtained from third parties and distributed over the Internet by
us may result in liability for defamation, negligence, intellectual property infringement, product or service liability and dissemination
of computer viruses or other disruptive problems. We may also be subject to claims from third parties asserting trademark
infringement, unfair competition and violation of publicity and privacy rights relating specifically to domains.
As a domain name registrar, we regularly become involved in disputes over registration of domain names. These disputes
are typically resolved through the UDRP, ICANN’s administrative process for domain name dispute resolution, or less frequently
through litigation under the ACPA, or under general theories of trademark infringement or dilution. The UDRP generally does not
impose liability on registrars, and the ACPA provides that registrars may not be held liable for registering or maintaining a domain
name absent a showing of bad faith intent to profit or reckless disregard of a court order by the registrars. However, we may face
liability if we fail to comply in a timely manner with procedural requirements under these rules. In addition, these processes typically
require at least limited involvement by us, and therefore increase our cost of doing business. The volume of domain name registration
disputes may increase in the future as the overall number of registered domain names increases.
We have substantial goodwill and other intangible assets, therefore to the extent that any intellectual property is deemed
impaired we would be required to record a significant charge to earnings in our financial statements during the period in which any
impairment of our goodwill or intangible assets is determined. Any impairment charges or changes to the estimated amortization
periods could have a material adverse effect on our financial results.
Our service offerings both in Network Access Services and Domain Services are exposed to risks associated with credit card and
other online payment chargebacks, fraud and new payment methods.
Network Access Services
Ting offers its wireless and Internet services on a postpaid basis. The success of its postpaid offerings depends on its ability
to manage its credit risk while attracting new customers with profitable usage patterns. Both Ting Mobile & Ting Fiber have a short
operating history and there can be no assurance that it will be able to manage its credit risk or generate sufficient revenue to cover
its postpaid-related expenses, including losses arising from its customers’ failure to make payments when due. Ting manages credit
risk exposure using techniques that are designed to set terms and limits for the credit risk it accepts. The techniques it uses may not
accurately predict future defaults due to, among other things, inaccurate assumptions or fraud. Ting’s ability to manage credit risk
may also be adversely affected by legal or regulatory changes, competitors’ actions, consumer behavior, and inadequate collections
staffing or techniques. While Ting continually seeks to improve its assumptions and controls, its failure to manage its credit risks
appropriately may materially adversely affect our profitability and ability to grow.
Domain Services
A substantial majority of our revenue originates from online credit card transactions. Under current credit card industry
practices, we are liable for fraudulent and disputed credit card transactions because we do not obtain the cardholder’s signature at
the time of the transaction, even though the financial institution issuing the credit card may have authorized the transaction. Under
credit card association rules, penalties may be imposed at the discretion of the association. Any such potential penalties would be
imposed on our credit card processor by the association. Under our contract with our processor, we are required to reimburse our
processor for such penalties. Our current level of fraud protection, based on our fraudulent and disputed credit card transaction
history, is within the guidelines established by the credit card associations. However, we face the risk that one or more credit card
associations may, at any time, assess penalties against us or terminate our ability to accept credit card payments from custo mers,
which would have a material adverse effect on our business, financial condition and results of operations.
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Our indebtedness could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our
ability to operate our business, divert our cash flow from operations for debt payments and prevent us from meeting our debt
obligations. Our debt agreements impose significant operating and financial restrictions on us and our subsidiaries, which may
prevent us from capitalizing on business opportunities.
As of March 2, 2020, our outstanding debt under our credit facility was $114.4 million. Our ability to generate cash flow
from operations to make principal and interest payments on our debt will depend on our future performance, which will be affected
by a range of economic, competitive and business factors as well as changes in government monetary or fiscal policy.
Absent sufficient cash flows from operations, we may need to engage in equity or debt financings to secure additional funds
to meet our operating and capital needs. We may not be able to secure additional debt or equity financing on favorable terms, or at
all, at the time when we need that funding. In addition, even though we may have sufficient cash flow, we may still elect to sell
additional equity or debt securities or obtain credit facilities for other reasons. If we raise additional funds through further issuances
of equity or convertible debt securities, our existing shareholders could suffer significant dilution in their percentage ownership of
our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our
common stock. In addition, if we decide to raise funds through debt or convertible debt financings, we may be unable to meet our
interest or principal payments. Our inability to generate sufficient cash flow from operations or obtain additional capital or alternative
financing on acceptable terms could have a material adverse effect on our business, financial condition and results of operations.
The current agreements governing our indebtedness impose significant operating and financial restrictions on us. These
restrictions, subject in certain cases to customary baskets, exceptions, and incurrence-based ratio tests, may limit our or our
subsidiaries' ability to engage in some transactions, including the following: incurring additional indebtedness and issuing stock;
paying dividends, share repurchases or making other restricted payments or investments; selling assets, properties, or licenses that
we have or in the future may procure; creating liens on assets; engaging in mergers, acquisitions, business combinations, or other
transactions. These restrictions could limit our ability to react to changes in our operating environment or the economy. Any future
indebtedness that we incur may contain similar or more restrictive covenants. Any failure to comply with the restrictions of our debt
agreements may result in an event of default under these agreements, which in turn may result in defaults or acceleration of
obligations under these agreements and other agreements, giving our lenders the right to terminate any commitments they had made
to provide us with further funds and to require us to repay all amounts then outstanding. Any of these events would have a material
adverse effect on our business, financial condition, and operating results.
The international nature of our businesses and operations expose us to additional risks that could harm our business, operating
results, and growth strategy; including risks related to taxation and foreign currencies fluctuations.
We are a U.S. based multinational company. Expansion into international markets is a continued element of our growth
strategy. Introducing and marketing our services internationally, developing direct and indirect international sales and support
channels and managing foreign personnel and operations all require significant management attention and financial resources. We
face a number of risks associated with expanding our businesses internationally that could negatively impact our results of operations,
including the following:
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Foreign currency fluctuations and exchange rates: Our operating results are accordingly subject to fluctuations in foreign
currency exchange rates, which could adversely affect our future operating results. We attempt to mitigate a portion of
these risks through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity
and expense. We generally use hedging programs to partially hedge our exposure to foreign currency exchange rate
fluctuations for Canadian dollars, the currency in which we incur the majority of operating expenses. Although we
regularly review our hedging program and make adjustments as necessary based on the judgment factors discussed above,
our hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable
movement in foreign currency exchange rates, which could adversely affect our financial condition or results of operations.
Potentially adverse tax consequences or an inability to realize tax benefits: Significant judgment is required in determining
our provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis.
While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business,
it is possible that these positions may be overturned by jurisdictional tax authorities, which may have a significant impact
on our provision for income taxes. Tax laws are dynamic and subject to change as new laws are passed and new
interpretations of the law are issued or applied, including the Tax Cuts and Job Act of 2017. In addition, governmental tax
authorities are increasingly scrutinizing the tax positions of companies. If U.S. or other foreign tax authorities change
applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be
adversely impacted.
- Management, communication and integration problems resulting from cultural differences and geographic dispersion.
- Compliance with foreign laws, accreditation and regulatory requirements in relation to provision of services, protection of
intellectual property and third-party data in foreign jurisdictions.
- Competition from companies with international operations, including large international competitors and entrenched local
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companies.
To the extent we choose to make acquisitions to enable our international expansion efforts, the identification of suitable
acquisition targets in the markets into which we want to expand.
Political and economic instability in some international markets
Sufficiently qualified labor pools in various international markets
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- We may not succeed in our efforts to continue to expand our international presence as a result of the factors described
above or other factors that may have an adverse impact on our overall financial condition and results of operations.
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Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns
could adversely affect our operating results and financial condition.
We are subject to income and other taxes in a number of jurisdictions and our tax structure is subject to review by both
domestic and foreign tax authorities. We must make significant assumptions, judgments and estimates to determine our current
provision for income taxes, deferred tax assets and liabilities and any valuation allowance that may be recorded against our deferred
tax assets. Although we believe that our estimates are reasonable, the ultimate determination of our tax liability is always subject to
review by the applicable tax authorities. Any adverse outcome of such a review could have a negative effect on our operating results
and financial condition in the period or periods for which such determination is made. Our current and future tax liabilities could be
adversely affected by:
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international income tax authorities, including the Canada Revenue Agency and the U.S. Internal Revenue Service,
challenging the validity of our arms-length related party transfer pricing policies or the validity of our contemporaneous
documentation.
changes in the valuation of our deferred tax assets; or
changes in tax laws, regulations, accounting principles or the interpretations of such laws.
We could be subject to changes in tax rates, the adoption of new U.S. or international tax legislation, or exposure to additional
tax liabilities. This could discourage the registration or renewal of domain names.
Due to the global nature of the Internet, it is possible that, although our services and the Internet transactions related to them
typically originate in Virginia, Toronto, Canada, Denmark and Germany, governments of other states or foreign countries might
attempt to regulate our transactions or levy sales, income or other taxes relating to our activities. Tax authorities at the international,
federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in Internet commerce. New or
revised international, federal, state or local tax regulations may subject us or our customers to additional sales, income and other
taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet on
Tucows or on our customers. New or revised taxes and, in particular, sales taxes, would likely increase the cost of doing business
online and decrease the attractiveness of advertising and selling goods and services over the Internet. New taxes could also create
significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an
adverse effect on our business and results of operations.
Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the
innovation, creativity and teamwork fostered by our culture, and our business may be harmed.
We believe that a critical contributor to our success has been our corporate culture, which we believe fosters innovation,
creativity and teamwork. As our organization grows and we are required to implement more complex organizational management
structures, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This could negatively
impact our future success.
The Company’s success depends on the continued service and availability of key personnel.
Much of the Company’s future success depends on the continued availability and service of key personnel, including its
Chief Executive Officer, executive team and other highly skilled employees. Experienced personnel in the technology industry are
in high demand and competition for their talents is intense. We may not be able to retain our key employees or replace them when
necessary.
Our business depends on our strong brands. If we are not able to maintain and enhance our brands, our ability to expand our
customer base will be impaired and our business and operating results will be harmed.
In recognition of the evolving nature of the internet services market and to make it easier to clearly differentiate each service
we offer from our competitors, we enhanced our branding by focusing our primary service offerings under six distinct brands namely
“OpenSRS”, “eNom”, “Hover", "epag", "Ascio" and “Ting”. We also believe that maintaining and enhancing the “Tucows”
corporate brand and our service brands is critical to expanding our customer base. We anticipate that, as our market becomes
increasingly competitive, maintaining and enhancing our brands may become increasingly difficult and expensive. Maintaining and
enhancing our brands will depend largely on our ability to be a technology leader providing high quality products and services,
which we may not do successfully. To date, we have engaged in relatively little direct brand promotion activities. This enhances the
risk that we may not successfully implement brand enhancement efforts in the future.
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If we fail to maintain an effective system of disclosure controls and internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act, our ability to produce timely and accurate financial statements or comply with applicable
regulations could be impaired.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial
reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over
financial reporting in each Annual Report on Form 10-K. Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's
objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because
changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Implementation of new
technology related to the control system may result in misstatements due to errors that are not detected and corrected during testing.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be
detected.
As a result, we cannot assure you that material weaknesses in our internal control over financial reporting will not be
identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in
their implementation, could result in material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result
in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management
evaluations regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section
404 of the Sarbanes-Oxley Act of 2002 and the rules proclaimed after that. The existence of a material weakness could result in
errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting
obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price, and
it could make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors (“Board”) o r as
executive officers.
Economic, political, and market conditions may adversely affect our businesses, financial condition, and operating results.
The financial results of our business are both directly and indirectly dependent upon economic conditions throughout the
world, which in turn can be impacted by conditions in the global financial markets. Uncertainty about global economic conditions
may lead businesses to postpone spending in response to tighter credit and reductions in income or asset values. Weak economic
activity may lead government customers to cut back on services. Factors such as interest rates, availability of credit, inflation rates,
changes in laws (including laws relating to taxation), trade barriers, currency exchange rates and controls, and national and
international political circumstances (including wars, terrorist acts or security operations) could have a material adverse effect on
our business and investments, which could reduce our revenue, profitability and value of our assets. These factors may also adversely
affect the business, liquidity and financial condition of our customers. In addition, periods of poor economic conditions could
increase our ongoing exposure to credit risks on our accounts receivable balances. This could have a material adverse effect on our
business, financial condition and results of operations.
Our business and financial performance could be adversely affected, directly or indirectly, by disasters, by terrorist activities or
by international hostilities.
Neither the occurrence nor the potential impact of disasters, terrorist activities or international hostilities can be predicted.
However, these occurrences could impact us directly as a result of damage to our facilities or by preventing us from conducting our
business in the ordinary course, or indirectly as a result of their impact on our customers, suppliers or other counterparties. We could
also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets
or the economy in general or in any particular region. For example, a significant earthquake could impact us directly by disrupting
our business operations, including the disruption of data centers we operate that could affect customers across all of our regions of
operation and business lines.
Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency
planning, and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of disasters or terrorist
activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national
or regional emergency responders or on the part of other organizations and businesses that we deal with, particularly those that we
depend upon but have no control over.
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RISKS RELATED TO LEGAL, GOVERNMENTAL AND REGULATORY MATTERS
ICANN's Oversight of Domain Name Registration System and domain name registration charge. If these fee increase, this may
have a significant impact on our operating results.
ICANN is a private sector, not-for-profit corporation formed in 1998 by the U.S. Department of Commerce for the express
purposes of overseeing a number of Internet related tasks previously performed directly on behalf of the U.S. government, including
managing the domain name registration system. ICANN currently imposes a fee ($0.18) in association with the registration of each
domain name. We have no control over ICANN and cannot predict when they may increase their respective fees. If we absorb such
cost increases, or if surcharges act as a deterrent to registration, our profits may be adversely impacted by these third-party fees.
ICANN has been subject to strict scrutiny by the public and by the U.S. and other governments around the world with many
of those governments becoming increasingly interested in Internet governance. For example, the U.S. Congress has held hearings to
evaluate ICANN's selection process for new TLDs. In addition, ICANN faces significant questions regarding efficacy as a private
sector entity. ICANN may continue to evolve both its long-term structure and mission to address perceived shortcomings such as a
lack of accountability to the public and a failure to maintain a diverse representation of interests on its board of directors. We continue
to face the risks that:
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the U.S. or any other government may reassess its decision to introduce competition into, or ICANN’s role in overseeing, the
domain registration market;
the Internet community or the U.S. Department of Commerce or U.S. Congress may refuse to recognize ICANN’s authority or
support its policies, which could create instability in the domain registration system;
some of ICANN’s policies and practices, and the policies and practices adopted by registries and registrars, could be found to
conflict with the laws of one or more jurisdictions;
ICANN may lose any one of the several claims pending against it in both the U.S. and international courts, in which case its
credibility may suffer and its policies may be discredited;
the terms of the Registrar Accreditation Agreement (the “RAA”), under which we are accredited as a registrar, could change
in ways that are disadvantageous to us or under certain circumstances could be terminated by ICANN preventing us from
operating our Registrar, or ICANN could adopt unilateral changes to the RAA that are unfavorable to us, that are inconsistent
with our current or future plans, or that affect our competitive position;
ICANN and, under their registry agreements, VeriSign and other registries may impose increased fees received for each ICANN
accredited registrar and/or domain name registration managed by those registries;
ICANN or any registries may implement policy changes that would impact our ability to run our current business practices
throughout the various stages of the lifecycle of a domain name; and
international regulatory or governing bodies, such as the International Telecommunications Union or the European Union, may
gain increased influence over the management and regulation of the domain registration system, leading to increased regulation
in areas such as taxation and privacy.
If any of these events occur, they could create instability in the domain registration system. These events could also disrupt or
suspend portions of our domain registration solution, which would result in reduced revenue.
Data protection regulations may impose legal obligations on us that we cannot meet or that conflict with our ICANN contractual
requirements.
In 2018, the European Commission adopted the General Data Protection Regulation (the “GDPR”), which creates
obligations around the procurement, processing, publication and sharing of personal data. Potential fines for violations of certain
provisions of GDPR reach as high as 4% of a company’s annual total revenue, potentially including the revenue of its international
affiliates. The solutions we develop for GDPR-compliance may not be adequate in the views of regulatory authorities or ICANN,
which may cause the loss of WHOIS privacy revenue or increase our costs of developing compliant solutions or subject us to
litigation, liability, civil penalties, or loss of market share. As the privacy laws and regulations around the world continue to evolve,
these changes could adversely affect our business operations in similar ways.
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The law relating to the use of and ownership of intellectual property on the internet as well as the liability of internet services
companies for data and content carried on or disseminated through their network's websites is currently unsettled and could
expose us to unforeseen liabilities. This could negatively affect the public’s perception of our corporate image.
As a registrar of domain names services, we may be subject to potential liability for illegal activities by our resellers’
customers on their websites. We provide an automated service that enables users to register domain names. We do not monitor or
review, nor does our accreditation agreement with ICANN require that we monitor or review, the appropriateness of the domain
names we register for our customers or the content of their websites, and we have no control over the activities in which these
customers engage. While we have policies in place to terminate domain names or to take other action if presented with evidence of
illegal conduct, customers could nonetheless engage in prohibited activities without our knowledge.
Several bodies of law may be deemed to apply to us with respect to various customer activities. Because we operate in a
relatively new and rapidly evolving industry and since our industry is characterized by rapid changes in technology and in new and
growing illegal activity, these bodies of laws are constantly evolving. Some of the laws that apply to us with respect to certain
customer activities include the following:
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The Communications Decency Act of 1996 (the “CDA”), generally protects online service providers, such as Tucows,
from liability for certain activities of their customers, such as posting of defamatory or obscene content, unless the online
service provider is participating in the unlawful conduct. Notwithstanding the general protections from liability under
the CDA, we may nonetheless be forced to defend ourselves from claims of liability covered by the CDA, resulting in
an increased cost of doing business.
The Digital Millennium Copyright Act of 1998 (the “DMCA”), provides recourse for owners of copyrighted material
who believe that their rights under U.S. copyright law have been infringed on the Internet. Under the DMCA, we
generally are not liable for infringing content posted by third parties. However, if we receive a proper notice from a
copyright owner alleging infringement of its protected works by web pages for which we provide hosting services, and
we fail to expeditiously remove or disable access to the allegedly infringing material, fail to post and enforce a digital
rights management policy or a policy to terminate accounts of repeat infringers, or otherwise fail to meet the
requirements of the safe harbor under the DMCA, the owner may seek to impose liability on us.
- Although established statutory law and case law in these areas to date generally have shielded us from liability for
customer activities, court rulings in pending or future litigation may serve to narrow the scope of protection afforded us
under these laws. In addition, laws governing these activities are unsettled in many international jurisdictions, or may
prove difficult or impossible for us to comply with in some international jurisdictions. Also, notwithstanding the
exculpatory language of these bodies of law, we may be embroiled in complaints and lawsuits which, even if ultimately
resolved in our favor, add cost to our doing business and may divert management’s time and attention. Finally, other
existing bodies of law, including the criminal laws of various states, may be deemed to apply or new statutes or
regulations may be adopted in the future. Our insurance may not be adequate to compensate or may not cover us at all
in the event we incur liability for damages due to data and content carried on or disseminated through our network. Any
costs not covered by insurance that are incurred as a result of this liability or alleged liability, including any damages
awarded and costs of litigation, could harm our business and prospects.
- Domain name registrars also face potential tort law liability for their role in wrongful transfers of domain names. The
safeguards and procedures we have adopted may not be successful in insulating us against liability from such claims in
the future. In addition, we face potential liability for other forms of “domain name hijacking,” including
misappropriation by third parties of our network of customer domain names and attempts by third parties to operate
websites on these domain names or to extort the customer whose domain name and website were misappropriated.
Furthermore, our risk of incurring liability for a security breach on a customer website would increase if the security
breach were to occur following our sale to a customer of an SSL certificate that proved ineffectual in preventing it.
Finally, we are exposed to potential liability as a result of our private domain name registration service, wherein we
become the domain name registrant, on a proxy basis, on behalf of our customers. While we have a policy of providing
the underlying information and reserve the right to cancel privacy services on domain names giving rise to domain name
disputes including when we receive reasonable evidence of an actionable harm, the safeguards we have in place may
not be sufficient to avoid liability in the future, which could increase our costs of doing business.
There have been ongoing legislative developments and judicial decisions concerning trademark infringement claims,
unfair competition claims and dispute resolution policies relating to the registration of domains. To help protect
ourselves from liability in the face of these ongoing legal developments, we have taken the following precautions:
our standard registration agreement requires that each registrant indemnify, defend and hold us harmless for any dispute
arising from the registration or use of a domain registered in that person’s name; and
since December 1, 1999, we have required our resellers to ensure that all registrants are bound to the UDRP as approved
by ICANN.
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Despite these precautions, we cannot be assured that our indemnity and dispute resolution policies will be sufficient to
protect us against claims asserted by various third parties, including claims of trademark infringement and unfair competition.
New laws or regulations concerning domains and registrars may be adopted at any time. Our responses to uncertainty in
the industry or new regulations could increase our costs or prevent us from delivering our domain registration services over the
Internet, which could delay growth in demand for our services and limit the growth of our revenues. New and existing laws may
cover issues such as:
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pricing controls;
the creation of additional generic top-level domains and country code domains;
consumer protection;
cross-border domain registrations;
trademark, copyright and patent infringement;
domain dispute resolution; and
the nature or content of domains and domain registration.
An example of legislation passed in response to novel intellectual property concerns created by the Internet is the ACPA
enacted by the United States government in November 1999. This law seeks to curtail a practice commonly known in the domain
registration industry as cybersquatting. A cyber squatter is generally defined in the ACPA as one who registers a domain that is
identical or similar to another party’s trademark, or the name of another living person, with the bad faith intent to profit from use of
the domain. The ACPA states that registrars may not be held liable for registration or maintenance of a domain for another pe rson
absent a showing of the registrar’s bad faith intent to profit from the use of the domain. Registrars may be held liable, however, if
they do not comply promptly with procedural provisions of the ACPA. For example, if there is litigation involving a domain, the
registrar is required to deposit a certificate representing the domain registration with the court. If we are held liable under the ACPA,
any liability could have a material adverse effect on our business, financial condition and results of operations.
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Our service offerings both in Network Access Services and Domain Services may become subject to new government regulations
that may be costly to adopt, and may adversely affect our business prospects, future growth or results of operations.
Network Access Services
The FCC and other federal, state and local, as well as international, governmental authorities have jurisdiction over our
business and could adopt regulations or take other actions that would adversely affect our business prospects or results of operations.
The licensing, construction, operation, sale and interconnection arrangements of wireless telecommunications systems are
regulated by the FCC and, depending on the jurisdiction, international, state and local regulatory agencies. In particular, the FCC
imposes significant regulation on licensees of wireless spectrum with respect to how radio spectrum is used by licensees, the nature
of the services that licensees may offer and how the services may be offered, and resolution of issues of interference between
spectrum bands.
The FCC grants wireless licenses for terms of generally ten years that are subject to renewal and revocation. There is no
guarantee that our Network Operators’ licenses will be renewed. Failure to comply with FCC requirements applicable to a given
license could result in revocation of that license and, depending on the nature of the non-compliance, other licenses.
Various states are considering regulations over terms and conditions of service, including certain billing practices,
privacy, and consumer-related issues that may not be pre-empted by federal law. If imposed, these regulations could make it more
difficult and expensive to implement national sales and marketing programs and could increase the costs of our wireless operations.
Domain Services
To date, government regulations have not materially restricted use of the Internet in most parts of the world. The legal and
regulatory environment pertaining to the Internet, however, is uncertain and may change. New laws may be passed, existing but
previously inapplicable laws may be deemed to apply to the Internet, or existing legal safe harbors may be narrowed, both by U.S.
federal or state governments and by governments of foreign jurisdictions. These changes could affect:
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the liability of online resellers for actions by customers, including fraud, illegal content, spam, phishing, libel and
defamation, infringement of third-party intellectual property and other abusive conduct;
other claims based on the nature and content of Internet materials, such as pornography;
user privacy and security issues;
consumer protection;
sales and other taxes, including the value-added tax of the European Union member states;
characteristics and quality of services; and
cross-border commerce.
The adoption of any new laws or regulations, or the application or interpretation of existing laws or regulations to the
Internet, could hinder growth in use of the Internet and online services generally, and decrease acceptance of the Internet and online
services as a means of communications, commerce and advertising. In addition, such changes in laws could increase our costs of
doing business, subject our business to increased liability or prevent us from delivering our services over the Internet, thereby
harming our business and results of operations.
Our Network Access Services businesses rely on Network Operators. Failure by the Network Operators to obtain the proper
licenses and governmental approvals from regulatory authorities would cause us to be unable to successfully operate those
businesses.
The FCC licenses currently held by our Network Operators and their third-party affiliates to provide wireless services are
subject to renewal and revocation. There is no guarantee that their wireless licenses will be renewed. The FCC requires all wireless
licensee to meet certain requirements, including so-called “build-out” requirements, to retain their licenses. Their failure to comply
with certain FCC requirements in a given license area could result in the revocation of their wireless license for that geographic area.
As Ting expands its Internet business, enters new markets, and considers offering regulated telecommunications services, it takes on
additional local, state and federal regulatory and compliance obligations that require additional diligence and resources.
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We may experience unforeseen or potentially uninsured liabilities or losses in connection with our Domain Services business,
including the risk that our standard agreements with customers may not be enforceable. This could negatively impact our
financial results.
We operate on a global basis and all of our customers must execute our standard agreements that govern the terms of the
services we provide to our customers. These agreements contain provisions intended to limit our potential liability arising from the
provision of services to our customers. As most of our customers purchase our services online, execution of our agreements by
resellers occurs electronically or, in the case of our terms of use, is deemed to occur because of a user’s continued use of the
website/internet service following notice of those terms. We believe that our reliance on these agreements is consistent with the
practices in our industry, but if a domestic, foreign or international court were to find that either one of these methods of execution
is invalid or that key provisions of our services agreements are unenforceable, we could be subject to liability that has a material
adverse effect on our business or we could be required to change our business practices in a way that increases our cost of doing
business.
Although we maintain general liability insurance, claims could exceed the coverage obtained or might not be covered by
our insurance. While we typically obtain representations from our technology and content providers and contractual partners
concerning the ownership of licensed technology and informational content and obtain indemnification to cover any breach of these
representations, we still may not receive accurate representations or adequate compensation for any breach of these representations.
We may have to pay a substantial amount of money for claims that are not covered by insurance or indemnification or for claims
where the existing scope or adequacy of insurance or indemnification is disputed or insufficient.
RISKS RELATES TO OWNERSHIP OF OUR STOCK
Our share price may be volatile, which may make it difficult for shareholders to sell their shares of common stock when they
want to, at an attractive price.
Our share price has varied recently and the price of our common stock may decrease in the future, regardless of our operating
performance. Investors may be unable to resell their common stock following periods of volatility because of the market’s adverse
reaction to this volatility.
The following factors may contribute to this volatility: actual or anticipated variations in our quarterly operating results;
interruptions in our services; seasonality of the markets and businesses of our customers; announcements of new technologies or
new services by our company or our competitors; our ability to accurately select appropriate business models and strategies; the
operating and stock price performance of other companies that investors may view as comparable to us; analyst or short-seller
reports; news relating to our industry as a whole; and news relating to trends in our markets.
The stock market in general and the market for Internet-related companies in particular, including our company, has
experienced volatility.
We cannot guarantee that our recently announced stock buyback program will be fully consummated or that such program will
enhance the long-term value of our share price.
In February 2020, the Company’s Board approved a stock buyback program to repurchase up to $40 million of the
Company’s common stock, which can be discontinued at any time. Although, the Company has repurchased shares under previous
programs, including 101,816 shares in Fiscal 2019, there is no obligation for the Company to continue to repurchase or to repurchase
any specific dollar amount of stock. The stock buyback program could affect the price of our stock and increase volatility in the
market. We cannot guarantee that this program will be fully consummated or that such program will enhance the long-term value of
our share price.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal administrative, engineering, marketing and sales office is located in Toronto, Ontario, consists of
approximately 28,000 square feet. We lease satellite offices in various cities across the United States as well as internationally
in Germany and Denmark.
The Company purchased real property in Centennial, CO and Fuquay-Varina, NC where we are currently constructing a
mix of offices and data centers both to support our local logistical operations and our North American colocation needs.
Currently, substantially all of our computer and communications hardware is located at our facilities or at server hosting
facilities in Toronto, Ontario, San Jose, CA and Ashburn, VA.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which,
individually or in aggregate in our opinion, will materially harm our business. We cannot assure you 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 management attention.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common stock
Our common stock is traded on the NASDAQ Capital Market under the symbol “TCX”. Our common stock is also traded
on the Toronto Stock Exchange under the symbol “TC”.
As of March 2, 2020, Tucows had 80 shareholders of record.
We have not declared or paid any cash dividends on our common stock during the fiscal years ended December 31, 2019
and December 31, 2018, and we do not intend to do so in the immediate future, but we may decide to do so in the future depending
on ongoing market conditions. Our ability to pay any cash dividends on our common stock, should our Board decide to do so, is also
dependent on our earnings and cash requirements and may, from time to time, be governed by the terms of our credit agreements.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
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.
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. The Company repurchased 101,816 shares under this program for total consideration of $5.0
million.
2018 Stock Buyback Program:
On February 14, 2018, 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, 2018 and
terminated on February 13, 2019. No repurchases were made under this program.
Net Exercise of Stock Options:
Our current equity-based compensation plans include provisions that allow for the “net exercise” of stock options by all
plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from
the option holder can be paid for by having the option holder tender back to the Company a number of shares at fair value equal to
the amounts due. These transactions are accounted for by the Company as a purchase and retirement of shares and are included in
the table below as common stock received in connection with share-based compensation.
Common stock repurchased on the open market or through tender offer
Number of shares
Aggregate market value of shares (in thousands)
Average price per share
Common stock received in connection with share-based compensation
Number of shares
Aggregate market value of shares (in thousands)
Average price per share
$
$
$
$
24
Year Ended December 31,
2018
2017
2019
101,816
4,986 $
48.97 $
-
- $
- $
-
-
-
21,332
1,510 $
70.77 $
19,777
1,138 $
57.56 $
50,454
2,602
51.58
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STOCK PERFORMANCE GRAPH
The following graph and table compares the Company's stock performance to three stock indices over a five-year period
assuming a $100 investment was made on the last day of fiscal year 2014.
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Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
Beginning with the Company’s Quarterly Report on Form 10-Q ended June 30, 2018 filed with the SEC August 8, 2018,
all dollar values of current and comparative figures in the financial statements and accompanying tables have been rounded to the
nearest thousand ($000), except when otherwise indicated.
The following table summarizes certain selected financial data. The selected financial data is derived from, and is qualified
by reference to, our audited consolidated financial statements for the years ended December 31, 2019, 2018, 2017, 2016, and 2015
and should be read in conjunction with those statements (amounts expressed in thousands, except per share amounts).
Please note that the Company has adopted ASC 2016-02, Leases (Topic 842) on January 1, 2019 using the modified
retrospective method and (“ASC”) Topic 606, Revenue from Contracts with Customers (Topic 606) on January 1, 2018 using the
modified retrospective method. The comparative periods were not restated. See “Note 2 (v) – Significant Accounting Policies” of the
Notes to the Consolidated Financial Statements for the years ended December 31, 2019, December 31, 2018 and December 31,
2017 included in Part II, Item 8 of this Annual Report.
2019
For the year ended December 31,
2016
2017
2018
2015
Statement of Operations Data
Revenue
Total cost of revenues
Sales and marketing
Technical operations and development
General and administrative
Depreciation, amortization and impairment of indefinite life
intangible assets
Loss on disposition of property and equipment
Loss (gain) on currency forward contracts
Total other income (expense), net
Income before provision for income taxes
Provision for (recovery of) income taxes
Net income
Net income per share attributable to common stockholders
Basic
Diluted
Weighted average shares used in computing net income per
share
Basic
Diluted
$ 337,145 $ 346,013 $ 329,421 $ 189,819 $ 171,687
119,629
17,394
4,503
10,662
126,765
20,755
4,495
11,405
249,243
33,063
8,748
17,710
244,900
29,423
7,258
13,594
236,368
34,270
9,717
17,880
9,695
73
(198 )
(4,769 )
24,571
9,173
15,398 $
7,671
-
254
(3,169 )
26,155
9,020
17,135 $
7,262
-
(98 )
(3,007 )
24,075
1,748
22,327 $
1,451
-
(99 )
66
25,113
9,046
16,067 $
690
-
793
(73 )
17,943
6,569
11,374
1.45 $
1.43 $
1.62 $
1.59 $
2.12 $
2.07 $
1.53 $
1.50 $
1.04
1.00
$
$
$
10,624
10,773
10,605
10,794
10,537
10,794
10,525
10,714
10,969
11,360
2019
2018
At December 31,
2017
2016
2015
Balance Sheet Data
Cash and cash equivalents
Prepaid domain name registry and ancillary services fees
Total assets
Deferred revenue
Debt
Total liabilities
Total stockholders' equity
$
$
20,393 $
109,167
425,918
149,303
113,503
331,724
94,194 $
12,637 $
106,527
339,575
143,694
64,601
259,799
79,776 $
18,049 $
127,003
350,650
160,582
76,924
290,439
60,211 $
15,105 $
60,390
154,413
77,849
10,249
116,596
37,817 $
7,723
55,749
129,130
71,594
3,500
102,801
26,329
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion and analysis should be read together with the audited consolidated financial statements of Tucows
Inc. (the “Company”, “we”, “us”, “Tucows” or “our”) as at December 31, 2019 and December 31, 2018 and for the years ended
December 31, 2019, 2018 and 2017 and accompanying notes set forth elsewhere in this report. All financial information is presented
in U.S. dollars.
Some of the statements set forth in this section are forward-looking statements relating to our future results of operations.
Accordingly, reference is made to “Part I. Item 1A. Risk Factors” and “Cautionary Statement Regarding Forward-Looking
Statements,” which describe important factors that could cause actual results to differ from expectations and non-historical
information contained herein.
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 principal place of business is located in Canada. We manage our business as segments, Network Access Services,
which primarily derives revenue from the sale of retail mobile phones, telephony services and high-speed Internet access to
individuals and small businesses, and Domain Services, which derives revenue from three distinct service offerings – wholesale,
retail and portfolio. To assist us in forecasting growth and to help us monitor the effectiveness of our operational strategies, our
management regularly reviews revenue and cost of revenues for each of our segments in order to gain more depth and understanding
of the key business metrics driving our business.
For the years ended December 31, 2019, 2018 and 2017, we reported revenue of $337 million, $346 million and
$329 million, respectively.
Network Access Services
Network Access Services derives revenue from the sale of retail mobile phones and services to individuals and small
businesses through the Ting website, as well as from providing high speed Internet access, and network consulting services to
customers in select cities in the United States. Ting provides its mobile and internet customers with access to our provisioning and
management tools to enable them, via the ting.com website, to purchase retail mobile phones and services nationally and fixed
Internet access in select cities. Revenues are generated in the United States and are provided on a monthly basis with no fixed contract
term. As of December 31, 2019, Ting mobile managed mobile telephony services for approximately 160,000 subscribers and had
approximately 289,000 devices under management.
Our primary distribution channel for Ting Internet services is through our website, ting.com. We strive to meet or exceed
our Network Access Service customers’ needs by providing them with superior services, easy-to-use interfaces and proactive and
attentive customer service.
The Company also operates other MVNO brands, Zipsim and Always Online Wireless brands (collectively referred to as
“Roam Mobility brands”). Roam Mobility brands operates as a MVNO on the same nationwide Global System for Mobile
communications (“GSM”) network as Ting Mobile and distributes through third-party retail stores and product branded websites.
The primary focus of the Roam Mobility brands is to offer affordable roaming service to international travelers.
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Domain Services
Domain Services include wholesale and retail domain name registration services, value added services and portfolio
services derived through our OpenSRS, eNom, Ascio 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,
primarily Canada and the United States.
