10-K 1 tcx20191231_10k.htm FORM 10-K tcx20191231_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, 2019

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

 

Trading Symbol

 

Name of Each Exchange on Which Registered

Common stock, no par value

 

TCX  

 

NASDAQ Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐ 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files. Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.  ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Act). Yes ☐  No ☒

 

As of June 30, 2019, (the last day of our most recently completed second quarter), the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $577.2 million. Such aggregate market value was computed by reference to the closing sale price per share of $61.02 as reported on the NASDAQ Capital Market on such date. For purposes of making this calculation, the registrant has excluded each executive officer, each director and each beneficial owner of more than ten percent of the outstanding shares of common stock of the Company. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The number of shares outstanding of the registrant’s common stock as of March 2, 2020, was 10,621,338

 



 

 

 

 

TUCOWS INC.

ANNUAL REPORT ON FORM 10-K

For Fiscal Year Ended December 31, 2019

 

TABLE OF CONTENTS

  

 

Page

PART I

Item 1

Business

3

Item 1A

Risk Factors

10

Item 2

Properties

23

Item 3

Legal Proceedings

23

Item 4

Mine Safety Disclosures

23

PART II

Item 5

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

24

Item 6 Selected Financial Data 26

Item 7

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

27

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

57

Item 8

Financial Statements and Supplementary Data

59

Item 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

59

Item 9A

Controls and Procedures

59

Item 9B

Other Information

59

PART III

Item 10

Directors, Executive Officers and Corporate Governance

60

Item 11

Executive Compensation

68

Item 12

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

84

Item 13

Certain Relationships and Related Transactions, and Director Independence

86

Item 14

Principal Accountant Fees and Services

87

PART IV

Item 15

Exhibits and Financial Statement Schedules

88

 


 
TRADEMARKS, TRADE NAMES AND SERVICE MARKS

 

Tucows®, EPAG®, Hover®, OpenSRS®, Platypus®, Ting®, eNom®, Roam®, Roam Mobility®, Bulkregister®, Ascio®, Cedar®, and YummyNames® are registered trademarks of Tucows Inc. or its subsidiaries. Other service marks, trademarks and trade names of Tucows Inc. or its subsidiaries may be used in this Annual Report on Form 10-K (this “Annual Report”). All other service marks, trademarks and trade names referred to in this Annual Report are the property of their respective owners. Solely for convenience, any trademarks referred to in this Annual Report may appear without the ® or TM symbol, but such references are not intended to indicate, in any way, that we or the owner of such trademark, as applicable, will not assert, to the fullest extent under applicable law, our or its rights, or the right of the applicable licensor, to these trademarks.

 

 

 

Information Concerning Forward-Looking Statements

 

This Annual Report on Form 10-K contains, in addition to historical information, forward-looking statements by Tucows Inc. (the “Company”, “we”, “us” “Tucows” or “our”) with regard to our expectations as to financial results and other aspects of our business that involve risks and uncertainties and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “should,” “anticipate,” “believe,” “plan,” “estimate,” “expect,” and “intend,” and other similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this report include statements regarding, among other things, the competition we expect to encounter as our business develops and competes in a broader range of Internet services, the Company's foreign currency requirements, specifically for the Canadian dollar and Euro; Ting Mobile and fixed Internet access subscriber growth and retention rates, the number of new, renewed and transferred-in domain names we register as our business develops and competes; the effect of a potential generic top level domain (“gTLD”) expansion by the Internet Corporation for Assigned Names and Numbers (“ICANN”) on the number of domains we register and the impact it may have on related revenues; our belief that the market for domain name registration will trend upward gradually and may be affected by market volatility; our belief that, by increasing the number of services we offer, we will be able to generate higher revenues; the effectiveness of our intellectual property protection, including our ability to license proprietary rights to network partners and to register additional trademarks and service marks; the potential impact of current and pending claims on our business; our expectation to collect our outstanding receivables, net of our allowance for doubtful accounts; our expectation regarding fluctuations in certain expense and cost categories; our expectations regarding cash from operations to fund our business; and general business conditions and economic uncertainty. These statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Many factors affect our ability to achieve our objectives and to successfully develop and commercialize our services including:

 

 

Changes in the nature of key strategic relationships with our Mobile Virtual Network Operator ("MVNO") partners;

 

 

 

 

The effects of vigorous competition on a highly penetrated mobile telephony market, including the impact of competition on the price we are able to charge subscribers for services and devices and on the geographic areas served by our MVNO partner wireless networks;

 

 

 

 

Our ability to manage any potential increase in subscriber churn or bad debt expense;

 

 

 

 

Our ability to continue to generate sufficient working capital to meet our operating requirements;

 

 

 

 

Our ability to service our debt commitments;

 

 

 

 

Our ability to maintain a good working relationship with our vendors and customers;

 

 

 

 

The ability of vendors to continue to supply our needs;

 

 

 

 

Actions by our competitors;

 

 

 

 

Our ability to attract and retain qualified personnel in our business;

 

 

 

 

Our ability to effectively manage our business;

 

 

 

 

The effects of any material impairment of our goodwill or other indefinite-lived intangible assets;

 

 

 

 

Our ability to obtain and maintain approvals from regulatory authorities on regulatory issues;

 

 

 

Our ability to invest in the build-out of fiber networks into selected towns and cities to provide Internet access services to residential and commercial customers while maintaining the development and sales of our established services;

 

 

 

 

Adverse tax consequences such as those related to changes in tax laws or tax rates or their interpretations, including with respect to the impact of the Tax Cuts and Jobs Act of 2017;

 

 

 

 

The application of judgment in determining our global provision for income taxes, deferred tax assets or liabilities or other tax liabilities given the ultimate tax determination is uncertain;

 

 

 

 

Pending or new litigation; and

 

 

 

 

Factors set forth herein under the caption “Item 1A Risk Factors”.

 

This list of factors that may affect our future performance and financial and competitive position and the accuracy of forward-looking statements is illustrative, but it is by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All forward-looking statements included in this document are based on information available to us as of the date of this document, and we assume no obligation to update these cautionary statements or any forward-looking statements, except as required by law. These statements are not guarantees of future performance.

 

We qualify all the forward-looking statements contained in this Annual Report on Form 10-K by the foregoing cautionary statements.

 

PART I

 

ITEM 1.  BUSINESS

 

Overview

 

Our mission is to provide simple useful services that help people unlock the power of the Internet.

 

We accomplish this by reducing the complexity of our customers’ experience as they access the Internet (at home or on the go) and while using Internet services such as domain name registration, email and other Internet services. We are organized, managed and report our financial results as two segments, Network Access Services and Domain Services, which are differentiated primarily by their services, the markets they serve and the regulatory environments in which they operate.

 

Our management regularly reviews our operating results on a consolidated basis, principally to make decisions about how we utilize our resources and to measure our consolidated operating performance. To assist us in forecasting growth and to help us monitor the effectiveness of our operational strategies, our management regularly reviews revenue for each of our service offerings in order to gain more depth and understanding of the key business metrics driving our business. Accordingly, we report Network Access Services and Domain Services revenue separately.

 

Network Access Services

 

Network Access Services includes mobile, fixed high-speed Internet access services and other revenue sources, including billing solutions to small Internet service providers (“ISPs”).

 

Our primary mobile service offering (“Ting Mobile”) is mainly distributed through the Ting website and to a lesser extent certain third-party retail stores and on-line retailers. We generate revenues from the sale of retail telephony services, mobile phone hardware and related accessories to individuals and small businesses through the Ting website. Ting Mobile’s primary focus is providing simple and easy to use services, including simple value pricing, in particular for multi-line accounts, and superior customer care.

 

The Company also operates other MVNO brands, Zipsim and Always Online Wireless (collectively referred to as the “Roam Mobility brands”). Roam Mobility brands operates as an MVNO on the same nationwide Global System for Mobile communications (“GSM”) network as Ting Mobile and distributes through third-party retail stores and product branded websites. The primary focus of the Roam Mobility brands is to offer affordable roaming service to international travelers.

 

The Company also derives revenue from the sale of fixed high-speed Internet access (“Ting Internet”) in select communities, including towns in North Carolina, Maryland, Idaho, Colorado, and Virginia. Our primarily sales channel of Ting Internet is through the Ting website. The primary focus of Ting Internet is to provide reliable Gigabit Internet services to consumer and business customers.

 

Revenues from Ting Mobile and Ting Internet are generated in the United States and are provided on a monthly basis with no fixed contract term. Revenues from Roam Mobility brands are generated in the United States, and Canada on a prepaid usage basis with no fixed contract terms.

 

 

Recent Developments

 

On January 1, 2020, the Company closed its previously disclosed acquisition of Cedar Holdings Group, Incorporated (“Cedar”), a fiber Internet provider business based in Durango, Colorado. Cedar is a telecommunications provider serving multiple markets in the Western Slope of Colorado and northwestern New Mexico. Cedar has focused the last several years on building fiber to enterprise, anchor institution, and residential customers. The Cedar acquisition is discussed in more detail in Part II, Item 9B of  this Annual Report on Form 10-K.

 

Domain Services

 

Domain Services includes wholesale and retail domain name registration services, value added services and portfolio services derived through our OpenSRS, eNom, Ascio and Hover brands. We earn revenues primarily from the registration fees charged to resellers in connection with new, renewed and transferred domain name registrations. In addition, we earn revenues from the sale of retail domain name registration and email services to individuals and small businesses; and by making our portfolio of domain names available for sale or lease. Domain Services revenues are attributed to the country in which the contract originates, primarily Canada and the United States.

 

Our primary distribution channel is a global network of approximately 36,000 resellers that operate in approximately 160 countries and who typically provide their customers, the end-users of Internet-based services, with solutions for establishing and maintaining an online presence. Our primary focus is serving the needs of this network of resellers by providing the broadest portfolio of gTLD and the country code top-level domain (“ccTLD”) options and related services, a white-label platform that facilitates the provisioning and management of domain names, a powerful Application Program Interface, easy-to-use interfaces, comprehensive management and reporting tools, and proactive and attentive customer service. Our services are integral to the solutions that our resellers deliver to their customers. We provide “second tier” support to our resellers by email, chat and phone in the event resellers experience issues or problems with our services. In addition, our Network Operating Center proactively monitors all services and network infrastructure to address deficiencies before customer services are impacted.

