10-K 1 tcx20171231_10k.htm FORM 10-K tcx20171231_10k.htm
 

 

Table of Contents



 

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

For the fiscal year ended December 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

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)

23-2707366

(I.R.S. Employer Identification No.)

96 Mowat Avenue

Toronto, Ontario, Canada

(Address of Principal Executive Offices)

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

  

Name of Each Exchange on Which Registered

Common stock, no par value

  

NASDAQ

 

Securities registered pursuant to Section 12(g) of the Act:

 

  

(Title of Class)

  

  

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 and posted on its Corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files. Yes ☒  No ☐

 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

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 ☐

(Do not check if a smaller reporting company)

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, 2017, (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 $564.6 million. Such aggregate market value was computed by reference to the closing sale price per share of $53.50 as reported on the NASDAQ Capital Market on such date. For purposes of making this calculation only, the registrant has defined affiliates as including all officers, directors and beneficial owners of more than ten percent of the outstanding shares of common stock of the Company. In making such calculation, the registrant is not making a determination of the affiliate or non-affiliate status of any holders of shares of the registrant’s common stock.

 

The number of shares outstanding of the registrant’s common stock as of March 2, 2018, was 10,589,221.

 

 



 

 

 

TUCOWS INC.

ANNUAL REPORT ON FORM 10-K

For Fiscal Year Ended December 31, 2017

 

TABLE OF CONTENTS

  

 

Page

PART I

Item 1

Business

3

Item 1A

Risk Factors

11

Item 2

Properties

40

Item 3

Legal Proceedings

40

Item 4

Mine Safety Disclosures

40

PART II

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

41

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

45

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

82

Item 8

Financial Statements and Supplementary Data

84

Item 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

84

Item 9A

Controls and Procedures

84

Item 9B

Other Information

85

PART III

Item 10

Directors, Executive Officers and Corporate Governance

86

Item 11

Executive Compensation

94

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

110

Item 13

Certain Relationships and Related Transactions, and Director Independence

112

Item 14

Principal Accountant Fees and Services

113

PART IV

Item 15

Exhibits and Financial Statement Schedules

114

 

 

 

 
TRADEMARKS, TRADE NAMES AND SERVICE MARKS

 

Tucows®, EPAG®, Hover®, OpenSRS®, Platypus®, Ting®, eNom®, Roam®, Roam Mobility®, Bulkregister® 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.

  

 

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; 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 global 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 revenue that our parked page vendor relationships may generate in the future; 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 valuations of certain deferred tax assets; our expectation to collect our outstanding receivables, net of our allowance for doubtful accounts; our expectation regarding fluctuations in certain expense and cost categories; our expectations regarding our unrecognized tax benefit and the timing or completion of certain audits of our US, Canadian and German tax returns; our expectations regarding cash from operations to fund our business; the impact of cancellations of or amendments to market development fund programs under which we receive funds, 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;

 

 

 

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;

     
 

Our ability to effectively integrate acquisitions, including the acquisition of eNom, Incorporated in January 2017;

 

 

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.

 

 

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 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, Internet hosting and network consulting services.

 

Our primary mobile service offering 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 (“Ting Mobile”) 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. On September 19, 2017, the Company acquired the consumer related assets of Otono, Networks Inc. The consumer assets relate to the mobile roaming and instant activation eSIM business under the Roam Mobility, Zipsim and Always Online Wireless brands (collectively “Roam Mobility brands”). The acquired portfolio 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 Company also derives revenue from the sale of fixed high-speed Internet access (“Ting Internet”) in select towns including Holly Springs, North Carolina; Westminster, Maryland; and Charlottesville, 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. We also derive revenue from providing Internet hosting and network consulting services to business customers in Central Virginia through our acquisition of a 70% share in Ting Virginia, LLC on February 27, 2015, which was increased to a 90% interest in February 2017.  On February 13, 2018, the Company entered into an agreement with the Minority Shareholders of Ting Virginia, LLC 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.  The put option was simultaneously exercised 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.

 

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 are generated in the United States, Canada and the United Kingdom on a prepaid usage basis with no fixed contract terms.

 

 

Domain Services

 

Domain Services includes wholesale and retail domain name registration services, value added services and portfolio services derived through our OpenSRS, eNom 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. The Company acquired eNom, Incorporated (“eNom”), a domain registration wholesale and retail company, from Rightside Group, Ltd, on January 20, 2017. Please see “Note 3 – Acquisitions” in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

 

Our primary distribution channel is a global network of approximately 39,000 resellers that operate in over 150 countries and who typically provide their customers, the end-users of Internet-based services, with solutions for establishing and maintaining an online presence. The increase in our reseller network during the year from 13,000 resellers resulted from our acquisition of eNom. 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 (API), easy-to-use interfaces, comprehensive management and reporting tools, and proactive and attentive customer service. Our services are integral to the solutions that our resellers deliver to their customers. We provide “second tier” support to our resellers by email, chat and phone in the event resellers experience issues or problems with our services. In addition, our Network Operating Center proactively monitors all services and network infrastructure to address deficiencies before customer services are impacted.

 

We believe that the underlying platforms for our services are among the most mature, reliable and functional reseller-oriented provisioning and management platforms in our industry, and we continue to refine, evolve and improve these services for both resellers and end-users. Our business model is characterized primarily by non-refundable, up-front payments, which lead to recurring revenue and positive operating cash flow.

  

Wholesale, primarily branded as OpenSRS and eNom, derives revenue from its Domain Service and from providing Value-Added Services. The OpenSRS and eNom Domain Services manage 28 million domain names under the Tucows and eNom ICANN registrar accreditations and for other registrars under their own accreditations. In January 2018, the Company completed a bulk transfer of 2.65 million names for domain names under management related to Namecheap as more fully described in “Note 17 – Subsequent events” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report. Value-Added Services include hosted email which provides email delivery and webmail access to millions of mailboxes, Internet security services, publishing tools and other value-added services. All of these services are made available to end-users through a network of 39,000 web hosts, Internet service providers (“ISPs”), and other resellers around the world. In addition, we also derive revenue by monetizing domain names which are near the end of their lifecycle through advertising revenue or auction sale.

   

Retail, primarily the Hover and eNom portfolio of websites, including eNom, eNom Central and Bulkregister, derive revenues from the sale of domain name registration and email services to individuals and small businesses. Retail also includes our Personal Names Service – based on over 36,000 surname domains – that allows roughly two-thirds of Americans to purchase an email address based on their last name.

 

Portfolio generates revenue by offering names in our domain portfolio for resale through a number of distribution channels including our reseller network. We also generate advertising revenue from our portfolio.

 

Additional information about segments can be found in “Note 16 – Segment Reporting” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

 

 

Net Revenues

 

Network Access Services

 

Mobile Service

 

We derive revenue from Ting Mobile’s sale of retail mobile phones, accessories and services to individuals and small businesses nationally. Revenues are generated primarily through the Ting website with telephony services charged on a monthly post-paid basis with no fixed contract term, with a significant portion of our customers having multiple devices on their accounts. For the mobile roaming and instant activation eSIM business under the Roam Mobility brands, we derive revenue from the sale of SIM cards with prepaid usage as well as pay-as-you-go usage sold through third-party retail stores and product branded websites.

 

Fixed high-speed Internet Service

 

The Company also derives revenue from the sale of Ting Internet in select towns including Holly Springs, North Carolina; Westminster, Maryland; and Charlottesville, Virginia. Our primarily sales channel of Ting Internet is through the Ting website with revenues generated from fixed monthly access charges with a primary focus on the 1 GB unlimited data usage package. Services are provided on a monthly basis with no fixed contract term.  Revenue from hardware and installation is recognized at time of delivery. We also derive revenue from providing Internet hosting and network consulting services to business customers in Central Virginia through our acquisition of a 70% share in Ting Virginia, LLC on February 27, 2015, which was increased to a 90% interest in February 2017.  On February 13, 2018, the Company entered into an agreement with the Minority Shareholders of Ting Virginia, LLC 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.  The put option was simultaneously exercised 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.

 

 

 Domain Services

 

Wholesale

 

Historically, our wholesale OpenSRS 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. With the acquisition of eNom and its 26,000 reseller network, domain services will continue to be the largest portion of our business and will further fuel our ability sell add-on services.

 

We receive revenues for each domain registration or other Internet service processed through our systems by Service Providers.

 

With respect to the sale of domain registrations, we earn registration fees in connection with each new, renewed and transferred-in registration and from providing provisioning services to Service Providers and registrars on a monthly basis. Domain registrations are generally purchased for terms of one to ten years. Payments for the full term of all services, or billed revenue, are received at the time of activation of service and where appropriate are recorded as deferred revenue and are recognized as earned ratably over the term of provision of service. This accounting treatment reasonably approximates a recognition pattern that corresponds with the provision of the services during the quarters and the year.

 

Wholesale –Value-Added Services

 

We derive revenue from our hosted email service through our global distribution network. Our hosted email service is offered on a per account, per month basis, and provides resellers with a reliable, scalable “white label” hosted email solution that can be customized to their branding and business model requirements. The hosted email service also includes spam and virus filtering on all accounts. End-users can access the hosted email service via a full-featured, multi-language web interface or through traditional desktop email clients, such as Microsoft Outlook or Apple Mail, using IMAP or POP/SMTP.

 

 

We also derive revenue from other Value-Added Services primarily from provisioning SSL certificates. In addition, we derive revenue from the bulk sale of domain names and advertising from the OpenSRS and eNom domain expiry stream.

 

In addition, we provide billing, provisioning and customer care software solutions to ISPs through our Platypus billing software.

 

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

 

We derive revenue from our portfolio of domain names by displaying advertising on the domains and by making them available for sale or lease. When a user types one of these domain names into a web browser, they are presented with dynamically generated links that are pay-per-click advertising. Every time a user clicks on one of these links, it generates revenue for us through our partnership with third-parties who provide syndicated pay-per-click advertising (“parked page vendors”).

 

Our parked page vendor relationships may not continue to generate levels of revenue commensurate with what we have achieved during past periods. Our ability to generate online advertising revenue from parked page vendors depends on their advertising networks' assessment of the quality and performance characteristics of Internet traffic resulting from online advertisements rendered on their websites. We have no control over any of these quality assessments. Parked page vendors may from time to time change their existing, or establish new, methodologies and metrics for valuing the quality of Internet traffic and delivering pay-per-click advertisements. Any changes in these methodologies, metrics and advertising technology platforms could decrease the amount of revenue that we generate from online advertisements. In addition, parked page vendors may at any time change the nature of the service or suspend the service that they provide to online advertisers. These types of changes or suspensions would adversely impact our ability to generate revenue from pay-per-click advertising.

 

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.

 

Portfolio names that have been acquired from third-parties or through acquisition are included as intangible assets with indefinite lives on our consolidated balance sheet.

 

For information about geographic areas, see “Note 16 – Segment Reporting” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report

 

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” 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 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 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.

 

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, 2017, we had approximately 558 full-time employees. None of our employees are currently represented by a labor union. We consider our relations with our employees to be good.

 

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 and the United States of America.

 

 

The public may read and copy any materials we file with the Securities and Exchange Commission, or SEC, at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically at http://sec.gov.

 

Our web site address is tucows.com. We make available through our web site, 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. The information on the web site 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

Age

Title

Elliot Noss

55

President and Chief Executive Officer

Davinder Singh

43

Chief Financial Officer

David Woroch

55

Executive Vice President, Domains

Bret Fausett

54

Chief Legal Officer

Hanno Liem

44

Chief Technology Officer

Jason Silverstein

44

Vice President, Corporate Operations

Jessica Johannson

45

Vice President, Human Resources

Michael Goldstein

46

Vice President, Sales and Marketing

Ross Rader

46

Vice President, Customer Experience

 

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 April 2017, having previously served as Vice President Finance since joining the Company in February 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 Communications (“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 he oversees the Domains business at Tucows, including OpenSRS, eNom 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 focused on site operations and engineering.

 

 

Jason Silverstein joined Tucows in January 2017 as our Vice President, Corporate Operations in connection with the acquisition of eNom, where served as its General Manager as well as Vice President of Product and Engineering for Rightside Group, Ltd. since July 2015. Prior to Rightside Group, Ltd., Mr. Silverstein served in similar business technology leadership roles within companies such as the NBA, Yahoo!, multiple media companies and two start-ups co-founded by him.

 

Jessica Johannson has served as our Vice President of Human Resources 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 Vice President, Sales and Marketing since September 2009. Before joining us, Mr. Goldstein spent five years at Ogilvy, NY as a Partner, 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 Vice President, Customer Experience since 2012, 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.

 

 

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

 

Risks Related to Network Access Services

 

Competition in the wireless and broadband industries could adversely affect Ting’s revenues and profitability.