Our wholesale domain name registration service, primarily branded as OpenSRS, eNom and Ascio, derives revenue from
its Domain Service and from providing Value-added services. The OpenSRS, eNom and Ascio Domain Services manage 23.8 million
domain names under the Tucows, eNom and Ascio ICANN registrar accreditations and for other registrars under their own
accreditations, which has increased by 0.5 million domain names since December 31, 2018. The increase from prior year is primarily
due to the acquisition of 1.9 million names acquired in the Ascio acquisition on March 18, 2019. The increase was offset by the
decrease of 0.9 million domain names is related to the bulk transfer domain names in the third quarter of 2019, which were registered
to a single, low margin hosted customer. A further decrease of 0.5 million domain names was related to the erosion of registrations
related to non-core customers.
Our 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.
Our retail domain name registration service, 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 domain service 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,
and our reseller network.
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KEY BUSINESS METRICS and Non-GAAP Measure
We regularly review a number of business metrics, including the following key metrics and non-GAAP measure, 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.
Ting Mobile
2019
For the year ended December 31,(1)
2018
(in '000's)
2017
Ting mobile accounts under management
Ting mobile subscribers under management
160
289
163
296
166
282
(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.
Ting Internet
2019
For the year ended December 31,
2018
(in '000's)
2017
Ting Internet accounts under management
Ting Internet serviceable addresses (1)
10
36
7
28
N/A
N/A
(1) Defined as premises to which Ting has the capability to provide a customer connection in a service area.
Domain Services
2019
For the year ended December 31,(1)
2018
(in 000's)
2017
Total new, renewed and transferred-in domain name registrations
provisioned(2)
Domains under management
Registered using Registrar Accreditation belonging to the Tucows
Group
Registered using Registrar Accreditation belonging to Resellers
Total domain names under management(2)
17,285
17,358
19,361
19,233
4,540
23,773
18,537
4,772
23,309
22,300
5,400
27,700
(1) 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.
(2) Throughout 2018, the Company completed bulk transfers of 2.89 million names, for domain names under management
related to Namecheap.
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OPPORTUNITIES, CHALLENGES AND RISKS
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.
On June 6, 2018, our current MNOs, T-Mobile and Sprint, submitted a formal merger application to the Federal
Communications Commission (“FCC”), which has since been approved. As of February 11, 2020, the merger between T-Mobile
and Sprint is expected to be finalized as early as April 1, 2020, subject also to resolution of a lawsuit filed by certain state attorneys
general. If T-Mobile and Sprint successfully consummate the merger, the consolidation of our MNOs could hinder our ability in the
future to negotiate favourable rates and access to mobile services. On July 9, 2019, the Company announced that it will offer service
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.
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 and annual 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.
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.
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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
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.
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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 the 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. The size of our
domain name portfolio varies over time, as we acquire and sell domains on a regular basis to maximize the overall value and revenue
generation potential of our portfolio. In evaluating names for sale, we consider the potential foregone revenue from pay-per-click
advertising, as well as other factors. The name will be offered for sale if, based on our evaluation, the name is deemed non-essential
to our business and management believes that deriving proceeds from the sale is strategically more beneficial to the Company. 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.
Critical Accounting Policies
The following is a discussion of our critical accounting policies and methods. Critical accounting policies are defined as
those that are both important to the portrayal of our financial condition and results of operations and are reflective of significant
judgments and uncertainties made by management that may result in materially different results under different assumptions and
conditions. “Note 2 – Significant Accounting Policies” of the Notes to the Consolidated Financial Statements for the year ended
December 31, 2019 (“Fiscal 2019”) included in Part II, Item 8 of this Annual Report, includes further information on the significant
accounting policies and methods used in the preparation of our consolidated financial statements.
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate the application of these estimates, including those related to the recoverability of
useful lives and valuation of intangible assets, valuation of goodwill, fair value measurement of assets and liabilities, product
development costs, revenue recognition and deferred revenue and accounting for income taxes. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual amounts could differ significantly from these estimates.
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Revenue Recognition Policy
The Company’s revenues are derived from (a) the provisioning of mobile and fiber Internet services; and from (b) domain
name registration contracts, other domain related value-added services and domain sale contracts. Amounts received in advance of
meeting the revenue recognition criteria described below are recorded as deferred revenue. All products are generally sold without
the right of return or refund.
Revenue is measured based on consideration specified in a contract with a customer and excludes any sales incentives and
amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by
transferring control over a product or service to a customer.
Nature of goods and services
The following is a description of principal activities – separated by reportable segments – from which the Company
generates its revenue. For more detailed information about reportable segments. See “Note 19 – Segment Reporting” of the Notes to
the Consolidated Financial Statements included in this report for more information.
(a) Network Access Services
The Company generates Network Access Services revenues primarily through the provisioning of mobile services (“Ting
Mobile”). Other sources of revenue include the provisioning of fixed high-speed Internet access (“Ting Internet”) as well as billing
solutions to ISPs.
Ting Mobile wireless usage contracts grant customers access to standard talk, text and data mobile services. Ting Mobile
contracts are billed based on the actual amount of monthly services utilized by each customer during their billing cycle and charged
to customers on a postpaid basis. Voice minutes, text messages and megabytes of data are each billed separately based on a tiered
pricing program. The Company recognizes revenue for Ting Mobile usage based on the actual amount of monthly services utilized
by each customer.
Ting Internet contracts provide customers Internet access at their home or business through the installation and use of our
fiber optic network. Ting Internet contracts are generally prepaid and grant customers with unlimited bandwidth based on a fixed
price-per-month basis. Because consideration is collected before the service period, revenue is initially deferred and recognized as
the Company performs its obligation to provide Internet access.
Both Ting Mobile and Ting Internet access services are primarily contracted through the Ting website, for one month at a
time and contain no commitment to renew the contract following each customer’s monthly billing cycle. The Company’s billing
cycle for all Ting Mobile and Ting Internet customers is computed based on the customer’s activation date. In order to recognize
revenue as the Company satisfies its obligations, we compute the amount of revenues earned but not billed from the end of each
billing cycle to the end of each reporting period. In addition, revenues associated with the sale of wireless devices and accessories
and Internet hardware to subscribers are recognized when title and risk of loss is transferred to the subscriber and shipment has
occurred. Incentive marketing credits given to customers are recorded as a reduction of revenue.
Our Roam Mobility brands also 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.
In those cases, where payment is not received at the time of sale, revenue is not recognized at contract inception unless the
collection of the related accounts receivable is reasonably assured. The Company records costs that reflect expected refunds, rebates
and credit card charge-backs as a reduction of revenues at the time of the sale based on historical experiences and current
expectations.
(b) Domain Services
Domain registration contracts, which can be purchased for terms of one to ten years, provide our resellers and retail
registrant customers with the exclusive right to a personalized internet address from which to build an online presence. The Company
enters into domain registration contracts in connection with each new, renewed and transferred-in domain registration. At the
inception of the contract, the Company charges and collects the registration fee for the entire registration period. Though fees are
collected upfront, revenue from domain registrations are recognized rateably over the registration period as domain registration
contracts contain a ‘right to access’ license of IP, which is a distinct performance obligation measured over time. The registration
period begins once the Company has confirmed that the requested domain name has been appropriately recorded in the registry
under contractual performance standards.
Domain related value-added services like digital certifications, WHOIS privacy and hosted email provide our resellers and
retail registrant customers tools and additional functionality to be used in conjunction with domain registrations. All domain related
value-added services are considered distinct performance obligations which transfer the promised service to the customer over the
contracted term. Fees charged to customers for domain related value-added services are collected at the inception of the contract,
and revenue is recognized on a straight-line basis over the contracted term, consistent with the satisfaction of the performance
obligations.
The Company is an ICANN accredited registrar. Thus, the Company is the primary obligor with our reseller and retail
registrant customers and is responsible for the fulfillment of our registrar services to those parties. As a result, the Company reports
revenue in the amount of the fees we receive directly from our reseller and retail registrant customers. Our reseller customers maintain
the primary obligor relationship with their retail customers, establish pricing and retain credit risk to those customers. Accordingly,
the Company does not recognize any revenue related to transactions between our reseller customers and their ultimate retail
customers.
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The Company also sells the rights to the Company’s portfolio domains or names acquired through the Company’s domain
expiry stream. Revenue generated from sale of domain name contracts, containing a distinct performance obligation to transfer the
domain name rights under the Company’s control, is generally recognized once the rights have been transferred and payment has
been received in full.
Valuation of Goodwill, Intangible Assets and Long-Lived Assets
The excess of the purchase price over the fair values of the identifiable assets and liabilities from our acquisitions is recorded
as goodwill. At December 31, 2019, we had $109.8 million in goodwill related to our acquisitions and $57.7 million in intangible
assets comprised of indefinite life intangibles of $12.3 million and finite life intangible assets of $45.4 million. At December 31,
2018, we had $90.1 million in goodwill related to our acquisitions and $49.4 million in intangible assets comprised of indefinite life
intangibles of $12.4 million and finite life intangible assets of $37.0 million. We report our financial results as two operating
segments, Domain Services, being wholesale and retail domain name registration services, value added services and portfolio, and
Network Access which derives revenue from the sale of retail mobile phones, telephony services, fixed high speed internet access,
Internet hosting and network consulting services. Ninety-eight percent of goodwill relates to our Domain Services operating segment
and 2% of goodwill relates to our Network Access segment. Of our goodwill balance, $81.0 million is not deductible for tax purposes.
Ninety percent of intangible assets relate to our Domain Services operating segment and 10% of intangible assets relate to our
Network Access operating segment.
We account for goodwill and indefinite life intangible assets in accordance with the Financial Accounting Standards Board’s
(“FASB’s”) authoritative guidance, which requires that goodwill and indefinite life intangible assets are not amortized, but are
subject to an annual impairment test. We complete our impairment test on an annual basis, during the fourth quarter of our fiscal
year, or more frequently, if changes in facts and circumstances indicate that impairment indicators are present.
Our indefinite life intangible assets consist of surname domain names and direct navigation domain names. In order to
maintain our rights to these domain names, we pay annual renewal fees to the applicable domain name registries. Over the course of
time, we sometimes decide not to renew certain under-performing domain names and incur an impairment charge associated with
such non-renewal. We recorded an impairment charge of nil for both 2019 and 2018 respectively and $0.1 million in 2017.
With regard to long-lived assets comprised of property and equipment and finite life intangible assets, we continually
evaluate whether events or circumstances have occurred that indicate the remaining estimated useful lives of our definite-life
intangible assets may warrant revision or whether the carrying amount of such assets may not be recoverable and exceed their fair
value. We use an estimate of the related undiscounted cash flows over the remaining life of the asset in measuring whether the asset
is recoverable. There was no impairment recorded on definite-life intangible assets and property and equipment during 2019, 2018
or 2017.
We performed a qualitative assessment to determine whether there were events or circumstances which would lead to a
determination, whether it is more likely than not, that goodwill and indefinite life intangible assets have been impaired. In performing
the qualitative testing, we made an evaluation of the impact of various factors to the expected future cash flows attributable to our
operating segments and to the assumed discount rate which would be used to present value those cash flows. Consideration was
given to factors such as macro-economic, industry and market conditions including the capital markets and the competitive
environment amongst others. We concluded that there were no indications of impairment under the qualitative approach. The analysis
was consistent with the approach we utilized in our analysis performed in prior years.
Any changes to our key assumptions about our businesses and our prospects, or changes in market conditions, could cause
the fair value of our operating segments to fall below its carrying value, resulting in a potential impairment charge. In addition,
changes in our organizational structure or how our management allocates resources and assesses performance, could result in a
change in our operating segments, requiring a reallocation and updated impairment analysis of goodwill and indefinite life intangible
assets. A goodwill or intangible asset impairment charge could have a material effect on our consolidated financial statements
because of the significance of goodwill and intangible assets to our consolidated balance sheet. There was no further impairment of
goodwill or intangible assets as a result of the annual impairment tests completed during the fourth quarters of 2019, 2018 or 2017.
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Accounting for Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating
our uncertain tax positions and determining our provision for income taxes. We apply a two-step approach to recognizing and
measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if on the weight of
available evidence, it is more likely than not that the position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit that is more than 50% likely to be realized upon settlement.
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final
tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the
closing of a tax audit or the refinement of an estimate based on new information that may become available. To the extent that the
final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes
in the period in which such determination is made.
As we account for income taxes under the asset and liability method, we recognize deferred tax assets or liabilities for the
anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and
liabilities. We record a valuation allowance to reduce the net deferred tax assets when it is more likely than not that the benefit from
the deferred tax assets will not be realized. In assessing the need for a valuation allowance, historical and future levels of income,
expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies are considered. In the
event that it is determined that the deferred tax assets to be realized in the future would be in excess of the net recorded amount, an
adjustment to the deferred tax asset valuation allowance would be recorded. This adjustment would increase income in the period
that such determination was made. Likewise, should it be determined that all or part of a recorded net deferred tax asset would not
be realized in the future, an adjustment to increase the deferred tax asset valuation allowance would be charged to income in the
period that such determination would be made. At December 31, 2019, the valuation allowance of $9.4 million was related to foreign
tax credits, R&D tax credits and net operating losses that we are not expected to realize.
On a periodic basis, we evaluate the probability that our deferred tax asset balance will be recovered to assess its
realizability. To the extent we believe it is more likely than not that some portion of our deferred tax assets will not be realized, we
will increase the valuation allowance against the deferred tax assets. Realization of our deferred tax assets is dependent primarily
upon future taxable income. Our judgments regarding future profitability may change due to future market conditions, changes in
U.S. or international tax laws and other factors. These changes, if any, may require possible material adjustments to these deferred
tax assets, impacting net income or net loss in the period when such determinations are made.
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 legacy domain
services. 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. In the fourth quarter of 2019, the Internal
Revenue Service granted the Company relief with respect to the technical violation to the administrative application of the accounting
method change. Based on the Company’s filing position on the accounting method change itself, relating to the deductibility of
prepaid registry fees, we believe that on a more likely than not basis that our tax position will be sustained. If the position is not
sustained, then the accounting method change would be deferred into the following taxation period and we may be subject to
incremental taxes as well as interest and penalties.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to
the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax
years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial
system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. For the year ended December 31,
2017, we recorded in our provision for income taxes a net $5.8 million reduction to income tax expense related to the implementation
impact of the Act. The net positive impact amount related to the remeasurement of certain deferred tax assets and liabilities, based
on the rates at which they are expected to reverse in the future, was $10.0 million. This positive impact was offset by us recording a
valuation allowance of $1.3 million related to prior year foreign tax credits as we have determined there is insufficient foreign source
income projected to utilize these credits. The amount related to the one-time transition tax on the mandatory deemed repatriation of
foreign earnings was less than $0.1 million.
Recently Issued Accounting Standards
See “Note 2 – Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in Part II,
Item 8 of this Annual Report for information regarding recently issued accounting standards.
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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2019 AS COMPARED TO THE YEAR ENDED
DECEMBER 31, 2018
The Company has initially applied Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842) on January 1,
2019, which was adopted using the modified retrospective basis. Accordingly, comparative figures have not been restated.
NET REVENUES
The following table presents our net revenues, by revenue source:
(Dollar amounts in thousands of U.S. dollars)
Network Access Services:
Mobile Services
Other Services
Total Network Access Services
Domain Services:
Wholesale
Domain Services
Value Added Services
Total Wholesale
Retail
Portfolio
Total Domain Services
(Decrease) increase over prior period
(Decrease) increase - percentage
Year ended December 31,
2018
2019
$
84,657
11,006
95,663
89,340
7,984
97,324
182,957
18,922
201,879
34,786
4,817
241,482
189,434
17,756
207,190
34,524
6,975
248,689
337,145
$
346,013
(8,868 )
(3 )%
$
$
$
The following table presents our revenues, by revenue source, as a percentage of total revenues:
Network Access Services:
Mobile Services
Other Services
Total Network Access Services
Domain Services:
Wholesale
Domain Services
Value Added Services
Total Wholesale
Retail
Portfolio
Total Domain Services
Year ended December 31,
2018
2019
25 %
3 %
28 %
55 %
6 %
61 %
10 %
1 %
72 %
26 %
2 %
28 %
55 %
5 %
60 %
10 %
2 %
72 %
100 %
100 %
Total net revenues for Fiscal 2019 decreased by $8.9 million, or 3%, to $337.1 million from $346.0 million for the fiscal
year ended December 31, 2019 (“Fiscal 2019”). The overall decrease in revenue was primarily driven by the $16.9 million
acceleration of revenue related to the Namecheap bulk transfer of 2.89 million names throughout Fiscal 2018. Wholesale and domain
revenue decreased a further $5.8 million during Fiscal 2019 related an erosion in Wholesale domain registrations by non-core
customers. Ting Mobile handset and mobile usage revenue decreased $4.6 million due to a decrease in mobile subscribers, and
portfolio revenue decreased $2.2 million. The decreases in revenues were offset by a $17.4 million increase related to the acquisition
of Ascio, a domain registrar business acquired on March 18, 2019, an increase in Wholesale domain revenue related to price
increases, as well as a $3.0 million increase in revenue related to the expanding Ting Internet footprint. Deferred revenue from
domain name registrations and other Internet services at December 31, 2019 increased to $149.3 million from $143.7 million at
December 31, 2018, primarily due to the acquisition of Ascio.
No customer accounted for more than 10% of revenue during Fiscal 2019 or Fiscal 2018, and no customers accounted for
more than 10% of accounts receivable as of December 31, 2019 and 2018. Management judgment is required at the time of recording
of revenue 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.
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Network Access Services
Mobile and Other Services
Net revenues from mobile phone equipment and services for Fiscal 2019, as compared to Fiscal 2018, decreased by
$4.6 million or 5% to $84.7 million. The overall decrease in revenue was primarily related to a decline in mobile service revenue,
which decreased by $2.2 million compared to Fiscal 2018, to $78.2 million, as a result of a decline in mobile subscribers.
Revenues from the sale of mobile hardware and related accessories decreased by $2.4 million compared to Fiscal 2018, to
$6.5 million. The decrease in device revenue was primarily driven by reduced demand for higher-priced devices compared
to Fiscal 2018.
Other revenues from Ting Internet and billing solutions generated $11.0 million in revenue during Fiscal 2019, up
$3.0 million or 38% compared to Fiscal 2018. Growth in Ting Internet revenues was as a result of the increased Ting Internet
footprint in existing Ting towns throughout the United States, as well as the addition of Fuquay-Varina, NC in the first quarter
of 2019.
As of December 31, 2019, Ting Mobile had 160,000 mobile subscribers and 289,000 mobile devices under its management
compared to 163,000 subscribers and 296,000 devices under its management as of December 31, 2018.
As of December 31, 2019, Ting Internet had access to 36,000 serviceable addresses and 10,000 active accounts under its
management compared to having access to 28,000 serviceable addresses and 7,000 active accounts under its management as of
December 31, 2018.
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Domain Services
Wholesale
During Fiscal 2019, Wholesale domain services revenue decreased by $6.4 million or 3% to $183.0 million. The decrease
in revenue compared to Fiscal 2018 was primarily driven by the $16.9 million acceleration of revenue related to the Namecheap
bulk transfer of 2.89 million domain names during 2018. Wholesale domain revenue decreased a further $10.1 million related to the
erosion of registrations by non-core customers during Fiscal 2019. The overall decrease in Wholesale domain revenues was partially
offset by a $17.4 million increase in revenue related to the acquisition of Ascio and a $3.2 million increase in revenue related to
price increases.
The number of overall transactions from new, renewed and transferred-in domain name registrations for Fiscal 2019, as
compared to Fiscal 2018, decreased by 0.1 million to 17.3 million. The decrease was primarily driven by the departure of a few
large, low margin customers, including Namecheap. The overall decrease was partially offset by an increase in new, renewed and
transferred-in domain name registrations related to the acquisition of Ascio. While we anticipate that the number of new, renewed
and transferred-in domain name registrations will continue to incrementally increase in the long term, the volatility of these factors
could affect the growth of domain names that we manage.
Net revenues from value-added services increased by $1.1 million to $18.9 million compared to Fiscal 2018. The increase
in value-added service revenue over Fiscal 2018 was primarily driven by an increase in expiry stream revenue.
Retail
Net revenues from retail increased by $0.3 million to $34.8 million compared to Fiscal 2018. Revenue increased, because
Fiscal 2018 revenue was negatively impacted by the fair value effect of deferred revenue acquired in the eNom acquisition to a
greater extent than in Fiscal 2019.
Portfolio
Portfolio revenues decreased by $2.2 million to $4.8 million compared to Fiscal 2018. The decrease is due to a decrease
in the volume of portfolio sales in Fiscal 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.
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COST OF REVENUES
Network Access Services
Mobile
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.
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.
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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)
Network Access Services:
Mobile Services
Other Services
Total Network Access Services
Domain Services:
Wholesale
Domain Services
Value Added Services
Total Wholesale
Retail
Portfolio
Total Domain Services
Network Expenses:
Network, other costs
Network, depreciation and amortization costs
(Decrease) increase over prior period
(Decrease) increase - percentage
Year ended December 31,
2018
2019
$
44,415 $
3,928
48,343
46,061
3,994
50,055
148,530
2,986
151,516
17,093
627
169,236
9,190
9,599
18,789
236,368 $
(12,875 )
-5 %
160,216
3,154
163,370
17,725
953
182,048
9,846
7,294
17,140
249,243
$
$
The following table presents our cost of revenues, as a percentage of total cost of revenues for the periods presented:
Network Access Services:
Mobile Services
Other Services
Total Network Access Services
Domain Services:
Wholesale
Domain Services
Value Added Services
Total Wholesale
Retail
Portfolio
Total Domain Services
Network Expenses:
Network, other costs
Year ended December 31,
2018
2019
19 %
2 %
21 %
63 %
1 %
64 %
7 %
0 %
71 %
18 %
2 %
20 %
65 %
1 %
66 %
7 %
0 %
73 %
4 %
4 %
Network, depreciation and amortization costs
4 %
8 %
3 %
7 %
100 %
100 %
Total cost of revenues for Fiscal 2019 decreased by $12.8 million, or 5%, to $236.4 million from $249.2 million in Fiscal
2018. The decrease was primarily driven by the $16.8 million acceleration of costs related to the Namecheap bulk transfer of 2.89
million names during Fiscal 2018. Wholesale domain and value added service costs decreased a further $9.9 million related to an
erosion in registrations by non-core customers. Retail domain costs decreased $0.6 million related to the churn of low margin
customers and portfolio costs decreased by $0.4 million. Cost of revenue decreased a further $1.7 million due to a decline in mobile
subscribers. The overall decrease in cost of revenue was offset by an increase of $14.8 million of costs related to the acquisition of
Ascio, and an increase of $1.7 million in Network Expenses associated with the expanding Ting Internet footprint. Prepaid domain
registration and other Internet services fees as of December 31, 2019 increased by $2.7 million, or 3%, to $109.2 million from
$106.5 million at December 31, 2018 primarily from the acquisition of Ascio.
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Network Access Services
Mobile and Other Services
Cost of revenues from mobile phone equipment and services for Fiscal 2019, as compared to Fiscal 2018, decreased by
$1.7 million or 4% to $44.4 million. The decrease in mobile usage charges was primarily driven by a decrease in Roam Mobility
brands related costs of $1.8 million related to lower network operator costs in the current period and restructuring charges that were
incurred during Fiscal 2018. The decrease was also driven by lower mobile hardware and related accessories costs, which decreased
$2.1 million as compared to Fiscal 2018. The decrease in hardware sales was primarily driven by reduced demand for higher-priced
devices compared to Fiscal 2018. The decrease in mobile usage costs were offset by an increase in Ting mobile service related costs
of $2.2 million related to increased minimum charges with network operators.
In Fiscal 2019, costs related to provisioning high speed Internet access and billing solutions decreased $0.1, or 3%,
to $3.9 million as compared to $4.0 million during Fiscal 2018. The decrease in costs was primarily due to the fact that overhead
resources have been increasingly focused on capital activities as compared to Fiscal 2018.
Domain Services
Wholesale
Domain Service
Costs for wholesale domain services for Fiscal 2019 decreased by $11.7 million to $148.5 million, when compared to
Fiscal 2018. The decrease was primarily driven by the accelerated recognition of $16.8 million domains revenue associated with the
Namecheap bulk transfer of 2.89 million names throughout Fiscal 2018. Wholesale domain costs decreased a further $9.7 million
related to an erosion in registrations by non-core customers. The decreases were partially offset by a $14.8 million increase related
to the acquisition of Ascio.
Value-Added Services
Costs for wholesale value-added services for Fiscal 2019 decreased by $0.2 million to $3.0 million, when compared to
Fiscal 2018. The decrease in cost of revenue is primarily related to an overall decline in certification and email sales during Fiscal
2018.
Retail
Costs for retail for Fiscal 2019 decreased by $0.6 million, to $17.1 million, when compared to Fiscal 2018. The decrease
was a result of an overall declining volume of transactions related to certain retail brands.
Portfolio
Costs for portfolio decreased by $0.4 million for Fiscal 2019, to $0.6 million when compared to Fiscal 2018, the decrease
in cost is primarily driven by a lower volume of portfolio sales compared to Fiscal 2018. 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 and thereafter inline with the expected decline in revenue.
Network Expenses
Network costs for Fiscal 2019 increased by $1.7 million to $18.8 million when compared to Fiscal 2018, which is primarily
driven by the increase in network costs and depreciation of the fiber assets associated with the continuing expansion of the Ting
Fiber footprint.
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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)
Sales and marketing
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2018
2019
$
$
34,270 $
1,207
4 %
10 %
33,063
10 %
Sales and marketing expenses for Fiscal 2019 increased by $1.2 million, or 4%, to $34.3 million as compared to Fiscal
2018. This increase primarily related to a $1.3 million increase in people costs acquired in the acquisition of Ascio in the first quarter
of 2019. Stock-based compensation expenses also increased $0.2 million in Fiscal 2019 to attract and retain labor. The overall
increase in sales and marketing expense was partially offset by a decrease in other marketing expenses of $0.3 million.
Excluding movements in exchange rates, we expect sales and marketing expenses for the fiscal year ending December 31,
2020 (“Fiscal 2020”) to increase in absolute dollars, as we adjust our marketing programs and sales and customer support personnel
costs to support our network access services marketing and customer service needs.
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)
Technical operations and development
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2018
2019
$
$
9,717 $
969
11 %
3 %
8,748
3 %
Technical operations and development expenses for Fiscal 2019 increased by $1.0 million, or 11%, to $9.7 million. The
increase in costs relates primarily to a $0.7 million increase related to the Ascio acquisition, with a further increase of $0.3 million
related to increased salaries and benefits driven by an expanding workforce and wage inflation.
Excluding movements in exchange rates, we expect technical operations and development expenses for Fiscal 2020, in
absolute dollars, to increase when compared to Fiscal 2019 to support the ongoing growth in our operations.
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)
General and administrative
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2018
2019
$
$
17,880 $
170
1 %
5 %
17,710
5 %
General and administrative expenses for Fiscal 2019 increased by $0.2 million, or 1%, to $17.9 million as compared to
Fiscal 2018. The overall increase in general and administrative expense was primarily driven by a $0.7 million increase related
to Ascio expenses. The overall increase in general and administrative expenses was partially offset by a foreign exchange gain of
$0.5 million.
Excluding movements in exchange rates, we expect general and administrative expenses for Fiscal 2020, in absolute dollars,
to increase when compared to Fiscal 2019 largely to support the growth of our business.
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DEPRECIATION OF PROPERTY AND EQUIPMENT
(Dollar amounts in thousands of U.S. dollars)
Depreciation of property and equipment
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2018
2019
$
$
486 $
62
15 %
0 %
424
0 %
Depreciation costs for Fiscal 2019 increased to $0.5 million when compared to $0.4 million for Fiscal 2018. The increase
is driven by an increase in computer hardware assets, compared to Fiscal 2018.
LOSS ON DISPOSAL OF PROPERTY AND EQUIPMENT
(Dollar amounts in thousands of U.S. dollars)
Loss on disposition of property and equipment
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2018
2019
$
$
73 $
73
N/A
0 %
-
- %
Loss on disposal costs were $0.1 million during the Fiscal 2019 related to equipment disposal from the Kirkland
office.
AMORTIZATION OF INTANGIBLE ASSETS
(Dollar amounts in thousands of U.S. dollars)
Amortization of intangible assets
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2018
2019
$
$
9,209 $
1,962
27 %
3 %
7,247
2 %
Amortization of intangible assets increased $2.0 million for Fiscal 2019, to $9.2 million. The increase is primarily driven
by the acquisition of Ascio.
Network rights, brand and customer relationships acquired in connection with the acquisitions eNom in January 2017, Roam
Mobility brands in September of 2017 and Ascio in March of 2019 are amortized on a straight-line basis over a range of two to seven
years.
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)
Loss (gain) on currency forward contracts
Decrease over prior period
Decrease - percentage
Percentage of net revenues
Year ended December 31,
2018
2019
$
$
(198 ) $
(452 )
178 %
0 %
254
0 %
We have entered into certain forward exchange contracts that do not comply with the requirements of hedge accounting to
meet a portion of our future Canadian dollar requirements through December 2019. During Fiscal 2019, the Company recorded a
net gain of $0.3 million on the change in fair value of outstanding contracts as well as a $0.1 million realized loss on matured
contracts. In Fiscal 2018 the Company recorded a net loss of $0.2 million for the change in fair value of outstanding contracts and a
loss of less than $0.1 million of settlements of contracts not designated as hedges.
At December 31, 2019, our balance sheet reflects a derivative instrument asset of $0.7 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.
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OTHER INCOME (EXPENSES)
(Dollar amounts in thousands of U.S. dollars)
Other income (expense), net
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2018
2019
$
$
(4,769 ) $
(1,600 )
50 %
1 %
(3,169 )
1 %
Other expenses increased by $1.6 million when compared to Fiscal 2018 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, the acquisition of Ascio and funding for expenditures associated
with the Company’s Fiber to the Home program. Costs in 2018 were partially offset by income of $0.5 million from the amortization
of a $1.5 million Joint Marketing Agreement commencing in November 2015, which fully amortized in the fourth quarter of 2018.
INCOME TAXES
The following table presents our provision for income taxes for the periods presented:
(Dollar amounts in thousands of U.S. dollars)
Provision for income taxes
Increase in provision over prior period
Increase - percentage
Effective tax rate
Year ended December 31,
2018
2019
$
$
9,173 $
153
2 %
37 %
9,020
34 %
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.
Fiscal 2019 includes tax on profits of $24.6 million compared to $26.2 million for Fiscal 2018. Our Fiscal 2019 income tax
expense benefited from the inclusion of a $0.6 million tax recovery related to the adoption of 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 on
a prospective basis. The Fiscal 2018 tax recovery related to excess tax benefits related to employee share-based compensation was
$0.7 million.
On December 22, 2017, the Act was signed into law making significant changes to the Internal Revenue Code. Changes
include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31,
2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, bonus depreciation that will
allow for full expensing of qualified property, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings.
In Fiscal 2019, the Company was able to utilize the bonus depreciation with respect to its continued investment in the Ting
Internet business. The impact of this, together with the reduction in tax rate to 21%, make it unlikely we will ultimately be able to
fully claim the Fiscal 2019 foreign taxes paid in future years. As such, we have taken a valuation allowance for foreign tax credits
and R&D tax credits not utilized for 2019 income tax purposes and net operating losses not expected to be utilized in the future, the
net negative effect of which is a $5.3 million addition to income tax expense, as compared to $2.8 million additional tax expense in
Fiscal 2018.
A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in “Note 9 – Income Taxes” of
the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
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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), 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
(In Thousands of US Dollars)
(unaudited)
Net income for the period
Depreciation of property and equipment
Loss on disposition of property and equipment
Amortization of intangible assets
Impairment of intangible assets
Interest expense, net
Provision for income taxes
Stock-based compensation
Unrealized loss (gain) on change in fair value of forward
contracts
Unrealized loss (gain) on foreign exchange revaluation of
foreign denominated monetary assets and liabilities
Acquisition and other costs1
Twelve months ended December 31,
2018
(unaudited)
2019
(unaudited)
2017
(unaudited)
15,398 $
8,961
73
10,333
-
4,769
9,173
2,876
(313 )
(581 )
1,216
17,135 $
5,722
-
9,243
-
3,687
9,020
2,574
207
940
1,526
22,327
3,728
-
8,400
111
3,567
1,748
1,457
17
(805 )
806
Adjusted EBITDA
$
51,905 $
50,054 $
41,356
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 and Ascio in March 2019. Expenses
include severance or transitional costs associated with department, operational or overall company restructuring efforts,
including geographic alignments.
Adjusted EBITDA for the year ended December 31, 2019 increased by $1.8 million, or 4% to $51.9 million when compared
to the year ended December 31, 2018 The increase in adjusted EBITDA from period-to-period was primarily driven by an increase
in contribution from eNom, which is the result of increased operating cost synergies realized during Fiscal 2019, as well as an
increased contribution from Ting Fiber. The overall increase in EBITDA was partially offset by a lower contribution from Ting
Mobile, related to a decreasing subscriber base and minimum carrier fees, as well as a decreased contribution from domain Portfolio
sales.
.
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 impact of the fair value adjustment on outstanding hedged contracts for Fiscal 2019 was a net gain in other
comprehensive income of $1.3 million compared to a net loss of $0.8 million for Fiscal 2018.
The following table presents other comprehensive income for the periods presented:
(Dollar amounts in thousands of U.S. dollars)
Other comprehensive income (loss)
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2018
2019
$
$
$
1,283
2,093
(258 )%
0 %
(810 )
(0 )%
The impact of the fair value adjustments on outstanding hedged contracts during 2019 was a gain in OCI of $1.1 million as
compared to a loss of $1.0 million during 2018.
The net amount reclassified to earnings during 2019 was a loss of $0.2 million compared to a loss of $0.2 million during
2018.
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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2018 AS COMPARED TO THE YEAR ENDED
DECEMBER 31, 2017
The Company has reclassified certain prior year income statement amounts to conform the current year presentation. As a
result of these reclassifications, there were no changes to previously reported net income, comprehensive income and income from
operations.
The Company has initially applied ASC 2014-09 (Topic 606) on January 1, 2018 using the modified retrospective
method. Under this method, the comparative information is not restated.
NET REVENUES
The following table presents our net revenues, by revenue source:
(Dollar amounts in thousands of U.S. dollars)
Network Access Services:
Mobile Services
Other Services
Total Network Access Services
Domain Services:
Wholesale
Domain Services
Value Added Services
Total Wholesale
Retail
Portfolio
Total Domain Services
Increase over prior period
Increase - percentage
Year ended December 31,
2017
2018
$
89,340 $
7,984
97,324
83,885
5,567
89,452
189,434
17,756
207,190
34,524
6,975
248,689
346,013 $
16,592
5 %
183,731
17,832
201,563
31,649
6,757
239,969
329,421
$
$
The following table presents our revenues, by revenue source, as a percentage of total revenues:
Network Access Services:
Mobile Services
Other Services
Total Network Access Services
Domain Services:
Wholesale
Domain Services
Value Added Services
Total Wholesale
Retail
Portfolio
Total Domain Services
Year ended December 31,
2017
2018
26 %
2 %
28 %
55 %
5 %
60 %
10 %
2 %
72 %
25 %
2 %
27 %
56 %
5 %
61 %
10 %
2 %
73 %
100 %
100 %
Total net revenues for Fiscal 2018 increased by $16.6 million, or 5%, to $346.0 million from $329.4 million for the fiscal
year ended December 31, 2017 (“Fiscal 2017”). The overall increase in revenue was primarily driven by full year impact of the
2017 acquisitions of Enom and Roam Mobility, the expanding footprint of Ting Internet, organic growth in both Ting Mobile
services and wholesale domain services and the $16.9 million acceleration of revenue related to the Namecheap bulk transfer of
2.89 million names throughout 2018, a portion of which would have otherwise been recognized after Fiscal 2018. Revenue also
increased as compared to fiscal 2017 because eNom revenues 2017 were negatively impacted by amortizing into revenue, deferred
revenue that was recorded at fair value at the acquisition date which was approximately 10% lower than the historical cost basis of
eNom. The increase in revenue was partially offset by a subsequent decline in ongoing domain registrations related to the
departure of Namecheap and lower mobile device sales due to reduced demand for higher priced devices. Deferred revenue from
domain name registrations and other Internet services at December 31, 2018 decreased to $143.7 million from $160.6 million at
December 31, 2017, primarily due to the bulk transfers discussed above.