 

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

 

Our wholesale domain name registration services, primarily branded as OpenSRS, Ascio and eNom, derives revenue from its Domain Service and from providing value-added services. The OpenSRS, Ascio and eNom Domain Services manage 23.8 million domain names under the Tucows, eNom and Ascio ICANN registrar accreditations and for other registrars under their own accreditations, which has increased by 0.5 million domain names since December 31, 2018. The increase from prior year is primarily due to the acquisition of 1.9 million names acquired in the Ascio acquisition on March 18, 2019. The increase was offset by a decrease of 0.9 million domain names related to the bulk transfer domain names in the third quarter of 2019, which were registered to a single, low margin hosted customer. A further decrease of 0.5 million domain names was related to the erosion of registrations related to non-core customers.

 

Our value-added services include hosted email which provides email delivery and webmail access to millions of mailboxes, Internet security services, Internet hosting, WHOIS privacy, publishing tools and other value-added services. All of these services are made available to end-users through a network of 36,000 web hosts, ISPs and other resellers around the world. In addition, we also derive revenue by monetizing domain names which are near the end of their lifecycle through advertising revenue or auction sale.

 

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

 

Our portfolio services generate revenue by offering names in our domain portfolio for resale through a number of distribution channels including our reseller network. 

 

Additional information about segments can be found in “Note 19 – Segment Reporting” of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

 

 

Net Revenues

 

Network Access Services

 

The Company generates Network Access Services revenues primarily through the provisioning of mobile services. Other sources of revenue include the provisioning of fixed high-speed Internet access as well as billing solutions to ISPs.

 

Mobile

 

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

 

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

 

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

 

Other services

 

Other services derive revenues from providing Ting Internet to individuals and small businesses in select cities. In addition, we provide billing, provisioning and customer care software solutions to ISPs through our Platypus billing software. Ting Internet access contracts provide customers Internet access at their home or business through the installation and use of our fiber optic network. Ting Internet contracts are generally prepaid and grant customers with unlimited bandwidth based on a fixed price per month basis. Since consideration is collected before the service period, revenue is initially deferred and recognized as the Company performs its obligation to provide Internet access.

 

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

 

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

 

 

Domain Services

 

Wholesale

 

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

 

Historically, our wholesale domain service has constituted the largest portion of our business and encompasses all of our services as an accredited registrar related to the registration, renewal, transfer and management of domain names. In addition, this service fuels other revenue categories as it often is the initial service for which a reseller will engage us, enabling us to follow on with other services and allowing us to add to our portfolio by purchasing names registered through us upon their expiration.

 

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

 

Wholesale – Value-Added Services

 

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

 

We also derive revenue from other value-added services primarily from Internet hosting services, advertising from the OpenSRS and eNom domain expiry streams.

 

Retail

 

We derive revenues from Hover and eNom’s retail properties through the sale of retail domain name registration and email services to individuals and small businesses.

 

Portfolio

 

The Company sells the rights to the Company’s portfolio domains or names acquired through the Company’s domain expiry stream. Revenue generated from sale of domain name contracts, containing a distinct performance obligation to transfer the domain name rights under the Company’s control, is generally recognized once the rights have been transferred and payment has been received in full. Domain portfolio names are sold through our premium domain name service, auctions or in negotiated sales. The size of our domain name portfolio varies over time, as we acquire and sell domains on a regular basis to maximize the overall value and revenue generation potential of our portfolio. In evaluating names for sale, we consider the potential foregone revenue from pay-per-click advertising, as well as other factors. The name will be offered for sale if, based on our evaluation, the name is deemed non-essential to our business and management believes that deriving proceeds from the sale is strategically more beneficial to the Company.  In Fiscal 2019, the Company sold the remaining names held in its non-surname domain portfolio and portfolio revenue in Fiscal 2020 will only be derived from the sale of names from its surname portfolio.  The Company expects significantly lower portfolio revenues going forward.

 

For information about geographic areas, see “Note 19 – Segment Reporting” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

 

 

Intellectual Property

 

We believe that we are well positioned in the wholesale domain registration and email markets due in part to our highly-recognized “Tucows”, “OpenSRS”, “Ascio” and “eNom” brands and the respect they confer on us as a defender of end-user rights and reseller-friendly approaches to doing business. We were among the first group of 34 registrars to be accredited by ICANN in 1999, and we remain active in Internet governance issues.

 

Our success and ability to compete depend on our ability to develop and maintain the proprietary aspects of our brand name and technology. We rely on a combination of trademark, trade secret and copyright laws, as well as contractual restrictions to protect our intellectual property rights.

 

We have registered the Tucows trademark in the United States, Canada and the European Union and we register additional service marks and trademarks as appropriate and where such protection is available.

 

We seek to limit disclosure of our intellectual property by requiring all employees and consultants with access to our proprietary information to commit to confidentiality, non-disclosure and work-for-hire agreements. All of our employees are required to sign confidentiality and non-use agreements, which provide that any rights they may have in copyrightable works or patentable technologies accrue to us. Before entering into discussions with potential vendors and partners about our business and technologies, we require them to enter into a non-disclosure agreement. If these discussions result in a license or other business relationship, we also generally require that the agreement containing the parties’ rights and obligations include provisions for the protection of its intellectual property rights.

 

Customers

 

The majority of the customers to whom we provide reseller services are generally either web hosts or ISPs. A small number of customers are consultants and designers providing our services to their business clients. Both our Retail Domain Services and our Network Access Services customers are a very broad mix of consumers, small businesses and corporations.

 

No customer represented more than 10% of our consolidated revenues in any of the last three fiscal years.

 

While web hosts and ISPs are capitalizing on the growth in Internet usage and the demand for new services, they also face significant competition from numerous other service providers with competitive or comparable offerings. This has led such web hosts and ISPs to focus on core competencies. As such resellers are increasingly seeking to outsource non-core services. Outsourcing enables these resellers to better focus on customer acquisition and retention efforts by eliminating the need to own, develop and support non-core applications in-house.

  

Seasonality

 

During the summer months and certain other times of the year, such as major holidays, Internet usage often declines. As a result, many of our services (OpenSRS, eNom, Ascio, Hover, Ting and Roam Mobility) may experience reduced demand during these times. For example, our experience shows that new domain registrations decline during the summer months and around the year-end holidays. Seasonality may also affect advertising, which may have a slight impact on advertisement-based revenue. These seasonal effects could cause fluctuations in our financial results. For Ting Mobile, we see increased gross activation and churn activity in late summer as part of back-to-school activities as well as the holiday season in December. For Roam Mobility, we see increased roaming sales as consumers travel to warmer regions of the United Sates for extended periods of time.

 

Competition

 

Our competitors may be divided into the following groups:

 

 

US Mobile Phone Service providers such as AT&T, Verizon, T-Mobile and Sprint, who primarily compete with Ting Mobile Services.

 

 

 

 

US Broadband providers such as AT&T, Comcast, Verizon and CenturyLink, who primarily compete with Ting Internet Services.

 

 

 

 

Retail-oriented domain registrars, such as GoDaddy and Web.com who compete with our Reseller customers in wholesale domain services and with Hover.

 

 

 

 

Wholesale-oriented domain registrars, such as GoDaddy, who market services to resellers such as our customers.

 

 

 

 

Wholesale Email Service providers, such as Google, Microsoft, Bluetie and MailTrust.

 

We expect to continue to experience significant competition from the competitors identified above and, as our business continues to develop, we expect to encounter competition from other providers. Service providers, Internet portals, web hosting companies, email hosting companies, outsourced application companies, country code registries and major telecommunication firms may broaden their services to include services we offer.

 

 

We believe the primary competitive factors in our Network Access Services are:

 

 

Providing a superior customer service experience

 

 

 

 

Providing a simple and friendly user experience through more usable web and application interfaces and more fair and transparent pricing;

 

 

 

 

Being agnostic on telephony and internet hardware, including phones and network routers; and

 

 

 

 

Providing superior technology, speed and reliability with fiber to the home services. 

 

We believe the primary competitive factors in our Domain Services are:

 

 

Providing superior customer service by anticipating the technical requirements and business objectives of resellers and providing them with technical advice to help them understand how our services can be customized to meet their particular needs;

 

 

 

 

Providing cost savings over in-house solutions by relieving resellers of the expense of acquiring and maintaining hardware and software and the associated administrative burden;

 

 

 

 

Enabling resellers to better manage their relationships with their end-users;

 

 

 

 

Facilitating scalability through an infrastructure designed to support millions of transactions across millions of end-users; and

 

 

 

 

Providing superior technology and infrastructure, consisting of industry-leading software and hardware that allow resellers to provide these services to their customers without having to make substantial investments in their own software or hardware.

 

Although we encounter pricing pressure in many markets in which we compete, we believe the effects of that pressure are mitigated by the fact that we deliver a high degree of value to our customers through our business and technical practices. We believe our status as a trusted supplier also allows us to mitigate the effects of this type of competition. We believe that the long-term relationships we have made with many customers results in a sense of certainty that would not be available to those customers through a competitor.

 

Employees

 

As of December 31, 2019, we had approximately 633 full-time employees. None of our employees are currently represented by a labor union. We consider our relations with our employees to be good.

 

 

Corporate Information

 

Our principal place of business is located in Canada.

 

We were incorporated under the laws of the Commonwealth of Pennsylvania in November 1992 under the name Infonautics, Inc. In August 2001, we completed our acquisition of Tucows Inc., a Delaware corporation, and we changed our name from Infonautics, Inc. to Tucows Inc. Our principal executive offices are located at 96 Mowat Avenue, Toronto, Ontario, M6K 3M1 Canada. Our telephone number is (416) 535-0123. We also have offices in Germany, Denmark and the United States of America.