 

The wireless communications market is extremely competitive, and competition for customers is increasing. We compete with (1) facilities-based wireless communications providers and their prepaid affiliates or brands, including Verizon, AT&T, Sprint and T-Mobile; and (2) other MVNOs. 

 

Ting’s Internet services in local markets also face some competition from established incumbent cable TV and broadband providers, which could increase as Ting gains market share.

 

Most of our wireless and Internet service 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, our larger wireless competitors obtain discounts for facilities, equipment, handsets, 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. Certain of our wireless competitors may also use their ownership of local wireline and wireless telecommunications facilities to introduce service features and calling plans, such as free wireless-to-landline calls, that we are unable to offer at similar cost. Their larger wireless customer bases may make discounted or free in-network calling (that we do not offer currently) or unlimited voice and data plans more attractive than any similar service that we may offer.  Our Internet competitors may offer additional products and services, such as TV, VOIP, home security and other services that customers may seek as a bundled package, and that we do not currently offer. They may also better serve the mid-market in the short-term with Internet offerings that are lower-priced than Ting’s gigabit package, for a lower tier of service. This may impact our ability to gain significant market share from these competitors.

 

Ting has a short operating history which may not be indicative of our future performance and, if our revenue and earnings growth are not sustainable, we may not be able to generate the earnings necessary to fund our operations or continue to grow our business.

 

We launched Ting Mobile nationally in 2012 and Ting Internet in 2015. Consequently, Ting has a limited operating and financial history upon which to evaluate its business model, financial performance and ability to succeed in the future. You should consider its prospects in light of the risks it may encounter, including risks and expenses faced by a new business competing in rapidly evolving and highly competitive markets. Ting cannot be certain that its Mobile Virtual Network Operator (“MVNO”) business model, Internet business model or any specific products or services will be profitable or competitive in the long-term against larger, facilities-based wireless providers, other MVNOs or local cable and Internet competitors. Ting also cannot predict whether its MVNO model or Internet model will allow it to offer the services that customers may demand in the future. If Ting is unable to achieve sufficient revenues and earnings from operations, its financial results will be adversely affected and it may not have sufficient cash to fund its current operations or sustain its continued growth.

 

 

Ting’s service offerings may not be successful in the long term if it is unable to retain customers or attract new customers.

 

Ting services 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 adding new customers. If Ting is unable to sustain or increase the revenue that it generates from its existing customers or obtain new customers to replace churned customers, our operational performance and financial results may be adversely affected.

 

Ting may face competitive pressure to reduce prices for our products and services, which may adversely affect our profitability and other financial results.

 

As competition in the U.S. wireless communications industry has increased, providers have lowered prices or increased the number of minutes, messages and/or data units available under monthly service plans, including increasing offers of unlimited usage plans, to attract or retain customers. To remain competitive with existing and future competitors, we may be compelled to offer greater subsidies for our handsets, reduce the prices for our services or increase the minutes, messages and/or data units that we offer under our postpaid monthly plans. 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 handset 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, as handset prices decline and handsets become more disposable, customers without long-term contracts may change their wireless 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.

 

Currently Ting Internet's pricing for its gigabit package offers significantly superior value to consumers compared to our competitors. The biggest competitive pressure to impact Ting may be lowering the price of the gigabit package or creating a lower-priced, reduced service mid-tier package to compete for market share in the large price-sensitive market segment.

 

The blurring of the traditional dividing lines among long distance, local, wireless, video and Internet services contributes to increased competition for Ting services. 

 

The traditional dividing lines among long distance, local, wireless, video and Internet services are increasingly becoming blurred. In addition, the dividing lines between voice and data services are also becoming blurred. Through mergers, joint ventures and various service expansion strategies, major providers are striving to provide integrated services in many of the markets we serve. This trend is also reflected in changes in the regulatory environment that have encouraged competition and the offering of integrated services. 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.

 

If Ting is unable to keep pace with technological advances, our revenues, growth and profitability may be materially adversely affected. 

 

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. 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 broadband 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 cheaply/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’s ability to continue grow.

 

 

Ting employs a postpaid business model which exposes us to increased credit risk. 

 

Ting offers its wireless 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. Ting has 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.

 

Ting may be limited in its ability to grow its business and customer base for its wireless service offerings unless it can continue to obtain network capacity at favorable rates and meet the growing demands on its business systems and processes. 

 

To further expand our MVNO business, we must continue to obtain 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.

 

As a MVNO, Ting is dependent on two major network operators for their wireless networks and any disruptions of Ting’s use of such networks may adversely affect its business and financial results.

 

As a MVNO, we do not own or operate a physical network, but rather utilize the nationwide wireless communication networks of two major mobile Network Operators (“Network Operators”). To be successful, we will need to continue to provide our customers with reliable service over their nationwide wireless communication networks. 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. 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. 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 Ting’s 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.

 

We are dependent on technology used by our Network Operators. Wireless communications technology is evolving rapidly. A significant change in current wireless network technologies or the emergence of alternative technologies could reduce significantly our ability to offer a full range of data services, as compared to our competitors. If our Network Operators fail to keep up with these changes, we may lose customers or may not be able to attract new customers.

 

 

If our Network Operators terminate or determine that they do not wish to renew their Master Services Agreements on expiration for any reason, we may be unable to obtain the wireless services necessary to operate our business. In addition, transition to an alternative provider may be limited to a provider with a CDMA or GSM network as certain of our handsets are not capable of operating on all networks. Such a transition could be time-consuming and costly and we could lose a substantial number of customers during the transition period.

 

Our dependence on our Network Operators is not limited to our use of their nationwide networks. We rely on them and their third-party affiliates for other critical operational matters, including:

 

 

mobile voice, data and text usage information of our customers;

 

 

 

 

continued expansion and improvement of their nationwide networks and their third-party affiliates’ networks, which is expected to require additional investment;

 

 

 

 

deployment of upgrades and maintenance of their nationwide networks;

 

 

 

 

maintenance by our Network Operators of their relationships with their third-party affiliates;

 

 

 

 

maintenance by our Network Operators and their third-party affiliates of FCC authorizations in good standing;

 

 

 

 

integration of new services into their nationwide networks;

 

 

 

 

certification of new handsets for use on their nationwide networks;

 

 

 

 

compliance with FCC, state E911 and other regulatory requirements;

 

 

 

 

obtaining telephone numbers;

 

 

 

 

maintenance of interconnection agreements; and

 

 

 

 

compliance with applicable laws and regulations.

 

Ting Mobile competes with Network Operators’ products and services, and we can provide no assurance of our continued partnership with the Network Operators.

 

We compete with Network Operators’ products and services for mobile telephony services. In addition, our Network Operators may from time to time create products or acquire interests in businesses that directly or indirectly compete with us. As a result, their interests may be different from, or adverse to, ours. We can provide no assurance of our continued partnership with the Network Operators.

 

We have entered into agreements with unrelated parties for certain business operations for Ting. Any difficulties experienced by us in these arrangements could result in additional expense, loss of subscribers and revenue, interruption of our services or a delay in the roll-out of new technology. 

 

We have entered into agreements with unrelated parties for the day-to-day execution of 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.

 

We may not be able to realize the benefits of our fiber investments in the short or medium term

 

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. Such FTTH investments may involve risks and uncertainties, including: insufficient revenues from such investments 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.  

 

 

Risks related to Domain Services

 

We may not be able to maintain or improve our competitive position and may be forced to reduce our prices because of strong competition in the market for Internet services generally and domain name registration, in particular, which we expect will continue to intensify.

 

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. 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, including Google, Web.com, 1&1, Amazon, Namecheap, GoDaddy and VeriSign. Competitors like Microsoft, Google and Yahoo!, as well as other large Internet companies, 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. In particular, VeriSign may in the future decide to offer additional services that compete with our domain name registration services or other services. If VeriSign were to become a competitor of ours in our core business areas, VeriSign would likely enjoy a number of competitive advantages, including its position as the largest registry, as well as superior financial and operational resources and customer awareness within our industry.

 

In addition, these and other large competitors, in an attempt to gain market share, may offer aggressive price discounts on the services they offer. These pricing pressures may require us to match these discounts 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. As a result of these factors, in the future it may become increasingly difficult for us to compete successfully.

 

We also face significant competition from other existing registrars and the continued introduction of new registrars in the domain registration industry. Currently ICANN has over 2,500 active registrars who register domain names in one or more of the generic top-level domains (or“gTLDs”) that it oversees. Not all of these accredited registrars, however, are operational. There are relatively few barriers to entry in 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.

 

Each registry and the ICANN regulatory body impose a charge upon the registrar for the administration of each domain registration. If these fees increase, this may have a significant impact upon our operating results.

 

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 generic top-level domains, or gTLDs, that fall within its purview. We have no control over these agencies and cannot predict when they may increase their respective fees. In terms of the current registry agreement between ICANN and Verisign that was approved by the U.S. Department of Commerce in November 2012, VeriSign will continue as the exclusive registry for the .com gTLD until November 2018. In addition, pricing of new gTLDs is generally not set or controlled by ICANN, which could result in aggressive price increases on any particularly successful new gTLDs. The increase in these fees with respect to any gTLDs either must be included in the prices we charge to our service providers, imposed as a surcharge or absorbed by us. 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.

 

 

We rely on our network of resellers to renew their domain registrations through us and to distribute our services, and if we are unable to maintain these relationships or establish new relationships, our revenues will decline.

 

The growth of our business depends on, among other things, our resellers’ renewal of their customers’ domain registrations through us. Resellers may choose to renew their domains with other registrars or their registrants may choose not to renew and pay for renewal of their domains. This may reduce our resellers’ number of domain name registration customers which in turn would drive up their customer acquisition costs and harm our operating results. If resellers decide, for any reason, not to renew their registrations through us, it may in turn reduce the market to which our resellers could market our other higher-margin services, thereby further impacting our revenue and profitability and harming our operating results.

 

We believe that companies operating on the Internet are facing a period of consolidation. In addition, some of our resellers may decide to seek ICANN accreditation. Both of these situations could reduce the number of our active resellers, in which case our revenues may suffer.

 

If any of our competitors merge with one another, they will present a stronger combined 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 that they may process domain applications themselves. If a number of our customers decide to pursue this option, our sales may decrease materially.

 

Our failure to secure agreements with country code registries or our subsequent failure to comply with the regulations of the country code registries could cause customers to seek a registrar that offers these services.

 

The ccTLD registries require registrars to comply with specific regulations. Many of these regulations vary from ccTLD to ccTLD. If we fail to comply with the regulations imposed by ccTLD registries, these registries will likely prohibit us from registering or continuing to register domains in their ccTLD. Any failure on our part to offer domain registrations in a significant number of ccTLDs or in a popular 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.

 

Our standard agreements may not be enforceable, which could subject us to liability.

 

We operate on a global basis and all of our resellers 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 resellers and their customers, including liability resulting from our failure to register or maintain domains properly, from downtime or poor performance with respect to our Internet services, or for insecure or fraudulent transactions pursuant to which we have issued SSL certificates. 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 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.

 

Regulation could reduce the value of Internet domain names or negatively impact the Internet domain acquisition process, which could significantly impair the value attributable to our acquisitions of Internet domain names.

 

The acquisition of expiring domain names for parked page commercialization, the sale of names or acquisition of names for other uses involves the registration of thousands of Internet domain names, both in the United States and internationally. We have acquired and intend to continue to acquire previously-owned Internet domain names that have expired and have, following the period of permitted reclamation by their prior owners, been made available for sale. The acquisition of Internet domain names generally is governed by federal or international regulatory bodies. The regulation of Internet domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional requirements for previously-owned Internet domain names or modify the requirements for holding Internet domain names. As a result, we might not acquire or maintain names that contribute to our financial results in the same manner as we currently do. Because certain Internet domain names are important assets, a failure to acquire or maintain such Internet domain names could adversely affect our financial results and our growth. Any impairment in the value of these important assets could cause our stock price to decline.

 

 

We have presence in the hosted messaging and email market, which is a volatile business.

 

Factors that are likely to contribute to fluctuations in our operating results from provisioning hosted email services include:

 

 

the demand for outsourced email services;

 

 

 

 

our ability to attract and retain customers and provide customer satisfaction;

 

 

 

 

the ability to upgrade, develop and maintain our systems and infrastructure and to effectively respond to the rapid technological changes in the email market;

 

 

 

 

the budgeting and payment cycles of our existing and potential customers;

 

 

 

 

the amount and timing of operating costs and capital expenditures relating to expansion of the email service; and

 

 

 

 

the introduction of new or enhanced services by competitors.