No customer accounted for more than 10% of revenue during Fiscal 2018 or Fiscal 2017, and no customers accounted for
more than 10% of accounts receivable as of December 31, 2018 and 2017. Management judgment is required at the time of
recording of revenue 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.
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Table of Contents
Network Access Services
Mobile and Other Services
Net revenues from mobile phone equipment and services for Fiscal 2018, as compared to Fiscal 2017, increased by $5.5
million or 7% to $89.3 million. This increase primarily reflects the growth in service revenue, which grew by $6.9 million to $80.4
million as compared to Fiscal 2017. Revenues from the sale of mobile hardware and related accessories decreased by $1.4 million
to $8.9 million in Fiscal 2018. The decrease in device revenue was primarily driven by reduced demand for higher-priced devices
compared to the Fiscal 2017.
High speed Internet access, and network consulting services generated $8.0 million in revenue during Fiscal 2018, up
$2.4 million from Fiscal 2017. Growth in Ting Internet revenues was as a result of the increased Ting Internet footprint in
Charlottesville, VA, Westminster, MD and Holly Springs, NC. The Company began offering Ting Internet in Sandpoint, ID in the
second quarter of 2018 and in Centennial, CO in the third quarter of 2018.
As of December 31, 2018, Ting Mobile had 163,000 mobile subscribers and 296,000 mobile devices under its
management compared to 166,000 subscribers and 282,000 devices under its management as of December 31, 2017.
Domain Services
Wholesale
During Fiscal 2018, wholesale domain services revenue increased by $5.7 million to $189.4 million. The increase was
driven by the accelerated recognition of $16.9 million in domain revenue associated with the Namecheap bulk transfer of 2.8
million names during 2018, of which approximately $5.0 million would have been otherwise recognized after Fiscal 2018. The
increase in wholesale domain revenue was also driven by the organic growth and price increases associated with the Company’s
existing customer base of $4.9 million. Revenue also increased compared to Fiscal 2017 because eNom revenues and gross
margins in 2017 were negatively impacted by amortizing into revenue, deferred revenue that was recorded at fair value at the
acquisition date which was approximately 10% lower than the historical cost basis of eNom. The increase in revenue was partially
offset by a decrease in revenue associated with a decline in the number of overall transactions from new, renewed and transferred-
in domain name registrations, which has decreased to 17.4 million from 19.4 million when compared to Fiscal 2017. The overall
decrease in new, renewed and transferred-in domain name registrations was primarily driven by the migration of Namecheap, a
low margin customer who moved their domain management and domain transaction processing to their own accreditation and in-
house system. We anticipate that the number of new, renewed and transferred-in domain name registrations will continue to be
impacted by decisions that large volume customers make with regard to acquiring their own accreditations, as well as the impact
on the market, of the significant expansion in the number of new gTLDs added pursuant to the implementation of ICANN’s new
gTLD Program. While we anticipate that the number of new, renewed and transferred-in domain name registrations will continue
to incrementally increase in the long term, the volatility of these factors could affect the growth of domain names that we manage.
Value-added services decreased by $0.1 million to $17.8 million when compared to Fiscal 2017. The decrease in revenue
from Fiscal 2017 was primarily driven by decreased expiry stream revenue.
Retail
Net revenues from retail for Fiscal 2018, as compared to Fiscal 2017, increased by $2.9 million to $34.5 million. This
increase was primarily due to the full year impact of the acquisition of eNom and to a lesser extent growth in our incumbent retail
operations, Hover.
Portfolio
Net revenues from portfolio for Fiscal 2018, as compared to Fiscal 2017, increased by $0.2 million to $7.0 million. The
increase is primarily due to a large bulk sale of names in the fourth quarter of 2018.
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Table of Contents
COST OF REVENUES
The following table presents our cost of revenues, by revenue source:
(Dollar amounts in thousands of U.S. dollars)
Network Access Services:
Mobile Services
Other Services
Total Network Access Services
Domain Services:
Wholesale
Domain Services
Value Added Services
Total Wholesale
Retail
Portfolio
Total Domain Services
Network Expenses:
Network, other costs
Network, depreciation and amortization costs
Increase over prior period
Increase - percentage
Year ended December 31,
2017
2018
$
46,061 $
3,994
50,055
45,335
3,305
48,640
160,216
3,154
163,370
17,725
953
182,048
9,846
7,294
17,140
161,013
2,450
163,463
17,346
1,151
181,960
9,324
4,976
14,300
$
$
249,243 $
244,900
4,343
2 %
The following table presents our cost of revenues, as a percentage of total cost of revenues for the periods presented:
Network Access Services:
Mobile Services
Other Services
Total Network Access Services
Domain Services:
Wholesale
Domain Services
Value Added Services
Total Wholesale
Retail
Portfolio
Total Domain Services
Network Expenses:
Network, other costs
Network, depreciation and amortization costs
Year ended December 31,
2017
2018
18 %
2 %
20 %
65 %
1 %
66 %
7 %
0 %
73 %
4 %
3 %
7 %
19 %
1 %
20 %
66 %
1 %
67 %
7 %
0 %
74 %
4 %
2 %
6 %
100 %
100 %
Total cost of revenues for Fiscal 2018 increased by $4.3 million, or 2%, to $249.2 million from $244.9 million in Fiscal 2017.
This increase primarily resulted from the increase in network and people costs associated with the continuing expansion of the
Ting Fiber footprint and to a lesser extent, restructuring charges associated with terminating an unfavourable Roam Mobility
service supply contract. Prepaid domain registration and other Internet services fees as of December 31, 2018 decreased by
$20.5 million, or 16%, to $106.5 million from $127.0 million at December 31, 2017.
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Table of Contents
Network Access Services
Mobile and Other Services
Cost of revenues from mobile phone equipment and services for Fiscal 2018, as compared to Fiscal 2017, increased
by $0.7 million or 2% to $46.1 million. This increase primarily reflects the impact of mobile service costs of revenue which
grew by $2.3 million to $36.5 million as compared to Fiscal 2017. The increase in mobile service costs of revenue include
restructuring charges associated with terminating an unfavourable Roam Mobility service supply contract for $0.4 million.
Mobile hardware, shipping and related accessories costs decreased $1.6 million to $9.6 million. The decrease in device cost of
revenue was primarily driven by reduced demand for higher-priced devices compared to the Fiscal 2017.
In addition, in Fiscal 2018, we incurred costs of $4.0 million in provisioning high speed Internet access and network
consulting services as compared to $3.3 million during Fiscal 2017. The increase in costs was primarily due to the expansion of
the Ting Fiber foot print and increasing subscriber base.
Domain Services
Wholesale
Domain Service
Costs for wholesale domain services for Fiscal 2018 decreased by $0.8 million to $160.2 million, when compared to
Fiscal 2017. The decrease was driven by a $8.9 million decrease due to the decline in overall transactions from new, renewed
and transferred-in domain name registrations to 17.4 million from 19.4 million when compared to Fiscal 2017. The overall
decrease in new, renewed and transferred-in domain name registrations was primarily driven by the migration of Namecheap, a
low margin customer who moved their domain management and domain transaction processing to their own accreditation and
in-house system. The decrease was partially offset by the accelerated recognition of $16.7 million in cost of revenue associated
with the Namecheap bulk transfer of 2.8 million names during 2018, of which approximately $4.9 million would have been
otherwise recognized after Fiscal 2018. The decrease was also offset by organic growth in existing customers $3.2 million.
Value-Added Services
Costs for wholesale value-added services for Fiscal 2018 increased by $0.7 million to $3.2 million, when compared to
Fiscal 2017. The increase in cost of revenue is primarily related to organic growth in certification and email sales during Fiscal
2018.
Retail
Costs for retail for Fiscal 2018 increased by $0.4 million, to $17.7 million, when compared to Fiscal 2017. This
increase was primarily due to the full year impact of the acquisition of eNom and to a lesser extent growth in our incumbent
retail operations, Hover.
Portfolio
Costs for portfolio decreased by $0.2 million for Fiscal 2018, to $1.0 million when compared to Fiscal 2017, the
decrease in cost is primarily driven by a lower cost per name sold as compared to Fiscal 2017.
Network Expenses
Network costs for Fiscal 2018 increased by $2.8 million to $17.1 million when compared to Fiscal 2017, which is
primarily driven by the increase in network costs and depreciation of the fiber assets associated with the continuing expansion
of the Ting Fiber footprint.
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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)
Sales and marketing
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2017
2018
$
$
33,063 $
3,640
12 %
10 %
29,423
9 %
Sales and marketing expenses for Fiscal 2018 increased by $3.6 million, or 12%, to $33.1 million as compared to Fiscal
2017. This increase primarily related to a $3.3 million increase in workforce, travel, contract services and stock-based
compensation, which was driven by the growth in network access initiatives. In addition, marketing and other expenses
increased $0.3 million largely to support and acquire Ting Mobile and fixed Internet access subscribers.
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)
Technical operations and development
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2017
2018
$
$
8,748 $
1,490
21 %
3 %
7,258
2 %
Technical operations and development expenses for Fiscal 2018 increased by $1.5 million, or 21%, to $8.7 million. The
increase in costs relate primarily to the full year impact of the eNom acquisition, increased salaries and benefits, contract
services and stock-based compensation driven by an expanding workforce and wage inflation.
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)
General and administrative
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2017
2018
$
$
17,710 $
4,116
30 %
5 %
13,594
4 %
General and administrative expenses for Fiscal 2018 increased by $4.1 million, or 30%, to $17.7 million as compared to
Fiscal 2018. The increase was primarily the result of an increase in workforce, contract services and stock-based compensation
related costs of $3.8 million due to expanding workforce, unfavourable foreign exchange impacts and wage inflation. The
increase was also related to an increase in credit card processing fees and other administrative costs of $0.3 million.
DEPRECIATION OF PROPERTY AND EQUIPMENT
(Dollar amounts in thousands of U.S. dollars)
Depreciation of property and equipment
Decrease over prior period
Decrease - percentage
Percentage of net revenues
Year ended December 31,
2017
2018
$
$
$
424
(161 )
(28 )%
0 %
585
0 %
Depreciation costs for Fiscal 2018 decreased to $0.4 million when compared to $0.6 million for Fiscal 2017. The
decrease is driven by decreased purchases of equipment in 2018, compared to 2017 when the Company’s purchased equipment
increased due to the acquisition of eNom.
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AMORTIZATION OF INTANGIBLE ASSETS
(Dollar amounts in thousands of U.S. dollars)
Amortization of intangible assets
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2017
2018
$
$
7,247 $
681
10 %
2 %
6,566
2 %
Amortization of intangible assets increased $0.7 million for Fiscal 2018, to $7.2 million. The increase in amortization is
primarily related to customer acquisitions totalling $0.6 million throughout 2018 and the full year impact of acquisitions during
2017.
Network rights, brand and customer relationships acquired in connection with the acquisitions the BRI Group in February
2015, the international reseller channel of Melbourne IT in April 2016, eNom in January 2017, and Roam Mobility in September
of 2017 and immaterial acquisitions in 2018 are amortized on a straight-line basis over seven years.
IMPAIRMENT OF INDEFINITE LIFE INTANGIBLE ASSETS
(Dollar amounts in thousands of U.S. dollars)
Impairment of indefinite life intangible assets
Decrease over prior period
Decrease - percentage
Percentage of net revenues
Year ended December 31,
2017
2018
$
$
$
-
(111 )
(100 )%
- %
111
0 %
As part of our normal renewal process, we assess whether certain domain names acquired in the June 2006 acquisition of
Mailbank.com Inc. should not be renewed and be allowed to expire. During Fiscal 2018, we renewed all of the acquired domain
names. In Fiscal 2017, we assessed that that acquired domain names with a book value of less than $0.1 million should be written
off and accordingly, we recorded an impairment of indefinite life intangible assets.
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)
Loss (gain) on currency forward contracts
Increase over prior period
Increase - percentage
Percentage of net revenues
Year ended December 31,
2017
2018
$
$
254 $
352
359 %
0 %
(98 )
0 %
We have entered into certain forward exchange contracts that do not comply with the requirements of hedge accounting to
meet a portion of our future Canadian dollar requirements through December 2019. During Fiscal 2018, the Company recorded a
net loss of $0.2 million on the change in fair value of outstanding contracts as well as less than $0.1 million realized loss on
matured contracts. In Fiscal 2017 the Company recorded a net loss of less than $0.1 million for the change in fair value of
outstanding contracts and a gain $0.1 million of settlements of contracts not designated as hedges.
At December 31, 2018, our balance sheet reflects a derivative instrument liability of $1.3 million as a result of our
existing foreign exchange contracts.
OTHER INCOME AND (EXPENSES)
(Dollar amounts in thousands of U.S. dollars)
Other income (expense), net
Year ended December 31,
2017
2018
$
(3,169 ) $
(3,007 )
Increase over prior period
Increase - percentage
Percentage of net revenues
$
(162 )
5 %
1 %
1 %
Other expenses increased by $0.2 million when compared to Fiscal 2017 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. Within Other
expense we also recognized $0.5 million of a positive financial contribution from a Joint Marketing agreement that we entered into
in February 2015 where we waived our rights under a proposed joint venture to operate the online registry. The recognition of this
gain was consistent with the amount recognized in Fiscal 2017. The deferred gain has been fully recognized as of December 31,
2018.
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INCOME TAXES
The following table presents our provision for income taxes for the periods presented:
(Dollar amounts in thousands of U.S. dollars)
Provision for income taxes
Increase in provision over prior period
Increase - percentage
Effective tax rate
Year ended December 31,
2017
2018
$
$
9,020 $
7,272
416 %
37 %
1,748
7 %
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.
Fiscal 2018 includes tax on profits of $26.2 million compared to $24.1 million for Fiscal 2017. Our Fiscal 2017 income
tax expense benefited from a net $5.8 million positive implementation impact from the Tax cuts and Jobs Act of 2017, more fully
described below as well as the inclusion of a $2.8 million tax recovery related to the adoption of ASU 2016-09 in Fiscal 2017,
which requires all excess tax benefits and tax deficiencies related to employee share-based payments to be recognized through
income tax expense on a prospective basis. The Fiscal 2018 tax recovery related to excess tax benefits related to employee share-
based was $0.7 million.
On December 22, 2017, the Act was signed into law making significant changes to the Internal Revenue Code. Changes
include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31,
2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, bonus depreciation that will
allow for full expensing of qualified property, and a one-time transition tax on the mandatory deemed repatriation of foreign
earnings.
In Fiscal 2018, the Company was able to utilize the bonus depreciation with respect to its continued investment in the
Ting Internet business. The impact of this, together with the reduction in tax rate to 21%, make it unlikely we will ultimately be
able to fully claim the Fiscal 2018 foreign taxes paid in future years. In addition, the Company generated net operating losses of
$0.2 million which it does not expect to be able to utilize in the future. As such, we have taken a valuation allowance for foreign
tax credits not utilized for 2018 income tax purposes and net operating losses not expected to be utilized in the future, the net
negative effect of which is a $2.8 million addition to income tax expense.
In Fiscal 2017, we reflected a net $5.8 million non-cash tax benefit through income from continuing operations for the re-
measurement impact related to the changes in tax laws included in the Act. The primary driver of this re-measurement was the
result of the reduction in the corporate tax rate from 35% to 21% which resulted in our recognizing, based on the rates at which
they are expected to reverse in the future, a $10.0 million non-cash tax benefit through income from continuing operations for the
re-measurement of our deferred tax assets and liabilities. This amount was partially offset by our recording a valuation allowance
of $1.3 million related to prior year Foreign Tax Credits that we have determined are no longer more likely than not to be used as
the tax rate in the jurisdiction where these Foreign Tax Credits is generated is higher than the 21% corporate tax rate. In addition,
the impact of the prepaid registry fee deduction, more fully described below, together with the reduction in the tax rate to 21%
made it unlikely we would be able to claim the Fiscal 2017 foreign taxes paid in future years and as such opted to utilize the
foreign taxes paid as a deduction for 2017 income tax purposes, the net negative effect of which was a $2.9 million addition to
income tax expense.
We had approximately $nil of total gross unrecognized tax benefit as of December 31, 2018 compared to $15,000 as of
December 31, 2017.
A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in “Note 9 – Income Taxes” of
the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
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 impact of the fair value adjustment on outstanding hedged contracts for Fiscal 2018 was a
net loss in other comprehensive income of $0.8 million compared to a net loss of $0.1 million for Fiscal 2017.
The following table presents other comprehensive income for the periods presented:
(Dollar amounts in thousands of U.S. dollars)
Other comprehensive income (loss)
Decrease over prior period
Decrease - percentage
Percentage of net revenues
Year ended December 31,
2017
2018
$
$
(810 ) $
(710 )
710 %
0 %
(100 )
0 %
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The impact of the fair value adjustments on outstanding hedged contracts during 2018 was a loss in OCI of $1.0 million
as compared to a gain of $0.5 million during 2017. The decrease in OCI is associated with the fact that at December 31, 2018, the
Company had $36.5 million outstanding hedged forward contracts, as compared to Fiscal 2017 the Company had nil outstanding
hedged forward contracts.
The net amount reclassified to earnings during 2018 was a gain of $0.2 million compared to a loss of $0.6 million during
2017.
Liquidity and capital resources
As of December 31, 2019, our cash and cash equivalents balance increased $7.8 million when compared to
December 31, 2018. Our principal uses of cash were $28.5 million for the Acquisition of Ascio Technologies, Inc. (“Ascio”),
$8.1 million in loan repayments, $1.1 million of other costs, including tax payment associated with stock option exercises, $5.0
million in stock repurchases, continued investment in property and equipment of $44.1 million and $3.6 million acquisition of
customer relationships. These uses of cash were offset by proceeds from the exercise of stock options of $0.4 million, advances of
$57.4 million from our 2019 Amended Credit Facility (defined below) to fund Fiber to the Home program (“FTTH”) and cash
provided by operating activities of $40.4 million. On January 1, 2020, the Company paid cash of $9.0 million related to the
acquisition of Cedar Holdings Group. See "Note 20 - Subsequent Events" for more detail.
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.
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.
2017 Amended Credit Facility
Prior to entering into the Amended 2019 Credit Facility, the Company had entered into a secured Credit Agreement (as
amended, the “2017 Amended Credit Facility”) on January 20, 2017 with Bank of Montreal (“BMO”), RBC and Bank of Nova
Scotia (collectively, the “Previous Lenders”) under which the Company had access to an aggregate of up to $140 million in funds.
On March 18, 2019, the Company entered into the Second Amendment to the 2017 Credit Facility to provide the
Previous Lenders’ consent for the acquisition of Ascio, advance the acquisition funding and to reallocate borrowing limits between
loan facilities. We incurred costs associated with the Second Amendment to the 2017 Credit Facility of $0.2 million, which were
recorded as debt issuance costs.
The obligations of the Company under the 2017 Amended Credit Facility were secured by a first priority lien on
substantially all of the personal property and assets of the Company and had a four-year term.
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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 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 December 31, 2019, the Company held contracts in the amount of $30.5 million to trade U.S. dollars in
exchange for Canadian dollars.
Cash Flow from Operating Activities
Year ended December 31, 2019
Net cash inflows from operating activities were $40.4 million, an increase of 9% when compared to the prior year. Net
income, after adjusting for non-cash charges, during Fiscal 2019 was $38.4 million, an increase of 8% when compared to the prior
year. Net income included non-cash charges and recoveries of $23.0 million such as depreciation, amortization, impairment of
indefinite life intangible asset, excess tax benefits on stock-based compensation, stock-based compensation, the provision for
unrealized losses on currency forward contracts and a recovery for deferred tax. This generation of cash from net income was
further increased by a working capital change of $2.0 million. We generated $13.3 million from movements in inventory, prepaid
registration costs, prepaid expenses and deposits, accrued liabilities and customer deposits. These positive contributions were
offset by cash use of $11.3 million to invest in accounts receivable, deferred revenue, income taxes recoverable, accounts payable,
and accreditation fees.
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Year ended December 31, 2018
Net cash inflows from operating activities were $37.2 million, an increase of 17% when compared to the prior year. Net
income, after adjusting for non-cash charges, during Fiscal 2018 was $35.4 million, an increase of 18% when compared to the
prior year. Net income included non-cash charges and recoveries of $18.3 million such as depreciation, amortization, impairment
of indefinite life intangible asset, excess tax benefits on stock-based compensation, stock-based compensation, the provision for
unrealized losses on currency forward contracts and a recovery for deferred tax. This generation of cash from net income was
further increased by our increasing working capital of $1.8 million. We generated $24.9 million from movements in accounts
receivables, deferred registration costs, accounts payable and income taxes recoverable. These positive contributions were offset
by cash use of $23.1 million to invest in deferred revenue, accreditation fees, inventory, prepaid expenses and deposits, customer
deposits and accrued liabilities.
Year ended December 31, 2017
Net cash inflows from operating activities were $31.9 million, an increase of 42% when compared to the prior year. Net
income, after adjusting for non-cash charges, during Fiscal 2017 was $30.0 million, an increase of 43% when compared to the
prior year. Net income included non-cash charges and recoveries of $7.7 million such as depreciation, amortization, impairment of
indefinite life intangible asset, excess tax benefits on stock-based compensation, stock-based compensation, the provision for
unrealized losses on currency forward contracts and a recovery for deferred tax. This generation of cash from net income was
further increased by our increasing working capital of $1.9 million. We generated $11.1 million from movements in accounts
receivables, deferred revenue, deferred registration costs income taxes recoverable and customer deposits. These positive
contributions were offset by cash use of $9.2 million to invest in accounts payables, accreditation fees, inventory, prepaid expenses
and deposits and accrued liabilities.
Cash Flow from Financing Activities
Year ended December 31, 2019
Net cash inflows from financing activities during Fiscal 2019 totaled $43.5 million as compared to cash outflows of $12.9
million during Fiscal 2018. Net cash inflows of $57.4 million resulting from draws on the 2019 Amended Credit Facility to fund
the FTTH capital expenditures, the acquisition of Ascio and general working capital requirements. These cash inflows were
partially offset by outflows of $8.1 million of principal repayments relating to our 2019 Credit Amended Credit Facility, $5.0
million in stock repurchases, $0.6 million of loan costs and $0.2 million outflow from the net impact of exercise of stock options.
Year ended December 31, 2018
Net cash outflows from financing activities during Fiscal 2018 totaled $12.9 million as compared to cash inflows of
$65.2 million during Fiscal 2017. Net cash inflows of $7.0 million resulting from draws on the 2017 Amended Credit Facility
to fund the FTTH capital expenditures and general working capital requirements. These cash inflows were partially offset by
outflows of $19.6 million of principal repayments relating to our 2017 Credit Amended Credit Facility, $0.3 million outflow
from the net impact of exercise of stock options.
Year ended December 31, 2017
Net cash inflows from financing activities during Fiscal 2017 totaled $65.2 million as compared to cash outflows of $0.7
million during Fiscal 2016. Net cash inflows of $87.0 million resulting from draws on the 2017 Amended Credit Facility to fund
the acquisition of eNom and to fund FTTH capital expenditures. These cash inflows were partially offset by outflows of $20.0
million of principal repayments relating to our 2017 Credit Amended Credit Facility, $1.2 million outflow from the net impact of
exercise of stock options and $0.6 million of debt issuance costs.
Cash Flow from Investing Activities
Year ended December 31, 2019
Investing activities during the Fiscal 2019 used net cash of $76.1 million as compared to using $29.7 million during
Fiscal 2018.
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Cash outflows of $28.5 million related to the acquisition of Ascio Technologies, Inc., $3.6 million related to the
acquisition of intangible assets, of which $3.5 million related to the acquisition of mobile subscribers of the FreedomPop and
Unreal MVNO brands, and $44.1 million of cash outflows was 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 Charlottesville,
VA, Holly Springs, NC and Westminster, MD as well ramping construction in Sandpoint, ID, Centennial, CO, and Fuquay
Varina, 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 significantly during Fiscal 2019.
Year ended December 31, 2018
Investing activities during the Fiscal 2018 used net cash of $29.7 million as compared to using $94.1 million during
Fiscal 2017.
In the second half of Fiscal 2018, the Company purchased customer relationships related to hosting and mobile services
for $0.6 million.
On February 14, 2018, the Company acquired the remaining 10% interest in Ting Virginia, LLC. for a consideration of
$1.2 million. The consideration was funded through cash flow from operations. See Note 3(a) of the Notes to the Consolidated
Financial Statements included in this report.
In addition, the Company invested $27.9 million in property and equipment, primarily to support the continued
expansion of our fiber footprint. The Company continues to invest in our Ting towns of Charlottesville, VA, Holly Springs, NC
and Westminster, MD. We expect our capital expenditures on building and expanding our fiber network to remain significant
during Fiscal 2019, including construction of new networks in the greater Raleigh-Durham area.
Year ended December 31, 2017
Investing activities during the Fiscal 2017 used net cash of $94.1 million as compared to using $14.4 million during
Fiscal 2016.
On January 20, 2017, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with its
indirect wholly owned subsidiary, Tucows (Emerald), LLC, Rightside Group, Ltd., and Rightside Operating Co., pursuant to
which Tucows (Emerald), LLC purchased from Rightside Operating Co. all of the issued and outstanding capital stock of eNom, a
domain name registrar business. The purchase price was $76.2 million, net of cash of $1.6 million and purchase price adjustments
of $5.7 million relating primarily to a working capital deficit. In 2017, the Company incurred acquisition related expenditures of
$0.3 million in connection with this acquisition. The purchase price and the majority of the related acquisition costs were financed
through borrowings under Facility D of the 2017 Amended Credit Agreement. On June 13, 2017, the parties entered into an
amendment to the Purchase Agreement, which, among other things, amended certain definitions contained in the Purchase
Agreement.
On February 1, 2017, the Company acquired an additional 20% interest in Ting Virginia, LLC. for a consideration of $2.0
million. The consideration was funded through cash flow from operations. For additional details, see “Note 3(a) – Acquisitions” to
the Consolidated Financial Statements included in this report.
In the second half of Fiscal 2017, the Company purchased customer relationships related to shared hosting and domain
services for $0.3 million.
On September 19, 2017, the Company acquired the consumer related assets of Otono Networks Inc. for consideration of
$2.6 million and assumed working capital liabilities of $1.4 million. The intangible assets acquired relate to customer relationships
and are being amortized on a straight-line basis over a period of seven years.
In addition, the Company invested $12.9 million in property and equipment, primarily to support the continued expansion
of our fiber footprint. The Company continues to invest in our Ting towns of Charlottesville, VA, Holly Springs, NC and
Westminster, MD. We expect our capital expenditures on building and expanding our fiber network to increase significantly
during Fiscal 2018, including construction ramping in Sandpoint, ID and Centennial, CO, as we seek to extend both our current
network and expand to new towns.
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
We did not have any off-balance sheet arrangements as of December 31, 2019.
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Contractual Obligations
For the purpose of the contractual obligations table below, contractual obligations for purchases of goods or services are
defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The expected
timing of payment of the obligations discussed below is estimated based on information available to us as of December 31, 2019.
Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to
agreed-upon amounts for some obligations. The following table summarizes our contractual obligations at December 31, 2019
(Dollar amounts in thousands of US dollars):
Contractual Obligations for the year ending
December 31,
2020
2021
2022
2023
2024
Thereafter
Contractual
Lease
Obligations
(1)
Debt
Obligations
Purchase
Obligations
(2)
Total
Obligations
$
$
2,248 $
1,824
1,745
1,708
1,420
5,584
14,529 $
- $
-
-
114,400
-
-
114,400 $
29,153 $
12,638
12,264
13,584
19,074
5,250
91,963 $
31,401
14,462
14,009
129,692
20,494
10,834
220,892
(1) Contractual lease obligations include $0.9 million in lease payments related to Fiber IRU contracts that have not yet
commenced in Fiscal 2019.
(2) Purchase obligations include all other legally binding service contracts for mobile telephone services and other operational
agreements to be delivered during Fiscal 2020 and subsequent years. Note, Purchase Obligations do not include interest
payments on the Company’s credit facilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in Canada and sell these services in North America and Europe. Our sales are primarily made in U.S.
dollars, while a major portion of expenses are incurred in Canadian dollars. Our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Our interest income is sensitive to
changes in the general level of Canadian and U.S. interest rates, particularly since the majority of our investments are in short-term
instruments. Based on the nature of our short-term investments, we have concluded that there is no material interest rate risk exposure
as of December 31, 2019. We are also subject to market risk exposure related to changes in interest rates under our 2019 Amended
Credit Facility. We do not expect that any changes in interest rates will be material; however, fluctuations in interest rates are beyond
our control. We will continue to monitor and assess the risks associated with interest expense exposure and may take additional
actions in the future to mitigate these risks.
Although our functional currency is the U.S. dollar, a substantial portion of our fixed expenses are incurred in Canadian
dollars. Our policy with respect to foreign currency exposure is to manage financial exposure to certain foreign exchange fluctuations
with the objective of neutralizing some of the impact of foreign currency exchange movements. Exchange rates are, however, subject
to significant and rapid fluctuations, and therefore we cannot predict the prospective impact of exchange rate fluctuations on our
business, results of operations and financial condition. Accordingly, we have entered into foreign exchange forward contracts to
mitigate the exchange rate risk on portions of our Canadian dollar exposure.
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As of December 31, 2019, 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
January - March 2020
April - June 2020
July - September 2020
October - December 2020
10,729
9,654
5,300
4,803
30,486
1.3296
1.3296
1.3296
1.3296
1.3296 $
$
259
232
127
113
731
As of December 31, 2019, the Company had $30.5 million of outstanding foreign exchange forward contracts which will
convert to CDN $40.5 million. Of these contracts, $26.1 million met the requirements for hedge accounting.
As of December 31, 2018, the Company had $40.5 million of outstanding foreign exchange forward contracts which will
convert to CDN $53.3 million. Of these contracts, $36.5 million met the requirements for hedge accounting.
We have performed a sensitivity analysis model for foreign exchange exposure over the year ended December 31, 2019.
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 year ended
December 31, 2019. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates
would result in a decrease in pre-tax net income for the year ended December 31, 2019 of approximately $3.7 million. There can be
no assurances that the above projected exchange rate decrease will materialize. 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 December 31, 2019, 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 December 31, 2019, 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 December 31, 2019 is outstanding for the entire period.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data required by this item are attached to this Annual Report on
Form 10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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 annual
report, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019 our disclosure controls and
procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures
that:
● Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of our assets;
● Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America
● Provide reasonable assurance that our receipts and expenditures are being made only in accordance with authorization of our
management and directors; and
● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our
assets that could have a material effect on the financial statements.
Because of its inherent limitations, such as resource constraints, human error, lack of knowledge or awareness and the
possibility of intentional circumvention of these controls, internal control over financial reporting may not prevent or detect
misstatements. Furthermore, the design of any control system is based, in part, upon assumptions about the likelihood of future
events, for which assumptions may ultimately prove to be incorrect. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation.
Management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal
control over financial reporting as of December 31, 2019. In making this assessment, our management used the criteria established
in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
Our management has excluded from our evaluation the Internal Controls over Financial Reporting (“ICFR”) of Ascio,
which we acquired on March 18, 2019 as discussed in “Note 3 – Acquisitions” of the Notes to the Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K. Total revenues subject to Ascio’s ICFR represented 5% of our consolidated
total revenues for the fiscal year ended December 31, 2019. Total assets subject to Ascio ICFR represented approximately 10% of
our consolidated total assets as of December 31, 2019.
Based on the results of our evaluation, management has determined that our internal control over financial reporting was
effective as of December 31, 2019.
KPMG LLP, our independent registered public accounting firm, has audited our consolidated financial statements and
expressed an unqualified opinion thereon. KPMG has issued an attestation report on the effectiveness of our internal control over
financial reporting as of December 31, 2019. These reports are set forth at the beginning of Part II, Item 8 of this Annual Report on
Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes made in our internal controls over financial reporting occurred during Fiscal 2019 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Mr. Burnham, a member of our Board, is a member of Union Square Ventures, LLC (“USV LLC”) and entered into a fee
compensation agreement with USV LLC on December 1, 2017, under which Mr. Burnham agreed to hold the Company’s stock
option grants to him in his individual capacity, and upon the exercise of such options, Mr. Burnham will transfer to USV LLC the
shares acquired in the option exercise or, with the consent of USV LLC, a cash payment equal to the fair market value of such
shares. In connection with such option exercise and transfer, USV LLC will extend to Mr. Burnham an interest-free loan in an
amount equal to the exercise price of the option, and any transfer of acquired shares or cash payment will, to the extent not in excess
of the amount of the loan (if any), first be deemed as repayment of the loan.
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. The purchase price was $14.1 million, less an estimated
purchase price adjustment of approximately $0.1 million relating to a working capital deficit and assessment of the fair value of
contingent consideration, for net purchase consideration of $14.0 million. The cash consideration due at closing of $9.0 million was
financed by an advance on the 2019 Amended Credit Facility. The Company also issued 32,374 of Tucows Inc. shares ($2
million) with a two-year restriction period at closing. Included in the agreement is contingent consideration totaling up to $4.0
million is expected to be paid on the 24th and 36th month anniversaries of the closing of the transaction dependent upon certain
milestones as defined in the definitive transaction agreement. The fair value of the contingent consideration was determined to be
$3.1 million using a discount rate of 11.3%. 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.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Allen Karp
Chairman of the Board since September 2012 and Director since
October 2005
Mr. Karp, 79, was with Cineplex Odeon Corporation in various positions from 1986 to 2005, retiring as Chairman and
Chief Executive Officer in 2002 and as Chairman Emeritus in 2005. From 1966 to 1986, he practiced law at the law firm of Goodman
and Carr LLP, where he was named partner in 1970. Mr. Karp was until recently a Director of Brookfield Real Estate Services Inc.,
where he also served on the Audit Committee and as the Chair of the Corporate Governance Committee. From 2004 to 2014, Mr.
Karp was Chairman of the Board of Directors of IBI Group Inc., as well as Chairman of the Nominating, Governance and
Compensation Committee. Mr. Karp is a past director of the Toronto International Film Festival Group, where he served as Chairman
of the Board from 1999 to 2007 and served as Chairman of its Corporate Governance Committee from 2007 to 2012. Additionally,
Mr. Karp has previously served as director of several other public corporations.
Mr. Karp has extensive executive leadership skills, long-standing senior management experience, a strong ethics and
compliance focus and audit committee experience. These skills and qualifications, in addition to his recent service on the boards of
directors of other public companies, enable him to bring valuable perspectives to our Board, particularly with respect to corporate
governance matters, and qualify him to be a director of Tucows.
Rawleigh H. Ralls
Director since May 2009
Mr. Ralls, 57, was a founding partner of Lacuna, LLC, an investment management company focused on both public and
private companies, which he formed in October 2006. Prior thereto, from 1999 to 2006, he was Chairman of Netidentity.com, an
Internet email and web hosting company, where he led corporate strategy and development until the firm’s sale in 2006. Mr. Ralls
currently serves on the Board of Directors of a number of private companies.
Mr. Ralls has a wealth of industry experience, most notably the experience that he gained through his leadership of
Netidentity.com. In addition, Mr. Ralls contributes a unique perspective to the Board’s discussions and considerations based on the
two decades of investing and portfolio management experience. All of these attributes qualify Mr. Ralls to be a director of Tucows.