 

We are subject to the filing requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). Therefore, we file annual reports, periodic reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically at www.sec.gov.

 

Our website address is tucows.com. We make available through our website, free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as amended as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. The information on the website listed above is not and should not be considered part of this Annual Report and is not incorporated by reference in this document.

 

Executive Officers and Key Employees of the Registrant

 

The following table sets forth the names, ages and titles of persons currently serving as our executive officers and key employees.

 

Name

 

Age

 

Title

Elliot Noss

  57  

President and Chief Executive Officer

Davinder Singh

  45  

Chief Financial Officer

Dave Woroch

  57  

Executive Vice President, Domains

Bret Fausett

  56  

Chief Legal Officer

Hanno Liem

  46  

Chief Technology Officer

Jessica Johannson

  47  

Chief People Officer

Justin Reilly

  32  

Chief Product Officer

Michael Goldstein

  48  

Chief Revenue Officer, Ting

Ross Rader

  48  

Chief Customer Officer

 

Elliot Noss has served as our President and Chief Executive Officer since May 1999 and served as Vice President of Corporate Services for Tucows Interactive Limited, which was acquired by Tucows in May 1999, from April 1997 to May 1999.

 

Davinder Singh has served as our Chief Financial Officer since 2017, having previously served as Vice President Finance since joining the Company in 2016. Prior to joining the Company, Mr. Singh spent eight years at KPMG LLP primarily focusing on public company audits in the technology field. After leaving KPMG LLP, Mr. Singh joined TELUS and held progressive roles, including Chief Financial Officer of TELUS International, TELUS’ outsourcing division. Mr. Singh is a Chartered Professional Accountant with the Institute of Chartered Professional Accountants of British Columbia.

 

David Woroch has served as our Executive Vice President, Domains since 2014 and oversees the Domains business at Tucows, including OpenSRS, eNom, Ascio and EPAG (wholesale), Hover (retail) and the premium domain portfolio. Mr. Woroch joined Tucows in March 2000 after thirteen years at IBM and has helped build Tucows’ sales, marketing, business development, product management and technical support capabilities.

 

Bret Fausett joined Tucows in September 2017 as our Chief Legal Officer. Prior to joining Tucows, Mr. Fausett worked for Uniregistry, where he had served as General Counsel for six years. Prior to Uniregistry, Mr. Fausett worked as outside legal counsel to a number of domain industry related companies.

 

Hanno Liem joined Tucows in January 2018 as our Chief Technology Officer. Prior to joining Tucows, Mr. Liem worked for Rakuten Kobo since 2012 where he served as their Vice President of Global Operations and focused on site operations and engineering.

 

Jessica Johannson has served as our Chief People Officer since January 2017. Prior to joining Tucows, Ms. Johannson held executive level HR roles at Johnson Controls, Inc. since 2008, Brookfield Renewable Energy Group and Capgemini.

 

Michael Goldstein has served as our Chief Revenue Officer since September 2009. Before joining us, Mr. Goldstein spent five years at Ogilvy, NY as a Partner and, Marketing Director managing advertising, brand identity, digital and public relations campaigns for clients such as TD Ameritrade, Kraft, GlaxoSmithKline and DoubleClick.

 

Ross Rader has served as Chief Customer Officer since 2012, where he leads our customer service and support organization. In 2000, as our Director of Assigned Names, Ross helped launch Tucows OpenSRS service. In 2005, as General Manager, Retail Services he oversaw Tucows’ retail domain operations, including the development and launch of Hover in 2008.

 

Justin Reilly joined Tucows in September 2019 as our Chief Product Officer. Prior to joining Tucows, Justin was Head of Product & Customer Experience Innovation at Verizon, as well as founder of a number of companies with consumer grade product and machine learning at their core.

 

 

ITEM 1A.  RISK FACTORS

 

Our business faces significant risks. Some of the following risks relate principally to our business and the industry and statutory and regulatory environment in which we operate. Other risks relate principally to the securities markets and ownership of our stock. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following risk factors actually occur, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline.

 

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

 

We face intense competition and consolidation in the industries and markets we serve. If we do not continue to provide services that are useful to users, we may not remain competitive and be forced to reduce our prices, and our revenues and operating results could be adversely affected.

 

Network Access Services

 

The U.S. wireless communications & Internet services industry has become extremely competitive. We expect competition to continue to intensify as a result of the entrance of new competitors or the expansion of services offered by existing competitors. If we cannot compete effectively, our revenues, growth and profitability may be materially adversely affected. Our brands compete with (1) incumbent facilities-based wireless communication and Internet service providers and their prepaid affiliate brands and (2) other MVNOs. Most of our competitors have substantially greater financial, technical, personnel and marketing resources and a larger market share than we do, and we may not be able to compete successfully against them. Due to their size and bargaining power, they may obtain discounts for facilities, equipment, devices (including cellular handsets, IoT enabled devices and ONTs), content, and services, potentially placing us at a competitive disadvantage. As consolidation in the industry creates even larger competitors, our competitors’ purchasing advantages may increase further, hampering our efforts to attract and retain customers. They may use their significant market power to introduce additional products and service features (or lower prices) that we are unable to offer at similar cost or price to the customer. This may impact our ability to gain significant market share from these competitors. To remain competitive, we may be compelled to offer greater subsidies for our devices, reduce the prices for our wireless or gigabit services or augment our service offerings. Any subsidies or price reductions that we offer in order to remain competitive may reduce our margins and revenues, and may adversely affect our profitability and cash flows. Lower prices may also make our services more accessible to new, lower-value customers with less disposable income available to spend on our services. In addition, if prices decline, customers without long-term contracts may change their service providers more frequently, thereby increasing our churn and resulting in higher acquisition costs to replace those customers. A shift to lower value or less loyal customers could have an adverse impact on our results of operations and cash flows.

 

Domain Services

 

The market for Internet services generally and domain registrations in particular is intensely competitive and rapidly evolving as participants strive to protect their current market share and improve their competitive position, and we expect competition to intensify in the future. If any of our competitors merge with one another, or existing suppliers (Registries) decide to begin competing in our core business areas, they will present a stronger force in the market and may attract the business of both existing and prospective resellers. In addition, our resellers may opt to build their own technical systems and seek ICANN accreditation in order to process domain applications themselves. Currently ICANN has over 2,500 active registrars who register domain names in one or more of the gTLDs that it oversees. Not all of these accredited registrars, however, are operational. There are relatively few barriers of entry to this market, so as this market continues to develop we expect the number of competitors to increase. The continued entry into the domain registration industry and the rapid growth of some competitive registrars and service providers who have already entered the industry may make it difficult for us to maintain our current market share. As a result, we may not be able to compete effectively and our sales may decrease materially. To remain competitive, competitors may offer aggressive price discounts on the services they offer. At the same time, registries may increase their prices, increasing the cost of the services we sell. These pricing pressures may require us to match these discounts or absorb price increases in order to remain competitive, which would reduce our margins, or cause us to lose customers who decide to purchase the discounted service offerings of our competitors or forego a purchase because of pricing. Most of our existing competitors are also expanding the variety of services that they offer. These competitors include, among others, domain name registrars, hosting companies and Internet service providers, as well as other large Internet companies, who have the ability to offer these services for free or at a reduced price as part of a bundle with other service offerings. If these companies decide to devote greater resources to the development, promotion and sale of these new products and services, greater numbers of individuals and businesses may choose to use these competitors as their starting point for creating an online presence and as a general platform for running their online business operations.

 

 

Our service offerings both in Network Access Services and Domain Services may not be successful if we are unable to maintain existing customer relationships or establish new relationships.

 

Network Access Services

 

Ting services, both mobile and fiber businesses may not prove to be successful or profitable in the long term. Ting’s long-term success is dependent upon its sustained ability to generate sufficient revenue from its subscribers based on their use of its services and its ability to respond to churn by retaining existing customers and adding new customers. In Q2’19, the Company announced that it would not renew its agreement with T-Mobile effective December 19, 2019, whom operate on a GSM (“Global System for Mobile”) platform. The Company therefore must incentivize current customers who use GSM devices to migrate to devices which are compatible with Ting Mobile’s other MNOs – Sprint & Verizon. To mitigate transition effects, the Company has entered into a 3-year agreement with Prepaid Wireless Wholesale, LLC (PWW), a Mobile Virtual Network Enabler to provide wireless voice minutes and data services via the GSM standard on the T-Mobile network via a reseller arrangement with PWW. Due to the difficulty of identifying which inducements will be most effective, some customers may refuse or fail to migrate to compatible devices. This would result in increased customer churn, increased customer retention costs and/or significant shortfall penalties, if slow subscriber migration resulted in revenues below the minimum revenue commitments the Company has with the MNOs. If any of these events occur, our operational performance and financial results may be adversely affected.

 

Domain Services

 

Our network of resellers is our principal source for distributing domain services. We also rely on our resellers to market, promote and sell our services. Our ability to increase revenues in the future will depend significantly on our ability to maintain our reseller network, to sell more services through existing resellers and to develop our relationships with existing resellers by providing customer and sales support and additional products. Resellers have no obligations to distribute our services and may stop doing so at any time. If we are not able to maintain our relationships with resellers, our ability to distribute our services will be harmed, and our revenue may decline.

 

Our service offerings both in Network Access Services and Domain Services may be limited in ability to grow their respective businesses and customer base unless we can continue to manage vendor relationships and obtain both valuable network capacity and a multitude of domain name registration options. If these rates increase or product mix lags in comparison to our competitors, this have a significant impact upon our operating results.