 

In order to succeed in the hosted email business, our email product must remain competitive. We believe that some of the competitive factors affecting the market for hosted email services include:

 

 

breadth of platform features and functionality of our offering and the sophistication and innovation of our competitors;

 

 

 

 

scalability, reliability, performance and ease of expansion and upgrade;

 

 

 

 

ease of integration with customers’ existing systems; and

 

 

 

 

flexibility to enable customers to manage certain aspects of their systems and leverage outsourced services in other cases when resources, costs and time to market reasons favor an outsourced offering.

 

We believe competition will continue to be strong and further increase as our market attracts new competition, current competitors aggressively pursue customers, increase the sophistication of their offerings and as new participants enter the market. Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition in the business and greater financial, marketing and other resources than we do. Any delay in our development and delivery of new services or enhancement of existing services would allow our competitors additional time to improve their product offerings and provide time for new competition to develop and market messaging services. Increased competition could result in pricing pressures, reduced operating margins and loss of market share, any of which could cause our financial results to decline.

 

If we are unable to maintain our relationships with our customers our revenue may decline.

 

Our network of resellers is our principal source for distributing 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.

 

 

Disputes over registration of domain names, the activities of our reseller’s customers or the content of their websites could subject us to liability and 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:

 

 

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 this statute, 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 statute, 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, any of which could expose us to further liability and increase our costs of doing business.

 

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.

 

 

Other Risks Related to Our Business

 

The international nature of our business exposes us to certain business risks that could limit the effectiveness of our growth strategy and cause our results of operations to suffer.

 

Expansion into international markets is an 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 will require significant management attention and financial resources. We face a number of risks associated with expanding our business internationally that could negatively impact our results of operations, including:

 

 

management, communication and integration problems resulting from cultural differences and geographic dispersion;

 

 

 

 

compliance with foreign laws, including laws regarding liability of online resellers for activities of customers and more stringent laws in foreign jurisdictions relating to the privacy and protection of third-party data;

 

 

 

 

accreditation and other regulatory requirements to provide domain name registration, website hosting and other services in foreign jurisdictions;

 

 

 

 

competition from companies with international operations, including large international competitors and entrenched local 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;

 

 

 

 

difficulties in protecting intellectual property rights in international jurisdictions;

     
 

political and economic instability in some international markets;

 

 

 

 

sufficiency of qualified labor pools in various international markets;

 

 

 

 

currency fluctuations and exchange rates;

 

 

 

 

potentially adverse tax consequences or an inability to realize tax benefits; and

 

 

 

 

the lower level of adoption of the Internet in many international markets.

  
We may not succeed in our efforts 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.

 

 

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.

 

We currently license many third-party technologies and may need to license further technologies which could delay and increase the cost of product and service developments.

 

We currently license certain technologies from third parties and incorporate them into certain of our services including email, 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. 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.

 

In addition, we may fail to successfully integrate licensed technology into our services. These third-party licenses may expose us to increased risks, including risks related to the integration of new technology and potential intellectual property infringement claims. In addition, an inability to obtain needed licenses could delay product and service development until equivalent technology can be identified, licensed and integrated. Any delays in services or integration problems could hinder our ability to attract and retain customers and cause our business and operating results to suffer.

 

Our advertising revenues may be subject to fluctuations.

 

We believe that Internet advertising spending, as in traditional media, fluctuates significantly with economic cycles and during any calendar year, with spending being weighted towards the end of the year to reflect trends in the retail industry. Our advertisers can generally terminate their contracts with us at any time. Advertising spending is particularly sensitive to changes in general economic conditions and typically decreases when economic conditions are not favorable. A decrease in demand for Internet advertising could have a material adverse effect on our business, financial condition and results of operations.

 

We may acquire companies or make investments in, or enter into licensing arrangements with, other companies with technologies that are complementary to our business and these acquisitions or arrangements could disrupt our business, cause us to require additional financing and dilute your holdings in our company.

 

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. 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. Even if we successfully complete an acquisition, it could adversely affect our business.

 

 

We face additional risks as a result of our acquisition of eNom and may be unable to integrate our businesses successfully and such integration could result in unforeseen operating difficulties and require significant resources. 

 

The following factors, among others, could reduce our revenues and earnings, increase our operating costs, and result in operating difficulties requiring significant resources:

 

 

if we are unable to successfully integrate the benefit plans, information technology, duties and responsibilities, and other factors of interest to the management and employees of eNom, we could lose employees to our competitors, which could significantly affect our ability to operate the business and complete the integration;

 
       
 

if we fail to achieve the anticipated benefits of the acquisition in a timely manner, or at all;

 
       
 

if we are unable to implement and retain uniform standards, controls, policies, procedures and information system; and

 
       
 

if the integration process causes any delays with the delivery of our services and products, or the quality of those services and products, we could lose customers, which would reduce our revenues and earnings.

 

 

Notwithstanding the due diligence investigation we performed in connection with the acquisition, eNom may have liabilities, losses, or other exposures for which we do not have adequate insurance coverage, indemnification, or other protection. While we performed significant due diligence on eNom, we are dependent on the accuracy and completeness of statements and disclosures made or actions taken by eNom and its representatives when conducting due diligence and evaluating the results of such due diligence.

 

In the future, we may be unable to generate sufficient cash flow to satisfy our debt service obligations

 

In January 2017, we amended and increased our existing credit facilities to $140 million from $60 million in order to complete the acquisition of eNom. As of March 2, 2018, our outstanding debt under our credit facility was $76.9 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. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital, to pay dividends and to pursue business opportunities, including potential acquisitions. 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 agreements governing our indebtedness and other financing arrangements include restrictive covenants that limit our operating flexibility.

 

The 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, redeeming capital stock, or making other restricted payments or investments;

     

 

 

 

selling or buying assets, properties, or licenses;

     
 

developing assets, properties, or licenses that we have or in the future may procure;

     
 

creating liens on assets; and

     
 

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.

 

We are subject to taxation related risks in multiple jurisdictions.

 

We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. 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. The U.S. recently enacted significant tax reform legislation known as the Tax Cuts and Jobs Act in December 2017, We are still in the process of analyzing the ongoing impact of the Tax Cuts and Jobs Act on our operations, but certain provisions of the new law may adversely affect us. 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.

 

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.

 

Our business depends on a strong brand. If we are not able to maintain and enhance our brand, 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 four distinct brands namely “OpenSRS”, “eNom”, “Hover” 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.

 

If we fail to protect our proprietary rights, the value of those rights could be diminished.

 

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. 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.

 

Because of the global nature of the Internet, our websites can be viewed worldwide. However, we do not have intellectual property protection in every jurisdiction. Furthermore, effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services become available over the Internet. In addition, the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving.

 

We may not be able to realize the intended and anticipated benefits from our acquisitions of expiring domain names, which could affect the value of these acquisitions to our business and our ability to meet our financial obligations and targets.

 

We may not be able to realize the intended and anticipated benefits that we currently expect from our acquisition of expiring domain names. These intended and anticipated benefits include increasing our cash flow from operations, broadening our Internet service offerings and delivering services that strengthen our reseller relationships.

 

Factors that could affect our ability to achieve these benefits include:

 

 

A significant amount of revenue attributed to our domain name assets comes from the provision of personalized email services and the generation of revenue from third party advertisements on parked pages. Some of our existing resellers who provide similar services may perceive this as a competitive threat and therefore may decide to terminate their agreements with us because of our acquisitions of a substantial number of expiring domain names.

 

 

We will need to continue to acquire commercially valuable expiring domain names to grow our presence in the field of direct navigation. We will need to continuously improve our technologies to acquire valuable expiring domain names as competition in the marketplace for appropriate expiring domain names intensifies. Our domain name acquisition efforts are subject to rules and guidelines established by registries which maintain Internet domain name registrations and other registrars who process and facilitate Internet domain name registrations. The registries and registrars may change the rules and guidelines for acquiring expiring domains in ways that may prove detrimental to our domain name acquisition efforts.

 

 

The business of direct navigation is dependent on current technologies and user practices. If browser or search technologies were to change significantly, the practice of direct navigation may be altered to our disadvantage.

 

If the acquired assets are not integrated into our business as we anticipate, we may not be able to achieve the benefits of these acquired assets or realize the value paid for the asset acquisitions, which could materially harm our business, financial condition and results of operations.

 

 

We do not control the means by which end users access our web sites and material changes to current navigation practices or technologies or marketing practices could result in a material adverse effect on our business.

 

The success of our parked pages business depends in large part upon the current end user tendency to type desired destinations directly into the web browser. End users employ this practice of direct navigation to access our web sites primarily through the following methods: directly accessing our web sites by typing descriptive keywords or keyword strings into the uniform resource locator (or “URL”) address box of an Internet browser, accessing our web sites by clicking on bookmarked web sites and accessing our web sites indirectly through search engines and directories.

 

Each of these methods requires the use of a third-party product or service, such as an Internet browser or search engine or directory. Internet browsers may provide alternatives to the URL address box to locate web sites, and search engines may from time to time change and establish rules regarding the indexing and optimization of web sites. Product developments and market practices for these means of access to our web sites are not within our control. We may experience a decline in traffic to our web sites if third party browser technologies or search engine methodologies and rules, including those affecting marketing efforts, are changed to our disadvantage.

 

We may experience unforeseen liabilities in connection with our domain name portfolio, which could negatively impact our financial results.

 

We currently own a portfolio of domain names that were previously owned by another third-party. In addition, we have acquired, and intend to continue to acquire, other previously owned domain names. While we have a policy against acquiring domain names that infringe on third-party intellectual property rights, including trademarks or confusingly similar business names, in some cases, these acquired names may have trademark significance that is not readily apparent to us or is not identified by us in the bulk purchasing process. As a result, we may face demands by third party trademark owners asserting infringement or dilution of their rights and seeking transfer of the domain names through the Uniform Domain Name Resolution Policy (the“UDRP”), adopted by ICANN or actions under the Anticybersquatting Consumer Protection Act (the “ACPA”). We may also face actions from third-parties under national trademark or anti-competition legislation.

 

We review each claim or demand on its merits and we intend to transfer any such previously owned domain names acquired by us to parties that have demonstrated a valid prior right of claim. We cannot, however, guarantee that we will be able to resolve all such disputes without litigation. The potential violation of third party intellectual property rights and potential causes of action under consumer protection laws may subject us to unforeseen liabilities, including injunctions and judgments for monetary damages.

 

We may have to dedicate resources to the defense and resolution of litigation, and our financial condition and market price of common stock may be negatively affected.

 

As described in Part I, Item 3. Legal Proceedings, Namecheap is suing us for certain contractual claims, which we believe lack merit and intend to continue to defend vigorously. In connection with the Namecheap State Action, the court ordered preliminary relief to Namecheap for the Company to transfer approximately 2.65 million domain names from eNom. The ultimate resolution of this or other future litigation may take substantial time and resources, and we can provide no assurance on the outcome of litigation. We may be required to pay substantial litigation costs, and managerial attention and financial resources may be diverted from business operations. As a result, our financial condition and the market price of our common stock could be negatively affected.

 

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 losing significant rights and our ability to operate all or a portion of our business.

 

Claims of infringement of intellectual property or other rights of third parties against us could result in substantial costs. 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. Most of these disputes arise as a result of a third party registering a domain name that is identical or similar to another party’s trademark or the name of a living person. 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.

 

 

These claims and any related litigation could result in significant costs of defense, liability for damages and diversion of management’s time and attention. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims unless we are able to enter into agreements with the third parties making these claims. If a successful claim of infringement is brought against us and we fail to develop non-infringing technology or to license the infringed or similar technology on a timely basis, we may have to limit or discontinue the business operations which used the infringing technology.

 

Claims against third parties on which we rely for licensed technology could result in the loss of our use of this technology causing us to incur substantial costs to replace the technology.

 

We rely on technologies licensed from other parties. These third-party technology licenses may infringe on the proprietary rights of others and may not continue to be available on commercially reasonable terms, if at all. The loss of this technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost, which could increase our costs and make our products and services less attractive to customers.

 

The law relating to the liability of online services companies for data and content carried on or disseminated through their networks is currently unsettled and could expose us to unforeseen liabilities.

 

It is possible that claims could be made against online services companies under U.S., Canadian or foreign law for defamation, negligence, copyright or trademark infringement, or other theories based on data or content disseminated through their networks, even if a user independently originated this data or content. Several private lawsuits seeking to impose liability upon Internet service companies have been filed in U.S. and foreign courts. While the United States has passed laws protecting ISPs from liability for actions by independent users in limited circumstances, this protection may not apply in any particular case at issue. Our ability to monitor, censor or otherwise restrict the types of data or content distributed through our network is limited. Failure to comply with any applicable laws or regulations in particular jurisdictions could result in fines, penalties or the suspension or termination of our services in these jurisdictions. 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.