Erez Gissin
Director since August 2001
Mr. Gissin, 61, has served since 2010 as a managing partner in Helios Energy Investment, a renewable energy investment
fund. From 2005 to 2010, Mr. Gissin served as the Chief Executive Officer of BCID Ltd., an investment company focusing on
infrastructure development projects in China. From 2000 to 2005, Mr. Gissin served as the Chief Executive Officer of IP Planet
Networks Ltd., an Israeli satellite communication operator providing Internet backbone connectivity and solutions to Internet Service
Providers. From 1995 to 2000, Mr. Gissin was Vice President, Business Development of Eurocom Communications Ltd., a holding
company that controls several telecommunications services, equipment and Internet companies in Israel.
Mr. Gissin has a strong background in the internet communications industry and has gained significant institutional
knowledge in his long tenure as one of our directors. Mr. Gissin also has significant leadership experience as the Chief Executive
Officer of BCID Ltd. and IP Planet Networks Ltd. and has extensive financial acumen derived from his years of executive experience.
All of these qualities qualify Mr. Gissin to be a director of Tucows.
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Elliot Noss
Director since August 2001
Mr. Noss, 57, is our President and Chief Executive Officer and has served in such capacity since the completion of our
merger with Tucows Delaware in August 2001. From May 1999 until completion of the merger in August 2001, Mr. Noss served as
President and Chief Executive Officer of Tucows Delaware. Before that, from April 1997 to May 1999, Mr. Noss served as Vice
President of Corporate Services of Tucows Interactive Ltd., which was acquired by Tucows Delaware in May 1999.
Mr. Noss’s lengthy service as our Chief Executive Officer has provided him with extensive knowledge of, and experience
with, Tucows’ operations, strategy and financial position. In addition, Mr. Noss has widespread knowledge of the internet and
software industry generally that, coupled with his operational expertise, qualifies him to be a director of Tucows.
Jeffrey Schwartz
Director since June 2005
Mr. Schwartz, 57, has served as a director of Dorel Industries since 1987 and as Executive Vice President and Chief
Financial Officer since 2003. Mr. Schwartz is a graduate of McGill University in Montreal and has a degree in the field of business
administration.
Mr. Schwartz has a significant amount of public-company financial expertise, particularly in his executive experience as
the chief financial officer of Dorel Industries, Inc. This executive experience, along with Mr. Schwartz’s service as one of our Audit
Committee members (and as Chairman of our Audit Committee since 2005), qualifies him to be a director of Tucows.
Robin Chase
Director since October 2014
Robin Chase, 61, is a transportation entrepreneur. She is co-founder and former CEO of Zipcar, founded in 2000, the world’s
leading carsharing network; as well as co-founder of Veniam, founded in 2012, a network company that moves terabytes of data
between vehicles and the cloud. She has recently co-founded her first nonprofit, NUMO, a global alliance to channel the
opportunities presented by new urban mobility technologies to build cities that are sustainable and just. Her recent book is Peers
Inc: How People and Platforms are Inventing the Collaborative Economy and Reinventing Capitalism.
In addition to Ms. Chase’s position as a member of the Tucows Board, she sits on the boards of World Resources Institute
and Future Planet Capital, and serves on the Dutch multinational DSM’s Sustainability Advisory Board. In the past, she served on
the boards of Veniam and the Massachusetts Department of Transportation, the French National Digital Agency, the National
Advisory Council for Innovation & Entrepreneurship for the US Department of Commerce, the Intelligent Transportations Systems
Program Advisory Committee for the US Department of Transportation, the OECD’s International Transport Forum Advisory Board,
the Massachusetts Governor’s Transportation Transition Working Group, and Boston Mayor’s Wireless Task Force.
Ms. Chase lectures widely, has been frequently featured in the major media, and has received many awards in the areas of
innovation, design, and environment, including the prestigious Urban Land Institute’s Nicols Prize as Urban Visionary, Time 100
Most Influential People, Fast Company Fast 50 Innovators, and BusinessWeek Top 10 Designers. Robin graduated from Wellesley
College and MIT’s Sloan School of Management, was a Harvard University Loeb Fellow, and received an honorary Doctorate of
Design from the Illinois Institute of Technology.
Ms. Chase’s experience operating companies at the chief executive officer level along with her numerous experiences on
these boards and councils qualify her to be a director of Tucows.
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Brad Burnham
Director since January 2017
Brad Burnham, 64, is the co-founder and a current Partner of Union Square Ventures (“USV”), founded in 2003, an early
stage venture capital firm in New York. USV has invested in more than 75 Internet services, including, Twitter, Inc., Tumblr, Inc.,
Etsy, Inc., Indeed, Inc., Zynga Inc., and Foursqare Labs, Inc. Prior to USV, Mr. Burnham was a partner at AT&T Ventures, the
venture capital arm of AT&T. AT&T Ventures invested in consumer facing Internet services like Audible, telecommunications
technology companies such as Argon, Xedia, and Juniper Networks, and Competitive Local Exchange Carriers (CLECs) such as
Knology, and Data Local Exchange Carriers (“DLECs”) such as Covad. Prior to joining AT&T Ventures, Mr. Burnham was the
founder and CEO of Echo Logic, a software tools company spun out of Bell Laboratories. Earlier in his career, Brad held a number
of management positions in sales, marketing and business development at AT&T Computer Systems. He began his career as a sales
representative at New York Telephone. Mr. Burnham also currently serves on the boards of directors of several non-public
organizations.
Mr. Burnham has extensive experience in investing in and serving on the boards of numerous internet service companies
which qualify him to be a director of Tucows.
Our directors are elected annually and serve until the election or appointment and qualification of their successors or their
earlier death, resignation or removal.
Executive Officers
The required information regarding our executive officers is set forth in Part I hereof under the caption “Executive Officers
and Key Employees of the Registrant” and is incorporated herein by reference.
Governance Principles
The governance principles of our Board of Directors (“Board”) include the charters of our Audit Committee and our
Corporate Governance, Nominating and Compensation Committee. Our governing principles also include our Code of Business
Conduct and Ethics which includes specifics for our senior officers, including our Chief Executive Officer, principal financial officer,
principal accounting officer or controller, or persons performing similar functions. Each of these documents can be obtained without
charge from our Internet web site at tucows.com. Amendments and waivers of our ethics policy for our senior officers will either be
posted on our website or filed with the SEC on a Current Report on Form 8-K.
Mr. Karp serves as lead independent director. Our Board currently consists of seven directors, all of whom, except for Elliot
Noss, are “independent” within the meaning of the independence requirements prescribed by the listing standards of the NASDAQ
Capital Market. The Board believes that this structure, which provides an overwhelming majority of independent directors, coupled
with the Board meeting in executive session without any management directors or non-independent directors present, is an
appropriate structure for Tucows’ Board. We believe that this structure provides appropriate and independent oversight by the Board.
The Board regularly consults with our Chief Executive Officer, who is also a director, and our Corporate Governance, Nominating
and Compensation Committee to review the various types of risk that affect Tucows and the strategies to mitigate such risks. The
Board believes that this structure has been effective.
Meetings
Our Board met seven times during Fiscal 2019. Our Board also took action by unanimous written consent on six occasions
during Fiscal 2019. Each director attended at least 75% of the total number of meetings of the Board during Fiscal 2019.
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Executive Sessions of Independent Directors
A majority of the independent directors meet quarterly in executive sessions without members of our management present.
Mr. Karp is responsible for chairing the executive sessions.
Policy Regarding Attendance
Directors are expected, but are not required, to attend board meetings, meetings of committees on which they serve, and
shareholder meetings, and to spend the time needed and meet as frequently as necessary to discharge their responsibilities
properly. Elliot Noss attended our 2019 annual meeting of shareholders in person and the Board of Directors were available by
teleconference.
Committees
Our Board has two committees, an audit committee established in accordance with Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended, and a corporate governance, nominating and compensation committee. Our committees
generally meet in connection with regularly scheduled quarterly and annual meetings of the Board, with additional meetings held as
often as its members deem necessary to perform its responsibilities. From time to time, depending on the circumstances, the Board
may form a new committee or disband a current committee.
The Audit Committee currently consists of Mr. Schwartz (Chair), Mr. Karp and Mr. Gissin, all of whom are independent directors
as prescribed by the listing standards of the NASDAQ Capital Market.
The Audit Committee held five meetings during Fiscal 2019. The Audit Committee also took action by unanimous written
consent on one occasion during Fiscal 2019. Each member of the Audit Committee attended at least 75% of the total number of
meetings of the committee during Fiscal 2019. The Audit Committee’s purposes are to:
● Provide oversight of the Company’s accounting and financial reporting processes and the audit of the Company’s financial
statements;
● Assist the Board in oversight of (i) the integrity of the Company’s financial statements, (ii) the Company’s compliance with
legal and regulatory requirements, (iii) the qualifications, independence and performance of the Company’s independent
registered public accounting firm, and (iv) the Company’s internal accounting and financial controls;
● Provide to the Board such information and materials as it may deem necessary to make the Board aware of significant
financial matters that require the attention of the Board; and
● Oversee the management of risks associated with the Company’s financial reporting, accounting and auditing matters.
Each of the members of our Audit Committee is an independent director and satisfies the independence standards as
prescribed by the listing standards of the NASDAQ Capital Market and Rule 10A-3 under the Exchange Act and is able to read and
understand fundamental financial statements including balance sheets, income statements and cash flow statements. Additionally,
the Board has determined that Mr. Schwartz qualifies as an “audit committee financial expert” as defined under Item 407(d)(5) of
Regulation S-K. The Board has adopted a written charter for the Audit Committee, which the Audit Committee has reviewed and
determined to be in compliance with the rules prescribed by the listing standards of the NASDAQ Capital Market and which is
available at tucows.com.
The Corporate Governance, Nominating and Compensation Committee currently consists of Mr. Karp (Chair),
Mr. Schwartz, Ms. Chase and Mr. Ralls. Each member of our Corporate Governance, Nominating and Compensation Committee is
an independent director as defined in the listing standards of the NASDAQ Capital Market and also satisfies the applicable
compensation committee member independence standards as prescribed by the listing standards of the NASDAQ Capital Market
and Rule 10C-1 under the Exchange Act.
The Corporate Governance, Nominating and Compensation Committee held seven meetings during Fiscal 2019. The
Corporate Governance, Nominating and Compensation Committee took action by unanimous written consent on two occasions
during Fiscal 2019. Each member of the Corporate Governance, Nominating and Compensation Committee attended at least 75%
of the total number of meetings of the committee during Fiscal 2019. The Corporate Governance, Nominating and Compensation
Committee’s purposes are to:
Identify individuals qualified to become board members, consistent with criteria approved by the Board.
●
● Select, or recommend that the Board select, the director nominees for election at each annual meeting of stockholders.
● Oversee the evaluation of the Board and management.
● Review and approve corporate goals and objectives relevant to the Company’s Chief Executive Officer (“CEO”)
compensation, evaluate the CEO's performance in light of those goals and objectives, and, either as a committee or together
with the other independent directors (as directed by the Board), determine and approve the CEO's compensation level based
on this evaluation.
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● Review and approve non-CEO Executive compensation including incentive compensation and equity-based compensation.
● Provide oversight of the Company’s compensation policies and plans and benefits programs, and overall compensation
philosophy.
● Administer the Company’s equity compensation plans for its executive officers and employees and the granting of equity
awards pursuant to such plans or outside of such plans; and
● Cause to be prepared the report of the Corporate Governance, Nominating and Compensation required by the rules and
regulations of the Securities and Exchange Commission (the “SEC”).
The Corporate Governance, Nominating and Compensation Committee may delegate authority to one or more members of
this committee or one or more members of management when appropriate, but no such delegation is allowed if the authority is
required by law, regulation or listing standard to be exercised by the Corporate Governance, Nominating and Compensation
Committee as a whole. The Board has adopted a written charter for the Corporate Governance, Nominating and Compensation
Committee, which the Corporate Governance, Nominating and Compensation Committee has reviewed and determined to be in
compliance with the rules prescribed by the listing standards of the NASDAQ Capital Market and which is available at tucows.com.
Our executive officers do not play a formal role in determining their compensation. However, Jessica Johannson, our Chief
People Officer, reviews (i) information the Company purchased from PayScale Surveys and (ii) published trends for the year from
a variety of public sources, and, after consulting with Mr. Noss, our Chief Executive Officer, provides consolidated information
outlining management’s recommendation regarding executive officer compensation based on title to the Corporate Governance,
Nominating and Compensation Committee. The Corporate Governance, Nominating and Compensation Committee then reviews
and discusses the information provided with our CEO and Chief People Officer and then determines the total compensation for each
named executive office, as it deems appropriate.
Board Leadership Structure and Responsibilities
Our Board of Directors oversees management’s performance on behalf of our shareholders. Our Board of Directors’ primary
responsibilities are to (1) monitor management’s performance to assess whether we are operating in an effective, efficient and ethical
manner to create value for our shareholders, (2) periodically review our long-range plans, business initiatives, capital projects and
budget matters and (3) approve compensation for our President and Chief Executive Officer who, with senior management, manages
our day-to-day operations.
Our Board and its committees meet throughout the year on a set schedule, and also hold special meetings and act by written
consent from time to time as appropriate. The independent directors meet without management present at regularly scheduled
executive sessions at each quarterly Board meeting and some special Board meetings. Our Board has delegated certain
responsibilities and authority to its Audit Committee and Corporate Governance, Nominating and Compensation Committee. The
Audit Committee periodically discusses with management the Company's policies and guidelines regarding risk assessment and risk
management, as well as the Company's major financial risk exposures and the steps that management has taken to monitor and
control such exposures. The Audit Committee also reviews, evaluates and recommends changes to the Company’s financial reporting
policies and procedures. The Corporate Governance, Nominating and Compensation Committee reviews and evaluates the risks
underlying the Company’s compensation policies and plans and recommends changes to these policies and plans accordingly. Our
Board believes that risk oversight actions taken by our Board and its committees are appropriate and effective at this time.
We believe it is beneficial to separate the roles of Chief Executive Officer and Chairman to facilitate their differing roles in
the leadership of our company. The role of the Chairman includes setting the agenda for, and presiding over, all meetings of our
Board of Directors, including executive sessions of independent directors, providing input regarding information sent to our Board
of Directors, serving as liaison between the Chief Executive Officer and the independent directors and providing advice and
assistance to the Chief Executive Officer. The Chairman is also a key participant in establishing performance objectives and
overseeing the process for the annual evaluation of our Chief Executive Officer’s performance. In addition, under our Bylaws, our
Chairman has the authority to call special meetings of our Board of Directors and shareholders. In contrast, our Chief Executive
Officer is responsible for handling our day-to-day management and direction, serving as a leader to the management team and
formulating corporate strategy.
Currently our Chairman is Mr. Karp, while Mr. Noss serves as our Chief Executive Officer. Mr. Karp is an independent
director. Mr. Karp has extensive executive leadership skills, long-standing senior management and board experience, a strong ethics
and compliance focus and audit committee experience.
We believe that this leadership structure for our Board provides us with the most effective level of oversight over the
Company’s business operations while at the same time enhancing our Board’s ability to oversee our enterprise-wide approach to risk
management and corporate governance and best serves the interests of our shareholders. It allows for a balanced corporate vision
and strategy, which is necessary to address the challenges and opportunities we face at this time and demonstrates our commitment
to good corporate governance. In addition, it allows for appropriate oversight of the Company by our Board, fosters appropriate
accountability of management and provides a clear delineation of responsibilities for each position.
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Role of the Board in Risk Oversight
One of our Board’s key functions is providing oversight of our risk management process. Our Board does not have a
standing risk management committee, but rather administers this oversight function directly through our Board as a whole, as well
as through Board of Directors standing committees that address risks inherent in their respective areas of oversight. In particular,
our Audit Committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management
has taken to monitor and control these exposures, our Corporate Governance, Nominating and Compensation Committee assesses
and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking, monitors
our major legal compliance risk exposures and our program for promoting and monitoring compliance with applicable legal and
regulatory requirements, and our Board is responsible for monitoring and assessing strategic risk exposure and other risks not covered
by our committees.
The full Board (or the appropriate committee in the case of risks that are under the purview of a particular committee)
receives reports on the risks we face from our Chief Executive Officer or other members of management to enable us to understand
our risk identification, risk management and risk mitigation strategies. When a committee receives the report, the chairman of the
relevant committee reports on the discussion to the full Board during that committee’s reports portion of the next Board meeting.
However, it is the responsibility of the committee chairs to report findings regarding material risk exposures to our Board as quickly
as possible.
Director Nomination
Our Corporate Governance, Nominating and Compensation Committee is responsible for identifying potential nominees to
our Board. In considering candidates for nomination, our Corporate Governance, Nominating and Compensation Committee seeks
individuals who evidence strength of character, mature judgment, career specialization, relevant technical skills or financial acumen,
diversity of viewpoint and industry knowledge. As set forth in the charter of our Corporate Governance, Nominating and
Compensation Committee, our Board endeavors to have directors who collectively possess a broad range of skills, expertise, industry
and other knowledge and business and other experience useful to the effective oversight of our business. In addition, our Board also
seeks members from diverse backgrounds so that our Board consists of members with a broad spectrum of experience and expertise
and with a reputation for integrity. In determining whether to nominate a current director for re-election, our Corporate Governance,
Nominating and Compensation Committee will take into account these same criteria as well as the director’s past performance,
including his or her participation in and contributions to the activities of the Board.
Our Corporate Governance, Nominating and Compensation Committee will evaluate and consider recommendations for
director candidates from shareholders using the same criteria described above. As set forth in the charter of the Corporate
Governance, Nominating and Compensation Committee, recommendations submitted by the Company’s shareholders shall be
submitted, along with the following to the attention of the Chairperson of the Corporate Governance, Nominating and Compensation
Committee at 96 Mowat Avenue, Toronto, Ontario M6K 3M1 Canada at least 120 days before the first anniversary of the date on
which we first mailed our proxy materials for our prior year’s annual meeting of shareholders:
•
•
•
•
•
the name and address of the recommending shareholder;
the candidate’s name and the information about the individual that would be required to be included in a proxy statement
under the rules of the SEC;
information about the relationship between the candidate and the recommending shareholder;
the consent of the candidate to serve as a director; and
proof of the number of shares of our common stock that the recommending shareholder owns and the length of time the
shares have been owned.
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Communications with our Board of Directors
A Tucows’ shareholder who wishes to communicate with our Board may send correspondence to the attention of our
Secretary at 96 Mowat Avenue, Toronto, Ontario M6K 3M1 Canada. The Secretary will submit the shareholder’s correspondence
to the Chairman of the Board, the Chairman of the appropriate committee, or the appropriate individual director, as applicable.
Director Compensation
Under the terms of our 2006 Amended and Restated Equity Compensation Plan (the “2006 Plan”), we make automatic
formula grants of nonqualified stock options to our non-employee directors and members of committees of our Board as described
below. All stock-based compensation for our non-employee directors is governed by our 2006 Plan or its predecessor, our 1996
Equity Compensation Plan (the “1996 Plan”). All options granted under the automatic formula grants vest after one year, have an
exercise price equal to the fair market value per common share as determined by the per share price as of the close of business on
the date of grant and have a five-year term. Options are granted to directors under the 2006 Plan as follows:
•
•
•
•
on the date a non-employee director becomes a director, he or she is granted options to purchase 4,375 shares of our common
stock;
on the date a director becomes a member of the Audit Committee, he or she is granted options to purchase 3,750 shares of
our common stock;
on the date a director becomes a member of the Corporate Governance, Nominating and Compensation Committee, he or she
is granted options to purchase 2,500 shares of our common stock; and
on each date on which we hold our annual meeting of shareholders, each non-employee director in office immediately before
and after the annual election of directors receives an automatic grant of options to purchase 3,750 shares of our common
stock.
Directors who are employees receive no additional or special compensation for serving as directors.
All annual fees are paid to our directors in quarterly installments.
In November 2017, the Board approved a new fee structure for 2018 that simplified the Director compensation structure
with annual fees and eliminates per meeting attendance fees. Commencing with Fiscal 2018, each date on which we hold our annual
meeting of shareholders, each non-employee director in office immediately before and after the annual election of directors receives
an automatic grant of options to purchase shares of our common stock. The initial grant was set at 3,750 options based on a $60 per
share price with the actual grant each year to be determined based on the share price 30 days prior to the annual election of
directors. Each non-employee member of the Board will receive $30,000 annually, the Chairman of the Board will additionally
receive $15,000; each Chair of the Audit Committee and Corporate Governance, Nomination and Compensation Committee will
additionally receive $7,500; and each member of the Audit Committee and Corporate Governance, Nomination and Compensation
Committee will additionally receive $12,000.
We also purchase directors and officers liability insurance for the benefit of our directors and officers as a group in the
amount of $30 million. We also reimburse our directors for their reasonable out-of-pocket expenses incurred in attending meetings
of our Board or its committees.
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The table below shows all compensation paid to each of our non-employee directors during 2019. Each of the directors
listed below served for the entire year.
Name
(a)
Allen Karp
Rawleigh Ralls
Erez Gissin
Robin Chase
Jeffrey Schwartz
Brad Burnham
Fees earned or
paid in cash ($)
(b)
Option awards
($)(1)
(d)
Total ($)
(h)
$
$
76,500 $
57,000
42,000
42,000
61,500
30,000
309,000 $
54,038 $
54,038
54,038
54,038
54,038
54,038
324,228 $
130,538
111,038
96,038
96,038
115,538
84,038
633,228
(1) On September 9, 2019 under the 2006 Plan, our non-employee directors were awarded these automatic formula option grants. Under
the 2006 Plan, these options will vest one year after the grant date and carry an exercise price of $53.93. All these options remained
outstanding as of December 31, 2019 and have a five-year term. The aggregate grant date fair value of the option grants was calculated
in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718 and based
on the Black-Scholes option-pricing model and used the same assumptions that are set forth in “Note 14 – Stock Option Plans” of
the Notes to the Consolidated Financial Statements including Part II, Item 8 of this Annual Report.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, requires our directors and executive officers and persons who own more than ten percent
of a registered class of our equity securities to file with the SEC reports of ownership and reports of changes in ownership of our
common stock and our other equity securities. These persons are required by SEC regulation to furnish us with copies of all
Section 16(a) reports they file.
We believe that, under the SEC’s rules and based solely upon our review of the copies of the Forms 3, 4 and 5 furnished to
us, or written representations from certain reporting persons, any such reports have been filed in a timely manner.
Stock ownership of management
We encourage stock ownership by our directors, officers and employees to align their interests with the interests of
shareholders. Under Section 16(a) of the Exchange Act, directors, officers and certain beneficial owners of the Company’s equity
securities are required to file reports of their transactions in the Company’s equity securities with the SEC on specified due dates.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Philosophy
We recognize that our success depends to a great degree on the integrity, knowledge, imagination, skill, diversity and
teamwork of our employees. To this end, attracting and retaining the level of executive talent we need to be successful in
accomplishing our mission of providing simple useful services that help people unlock the power of the Internet is a key objective
of our executive compensation program. Our executive compensation program is designed to ensure we have the talent we need to
maintain our current high-performance standards and grow our business for the future. As such, we aim to provide competitive
compensation packages for all our key positions, including our Named Executive Officers (“NEOs”) that are guided by market rates
and tailored to account for the specific needs and responsibilities of the particular position as well as the performance and unique
qualifications of the individual employee. For Fiscal 2018, our NEO's included Messrs. Noss, Singh, Woroch, Liem and Fausett.
This Compensation Discussion and Analysis (“CD&A”) provides comprehensive information about our executive
compensation program for our Fiscal 2019 NEOs, who are listed below, and provides context for the decisions underlying the
compensation reported in the executive compensation tables in this Annual Report. Our NEOs are:
Elliot Noss
Davinder Singh
David Woroch
Hanno Liem
Bret Fausett
President and Chief Executive Officer (“CEO”)
Chief Financial Officer (“CFO”)
Executive Vice-President, Domains (“EVP, Domains”)
Chief Technology Officer (“CTO”)
Chief Legal Officer & General Counsel (“General Counsel”)
Our philosophy is to provide a mix of compensation that motivates our executives to achieve our short and long- term
performance goals in a market-competitive and fiscally responsible way, which in turn will create value for our shareholders. We
achieve our objectives by designing our executive compensation program so that a substantial amount of our NEOs’ compensation
is performance-based to ensure the actual compensation paid to our executives is appropriately aligned with our Company’s
performance and shareholder long-term interests. In addition, we also link individual compensation to Company performance by
virtue of the stock options granted by the Company. More specifically, our executive compensation programs are designed to:
•
•
•
•
provide an appropriate mix of fixed and variable compensation to attract, retain and motivate key executives;
provide a substantial portion of our executive compensation that is performance-based, on a company or service basis, to
support creation of long-term shareholder value, Adjusted EBITDA for Compensation (as defined below) growth and
operational efficiency without encouraging excessive risk taking;
target compensation at the 50th percentile of market levels, as measured by PayScale Surveys; and
promote internal equity by offering comparable pay to executives whom we expect to make roughly equivalent contributions,
while differentiating executives’ compensation arrangements when appropriate.
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Overview of Pay Elements and Linkage to Compensation Philosophy and Objectives
We believe the following elements of our compensation program help us to realize our compensation philosophy and
objectives:
Pay Element
Salary
Characteristics
Annual fixed cash
compensation
Compensation Philosophy and
Objectives
Factors Considered to
Determine Awards
Provides a competitive and stable
component of income to our executives
• Job responsibilities
• Experience
• Individual contributions
• Future potential
• Internal pay equity
• Effect on other elements of
compensation and benefits
including target bonus amounts
• Company performance measures
• Service performance measures
Short-Term Incentive
Bonus
Annual variable cash
compensation based on
the achievement of pre-
established annual
performance measures
based on Adjusted
EBITDA for
Compensation
Provides competitive short- term
incentive opportunities for our
executives to earn annual cash bonuses
based on performance objectives that, if
attained, can reasonably be expected to
(i) promote our business and strategic
objectives and (ii) correspond to those
paid to similarly-situated and
comparably skilled executives at peer
companies
Stock Options Grants
Annual long-term equity
awards that vest over four
years
Provides variable compensation that
helps to retain executives and ensures
our executives’ interests are aligned
with those of shareholders to grow long-
term value
• Job responsibilities
• Individual contributions
• Future potential
• Value of vested and unvested
outstanding equity awards
• Internal pay equity
The weight of each of these components has to date not been determined by any particular formula, although our overall
mix of total compensation has historically emphasized retention value. The specific mix of components has been and will continue
to be within the discretion and business judgment of our Board and the Corporate Governance, Nominating and Compensation
Committee, which has placed greater emphasis on considerations specific to the individual holding a particular executive position
rather than on general market data.
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Role of Shareholder Say-on-Pay Votes
We provide our shareholders with the opportunity to cast a triennial advisory vote on executive compensation, or a Say-on-
Pay proposal. At our annual meeting of stockholders held on September 5, 2017, 98% of the votes cast on the Say- on-Pay proposal
at that meeting were voted in favor of the compensation of our NEOs, as described in the proxy statement for the 2017 annual
meeting. Accordingly, the Corporate Governance, Nominating and Compensation Committee believes that this affirms stockholder
support for our executive compensation policies and practices, and no material changes have been made to such policies and practices
as a result of our Say-on-Pay proposal and voting results in September 2017.
At the 2014 Annual Meeting, a majority of our stockholders approved, as recommended by our Board, a proposal for our
stockholders to be provided with the opportunity to cast a non-binding advisory vote on compensation of our NEOs every three
years. Our Board believed that this frequency would be appropriate as a triennial vote would provide the Company with sufficient
time to engage with stockholders to understand and respond to the “say-on-pay” vote results and to put in place any changes to the
Company’s compensation program as a result of such discussions, if necessary. The next stockholder advisory (non-binding) vote
on executive compensation will be held at our upcoming 2020 Annual Meeting.
Determining Total Compensation
Role of Compensation Consultant and Use of Market Data
Our Corporate Governance, Nominating and Compensation Committee (the “Committee”) is authorized to retain the
services of one or more executive compensation advisors, as it deems appropriate, in connection with the establishment and
maintenance of our executive compensation programs and related policies. The Committee engaged Integrated HR &
Compensation Solutions (“ICS”) to provide compensation advisory services to advise the Committee on its current executive
compensation program and make recommendations for any changes needed in order for executive compensation to be at the
median of market data.
ICS worked with our Chief People Officer to (i) establish executive compensation benchmarking points, (ii) establish
appropriate market-based compensation ranges for executive employees, (iii) provide advice and recommendations related to our
long term incentive programs (“LTIPs”) and short term incentive programs (“STIPs”), (iv) analyze and compare to prevalent
market practices for comparable roles our total compensation mix (i.e. base salary, LTIPs and STIPs) for our executives and (v)
provide a software tool to assist the Company in its executive compensation planning efforts.
In establishing market comparators for the executive team, ICS consulted market data as provided by Mercer’s
Benchmark Database compensation survey and the most recent publicly filed compensation disclosures of companies of
comparable size and scope.
In electing to engage ICS, the Committee took into consideration all factors relevant to the Consultant’s independence
and concluded that no conflict of interest existed.
Base Salary
With respect to each NEO, in determining total compensation, the Corporate Governance, Nominating and Compensation
Committee considers the Company’s compensation philosophy as outlined above, comparative market data and specific factors
relative to each NEO’s responsibilities and performance. We do not specifically benchmark compensation for our NEOs in terms of
picking a particular percentile relative to other people with similar titles at peer group companies. We believe that many subjective
factors unique to each NEO’s responsibilities and performance are not adequately reflected or otherwise accounted for in a percentile-
based compensation determination.
In addition, in determining the appropriate level of total compensation for our NEOs, the Corporate Governance,
Nominating and Compensation Committee (i) reviews and considers the performance of each NEO, and (ii) considers, for each
NEO, the estimated amount of total compensation:
● we would be willing to pay to retain that person;
● we would have to pay to replace the person; and
●
the individual could otherwise command in the employment marketplace.
Our Chief People Officer reviews comparative data derived from market research and publicly available information for
each of the NEOs and then recommends compensation levels for all employees to our CEO. The CEO then, after consultation with
the Vice President, Human Resources, makes recommendations to the Corporate Governance, Nominating and Compensation
Committee regarding total compensation for each NEO. The Corporate Governance, Nominating and Compensation Committee
reviews and discusses the information and then determines the total compensation for each NEO, as it deems appropriate.
The CEO’s total compensation is determined by the Corporate Governance, Nominating and Compensation Committee
outside the presence of the CEO. The Committee’s decision regarding total compensation for the CEO is based on the philosophy
outlined above and includes a review of comparative data and consideration of the accomplishments of the CEO in developing the
business strategy for the Company, the performance of the Company relative to this strategy and his ability to attract and retain
senior management. In establishing the CEO’s total compensation, the Corporate Governance, Nominating and Compensation
Committee is also mindful of the prior results of the shareholder’s Advisory Vote on Executive Compensation.
We provide a base salary to our NEOs to compensate them for services rendered on a day-to-day basis during the year and
to provide sufficient fixed cash compensation to allow them to focus on their ongoing responsibilities. The base salaries of all
executive officers are reviewed annually and adjusted when necessary to reflect individual roles and performance as well as market
conditions.
In connection with the Corporate Governance, Nominating and Compensation Committee's annual review process, each of
our NEOs were awarded standard merit increases effective January 1, 2020.
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Annual Cash Incentive Bonuses
We use annual cash incentive bonuses to communicate specific goals that are of primary importance during the coming
year and motivate our senior officers and NEOs to achieve these goals. Each year, we assess if our corporate financial and strategic
objectives are optimally aligned with our management incentive compensation plan to motivate and reward our senior executives,
including our NEOs, to attain specific short-term performance objectives that, in turn, further our long- term business objectives.
These objectives are based upon corporate or service-related targets, rather than individual objectives. In setting target payout levels
under our management incentive compensation plan, our Corporate Governance, Nominating and Compensation Committee
considers historical payouts, the total cost to the company should performance objectives be achieved and our retention needs.
The Corporate Governance, Nominating and Compensation Committee determines the initial level of funding for the annual
incentive bonus pools during the annual budgeting process and approves provisional quarterly payments, computed on a pro-rata
basis, based on quarterly minimum year-to-date targets for our senior officers, including NEOs, taking into account the Company’s
actual performance on a year-to-date basis. To ensure that our annual target remains the primary consideration, any quarterly
payments are subject to a discretionary holdback percentage, which has historically been set at 25% but may be adjusted each quarter
should circumstances warrant it. To mitigate the risk of overpayment of incentive bonuses based on a quarterly performance, a 25%
holdback of quarterly payments is maintained. The Corporate Governance, Nominating and Compensation Committee retains the
right to interpret, rescind, prescribe, amend or suspend payment under our management incentive compensation plan at any time.
Changes made by the Corporate Governance, Nominating and Compensation Committee will however only be on a prospective
basis so will not impact any quarterly rights our NEO’s and senior officers may have up to the date of the change.
The performance goals under our management incentive compensation plan consists of two components; namely, an
incentive bonus and an overachievement bonus, each with established thresholds and maximum achievement levels.
For the incentive bonus component, achievement of established targets for each NEO will equate to 100% of the bonus
being paid. Where 75% of an established target is achieved (“floor level”) this will result in 50% of the bonus being paid. Below the
floor level no bonus is payable. In those cases where achievement is between the floor level and the established target, straight-line
interpolation is applied from the established target levels.
To further incent our senior management and NEOs to promote our business and strategic objectives; to the extent that the
Company’s actual performance exceeds the Company’s Adjusted EBITDA for compensation goals (“overachievement target”), the
Compensation Committee sets aside 30% of the overachievement target in an overachievement pool to reward our senior
management, employees and NEOs. At the discretion of the Corporate Governance, Nominating and Compensation Committee,
approximately 40% of the overachievement pool has been allocated to the NEOs and is shared equally among them.
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Incentive Bonus program
The table below summarizes the 2019 and 2020 incentive bonus opportunities for our NEOs.
Named Officer
Elliot Noss
Davinder Singh
Bret Fausett
Hanno Liem
David Woroch
Target incentive Bonus
Opportunity(1)
2020
2019
Basis for Target incentive Bonus
$
$
$
$
$
161,437 $
41,383 $
63,000 $
45,917 $
105,815 $
154,735 100% Corporate Adjusted EBITDA for Compensation(2)
39,665 100% Corporate Adjusted EBITDA for Compensation(2)
63,000 100% Corporate Adjusted EBITDA for Compensation(2)
44,011 100% Corporate Adjusted EBITDA for Compensation(2)
101,422 100% Domain Services targets
(1) All dollar amounts below are shown U.S. dollars. Amounts payable in Canadian dollars for 2019 have been converted into U.S.
dollars based upon the exchange rate of 1.3067 Canadian dollars for each U.S. dollar, the Oanda exchange rate as at December
31, 2019. Amounts that were payable in Canadian dollars during the 2018 fiscal year have been converted into U.S. dollars
based upon the exchange rate of 1.3633 Canadian dollars for each U.S. dollar, which represents the Oanda exchange rate for
2018 as at December 31, 2018.
(2) Adjusted EBITDA for Compensation is a non-GAAP measure and excludes depreciation, amortization of intangibles, income
tax provision, interest expense, interest income, stock-based compensation, asset impairment, net deferred revenue, which
comprises the change in deferred revenue, net of prepaid domain name registry and other Internet services fees, to reflect the
material amount of cash we collect and pay for domain registrations and other Internet services at the time of activation, 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 and infrequently occurring items. Under relevant SEC rule, we are not required to present
reconciliation of Adjusted EBITDA for Compensation to GAAP financial measures if Adjusted EBITDA for Compensation is
presented in connection with disclosure of target levels in the CD&A.