 

Network Access Services

 

In order to remain competitive and to further expand our MVNO business, we must continue to obtain valuable wireless network capacity at favorable rates and terms, provide adequate customer service and acquire and market a sufficient quantity and mix of handsets and related accessories. Our operating performance and ability to attract new customers may be adversely affected if we are unable to meet the increasing demands for our services in a timely and efficient manner, while adequately addressing the growing demands on our customer service, billing, and other back-office functions. Any change in our ability, or the ability of third parties with whom we contract, to provide these services also could adversely affect our operations and financial performance. On June 6, 2018, two of our current Network Operators, T-Mobile and Sprint submitted a formal merger application to the Federal Communications Commission (“FCC”), which has since been approved. As of February 11, 2020, the merger between T-Mobile and Sprint is expected to be finalized as early as April 1, 2020, subject also to resolution of a lawsuit filed by certain state attorneys general. If the merger is successful, the consolidation of our Network Operators could hinder our ability in the future to negotiate favorable rates and access to the mobile services mentioned above. We also have added Verizon as a Network Operator but have not yet integrated with their systems or made this service available to our customers on our Ting MVNO platform. Our integration may not be successful or profitable.

 

Domain Services

 

In order to remain competitive, we must provide a multitude of domain name registration options (TLDs, ccTLDs) to our resellers. Any failure on our part to offer domain registrations in a significant number of TLDs/ccTLDs or in a popular TLD/ccTLD would cause us to lose a competitive advantage and could cause resellers to elect to take their business to a registrar that does offer these services. Each registry typically imposes a fee in association with the registration of each domain. For example, Verisign, the registry for .com, presently charges a $7.85 fee for each .com registration and ICANN currently charges a $0.18 fee for each .com domain name registered in the gTLDs that fall within its purview. We have no control over these agencies and cannot predict when they may increase their respective fees. An amendment to the registry agreement between ICANN and Verisign was approved by the U.S. Department of Commerce in November 2018. The amendment confirms that Verisign will operate the .com registry until 2024. The amendment also repeals price controls and provides Verisign the pricing flexibility to change its .com Registry Agreement with ICANN to increase wholesale .com prices. Specifically, the flexibility permits Verisign to pursue with ICANN an up to 7 percent increase in the prices for .com domain names, in each of the last four years of the six-year term of the .com Registry Agreement. The changes also affirm that Verisign may not vertically integrate or operate as a registrar in the .com top level domain. 

 

 

Our service offerings both in Network Access Services and Domain Services may experience a material adverse effect should the nature of the Internet fundamentally change or fail to grow and expand internationally as a viable medium for commerce. This includes changes in current navigation practices, technologies or marketing practices.

 

Network Access Services

 

The success of our Network Access Services, primarily Ting Fiber depends on the continued development and acceptance of symmetrical gigabyte Internet infrastructure and service as a medium for faster Internet communication. A number of factors could prevent continued growth and acceptance, including:

 

 

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the unwillingness of companies and customers to shift their purchasing from traditional ISP vendors to alternative vendors like Ting Fiber;

 

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

 

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the development of alternative, wireless technologies (such as 5G) that could provide a similar Internet speed and service without a fixed connection/physical network.

 

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

 

Domain Services

 

The domain name registration industry continues to develop and adapt to changing technology and the demands of individual governments. These developments may include changes in the administration or operation of the Internet, including (a) the creation and institution of alternate systems for directing Internet traffic without the use of the existing domain system or (b) systems under local government control that splinter from, or thwart the operation of, the Internet. Systems existing outside the domain name system are not subject to ICANN accreditation requirements and restrictions. Other competitors have attempted to introduce naming systems that use keywords rather than traditional domains. The widespread acceptance of any alternative systems and Internet navigation practices could eliminate the need to register a domain to establish an online presence and could materially adversely affect our business, financial condition and results of operations.

 

Additionally, we believe that a major source of growth for Internet-based companies will come from individuals and businesses outside the United States where Internet access and use is currently less prevalent. A substantial number of our resellers are currently based outside the United States and we plan to grow our business in other countries. If Internet usage in these jurisdictions does not increase as anticipated, or if governments prohibit the registration and use of domain names or certain classes of domain names, our revenues may not grow as anticipated.

 

Our ongoing investment in new businesses, services and technologies is inherently risky, and could disrupt our current operations. We may not be able to realize the intended and anticipated benefits from our investments and acquisitions, which could affect the value of these investments to our business and our ability to meet our financial obligations and targets in the short or medium term.

 

Network Access Services

 

We have invested and expect to continue to invest in our new fiber to the home (“FTTH”) deployments in select markets in the United States (Ting Fiber) both organically and inorganically through acquisitions like the purchase of Cedar Holdings Group, a telecommunications provider serving multiple markets in the Western Slope of Colorado and northwestern New Mexico. The investments are a reflection of our ongoing efforts to build FTTH network via public-private partnerships in communities we identify as having strong, unmet demand for FTTH services. Such FTTH investments may involve risks and uncertainties, including: insufficient revenues from such investments and acquisitions, in the short and medium term to offset any new commitments assumed and expenses associated with these new investments; inadequate return of capital on our investments; inability to obtain the appropriate technical and operational resources; and unanticipated local or federal regulatory changes that could cause us to fail to realize the anticipated benefits of such investments. Because these new FTTH deployments are inherently risky, no assurance can be given that such investments will be successful and will not adversely affect our financial condition and operating results.

 

Domain Services

 

We may acquire companies, assets or the rights to technologies in the future in order to develop new services or enhance existing services, to enhance our operating infrastructure, to fund expansion, to respond to competitive pressures or to acquire complementary businesses in the Domain Services industry. Entering into these types of arrangements entails many risks, any of which could materially harm our business, including: the diversion of management’s attention from other business concerns; the failure to effectively integrate the acquired technology or company into our business; the incurring of significant acquisition costs; the loss of key employees from either our current business or the acquired business; and the assumption of significant liabilities of the acquired company. Any of the foregoing or other factors could harm our ability to achieve anticipated levels of profitability from acquired businesses or to realize other anticipated benefits of acquisitions. We may not be able to identify or consummate any future acquisitions on favorable terms, or at all. If we do effect an acquisition, it is possible that the financial markets or investors will view the acquisition negatively. 

 

The Company's success depends on our ability to keep pace with technological advances. Failure to respond to rapid technological changes in the industries we serve or difficulty in scaling or adapting existing architecture could result in the loss of customers and cause us to incur additional expenses.

 

 

Network Access Services

 

The U.S. wireless communications industry is experiencing rapid growth of new technologies, products and services. We cannot predict which of many possible future technologies, products, or services will be important to maintain our competitive position or what expenditures we will be required to make in order to develop and provide these technologies, products or services. To the extent we do not keep pace with technological advances or fail to timely respond to changes in the competitive environment affecting our industry, we could lose market share or experience a decline in revenue, cash flows and net income from our telecommunications brands (Ting Mobile, Roam). As a result of the financial strength and benefits of scale enjoyed by some of our competitors, they may be able to offer services at lower prices than we can, thereby adversely affecting our revenues, growth and profitability.

 

Currently there is no Internet access technology that comes close to the speed, reliability, scalability and value of fiber-optics. However, it’s possible that another medium that’s either better or more economically/easily deployed could be developed in the longer term, or wireless could be improved enough to supplant the need for fiber in certain types of installations, like multi-family units, that would impact Ting Fiber’s ability to grow. To be successful as we continue to build out the Ting Fiber network in communities across the U.S. and bring customers onto the network we must ensure that our network infrastructure performs well and is reliable. The greater the user traffic and the greater the complexity of our services, the more computing power we will need. We have spent and expect to continue to spend substantial amounts on the purchase of equipment to enable our network infrastructure to handle increased traffic. This expansion is expensive and complex and could result in inefficiencies or operational failures. If we do not expand successfully, or if we experience inefficiencies and operational failures, the quality of our services and our customers’ experience could decline. This could damage our reputation and lead us to lose current and potential customers. Cost increases, loss of traffic or failure to accommodate new technologies or changing business requirements could harm our operating results and financial condition.

 

Domain Services

 

The Internet and e-commerce are characterized by rapid technological change. Sudden changes in user and customer requirements and preferences, the frequent introduction of new applications and services embodying new technologies and the emergence of new industry standards and practices could make our applications, services and systems obsolete. The emerging nature of applications and services in the Internet application and services industry and their rapid evolution will require that we continually improve the performance, features and reliability of our applications and services. Our success will depend, in part, on our ability: to develop and license new applications, services and technologies that address the increasingly sophisticated and varied needs of our current and prospective customers; and to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

 

The development of applications and services and other proprietary technology involves significant technological and business risks and requires substantial expenditures and lead-time. We may be unable to use new technologies effectively or adapt our internally developed technology and transaction-processing systems to customer requirements or emerging industry standards in a timely manner, or at all. Our internal development teams may also be unable to keep pace with new technological developments that affect the marketplace for our services. In addition, as we offer new services and functionality, we will need to ensure that any new services and functionality are well integrated with our current services, particularly as we offer an increasing number of our services as part of bundled suites. To the extent that any new services offered by us do not interoperate well with our existing services, our ability to market and sell those new services would be adversely affected and our revenue level and ability to achieve and sustain profitability might be harmed. Updating technology internally and licensing new technology from third parties may require us to incur significant additional capital expenditures.

 

Corporate Systems

 

For our fiber, MVNO, and domain services businesses, we use data centers, some provided by third-parties and some provided by ourselves, for the storage and exchange of corporate and customer data. Any damage to or failure of our data center systems could result in interruptions in our service, which could reduce our revenues and profits, and damage our brands.