 

Privacy concerns relating to our technology could damage our reputation and deter current and potential users from using our services.

 

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.

 

 

In addition, due to the fact that our services are web based, the amount of data we store for our users on our servers (including personal information) has been increasing. Any systems failure or compromise of our security that results in the release of our users’ data could seriously limit the adoption of our services as well as harm our reputation and brand and, therefore, our business. We may also need to expend significant resources to protect against security breaches. The risk that these types of events could seriously harm our business is likely to increase as we expand the number of Internet services we offer.

 

A large number of legislative proposals are pending before the United States Congress, various state legislative bodies and foreign governments concerning data protection. We cannot guarantee that our current information-collection procedures and disclosure policies will be found to be in compliance with existing or future laws or regulations. If our policies and procedures are found not to be in compliance, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could in turn have a material effect on our business. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

 

Data protection regulations may impose legal obligations on us that we cannot meet or that conflict with our ICANN contractual requirements.

 

The European Commission has adopted the General Data Protection Regulation (the “GDPR”), which introduces numerous privacy-related changes for companies operating in the E.U., effective on May 25, 2018. The GDPR includes 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 interpretation and application of the GDPR is still unsettled. Our domain name registrar businesses, and the contracts we have with domain name registries and ICANN, require us to process and share personal data. The solutions we develop for GDRP-compliance may not be adequate in the views of regulatory authorities or ICANN, which may 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.

 

Because we are required to recognize revenue for our services over the term of the applicable customer agreement, changes in our sales may not be immediately reflected in our operating results.

 

We recognize revenue from our customers ratably over the respective terms of their agreements with us as required by generally accepted accounting principles (GAAP). Typically, our domain name registration agreements have terms that range from one to ten years, and our website hosting agreements have annual or month-to-month terms. Accordingly, any increases or decreases in sales during a particular period do not translate into immediate, proportional increases or decreases in revenue during that period, and a substantial portion of the revenue that we recognize during a quarter, is derived from deferred revenue from customer agreements that we entered into during previous quarters. As a result, we may not generate net earnings despite substantial sales activity during a particular period, because we are not permitted under GAAP to recognize all of the revenue from these sales immediately, and because we are required to reflect a significant portion of our related operating expenses in full during that period. Conversely, the existence of substantial deferred revenue may prevent deteriorating sales activity from becoming immediately observable in our consolidated statement of operations.

 

In addition, we may not be able to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, and any significant shortfall in revenue relative to planned expenditures could negatively impact our business and results of operations.

 

Global currency fluctuations may adversely affect our revenues and earnings.

 

Our revenue is primarily realized in U.S. dollars and a major portion of our operating expenses are paid in Canadian dollars. 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.

 

 

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.

 

If we do not maintain a low rate of credit card chargebacks, we will face the prospect of financial penalties and could lose our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition and results of operations.

 

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 customers, which would have a material adverse effect on our business, financial condition and results of operations.

 

Forecasting our tax rate is complex and subject to uncertainty.

 

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:

 

 

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.

 

Our business may be adversely affected if our internal controls are not effective.

 

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 or as executive officers.

 

Impairment of goodwill and other intangible assets would result in a decrease in earnings.

 

Current accounting rules require that goodwill and other intangible assets with indefinite useful lives are not amortized, but instead must be tested for impairment at least annually. These rules also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To the extent such evaluation indicates that the useful lives of intangible assets are different than originally estimated, the amortization period is reduced or extended and, accordingly, the quarterly amortization expense is increased or decreased. We have substantial goodwill and other intangible assets, and 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.

 

We could suffer uninsured losses.

 

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.

 

Difficult economic and financial conditions could have a material adverse effect on us.

 

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 quarterly and annual operating results may fluctuate and our future revenues and profitability are uncertain.

 

Our quarterly and annual operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. Our quarterly and annual operating results may be adversely affected by a wide variety of factors, including:

 

 

our ability to maintain revenue growth at current levels or anticipate a decline in revenue from any of our services;

 

 

 

 

our ability to identify and develop new technologies or services and to commercialize those technologies into new services in a timely manner;

 

 

 

 

the mix of our services sold during the quarter or year;

 

 

 

 

our ability to make appropriate decisions which will position us to achieve further growth;

 

 

 

 

concentrated capital expenditures in any particular period to support our growth or for other reasons;

 

 

 

 

changes in our pricing policies or those of our competitors, changes in domain name fees charged to us by Internet registries or ICANN, or other competitive pressures on selling prices;

 

 

 

 

our ability to identify, hire, train, motivate and retain highly qualified personnel, and to achieve targeted productivity levels;

 

 

 

 

market acceptance of Internet services generally and of new and enhanced versions of our services in particular;

 

 

 

 

our ability to establish and maintain a competitive advantage;

 

 

 

 

the continued development of our global distribution channel and our ability to compete in multiple countries successfully as part of our sales and marketing strategy;

 

 

 

 

the number and significance of service enhancements and new service and technology announcements by our competitors;

 

 

 

 

our ability to identify, develop, deliver and introduce in a timely manner new and enhanced version of our current service offerings that anticipate market demand and address customer needs;

 

 

 

 

changes in foreign currency exchange rates and issues relating to the conversion to the Canadian dollar;

 

 

 

 

foreign, federal or state regulation affecting our business;

 

 

 

 

our ability to continue to attract users to our website;

 

 

 

 

our ability to continue to attract advertisers to place content on our website;

 

 

 

 

technical difficulties or other factors that result in system downtime;

 

 

 

 

seasonality of the markets and businesses of our customers;

 

 

 

 

news relating to our industry as a whole;

 

 

 

 

our ability to enforce our intellectual property rights;

 

 

 

 

our ability to manage Internet fraud and information theft; and

 

 

 

 

current economic conditions.

 

 

Our operating expenses may increase. We base our operating expense budgets on expected revenue trends that are more difficult to predict in periods of economic uncertainty. We intend to continue our efforts to control discretionary spending; however, we will continue to selectively incur expenditures in areas that we believe will strengthen our position in the marketplace. If we do not meet revenue goals, we may not be able to meet reduced operating expense levels and our operating results will suffer. It is possible that in one or more future quarters, our operating results may be below our expectations and the expectations of public market analysts and investors. In that event, the price of our common stock may fall.

 

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.

 

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.

 

Risks Related to the Internet and Our Technology

 

Our business could be materially harmed if the administration and operation of the Internet no longer rely upon the existing domain system.

 

The domain registration industry continues to develop and adapt to changing technology. This development may include changes in the administration or operation of the Internet, including the creation and institution of alternate systems for directing Internet traffic without the use of the existing domain system. Some of our competitors have begun registering domains with extensions that rely on such alternate systems. These competitors 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 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.

 

The law relating to the use of and ownership in intellectual property on the Internet is currently unsettled and may expose us to unforeseen liabilities.

 

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.

 

 

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:

 

 

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 cybersquatter 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 person 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.

 

If Internet usage does not grow or if the Internet does not continue to expand as a medium for commerce, our business may suffer.

 

Our success depends upon the continued development and acceptance of the Internet as a widely used medium for commerce and communication. Rapid growth in the uses of, and interest in, the Internet is a relatively recent phenomenon and its continued growth cannot be assured. A number of factors could prevent continued growth, development and acceptance, including:

 

 

the unwillingness of companies and consumers to shift their purchasing from traditional vendors to online vendors;

 

 

the Internet infrastructure may not be able to support the demands placed on it, and its performance and reliability may decline as usage grows;

 

 

security and authentication issues may create concerns with respect to the transmission over the Internet of confidential information; and

 

 

privacy concerns, including those related to the ability of websites to gather user information without the user’s knowledge or consent, may impact consumers’ willingness to interact online.

 

Any of these issues could slow the growth of the Internet, which could limit our growth and revenues.

 

 

We believe that part of our growth will be derived from resellers in international markets and may suffer if Internet usage does not continue to grow globally.

 

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, our revenues may not grow as anticipated.

 

We may be unable to respond to the rapid technological changes in the industry, and our attempts to respond may require significant capital expenditures.

 

The Internet and electronic 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.

 

We could experience system failures and capacity constraints which could diminish our ability to effectively provide our services and could damage our reputation and harm our operating results.

 

The availability of our 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 brand. 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.

 

 

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, 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. We have previously been the target of attempted attacks and must monitor and develop our systems to protect our and our customer’s data from misappropriation. Our ability to securely process and maintain this information is critical to our business. Despite our security measures, our systems may be vulnerable to unauthorized access by hackers or others, computer viruses and other disruptive problems. Someone who is able to circumvent security measures could misappropriate customer or proprietary information or cause interruptions in Internet operations. Internet and online resellers have in the past experienced, and may in the future experience, interruptions in service because of the accidental or intentional actions of Internet users, current and former employees or others.

 

We may need to expend significant capital and other resources to protect against the threat of security breaches or alleviate problems caused by breaches. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to users accessing our websites and the web pages that deliver our content services. An information technology systems security breach may lead to a material disruption of our systems and/or the loss of business information, which may materially and adversely affect our business. Risks relating to such a security breach may include, among other things: a material adverse impact on our business and future financial results due to the theft, destruction, loss, misappropriation or release of confidential data, negative publicity resulting in reputation or brand damage with our customers, vendors or peers due to the theft, destruction, loss, misappropriation or release of confidential data,  operational or business delays resulting from the disruption of information technology systems and subsequent clean-up and mitigation activities and adverse effects on our compliance with regulatory laws and regulations. Repeated or substantial interruptions could result in the loss of customers and reduced revenues.

 

We may have difficulty scaling and adapting our existing architecture to accommodate increased traffic and technology advances or changing business requirements, which could lead to the loss of customers and cause us to incur additional expenses.

 

To be successful, our network infrastructure must perform well and be 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 new equipment to upgrade our technology and network infrastructure to enable it 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.

 

We rely on bandwidth providers, data centers and other vendors in providing services to our customers, and any failure or interruption in the services provided by these third parties could harm our ability to operate our business and damage our reputation.

 

We rely on vendors, including data center and bandwidth providers in providing services to our customers. Any disruption in the network access or co-location services provided by these providers or any failure of these providers to handle current or increased volumes of use could significantly harm our business. Any financial or other difficulties our providers face may also have negative effects on our business. We exercise little control over these vendors, which increases our vulnerability to problems with the services they provide. We license technology and related databases to facilitate certain aspects of our data center and connectivity operations, including Internet traffic management services. We have experienced and expect to continue to experience interruptions and delays in service and availability for such elements. Any errors, failures, interruptions or delays in connection with these technologies and information services could harm our relationship with customers, adversely affect our brand and expose us to liabilities.

  

 

New tax treatment of companies engaged in Internet commerce may adversely affect the demand for our marketing services and our financial results.

 

Due to the global nature of the Internet, it is possible that, although our services and the Internet transmissions related to them typically originate in Virginia, Toronto, Canada and Germany, governments of other states or foreign countries might attempt to regulate our transmissions 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.

 

We may be accused of intellectual property infringement of the technology we have employed to support both our back-end platform and the products and services we offer to and through our resellers and may be sued for damages caused by actual use of the platforms or products and services and we may be required to pay substantial damage awards.

 

We seek to ensure that we have licensed or otherwise secured the necessary rights to use and offer for use all intellectual property relating to our platforms and the services we offer resellers through the platforms. Despite our efforts, we may be sued by third parties claiming rights in and to the technology we employ or by third parties who claim to have suffered as a result of any use, or inability to use, the platforms, products and services. If we are sued, defense of any such claims may require the resources of both our time and money. If a third-party is successful in its assertions, we may be required to pay damages that may have a material impact on our financial resources.

 

Our reputation and business may be harmed and it may be subject to legal claims if there is loss, disclosure or misappropriation of or access to our subscribers' or our own information or other breaches of our information security.

 

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. 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 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.

 

In addition, we and third-party service providers process and maintain our proprietary business information and data related to our business-to-business customers or suppliers. Our information technology and other systems that maintain and transmit this information, or those of service providers, may also be compromised by a malicious third-party penetration of our network security or that of a third-party service provider, or impacted by intentional or inadvertent actions or inactions by our employees or those of a third-party service provider. We also purchase equipment from third parties that could contain software defects, Trojan horses, malware, or other means by which third parties could access our network or the information stored or transmitted on such networks or equipment. As a result, our business information, or subscriber or supplier data may be lost, disclosed, accessed, used, corrupted, destroyed or taken without 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 service and subject us to additional costs and liabilities, including litigation, which could be material.

 

Governmental and Regulatory Risks

 

Governmental and regulatory policies or claims concerning the domain registration system, and industry reactions to those policies or claims, may cause instability in the industry and disrupt our business.

 

 

ICANN Oversight of Domain Name Registration System

 

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 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:

 

 

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.