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Our Corporate Governance, Nominating and Compensation Committee met in February 2020 and determined the
achievement of the financial objectives applicable under the management incentive compensation plan for 2019 had been not been
fully achieved. As the Company did not meet its Adjusted EBITDA for Compensation targets for the fiscal year ended
December 31, 2019, the Corporate Governance, Nominating and Compensation Committee assessed that 70% of the incentive
bonuses for all our NEO’s was payable. With the exception of Mr. Woroch, who earned 88% of his targeted bonus, all other bonuses
were assessed at 70% of target.
In connection with the Corporate Governance, Nominating and Compensation Committee’s annual review process, the
Committee also approved a new set of performance goals under our management incentive compensation plan for Fiscal 2019 and
decided not to increase the incentive bonus target opportunity for our NEOs.
Overachievement Bonus Program
The Overachievement Bonus Program is designed to further incent our employees, senior management and NEOs to exceed
the Company’s Adjusted EBITDA for compensation goals. In assessing our overall performance for Fiscal 2019, the Corporate
Governance, Nominating and Compensation Committee deemed that no overachievement bonus should be payable for Fiscal 2019.
Equity-Based Awards
We believe that equity-based awards encourage our NEOs to focus on the long-term performance of our business. Our
Board grants equity awards to executives and other employees in order to enable them to participate in the long-term appreciation
of our stock price. Additionally, we believe our equity awards provide an important retention tool for our NEOs, as they are subject
to multi-year vesting. To date, we have not adopted stock ownership guidelines for our NEOs.
Historically, we have granted equity-based awards in the form of stock options, including options granted at the
commencement of employment and additional awards each year. The size of the initial option grant made to each NEO upon joining
our company is primarily based on competitive conditions applicable to the NEO's specific position. For subsequent equity grants
to our NEOs, our Corporate Governance, Nominating and Compensation Committee receives input from our CEO and Vice
President, Human Resources.
In connection with its annual review process, the Corporate Governance, Nominating and Compensation Committee
approved, effective May 28, 2019, the following stock option awards to our NEOs. These stock options vest in equal installments
on each of the first four anniversaries of the grant date, generally subject to the NEO’s continued employment with us. No grants
have yet been awarded for Fiscal 2020.
Name
Elliot Noss
Davinder Singh
Bret Fausett
Hanno Liem
David Woroch
Number of stock
options
Aggregate Grant
Date Fair Value
(US Dollars)
4,500 $
2,250 $
2,250 $
2,250 $
2,250 $
95,760
47,880
47,880
47,880
47,880
During Fiscal 2019 options exercised and vested for our named executive officers were as follows:
Name
Elliot Noss
Davinder Singh
Bret Fausett
Hanno Liem
David Woroch
Options
exercised
during Fiscal
2019
Options vested
during Fiscal
2019
8,125
-
-
-
13,750
6,125
2,313
2,781
1,438
3,063
Severance and Change of Control Benefits
Our Board believes that it is necessary to offer senior members of our executive team severance benefits to ensure that they
remain focused on executing our strategic plans, including in the event of a proposed or actual acquisition. We have entered into
employment agreements with our NEOs to provide them with additional severance benefits upon an involuntary termination of
employment under specified circumstances prior to and following a change of control. The terms of these agreements are described
below in "Potential Payments on Termination or Change in Control."
Perquisites
We do not provide any significant perquisites or other personal benefits to our NEOs.
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Benefits
We provide the following benefits to our NEOs. We believe these benefits are typical of the companies with which we
compete for employees:
• healthcare insurance;
• life insurance and accidental death and dismemberment insurance;
• long term disability insurance;
• a registered retirement savings matching program;
• a healthcare spending account;
• a car allowance;
• an annual medical; and
• an employee assistance program.
Certain Corporate Governance Considerations
We currently do not require our executive officers to own a particular number of shares of our common stock. The Corporate
Governance, Nominating and Compensation Committee is satisfied that stock and option holdings among our executive officers are
sufficient at this time to provide motivation and to align their interests with those of our stockholders. However, we prohibit all
directors and employees from hedging their economic interest in the Company securities that they hold.
Tax Considerations
We do not provide any tax gross-ups to our executive officers or directors.
In designing our compensation programs, the Corporate Governance, Nominating and Compensation Committee considers
the financial accounting and tax consequences to Tucows as well as the tax consequences to our employees. In determining the
aggregate number and mix of equity grants in any fiscal year, the Corporate Governance, Nominating and Compensation Committee
and management consider the size and share-based compensation expense of the outstanding and new equity awards. Section 162(m)
of the Code generally disallows a tax deduction to public corporations for compensation greater than $1 million paid for any fiscal
year to the corporation’s Chief Executive Officer and the three other most highly compensated executive officers as of the end of
any fiscal year, other than the Chief Financial Officer. However, certain types of performance-based compensation are excluded
from the $1 million deduction limit if specific requirements are met.
The Committee considers the impact of Section 162(m) when designing our Executive Compensation Program and
structured our Executive Bonus Plan, stock plans and performance share programs so that a number of awards may be granted under
these plans and programs in a manner that complies with the requirements imposed by Section 162(m). Tax deductibility is not the
primary factor used by the Committee in setting compensation, however, and corporate objectives may not necessarily align with
the requirements for full deductibility under Section 162(m). We believe it is important to preserve flexibility in administering
compensation programs as corporate objectives may not always be consistent with the requirements for full deductibility. While our
Corporate Governance, Nominating and Compensation Committee has not adopted a formal policy regarding tax deductibility of
compensation paid to our NEOs, our Corporate Governance, Nominating and Compensation Committee may exercise discretion to
pay non-deductible compensation if following the requirements of Section 162(m) would not be in the interests of our shareholders.
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Compensation Risk Assessment
The Corporate Governance, Nominating and Compensation Committee oversaw the performance of a risk assessment of
our Executive Compensation Program to ascertain any potential material risks that may be created by this program. Because
performance-based incentives are used in our executive compensation program, it is important to ensure that these incentives do not
result in our NEOs taking unnecessary or excessive risks or any other actions that may conflict with our long-term interests. The
Corporate Governance, Nominating and Compensation Committee considered the following attributes of our Executive
Compensation Program:
•
•
•
•
the balance between short- and long-term incentives;
use of qualitative as well as quantitative performance factors in determining compensation payouts, including minimum and
maximum performance thresholds, funding that is based on actual results measured against pre-approved financial and
operational goals and metrics that are clearly defined;
incentive compensation that includes a stock component where value is best realized through long-term appreciation of
stockholder value; and
incentive compensation components that are paid or vest over an extended period.
The Corporate Governance, Nominating and Compensation Committee focuses primarily on the compensation of our NEOs
because risk-related decisions depend predominantly on their judgment. The Corporate Governance, Nominating and Compensation
Committee believes that risks arising from our policies and practices for compensation of other employees are not reasonably likely
to have a material adverse effect on us.
Compensation Committee Report
The Corporate Governance, Nominating and Compensation Committee has reviewed and discussed the foregoing CD&A
with management and, based on such review and discussions, the Corporate Governance, Nominating and Compensation Committee
has recommended to the Board that the CD&A be included in this Annual Report.
Submitted by the following members of the Corporate Governance, Nominating and Compensation Committee:
Allen Karp, Chair
Rawleigh Ralls
Jeffrey Schwartz
Robin Chase
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Summary Compensation Table
The following Summary Compensation table provides a summary of the compensation earned by our NEOs, including our
Chief Executive Officer, our Chief Financial Officer, and our next three most highly compensated executive officers for services
rendered in all capacities during 2019. Specific aspects of this compensation are dealt with in further detail in the tables that follow.
All dollar amounts below are shown in U.S. dollars. If necessary, amounts that were paid in Canadian dollars during Fiscal 2019
were converted into U.S. dollars based upon the exchange rate of 1.3273 Canadian dollars for each U.S. dollar, which represents the
average Oanda exchange rate for 2019.
Name and Principal Position Year Salary ($) Bonus (1) ($)
(b)
(a)
Elliot Noss
2019 $
President and Chief Executive
Officer
(c)
321,932 $
(d)
111,252 $
2018
2017
320,587
319,797
141,359
123,853
Davinder Singh(4)
Chief Financial Officer
Bret Fausett(5)
Chief Legal Officer
2019
2018
2017
2019
2018
2017
205,643
229,915
170,687
254,846
250,000
81,571
28,519
34,254
31,748
44,100
51,660
38,845
Hanno Liem (6)
Chief Technology Officer
2019
2018
178,483
174,372
31,643
38,007
Stock
Awards ($)
OptionAwards
(2) ($)
(f)
All Other
Compensation
(3) ($)
(i)
— $
95,760 $
7,911 $
Total ($)
(j)
536,855
—
—
—
—
—
—
—
—
—
—
105,930
-
8,111
8,091
575,987
451,741
47,880
52,965
42,240
47,880
26,483
196,300
47,880
195,150
6,781
6,953
6,935
288,823
324,087
251,610
-
—
—
346,826
328,143
316,716
1,130
1,159
259,136
408,688
David Woroch
Executive Vice President,
Domains
2019
216,453
91,673
—
47,880
6,781
362,787
2018
2017
215,473
208,677
99,041
106,549
—
—
52,965
—
6,953
6,935
374,432
322,161
(1) Represents bonus earned under our incentive programs during the fiscal years ended December 31, 2019, 2018 and 2017 and
bonus earned under our overachievement bonus programs during the fiscal year ended December 31, 2017.
Of the 2019 amount, the following amounts were paid in February 2020:
Elliot Noss
Davinder Singh
Bret Fausett
Hanno Liem
David Woroch
Of the 2018 amount, the following amounts were paid in February 2019:
Elliot Noss
Davinder Singh
Bret Fausett
Hanno Liem
David Woroch
76
$
$
$
$
$
$
$
$
$
$
54,037
13,852
21,420
15,370
42,450
58,461
14,986
22,601
16,628
41,790
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Of the 2017 amount, the following amounts were paid in February 2018:
Elliot Noss
Davinder Singh
David Woroch
$
$
$
55,347
14,187
49,012
(2) Represents the aggregate grant date fair value of such awards, calculated in accordance with FASB ASC 718. Please see “Note
14 – Stock Option Plans” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report, for
a discussion of the assumptions underlying these calculations.
(3) Amounts reported in this column are comprised of the following items:
Additional
Elliot Noss
Davinder Singh
Bret Fausett
Hanno Liem
David Woroch
Year
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2019
2018
2017
Health
Spending
Credits ($)
$
Car
Allowance
($)
All Other
Compensation
($)
1,130 $
1,159
1,156
1,130
1,159
1,156
—
—
—
1,130
1,159
1,130
1,159
1,156
6,781 $
6,952
6,935
5,651
5,794
5,779
—
—
—
—
—
5,651
5,794
5,779
7,911
8,111
8,091
6,781
6,953
6,935
—
—
—
1,130
1,159
6,781
6,953
6,935
(4) Mr. Singh was appointed to his position as CFO effective April 1, 2017.
(5) Mr. Fausett joined the Company in October 2017.
(6) Mr. Liem joined the Company in January 2018.
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Executive Pay Ratio
In August 2015 pursuant to a mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC
adopted a rule requiring annual disclosure of the ratio of the median employee’s annual total compensation to the total annual
compensation of the principal executive officer (‟PEO”). The Company’s PEO is Mr. Noss. The annual total compensation for fiscal
year 2019 for our PEO was $527,319, and for the median employee was $36,836. The resulting ratio of our PEO’s pay to the pay of
our median employee for fiscal year 2019 is 14 to 1.
The measurement was prepared as of December 31, 2019 based on active employees as at that date and total compensation
for the annual period then ended. The Company utilized tax records to determine the total annual compensation based on gross
employment income for each individual Form W-2 or equivalent for our international subsidiaries. Gross employment income
includes salaries, bonus, company medical benefits, car allowance and benefits from exercise of stock-options. We determined the
compensation of our median employee (i) by calculating the annual total compensation described above for each of our employees,
(ii) ranking the annual total compensation of all employees except for the PEO from lowest to highest and (iii) determining the
Median Employee. The Median Employee’s Fiscal 2019 compensation was then determined in a manner consistent with the
Summary Compensation Table above and compared to the PEO to derive the ratio.
Grants of Plan-Based Awards
The following table sets forth information concerning plan-based awards granted to our NEOs in 2019:
Name
Elliot Noss
Davinder Singh
Bret Fausett
Hanno Liem
David Woroch
Grant
date
All other
option
awards:
Number of
shares
underlying
options
Exercise or
base price
of option
awards
Grant date
fair value of
option
awards (1)
5/28/2019
4,500 $
62.12 $
95,760
5/28/2019
2,250 $
62.12 $
47,880
5/28/2019
2,250 $
62.12 $
47,880
5/28/2019
2,250 $
62.12 $
47,880
5/28/2019
2,250 $
62.12 $
47,880
(1) Represents the grant date fair value of such awards, calculated in accordance with FASB ASC 718. Please see “Note 14
– Stock Option Plans” of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report, for a
discussion of the assumptions underlying these calculations.
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Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information concerning stock options held by the named executive officers as of
December 31, 2019:
Name
Elliot Noss
Davinder Singh
Bret Fausett
Hanno Liem
David Woroch
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Option
Exercise Price
($)
Option
Expiration Date
6,250
10,000
7,500
1,125
—
24,875
2,000
3,750
1,000
562
—
7,312
5,000
281
—
5,281
5,000
1,250
187
—
6,437
6,250
5,000
3,750
562
—
15,562
—
—
2,500
3,375
4,500
10,375
—
1,250
1,000
1,688
2,250
6,188
5,000
844
2,250
8,094
—
3,750
563
2,250
6,563
—
—
1,250
1,688
2,250
5,188
10.16
19.41
21.10
64.10
62.12
19.95
19.95
55.65
64.10
62.12
53.20
64.10
62.12
58.65
58.65
64.10
62.12
10.16
19.41
21.10
64.10
62.12
11/10/2020
12/31/2021
12/31/2022
6/4/2025
5/27/2026
2/11/2023
2/11/2023
7/23/2024
6/4/2025
5/27/2026
9/4/2024
6/4/2025
5/27/2026
1/7/2025
1/7/2025
6/4/2025
5/27/2026
11/10/2020
12/31/2021
12/31/2022
6/4/2025
5/27/2026
The stock options grants listed in the above table were issued under our 2006 Plan.
Under the 2006 Plan, these options primarily vest over a period of four years and have a 7-year term. These options are not
exercisable for one year after the grant. Thereafter they become exercisable at the rate of 25% per annum, becoming fully exercisable
after the fourth year.
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Director Compensation
The required information regarding our director compensation is set forth in Part III, Item 10 “Directors, Executive Officers
and Corporate Governance” of this Annual Report and is incorporated herein by reference.
Potential Payments on Termination or Change in Control
We have certain agreements that require us to provide compensation to our NEO in the event of a termination of employment
or a change in control of Tucows. These agreements are summarized following the table below and do not include any payment for
termination for cause. The tables below show estimated compensation payable to each NEO upon various triggering events. Actual
amounts can only be determined upon the triggering event.
Elliot Noss (1)
Compensation
Base Salary/Severance (2)
Bonus Plan (3)
Acceleration of Unvested Equity Awards (4)
Benefits (5)
Car Allowance
Healthcare Flexible Spending Account
Davinder Singh (1)
Compensation
Base Salary/Severance (2)
Bonus Plan (3)
Acceleration of Unvested Equity Awards (4)
Benefits (5)
Car Allowance
Healthcare Flexible Spending Account
Bret Fausett (1)
Compensation
Base Salary/Severance (2)
Bonus Plan (3)
Acceleration of Unvested Equity Awards (4)
Benefits (5)
Car Allowance
Healthcare Flexible Spending Account
Termination
without Cause
(Dollar amounts
in U.S. dollars)
Change in
Control (Dollar
amounts in U.S.
dollars)
2019
$
643,863 $
317,863
101,700
2,643,863
317,863
101,700
13,562
2,260
13,562
2,260
$
1,079,248 $
3,079,248
Termination
without Cause
(Dollar amounts
in U.S. dollars)
Change in
Control (Dollar
amounts in U.S.
dollars)
2019
$
154,232 $
30,555
55,353
4,238
848
$
245,226 $
—
—
—
—
—
—
Termination
without Cause
(Dollar amounts
in U.S. dollars)
Change in
Control (Dollar
amounts in U.S.
dollars)
2019
$
171,667 $
42,000
21,450
—
—
$
235,117 $
—
—
—
—
—
—
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Hanno Liem (1)
Compensation
Base Salary/Severance (2)
Bonus Plan (3)
Acceleration of Unvested Equity Awards (4)
Benefits (5)
Car Allowance
Healthcare Flexible Spending Account
David Woroch (1)
Compensation
Base Salary/Severance (2)
Bonus Plan (3)
Acceleration of Unvested Equity Awards (4)
Benefits (5)
Car Allowance
Healthcare Flexible Spending Account
Termination
without Cause
(Dollar amounts
in U.S. dollars)
Change in
Control (Dollar
amounts in U.S.
dollars)
2019
$
104,115 $
26,369
3,913
—
659
$
135,056 $
—
—
—
—
—
—
Termination
without Cause
(Dollar amounts
in U.S. dollars)
Change in
Control (Dollar
amounts in U.S.
dollars)
2019
$
432,909 $
208,346
50,850
432,909
208,346
50,850
11,302
2,260
11,302
2,260
$
705,667 $
705,667
(1)
(2)
(3)
(4)
(5)
For the purpose of the table we assumed an annual base salary at the executive’s level as of December 31, 2019
Severance for Mr. Noss is compensation for one year plus one-month additional compensation for each completed year of
service. Total compensation is capped at 24 months. For Messrs. Singh, Fausett, Liem and Woroch, severance compensation is
for six months plus one-month additional compensation for each completed year of service. Total compensation is capped at
24 months.
For the purpose of the table we assumed that the annual incentive bonus target as of December 31, 2019 had been achieved and
that no overachievement bonus or special bonuses would be payable.
For purposes of the above table, we have assumed that if we terminate Mr. Noss without cause all his unvested options vest
automatically and that for Messrs. Singh, Fausett, Liem and Woroch, their options continue to vest through any severance
period. On a change in control we have assumed that all unvested options for Mr. Noss vest automatically and that for Messrs.
Singh, Fausett, Liem and Woroch, their options continue to vest through and until the end of any severance period. Amounts
disclosed in this table equal the closing market value of our common stock as of December 31, 2019, minus the exercise price,
multiplied by the number of unvested shares of our common stock that would vest. The closing market value of our common
stock on December 31, 2019 was $61.78.
Pay for unused vacation, extended health, matching registered retirement savings plan benefit, life insurance and accidental
death and dismemberment insurance are standard programs offered to all employees and are therefore not reported.
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Employment Agreements—Termination
Employment contracts are currently in place for each of the NEOs. These employment contracts detail the severance
payments that will be provided on termination of employment and the consequent obligations of non-competition and non-
solicitation.
The following details the cash severance payment that will be paid to each of the named executive officers in the event of
termination without cause or termination for good reason.
Upon termination without cause, Messrs. Woroch, Singh, Liem and Fausett are each entitled to a severance payment in the
amount of six months’ compensation plus one months’ compensation for each additional completed year of service. Severance
payments can be made in equal monthly installments. Messrs. Woroch, Singh, Liem and Fausett are each bound by a standard non-
competition covenant for a period of twelve months following their termination.
Mr. Noss’s employment agreements is subject to early termination by us due to:
the death or disability of the executive;
●
●
for “cause;” or
● without “cause.”
If we terminate Mr. Noss without “cause,” he is entitled to receive 12 months of compensation plus one month of
compensation for each year of service, to a maximum of 24 months of compensation.
For purposes of the employment agreements, “cause” is defined to mean the executive’s conviction (or plea of guilty or
nolo contendere) for committing an act of fraud, embezzlement, theft or other act constituting a felony or willful failure or an
executive’s refusal to perform the duties and responsibilities of his position, which failure or refusal is not cured within 30 days of
receiving a written notice thereof from our Board.
Employment Agreements—Change in Control
Under his employment agreements, Mr. Noss is also entitled to the change in control benefits described in the following
paragraph if:
●
the executive resigns with or without “good reason” within the 30-day period immediately following the date that is six months
after the effective date of the “change in control;” or
● within 18 months after a “change in control” and executive’s employment is terminated either:
● without “cause;” or
● by resignation for “good reason.”
If an executive’s employment is terminated following a change in control under the circumstances described in the
preceding paragraph, the executive is entitled to receive a lump sum payment based upon the fair market value of the Company on
the effective date of the “change in control” as determined by our Board in the exercise of good faith and reasonable judgment taking
into account, among other things, the nature of the “change in control” and the amount and type of consideration, if any, paid in
connection with the “change in control.” Depending on the fair market value of the company, the lump sum payments range from
$375,000 to $2 million for Mr. Noss. In addition to the lump sum payments, all stock options held by Mr. Noss will be immediately
and fully vested and exercisable as of the date of termination.
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A “change in control” is generally defined as:
●
●
●
●
●
●
the acquisition of 50% or more of our common stock;
a change in the majority of our Board unless approved by the incumbent directors (other than as a result of a contested
election); and
certain reorganizations, mergers, consolidations, liquidations or dissolutions, unless certain requirements are met regarding
continuing ownership of our outstanding common stock.
“Good reason” is defined to include the occurrence of one or more of the following:
the executive’s position, management responsibilities or working conditions are diminished from those in effect immediately
prior to the change in control, or he is assigned duties inconsistent with his position;
the executive is required to be based at a location in excess of 30 miles from his principal job location or office immediately
prior to the change in control;
the executive’s base compensation is reduced, or the executive’s compensation and benefits taken as a whole are materially
reduced, from those in effect immediately prior to the change in control; or
● we fail to obtain a satisfactory agreement from any successor to assume and agree to perform our obligations to the executive
under his employment agreement.
Compensation Committee Interlocks and Insider Participation
The members of the Corporate Governance, Nominating and Compensation Committee of our Board during 2019 were
Messrs. Karp (Chair), Schwartz and Ralls and Ms. Chase. To ensure that our compensation policies are administered in an objective
manner, our Corporate Governance, Nominating and Compensation Committee is comprised entirely of independent directors. None
of the members of our Corporate Governance, Nominating and Compensation Committee has ever been an officer or employee of
the Company or its subsidiaries. None of our executive officers serves as a member of the Board or compensation committee of any
entity that has one or more executive officers on our Board or Corporate Governance, Nominating and Compensation Committee.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth the beneficial ownership of our common stock, as of March 2, 2020, by each of our directors
and NEOs, as well as by all of our directors and executive officers as a group. The information on beneficial ownership in the table
and related footnotes is based upon data furnished to us by, or on behalf of, the persons referred to in the table. Unless otherwise
indicated in the footnotes to the table, each person named has sole voting power and sole investment power with respect to the shares
included in the table.
Beneficial Ownership of Common Stock
Common Stock
Beneficially
Owned
Excluding
Options
Stock Options
Exercisable
within 60 Days
of March 2,
2020
Total Common
Stock
Beneficially
Owned
Percent of
Class(1)
739,803 (2)
0
0
0
124,856 (3)
15,142 (4)
2,261
4,375
10,387
8,625
353,982 (5)
27,375
8,562
5,281
0
16,812
15,000
7,500
17,500
15,000
15,000
11,875 (6)
767,178
8,562
5,281
0
141,668
30,142
9,761
21,875
25,387
23,625
365,857
7.2 %
*
0.0 %
*
1.3 %
*
*
*
*
*
3.4 %
1,300,601
187,261
1,487,862
13.8 %
Name
Elliot Noss
Davinder Singh
Bret Fausett
Hanno Liem
David Woroch
Allen Karp
Rawleigh Ralls
Robin Chase
Erez Gissin
Jeffrey Schwartz
Brad Burnham
All directors and executive officers as a group (15
persons)
* Less than 1%.
(1) Based on 10,621,338 shares outstanding as of March 2, 2020, and stock options exercisable within 60 days of March 2,
2020.
(2) Includes an aggregate of 120,670 shares of common stock that are held in Mr. Noss’s RRSP accounts. Includes an aggregate
of 1,639 shares of common stock that are held in Mr. Noss’s TFSA account. Includes 43,127 shares of common stock that are held
in Mr. Noss’s former spouses name, over which he has voting power only, pursuant to a separation agreement of 2013. Includes an
aggregate of 6,206 shares of common stock that are held in trust for Mr. Noss’s children. Includes 514,951 shares of Common
Stock that are subject to a loan and pledge arrangement entered into by Mr. Noss in order to satisfy the required Canadian taxes
and exercise price due in connection with the exercise of expiring options.
(3) Includes 54,984 shares of common stock that are held in Mr. Woroch’s RRSP account and 10,750 shares of common stock
held in his wife’s RRSP account.
(4) Includes 3,000 shares of common stock that are held directly by Mr. Karp’s wife.
(5) Includes 26,112 shares held directly by Mr. Burnham, and 327,870 shares held by USV Opportunity Investors 2014, L.P.
(“USV Opportunity 2014”). USV Opportunity 2014 GP, LLC ("USV Opportunity 2014 GP") is the general partner of USV
Opportunity 2014 and, as such, has the power to vote and dispose of the 327,870 shares held by USV Opportunity 2014. Mr.
Burnham is a manager of USV Opportunity 2014 GP and, as such, may be deemed to share voting and dispositive power over the
327,870 shares held by USV Opportunity 2014. Mr. Burnham disclaims beneficial ownership of the shares owned by USV
Opportunity 2014 except to the extent of his pecuniary interest therein.
(6) On December 1, 2017, Mr. Burnham, a member of Union Square Ventures, LLC (“USV LLC”), entered into a fee
compensation agreement with USV LLC, under which Mr. Burnham agreed to hold the Company’s stock option grants to him in
his individual capacity, and upon the exercise of such options, Mr. Burnham will transfer to USV LLC the shares acquired in the
option exercise or, with the consent of USV LLC, a cash payment equal to the fair market value of such shares. In connection with
such option exercise and transfer, USV LLC will extend to Mr. Burnham an interest-free loan in an amount equal to the exercise
price of the option, and any transfer of acquired shares or cash payment will, to the extent not in excess of the amount of the loan
(if any), first be deemed as repayment of the loan.
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Share Ownership of Certain Beneficial Owners
The following table sets forth information with respect to each shareholder known to us to be the beneficial owner of more
than 5% of our outstanding common stock as of March 2, 2020 except for Mr. Noss, whose beneficial ownership of shares is
described in the table above.
Name and Address of Beneficial Owner
Investmentaktiengesellschaft fuer langfristige Invetoren TGV
Ruengsdorfer Str. 2e
53173 Bonn, Germany
CLS Investments, LLC
17605 Wright St
Omaha, NE 68130
Beneficial Ownership of Common Stock
Number of Shares
Beneficially
Owned
Percent of Class
(1)
1,605,127 (2)
15.1 %
544,000 (3)
5.1 %
(1) Based on 10,621,338 shares outstanding as of March 2, 2020.
(2) Investmentaktiengesellschaft fuer langfristige Invetoren TGV had sole dispositive power and sole voting power over
1,605,127 shares of common stock. This information is based solely on a review of a Schedule 13G filed with the SEC on January
16, 2020 by Investmentaktiengesellschaft fuer langfristige Invetoren TGV.
(3) CLS Investments, LLC had shared voting power over 64,000 shares of common stock and sole dispositive power over
544,000 shares of common stock. This information is based solely on a review of a Schedule 13G filed with the SEC on June 14,
2019 by CLS Investments, LLC.
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Equity Compensation Plan Information
The following table provides information for our equity compensation plans as of December 31, 2019:
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights (#)
Weighted
average exercise
price of
outstanding
options,
warrants and
rights ($)
Number of
securities
remaining
available for
future issuance
under the plan
(excluding
securities
reflected in the
first column) (#)
754,497 $
—
754,497 $
49.94
—
49.94
209,169
—
209,169
Plan category
Equity compensation plans approved by security holders:
2006 Equity Compensation Plan
Equity compensation plans not approved by security holders
Total
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Review, Approval or Ratification of Transactions with Related Persons
The Audit Committee of the Board is responsible for reviewing and, if appropriate, approving all related party transactions
between us and any officer or director that would potentially require disclosure pursuant to the Audit Committee charter. As of the
date of this Annual Report on Form 10-K, we expect that any transactions in which related persons have a direct or indirect interest
will be presented to the Audit Committee for review and approval. While neither the Audit Committee nor the board have adopted
a written policy regarding related party transactions, the Audit Committee makes inquiries to our management and our auditors when
reviewing such transactions. Neither we nor the audit committee are aware of any transaction that was required to be reported with
the SEC where such policies and procedures either did not require review or were not followed.
Director Independence
Our Board has determined that each of Messrs. Karp, Ralls, Gissin, Schwarz and Burnham and Ms. Chase are independent
directors, as prescribed by the listing standards of the NASDAQ Capital Market. In this Annual Report, each of these six directors
are referred to individually as an “independent director” and collectively as the “independent directors”. In addition, our Board has
determined that each member of our Audit Committee satisfies the applicable audit committee independence standards as prescribed
by the listing standards of the NASDAQ Capital Market and Rule 10A-3 under the Exchange Act, and that each member of our
Corporate Governance, Nomination and Compensation Committee satisfies the applicable compensation committee member
independence standards as prescribed by the listing standards of the NASDAQ Capital Market and Rule 10C-1 under the Exchange
Act.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
A summary of the fees of KPMG LLP for the years ended December 31, 2019 and 2018 are set forth below:
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees
Total Fees
2019 Fees
2018 Fees
$
$
566,000 $
-
91,000
-
657,000 $
515,000
-
70,000
-
585,000
(1) Consists of fees and expenses for (a) the annual audits of our consolidated financial statements and the accompanying
attestation report regarding our ICFR contained in our Annual Report on Form 10-K, (b) the review of quarterly financial
information included in our Quarterly Reports on Form 10-Q, and (c) audit services related to mergers and acquisitions.
(2) Consists of fees and expenses for assurance and related services, such as the review of non-periodic filings with the SEC.
(3) Consists of fees and expenses for tax compliance and advisory services.
Audit Committee pre-approval of audit and permissible non-audit services of independent auditors.
The Audit Committee has adopted a pre-approval policy that provides guidelines for the audit, audit-related, tax and other
non-audit services that may be provided to us by our independent auditors. Under this policy, the Audit Committee pre-approves all
audit and certain permissible accounting and non-audit services performed by the independent auditors. These permissible services
are set forth on an attachment to the policy that is updated at least annually and may include audit services, audit-related services,
tax services and other services. For audit services, the independent auditor provides the audit committee with an audit plan including
proposed fees in advance of the annual audit. The Audit Committee approves the plan and fees for the audit.
With respect to non-audit and accounting services of our independent auditors that are not pre-approved under the policy,
the employee making the request must submit the request to our Chief Financial Officer. The request must include a description of
the services, the estimated fee, a statement that the services are not prohibited services under the policy and the reason why the
employee is requesting our independent auditors to perform the services. If the aggregate fees for such services are estimated to be
less than or equal to $50,000, our Chief Financial Officer will submit the request to the chairman of the audit committee for
consideration and approval, and the engagement may commence upon the approval of the chairman. The chairman is required to
inform the full Audit Committee of the services at its next meeting. If the aggregate fees for such services are estimated to be greater
than $50,000, our Chief Financial Officer will submit the request to the full Audit Committee for consideration and approval,
generally at its next meeting or special meeting called for the purpose of approving such services. The engagement may only
commence upon the approval of full Audit Committee.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report on Form 10-K:
1. Financial Statements. The financial statements listed in the accompanying index to consolidated financial
statements are filed as part of this Annual Report on Form 10-K.
2. Financial Statement Schedules. Schedules are not submitted because they are not required or are not applicable,
or the required information is shown in the consolidated financial statements or notes thereto.
3. Exhibits. The Exhibits listed below are filed or incorporated by reference as part of this Annual Report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits
incorporated by reference, the location of the exhibit in the previous filing is indicated in the footnotes below.
Exhibit
No.
2.1
2.2
2.3
Description
Stock Purchase Agreement, dated as of January 20, 2017, by and among Tucows Inc., Tucows (Emerald), LLC, Rightside
Group, Ltd., Rightside Operating Co. and eNom, Incorporated (Incorporated by reference to Exhibit 2.1 filed with Tucows’
Current Report on Form 8-K, as filed with the SEC on January 23, 2017).
First Amendment, dated as of June 13, 2017, to Stock Purchase Agreement, dated as of January 20, 2017, by and among
Tucows Inc., Tucows (Emerald), LLC, Rightside Group, Ltd., Rightside Operating Co. and eNom, Incorporated
(Incorporated by reference to Exhibit 2.3 filed with Tucows’ Current Report on Form 8-K, as filed with the SEC on June
15, 2017, 2017).
Asset Purchase Agreement, dated as of March 18, 2019, by and among Tucows Inc., Ting Fiber, Inc., NetNames European
Holdings ApS, NetNames GmbH, CSC Administrative Services Limited UK, Corporation Service Company and Ascio
Technologies, Inc. (Incorporated by reference to Exhibit 2.1 filed with Tucows’ Current Report on Form 8-K, as filed with
the SEC on March 20, 2019).
3.1.1
Fourth Amended and Restated Articles of Incorporation of Tucows Inc. (Incorporated by reference to Exhibit 3.1 filed with
Tucows’ Current Report on Form 8-K, as filed with the SEC on November 29, 2007).
3.1.2
Articles of Amendment to Fourth Amended and Restated Articles of Incorporation of Tucows Inc. (Incorporated by
reference to Exhibit 3.1 filed with Tucows’ Current Report on Form 8-K, as filed with the SEC on January 3, 2014).
3.2
3.3
Second Amended and Restated Bylaws of Tucows Inc. (Incorporated by reference to Exhibit 3.2 filed with Tucows’ Annual
Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 29, 2007).
Amendment No. 1 to Second Amended and Restated Bylaws of Tucows Inc. (Incorporated by Reference to Exhibit 3.3 filed
with Tucows’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
4.1#
Description of Securities of the Registrant.
10.1*
2006 Equity Compensation Plan, as amended and restated effective as of September 8, 2015 (Incorporated by reference to
Exhibit 99(d)(1) filed with Tucows’ Schedule TO, as filed with the SEC on September 17, 2010).
10.2*
Employment Agreement, dated as of January 22, 2003, between Tucows.com Co. and Elliot Noss (Incorporated by reference
to Exhibit 10.3 filed with Tucows’ Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the
SEC on March 28, 2003).
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Exhibit
No.
10.3
Lease between 707932 Ontario Limited and Tucows International Corporation, dated as of December 10, 1999
(Incorporated by reference to exhibit number 10.9 filed with Tucows’ Annual Report on Form 10-K for the year ended
December 31, 2001, as filed with the SEC on April 1, 2002).
Description
10.4
Lease extension between 707932 Ontario Limited and Tucows Inc. and Tucows.com Co., dated as of September 18, 2004
(Incorporated by reference to Exhibit 10.8 filed with Tucows’ Annual Report on Form 10-K for the year ended December
31, 2004, as filed with the SEC on March 24, 2005).
10.5#
Lease extension between 707932 Ontario Limited and Tucows (Delaware) Inc. and Tucows.com Co., dated as of January
1, 2019
10.6*
Description of Tucows Fiscal 2004 At Risk Compensation Plan (Incorporated by reference to Exhibit 10.9 filed with
Tucows’ Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the SEC on March 24, 2005).
10.7
10.8
10.9
Credit Agreement, dated as of August 18, 2016, by and among Tucows.com Co., Ting Fiber, Inc., Ting Inc., as Borrowers,
Tucows Inc., as Guarantor, and Bank of Montreal and Royal Bank of Canada, as Lenders (Incorporated by reference to
Exhibit 10.1 filed with Tucows’ Current Report on Form 8-K, as filed with the SEC on August 19, 2016).
First Amended and Restated Credit Agreement, dated as of January 20, 2017, by and amount Tucows.com Co., Ting Fiber,
Inc., Ting Inc., Tucows (Emerald) LLC, as Borrowers, Tucows Inc., as Guarantor, and Bank of Montreal, Royal Bank of
Canada and Bank of Nova Scotia, as Lenders (Incorporated by reference to Exhibit 10.1 filed with Tucows’ Current Report
on Form 8-K, as filed with the SEC on January 23, 2017).