 

 

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

 

Network Access Services

 

As an MVNO, our telecommunications brands (Ting Mobile & Roam) do not own or operate a physical network, but rather utilize the nationwide wireless communication networks of our Network Operators. We rely on them and their third-party affiliates to maintain their wireless facilities and government authorizations and to comply with government policies and regulations. If they fail to do so, we may incur substantial losses. Some of the risks related to their nationwide wireless communication networks and infrastructure include: major equipment failures, breaches of network or information technology security that affect their wireless networks, including transport facilities, communications switches, routers, microwave links, cell sites or other equipment or third-party owned local and long-distance networks on which we rely, power surges or outages, software defects and disruptions beyond their control, such as natural disasters and acts of terrorism, among others. The Master Services Agreements with our Network Operators do not contain any contractual indemnification provisions relating to network outages or other disruptions. Any impact on their nationwide wireless communication networks could disrupt our operations, require significant resources, result in a loss of subscribers or impair our ability to attract new subscribers, which in turn could have a material adverse effect on our business, results of operations and financial condition. Delays or failure to add network capacity, or increased costs of adding capacity or operating the network, could limit our ability to increase our customer base, limit our ability to increase our revenues, or cause a deterioration of our operating margin.

 

Domain Services

 

The availability of our Domain Name services depends on the continuing operation of our information technology and communications systems. Any damage to or failure of our systems could result in interruptions in our service, which could reduce our revenues and profits, and damage our brands. Our systems are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems. Some of our data centers are located in areas with a high risk of major earthquakes. Our data centers are also subject to break-ins, sabotage and intentional acts of vandalism, and to potential disruptions if the operators of these facilities have financial difficulties. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a decision to close a facility without adequate notice or other unanticipated problems at our data centers could result in lengthy interruptions in our service.

 

 

We have currently entered into agreements with unrelated parties for certain business operations and to license third-party technologies. Any claims against these unrelated parties to which we rely for business operations and/or licensed technology could result in the need to incur substantial costs to replace the technology or services which could delay and increase the cost of product and service developments.

 

Network Access Services

 

We have entered into agreements with unrelated parties for the day-to-day execution of certain services, the development and maintenance of certain systems necessary for the operation of our business, and for network equipment, handsets, devices, and other equipment. We expect our dependence on key suppliers to continue as more advanced technologies are developed. If we experience difficulties with regard to these arrangements, it could result in additional expense, loss of subscribers and revenue, interruption of our services or a delay in the roll-out of new technology.

 

Domain Services

 

We currently license certain technologies from third parties and incorporate them into certain of our services including email, security certificates, anti-spam and anti-virus. The Internet services market is evolving and we may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms or at all (should these third-party technology licenses infringe on the proprietary rights of others). To the extent we cannot license necessary solutions, we may have to devote our resources to development of such technologies, which could delay and increase the cost of product and service developments overall.

 

Our systems face security risks, and any compromise of the security of these systems could disrupt our business, damage our reputation and result in the disclosure of confidential information, legal liability for damages and loss of customers.

 

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees. Due to the fact that all of our services are Internet based, the amount of data we store for our users on our servers (including personal information) has been increasing. We make extensive use of online services and centralized data processing, including through third-party service providers. The secure maintenance and transmission of customer information is an important element of our operations.

 

From time to time, concerns have been expressed about whether our services compromise the privacy of our users and others. Concerns about our practices with regard to the collection, use, disclosure or security of personal information or other privacy-related matters, even if unfounded, could damage our reputation and operating results and expose us to litigation and possible liability, including claims for unauthorized purchases with credit card information, impersonation, or fraud claims and other claims relating to the misuse of personal information and unauthorized marketing purposes. While we strive to comply with all applicable data protection laws and regulations, as well as our own privacy policies, any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, which could potentially have an adverse effect on our business.

 

We have previously been the target of attempted attacks and must monitor and develop our systems to protect this data from misappropriation. Our information technology and other systems that maintain and transmit customer information, including location or personal information, or those of service providers, may be compromised by a malicious third-party penetration of our network security, or that of a third-party service provider, or impacted by advertent or inadvertent actions or inactions by our employees, or those of a third-party service provider. Cyber-attacks, which include the use of malware, computer viruses and other means for disruption or unauthorized access, have increased in frequency, scope and potential harm in recent years. While, to date, we have not been subject to any successful cyber-attacks or other cyber incidents which, individually or in the aggregate, have been material to our operations or financial condition, the preventive actions we take to reduce the risk of cyber incidents and protect our information technology and networks may be insufficient to repel a major cyber-attack in the future. As a result, our subscribers’ information may be lost, disclosed, accessed, used, corrupted, destroyed or taken without the subscribers’ consent.

 

Any major compromise of our data or network security, failure to prevent or mitigate the loss of our services or customer information and delays in detecting any such compromise or loss could disrupt our operations, impact our reputation and subscribers' willingness to purchase our services and subject us to additional costs and liabilities, including litigation, which could be material.

 

 

Disputes concerning the ownership or rights to use intellectual property and litigation involving other rights of third parties could be costly and time-consuming to litigate, may distract management from operating the business, and may result in us paying significant damage awards, losing significant rights and our ability to operate all or a portion of our business.

 

We rely upon copyright, trade secret and trademark law, confidentiality and nondisclosure agreements, invention assignment agreements and work-for-hire agreements to protect our proprietary technology, all of which offer only limited protection. Due to the global nature of our web-based businesses and services, we cannot ensure that our efforts to protect our proprietary information will be adequate to protect against infringement and misappropriation by third parties, particularly in foreign countries where laws or law enforcement practices may not protect proprietary rights as fully as in the United States of America and Canada.

 

We have licensed, and may in the future license, some of our trademarks and other proprietary rights to others. Third parties may also reproduce or use our intellectual property rights without seeking a license and thus benefit from our technology without paying for it. Third parties could also independently develop technology, processes or other intellectual property that are similar to or superior to those used by us. Actions by licensees, misappropriation of the intellectual property rights or independent development by others of similar or superior technology might diminish the value of our proprietary rights or damage our reputation. The unauthorized reproduction or other misappropriation of our intellectual property rights, including copying the look, feel and functionality of our website could enable third parties to benefit from our technology without us receiving any compensation. The enforcement of our intellectual property rights may depend on our taking legal action against these infringing parties, and we cannot be sure that these actions will be successful.

 

Defense of claims of infringement of intellectual property or other rights of third parties against us would require the resources of both our time and money. Third parties may assert claims of infringement of patents or other intellectual property rights against us concerning past, current or future technologies. Content obtained from third parties and distributed over the Internet by us may result in liability for defamation, negligence, intellectual property infringement, product or service liability and dissemination of computer viruses or other disruptive problems. We may also be subject to claims from third parties asserting trademark infringement, unfair competition and violation of publicity and privacy rights relating specifically to domains.

 

As a domain name registrar, we regularly become involved in disputes over registration of domain names. These disputes are typically resolved through the UDRP, ICANN’s administrative process for domain name dispute resolution, or less frequently through litigation under the ACPA, or under general theories of trademark infringement or dilution. The UDRP generally does not impose liability on registrars, and the ACPA provides that registrars may not be held liable for registering or maintaining a domain name absent a showing of bad faith intent to profit or reckless disregard of a court order by the registrars. However, we may face liability if we fail to comply in a timely manner with procedural requirements under these rules. In addition, these processes typically require at least limited involvement by us, and therefore increase our cost of doing business. The volume of domain name registration disputes may increase in the future as the overall number of registered domain names increases.

 

We have substantial goodwill and other intangible assets, therefore to the extent that any intellectual property is deemed impaired we would be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or intangible assets is determined. Any impairment charges or changes to the estimated amortization periods could have a material adverse effect on our financial results.

 

Our service offerings both in Network Access Services and Domain Services are exposed to risks associated with credit card and other online payment chargebacks, fraud and new payment methods.

 

Network Access Services

 

Ting offers its wireless and Internet services on a postpaid basis. The success of its postpaid offerings depends on its ability to manage its credit risk while attracting new customers with profitable usage patterns. Both Ting Mobile & Ting Fiber have a short operating history and there can be no assurance that it will be able to manage its credit risk or generate sufficient revenue to cover its postpaid-related expenses, including losses arising from its customers’ failure to make payments when due. Ting manages credit risk exposure using techniques that are designed to set terms and limits for the credit risk it accepts. The techniques it uses may not accurately predict future defaults due to, among other things, inaccurate assumptions or fraud. Ting’s ability to manage credit risk may also be adversely affected by legal or regulatory changes, competitors’ actions, consumer behavior, and inadequate collections staffing or techniques. While Ting continually seeks to improve its assumptions and controls, its failure to manage its credit risks appropriately may materially adversely affect our profitability and ability to grow.

 

Domain Services

 

A substantial majority of our revenue originates from online credit card transactions. Under current credit card industry practices, we are liable for fraudulent and disputed credit card transactions because we do not obtain the cardholder’s signature at the time of the transaction, even though the financial institution issuing the credit card may have authorized the transaction. Under credit card association rules, penalties may be imposed at the discretion of the association. Any such potential penalties would be imposed on our credit card processor by the association. Under our contract with our processor, we are required to reimburse our processor for such penalties. Our current level of fraud protection, based on our fraudulent and disputed credit card transaction history, is within the guidelines established by the credit card associations. However, we face the risk that one or more credit card associations may, at any time, assess penalties against us or terminate our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition and results of operations.

 

 

Our indebtedness could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, divert our cash flow from operations for debt payments and prevent us from meeting our debt obligations. Our debt agreements impose significant operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business opportunities.

 

As of March 2, 2020, our outstanding debt under our credit facility was $114.4 million. Our ability to generate cash flow from operations to make principal and interest payments on our debt will depend on our future performance, which will be affected by a range of economic, competitive and business factors as well as changes in government monetary or fiscal policy.

 

Absent sufficient cash flows from operations, we may need to engage in equity or debt financings to secure additional funds to meet our operating and capital needs. We may not be able to secure additional debt or equity financing on favorable terms, or at all, at the time when we need that funding. In addition, even though we may have sufficient cash flow, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. In addition, if we decide to raise funds through debt or convertible debt financings, we may be unable to meet our interest or principal payments. Our inability to generate sufficient cash flow from operations or obtain additional capital or alternative financing on acceptable terms could have a material adverse effect on our business, financial condition and results of operations.