 

Governmental Regulation Affecting the Internet

 

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:

 

 

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.

 

We may be subject to government regulation that may be costly and may interfere with our ability to conduct business.

 

Although transmission of our websites primarily originates in Canada and the United States, the Internet is global in nature. Governments of foreign countries might try to regulate our transmissions or prosecute us for violations of their laws. Because of the increasing popularity and use of the Internet, federal, state and foreign governments may adopt laws or regulations in the future concerning commercial online services and the Internet, with respect to:

 

 

user privacy;

 

 

children;

 

 

copyrights and other intellectual property rights and infringement;

 

 

domains;

 

 

pricing;

 

 

content regulation;

 

 

defamation;

 

 

taxation; and

 

 

the characteristics and quality of products and services.

 

Laws and regulations directly applicable to online commerce or Internet communications are becoming more prevalent. Laws and regulations such as those listed above or others, if enacted, could expose us to substantial liability and increase our costs of compliance and doing business.

 

 

Ting’s Network Operators’ failure to obtain the proper licenses and governmental approvals from regulatory authorities would cause Ting to be unable to successfully operate its business.

 

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 licensees 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.

 

Government regulation could adversely affect Ting’s prospects and results of operations; the FCC and state regulatory commissions may adopt new regulations or take other actions that could adversely affect its business prospects, future growth or results of operations.

 

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 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.

 

Risks Related to our Stock

 

Our share price is 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;

 

 

 

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. This volatility often has been unrelated to the operating performance of these companies. These broad market and industry fluctuations may cause the price of our common stock to drop, regardless of our performance.

 

Future sales of shares of our common stock by our existing shareholders could cause our share price to fall.

 

If our shareholders sell substantial amounts of common stock in the public market, the market price of the common stock could fall. The perception among investors that these sales will occur could also produce this effect.

 

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 2018, the Company’s Board of Directors 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 this buyback program has been approved, there is no obligation for the Company 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.

 

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

 

ITEM 2.  PROPERTIES

 

We do not own any real property. Our principal administrative, engineering, marketing and sales office totals approximately 26,900 square feet and is located in Toronto, Ontario under a lease that expires on December 31, 2020. In addition, we also maintain offices of approximately 20,500 square feet in Kirkland, Washington, approximately 14,100 square feet in St Catharines, Ontario, approximately 11,200 square feet in Charlottesville, Virginia, approximately 7,000 square feet in Sandpoint, Idaho, approximately 5,000 square feet in Holly Springs, North Carolina, approximately 4,000 square feet in Starkville, Mississippi, approximately 2,900 square feet in Bonn, Germany and a satellite office in Westminster, Maryland.

 

Substantially all of our computer and communications hardware is located at our facilities or at server hosting facilities in Toronto, Ontario, San Jose, California and Ashburn, Virginia.

 

 

ITEM 3.  LEGAL PROCEEDINGS

 

We are involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, 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.

 

    On August 30, 2017, Namecheap, Inc. (“Namecheap”) filed a complaint against the Company, eNom, Inc., and unknown John Does in the United States District Court for the Western District of Washington alleging breach of contract, breach of the implied duty of good faith and fair dealing, and unjust enrichment (the “Namecheap Federal Action”). Namecheap voluntarily dismissed the Namecheap Federal Action without prejudice on October 10, 2017. That same day, Namecheap filed a substantially similar complaint against Tucows Inc., eNom, LLC, and unknown John Does alleging breach of contract and breach of the implied duty of good faith and fair dealing in Washington State Court, King County (the “Namecheap State Action”). In the Namecheap State Action, Namecheap sought preliminary and ultimate equitable relief by way of the transfer of approximately 2.65 million domain names from the eNom, LLC platform to the Namecheap platform using BTAPPA. By Order dated November 15, 2017, the Court granted Namecheap’s Motion for Preliminary Injunction and the Company complied therewith in taking steps with Namecheap towards the BTAPPA. The Court ordered Namecheap to post a bond against damages sustained by the Company. The Company sought clarification from the Court on one BTAPPA requirement which the Court provided in the January 5, 2018 Order. The BTAPPA transfer was initiated on January 8, 2018 and completed on January 16, 2018. In addition to the equitable relief it has sought, Namecheap also seeks direct and consequential damages in the Namecheap State Action. The Company believes that the claims lack merit and intends to continue to defend them vigorously. The Company does not believe that this litigation is a material pending legal proceeding.

 

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

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”.

 

The following table sets forth the range of high and low sales prices for TCX for the periods indicated:

 

Year

 

Fiscal Quarter Ended

 

High

 

 

Low

 

2017

 

March 31, 2017

 

 

52.75

 

 

 

35.30

 

 

 

June 30, 2017

 

 

63.20

 

 

 

50.50

 

 

 

September 30, 2017

 

 

60.00

 

 

 

49.70

 

 

 

December 31, 2017

 

 

71.75

 

 

 

54.50

 

2016

 

March 31, 2016

 

 

23.21

 

 

 

17.67

 

 

 

June 30, 2016

 

 

26.48

 

 

 

21.47

 

 

 

September 30, 2016

 

 

33.94

 

 

 

24.10

 

 

 

December 31, 2016

 

 

37.00

 

 

 

27.25

 

 

As of March 2, 2018, Tucows had 78 shareholders of record.

 

We have not declared or paid any cash dividends on our common stock during the fiscal years ended December 31, 2017 and December 31, 2016, 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 of Directors 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

 

2018 Stock Buyback Program:

 

On February 14, 2018, the Company announced that its Board of Directors has approved a stock buyback program to repurchase up to $40 million of its common stock in the open market. Please see “Note 17 – Subsequent Events” for more information on the 2018 stock buyback program.

 

2017 Stock Buyback Program:

 

On February 28, 2017, the Company's Board of Directors authorized the repurchase of up to $40 million of the Company's common stock at the Company's discretion. The $40 million buyback program commenced on March 1, 2017 and terminated on February 14, 2018. No repurchases were made under this program.

 

2016 Stock Buyback Program:

 

On February 9, 2016, the Company announced that its Board of Directors had approved a stock buyback program to repurchase up to $40 million of its common stock in the open market. Purchases were made exclusively through the facilities of the NASDAQ Capital Market. The stock buyback program commenced on February 10, 2016 and terminated on February 9, 2017. The Company repurchased 308,416 shares under this program during the year ended December 31, 2016 for a total $7.2 million.

 

2015 Stock Buyback Program:

 

On February 11, 2015, the Company announced a stock buyback program. Under this buyback program, the Company could repurchase up to $20 million of the Company's common stock over the 12-month period that commenced on February 11, 2015. The Company repurchased 868,549 shares under this program during the year ended December 31, 2015 for a total of $20.0 million.

 

      Modified Dutch Tender Offers:

 

On January 7, 2015, we successfully concluded a modified “Dutch auction tender offer” that was announced in December 2014. Under the terms of the offer, we repurchased an aggregate of 193,907 shares of our common stock at a purchase price of $18.50 per share, for a total of $3,587,280, excluding transaction costs of approximately $70,000. The purchase price and all transaction costs were funded from available cash. All shares purchased in the tender offer received the same price and all shares repurchased were immediately retired.

 

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.

 

 

The following table summarizes our share repurchase activity for the periods covered below:

  

SHARE REPURCHASES

 

   

Year Ended December 31,

 
   

2017

   

2016

   

2015

 

Common stock repurchased on the open market or through tender offer

                       

Number of shares

    -       308,416       1,062,456  

Aggregate market value of shares (in thousands)

  $ -     $ 7,180     $ 23,616  

Average price per share

    -     $ 23.28     $ 22.23  
                         

Common stock received in connection with share-based compensation

                       

Number of shares

    50,454       25,572       99,675  

Aggregate market value of shares (in thousands)

  $ 2,602     $ 634     $ 2,335  

Average price per share

  $ 51.58     $ 24.80     $ 23.42  

 

 

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 2012.

 

 

 

ITEM 6.     SELECTED FINANCIAL DATA

 

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, 2017, 2016, 2015, 2014, and 2013 and should be read in conjunction with those statements (amounts expressed in thousands, except per share amounts).

 

   

For the year ended December 31,

 
   

2017

   

2016

   

2015

   

2014

   

2013

 

Statement of Operations Data

                                       
                                         

Revenue

  $ 329,421     $ 189,819     $ 171,687     $ 146,509     $ 129,264  

Total cost of revenues

    244,900       126,765       119,629       107,115       98,508  

Sales and marketing

    29,423       20,755       17,394       14,236       11,470  

Technical operations and development

    7,258       4,495       4,503       4,306       4,159  

General and administrative

    13,594       11,405       10,662       9,459       7,524  

Depreciation, amortization and impairment of indefinite life intangible assets

    7,262       1,451       690       1,400       1,092  

Loss (gain) on currency forward contracts

    (98

)

    (99

)

    793       358       357  

Total other income (expense), net

    (3,007

)

    66       (73

)

    (207 )     (355 )

Income before provision for income taxes

    24,075       25,113       17,943       9,428       5,799  

Provision for income taxes

    1,748       9,046       6,569       3,054       1,619  

Net income

  $ 22,327     $ 16,067     $ 11,374     $ 6,374     $ 4,180  
                                         

Net income per share attributable to common stockholders

                                       

Basic

  $ 2.12     $ 1.53     $ 1.04     $ 0.57     $ 0.40  

Diluted

  $ 2.07     $ 1.50     $ 1.00     $ 0.54     $ 0.37  
                                         

Weighted average shares used in computing net income per share

                                       

Basic

    10,537       10,525       10,969       11,221       10,468  

Diluted

    10,794       10,714       11,360       11,730       11,281  

 

 

 

At December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,049

 

 

$

15,105

 

 

$

7,723

 

 

$

8,271

 

 

$

12,419

 

Prepaid domain name registry and ancillary services fees

 

 

127,003

 

 

 

60,390

 

 

 

55,749

 

 

 

56,380

 

 

 

56,048

 

Total assets

 

 

350,650

 

 

 

154,413

 

 

 

129,130

 

 

 

125,795

 

 

 

121,353

 

Deferred revenue

 

 

160,582

 

 

 

77,849

 

 

 

71,594

 

 

 

71,106

 

 

 

70,018

 

Debt

 

 

76,924

 

 

 

10,249

 

 

 

3,500

 

 

 

0

 

 

 

6,300

 

Total liabilities

 

 

290,439

 

 

 

116,596

 

 

 

102,801

 

 

 

90,153

 

 

 

94,436

 

Total stockholders' equity

 

$

60,211

 

 

$

37,817

 

 

$

26,329

 

 

$

35,642

 

 

$

26,917

 

 

 

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, 2017 and December 31, 2016 and for the years ended December 31, 2017, 2016 and 2015 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 our customers’ experience as they access the Internet (at home or on the go) or Internet services such as domain name registration, email, mobile telephony services and other Internet services. We are organized and managed based on 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, 2017, 2016 and 2015, we reported revenue of $329 million, $190 million and $172 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, Internet hosting and network consulting services to customers in select cities in the United States. Ting provides 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, 2017, Ting managed mobile telephony services for approximately 172,000 subscribers and had approximately 283,000 devices under management.

 

Our primary distribution channel for Network Access 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.

 

On September 19, 2017, the Company acquired the consumer related assets of Otono Networks, Inc. The consumer assets relate to the mobile roaming and instant activation eSIM business under the Roam Mobility, Zipsim and Always Online Wireless brands. The acquired portfolio operates as a MVNO on the same nationwide GSM network as Ting Mobile and distributes through third-party retail stores and product-branded websites.

 

 

Domain Services

 

Domain Services include wholesale and retail domain name registration services, value added services and portfolio services derived through our OpenSRS, eNom 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 39,000 resellers that operate in over 150 countries and who typically provide their customers, the end-users of Internet-based services, with solutions for establishing and maintaining an online presence.  The increase in our reseller network during the year from 13,000 resellers resulted from our acquisition of eNom.  Our primary focus is serving the needs of this network of resellers by providing the broadest portfolio of gTLD and 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.

 

Wholesale, primarily branded as OpenSRS and eNom, derives revenue from its Domain Service and from providing Value-Added Services. The OpenSRS and eNom Domain Services manage 28 million domain names under the Tucows and eNom ICANN registrar accreditations and for other registrars under their own accreditations. In January 2018, the Company completed a bulk transfer of 2.65 million names for domain names under management related to Namecheap as more fully described in “Note 17 – Subsequent events” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

 

Value-Added Services include hosted email which provides email delivery and webmail access to millions of mailboxes, Internet security services, publishing tools and other value-added services. All of these services are made available to end-users through a network of 39,000 web hosts, Internet service providers (“ISPs”), and other resellers around the world. In addition, we also derive revenue by monetizing domain names which are near the end of their lifecycle through advertising revenue or auction sale.