First Amendment, dated as of June 6, 2017 to the Amended and Restated Credit Agreement, dated as of January 20, 2017,
by and amount Tucows.com Co., Ting Fiber, Inc., Ting Inc., Tucows (Emerald) LLC, as Borrowers, Tucows Inc., as
Guarantor, and Bank of Montreal, Royal Bank of Canada and Bank of Nova Scotia, as Lenders (Incorporated by reference
to Exhibit 10.1 filed with Tucows’ Current Report on Form 8-K, as filed with the SEC on June 9, 2017).
10.10
Interim Amendment, dated as of December 5, 2017, to the Amended and Restated Credit Agreement, dated as of January
20, 2017, by and amount Tucows.com Co., Ting Fiber, Inc., Ting Inc., Tucows (Emerald) LLC, as Borrowers, Tucows Inc.,
as Guarantor, and Bank of Montreal, Royal Bank of Canada and Bank of Nova Scotia, as Lenders (Incorporated by reference
to Exhibit 10.1 filed with Tucows’ Current Report on Form 8-K, as filed with the SEC on December 8, 2017).
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Exhibit
No.
10.11
10.12
10.13
Description
Second Interim Amendment, dated as of January 24, 2018, to the First Amended and Restated Credit Agreement, dated as
of January 20, 2017, by and among Tucows.com Co., Ting Fiber, Inc., Ting Inc., Tucows (Delaware), Inc., Tucows
(Emerald) LLC, as Borrowers, Tucows Inc., as Guarantor, and Bank of Montreal, Royal Bank of Canada and Bank of Nova
Scotia, as Lenders (Incorporated by reference to Exhibit 10.1 filed with Tucows’ Current Report on Form 8-K, as filed with
the SEC on January 24, 2018).
Second Amendment to First Amended and Restated Credit Agreement, dated as of March 18, 2019, by and among
Tucows.com Co., Ting Fiber, Inc., Ting Inc., Tucows (Delaware) Inc. and Tucows (Emerald), LLC, as Borrowers, Tucows
Inc., as Guarantor, Bank of Montreal, as Administrative Agent, and Bank of Montreal, Royal Bank of Canada and The Bank
of Nova Scotia, as Lenders (Incorporated by reference to Exhibit 10.1 filed with Tucows’ Current Report on Form 8-K, as
filed with the SEC on March 20, 2019).
Amended and Restated Senior Secured Credit Agreement, dated as of June 14, 2019, by and among Tucows.com Co., Ting
Fiber, Inc., Ting, Inc., Tucows (Delaware) Inc., Tucows (Emerald), LLC, as Borrowers, Tucows, Inc., as parent, Royal
Bank of Canada, as Administrative Agent, and Royal Bank of Canada, Bank of Montreal, Bank of Nova Scotia, HSBC
Bank Canada and Canadian Imperial Bank of Commerce, as Lenders (Incorporated by reference to Exhibit 10.1 filed with
Tucows’ Current Report on Form 8-K, as filed with the SEC on June 18, 2019).
10.14
Amending Agreement No. 1, dated as of November 27, 2019, to the Amended and Restated Senior Secured Credit
Agreement, dated as of June 14, 2019 (Incorporated by reference to Exhibit 10.1 filed with Tucows’ Current Report on
Form 8-K, as filed with the SEC on December 4, 2019).
21.1#
Subsidiaries of Tucows Inc.
23.1#
Consent of KPMG LLP, Independent Registered Public Accounting Firm.
31.1#
Chief Executive Officer’s Rule 13a-14(a)/15d-14(a) Certification.
31.2#
Chief Financial Officer’s Rule 13a-14(a)/15d-14(a) Certification.
32.1†
Chief Executive Officer’s Section 1350 Certification.
32.2†
Chief Financial Officer’s Section 1350 Certification.
101.INS# XBRL Instance
101.SCH# XBRL Taxonomy Extension Schema
101.CAL# XBRL Taxonomy Extension Calculation
101.DEF# XBRL Taxonomy Extension Definition
101.LAB# XBRL Taxonomy Extension Labels
101.PRE# XBRL Taxonomy Extension Presentation
104
The cover page from this Annual Report on Form 10-K, formatted as Inline XBRL.
* Management or compensatory contract.
#
†
Filed herewith.
Furnished herewith.
90
Table of Contents
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of Tucows Inc.
Consolidated Financial Statements of Tucows Inc.
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
F-1
Pages
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-8
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Tucows Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Tucows Inc.’s and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated
statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 4, 2020
expressed an unqualified opinion on those consolidated financial statements.
The Company acquired Ascio Technologies, Inc. (“Ascio”) during 2019, and management excluded from its assessment of the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, Ascio’s internal control over
financial reporting associated with total assets of $44 million and total revenues of $17 million included in the consolidated
financial statements of the Company as of and for the year ended December 31, 2019. Our audit of internal control over financial
reporting of the Company also excluded an evaluation of the internal control over financial reporting of Ascio.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual
Report on Internal Control over Financial Reporting in Item 9A of the Form 10-K for the fiscal year-ended December 31, 2019.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Chartered Professional Accountants, Licensed Public Accountants
Vaughan, Canada
March 4, 2020
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Tucows Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Tucows, Inc. and subsidiaries (the Company) as of
December 31, 2019 and 2018, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows
for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated
financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 4, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company adopted Accounting Standards Codification
(“ASC”) Topic 842, Leases (“ASC 842”) on January 1, 2019 using the modified retrospective method by recognizing the
cumulative effect of initially applying ASC 842 as an adjustment to the opening balance sheet as at January 1, 2019.
As discussed in Note 2 to the consolidated financial statements, the Company adopted Accounting Standards Codification
(“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 using the modified retrospective
method by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance sheet as at
January 1, 2018.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ KPMG LLP
Chartered Professional Accountants, Licensed Public Accountants
We have served as the Company’s auditor since 2000.
Vaughan, Canada
March 4, 2020
F-3
Table of Contents
Tucows Inc.
Consolidated Balance Sheets
(Dollar amounts in thousands of U.S. dollars)
December 31, December 31,
2019
2018*
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $131 as of December 31, 2019
and $132 as of December 31, 2018
Inventory
Prepaid expenses and deposits
Derivative instrument asset, current portion (note 7)
Prepaid domain name registry and ancillary services fees, current portion (note 11 (b))
Income taxes recoverable
Total current assets
$
$
$
Prepaid domain name registry and ancillary services fees, long-term portion (note 11 (b))
Property and equipment (note 4)
Right of use operating lease asset
Contract costs (note 11 (a))
Intangible assets (note 5)
Goodwill (note 5)
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Accrued liabilities
Customer deposits
Derivative instrument liability (note 7)
Deferred rent, current portion
Operating lease liability, current portion (note 12)
Loan payable, current portion (note 8)
Deferred revenue, current portion (note 10)
Accreditation fees payable, current portion
Income taxes payable
Total current liabilities
Deferred revenue, long-term portion (note 10)
Accreditation fees payable, long-term portion
Deferred rent, long-term portion
Operating lease liability, long-term portion (note 12)
Loan payable, long-term portion (note 8)
Deferred tax liability (note 9)
Stockholders' equity (note 13)
20,393 $
12,637
14,564
3,457
13,478
731
91,252
1,800
145,675
17,915
82,121
11,335
1,400
57,654
109,818
425,918 $
6,671 $
9,373
14,074
-
-
1,413
-
123,101
952
1,324
156,908
26,202
216
-
9,424
113,503
25,471
10,837
3,775
15,472
-
87,782
1,423
131,926
18,745
48,065
-
1,390
49,395
90,054
339,575
8,445
5,899
11,919
1,276
21
-
18,400
116,734
985
1,668
165,347
26,960
250
116
-
46,201
20,925
Preferred stock - no par value, 1,250,000 shares authorized; none issued and outstanding
Common stock - no par value, 250,000,000 shares authorized; 10,585,159 shares issued and
outstanding as of December 31, 2019 and 10,627,988 shares issued and outstanding as of
December 31, 2018
-
-
16,633
15,823
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss) (note 7)
Total stockholders' equity
Total liabilities and stockholders' equity
Commitments and contingencies (note 18)
Subsequent events (note 20)
880
76,208
473
94,194
425,918 $
3,953
60,810
(810 )
79,776
339,575
$
*The Company has initially applied ASC 2016-02 (Topic 842) on January 1, 2019 using the modified retrospective method (note 2
(v)). Under this method, the comparative information is not restated.
See accompanying notes to consolidated financial statements
F-4
Table of Contents
Tucows Inc.
Consolidated Statements of Comprehensive Income
(Dollar amounts in thousands of U.S. dollars, except per share amounts)
Net revenues (note 10)
Cost of revenues (note 10)
Cost of revenues
Network expenses
Depreciation of property and equipment (note 4)
Amortization of intangible assets (note 5)
Total cost of revenues
Gross profit
Expenses:
Sales and marketing
Technical operations and development
General and administrative
Depreciation of property and equipment (note 4)
Loss on disposition of property and equipment
Amortization of intangible assets (note 5)
Impairment of indefinite life intangible assets (note 5)
Loss (gain) on currency forward contracts (note 7)
Total expenses
Income from operations
Other income (expenses):
Interest expense, net
Other income, net (note 16)
Total other income (expenses)
2019
Year ended December 31,
2018*
2017*
$
337,145 $
346,013 $
329,421
217,579
9,190
8,475
1,124
236,368
232,103
9,846
5,298
1,996
249,243
230,600
9,324
3,142
1,834
244,900
100,777
96,770
84,521
34,270
9,717
17,880
486
73
9,209
-
(198 )
71,437
33,063
8,748
17,710
424
-
7,247
-
254
67,446
29,423
7,258
13,594
585
-
6,566
111
(98 )
57,439
29,340
29,324
27,082
(4,769 )
-
(4,769 )
(3,687 )
518
(3,169 )
(3,567 )
560
(3,007 )
Income before provision for income taxes
24,571
26,155
24,075
Provision for income taxes (note 9)
9,173
9,020
1,748
Net income before redeemable non-controlling interest
15,398
17,135
22,327
Redeemable non-controlling interest
Net income attributable to redeemable non-controlling interest
-
-
(26 )
26
(387 )
387
Net income for the period
15,398
17,135
22,327
Other comprehensive income, net of tax
Unrealized income (loss) on hedging activities (note 7)
Net amount reclassified to earnings (note 7)
Other comprehensive income (loss) net of tax (expense) recovery of
($411), $259 and $56 for the years ended December 31, 2019, 2018 and
2017 (note 7)
1,101
182
(1,022 )
212
550
(650 )
1,283
(810 )
(100 )
Comprehensive income, net of tax for the period
$
16,681 $
16,325 $
22,227
Basic earnings per common share (note 17)
$
1.45 $
1.62 $
2.12
Shares used in computing basic earnings per common share (note 17)
10,623,799
10,604,722
10,537,356
Diluted earnings per common share (note 17)
$
1.43 $
1.59 $
2.07
Shares used in computing diluted earnings per common share (note 17)
10,772,812
10,794,170
10,793,622
*The Company has initially applied ASC 2014-09 (Topic 606) on January 1, 2018 and ASC 2016-02 (Topic 842) on January 1, 2019
(note 2 (v)). Both accounting standards were adopted using the modified retrospective method, under this method the comparative
periods were not restated.
See accompanying notes to consolidated financial statements
F-5
Table of Contents
Tucows Inc.
Consolidated Statements of Stockholders’ Equity
(Dollar amounts in thousands of U.S. dollars)
Additional
Common stock
paid in
Number Amount capital
Retained comprehensive stockholders'
earnings income (loss)
equity
Accumulated
other
Total
Balances, December 31, 2016*
10,461,574 $ 14,460 $
2,858 $ 20,400 $
100 $
37,818
Exercise of stock options
Shares deducted from exercise of stock options
for payment of withholding taxes and exercise
consideration
Stock-based compensation (note 14)
Net income
Accretion of redeemable non-controlling interest
in Ting Virginia, LLC.
Other comprehensive income (loss) (note 7)
Balances, December 31, 2017*
Adoption of Topic 606 (note 2(v))
Adjusted, January 1, 2018
Exercise of stock options
Shares deducted from exercise of stock options
for payment of withholding taxes and exercise
consideration
Stock-based compensation (note 14)
Net income
Accretion of redeemable non-controlling interest
in Ting Virginia, LLC.
Other comprehensive income (loss) (note 7)
Balances, December 31, 2018*
172,759
908
(686 )
-
-
222
(50,454 )
-
-
-
-
-
(1,462 )
1,457
-
-
- 22,327
-
-
-
-
10,583,879 15,368
-
-
10,583,879 15,368
-
-
(51 )
-
2,167 42,676
1,063
2,167 43,739
-
-
-
-
-
(100 )
-
-
-
(1,462 )
1,457
22,327
(51 )
(100 )
60,211
1,063
61,274
63,886
455
(343 )
-
-
112
(19,777 )
-
-
-
-
-
(445 )
2,574
-
-
- 17,135
-
-
-
-
10,627,988 15,823
-
-
(64 )
-
3,953 60,810
-
-
-
-
(810 )
(810 )
(445 )
2,574
17,135
(64 )
(810 )
79,776
Exercise of stock options
Shares deducted from exercise of stock options
for payment of withholding taxes and exercise
consideration
Repurchase and retirement of shares (note 13(a))
Stock-based compensation (note 14)
Net income
Other comprehensive income (loss) (note 7)
Balances, December 31, 2019**
80,319
967
(572 )
-
-
395
-
(21,332 )
(157 )
(101,816 )
-
-
-
-
-
-
10,585,159 $ 16,633 $
(548 )
(4,829 )
2,876
-
-
-
- 15,398
-
-
880 $ 76,208 $
-
-
-
-
1,283
473 $
(548 )
(4,986 )
2,876
15,398
1,283
94,194
*The Company has initially applied ASC 2014-09 (Topic 606) on January 1, 2018 and ASC 2016-02 (Topic 842) on January 1, 2019
(note 2(v)). Both accounting standards were adopted using the modified retrospective method, under this method the comparative
periods were not restated.
See accompanying notes to consolidated financial statements
F-6
Table of Contents
Tucows Inc.
Consolidated Statements of Cash Flows
(Dollar amounts in thousands of U.S. dollars)
Cash provided by:
Operating activities:
Net income for the period
Items not involving cash:
Depreciation of property and equipment
Loss on write off of property and equipment
Amortization of debt discount and issuance costs
Amortization of intangible assets
Net amortization contract costs
Impairment of indefinite life intangible asset
Deferred income taxes (recovery)
Excess tax benefits on share-based compensation expense
Amortization of deferred rent
Net Right of use operating assets/Operating lease liability
Loss on disposal of domain names
Other income
Loss (gain) on change in the fair value of forward contracts
Stock-based compensation
Change in non-cash operating working capital:
Accounts receivable
Inventory
Prepaid expenses and deposits
Prepaid domain name registry and ancillary services fees
Income taxes recoverable
Accounts payable
Accrued liabilities
Customer deposits
Deferred revenue
Accreditation fees payable
Net cash provided by operating activities
Financing activities:
Proceeds received on exercise of stock options
Payment of tax obligations resulting from net exercise of stock options
Repurchase of common stock
Proceeds received on loan payable
Repayment of loan payable
Payment of loan payable costs
Net cash (used in) provided by financing activities
Year ended December 31,
2018*
2017*
2019
$
15,398 $
17,135 $
22,327
8,961
142
297
10,333
(10 )
-
1,285
(634 )
-
(32 )
115
-
(313 )
2,876
(3,015 )
318
2,904
7,678
(89 )
(1,222 )
2,329
27
(6,900 )
(67 )
40,381
395
(548 )
(4,986 )
57,371
(8,130 )
(641 )
43,461
5,722
-
281
9,243
14
-
1,038
(697 )
(14 )
-
341
(429 )
207
2,574
1,539
(831 )
(1,286 )
20,476
2,691
171
(513 )
(3,336 )
(16,888 )
(229 )
37,209
112
(445 )
-
7,000
(19,596 )
(8 )
(12,937 )
3,727
17
273
8,400
-
111
(3,337 )
(2,796 )
6
-
291
(515 )
17
1,457
1,010
(1,733 )
(1,642 )
4,030
(426 )
(3,826 )
(1,275 )
1,085
4,933
(238 )
31,896
222
(1,462 )
-
86,998
(19,976 )
(620 )
65,162
Investing activities:
Additions to property and equipment
Acquisition of a portion of the minority interest in Ting Virginia, LLC (note
3(a))
Acquisition of Enom Incorporated, net of cash (note 3(b))
Acquisition of Ascio Technologies, net of cash of $1,437 (note 3(c))
Acquisition of intangible assets
Net cash used in investing activities
(44,070 )
(27,919 )
(12,935 )
-
-
(28,450 )
(3,566 )
(76,086 )
(1,200 )
-
(2,000 )
(76,237 )
(565 )
(29,684 )
(2,942 )
(94,114 )
Increase (decrease) in cash and cash equivalents
7,756
(5,412 )
2,944
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental cash flow information:
Interest paid
Income taxes paid, net
Supplementary disclosure of non-cash investing and financing activities:
Property and equipment acquired during the period not yet paid for
12,637
20,393 $
18,049
12,637 $
15,105
18,049
4,785 $
7,941 $
3,712 $
6,799 $
3,587
7,815
548 $
1,462 $
214
$
$
$
$
*The Company has initially applied ASC 2014-09 (Topic 606) on January 1, 2018 and ASC 2016-02 (Topic 842) on January 1, 2019.
Both accounting standards were adopted using the modified retrospective method, under this method the comparative periods were not
restated.
See accompanying notes to consolidated financial statements
F-7
Table of Contents
Tucows Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands of U.S. dollars, except per share amounts)
1. Organization of the Company:
Tucows Inc. (the “Company”) 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. Significant Accounting Policies:
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America (“U.S. GAAP”) and are stated in U.S. dollars, except where otherwise noted.
(a) Basis of presentation
These consolidated financial statements include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated on consolidation.
(b) Use of estimates
The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to amounts
recognized for carrying values of revenues, bad debts, inventory obsolescence which requires estimates of sales forecasts and other
marketplace considerations, internal use software which requires estimates of whether the costs incurred meet the criteria for
capitalization based on the stage of the projects, goodwill and intangible assets which require estimates of future cash flows and
discount rates, lease liability which requires estimates of incremental borrowing rate and the expectation of exercising lease renewal
periods, income taxes, contingencies and litigation, and estimates of credit spreads for determination of the fair value of derivative
instruments. Management bases its estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances at the time they are made. Under different assumptions or conditions, the actual results will
differ, potentially materially, from those previously estimated. Many of the conditions impacting these assumptions and estimates
are outside of the Company’s control.
(c) Cash and cash equivalents
All highly liquid investments, with an original term to maturity of three months or less are classified as cash and cash
equivalents. Cash and cash equivalents are stated at cost which approximates market value.
F-8
Table of Contents
(d) Inventory
Inventory primarily consists of mobile devices, mobile sim cards and related accessories, and Internet optical network
terminals and are stated at the lower of cost or net realizable value. Cost is determined based on actual cost of the mobile device,
accessory shipped or optical network terminals.
The net realizable value of inventory is analyzed on a regular basis. This analysis includes assessing obsolescence, sales
forecasts, product life cycle, marketplace and other considerations. If assessments regarding the above factors adversely change, we
may be required to write down the value of inventory.
(e) Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided on a straight-line basis
so as to depreciate the cost of depreciable assets over their estimated useful lives at the following rates:
Rate
Asset
Computer equipment
Computer software
Furniture and equipment
Vehicles and tools
Fiber network (years)
Customer equipment and installations (years)
Leasehold improvements
Assets under construction
Capitalized internal use software (years)
331/3
100%
30%
-
20%
20%
15
3
Over term of lease
N/A
3 - 7
The Company reviews the carrying values of its property and equipment for potential impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated undiscounted future
cash flows expected to result from the use of the group of assets and their eventual disposition is less than their carrying amount,
they are considered to be impaired. The amount of the impairment loss recognized is measured as the amount by which the carrying
value of the asset exceeds the fair value of the asset, with fair value being determined based upon discounted cash flows or appraised
values, depending on the nature of the assets.
Additions to the fiber network are recorded at cost, including all material, labor, vehicle and installation and construction
costs and certain indirect costs associated with the construction of cable transmission and distribution facilities. While the Company’s
capitalization is based on specific activities, once capitalized, costs are tracked by fixed asset category at the fiber network level and
not on a specific asset basis. For assets that are retired, the estimated historical cost and related accumulated depreciation is removed.
Additions to land are recorded at cost, and include any direct costs associated with the purchase, as well as any direct costs
incurred to bring it to the condition necessary for its intended use, such as legal fees associated with the acquisition and the cost of
permanent improvements. Land is not depreciated.
We capitalize costs for software to be used internally when we enter the application development stage. This occurs when
we complete the preliminary project stage, management authorizes and commits to funding the project, and it is feasible that the
project will be completed and the software will perform the intended function. We cease to capitalize costs related to a software
project when it enters the post implementation and operation stage.
Costs capitalized during the application development stage consist of payroll and related costs for employees who are
directly associated with, and who devote time directly to, a project to develop software for internal use. We do not capitalize
any general and administrative or overhead costs or costs incurred during the application development stage related to training
or data conversion costs. Costs related to upgrades and enhancements to internal-use software, if those upgrades and
enhancements result in additional functionality, are capitalized. If upgrades and enhancements do not result in additional
functionality, those costs are expensed as incurred.
The capitalized software development costs are generally to be amortized using the straight-line method over a 3 to 7-
year period. In determining and reassessing the estimated useful life over which the cost incurred for the software should be
amortized, we consider the effects of obsolescence, technology, competition and other economic factors.
(f) Derivative Financial Instruments
The Company uses derivative financial instruments to manage foreign currency exchange risk. The Company accounts for
these instruments in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") Topic 815, “Derivatives and Hedging” ("Topic 815"), which requires that every derivative instrument be recorded on the
balance sheet as either an asset or liability measured at its fair value as of the reporting date. Topic 815 also requires that changes in
our derivative financial instruments’ fair values be recognized in earnings, unless specific hedge accounting and documentation
criteria are met (i.e. the instruments are accounted for as hedges). The Company recorded the effective portions of the gain or loss
on derivative financial instruments that were designated as cash flow hedges in accumulated other comprehensive income in our
accompanying Consolidated Balance Sheets.
For certain contracts, the Company has not complied with the documentation standards required for its forward foreign
exchange contracts to be accounted for as hedges and has, therefore, accounted for such forward foreign exchange contracts at their
fair values with the changes in fair value recorded in net income.
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The fair value of the forward exchange contracts is determined using an estimated credit adjusted mark-to-market valuation
which takes into consideration the Company's and the counterparty's credit risk. The valuation technique used to measure the fair
values of the derivative instruments is a discounted cash flow technique, with all significant inputs derived from or corroborated by
observable market data, as no quoted market prices exist for the derivative instruments. The discounted cash flow techniques use
observable market inputs, such as foreign currency spot and forward rates.
(g) Goodwill and Other Intangible assets
Goodwill
Goodwill represents the excess of purchase price over the fair values assigned to the net assets acquired in business
combinations. The Company does not amortize goodwill. Impairment testing for goodwill is performed annually in the fourth quarter
of each year or more frequently if impairment indicators are present. Impairment testing is performed at the operating segment level.
The Company has determined that it has two operating segments, Domain Services and Network Access services.
The Company performs a qualitative assessment to determine whether there are events or circumstances which would lead
to a determination that it is more likely than not that goodwill has been impaired. If, after this qualitative assessment, the Company
determines that it is not more likely than not that goodwill has been impaired, then no further quantitative testing is necessary. In
performance of the qualitative test, an evaluation is made of the impact of various factors to the expected future cash flows
attributable to its operating segments and to the assumed discount rate which would be used to present value those cash flows.
Consideration is given to factors such as, macro-economic and industry and market conditions including the capital markets and the
competitive environment amongst others. In the event that the qualitative tests indicate that there may be impairment, quantitative
impairment testing is required.
If required to perform the quantitative test, the Company uses a discounted cash flow or income approach in which future
expected cash flows at the operating segment level are converted to present value using factors that consider the timing and risk of
the future cash flows. The estimate of cash flows used is prepared on an unleveraged debt-free basis. The discount rate reflects a
market-derived weighted average cost of capital. The Company believes that this approach is appropriate because it provides a fair
value estimate based upon the Company’s expected long-term operating and cash flow performance for its operating segment. The
projections are based upon the Company’s best estimates of projected economic and market conditions over the related period
including growth rates, estimates of future expected changes in operating margins and cash expenditures.
Other significant estimates and assumptions include terminal value growth rates, terminal value margin rates, future capital
expenditures and changes in future working capital. If assumptions and estimates used to allocate the purchase price or used to assess
impairment prove to be inaccurate, future asset impairment charges could be required.
Intangibles Assets Not Subject to Amortization
Intangible assets not subject to amortization consist of surname domain names and direct navigation domain names. While
the domain names are renewed annually, through payment of a renewal fee to the applicable registry, the Company has the exclusive
right to renew these names at its option. Renewals occur routinely and at a nominal cost. Moreover, the Company has determined
that there are currently no legal, regulatory, contractual, economic or other factors that limit the useful life of these domain names
on an aggregate basis and accordingly treat the portfolio of domain names as indefinite life intangible assets. The Company re-
evaluates the useful life determination for domain names in the portfolio each year to determine whether events and circumstances
continue to support an indefinite useful life.
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The Company reviews individual domain names in the portfolio for potential impairment throughout the fiscal year in
determining whether a particular name should be renewed. Impairment is recognized for names that are not renewed.
Intangible Assets Subject to Amortization
Intangible assets subject to amortization, consist of brand, customer relationships, technology and network rights and are
amortized on a straight-line basis over their estimated useful lives as follows:
Technology
Brand
Customer relationships
Network rights
(in years)
2
7
3
- 7
15
The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated
useful lives of its intangible assets subject to amortization may warrant revision or that the remaining balance of such assets may not
be recoverable. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the asset in
measuring whether the asset is recoverable.
(h) Revenue recognition
See “Note 10 – Revenue” for a description of the Company’s Revenue recognition policy and a further description of the
principal activities – separated by reportable segments – from which the Company generates its revenue.
(i) Deferred revenue
Deferred revenue primarily relates to the unearned portion of revenues received in advance related to the unexpired term of
registration fees from domain name registrations and other domain related Internet services, on both a wholesale and retail basis, net
of external commissions.
(j) Contract Costs
See “Note 11 – Costs to obtain and fulfill a contract” for a description of the Company’s Contract Cost recognition policy.
(k) Leases
See note 2(v) for the Company’s adoption of ASC 842 on January 1, 2019.
Under ASC 842, we determine if an arrangement is a lease at inception. Our lease agreements generally contain lease and
non-lease components. Payments under our lease arrangements are primarily fixed. Non-lease components primarily include
payments for maintenance and utilities. We combine fixed payments for non-lease components with lease payments and account
for them together as a single lease component which increases the amount of our lease assets and liabilities.
Certain lease agreements contain variable payments, which are expensed as incurred and not included in the lease assets
and liabilities. These amounts include payments affected by payments contingent the number of Ting internet subscribers
connected to a leased fiber network, and payments for maintenance and utilities.
We have elected to consider leases with a term of 12 months or less as short-term, and as such have not been recognized
on the balance sheet. We recognize lease expense for short-term leases on a straight-line basis over the lease term.
Lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement
date. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because
the interest rate implicit in our leases is not readily determinable. Our incremental borrowing rate is estimated to approximate
the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset
is located. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we
will exercise that option. We generally use the base, non-cancelable, lease term when determining the lease assets and liabilities.
Lease assets also include any prepaid lease payments.
Operating lease assets and liabilities are included on our Consolidated Balance Sheet beginning January 1, 2019.
Operating lease expense is recognized on a straight-line basis over the lease term.
(l) Accreditation fees payable
In accordance with ICANN rules, the Company has elected to pay ICANN fees incurred on the registration of Generic Top-
Level Domains on an annual basis. Accordingly, accreditation fees that relate to registrations completed prior to ICANN rendering
a bill are accrued and reflected as accreditation fees payable.
(m) Prepaid domain name registry fees
Prepaid domain name registry and other Internet services fees represent amounts paid to registries, and country code domain
name operators for updating and maintaining the registries, as well as to suppliers of other Internet services. Domain name registry
and other Internet services fees are recognized on a straight-line basis over the life of the contracted registration term.
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(n) Translation of foreign currency transactions
The Company’s functional currency is the United States dollar. Monetary assets and liabilities of the Company and of its
wholly owned subsidiaries that are denominated in foreign currencies are translated into United States dollars at the exchange rates
prevailing at the balance sheet dates. Non-monetary assets and liabilities are translated at the historical exchange rates. Transactions
included in operations are translated at the rate at the date of the transactions.
(o) Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in net income in the year that includes the enactment date. A valuation allowance is recorded if it is not “more
likely than not” that some portion of or all of a deferred tax asset will be realized.
The Company recognizes the impact of an uncertain income tax position at the largest amount that is more-likely-than-not
to be sustained upon audit by the relevant taxing authority and includes consideration of interest and penalties. An uncertain income
tax position will not be recognized if it has less than a 50% likelihood of being sustained. The liability for unrecognized tax benefits
is classified as non-current unless the liability is expected to be settled in cash within 12 months of the reporting date.
(p) Stock-based compensation
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment
awards that is ultimately expected to vest, reduced for estimated forfeitures.
(q) Earnings per common share
Basic earnings per common share has been calculated on the basis of net income for the year divided by the weighted
average number of common shares outstanding during each year. Diluted earnings per share gives effect to all dilutive potential
common shares outstanding at the end of the year assuming that they had been issued, converted or exercised at the later of the
beginning of the year or their date of issuance. In computing diluted earnings per share, the treasury stock method is used to determine
the number of shares assumed to be purchased from the conversion of common share equivalents or the proceeds of the exercise of
options.
(r) Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash
equivalents, accounts receivable and forward foreign exchange contracts. Cash equivalents consist of deposits with major
commercial banks, the maturities of which are three months or less from the date of purchase. With respect to accounts receivable,
the Company performs periodic credit evaluations of the financial condition of its customers and typically does not require collateral
from them. The counterparty to any forward foreign exchange contracts is a major commercial bank which management believes
does not represent a significant credit risk. Management assesses the need for allowances for potential credit losses by considering
the credit risk of specific customers, historical trends and other information.
(s) Fair value measurement
Fair value of financial assets and liabilities is defined as an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs
used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities,
is as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities
Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3—No observable pricing inputs in the market
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant
to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires
judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
F-12
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The fair value of cash and cash equivalents, accounts receivable, accounts payable, accreditation fees payable, customer
deposits and accrued liabilities (level 2 measurements) approximate their carrying values due to the relatively short periods to
maturity of the instruments.
The fair value of the derivative financial instruments is determined using an estimated credit-adjusted mark-to-market
valuation (a level 2 measurement) which takes into consideration the Company and the counterparty credit risk.
(t) Investments
The Company accounts for investment in entities over which it has the ability to exert significant influence, but does not
control and is not the primary beneficiary of, using the equity method of accounting. The Company includes the proportionate share
of earnings (loss) of the equity method investees in Other Income in the Consolidated Statements of Comprehensive Income. The
proportional shares of affiliate earnings or losses accounted for under the equity method of accounting were not material for all
periods presented.
(u) Segment reporting
The Company operates in two operating segments, Domain Services and Network Access Services.
The Company’s Domain Services revenues are attributed to the country in which the contract originates. Revenues from
domain names issued under the OpenSRS brand from the Ontario, Canada location are attributed to Canada because it is
impracticable to determine the country of the customer. Revenues from domain names issued under the eNom brand from
the Washington state location are attributable to the United States because it is impracticable to determine the country of the
customer. The Company’s Network Access Services which consist primarily of mobile telephony services, and the provisioning of
high speed Internet access and consulting services, are generated primarily through its business operations in the United States.
The Company’s assets are primarily located in Canada, the United States and Europe.
(v) Recent Accounting Pronouncements
Recent Accounting Pronouncements Adopted
ASU 2016-02: Adoption of Leases (Topic 842)
The Company adopted ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) as of January 1, 2019.
The Company has elected to apply ASU 2016-02 using the modified retrospective approach with the transition relief
provided by ASC 2018-11, which allows the Company to use January 1, 2019 as the date of initial application. As a result, all
comparative periods have not been restated and continue to be reported under Topic 840.
The Company elected the practical expedient to use hindsight when considering the likelihood that lessee options to
extend or terminate a lease or purchase the underlying asset will be exercised, and in assessing the impairment of right-of-use
assets.
The Company elected the practical expedient to separate non-lease components from the associated lease components
for its existing datacenter, corporate offices and fiber-optic cable leases at transition.
As a result of adopting ASU 2016-02, the most significant effects were the recognition of a right-of-use (“ROU”) asset
and lease liability related to operating leases of approximately $8.8 million and approximately $8.3 million, respectively at
January 1, 2019. The difference between the ROU asset and lease liability of $0.5 million was due to the net reclassification of
previously deferred rent and prepaid expenses of approximately $0.1 million and approximately $0.6 million, respectively to
the ROU asset. There was no impact on opening retained earnings on adoption. The adoption of ASU 2016-02 did not have a
significant impact on our consolidated statements of comprehensive income or our consolidated statements of cash flows.
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ASU 2014-09: Adoption of Revenue from Contracts with Customers (Topic 606)
On January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective method by recognizing the
cumulative effect of initially applying ASU 2014-09 as an adjustment to the opening balance of equity as at January 1, 2018. The
results for reporting periods beginning after January 1, 2018 are presented under ASU 2014-09, while prior period amounts are
not adjusted and continue to be reported in accordance with our historic accounting policy, under Accounting Standards
Codification (“ASC”) Topic 605, Revenue Recognition (ASC Topic 605). The adoption of ASU 2014-09 did not affect the
Company’s cash flows from operating, investing, or financing activities. Furthermore, the impact on timing of revenue
recognition was not material as the treatment of revenue for services rendered over time is consistent under ASU 2014-09 and
ASC Topic 605. The details of the significant changes and quantitative impact of the changes are set out below. For a more
comprehensive description of how the Company recognizes revenue under the new revenue standard in accordance with its
performance obligations, see Note 10 – Revenue for more information.
The Company previously recognized commission fees related to Ting Mobile, Ting Internet, eNom domain registration
and eNom domain related value-added service contracts as selling expenses when they were incurred. Under ASU 2014-09, when
these commission fees are deemed incremental and are expected to be recovered, the Company capitalizes as an asset such
commission fees as costs of obtaining a contract. These commission fees are amortized into income consistently with the pattern
of transfer of the good or service to which the asset relates. The amortization of deferred costs of acquisition are amortized into
Sales and marketing expense. The estimation of the amortization period for the costs to obtain a contract requires judgement.
Under ASU 2014-09, the Company has applied the following practical expedients:
a) When the amortization period for costs incurred to obtain a contract with a customer is less than one year, the Company
has elected to apply a practical expedient to expense the costs as incurred; and
b) 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).
On January 1, 2018 as a result of adopting ASU 2014-09, the Company recorded a contract cost asset of $1.4 million with
a corresponding increase to opening retained earnings and deferred tax liability of $1.1 million and $0.3 million, respectively,
due to the deferral of costs of obtaining contracts.
ASU 2017-12: Derivatives and Hedging (Topic 815)
In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-12, Derivatives and
Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12”), which better aligns an
entity’s risk management activities and financial reporting for hedging relationship through changes to both the designation and
measurement guidance for qualifying hedging relationships and presentation of hedge results. The new standard expands and
refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the
effects of the hedging instrument and hedged item in the financial statements. The Company adopted the targeted
improvements to ASU 2017-12 on January 1, 2019 using a modified retrospective approach to existing hedging relationships.