 

The current agreements governing our indebtedness impose significant operating and financial restrictions on us. These restrictions, subject in certain cases to customary baskets, exceptions, and incurrence-based ratio tests, may limit our or our subsidiaries' ability to engage in some transactions, including the following: incurring additional indebtedness and issuing stock; paying dividends, share repurchases or making other restricted payments or investments; selling assets, properties, or licenses that we have or in the future may procure; creating liens on assets; engaging in mergers, acquisitions, business combinations, or other transactions. These restrictions could limit our ability to react to changes in our operating environment or the economy. Any future indebtedness that we incur may contain similar or more restrictive covenants. Any failure to comply with the restrictions of our debt agreements may result in an event of default under these agreements, which in turn may result in defaults or acceleration of obligations under these agreements and other agreements, giving our lenders the right to terminate any commitments they had made to provide us with further funds and to require us to repay all amounts then outstanding. Any of these events would have a material adverse effect on our business, financial condition, and operating results.

 

The international nature of our businesses and operations expose us to additional risks that could harm our business, operating results, and growth strategy; including risks related to taxation and foreign currencies fluctuations.

 

We are a U.S. based multinational company. Expansion into international markets is a continued element of our growth strategy. Introducing and marketing our services internationally, developing direct and indirect international sales and support channels and managing foreign personnel and operations all require significant management attention and financial resources. We face a number of risks associated with expanding our businesses internationally that could negatively impact our results of operations, including the following:

 

 

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Foreign currency fluctuations and exchange rates: Our operating results are accordingly subject to fluctuations in foreign currency exchange rates, which could adversely affect our future operating results. We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity and expense. We generally use hedging programs to partially hedge our exposure to foreign currency exchange rate fluctuations for Canadian dollars, the currency in which we incur the majority of operating expenses. Although we regularly review our hedging program and make adjustments as necessary based on the judgment factors discussed above, our hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates, which could adversely affect our financial condition or results of operations.

 

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Potentially adverse tax consequences or an inability to realize tax benefits: Significant judgment is required in determining our provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions may be overturned by jurisdictional tax authorities, which may have a significant impact on our provision for income taxes. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied, including the Tax Cuts and Job Act of 2017. In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies. If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.

 

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Management, communication and integration problems resulting from cultural differences and geographic dispersion.

 

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Compliance with foreign laws, accreditation and regulatory requirements in relation to provision of services, protection of intellectual property and third-party data in foreign jurisdictions.

 

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Competition from companies with international operations, including large international competitors and entrenched local companies.

 

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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.

 

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Political and economic instability in some international markets

 

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Sufficiently qualified labor pools in various international markets

 

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We may not succeed in our efforts to continue to expand our international presence as a result of the factors described above or other factors that may have an adverse impact on our overall financial condition and results of operations.

 

 

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition.

 

We are subject to income and other taxes in a number of jurisdictions and our tax structure is subject to review by both domestic and foreign tax authorities. We must make significant assumptions, judgments and estimates to determine our current provision for income taxes, deferred tax assets and liabilities and any valuation allowance that may be recorded against our deferred tax assets. Although we believe that our estimates are reasonable, the ultimate determination of our tax liability is always subject to review by the applicable tax authorities. Any adverse outcome of such a review could have a negative effect on our operating results and financial condition in the period or periods for which such determination is made. Our current and future tax liabilities could be adversely affected by:

 

 

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international income tax authorities, including the Canada Revenue Agency and the U.S. Internal Revenue Service, challenging the validity of our arms-length related party transfer pricing policies or the validity of our contemporaneous documentation.

 

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changes in the valuation of our deferred tax assets; or

 

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changes in tax laws, regulations, accounting principles or the interpretations of such laws.

 

We could be subject to changes in tax rates, the adoption of new U.S. or international tax legislation, or exposure to additional tax liabilities. This could discourage the registration or renewal of domain names.

 

Due to the global nature of the Internet, it is possible that, although our services and the Internet transactions related to them typically originate in Virginia, Toronto, Canada, Denmark and Germany, governments of other states or foreign countries might attempt to regulate our transactions or levy sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in Internet commerce. New or revised international, federal, state or local tax regulations may subject us or our customers to additional sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet on Tucows or on our customers. New or revised taxes and, in particular, sales taxes, would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over the Internet. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.

 

Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed.

 

We believe that a critical contributor to our success has been our corporate culture, which we believe fosters innovation, creativity and teamwork. As our organization grows and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This could negatively impact our future success.

 

The Company’s success depends on the continued service and availability of key personnel.

 

Much of the Company’s future success depends on the continued availability and service of key personnel, including its Chief Executive Officer, executive team and other highly skilled employees. Experienced personnel in the technology industry are in high demand and competition for their talents is intense. We may not be able to retain our key employees or replace them when necessary.

 

Our business depends on our strong brands. If we are not able to maintain and enhance our brands, our ability to expand our customer base will be impaired and our business and operating results will be harmed.

 

In recognition of the evolving nature of the internet services market and to make it easier to clearly differentiate each service we offer from our competitors, we enhanced our branding by focusing our primary service offerings under six distinct brands namely “OpenSRS”, “eNom”, “Hover", "epag", "Ascio" and “Ting”. We also believe that maintaining and enhancing the “Tucows” corporate brand and our service brands is critical to expanding our customer base. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brands may become increasingly difficult and expensive. Maintaining and enhancing our brands will depend largely on our ability to be a technology leader providing high quality products and services, which we may not do successfully. To date, we have engaged in relatively little direct brand promotion activities. This enhances the risk that we may not successfully implement brand enhancement efforts in the future.

 

 

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Implementation of new technology related to the control system may result in misstatements due to errors that are not detected and corrected during testing. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

 

As a result, we cannot assure you that material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules proclaimed after that. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price, and it could make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors (“Board”) or as executive officers.

 

Economic, political, and market conditions may adversely affect our businesses, financial condition, and operating results.

 

The financial results of our business are both directly and indirectly dependent upon economic conditions throughout the world, which in turn can be impacted by conditions in the global financial markets. Uncertainty about global economic conditions may lead businesses to postpone spending in response to tighter credit and reductions in income or asset values. Weak economic activity may lead government customers to cut back on services. Factors such as interest rates, availability of credit, inflation rates, changes in laws (including laws relating to taxation), trade barriers, currency exchange rates and controls, and national and international political circumstances (including wars, terrorist acts or security operations) could have a material adverse effect on our business and investments, which could reduce our revenue, profitability and value of our assets. These factors may also adversely affect the business, liquidity and financial condition of our customers. In addition, periods of poor economic conditions could increase our ongoing exposure to credit risks on our accounts receivable balances. This could have a material adverse effect on our business, financial condition and results of operations.

 

Our business and financial performance could be adversely affected, directly or indirectly, by disasters, by terrorist activities or by international hostilities.

 

Neither the occurrence nor the potential impact of disasters, terrorist activities or international hostilities can be predicted. However, these occurrences could impact us directly as a result of damage to our facilities or by preventing us from conducting our business in the ordinary course, or indirectly as a result of their impact on our customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region. For example, a significant earthquake could impact us directly by disrupting our business operations, including the disruption of data centers we operate that could affect customers across all of our regions of operation and business lines.

 

Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning, and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of disasters or terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses that we deal with, particularly those that we depend upon but have no control over.

 

 

RISKS RELATED TO LEGAL, GOVERNMENTAL AND REGULATORY MATTERS

 

ICANN's Oversight of Domain Name Registration System and domain name registration charge. If these fee increase, this may have a significant impact on our operating results.

 

ICANN is a private sector, not-for-profit corporation formed in 1998 by the U.S. Department of Commerce for the express purposes of overseeing a number of Internet related tasks previously performed directly on behalf of the U.S. government, including managing the domain name registration system. ICANN currently imposes a fee ($0.18) in association with the registration of each domain name. We have no control over ICANN and cannot predict when they may increase their respective fees. If we absorb such cost increases, or if surcharges act as a deterrent to registration, our profits may be adversely impacted by these third-party fees.

 

ICANN has been subject to strict scrutiny by the public and by the U.S. and other governments around the world with many of those governments becoming increasingly interested in Internet governance. For example, the U.S. Congress has held hearings to evaluate ICANN's selection process for new TLDs. In addition, ICANN faces significant questions regarding efficacy as a private sector entity. ICANN may continue to evolve both its long-term structure and mission to address perceived shortcomings such as a lack of accountability to the public and a failure to maintain a diverse representation of interests on its board of directors. We continue to face the risks that:

 

 

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the U.S. or any other government may reassess its decision to introduce competition into, or ICANN’s role in overseeing, the domain registration market;

 

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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;

 

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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;

 

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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;

 

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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;

 

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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;

 

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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

 

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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.

 

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If any of these events occur, they could create instability in the domain registration system. These events could also disrupt or suspend portions of our domain registration solution, which would result in reduced revenue.

 

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

 

In 2018, the European Commission adopted the General Data Protection Regulation (the “GDPR”), which creates obligations around the procurement, processing, publication and sharing of personal data. Potential fines for violations of certain provisions of GDPR reach as high as 4% of a company’s annual total revenue, potentially including the revenue of its international affiliates. The solutions we develop for GDPR-compliance may not be adequate in the views of regulatory authorities or ICANN, which may cause the loss of WHOIS privacy revenue or increase our costs of developing compliant solutions or subject us to litigation, liability, civil penalties, or loss of market share. As the privacy laws and regulations around the world continue to evolve, these changes could adversely affect our business operations in similar ways.

 

 

The law relating to the use of and ownership of intellectual property on the internet as well as the liability of internet services companies for data and content carried on or disseminated through their network's websites is currently unsettled and could expose us to unforeseen liabilities. This could negatively affect the public’s perception of our corporate image.

 

As a registrar of domain names services, we may be subject to potential liability for illegal activities by our resellers’ customers on their websites. We provide an automated service that enables users to register domain names. We do not monitor or review, nor does our accreditation agreement with ICANN require that we monitor or review, the appropriateness of the domain names we register for our customers or the content of their websites, and we have no control over the activities in which these customers engage. While we have policies in place to terminate domain names or to take other action if presented with evidence of illegal conduct, customers could nonetheless engage in prohibited activities without our knowledge.