 

Retail, primarily the Hover and eNom portfolio of websites, including eNom, eNom Central and Bulkregister, derive revenues from the sale of domain name registration and email services to individuals and small businesses. Retail also includes our Personal Names Service – based on over 36,000 surname domains – that allows roughly two-thirds of Americans to purchase an email address based on their last name.

 

Portfolio generates revenue by offering names in our domain portfolio for resale through a number of distribution channels, and our reseller network. We also generate advertising revenue from our portfolio.

 

 

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.

 

Network Access Services

 

Year ended December 31, (1)

 
   

2017

   

2016

   

2015

 
   

 

 
                         

Ting Mobile subscribers under management

    172,000       151,000       128,000  

Ting Mobile devices under management

    283,000       245,000       202,000  

 

 

(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.

 

Domain Services

 

   

Year ended December 31, (1)

 
   

2017

   

2016

   

2015

 
           

(in ‘000’s)

         

Total new, renewed and transferred-in domain name registrations provisioned

    19,361       9,950       9,133  

Domain names under management

                       

Registered using Registrar Accreditation belonging to the Tucows Group

    22,300       11,356       10,173  

Registered using Registrar Accreditations belonging to Resellers

    5,400       3,547       3,163  

Total domain names under management(2)

    27,700       14,903       13,336  

 


 

(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)

In January 2018, the Company completed a bulk transfer of 2.65 million names for domain names under management related to Namecheap as more fully described in “Note 17 – Subsequent events” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

 

 

OPPORTUNITIES, CHALLENGES AND RISKS

 

As a MVNO our Ting 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 has also enjoyed rapid growth in its first four years of operation. During this growth phase we have been able to continue to grow gross customer additions and maintain a consistent churn rate, which has allowed us to maintain net new customer additions despite the impact of churn on a fast-growing customer base. 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 slower growth rates or in certain cases, our ability to maintain growth.

 

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.

  

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.

 

 

Net Revenues

 

Network Access Services

 

Mobile

 

We derive revenue from Ting's sale of retail mobile phones and services and provide 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. Revenues are generated in the United States with a fixed access line charge per device and variable charges based on actual voice, data and text usage. Services are provided on a monthly post-paid basis with no fixed contract term. For the mobile roaming and instant activation eSIM business under the Roam Mobility brands, we derive revenue from the sale of SIM cards with prepaid usage as well as pay-as-you-go usage sold through third-party retail stores and product branded websites.

 

Other Services

 

Other services derive revenues from providing fixed high-speed internet access to individuals and small businesses in select cities including Westminster, Maryland, Holly Springs, North Carolina and Charlottesville, Virginia along with Internet hosting and network consulting services to customers in Charlottesville, Virginia. Ting provides customers with access to our provisioning and management tools to enable them, via the ting.com website, to purchase our fixed Internet access services. Revenues are generated from fixed monthly access charges with a primary focus on the 1 GB unlimited data usage package. Services are provided on a monthly basis with no fixed contract term.

  

Domain Services

 

Wholesale

 

Historically, our OpenSRS 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. With the acquisition of eNom and its 26,000 reseller network, domain services will continue to be the largest portion of our business and will further fuel our ability to sell add-on services.

 

We receive revenues for each domain registration or other Internet service processed through our system by ISPs. Our domain service revenue is principally comprised of registration fees charged to resellers in connection with new, renewed and transferred domain name registrations. The registration fee provides our resellers with access to our provisioning and management tools to enable them to register and administer domain names and access to additional services like WHOIS privacy and Domain Name System services, enhanced domain name suggestion tools and access to our premium domain names. We earn fees in connection with each new, renewed and transferred-in registration and from providing provisioning services to resellers and registrars on a monthly basis. Domain registrations are generally purchased for terms of one to ten years, with a majority having a one-year term. Payments for the full term of all services, or billed revenue, are received at the time of activation of service and where appropriate are recorded as deferred revenue and are recognized as earned ratably over the term of provision of service. This accounting treatment reasonably approximates a recognition pattern that corresponds with the provision of the services during the quarters and the year.

 

Wholesale – Value-Added Services

 

We derive revenue from our hosted email service through our global distribution network. Our hosted email service is offered on a per account, per month basis, and provides resellers with a reliable, scalable “white label” hosted email solution that can be customized to their branding and business model requirements. The hosted email service also includes spam and virus filtering on all accounts. End-users can access the hosted email service via a full-featured, multi-language web interface or through traditional desktop email clients, such as Microsoft Outlook or Apple Mail, using IMAP or POP/SMTP.

 

 

We also derive revenue from other Value-Added Services primarily from provisioning SSL certificates. In addition, we derive revenue from the bulk sale of domain names and advertising from the OpenSRS and eNom Domain Expiry Streams.

 

In addition, we provide billing, provisioning and customer care software solutions to ISPs through our Platypus billing software.

 

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

 

We derive revenue from our portfolio of domain names by displaying advertising on the domains and by making them available for sale or lease. When a user types one of these domain names into a web browser, they are presented with dynamically generated links that are pay-per-click advertising. Every time a user clicks on one of these links, it generates revenue for us through our partnership with third-parties who provide syndicated pay-per-click advertising (“parked page vendors”).

 

Our parked page vendor relationships may not continue to generate levels of revenue commensurate with what we have achieved during past periods. Our ability to generate online advertising revenue from parked page vendors depends on their advertising networks' assessment of the quality and performance characteristics of Internet traffic resulting from online advertisements rendered on their websites. We have no control over any of these quality assessments. Parked page vendors may from time to time change their existing, or establish new, methodologies and metrics for valuing the quality of Internet traffic and delivering pay-per-click advertisements. Any changes in these methodologies, metrics and advertising technology platforms could decrease the amount of revenue that we generate from online advertisements. In addition, parked page vendors may at any time change the nature of the service or suspend the service that they provide to online advertisers. These types of changes or suspensions would adversely impact our ability to generate revenue from pay-per-click advertising.

 

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.

 

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” in the Notes to the Consolidated Financial Statements for the year ended December 31, 2017 (“Fiscal 2017”) 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 financial statements in conformity with 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 investments, 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.

 

 

Revenue recognition policy

 

We earn revenues from the following services:

 

 

Network Access Services – Ting and Roam (sale of retail mobile phones and services, prepaid sim cards, fixed high speed internet access, Internet hosting and network consulting services);

 

 

 

 

Domain Services - Wholesale (OpenSRS and eNom Domain Services and OpenSRS and eNom Value-Added Services); Retail (Hover and eNom) and Portfolio (Domain Portfolio monetization and sales).

 

Revenues derived from provisioning mobile phone service to individuals and small businesses through the Ting website, are recognized once services have been provided. This is based upon either usage (e.g., minutes of traffic/bytes of data processed), period of time (e.g., monthly service fees), various regulatory fees imposed on us by governmental authorities or other established fee schedules. Revenues for wireless services are billed based on the actual amount of monthly services utilized by each customer during their billing cycle on a postpaid basis. Our billing cycle for each customer is computed based on their activation date and not on our reporting period. As a result, we are required to estimate the amount of revenues earned but not billed from the end of each billing cycle to the end of each reporting period. These estimates are based on an assessment of the actual services rendered to each customer since the last billing period against our rate plans existing at that time. Adjustments affecting revenue may occur in periods subsequent to the billing period when the services were provided and are recognized as revenue during the current billing cycle. In addition, revenues associated with the sale of wireless devices and accessories to subscribers is 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. For the mobile roaming and instant activation eSIM business under Roam Mobility brands, we derive revenue from the sale of SIM cards with prepaid usage as well as pay-as-you-go usage sold through third-party retail stores and product branded websites. Revenue for sim cards is recognized when shipped to the consumer or third-party retailer while prepaid usage is recognized ratably over the period the sim card is active. Prepaid usage related to unused or not-yet activated sim cards is deferred.

 

Revenues from providing fixed high speed internet access in select cities including Westminster, Maryland, Holly Springs, North Carolina and Charlottesville, Virginia along with Internet hosting and network consulting services to customers in Charlottesville, Virginia are recognized when the related services are provided. Services are billed monthly and our billing cycle for each customer is computed based on their activation date and not our reporting period. As a result, we accrue the amount of revenues earned but not billed from the end of each billing cycle to the end of each reporting period.

 

With respect to the sale of domain registrations and other value-added services, we earn registration fees in connection with each new, renewed and transferred-in registration and from providing provisioning services to resellers and registrars on a monthly basis. We also enter into revenue arrangements in which a reseller may purchase a combination of services. When a standalone selling price exists for each deliverable, we allocate revenue to each deliverable based on the relative selling price of each of the deliverables. The standalone selling price is established for each deliverable by the price charged when that deliverable is sold separately by the Company which is vendor specific objective evidence (“VSOE”). For arrangements where the Company does not sell the deliverable separately, the selling price is determined based on third party evidence (“TPE”), which is the price at which a competitor or third party sells the same or similar and largely interchangeable deliverable on a standalone basis. In instances where VSOE and TPE do not exist, the Company uses an estimated selling price for the deliverable, which is the price at which a company would transact if the deliverable were sold by the vendor regularly on a standalone basis. Payments for the full term of all services are received at the time of activation of service and where appropriate are recorded as deferred revenue and are recognized as earned ratably over the term of provision of service. This accounting treatment reasonably approximates a recognition pattern that corresponds with the provision of the services during the quarters and the year.

 

 

Revenue from domain portfolio monetization and sales consists primarily of amounts earned for the transfer of rights to domain names and domain related rights that are currently under the Company's control. Collectability of revenues generated is subject to a high level of uncertainty; accordingly, revenues are recognized only when payment is received, except where a fixed contract has been negotiated, in which case revenues are recognized once all the terms of the contract have been satisfied.

 

We also generate advertising and other revenue from our OpenSRS and eNom expired domain names and our domain name portfolio. Advertising and other revenue is recognized ratably over the period in which it is presented. To the extent that the minimum number of post-presentation impressions we guarantee to customers is not met, we defer recognition of the corresponding revenues until the guaranteed impressions are achieved. Revenue is also generated from vendors who are seeking to expand or maintain their services market position and is recognized once all the conditions have been met.

 

Changes to contractual relationships in the future could impact the amounts and timing of revenue recognition.

 

In those cases where payment is not received at the time of sale, additional conditions for recognition of revenue apply. The conditions are (i) that the collection of sales proceeds is reasonably assured and (ii) that we have no further performance obligations. We record 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. Should these expectations not be met, adjustments will be required in future periods.

 

We record provisions for possible uncollectible accounts receivable and contingent liabilities which may arise in the normal course of business. The allowance for doubtful accounts is calculated by taking into account factors such as our historical collection and write-off experience, the number of days the customer is past due and the status of the customer's account with respect to whether or not the customer is continuing to receive service. The contingent liability estimates are based on management's historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported amounts of liabilities and expenses that are not readily apparent from other sources. Historically, credit losses have been within our expectations and the reserves we have established have been appropriate. However, we have, on occasion, experienced issues which have led to accounts receivable not being fully collected. Should these issues occur more frequently, additional provisions may be required.

 

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, 2017, we had $90.1 million in goodwill related to our acquisitions and $58.4 million in intangible assets comprised of indefinite life intangibles of $12.8 million and finite life intangible assets of $45.7 million. At December 31, 2016, we had $21.0 million in goodwill related to our acquisitions and $20.0 million in intangible assets comprised of indefinite life intangibles of $13.2 million and finite life intangible assets of $6.8 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-nine percent of intangible assets relate to our Domain Services operating segment and 1% of intangible assets relate to our Network Access operating segment.

 

We account for goodwill and indefinite life intangible assets in accordance with 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 $0.1 million and $42,673 in 2017 and 2016 respectively and $0.2 million in 2015.

 

 

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 2017 and 2016.

 

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 2017 and 2016.

 

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, 2017, the valuation allowance of $1.3 million was related to foreign tax credits that we are not expected to realize.

 

 

In connection with the eNom acquisition, 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 addition, 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.

 

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. We have estimated our provision for income taxes in accordance with the Act and guidance available as of the date of this filing and as a result have recorded a net $5.8 million reduction to income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. 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. In addition, we opted to utilize our 2017 foreign taxes paid as a deduction rather than a credit, the net negative impact of which was $2.9 million, as we have insufficient foreign sourced income to utilize these credits.  The provisional 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 – Summary of 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.

 

 

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2017 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2016

 

 

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.