The new guidance did not have a material impact on our consolidated financial statements.
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Recent Accounting Pronouncements Not Yet Adopted
In August 2018, the 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 will be effective for the Company for fiscal years
beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not believe there will be
a material impact as a result of adopting this standard.
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3. Acquisitions:
(a) Blue Ridge Websoft
On February 27, 2015, Ting Fiber, Inc. (“Ting”), one of the Company’s wholly owned subsidiaries, acquired a 70%
ownership interest in Ting Virginia, LLC and its subsidiaries, Blue Ridge Websoft, LLC (doing business as Blue Ridge Internet
Works), Fiber Roads, LLC and Navigator Network Services, LLC for consideration of approximately $3.5 million.
On February 1, 2017, under the terms of a call option in the agreement, Ting acquired an additional 20% interest in Ting
Virginia, LLC from the selling shareholders (the “Minority Shareholders”) for consideration of $2.0 million.
On February 13, 2018, the Company entered into an agreement with the Minority Shareholders pursuant to which the
Minority Shareholders could immediately exercise their put option to sell their remaining 10% ownership interest in Ting Virginia,
LLC for $1.2 million to the Company. The put option was exercised on February 13, 2018 and the Company paid $1.2 million for
the remaining 10% ownership interest and Ting Virginia, LLC became a wholly-owned subsidiary of the Company.
(b) eNom, Incorporated
On January 20, 2017, the Company entered into a Stock Purchase Agreement with its indirect wholly owned subsidiary,
Tucows (Emerald), LLC, Rightside Group, Ltd., and Rightside Operating Co., pursuant to which Tucows (Emerald), LLC purchased
from Rightside Operating Co. all of the issued and outstanding capital stock of eNom, Incorporated, a domain name registrar
business. The purchase price was $77.8 million, which represented the agreed upon purchase of $83.5 million less an amount of $5.7
million related to the working capital deficiency acquired.
As required by ASC 805, Business Combinations, the Company has recorded deferred revenue at fair value at the
acquisition date, which was determined by estimating the costs associated with customer support services and prepaid domain name
registration fees to fulfill the contractual obligations over the remaining life of the contract at the acquisition date plus a normal profit
margin.
The goodwill related to this acquisition is primarily attributable to synergies expected to arise from the acquisition and is
not deductible for tax purposes.
In connection with this acquisition, the Company incurred total acquisition related costs of $0.3 million included in
General & Administrative expenses in the Consolidated Statements of Comprehensive Income for Fiscal 2017.
The amortization for the brands, technology and customer relationships are 7, 2 and 7 years, respectively.
The Company has prepared a final purchase price allocation of the assets acquired and the liabilities assumed of eNom
based on management’s best estimates of fair value. The final purchase price reflects the final appraisals, valuations and analyses of
the fair value of the acquired assets and assumed liabilities.
The following table shows the final allocation of the purchase price for eNom to the acquired identifiable assets and
liabilities assumed (thousands of U.S. dollars):
Goodwill
Cash
Brand
Developed technology
Customer relationships
Prepaid domain registry fees
Other assets
Total assets
Deferred Revenue
Deferred Tax Liabilities
Other liabilities
Total liabilities
$
69,048
1,594
12,400
3,900
28,000
70,644
10,171
195,757
(77,799 )
(24,223 )
(15,903 )
(117,925 )
Consideration Paid
$
77,832
(c) Ascio
On March 18, 2019, the Company entered into an Asset Purchase Agreement with its indirect wholly owned
subsidiary, Ting Fiber, Inc., and NetNames European Holdings ApS, CSC Administrative Services Limited UK, and
Corporation Service Company (“CSC”), pursuant to which Ting Fiber, Inc. purchased from CSC all of the equity of Ascio
Technologies, Inc. (“Ascio”), a domain registrar business, and all of CSC’s assets related to that business. The final purchase
price was $29.9 million, which represented the agreed upon purchase of $29.44 million plus an amount of $0.45 million related
to the estimated working capital deficiency acquired.
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As required by ASC 805, Business Combinations, the Company has recorded deferred revenue at fair value at the
acquisition date, which was determined by estimating the costs associated with customer support services and prepaid domain
name registration fees to fulfill the contractual obligations over the remaining life of the contract at the acquisition date plus a
normal profit margin.
Goodwill
Cash
Brand
Developed technology
Customer relationships
Prepaid domain registry fees
Other assets
Total assets
Deferred Revenue
Deferred Tax Liabilities
Other liabilities
Total liabilities
Consideration Paid
$
$
19,765
1,437
2,090
2,440
10,610
10,318
2,218
48,878
(12,510 )
(2,852 )
(3,630 )
(18,992 )
29,886
All definite life intangible assets acquired, including brand, developed technology and customer relationships will be
amortized over 7 years.
The goodwill related this acquisition is primarily attributable to synergies expected to arise from the acquisition and is
deductible for US tax purposes but non-deductible for Danish tax purposes.
In connection with this acquisition, the Company incurred total acquisition related costs of $0.5 million of which
$0.3 million were included in General & Administrative expenses in the consolidated statements of operations and
comprehensive income during Fiscal 2019.
The following table presents selected unaudited pro forma information for the Company assuming the acquisition of
Ascio had occurred as of January 1, 2018. 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.
Net revenues
Net income
Basic earnings per common share
Diluted earnings per common share
Unaudited
Twelve months ended December 31,
2019
2018
$
$
341,860 $
15,466
365,963
14,404
1.46
1.44 $
1.36
1.33
The amount of revenue recognized since the acquisition date included in the consolidated statements of operations and
comprehensive income statement for Fiscal 2019 is $17.4 million.
The net income recognized since the acquisition date included in the consolidated statements of operations and
comprehensive income for Fiscal 2019 are losses of $1.7 million.
4. Property and Equipment:
Property and equipment consist of the following (Dollar amounts in thousands of U.S. dollars):
Computer equipment
Computer software
Capitalized internal use software
Furniture and equipment
Vehicles and tools
Fiber network
Customer equipment and installations
Land
Assets under construction
Leasehold improvements
Less:
Accumulated depreciation
December 31, December 31,
2019
2018
$
$
18,027 $
2,336
1,270
1,394
2,656
40,645
8,586
1,511
30,352
542
107,319
25,198
82,121 $
13,566
1,496
-
1,364
2,323
30,215
4,939
823
10,030
229
64,985
16,920
48,065
Depreciation of property and equipment (Dollar amounts in thousands of U.S. dollars):
Depreciation of property and equipment
$
8,961 $
5,722 $
3,727
During the year ended December 31, 2019, property, plant and equipment with a net book value of $0.1 million was
written off. During the years ended December 31, 2018 and 2017, property, plant and equipment with a net book value of $nil, and
$nil respectively were written off.
Year Ended
December 31,
2019
Year Ended
December 31,
Year Ended
December 31,
2018
2017
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5. Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair value of tangible and identifiable intangible assets
acquired and liabilities assumed in our acquisitions.
The Company's Goodwill balance is $109.8 million as of December 31, 2019 and $90.1 million as of December 31, 2018.
The Company's goodwill relates 98% ($107.7 million) to its Domain Services operating segment and 2% ($2.1 million) to its
Network Access Services operating segment.
Goodwill is not amortized, but is subject to an annual impairment test. The Company performed an impairment analysis as
outlined in “Note 2(g) – Significant Accounting Policies” and there were no indications of impairment for Fiscal 2019 and
Fiscal 2018.
Other Intangible Assets:
Intangible assets consist of acquired brand, technology, customer relationships, surname domain names, direct navigation
domain names and network rights. The Company considers its intangible assets consisting of surname domain names and direct
navigation domain names as indefinite life intangible assets. The Company has the exclusive right to these domain names as long as
the annual renewal fees are paid to the applicable registry. Renewals occur routinely and at a nominal cost. The indefinite life
intangible assets are not amortized, but are subject to impairment assessments performed throughout the year. During Fiscal 2019,
we assessed that certain domain names that were originally acquired in the June 2006 acquisition of Mailbank.com Inc. that were up
for renewal, should not be renewed. During the years ended December 31, 2019 and December 31, 2018, domain names with a book
value of $nil, were not renewed and were recorded as an impairment of indefinite life intangible assets. During the year ended
December 31, 2017 domain names, with a book value of $0.1 million, were not renewed and were recorded as impairments of
indefinite life intangible assets.
Intangible assets, comprising brand, technology, customer relationships and network rights are being amortized on a
straight-line basis over periods of two to fifteen years.
On November 16, 2018, the Company acquired the right from The People’s Operator USA, LLC (“TPO”) to mass migrate
TPO MVNO customers based in the United States, for consideration of $0.4 million. These assets have been assigned to Customer
Relationships and are being amortized over 3 years.
In the third quarter of 2019, the Company acquired the mobile customer base of FreedomPop and Unreal Mobile brands
from STS Media Inc., operating on the Sprint network. The migration of these customers occurred over a 60-day period, ending in
September 2019 with subscribers having the option to accept the Ting offering or cancel or port their service elsewhere. The final
purchase price was $3.5 million. These assets have been assigned to Customer Relationships and are being amortized over 3 years.
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Acquired intangible assets consist of the following (Dollar amounts in thousands of U.S. dollars):
Direct
Brand Customer
Technology Network
Total
relationships
rights
Surname
domain
names
navigation
domain
names
indefinite
life
Amortization period
indefinite
life
7 years 3 - 7 years 2 - 7 years 15 years
Balances, December 31, 2017
Acquisition of customer relationships
Additions to/(disposals from) domain
portfolio, net
Amortization expense
Balances December 31, 2018
Ascio Technologies Inc. acquisition
FreedomPop acquisition
Acquisition of customer relationships
Additions to/(disposals from) domain
portfolio, net
Amortization expense
Balances December 31, 2019
$ 11,257 $
-
1,505 $ 10,793 $
-
-
32,185 $
565
2,113 $
-
561 $ 58,414
565
-
(81 )
-
$ 11,176 $
-
-
-
(260 )
-
- (1,789 )
1,245 $ 9,004 $
- 2,090
-
-
-
-
(12 )
-
$ 11,164 $
(102 )
-
- (2,003 )
1,143 $ 9,091 $
-
(5,458 )
27,292 $
10,610
3,475
91
-
(7,197 )
34,271 $
-
(1,950 )
163 $
2,440
-
-
-
(341 )
(46 ) (9,243 )
515 49,395
- 15,140
- 3,475
91
-
-
(1,087 )
1,516 $
-
(114 )
(46 ) (10,333 )
469 $ 57,654
The following table shows the estimated amortization expense for each of the next 5 years, assuming no further additions
to acquired intangible assets are made (Dollar amounts in thousands of U.S. dollars):
2020
2021
2022
2023
2024
Thereafter
Total
Year ending
December 31,
$
9,416
10,455
10,455
9,386
2,796
2,839
45,347
$
6. Fair Value Measurement:
For financial assets and liabilities recorded in our financial statements at fair value we utilize a valuation hierarchy for
disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar
assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through
market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the
Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within
the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides a summary of the fair values of the Company’s derivative instruments measured at fair value
on a recurring basis as at December 31, 2019 (Dollar amounts in thousands of U.S. dollars):
December 31, 2019
Fair Value Measurement Using
Level 1
Level 2
Level 3
Assets
(Liabilities)
at Fair
value
Derivative instrument asset
Total Assets
$
$
- $
731 $
- $
731 $
- $
- $
731
731
The following table provides a summary of the fair values of the Company’s derivative instruments measured at fair value
on a recurring basis as at December 31, 2018 (Dollar amounts in thousands of U.S. dollars):
Derivative instrument liability
Total Liabilities
December 31, 2018
Fair Value Measurement Using
Level 1
Level 2
Level 3
Assets
(Liabilities)
at Fair
value
$
$
F-19
- $
(1,276 ) $
- $
(1,276 )
- $
(1,276 ) $
- $
(1,276 )
Table of Contents
7. Derivative Instruments and Hedging Activities:
Foreign currency forward contracts
Since October 2012, the Company has employed a hedging program with a Canadian chartered bank to limit the potential
foreign exchange fluctuations incurred on its future cash flows related to a portion of payroll, taxes, rent and payments to Canadian
domain name registry suppliers that are denominated in Canadian dollars and are expected to be paid by its Canadian operating
subsidiary. As part of its risk management strategy, the Company uses derivative instruments to hedge a portion of the foreign
exchange risk associated with these costs. The Company does not use these forward contracts for trading or speculative purposes.
These forward contracts typically mature between one and eighteen months.
The Company has designated certain of these transactions as cash flow hedges of forecasted transactions under
ASC Topic 815. For certain contracts, as the critical terms of the hedging instrument, and of the entire hedged forecasted transaction,
are the same, in accordance with ASC Topic 815, the Company has been able to conclude that changes in fair value and cash flows
attributable to the risk of being hedged are expected to completely offset at inception and on an ongoing basis. Accordingly,
unrealized gains or losses on the effective portion of these contracts have been included within other comprehensive income. The
fair value of the contracts, as of December 31, 2019 and 2018, is recorded as derivative instrument assets or liabilities. For certain
contracts where the hedged transactions are no longer probable to occur, the loss on the associated forward contract is recognized in
earnings.
As of December 31, 2019, the notional amount of forward contracts that the Company held to sell U.S. dollars in exchange
for Canadian dollars was $30.5 million, of which $26.1 million met the requirements of ASC Topic 815 and were designated as
hedges.
As of December 31, 2018 the notional amount of forward contracts that the Company held to sell U.S. dollars in exchange
for Canadian dollars was $40.5 million, of which $36.5 million met the requirements of ASC Topic 815 and were designated as
hedges.
As of December 31, 2019, we had the following outstanding forward contracts to trade U.S. dollars in exchange for
Canadian 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
January - March 2020
April - June 2020
July - September 2020
October - December 2020
10,729
9,654
5,300
4,803
30,486
1.3296
1.3296
1.3296
1.3296
1.3296 $
$
259
232
127
113
731
Fair value of derivative instruments and effect of derivative instruments on financial performance
The effect of these derivative instruments on our consolidated financial statements as of, and for the year ended
December 31, 2019 and 2018, were as follows (amounts presented do not include any income tax effects).
Fair value of derivative instruments in the consolidated balance sheets (see “Note 6 – Fair Value Measurement”)
Derivatives (Dollar amounts in thousands of U.S. dollars)
Foreign Currency forward contracts designated as cash flow
hedges (net)
Foreign Currency forward contracts not designated as cash flow
hedges (net)
Total foreign currency forward contracts (net)
Balance Sheet Location
As of December
31, 2019 Fair
Value Asset
As of December
31, 2018 Fair
Value Liability
Derivative instruments
$
626 $
(1,069 )
Derivative instruments
Derivative instruments
$
105
731 $
(207 )
(1,276 )
F-20
Table of Contents
Movement in AOCI balance for the year ended December 31, 2019 (Dollar amounts in thousands of U.S. dollars)
Gains and
losses on cash
flow hedges
Tax impact
Total AOCI
Opening AOCI balance - December 31, 2018
Other comprehensive income (loss) before reclassifications
Amount reclassified from AOCI
Other comprehensive income (loss) for the year ended December 31,
2019
$
(1,069 ) $
1,454
240
259 $
(353 )
(58 )
1,694
(411 )
(810 )
1,101
182
1,283
Ending AOCI Balance - December 31, 2019
$
625 $
(152 ) $
473
Movement in AOCI balance for the year ended December 31, 2018 (Dollar amounts in thousands of U.S. dollars)
Opening AOCI balance - December 31, 2017
Other comprehensive income (loss) before reclassifications
Amount reclassified from AOCI
Other comprehensive income (loss) for the year ended December 31,
2018
$
Gains and
losses on cash
flow hedges
Tax impact
- $
(1,350 )
281
Total AOCI
- $
328
(69 )
-
(1,022 )
212
(1,069 )
259
(810 )
(810 )
Ending AOCI Balance - December 31, 2018
$
(1,069 ) $
259 $
Movement in AOCI balance for the year ended December 31, 2017 (Dollar amounts in thousands of U.S. dollars)
Gains and
losses on cash
flow hedges
Tax impact
Total AOCI
Opening AOCI balance - December 31, 2016
Other comprehensive income (loss) before reclassifications
Amount reclassified from AOCI
Other comprehensive income (loss) for the year ended December 31,
2017
$
156 $
863
(1,019 )
(156 )
Ending AOCI Balance - December 31, 2017
$
- $
(56 ) $
(313 )
369
56
- $
100
550
(650 )
(100 )
-
F-21
Table of Contents
Effects of derivative instruments on income and other comprehensive income (OCI) (Dollar amounts in thousands of U.S.
dollars)
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
Operating expenses $
Amount of Gain or
(Loss) Reclassified
from AOCI into
Income
Foreign currency forward contracts for the year ended December
31, 2019
$
Foreign currency forward contracts for the year ended December
31, 2018
$
Foreign currency forward contracts for the year ended December
31, 2017
$
1,283 Cost of revenues
$
Operating expenses $
(810 ) Cost of revenues
$
Operating expenses $
(100 ) Cost of revenues
$
(197 )
(43 )
(245 )
(36 )
879
140
We have entered into certain forward exchange contracts that do not comply with the requirements of hedge accounting to
meet a portion of our future Canadian dollar requirements through December 2019. During Fiscal 2019, the Company recorded a
net gain of $0.3 million on the change in fair value of outstanding contracts as well as a $0.1 million realized loss on matured
contracts. In Fiscal 2018 the Company recorded a net loss of $0.2 million for the change in fair value of outstanding contracts and
a loss of less than $0.1 million of settlements of contracts not designated as hedges. For the year ended December 31, 2017, the
Company recorded a gain of $0.1 million on matured contracts, with no contracts outstanding at December 31, 2017.
8. Loan Payable:
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 (the
“Amended 2019 Credit Facility”) with Royal Bank (“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, which consists of $180
million guaranteed credit facility and a $60 million accordion facility. The Amended 2019 Credit Facility replaced the
Company’s 2017 Amended Credit Facility.
In connection with the Amended 2019 Credit Facility, the Company incurred $0.3 million of fees paid to the 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, maturing on June 13, 2023.
2017 Amended Credit Facility
Prior to entering into the Amended 2019 Credit Facility, the Company had entered into a secured Credit Agreement (as
amended, the “2017 Amended Credit Facility”) on January 20, 2017 with Bank of Montreal (“BMO”), RBC and Bank of Nova
Scotia (collectively, the “Previous Lenders”) under which the Company had access to an aggregate of up to $140 million in
funds.
On March 18, 2019, the Company entered into the Second Amendment to the 2017 Credit Facility to provide the Previous
Lenders’ consent for the acquisition of Ascio (discussed in “Note 3 (c) – Acquisitions”), advance the acquisition funding and to
reallocate borrowing limits between loan facilities. We incurred costs associated with the Second Amendment to the 2017 Credit
Facility of $0.2 million, which were recorded as debt issuance costs.
The obligations of the Company under the 2017 Amended Credit Facility were secured by a first priority lien on
substantially all of the personal property and assets of the Company and had a four-year term.
F-22
Table of Contents
Credit Facility Terms
The Amended 2019 Credit Facility is revolving with interest only payments with no scheduled repayments during the
term.
The Amended 2019 Credit Facility contains customary representations and warranties, affirmative and negative
covenants, and events of default. The Amended 2019 Credit Facility requires that the Company to comply with the following
financial covenants: (i) at all times, a Total Funded Debt to Adjusted EBITDA Ratio (as defined in the Amended 2019 Credit
Agreement) of 3.50:1; and (ii) with respect to each fiscal quarter, an Interest Coverage Ratio (as defined in the Amended 2019
Credit Agreement) of not less than 3.00:1. Further, the Company’s maximum annual Capital Expenditures cannot exceed 110%
of the forecasted capital expenditures of its annual business plan. In addition, share repurchases require the Lenders’ consent if
the Company’s Total Funded Debt to Adjusted EBITDA ratio exceeds 2.00:1. As at and for the period ending December 31,
2019, the Company was in compliance with these covenants and as at and for the period ending December 31, 2018, the
Company was in compliance with the covenants under the 2017 Amended Credit Facility.
Borrowings under the Amended 2019 Credit Facility will accrue interest and standby fees based on the Company’s
Total Funded Debt to Adjusted EBITDA ratio and the availment type as follows:
Availment type or fee
Canadian dollar borrowings based on Bankers’ Acceptance
or U.S. dollar borrowings based on LIBOR (Margin)
Canadian or U.S. dollar borrowings based on Prime Rate or
U.S. dollar borrowings based on Base Rate (Margin)
Standby fees
If Total Funded Debt to EBITDA is:
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
1.85%
0.60%
0.37%
2.35%
1.10%
0.47%
2.85%
1.60%
0.57%
Less
than
1.00
1.50%
0.25%
0.30%
F-23
Table of Contents
The following table summarizes the Company’s borrowings under the credit facilities (Dollar amounts in thousands of U.S. dollars):
Revolver
Facility A
Facility B
Facility C
Facility D
Less: unamortized debt discount and issuance costs
Total loan payable
Less: loan payable, current portion
Loan payable, long-term portion
December 31,
2019
December 31,
2018
114,400
-
-
-
-
(897 )
113,503
-
113,503
-
1,000
6,000
3,232
54,924
(555 )
64,601
(18,400 )
46,201
The following table summarizes our scheduled principal repayments as of December 31, 2019 (Dollar amounts in thousands of U.S.
dollars):
2020
2021
2022
2023
Other Credit Facilities
-
-
-
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 Prior Credit Facilities have
been terminated.
F-24
Table of Contents
9. Income Taxes:
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate of 21%
for the years ended December 31, 2019 and December 31, 2018 and 35% for the year ended December 31, 2017, to income before
provision for income taxes as a result of the following (Dollar amounts in thousands of U.S. dollars):
Year ended December 31,
2018
2017
2019
Income for the year before provision for income taxes
$
Computed federal tax expense
24,571 $
5,160
26,155 $
5,492
24,075
8,185
Increase (reduction) in income tax expense resulting from:
State income taxes
Effect of the decrease in Federal tax rate on deferred taxes
Change in Valuation allowance
Non-creditable Foreign Tax
Excess tax benefits on share-based compensation expense
Permanent differences
Effect of deferred tax in foreign branch
Others
Provision for income taxes
$
526
-
5,277
515
(634 )
(103 )
(840 )
(728 )
9,173 $
846
-
2,811
-
(697 )
159
-
409
9,020 $
657
(10,036 )
1,276
2,903
(2,796 )
1,636
-
(77 )
1,748
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts
and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to:
(1) reducing the U.S. federal corporate tax rate from 35% to 21% ; (2) changing rules related to uses and limitations of net
operating loss carry forwards created in tax years beginning after December 31, 2017; (3) bonus depreciation allows for full
expensing of qualified property; (4) creating a new limitation on deductible interest expense; (5) eliminating the corporate
alternative minimum tax; and (6) new tax rules related to foreign operations.
In Fiscal 2019, the Company was able to utilize the bonus depreciation with respect to its continued investment in the Ting
Internet business. The impact of this, together with the reduction in tax rate to 21%, make it unlikely we will ultimately be able to
fully claim the Fiscal 2019 foreign taxes paid in future years. In addition, the Company generated net operating losses of
$0.3 million which it does not expect to be able to utilize in the future. As such, we have taken a valuation allowance on foreign
tax credits not utilized for 2019 income tax purposes and net operating losses not expected to be utilized in the future, the net
negative effect of which is a $5.3 million addition to income tax expense.
In Fiscal 2018, the Company was able to utilize the bonus depreciation with respect to its continued investment in the Ting
Internet business. The impact of this, together with the reduction in tax rate to 21%, make it unlikely we will ultimately be able to
fully claim the Fiscal 2018 foreign taxes paid in future years. In addition, the Company generated net operating losses of $0.2
million which it does not expect to be able to utilize in the future. As such, we have taken a valuation allowance on foreign tax
credits not utilized for 2018 income tax purposes and net operating losses not expected to be utilized in the future, the net
negative effect of which is a $2.8 million addition to income tax expense.
In Fiscal 2017, we reflected a net $5.8 million non-cash tax benefit through income from continuing operations for the re-
measurement impact related to the changes in tax laws included in the Tax Act. The primary driver of this re-measurement was
the result of the reduction in the corporate tax rate from 35% to 21% which resulted in our recognizing, based on the rates at
which they are expected to reverse in the future, a $10.0 million non-cash tax benefit through income from continuing operations
for the re-measurement of our deferred tax assets and liabilities. This amount was partially offset by our recording a valuation
allowance of $1.3 million related to prior year Foreign Tax Credits that we have determined are no longer more likely than not to
be used as the tax rate in the jurisdiction where these Foreign Tax Credits were generated is higher than the 21% corporate tax
rate. In addition, the impact of the prepaid registry fee deduction, more fully described below, together with the reduction in the
tax rate to 21% made it unlikely we would be able to claim the Fiscal 2017 foreign taxes paid in future years and as such opted to
utilize the foreign taxes paid as a deduction for 2017 income tax purposes, the net negative effect of which was a $2.9 million
addition to income tax expense.
On December 22, 2017, the SEC issued guidance to address the application of GAAP in situations when a registrant does
not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the
accounting for certain income tax effects of the Tax Act. The completion of our 2017 income tax returns, future guidance and
additional information and interpretations with the respect to the Tax Act resulted in insignificant adjustments related to
provisional impact estimates from Fiscal 2017.
F-25
Table of Contents
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of
December 31, 2019, and 2018 are presented below (Dollar amounts in thousands of U.S. dollars):
Deferred tax assets (liabilities):
Deferred tax assets:
Deferred revenue
Foreign tax credits and general business credits
Net operating losses
Accruals, including foreign exchange and other
Sub-total Deferred tax assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Prepaid registry fees and expenses
Amortization
Limited life intangible assets
Indefinite life intangible assets
Foreign branch deferred tax liability
Total deferred tax liability
Net deferred tax asset (liability)
December 31,
2019
December 31,
2018
$
$
$
$
$
6,301 $
9,004
1,341
1,490
18,136
(9,365 )
8,771 $
(16,237 ) $
(6,925 )
(5,958 )
(3,110 )
(2,012 )
(34,242 ) $
6,497
3,864
1,892
1,955
14,208
(4,087 )
10,121
(15,950 )
(5,871 )
(6,115 )
(3,110 )
-
(31,046 )
(25,471 ) $
(20,925 )
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.
We believe it is more likely than not that our remaining deferred tax assets, net of the valuation allowance, will be realized
based on current income tax laws, including those modified by the Tax Act, and expectations of future taxable income stemming
from forecasted profits from ongoing operations and from the reversal of existing deferred tax liabilities.
The Company had nil total gross unrecognized tax benefits as of both December 31, 2019 and December 31, 2018. The
Company had $15 (in thousands of U.S. dollars) total gross unrecognized tax benefits as of December 31, 2017.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. The Company
did not have any interest and penalties accrued as of December 31, 2019, and December 31, 2018.
The following is a reconciliation of Tucows’ change in uncertain tax position (Dollar amounts in thousands of U.S. dollars):
Total Gross Unrecognized Tax Benefits
Balance, beginning of year
Change in uncertain tax benefits
Balance, end of year
December 31,
2019
December 31,
2018
$
$
- $
-
- $
15
(15 )
-
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 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 December 31, 2019.
F-26
Table of Contents
10. Revenue:
Significant accounting policy
The Company’s revenues are derived from (a) the provisioning of mobile and fiber Internet services; and from (b) domain
name registration contracts, other domain related value-added services, domain sale contracts, and other advertising revenue.
Amounts received in advance of meeting the revenue recognition criteria described below are recorded as deferred revenue. All
products are generally sold without the right of return or refund.
Revenue is measured based on consideration specified in a contract with a customer and excludes any sales incentives and
amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by
transferring control over a product or service to a customer.
Nature of goods and services
The following is a description of principal activities – separated by reportable segments – from which the Company
generates its revenue. For more detailed information about reportable segments. See note 19 – Segment reporting for more
information.
(a) Network Access Services
The Company generates Network Access Services revenues primarily through the provisioning of mobile services (“Ting
Mobile”). Other sources of revenue include the provisioning of fixed high-speed Internet access (“Ting Internet”) as well as billing
solutions to Internet Service Providers (“ISPs”).
Ting Mobile wireless usage contracts grant customers access to standard talk, text and data mobile services. Ting Mobile
contracts are billed based on the actual amount of monthly services utilized by each customer during their billing cycle and charged
to customers on a postpaid basis. Voice minutes, text messages and megabytes of data are each billed separately based on a tiered
pricing program. The Company recognizes revenue for Ting Mobile usage based on the actual amount of monthly services utilized
by each customer.
Ting Internet contracts provide customers Internet access at their home or business through the installation and use of our
fiber optic network. Ting Internet contracts are generally prepaid and grant customers with unlimited bandwidth based on a fixed
price per month basis. Because consideration is collected before the service period, revenue is initially deferred and recognized as
the Company performs its obligation to provide Internet access. Though the Company does not consider the installation of fixed
Internet access to be a distinct performance obligation, the fees related to installation are immaterial and therefore revenue is
recognized as billed.
Both Ting Mobile and Ting Internet access services are primarily contracted through the Ting website, for one month at a
time and contain no commitment to renew the contract following each customer’s monthly billing cycle. The Company’s billing
cycle for all Ting Mobile and Ting Internet customers is computed based on the customer’s activation date. In order to recognize
revenue as the Company satisfies its obligations, we compute the amount of revenues earned but not billed from the end of each
billing cycle to the end of each reporting period. In addition, revenues associated with the sale of wireless devices and accessories
and Internet hardware to subscribers are recognized when title and risk of loss is transferred to the subscriber and shipment has
occurred. Incentive marketing credits given to customers are recorded as a reduction of revenue.
Our Roam Mobility brands also offers standard talk, text and data mobile services. Roam customers prepay for their usage
through the Roam Mobility website. When prepayments are received the amount is deferred, and subsequently recognized as the
Company satisfies its obligation to provide mobile services. In addition, revenues associated with the sale of SIM cards are
recognized when title and risk of loss is transferred to the subscriber and shipment has occurred. Incentive marketing credits given
to customers are recorded as a reduction of revenue.
In those cases, where payment is not received at the time of sale, revenue is not recognized at contract inception unless the
collection of the related accounts receivable is reasonably assured. The Company records costs that reflect expected refunds, rebates
and credit card charge-backs as a reduction of revenues at the time of the sale based on historical experiences and current
expectations.
(b) Domain Services
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.
F-27
Table of Contents
Domain related value-added services like digital certifications, WHOIS privacy, website hosting and hosted email provide
our resellers and retail registrant customers with tools and additional functionality to be used in conjunction with domain
registrations. All domain related value-added services are considered distinct performance obligations which transfer the promised
service to the customer over the contracted term. Fees charged to customers for domain related value-added services are collected at
the inception of the contract, and revenue is recognized on a straight-line basis over the contracted term, consistent with the
satisfaction of the performance obligations.
The Company is an ICANN accredited registrar. Thus, the Company is the primary obligor with our reseller and retail
registrant customers and is responsible for the fulfillment of our registrar services to those parties. As a result, the Company reports
revenue in the amount of the fees we receive directly from our reseller and retail registrant customers. Our reseller customers maintain
the primary obligor relationship with their retail customers, establish pricing and retain credit risk to those customers. Accordingly,
the Company does not recognize any revenue related to transactions between our reseller customers and their ultimate retail
customers.
The Company also sells the rights to the Company’s portfolio domains or names acquired through the Company’s domain
expiry stream. Revenue generated from sale of domain name contracts, containing a distinct performance obligation to transfer the
domain name rights under the Company’s control, is generally recognized once the rights have been transferred and payment has
been received in full.
Advertising revenue is derived through domain parking monetization, whereby the Company contracts with third-party
Internet advertising publishers to direct web traffic from the Company’s domain expiry stream domains and Internet portfolio
domains to advertising websites. Compensation from Internet advertising publishers is calculated variably on a cost-per-action basis
based on the number of advertising links that have been visited in a given month. Given that the variable consideration is calculated
and paid on a monthly basis, no estimation of variable consideration is required.
Disaggregation of Revenue
The following is a summary of the Company’s revenue earned from each significant revenue stream (Dollar amounts in
thousands of U.S. dollars):
Network Access Services:
Mobile Services
Other Services
Total Network Access Services
Domain Services:
Wholesale
Domain Services
Value Added Services
Total Wholesale
Retail
Portfolio
Total Domain Services
2019
2018*
2017
$
84,657 $
11,006
95,663
89,340 $
7,984
97,324
83,885
5,567
89,452
182,957
18,922
201,879
34,786
4,817
241,482
189,434
17,756
207,190
34,524
6,975
248,689
183,731
17,832
201,563
31,649
6,757
239,969
$
337,145 $
346,013 $
329,421
(*)As a result of the bulk transfers of 2.89 million domain names to Namecheap throughout 2018, recognized revenue for
the year ended December 31, 2018 includes $16.9 million, related to previously deferred revenue, a portion of which would have
otherwise been recognized after December 31, 2018.
During the years ended December 31, 2019, December 31, 2018 and December 31, 2017 no customer accounted for more
than 10% of total revenue and no customer accounted for more than 10% of accounts receivable.
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Table of Contents
The following is a summary of the Company’s cost of revenue from each significant revenue stream (Dollar amounts in
thousands of U.S. dollars):
Network Access Services:
Mobile Services
Other Services
Total Network Access Services
Domain Services:
Wholesale
Domain Services
Value Added Services
Total Wholesale
Retail
Portfolio
Total Domain Services
Network Expenses:
Network, other costs
Network, depreciation and amortization costs
2019
2018*
2017
$
44,415 $
3,928
48,343
46,061 $
3,994
50,055
45,335
3,305
48,640
148,530
2,986
151,516
17,093
627
169,236
160,216
3,154
163,370
17,725
953
182,048
9,190
9,599
18,789
9,846
7,294
17,140
161,013
2,450
163,463
17,346
1,151
181,960
9,324
4,976
14,300
$
236,368 $
249,243 $
244,900
(*)As a result of the bulk transfers of 2.89 million domain names to Namecheap throughout 2018, recognized Cost of revenue
for the year ended December 31, 2018 includes $16.8 million, related to previously deferred prepaid registry fees, a portion of which
would have otherwise been recognized after December 31, 2018.
Contract Balances
The following table provides information about contract liabilities (deferred revenue) from contracts with customers. The
Company accounts for contract assets and liabilities on a contract-by-contract basis, with each contract presented as either a net
contract asset or a net contract liability accordingly.
Given that Company’s long-term contracts with customers are billed in advance of service, the Company’s contract
liabilities relate to amounts recorded as deferred revenues. The Company does not have material streams of contracted revenue that
have not been billed.
Deferred revenue primarily relates to the portion of the transaction price received in advance related to the unexpired term
of domain name registrations and other domain related value-added services, on both a wholesale and retail basis, net of external
commissions.
The opening balance of deferred revenue was $143.7 million as of January 1, 2019. Significant changes in deferred revenue
were as follows (Dollar amounts in thousands of U.S. dollars):
Balance, beginning of period
Acquired in a business combination1
Deferred revenue
Recognized revenue
Balance, end of period
Year ended
December 31,
2019
$
$
143,694
12,510
232,647
(239,548 )
149,303
(1)The Company acquired Ascio on March 18, 2019. As part of the transition, the Company acquired active domain name contracts for
terms ranging from 1 - 10 years, for which the registration fees have already been collected from customers. As required by ASC 805,
Business Combinations, the Company has recorded deferred revenue at fair value at the acquisition date, which was determined by
estimating the costs associated with customer support services and prepaid domain name registration fees to fulfill the contractual
obligations over the remaining life of the contract at the acquisition date plus a normal profit margin.
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Remaining Performance Obligations:
As the Company fulfills its performance obligations, the following table includes revenues expected to be recognized in the
future related performance obligations that are unsatisfied (or partially unsatisfied) as at December 31, 2019 (Dollar amounts in
thousands of U.S. dollars):
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).