 

Several bodies of law may be deemed to apply to us with respect to various customer activities. Because we operate in a relatively new and rapidly evolving industry and since our industry is characterized by rapid changes in technology and in new and growing illegal activity, these bodies of laws are constantly evolving. Some of the laws that apply to us with respect to certain customer activities include the following:

 

 

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The Communications Decency Act of 1996 (the “CDA”), generally protects online service providers, such as Tucows, from liability for certain activities of their customers, such as posting of defamatory or obscene content, unless the online service provider is participating in the unlawful conduct. Notwithstanding the general protections from liability under the CDA, we may nonetheless be forced to defend ourselves from claims of liability covered by the CDA, resulting in an increased cost of doing business.

 

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The Digital Millennium Copyright Act of 1998 (the “DMCA”), provides recourse for owners of copyrighted material who believe that their rights under U.S. copyright law have been infringed on the Internet. Under the DMCA, we generally are not liable for infringing content posted by third parties. However, if we receive a proper notice from a copyright owner alleging infringement of its protected works by web pages for which we provide hosting services, and we fail to expeditiously remove or disable access to the allegedly infringing material, fail to post and enforce a digital rights management policy or a policy to terminate accounts of repeat infringers, or otherwise fail to meet the requirements of the safe harbor under the DMCA, the owner may seek to impose liability on us.

 

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Although established statutory law and case law in these areas to date generally have shielded us from liability for customer activities, court rulings in pending or future litigation may serve to narrow the scope of protection afforded us under these laws. In addition, laws governing these activities are unsettled in many international jurisdictions, or may prove difficult or impossible for us to comply with in some international jurisdictions. Also, notwithstanding the exculpatory language of these bodies of law, we may be embroiled in complaints and lawsuits which, even if ultimately resolved in our favor, add cost to our doing business and may divert management’s time and attention. Finally, other existing bodies of law, including the criminal laws of various states, may be deemed to apply or new statutes or regulations may be adopted in the future. Our insurance may not be adequate to compensate or may not cover us at all in the event we incur liability for damages due to data and content carried on or disseminated through our network. Any costs not covered by insurance that are incurred as a result of this liability or alleged liability, including any damages awarded and costs of litigation, could harm our business and prospects.

 

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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.

 

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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:

 

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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

 

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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:

 

 

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pricing controls;

 

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the creation of additional generic top-level domains and country code domains;

 

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consumer protection;

 

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cross-border domain registrations;

 

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trademark, copyright and patent infringement;

 

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domain dispute resolution; and

 

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the nature or content of domains and domain registration.

 

An example of legislation passed in response to novel intellectual property concerns created by the Internet is the ACPA enacted by the United States government in November 1999. This law seeks to curtail a practice commonly known in the domain registration industry as cybersquatting. A cyber squatter is generally defined in the ACPA as one who registers a domain that is identical or similar to another party’s trademark, or the name of another living person, with the bad faith intent to profit from use of the domain. The ACPA states that registrars may not be held liable for registration or maintenance of a domain for another 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.

 

 

Our service offerings both in Network Access Services and Domain Services may become subject to new government regulations that may be costly to adopt, and may adversely affect our business prospects, future growth or results of operations.

 

Network Access Services

 

The FCC and other federal, state and local, as well as international, governmental authorities have jurisdiction over our business and could adopt regulations or take other actions that would adversely affect our business prospects or results of operations.

 

The licensing, construction, operation, sale and interconnection arrangements of wireless telecommunications systems are regulated by the FCC and, depending on the jurisdiction, international, state and local regulatory agencies. In particular, the FCC imposes significant regulation on licensees of wireless spectrum with respect to how radio spectrum is used by licensees, the nature of the services that licensees may offer and how the services may be offered, and resolution of issues of interference between spectrum bands.

 

The FCC grants wireless licenses for terms of generally ten years that are subject to renewal and revocation. There is no guarantee that our Network Operators’ licenses will be renewed. Failure to comply with FCC requirements applicable to a given license could result in revocation of that license and, depending on the nature of the non-compliance, other licenses.

 

Various states are considering regulations over terms and conditions of service, including certain billing practices, privacy, and consumer-related issues that may not be pre-empted by federal law. If imposed, these regulations could make it more difficult and expensive to implement national sales and marketing programs and could increase the costs of our wireless operations.

 

Domain Services

 

To date, government regulations have not materially restricted use of the Internet in most parts of the world. The legal and regulatory environment pertaining to the Internet, however, is uncertain and may change. New laws may be passed, existing but previously inapplicable laws may be deemed to apply to the Internet, or existing legal safe harbors may be narrowed, both by U.S. federal or state governments and by governments of foreign jurisdictions. These changes could affect:

 

 

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the liability of online resellers for actions by customers, including fraud, illegal content, spam, phishing, libel and defamation, infringement of third-party intellectual property and other abusive conduct;

 

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other claims based on the nature and content of Internet materials, such as pornography;

 

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user privacy and security issues;

 

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consumer protection;

 

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sales and other taxes, including the value-added tax of the European Union member states;

 

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characteristics and quality of services; and

 

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cross-border commerce.

 

The adoption of any new laws or regulations, or the application or interpretation of existing laws or regulations to the Internet, could hinder growth in use of the Internet and online services generally, and decrease acceptance of the Internet and online services as a means of communications, commerce and advertising. In addition, such changes in laws could increase our costs of doing business, subject our business to increased liability or prevent us from delivering our services over the Internet, thereby harming our business and results of operations.

 

Our Network Access Services businesses rely on Network Operators. Failure by the Network Operators to obtain the proper licenses and governmental approvals from regulatory authorities would cause us to be unable to successfully operate those businesses.

 

The FCC licenses currently held by our Network Operators and their third-party affiliates to provide wireless services are subject to renewal and revocation. There is no guarantee that their wireless licenses will be renewed. The FCC requires all wireless licensee to meet certain requirements, including so-called “build-out” requirements, to retain their licenses. Their failure to comply with certain FCC requirements in a given license area could result in the revocation of their wireless license for that geographic area. As Ting expands its Internet business, enters new markets, and considers offering regulated telecommunications services, it takes on additional local, state and federal regulatory and compliance obligations that require additional diligence and resources.

 

 

We may experience unforeseen or potentially uninsured liabilities or losses in connection with our Domain Services business, including the risk that our standard agreements with customers may not be enforceable. This could negatively impact our financial results.

 

We operate on a global basis and all of our customers must execute our standard agreements that govern the terms of the services we provide to our customers. These agreements contain provisions intended to limit our potential liability arising from the provision of services to our customers. As most of our customers purchase our services online, execution of our agreements by resellers occurs electronically or, in the case of our terms of use, is deemed to occur because of a user’s continued use of the website/internet service following notice of those terms. We believe that our reliance on these agreements is consistent with the practices in our industry, but if a domestic, foreign or international court were to find that either one of these methods of execution is invalid or that key provisions of our services agreements are unenforceable, we could be subject to liability that has a material adverse effect on our business or we could be required to change our business practices in a way that increases our cost of doing business.

 

Although we maintain general liability insurance, claims could exceed the coverage obtained or might not be covered by our insurance. While we typically obtain representations from our technology and content providers and contractual partners concerning the ownership of licensed technology and informational content and obtain indemnification to cover any breach of these representations, we still may not receive accurate representations or adequate compensation for any breach of these representations. We may have to pay a substantial amount of money for claims that are not covered by insurance or indemnification or for claims where the existing scope or adequacy of insurance or indemnification is disputed or insufficient.

 

RISKS RELATES TO OWNERSHIP OF OUR STOCK

 

Our share price may be volatile, which may make it difficult for shareholders to sell their shares of common stock when they want to, at an attractive price.

 

Our share price has varied recently and the price of our common stock may decrease in the future, regardless of our operating performance. Investors may be unable to resell their common stock following periods of volatility because of the market’s adverse reaction to this volatility.

 

The following factors may contribute to this volatility: actual or anticipated variations in our quarterly operating results; interruptions in our services; seasonality of the markets and businesses of our customers; announcements of new technologies or new services by our company or our competitors; our ability to accurately select appropriate business models and strategies; the operating and stock price performance of other companies that investors may view as comparable to us; analyst or short-seller reports; news relating to our industry as a whole; and news relating to trends in our markets.

 

The stock market in general and the market for Internet-related companies in particular, including our company, has experienced volatility.

 

We cannot guarantee that our recently announced stock buyback program will be fully consummated or that such program will enhance the long-term value of our share price.

 

In February 2020, the Company’s Board approved a stock buyback program to repurchase up to $40 million of the Company’s common stock, which can be discontinued at any time. Although, the Company has repurchased shares under previous programs, including 101,816 shares in Fiscal 2019, there is no obligation for the Company to continue to repurchase or to repurchase any specific dollar amount of stock. The stock buyback program could affect the price of our stock and increase volatility in the market. We cannot guarantee that this program will be fully consummated or that such program will enhance the long-term value of our share price.

 

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

 

ITEM 2.  PROPERTIES

 

 

Our principal administrative, engineering, marketing and sales office is located in Toronto, Ontario, consists of approximately 28,000 square feet. We lease satellite offices in various cities across the United States as well as internationally in Germany and Denmark.

 

The Company purchased real property in Centennial, CO and Fuquay-Varina, NC where we are currently constructing a mix of offices and data centers both to support our local logistical operations and our North American colocation needs.

 

Currently, substantially all of our computer and communications hardware is located at our facilities or at server hosting facilities in Toronto, Ontario, San Jose, CA and Ashburn, VA. 

 

ITEM 3.  LEGAL PROCEEDINGS

 

We are involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, individually or in aggregate in our opinion, will materially harm our business. We cannot assure you that we will prevail in any litigation. Regardless of the outcome, any litigation may require us to incur significant litigation expense and may result in significant diversion of management attention.