 

NET REVENUES

 

The following table presents our net revenues, by revenue source:

 

   

Year ended December 31,

 
   

2017

   

2016

 
                 

Network Access Services:

               

Mobile Services

  $ 83,885,054     $ 70,127,294  

Other Services

    4,825,848       3,651,657  

Total Network Access Services

    88,710,902       73,778,951  
                 

Domain Services:

               

Wholesale

               

Domain Services

    183,731,385       89,009,546  

Value Added Services

    18,572,774       9,169,721  

Total Wholesale

    202,304,159       98,179,267  
                 

Retail

    31,649,000       14,629,949  

Portfolio

    6,756,680       3,230,765  

Total Domain Services

    240,709,839       116,039,981  
                 
    $ 329,420,741     $ 189,818,932  

Increase over prior period

  $ 139,601,809          

Increase - percentage

    74 %        

 

 

The following table presents our revenues, by revenue source, as a percentage of total revenues:

 

 

   

Year ended December 31,

 
   

2017

   

2016

 
                 

Network Access Services:

               

Mobile Services

    25 %     37 %

Other Services

    1 %     2 %

Total Network Access Services

    26 %     39 %
                 

Domain Services:

               

Wholesale

               

Domain Services

    56 %     46 %

Value Added Services

    6 %     5 %

Total Wholesale

    62 %     51 %
                 

Retail

    10 %     8 %

Portfolio

    2 %     2 %

Total Domain Services

    74 %     61 %
                 
      100 %     100 %

 

              Total net revenues for Fiscal 2017 increased by $139.6 million, or 74%, to $329.4 million from $189.8 million for the fiscal year ended December 31, 2016 (“Fiscal 2016”). Deferred revenue from domain name registrations and other Internet services at December 31, 2017 increased to $160.6 million from $77.8 million at December 31, 2016.

 

No customer accounted for more than 10% of revenue during Fiscal 2017 or Fiscal 2016, and no customers accounted for more than 10% of accounts receivable as of December 31, 2017 and 2016. 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.

 

Network Access Services

 

Mobile and Other Services

 

Net revenues from Ting mobile phone equipment and services for Fiscal 2017, as compared to Fiscal 2016, increased by $13.8 million or 20% to $83.9 million. This increase primarily reflects the impact the larger Ting subscriber base is having on Ting mobile service revenue which grew by $11.1 million to $73.6 million as compared to Fiscal 2016 as well as well as the acquisition of the consumer related mobile roaming assets Otono Networks in September 2017. Revenues from the sale of mobile hardware and related accessories increased slightly by $2.7 million to $10.3 million in Fiscal 2017. This increase was due to increased mix of higher priced devices attributed to the increased sales of new Apple mobile devices under the direct supply agreement signed in the second quarter of 2017.   

 

High speed Internet access, Internet hosting and network consulting services generated $4.8 million in revenue during Fiscal 2017, up $1.2 million from Fiscal 2016. Growth in High speed Internet access revenues was as a result of the increased Ting Internet footprint in Holly Springs, NC and Westminster, MD in Fiscal 2017. We expect continued expansions in Westminster, MD, Holly Springs, NC and Charlottesville, VA as well as new builds in Sandpoint, ID and Centennial, CO to contribute to revenue growth in 2018.

 

As of December 31, 2017, Ting Mobile had 172,000 mobile subscribers and 283,000 mobile devices under its management compared to 151,000 subscribers and 245,000 devices under its management as of December 31, 2016.

 

Domain Services

 

Wholesale

 

During Fiscal 2017, domain services revenue increased by $94.7 million to $183.7 million and the number of transactions from all new, renewed and transferred-in domain name registrations that we processed increased to 19.4 million from 9.9 million when compared to Fiscal 2016.  These increases were primarily due to the acquisition of eNom and to a lesser extent the acquisition of the international reseller channel of Melbourne IT on April 1, 2016. Our gross margins 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 from the acquisition was somewhat impacted by the continued and ongoing migration of a few large, low margin customers. These customers have been moving their domain management and domain transaction processing to their own accreditations and in-house systems. 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. Primarily for the same factors impacting domain transactions mentioned above, total domains that we manage under our own accreditation increased to 22.3 million as of December 31, 2017, when compared to 11.4 million at December 31, 2016. In January 2018, the Company transferred on a bulk basis 2.65 million names under management for Namecheap. See “Note 17 – Subsequent events” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report. Also, as of December 31, 2017, total domains that we manage on behalf of other accredited registrars who use our technical systems to process domain registrations with their own accreditation, increased to 5.4 million when compared to 3.5 million at the end of December 31, 2016, primarily as a result of the acquisition of eNom.

 

 

Value-Added Services increased by $9.4 million to $18.6 million when compared to Fiscal 2016. This increase was primarily due to the acquisition of eNom. Our gross margins 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 basis of eNom.

 

Retail

 

Net revenues from Retail for Fiscal 2017, as compared to Fiscal 2016, increased by $17.0 million to $31.6 million. This increase was primarily due to the acquisition of eNom and to a lesser extent growth in our incumbent retail operations, Hover. Our gross margins 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 basis of eNom.

 

Portfolio

 

Net revenues from Portfolio for Fiscal 2017, as compared to Fiscal 2016, increased by $3.5 million to $6.8 million. The increase is primarily due to a large bulk sale of names in the fourth quarter of 2017.

 

COST OF REVENUES

 

Network Access Services

 

Mobile

 

Cost of revenues for mobile services includes the costs of provisioning mobile services (primarily our customers' voice, messaging, data usage provided by our Network Operators), and the costs of providing mobile phone hardware (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 includes the costs for provisioning high speed Internet access (network access fees, software licenses), the costs of providing hardware (the cost of network routers sold to our customers, order fulfillment related expenses, and inventory write-downs) and any direct costs incurred in providing web hosting and IT consulting services.

 

Wholesale

 

Domain Service

 

Cost of revenues for domain registrations represents the amortization of registry fees on a basis consistent with the recognition of revenues from our customers, namely ratably 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 meet the criteria for revenue recognition under ASC 605-50 “Customer Payments and Incentives”, 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, fees paid to third-party service providers, primarily for trust certificates and for printing services in connection with Platypus. 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 ratably 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. As the total names in our portfolio continue to grow, this cost will become a more significant component of our cost of revenues. 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 ratably over the renewal term.

 

Costs of revenues for our larger ad-supported content site include the fees paid to third-party service providers, primarily for digital certificates sold through our content sites and content license fees.

 

 

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:

  

   

Year ended December 31,

 
   

2017

   

2016

 
                 

Network Access Services:

               

Mobile Services

  $ 45,335,276     $ 35,914,882  

Other Services

    3,371,255       2,024,801  

Total Network Access Services

    48,706,531       37,939,683  
                 

Domain Services:

               

Wholesale

               

Domain Services

    161,012,532       72,947,730  

Value Added Services

    2,383,627       1,918,165  

Total Wholesale

    163,396,159       74,865,895  
                 

Retail

    17,346,138       6,765,237  

Portfolio

    1,150,804       616,147  

Total Domain Services

    181,893,101       82,247,279  
                 

Network Expenses:

               

Network, other costs

    9,324,454       5,210,500  

Network, depreciation and amortization costs

    4,976,026       1,367,836  
      14,300,480       6,578,336  
                 
    $ 244,900,112     $ 126,765,298  

Increase over prior period

  $ 118,134,814          

Increase - percentage

    93 %        

 

 

The following table presents our cost of revenues, as a percentage of total cost of revenues for the periods presented:

 

   

Year ended December 31,

 
   

2017

   

2016

 
                 

Network Access Services:

               

Mobile Services

    19 %     28 %

Other Services

    1 %     2 %

Total Network Access Services

    20 %     30 %
                 

Domain Services:

               

Wholesale

               

Domain Services

    66 %     59 %

Value Added Services

    1 %     1 %

Total Wholesale

    67 %     60 %
                 

Retail

    7 %     5 %

Portfolio

    0 %     0 %

Total Domain Services

    74 %     65 %
                 

Network Expenses:

               

Network, other costs

    4 %     4 %

Network, depreciation and amortization costs

    2 %     1 %
      6 %     5 %
                 
      100 %     100 %

 

Total cost of revenues for Fiscal 2017 increased by $118.1 million, or 93%, to $244.9 million from $126.8 million in Fiscal 2016. This increase primarily resulted from the acquisition of eNom on January 20, 2017, acquisition of the international reseller channel of Melbourne IT on April 1, 2016 and the impact Ting’s larger subscriber base has on network access service costs. Prepaid domain registration and other Internet services fees as of December 31, 2017 increased by $66.6 million, or 110%, to $127 million from $60.4 million at December 31, 2016.

 

Network Access Services

 

Mobile and Other Services

 

Cost of revenues from Ting mobile phone equipment and services for Fiscal 2017, as compared to Fiscal 2016, increased by $9.4 million or 26% to $45.3 million. This increase primarily reflects the impact the larger subscriber base had on Ting mobile service cost of revenue as well as the acquisition of the mobile roaming assets Otono Networks in September 2017 which combined grew by $5.7 million to $34.1 million as compared to Fiscal 2016. Mobile hardware, shipping and related accessories costs increased $3.7 million to $11.2 million reflecting an increased mix of higher cost devices attributed to the increased sales of new Apple mobile devices under the direct supply agreement signed in the second quarter of 2017.   

 

 

In addition, in Fiscal 2017, we incurred costs of $3.4 million in provisioning high speed Internet access, Internet hosting and network consulting services as compared to $2.0 million during Fiscal 2016. The increase in costs was primarily due to the expansion of the Ting Fiber foot print and increasing subscriber base.

  

 

Domain Services

 

Wholesale

 

Costs for Wholesale domain and value-added services for Fiscal 2017 increased by $88.5 million to $163.4 million, when compared to Fiscal 2016. These increases were due to the acquisition of eNom and to a lesser extent acquisition of the international reseller channel of Melbourne IT in 2016.

 

Retail

 

Costs for Retail for Fiscal 2017 increased by $10.6 million, to $17.3 million, when compared to Fiscal 2016. These increases resulted primarily from the acquisition of eNom and to a lesser extent the increased cost of additional volume in Hover services.

 

Portfolio

 

Costs for Portfolio increased by $0.5 million for Fiscal 2017, to $1.2 million when compared to Fiscal 2016, primarily as a result of a bulk sale of names in the fourth quarter 2017 acquired in the June 2006 acquisition of Mailbank.com Inc.

  

Network Expenses

 

Network costs for Fiscal 2017 increased by $7.7 million to $14.3 million when compared to Fiscal 2016. The increase is primarily due to the acquisition of eNom, including acquired developed platform technology.

 

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.

 

   

Year ended December 31,

 
   

2017

   

2016

 

Sales and marketing

  $ 29,422,984     $ 20,754,752  

Increase over prior period

  $ 8,668,232          

Increase - percentage

    42

%

       

Percentage of net revenues

    9

%

    11

%

 

Sales and marketing expenses for Fiscal 2017 increased by $8.7 million, or 42%, to $29.4 million as compared to Fiscal 2016. This increase primarily related to a $6.6 million increase in workforce, travel and other workforce related costs driven by the growth in network access initiatives and the acquisition of eNom. In addition, marketing and other expenses increased $2.1 million largely to support and acquire Ting mobile and fixed Internet access subscribers.

 

Excluding movements in exchange rates, we expect sales and marketing expenses for the fiscal year ending December 31, 2018 (“Fiscal 2018”) 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.

 

   

Year ended December 31,

 
   

2017

   

2016

 

Technical operations and development

  $ 7,257,720     $ 4,494,819  

Increase over prior period

  $ 2,762,901          

Increase - percentage

    61

%

       

Percentage of net revenues

    2

%

    2

%

 

 

Technical operations and development expenses for Fiscal 2017 increased by $2.8 million, or 61%, to $7.3 million due to mainly to the acquisition of eNom.

 

We expect technical operations and development expenses for Fiscal 2018, in absolute dollars, to increase when compared to Fiscal 2017 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.

 

   

Year ended December 31,

 
   

2017

   

2016

 

General and administrative

  $ 13,593,901     $ 11,404,793  

Increase over prior period

  $ 2,189,108          

Increase - percentage

    19

%

       

Percentage of net revenues

    4

%

    6

%

 

General and administrative expenses for Fiscal 2017 increased by $2.2 million, or 19%, to $13.6 million as compared to Fiscal 2016. This was primarily the result of professional fees increase of $0.8 million related to the acquisition of eNom and the Namecheap litigation. Workforce related costs increased $1.0 million due mainly to the acquisition of eNom. Credit card processing fees, facilities costs and other expenses increased $1.2 million primarily to support growth of network access and also due to the acquisition of eNom. These increases were offset by a reduction expenses due to foreign exchange gains as the Company experienced a foreign exchange gain of $0.7 million in Fiscal 2017 as compared to a $0.1 million loss in Fiscal 2016.