2020
2021
2022
2023
2024
Thereafter
Total
Year ended
December 31,
2019
$
121,921
12,886
5,456
3,389
2,090
3,098
$
148,840
11. Costs to obtain and fulfill a contract
(a) Deferred costs of acquisition
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the period of benefit
of those costs to be longer than one year and those costs are expected to be recoverable under the term of the contract. We have
identified certain sales incentive programs that meet the requirements to be capitalized, and therefore, capitalized them as contract
costs in the amount of $1.4 million at December 31, 2019.
Capitalized contract acquisition costs are amortized into operating expense based on the transfer of goods or services to
which the assets relate which typically range from two – ten years. For the year ended December 31, 2019, the Company capitalized
$0.9 million and also amortized $0.9 million of contract costs, respectively. There was no impairment loss recognized in relation to
the costs capitalized during the year ended December 31, 2019. The breakdown of the movement in the contract costs balance for
the year ended December 31, 2019 is as follows (Dollar amounts in thousands of U.S. dollars):
Balance, beginning of period
Capitalization of costs
Amortization of costs
Balance, end of period
Year ended
December 31,
2019
$
$
1,390
924
(914 )
1,400
When the amortization period for costs incurred to obtain a contract with a customer is less than one year, we have elected
to apply a practical expedient to expense the costs as incurred. These costs include our internal sales compensation program and
certain partner sales incentive programs.
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Table of Contents
(b) Deferred costs of fulfillment
Deferred costs to fulfill contracts generally consist of domain registration costs which have been paid to a domain registry,
and are capitalized as Prepaid domain name registry and ancillary services fees. These costs are deferred and amortized over the life
of the domain which generally ranges from one to ten years. For the year ended December 31, 2019, the Company capitalized
$161.4 million and also amortized $169.1 million of contract costs. We also acquired $10.3 million of prepaid domain name registry
and ancillary service fees in the Ascio acquisition, which took place on March 18, 2019. There was no impairment loss recognized
in relation to the costs capitalized during the year ended December 31, 2019. Amortization expense is primarily included in cost of
revenue. The breakdown of the movement in the prepaid domain name registry and ancillary services fees balance for the year ended
December 31, 2019 is as follows (Dollar amounts in thousands of U.S. dollars).
Balance, beginning of period
Acquired in a business combination 1
Deferral of costs
Recognized costs
Balance, end of period
Year ended
December 31,
2019
$
$
106,527
10,318
161,385
(169,063 )
109,167
1The Company acquired Ascio on March 18, 2019. As part of the transition, the Company acquired active domain name
contracts with a terms ranging from 1 - 10 years, for which fees to suppliers were paid in advance.
12. Leases
We lease datacenters, corporate offices and fiber-optic cables under operating leases. The Company does not have any
leases classified as finance leases.
Our leases have remaining lease terms of 1 year to 19 years, some of which may include options to extend the leases for
up to 5 years, and some of which may include options to terminate the leases within 1 year.
The components of lease expense were as follows (Dollar amounts in thousands of U.S. dollars):
Operating Lease Cost (leases with a total term greater than 12 months)
Short-term Lease Cost (leases with a total term of 12 months or less)
Variable Lease Cost
Total Lease Cost
For the twelve
months ended
December 31,
2019
$
$
3,057
1,040
657
4,754
Lease Cost is presented in general and administrative expenses and network expenses within our consolidated statements of
operations and comprehensive income.
Information related to leases was as follows (Dollar amounts in thousands of U.S. dollars):
Supplemental cashflow information:
Operating Lease - Operating Cash Flows (Fixed Payments)
For the twelve
months ended
December 31,
2019
$
3,130
Operating Lease - Operating Cash Flows (Liability Reduction)
New ROU Assets - Operating Leases
$
$
2,665
5,392
Supplemental balance sheet information related to leases:
Weighted Average Discount Rate
Weighted Average Remaining Lease Term
December 31,
2019
(Transition)
January 1,
2019
5.20 %
8.62 yrs
5.04 %
5.62 yrs
Maturity of lease liability as of December 31, 2019 (Dollar amounts in thousands of U.S. dollars):
2020
2021
2022
2023
2024
Thereafter
Total future lease payments
Less interest
Total
December 31,
2019
$
$
1,910
1,783
1,704
1,667
1,380
5,162
13,606
2,769
10,837
Operating lease payments include payments under the non-cancellable term and approximately $0.6 million related to options
to extend lease terms that are reasonably certain of being exercised.
As of December 31, 2019, we have entered into lease agreements for total payments of $0.9 million that have not yet
commenced, and therefore are not included in the lease liability.
13. Common Shares
The Company’s authorized common share capital is 250 million shares of common stock without nominal or par value. On
December 31, 2019, there were 10,585,159 shares of common stock outstanding (2018: 10,627,988).
Repurchase of common shares:
(a) Normal Course Issuer Bids:
On February 12, 2020, the Company announced that its Board of Directors (“Board”) has 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 13, 2021. Please see “Note 20 – Subsequent Events” for more
information on the 2020 stock buyback program.
On February 13, 2019, the Company announced that its Board of Directors (“Board”) has 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 12, 2020. The Company repurchased 101,816 shares under this program, for a total
of $5.0 million.
On February 14, 2018, the Company announced that its Board 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, 2018 and
terminated on February 13, 2019. No repurchases were made under this program.
On March 1, 2017, the Company announced that its Board had approved a stock buyback program to repurchase of up to
$40 million of the Company's common stock in the open market. The $40 million buyback program commenced on March 1, 2017
and terminated on February 14, 2018. No repurchases were made under this program.
(b) Net Exercise of Stock Options
Our current equity-based compensation plans include provisions that allow for the “net exercise” of stock options by all
plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from
the option holder can be paid for by having the option holder tender back to the Company a number of shares at fair value equal to
the amounts due. These transactions are accounted for by the Company as a purchase and retirement of shares and are included in
the table on the following page as common stock received in connection with share-based compensation.
F-31
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The following table summarizes our share repurchase activity for the periods covered below (Dollar amounts in thousands of US
dollars, except for share data):
Common stock repurchased on the open market or through tender offer
Number of shares
Aggregate market value of shares (in thousands)
Average price per share
Common stock received in connection with share-based compensation
Number of shares
Aggregate market value of shares (in thousands)
Average price per share
$
$
$
$
14. Stock Option Plans:
Year Ended December 31,
2018
2017
2019
101,816
4,986 $
48.97 $
-
- $
- $
-
-
-
21,332
1,510 $
70.77 $
19,777
1,138 $
57.56 $
50,454
2,602
51.58
The Company’s 1996 Stock Option Plan (the “1996 Plan”) was established for the benefit of the employees, officers,
directors and certain consultants of the Company. The maximum number of common shares which may be set aside for issuance
under the 1996 Plan was 2,787,500 shares, provided that the Board of the Company has the right, from time to time, to increase such
number subject to the approval of the shareholders of the Company when required by law or regulatory authority. Generally, options
issued under the 1996 Plan vest over a four-year period. The 1996 Plan expired on February 25, 2006; no options were issued from
this plan after that date.
On November 22, 2006, the shareholders of the Company approved the Company’s 2006 Equity Compensation Plan (the
“2006 Plan”), which was amended and restated effective July 29, 2010 and which serves as a successor to the 1996 Plan. The 2006
Plan has been established for the benefit of the employees, officers, directors and certain consultants of the Company. The maximum
number of common shares which have been set aside for issuance under the 2006 Plan is 1.25 million shares. On October 8, 2010,
the 2006 Plan was amended to increase the number of shares which have been set aside for issuance by an additional 0.475 million
shares to 1.725 million shares. In September 2015, the 2006 Plan was amended to increase the number of shares which have been
set aside for issuance by an additional 0.75 million shares to 2.475 million shares. Generally, options issued under the 2006 Plan
vest over a four-year period and have a term not exceeding seven years, except for automatic formula grants of non-qualified stock
options, which vest after one year and have a five-year term. Prior to the September 2015 amendment to the 2006 Plan, automatic
formula grants of non-qualified stock options vested immediately upon grant.
Our current equity-based compensation plans include provisions that allow for the “net exercise” of stock options by all
plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from
the option holder can be paid for by having the option holder tender back to the Company a number of shares at fair value equal to
the amounts due. These transactions are accounted for by the Company as a purchase and retirement of shares.
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.
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The fair value of stock options granted during the years ended December 31, 2019, 2018 and 2017 was estimated using the
following weighted average assumptions:
Volatility
Risk-free interest rate
Expected life (in years)
Dividend yield
The weighted average grant date fair value for options issued, with the
exercise price equal to market value on the date of grant
Details of stock option transactions are as follows:
Year Ended December 31,
2018
2017
2019
36.5 %
2.0 %
4.50
0.0 %
37.9 %
2.7 %
4.48
0.0 %
41.6 %
1.8 %
4.55
0.0 %
$
20.20 $
22.22 $
20.08
Twelve months ended
December 31, 2019
Twelve months ended
December 31, 2018
Twelve months ended
December 31, 2017
Weighted
average
exercise price
per share
Number of
shares
Weighted
average
exercise price
per share
Weighted
average
exercise price
per share
Number of
shares
Number of
shares
Outstanding,
beginning of
period
Granted
Exercised
Forfeited
Expired
Outstanding, end
of period
Options
exercisable, end of
period
702,337 $
180,800
(80,319 )
(31,986 )
(16,335 )
43.80
60.56
16.90
59.35
47.51
653,571 $
163,366
(63,886 )
(50,714 )
-
36.69
62.80
12.86
52.33
-
474,501 $
370,025
(172,759 )
(18,196 )
-
12.67
54.10
7.88
37.70
-
754,497
49.94
702,337
43.80
653,571
36.69
356,066 $
40.64
326,937 $
28.91
243,771 $
14.79
As of December 31, 2019, the exercise prices, weighted average remaining contractual life of outstanding options and
intrinsic values were as follows:
Options outstanding
Weighted
Weighted
average
average
remaining
exercise
contractual
price per
life (years)
share
Number
outstanding
Options exercisable
Weighted
Weighted
average
average
remaining
exercise
contractual
price per
life (years)
share
Aggregate
intrinsic
value
Aggregate
intrinsic
value
Number
exercisable
19,535 $
74,465
58,750
14,375
5,000
340,078
242,294
754,497 $
8.56
16.42
23.73
35.89
47.00
55.53
62.99
49.94
0.4 $
1.7
2.1
3.4
4.2
4.5
6.0
4.4 $
1,040
3,378
2,236
372
74
19,535 $
73,215
48,750
11,875
2,500
2,124 172,802
27,389
9,224 356,066 $
-
8.56
16.36
24.27
36.02
47.00
55.68
64.10
40.64
0.4 $
1.7
1.9
3.3
4.2
4.2
5.4
3.2 $
1,039
3,326
1,829
306
37
1,053
-
7,590
Exercise price
$ 8.56 - $ 8.56
$10.16 - $19.95
$21.10 - $27.53
$35.25 - $37.35
$47.00 - $47.00
$53.20 - $58.65
$61.33 - $64.10
Total unrecognized compensation cost relating to unvested stock options at December 31, 2019, prior to the consideration
of expected forfeitures, is approximately $6.6 million and is expected to be recognized over a weighted average period of 2.3 years.
The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was $3.9 million,
$2.9 million and $7.6 million, respectively. Cash received from the exercise of stock options during the years ended
December 31, 2019, 2018 and 2017 was $0.4 million, $0.1 million and $0.2 million respectively.
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Table of Contents
The Company recorded stock-based compensation amounting to $2.9 million, $2.6 million and $1.5 million for the years ended
December 31, 2019, 2018 and 2017 respectively. Stock-based compensation has been included in operating expenses as follows
(Dollar amounts in thousands of US dollars):
Network expenses
Sales and marketing
Technical operations and development
General and administrative
15. Foreign Exchange:
Year Ended December 31,
2018
2017
2019
$
$
307 $
1,251
596
722
2,876 $
223 $
1,025
636
690
2,574 $
110
573
360
414
1,457
A foreign exchange gain amounting to $0.4 million has been recorded in general and administrative expenses during the
year ended December 31, 2019. A foreign exchange loss amounting to $0.9 million has been recorded in general and administrative
expenses during the year ended December 31, 2018. A foreign exchange gain amounting to $0.7 million has been recorded in general
and administrative expenses during the year ended December 31, 2017.
16. Other Income, Net:
In February 2015, we waived our rights under the proposed joint venture to operate the .online registry and instead
entered into a Joint Marketing agreement with our venture partners under which our original capital contributions have been
returned and a set of go-forward marketing arrangements have been created instead. Under the terms of the agreement, the
Company has undertaken to provide certain marketing support for .online registry and has agreed to certain volume commitments
during the term of the agreement. The Joint Marketing Agreement is for a term of three years and commenced in November 2015.
The Company generated a gain of $1.5 million for waiving its rights and entering the Joint Marketing Agreement. The gain
was being recognized over the term of three years. An amount of $0.5 million of this gain was recognized for the years ended
December 31, 2018 and 2017 respectively. As of December 31, 2018 the gain has been fully recognized.
17. Earnings Per Common Share:
The following table reconciles the numerators and denominators of the basic and diluted earnings per common share
computation (Dollar amounts in thousands of US dollars, except for share data):
Year ended December 31,
2018
2017
2019
Numerator for basic and diluted earnings per common share:
Net income for the period
$
15,398 $
17,135 $
22,327
Denominator for basic and diluted earnings per common share:
Basic weighted average number of common shares outstanding
Effect of outstanding stock options
Diluted weighted average number of shares outstanding
Basic earnings per common share
Diluted earnings per common share
10,623,799
149,013
10,772,812
10,604,722
189,448
10,794,170
10,537,356
256,266
10,793,622
$
$
1.45 $
1.62 $
1.43 $
1.59 $
2.12
2.07
Options to purchase 547,372 common shares were outstanding during 2019 (2018: 451,739; 2017: 341,650) but 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 year.
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18. Commitments and Contingencies:
(a) The Company has several non-cancelable lease and purchase obligations primarily for general office facilities,
service contracts for mobile telephone services and equipment that expire over the next ten years. Future minimum payments under
these agreements are as follows (Dollar amounts in thousands of US dollars):
Contractual Obligations for the year ending
December 31,
2020
2021
2022
2023
2024
Thereafter
Contractual
Lease
Obligations
(1)
Debt
Obligations
Purchase
Obligations
(2)
Total
Obligations
$
$
2,248 $
1,824
1,745
1,708
1,420
5,584
14,529 $
- $
-
-
114,400
-
-
114,400 $
29,153 $
12,638
12,264
13,584
19,074
5,250
91,963 $
31,401
14,462
14,009
129,692
20,494
10,834
220,892
(1) Contractual lease obligations include $0.9 million in lease payments related to Fiber IRU contracts that have not yet commenced in
Fiscal 2019.
(2) Purchase obligations include all other legally binding service contracts for mobile telephone services and other operational
agreements to be delivered during Fiscal 2020 and subsequent years.
(b) On February 9, 2015 Ting Fiber, Inc.(“Ting”) entered into a lease and network operation agreement with the City
of Westminster, Maryland (the “City”) relating to the deployment of a new fiber network throughout the Westminster area (“WFN”).
Under the agreement, the City will finance, construct, and maintain the WFN which will be leased to Ting for a period of
ten years. The network will be constructed in phases, the scope and timing of which shall be determined by the City, in cooperation
with Ting.
Under the terms of the agreement, Ting may be required to advance funds to the City in the event of a quarterly shortfall
between the City’s revenue from leasing the network to Ting and the City’s debt service requirements relating to financing of the
network. Ting could be responsible for shortfalls between $50,000 and $150,000 per quarter. In Fiscal 2016, the City has entered
into financing for the construction of the WFN which allows the City to draw up to $21.0 million, from their lenders, over the next
five years with interest only payments during that period with a loan maturity of 30 years. As of December 31, 2019, the City has
drawn $16.2 million and the City’s revenues from Ting exceed the City’s debt service requirements. The Company does not believe
it will be responsible for any shortfall in Fiscal 2020.
(c) On September 17, 2018 Ting entered into a non-exclusive access and use agreement with SiFi Networks Fullerton,
LLC (“SiFi”). The agreement memorializes a long-term (15-year) relationship wherein Ting will be granted the non-exclusive right
to act as an Internet service provider for a fiber-optic network to be constructed in the city of Fullerton, California. Under the terms
of the agreement, SiFi is fully responsible for constructing, operating and maintaining a wholesale fiber-optic network, as well as
the financing of those activities.
Ting will be responsible for paying a fee per subscriber to SiFi. Through a “take or pay” arrangement, Ting has agreed to
certain minimum charges based on minimum subscriber rates. These minimum fees are variable based on the percentage
completion of the fiber optic network, and thus have not been considered an unconditional purchase obligation for the purposes
of the table in Note 18(a).
(d) On November 4, 2019 Ting entered into an access and use agreement with Netly, LLC (“Netly”). The agreement
memorializes a long-term (12-year) relationship wherein Ting will be granted the right to act as an Internet service provider for fiber-
optic networks to be constructed in and around the cities of Solana Beach, California. Under the terms of the agreement, Ting will
have a 3-year “Headstart” period over each completed segment of the network, whereby Ting shall be the exclusive provider of
services to subscribers during the “Headstart” period. Netly is fully responsible for constructing, operating and maintaining a
wholesale fiber optic network, as well as the financing of those activities.
Ting will be responsible for paying a fee per subscriber to Netly, as well as an unlit door fee for each serviceable address
not subscribed. Through a “take or pay” arrangement, Ting has agreed to certain minimum charges based on minimum
subscriber rates. These minimum fees are variable based on the percentage completion of the fiber optic network, and thus
have not been considered an unconditional purchase obligation for the purposes of the table in Note 18(a).
(e) In the normal course of its operations, the Company becomes involved in various legal claims and lawsuits. The
Company intends to vigorously defend these claims. While the final outcome with respect to any actions or claims outstanding or
pending as of December 31, 2019 cannot be predicted with certainty, management does not believe that the resolution of these
claims, individually or in the aggregate, will have a material adverse effect on the Company’s financial position.
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Table of Contents
19. Segment Reporting:
(a) We are organized and managed based on two operating segments which are differentiated primarily by their services,
the markets they serve and the regulatory environments in which they operate and are described as follows:
1. Network Access Services - This segment derives revenue from the sale of mobile phones, telephony services, high
speed Internet access, billing solutions to individuals and small businesses primarily through the Ting website. Revenues are
generated in the United States.
2. Domain Services – This segment includes wholesale and retail domain name registration services, value added services
and portfolio services. The Company primarily earns revenues from the registration fees charged to resellers in connection with new,
renewed and transferred domain name registrations; the sale of retail Internet domain name registration and email services to
individuals and small businesses; and by making its portfolio of domain names available for sale or lease. Domain Services revenues
are attributed to the country in which the contract originates, primarily Canada and the United States.
The Chief Executive Officer (the “CEO”) is the chief operating decision maker and regularly reviews the operations and
performance by segment. The CEO reviews gross profit as (i) a key measure of performance for each segment and (ii) to make
decisions about the allocation of resources. Sales and marketing expenses, technical operations and development expenses, general
and administrative expenses, depreciation of property and equipment, amortization of intangibles assets, impairment of indefinite
life intangible assets, gain on currency forward contracts and other expense net are organized along functional lines and
are not included in the measurement of segment profitability. Total assets and total liabilities are centrally managed and
are not reviewed at the segment level by the CEO. The Company follows the same accounting policies for the segments as those
described in “Note 2 – Significant Accounting Policies”, and “Note 10 – Revenue”.
Information by reportable segments (with the exception of disaggregated revenue, which is discussed in “Note 10 –
Revenue”), which is regularly reported to the chief operating decision maker is as follows (Dollar amounts in thousands of US
dollars):
Year Ended December 31, 2019
Net Revenues
Cost of revenues
Cost of revenues
Network expenses
Depreciation of property and equipment
Amortization of intangible assets
Total cost of revenues
Gross Profit
Expenses:
Sales and marketing
Technical operations and development
General and administrative
Depreciation of property and equipment
Loss on disposition of property and equipment
Amortization of intangible assets
Impairment of indefinite life intangible assets
Loss (gain) on currency forward contracts
Income from operations
Other income (expenses), net
Income before provision for income taxes
Network Access
Services
Domain Services
Consolidated
Totals
$
95,663 $
241,482 $
337,145
48,343
2,007
6,877
46
57,273
38,390
169,236
7,183
1,598
1,078
179,095
62,387
F-36
$
217,579
9,190
8,475
1,124
236,368
100,777
34,270
9,717
17,880
486
73
9,209
-
(198 )
29,340
(4,769 )
24,571
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Year Ended December 31, 2018
Net Revenues
Cost of revenues
Cost of revenues
Network expenses
Depreciation of property and equipment
Amortization of intangible assets
Total cost of revenues
Gross Profit
Expenses:
Sales and marketing
Technical operations and development
General and administrative
Depreciation of property and equipment
Amortization of intangible assets
Loss (gain) on currency forward contracts
Income from operations
Other income (expenses), net
Income before provision for income taxes
Year Ended December 31, 2017
Net Revenues
Cost of revenues
Cost of revenues
Network expenses
Depreciation of property and equipment
Amortization of intangible assets
Total cost of revenues
Gross Profit
Expenses:
Sales and marketing
Technical operations and development
General and administrative
Depreciation of property and equipment
Amortization of intangible assets
Impairment of indefinite life intangible assets
Loss (gain) on currency forward contracts
Income from operations
Other income (expenses), net
Income before provision for income taxes
Network Access
Services
Domain Services
Consolidated
Totals
$
97,324 $
248,689 $
346,013
50,055
2,029
4,063
46
56,193
41,131
182,048
7,817
1,235
1,950
193,050
55,639
$
232,103
9,846
5,298
1,996
249,243
96,770
33,063
8,748
17,710
424
7,247
254
29,324
(3,169 )
26,155
Network Access
Services
Domain Services
Consolidated
Totals
$
89,452 $
239,969 $
329,421
48,640
1,861
2,201
46
52,748
36,704
181,960
7,463
941
1,788
192,152
47,817
F-37
$
230,600
9,324
3,142
1,834
244,900
84,521
29,423
7,258
13,594
585
6,566
111
(98 )
27,082
(3,007 )
24,075
Table of Contents
(b) The following is a summary of the Company’s cost of revenues from each significant revenue stream (Dollar
amounts in thousands of US dollars):
Network Access Services:
Mobile Services
Other Services
Total Network Access Services
Domain Services:
Wholesale
Domain Services
Value Added Services
Total Wholesale
Retail
Portfolio
Total Domain Services
Network Expenses:
Network, other costs
Network, depreciation and amortization costs
Total Network Expenses
2019
2018*
2017
$
44,415 $
3,928
48,343
46,061 $
3,994
50,055
45,335
3,305
48,640
148,530
2,986
151,516
17,093
627
169,236
160,216
3,154
163,370
17,725
953
182,048
9,190
9,599
18,789
9,846
7,294
17,140
161,013
2,450
163,463
17,346
1,151
181,960
9,324
4,976
14,300
$
236,368 $
249,243 $
244,900
(c) The following is a summary of the Company’s property and equipment by geographic region (Dollar amounts in
thousands of US dollars):
Canada
United States
Europe
December 31,
2019
December 31,
2018*
$
$
2,319 $
79,758
44
82,121 $
1,393
46,631
41
48,065
(d) The following is a summary of the Company’s amortizable intangible assets by geographic region (Dollar
amounts in thousands of US dollars):
Canada
United States
F-38
December 31,
2019
December 31,
2018*
$
$
5,207 $
40,140
45,347 $
6,553
30,421
36,974
Table of Contents
(e) The following is a summary of the Company’s deferred tax asset, net of valuation allowance, by geographic region
(Dollar amounts in thousands of US dollars):
Canada
December 31,
2019
December 31,
2018*
$
$
- $
- $
-
-
(f) Valuation and qualifying accounts (Dollar amounts in thousands of US dollars):
Allowance for doubtful accounts
Balance at
beginning of
period
Charged to
costs and
expenses
Write-offs
during
period
Balance at
end of period
Year Ended December 31, 2019
Year Ended December 31, 2018
$
$
132 $
168 $
(1 ) $
(36 ) $
- $
- $
131
132
20. Subsequent Events:
a. On October 31, 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 $0.1 million relating to a working capital deficit and assessment
of the fair value of contingent consideration, for net purchase consideration of $14.0 million. The cash consideration due at
closing of $9.0 million was financed by an advance on the 2019 Amended Credit Facility. The Company also issued 32,374
of Tucows Inc. shares ($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 following table shows the preliminary allocation of the purchase price for Cedar to the acquired identifiable assets,
liabilities assumed and goodwill:
Cash Consideration, including working capital adjustment
Share-based payment
Fair value of contingent payments
Total estimated purchase price
Cash and Cash Equivalents
Accounts Receivables, net
Other current assets
Property and equipment
Right of use operating lease
Intangible assets
Total identifiable assets
Accounts payable and accrued labilities
Deferred tax liability
Operating lease liability
Total liabilities assumed
$
8,901
2,000
3,065
13,966
66
67
195
4,488
18
5,570
10,404
(254 )
(2,207 )
(13 )
(2,474 )
Total net assets (liabilities) assumed
Total goodwill
$
7,930
6,036
b. 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 will be made exclusively through the facilities of the
NASDAQ Capital Market. The stock buyback program commenced on February 13, 2020 and will terminate on or before
February 12, 2021. The previously announced $40 million buyback program for the period February 14, 2019 to February 13,
2020 was terminated on February 13, 2020. The Company repurchased 101,816 shares under this program, for a total of $5.0
million. According to the terms of our 2019 Amended Credit Facility, share repurchases require the Lenders’ consent if the
Company’s Total Funded Debt to Adjusted EBITDA ratio exceeds 2.00:1.
21. Selected Quarterly Financial Data (Unaudited):
2019
Total revenues
Gross profit
Net income
Earnings per share:
Basic
Diluted
2018
Total revenues
Gross profit
Net income
Earnings per share:
Basic
Diluted
December
31
September
30
June 30
March 31
(in thousands, except for per share data)
85,946 $
26,045
5,778
88,129 $
27,574
4,205
84,117 $
24,507
2,616
78,953
22,651
2,799
0.55 $
0.54
0.40 $
0.39
0.25 $
0.24
0.26
0.26
85,612 $
27,731
4,436
83,519 $
24,261
5,346
81,087 $
22,158
3,608
95,795
22,619
3,744
0.42 $
0.41
0.50 $
0.50
0.34 $
0.33
0.35
0.35
$
$
$
$
F-39
Table of Contents
Exhibit
No.
2.1
EXHIBIT INDEX
Description
Stock Purchase Agreement, dated as of January 20, 2017, by and among Tucows Inc., Tucows (Emerald), LLC, Rightside
Group, Ltd., Rightside Operating Co. and eNom, Incorporated (Incorporated by reference to Exhibit 2.1 filed with
Tucows’ Current Report on Form 8-K, as filed with the SEC on January 23, 2017).
2.2
First Amendment, dated as of June 13, 2017, to Stock Purchase Agreement, dated as of June 13, 2017, by and among
Tucows Inc., Tucows (Emerald), LLC, Rightside Group, Ltd., Rightside Operating Co. and eNom, Incorporated
(Incorporated by reference to Exhibit 10.1 filed with Tucows’ Current Report on Form 8-K, as filed with the SEC on
June 13, 2017).
2.3
Asset Purchase Agreement, dated as of March 18, 2019, by and among Tucows Inc., Ting Fiber, Inc., NetNames
European Holdings ApS, NetNames GmbH, CSC Administrative Services Limited UK, Corporation Service Company
and Ascio Technologies, Inc. (Incorporated by reference to Exhibit 2.1 filed with Tucows’ Current Report on Form 8-
K, as filed with the SEC on March 20, 2019).
3.1.1
3.1.2
3.2
3.3
Fourth Amended and Restated Articles of Incorporation of Tucows Inc. (Incorporated by reference to Exhibit 3.1 filed
with Tucows’ Current Report on Form 8-K, as filed with the SEC on November 29, 2007).
Articles of Amendment to Fourth Amended and Restated Articles of Incorporation of Tucows Inc. (Incorporated by
reference to Exhibit 3.1 filed with Tucows’ Current Report on Form 8-K, as filed with the SEC on January 3, 2014).
Second Amended and Restated Bylaws of Tucows Inc. (Incorporated by reference to Exhibit 3.2 filed with Tucows’
Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 29, 2007).
Amendment No. 1 to Second Amended and Restated Bylaws of Tucows Inc. (Incorporated by Reference to Exhibit 3.3
filed with Tucows’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).
4.1#
Description of Securities of the Registrant.
10.1*
2006 Equity Compensation Plan, as amended and restated effective as of September 8, 2015 (Incorporated by reference
to Exhibit 99(d)(1) filed with Tucows’ Schedule TO, as filed with the SEC on September 17, 2010).
10.2*
Employment Agreement, dated as of January 22, 2003, between Tucows.com Co. and Elliot Noss (Incorporated by
reference to Exhibit 10.3 filed with Tucows’ Annual Report on Form 10-K for the year ended December 31, 2002, as
filed with the SEC on March 28, 2003).
10.3
10.4
Lease between 707932 Ontario Limited and Tucows International Corporation, dated as of December 10, 1999
(Incorporated by reference to exhibit number 10.9 filed with Tucows’ Annual Report on Form 10-K for the year ended
December 31, 2001, as filed with the SEC on April 1, 2002).
Lease extension between 707932 Ontario Limited and Tucows Inc. and Tucows.com Co., dated as of September 18,
2004 (Incorporated by reference to Exhibit 10.8 filed with Tucows’ Annual Report on Form 10-K for the year ended
December 31, 2004, as filed with the SEC on March 24, 2005).
10.5#
Lease extension between 707932 Ontario Limited and Tucows (Delaware) Inc. and Tucows.com Co dated as of
January 1, 2019.
10.6*
Description of Tucows Fiscal 2004 At Risk Compensation Plan (Incorporated by reference to Exhibit 10.9 filed with
Tucows’ Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the SEC on March 24, 2005).
91
Table of Contents
Exhibit No.
Description
10.7
10.8
10.9
Credit Agreement, dated as of August 18, 2016, by and among Tucows.com Co., Ting Fiber, Inc., Ting Inc., as Borrowers,
Tucows Inc., as Guarantor, and Bank of Montreal and Royal Bank of Canada, as Lenders (Incorporated by reference to
Exhibit 10.1 filed with Tucows’ Current Report on Form 8-K, as filed with the SEC on August 19, 2016).
First Amended and Restated Credit Agreement, dated as of January 20, 2017, by and among Tucows.com Co., Ting
Fiber, Inc., Ting Inc., Tucows (Delaware), Inc., Tucows (Emerald) LLC, as Borrowers, Tucows Inc., as Guarantor, and
Bank of Montreal, Royal Bank of Canada and Bank of Nova Scotia, as Lenders (Incorporated by reference to Exhibit
10.1 filed with Tucows’ Current Report on Form 8-K, as filed with the SEC on January 23, 2017).
First Amendment, dated as of June 6, 2017, to the First Amended and Restated Credit Agreement, dated as of January
20, 2017, by and among Tucows.com Co., Ting Fiber, Inc., Ting Inc., Tucows (Delaware), Inc., Tucows (Emerald)
LLC, as Borrowers, Tucows Inc., as Guarantor, and Bank of Montreal, Royal Bank of Canada and Bank of Nova
Scotia, as Lenders (Incorporated by reference to Exhibit 10.1 filed with Tucows’ Current Report on Form 8-K, as filed
with the SEC on June 9, 2017).
10.10
Interim Amendment, dated as of December 5, 2017, to the First Amended and Restated Credit Agreement, dated as of
January 20, 2017, by and among Tucows.com Co., Ting Fiber, Inc., Ting Inc., Tucows (Delaware), Inc., Tucows
(Emerald) LLC, as Borrowers, Tucows Inc., as Guarantor, and Bank of Montreal, Royal Bank of Canada and Bank of
Nova Scotia, as Lenders (Incorporated by reference to Exhibit 10.1 filed with Tucows’ Current Report on Form 8-K, as
filed with the SEC on December 8, 2017).
10.11
10.12
10.13
Second Interim Amendment, dated as of January 24, 2018, to the First Amended and Restated Credit Agreement, dated
as of January 20, 2017, by and among Tucows.com Co., Ting Fiber, Inc., Ting Inc., Tucows (Delaware), Inc., Tucows
(Emerald) LLC, as Borrowers, Tucows Inc., as Guarantor, and Bank of Montreal, Royal Bank of Canada and Bank of
Nova Scotia, as Lenders (Incorporated by reference to Exhibit 10.1 filed with Tucows’ Current Report on Form 8-K, as
filed with the SEC on January 24, 2018).
Second Amendment to First Amended and Restated Credit Agreement, dated as of March 18, 2019, by and among
Tucows.com Co., Ting Fiber, Inc., Ting Inc., Tucows (Delaware) Inc. and Tucows (Emerald), LLC, as Borrowers,
Tucows Inc., as Guarantor, Bank of Montreal, as Administrative Agent, and Bank of Montreal, Royal Bank of Canada
and The Bank of Nova Scotia, as Lenders (Incorporated by reference to Exhibit 10.1 filed with Tucows’ Current Report
on Form 8-K, as filed with the SEC on March 20, 2019).
Amended and Restated Senior Secured Credit Agreement, dated as of June 14, 2019, by and among Tucows.com Co.,
Ting Fiber, Inc., Ting, Inc., Tucows (Delaware) Inc., Tucows (Emerald), LLC, as Borrowers, Tucows, Inc., as parent,
Royal Bank of Canada, as Administrative Agent, and Royal Bank of Canada, Bank of Montreal, Bank of Nova Scotia,
HSBC Bank Canada and Canadian Imperial Bank of Commerce, as Lenders (Incorporated by reference to Exhibit 10.1
filed with Tucows’ Current Report on Form 8-K, as filed with the SEC on June 18, 2019).
10.14
Amending Agreement No. 1, dated as of November 27, 2019, to the Amended and Restated Senior Secured Credit
Agreement, dated as of June 14, 2019 (Incorporated by reference to Exhibit 10.1 filed with Tucows’ Current Report on
Form 8-K, as filed with the SEC on December 4, 2019).
21.1#
Subsidiaries of Tucows Inc.
23.1#
Consent of KPMG LLP, Independent Registered Public Accounting Firm.
31.1#
Chief Executive Officer’s Rule 13a-14(a)/15d-14(a) Certification.
31.2#
Chief Financial Officer’s Rule 13a-14(a)/15d-14(a) Certification.
32.1†
Chief Executive Officer’s Section 1350 Certification.
32.2†
Chief Financial Officer’s Section 1350 Certification.
101.INS#
XBRL Instance
101.SCH# XBRL Taxonomy Extension Schema
101.CAL# XBRL Taxonomy Extension Calculation
101.DEF# XBRL Taxonomy Extension Definition
101.LAB# XBRL Taxonomy Extension Labels
101.PRE# XBRL Taxonomy Extension Presentation
* Management or compensatory contract.
#
†
Filed herewith.
Furnished herewith.
92
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: March 4, 2020
Tucows Inc.
By: /s/ ELLIOT NOSS
Name: Elliot Noss
Title: Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons of
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ ELLIOT NOSS
Elliot Noss
President, Chief Executive Officer
(Principal Executive Officer) and Director
/s/ DAVINDER SINGH
Davinder Singh
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ ALLEN KARP
Allen Karp
/s/ RAWLEIGH RALLS
Rawleigh Ralls
/s/ ROBIN CHASE
Robin Chase
/s/ EREZ GISSIN
Erez Gissin
/s/ JEFFREY SCHWARTZ
Jeffrey Schwartz
/s/ BRAD BURNHAM
Brad Burnham
Director
Director
Director
Director
Director
Director
93
Date
March 4, 2020
March 4, 2020
March 4, 2020
March 4, 2020
March 4, 2020
March 4, 2020
March 4, 2020
March 4, 2020