 

We expect general and administrative expenses for Fiscal 2018, in absolute dollars, to increase when compared to Fiscal 2017 largely to support the growth of our business.

 

DEPRECIATION OF PROPERTY AND EQUIPMENT

 

   

Year ended December 31,

 
   

2017

   

2016

 

Depreciation of property and equipment

  $ 585,424     $ 503,864  

Increase over prior period

  $ 81,560          

Increase - percentage

    16

%

       

Percentage of net revenues

    0

%

    0

%

 

Depreciation costs for Fiscal 2017 increased to $0.6 million when compared to $0.5 million for Fiscal 2016 driven primarily by the acquisition of eNom.

 

 

AMORTIZATION OF INTANGIBLE ASSETS

 

   

Year ended December 31,

 
   

2017

   

2016

 

Amortization of intangible assets

  $ 6,566,308     $ 905,157  

Increase over prior period

  $ 5,661,151          

Increase - percentage

    625

%

       

Percentage of net revenues

    2

%

    0

%

 

Amortization of intangible assets increased $5.7 million for Fiscal 2017, to $6.6 million. The increase in amortization reflects the impact of the acquisition of eNom. In the acquisition, the Company acquired intangible assets related to brand and customer relationships totaling $40.4 million.

 

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, and eNom in January 2017 are amortized on a straight-line basis over seven years.

 

IMPAIRMENT OF INDEFINITE LIFE INTANGIBLE ASSETS

 

   

Year ended December 31,

 
   

2017

   

2016

 

Impairment of indefinite life intangible assets

  $ 111,251     $ 42,673  

Increase over prior period

  $ 68,578          

Increase - percentage

    161

%

       

Percentage of net revenues

    0

%

    0

%

 

As part of our normal renewal process during Fiscal 2017 and Fiscal 2016, we assessed that certain domain names acquired in the June 2006 acquisition of Mailbank.com Inc. should not be renewed and were allowed to expire. Accordingly, these domain names, with a book value of $0.1 million and $42,673 have been written off and recorded as impairment of indefinite life intangible assets for Fiscal 2017 and Fiscal 2016, respectively.

 

(GAIN) LOSS 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.

 

   

Year ended December 31,

 
   

2017

   

2016

 

Loss (gain) on currency forward contracts

  $ (98,227 )   $ (98,977 )

Increase over prior period

  $ 750          

Increase - percentage

    (1

%)

       

Percentage of net revenues

    0

%

    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 2017. The impact of the fair value adjustment on outstanding contracts for Fiscal 2017 was a net loss of $17,328 compared to net gain of $0.3 million for Fiscal 2016. The impact of the fair value adjustment on outstanding contracts was decreased by a realized gain upon settlement of currency forward contracts of $0.1 million for Fiscal 2017 compared to a realized loss of $0.2 million for Fiscal 2016.

 

At December 31, 2017, we did not hold any forward contracts.

 

 

OTHER INCOME (EXPENSES)

 

   

Year ended December 31,

 
   

2017

   

2016

 

Other income (expense), net

  $ (3,006,500 )   $ 66,371  

Increase over prior period

  $ (3,072,871 )        

Increase - percentage

    (4,630

%)

       

Percentage of net revenues

    (1

%)

    0

%

 

Other income decreased by $3.1 million when compared to Fiscal 2016 primarily due to interest incurred on our credit facility with the majority of the borrowings on the credit facility to support the acquisition of eNom. Within Other income 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 2016.

 

INCOME TAXES

 

The following table presents our provision for income taxes for the periods presented:

 

   

Year ended December 31,

 
   

2017

   

2016

 

Provision for income taxes

  $ 1,748,174     $ 9,045,770  

Decrease in provision over prior period

  $ (7,297,596 )        

Decrease - percentage

    (81

%)

       

Effective tax rate

    7.3

%

    36.0

%

 

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 2017 includes tax on profits of $24.1 million compared to $25.1 million for Fiscal 2016. 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.

 

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. We have calculated our best estimate of the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing and as a result have recorded $5.8 million in reduced income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional 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 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, in connection with the eNom acquisition, 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.  The impact of this together with the reduction in tax rate to 21% make it unlikely we will be able to claim the fiscal 2017 foreign taxes paid in future years and as such opted to utilise the foreign taxes paid as a deduction for 2017 income tax purposes, the net negative effect of which is a $2.9 million addition to income tax expense.  The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was less than $0.1 million.

 

 

We had approximately $15,000 of total gross unrecognized tax benefit as of December 31, 2017 compared to $0.1 million as of December 31, 2016 which if recognized would favorably affect our income tax rate in future periods. The unrecognized tax benefit relates primarily to insignificant U.S. state taxes.

 

A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in “Note 9 – Income Taxes” of Notes to 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 2017 was a net loss in other comprehensive income of $0.1 million compared to a net gain of $1.2 million for Fiscal 2016.

 

The following table presents other comprehensive income for the periods presented:

 

   

Year ended December 31,

 
   

2017

   

2016

 

Other comprehensive income (loss)

  $ (99,154 )   $ 1,208,606  

Decrease over prior period

  $ (1,307,760 )        

Decrease - percentage

    (108

%)

       

Percentage of net revenues

    (0

%)

    1

%

 

 

 

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 (dollars in thousands):

 

 

Reconciliation of Net income to Adjusted EBITDA

                       

(In Thousands of US Dollars)

                       

(unaudited)

                       
                         
   

Year ended December 31,

 
   

2017

(unaudited)

   

2016

(unaudited)

   

2015

(unaudited)

 
                         

Net income for the period

  $ 22,327     $ 16,067       11,374  

Depreciation of property and equipment

    3,728       1,824       1,404  

Amortization of intangible assets

    8,400       953       263  

Impairment of intangible assets

    111       43       206  

Interest expense, net

    3,567       450       159  

Provision for income taxes

    1,748       9,046       6,569  

Stock-based compensation

    1,457       799       526  

Unrealized loss (gain) on change in fair value of forward contracts

    17       (323 )     136  

Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities

    (805 )     829       311  

Acquisition and other costs(1)

    806       442       -  
                         

Adjusted EBITDA

  $ 41,356     $ 30,130       20,948  

 

(1)  Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, related to our acquisition of eNom in January 2017. 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, 2017 increased by $11.2 million, or 37% to $41.3 million when compared to the year ended December 31, 2016 with the increase primarily driven by the acquisition of eNom and to a lesser extent growth in domain services and Ting Mobile. Adjusted EBITDA for the year ended December 31, 2016 increased by $9.2 million, or 44% to $30.1 million when compared to the year ended December 31, 2015 with the increase primarily driven by the growth in Ting mobile services.

 

 

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2016 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2015

 

NET REVENUES

 

The following table presents our net revenues, by revenue source:

 

   

Year ended December 31,

 
   

2016

   

2015

 
                 

Network Access Services:

               

Mobile Services

  $ 70,127,294     $ 57,685,554  

Other Services

    3,651,657       3,288,711  

Total Network Access Services

    73,778,951       60,974,265  
                 

Domain Services:

               

Wholesale

               

Domain Services

    89,009,546       84,934,519  

Value Added Services

    9,169,721       9,298,978  

Total Wholesale

    98,179,267       94,233,497  
                 

Retail

    14,629,949       12,637,498  

Portfolio

    3,230,765       3,841,519  

Total Domain Services

    116,039,981       110,712,514  
                 
    $ 189,818,932     $ 171,686,779  

Increase over prior period

  $ 18,132,153          

Increase - percentage

    11

%

       

 

 

 

The following table presents our revenues, by revenue source, as a percentage of total revenues:

 

   

Year ended December 31,

 
   

2016

   

2015

 
                 

Network Access Services:

               

Mobile Services

    37

%

    35

%

Other Services

    2

%

    2

%

Total Network Access Services

    39

%

    37

%

                 

Domain Services:

               

Wholesale

               

Domain Services

    46

%

    49

%

Value Added Services

    5

%

    5

%

Total Wholesale

    51

%

    54

%

                 

Retail

    8

%

    7

%

Portfolio

    2

%

    2

%

Total Domain Services

    61

%

    63

%

                 
      100

%

    100

%

 

Total net revenues for Fiscal 2016 increased by $18.1 million, or 11%, to $189.8 million from $171.7 million for the fiscal year ended December 31, 2015 (“Fiscal 2015”). Deferred revenue from domain name registrations and other Internet services at December 31, 2016 increased to $77.8 million from $71.6 million at December 31, 2015.

 

No customer accounted for more than 10% of revenue during Fiscal 2016 or Fiscal 2015, and no customers accounted for more than 10% of accounts receivable as of December 31, 2016 and 2015. Significant 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.

 

Network Access Services

 

Mobile and Other Services

 

Net revenues from Ting mobile phone equipment and services for Fiscal 2016, as compared to Fiscal 2015, increased by $12.4 million or 22% to $70.1 million. This increase primarily reflects the impact the larger Ting subscriber base is having on Ting mobile service revenue which grew by $12.3 million to $62.5 million as compared to Fiscal 2015. Revenues from the sale of mobile hardware and related accessories increased slightly by $0.1 million to $7.6 million in Fiscal 2016. Mobile hardware and related accessories increase over Fiscal 2015 reflected higher cost device mix in 2016 partially offset by lower volumes.

 

High speed Internet access, Internet hosting and network consulting services generated $3.7 million in revenue during Fiscal 2016, up $0.5 million from Fiscal 2015. Growth in high speed Internet access revenues was as a result of the increased Ting Internet footprint in Charlottesville, VA in Fiscal 2016. We expect expansions in Westminster, MD and Holly Springs, NC to contribute to revenue in 2017. Increased access revenues were partially offset by ongoing declines in legacy revenues from hosting and network consulting services.

 

 

As of December 31, 2016, Ting had 151,000 mobile subscribers and 245,000 mobile devices under its management compared to 128,000 subscribers and 202,000 devices under its management as of December 31, 2015.

 

Domain Services

 

Wholesale

 

During Fiscal 2016, domain services revenue increased by $4.1 million to $89.0 million and the number of transactions from all new, renewed and transferred-in domain name registrations that we processed increased to 9.9 million from 9.1 million when compared to Fiscal 2015.  The increase was primarily driven by the acquisition of approximately 1.6 million domains under management from the international reseller channel of Melbourne IT in April 2016.  The increase from the acquisition was somewhat impacted by the continued and ongoing migration of a few large, low margin customers. These customers have been moving their domain management and domain transaction processing to their own accreditations and in-house systems. 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. Primarily for the same factors impacting domain transactions mentioned above, total domains that we manage under our own accreditation increased to 11.4 million as of December 31, 2016, when compared to 10.2 million at December 31, 2015. Also, as of December 31, 2016, total domains that we manage on behalf of other accredited registrars who use our technical systems to process domain registrations with their own accreditation, increased to 3.5 million when compared to 3.2 million at the end of December 31, 2015, primarily as a result of ongoing growth from these customers.

 

Value-Added Services decreased by $0.1 million to $9.2 million when compared to Fiscal 2015. This decrease was largely due to the decrease in revenue from pay-per-click advertising and the sale of names through the OpenSRS Domain Expiry Stream. The revenue associated with name sales and advertising has experienced flat to declining trends due to lower traffic and advertising yields in the marketplace, which may continue.

 

Retail

 

Net revenues from Retail for Fiscal 2016, as compared to Fiscal 2015, increased by $2.0 million to $14.6 million. This increase was largely due to the success that our retail marketing initiatives and improved websites are having on our ability to attract new customers and retain existing ones for Hover.

 

Portfolio

 

Net revenues from Portfolio for Fiscal 2016, as compared to Fiscal 2015, decreased by $0.6 million to $3.2 million. The decrease is primarily related to lower sales of big ticket domains.

 

 

COST OF REVENUES

 

The following table presents our cost of revenues, by revenue source:

   

Year ended December 31,

 
   

2016

   

2015

 
                 

Network Access Services:

               

Mobile Services

  $ 35,914,882     $ 32,615,416  

Other Services

    2,024,801       1,518,153  

Total Network Access Services

    37,939,683       34,133,569  
                 

Domain Services:

               

Wholesale

               

Domain Services

    72,947,730       70,633,267  

Value Added Services

    1,918,165       2,023,341  

Total Wholesale

    74,865,895       72,656,608  
                 

Retail

    6,765,237       5,494,550  

Portfolio

    616,147       695,958  

Total Domain Services

    82,247,279       78,847,116  
                 

Network Expenses:

               

Network, other costs

    5,210,500       5,464,777  

Network, depreciation and amortization costs

    1,367,836       1,183,508  
      6,578,336       6,648,285  
                 
    $ 126,765,298     $ 119,628,970  

Increase over prior period

  $ 7,136,328          

Increase - percentage