 

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

 

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Price Range of Common stock

 

Our common stock is traded on the NASDAQ Capital Market under the symbol “TCX”. Our common stock is also traded on the Toronto Stock Exchange under the symbol “TC”.

 

As of March 2, 2020, Tucows had 80 shareholders of record.

 

We have not declared or paid any cash dividends on our common stock during the fiscal years ended December 31, 2019 and December 31, 2018, and we do not intend to do so in the immediate future, but we may decide to do so in the future depending on ongoing market conditions. Our ability to pay any cash dividends on our common stock, should our Board decide to do so, is also dependent on our earnings and cash requirements and may, from time to time, be governed by the terms of our credit agreements.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

2020 Stock Buyback Program:

 

On February 12, 2020, the Company announced that its Board had approved a stock buyback program to repurchase up to $40 million of its common stock in the open market. The $40 million buyback program commenced on February 13, 2020 and is expected to terminate on February 12, 2021.

 

2019 Stock Buyback Program:

 

On February 13, 2019, the Company announced that its Board had approved a stock buyback program to repurchase up to $40 million of its common stock in the open market. The $40 million buyback program commenced on February 14, 2019 and terminated on February 13, 2020. The Company repurchased 101,816 shares under this program for total consideration of $5.0 million.

 

2018 Stock Buyback Program:

 

On February 14, 2018, the Company announced that its Board had approved a stock buyback program to repurchase up to $40 million of its common stock in the open market. The $40 million buyback program commenced on February 14, 2018 and terminated on February 13, 2019. No repurchases were made under this program.

 

Net Exercise of Stock Options:

 

Our current equity-based compensation plans include provisions that allow for the “net exercise” of stock options by all plan participants. In a net exercise, any required payroll taxes, federal withholding taxes and exercise price of the shares due from the option holder can be paid for by having the option holder tender back to the Company a number of shares at fair value equal to the amounts due.  These transactions are accounted for by the Company as a purchase and retirement of shares and are included in the table below as common stock received in connection with share-based compensation.

 

 

   

Year Ended December 31,

 
   

2019

   

2018

   

2017

 

Common stock repurchased on the open market or through tender offer

                       

Number of shares

    101,816       -       -  

Aggregate market value of shares (in thousands)

  $ 4,986     $ -     $ -  

Average price per share

  $ 48.97     $ -     $ -  
                         

Common stock received in connection with share-based compensation

                       

Number of shares

    21,332       19,777       50,454  

Aggregate market value of shares (in thousands)

  $ 1,510     $ 1,138     $ 2,602  

Average price per share

  $ 70.77     $ 57.56     $ 51.58  

 

 

STOCK PERFORMANCE GRAPH

 

The following graph and table compares the Company's stock performance to three stock indices over a five-year period assuming a $100 investment was made on the last day of fiscal year 2014.

 

 

 

ITEM 6.     SELECTED FINANCIAL DATA

 

Beginning with the Company’s Quarterly Report on Form 10-Q ended June 30, 2018 filed with the SEC August 8, 2018, all dollar values of current and comparative figures in the financial statements and accompanying tables have been rounded to the nearest thousand ($000), except when otherwise indicated.

 

The following table summarizes certain selected financial data. The selected financial data is derived from, and is qualified by reference to, our audited consolidated financial statements for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 and should be read in conjunction with those statements (amounts expressed in thousands, except per share amounts).

 

Please note that the Company has adopted ASC 2016-02, Leases (Topic 842) on January 1, 2019 using the modified retrospective method and (“ASC”) Topic 606, Revenue from Contracts with Customers (Topic 606) on January 1, 2018 using the modified retrospective method. The comparative periods were not restated. See “Note 2 (v) – Significant Accounting Policies” of the Notes to the Consolidated Financial Statements for the years ended December 31, 2019, December 31, 2018 and December 31, 2017 included in Part II, Item 8 of this Annual Report.

 

   

For the year ended December 31,

 
   

2019

   

2018

   

2017

   

2016

   

2015

 

Statement of Operations Data

                                       
                                         

Revenue

  $ 337,145     $ 346,013     $ 329,421     $ 189,819     $ 171,687  

Total cost of revenues

    236,368       249,243       244,900       126,765       119,629  

Sales and marketing

    34,270       33,063       29,423       20,755       17,394  

Technical operations and development

    9,717       8,748       7,258       4,495       4,503  

General and administrative

    17,880       17,710       13,594       11,405       10,662  

Depreciation, amortization and impairment of indefinite life intangible assets

    9,695       7,671       7,262       1,451       690  

Loss on disposition of property and equipment

    73       -       -       -       -  

Loss (gain) on currency forward contracts

    (198 )     254       (98 )     (99 )     793  

Total other income (expense), net

    (4,769 )     (3,169 )     (3,007 )     66       (73 )

Income before provision for income taxes

    24,571       26,155       24,075       25,113       17,943  

Provision for (recovery of) income taxes

    9,173       9,020       1,748       9,046       6,569  

Net income

  $ 15,398     $ 17,135     $ 22,327     $ 16,067     $ 11,374  
                                         

Net income per share attributable to common stockholders

                                       

Basic

  $ 1.45     $ 1.62     $ 2.12     $ 1.53     $ 1.04  

Diluted

  $ 1.43     $ 1.59     $ 2.07     $ 1.50     $ 1.00  
                                         

Weighted average shares used in computing net income per share

                                       

Basic

    10,624       10,605       10,537       10,525       10,969  

Diluted

    10,773       10,794       10,794       10,714       11,360  

 

   

At December 31,

 
   

2019

   

2018

   

2017

   

2016

   

2015

 

Balance Sheet Data

                                       

Cash and cash equivalents

  $ 20,393     $ 12,637     $ 18,049     $ 15,105     $ 7,723  

Prepaid domain name registry and ancillary services fees

    109,167       106,527       127,003       60,390       55,749  

Total assets

    425,918       339,575       350,650       154,413       129,130  

Deferred revenue

    149,303       143,694       160,582       77,849       71,594  

Debt

    113,503       64,601       76,924       10,249       3,500  

Total liabilities

    331,724       259,799       290,439       116,596       102,801  

Total stockholders' equity

  $ 94,194     $ 79,776     $ 60,211     $ 37,817     $ 26,329  

 

 

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

The following discussion and analysis should be read together with the audited consolidated financial statements of Tucows Inc. (the “Company”, “we”, “us”, “Tucows” or “our”) as at December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017 and accompanying notes set forth elsewhere in this report. All financial information is presented in U.S. dollars.

 

Some of the statements set forth in this section are forward-looking statements relating to our future results of operations. Accordingly, reference is made to “Part I. Item 1A. Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements,” which describe important factors that could cause actual results to differ from expectations and non-historical information contained herein.

 

OVERVIEW

 

Our mission is to provide simple useful services that help people unlock the power of the Internet.

 

We accomplish this by reducing the complexity of our customers’ experience as they access the Internet (at home or on the go) and while using Internet services such as domain name registration, email, and other Internet services. We are organized, managed and report our financial results as two segments, Network Access Services and Domain Services, which are differentiated primarily by their services, the markets they serve and the regulatory environments in which they operate.

 

Our principal place of business is located in Canada. We manage our business as segments, Network Access Services, which primarily derives revenue from the sale of retail mobile phones, telephony services and high-speed Internet access to individuals and small businesses, and Domain Services, which derives revenue from three distinct service offerings – wholesale, retail and portfolio. To assist us in forecasting growth and to help us monitor the effectiveness of our operational strategies, our management regularly reviews revenue and cost of revenues for each of our segments in order to gain more depth and understanding of the key business metrics driving our business.

 

For the years ended December 31, 2019, 2018 and 2017, we reported revenue of $337 million, $346 million and $329 million, respectively.

 

Network Access Services

 

Network Access Services derives revenue from the sale of retail mobile phones and services to individuals and small businesses through the Ting website, as well as from providing high speed Internet access, and network consulting services to customers in select cities in the United States. Ting provides its mobile and internet customers with access to our provisioning and management tools to enable them, via the ting.com website, to purchase retail mobile phones and services nationally and fixed Internet access in select cities. Revenues are generated in the United States and are provided on a monthly basis with no fixed contract term. As of December 31, 2019, Ting mobile managed mobile telephony services for approximately 160,000 subscribers and had approximately 289,000 devices under management.

 

Our primary distribution channel for Ting Internet services is through our website, ting.com. We strive to meet or exceed our Network Access Service customers’ needs by providing them with superior services, easy-to-use interfaces and proactive and attentive customer service.

 

The Company also operates other MVNO brands, Zipsim and Always Online Wireless brands (collectively referred to as “Roam Mobility brands”). Roam Mobility brands operates as a MVNO on the same nationwide Global System for Mobile communications (“GSM”) network as Ting Mobile and distributes through third-party retail stores and product branded websites. The primary focus of the Roam Mobility brands is to offer affordable roaming service to international travelers.

 

 

Domain Services

 

Domain Services include wholesale and retail domain name registration services, value added services and portfolio services derived through our OpenSRS, eNom, Ascio and Hover brands. We earn revenues primarily from the registration fees charged to resellers in connection with new, renewed and transferred domain name registrations. In addition, we earn revenues from the sale of retail domain name registration and email services to individuals and small businesses; and by making our portfolio of domain names available for sale or lease. Domain Services revenues are attributed to the country in which the contract originates, primarily Canada and the United States.

 

Our wholesale domain name registration service, primarily branded as OpenSRS, eNom and Ascio, derives revenue from its Domain Service and from providing Value-added services. The OpenSRS, eNom and Ascio Domain Services manage 23.8 million domain names under the Tucows, eNom and Ascio ICANN registrar accreditations and for other registrars under their own accreditations, which has increased by 0.5 million domain names since December 31, 2018. The increase from prior year is primarily due to the acquisition of 1.9 million names acquired in the Ascio acquisition on March 18, 2019. The increase was offset by the decrease of 0.9 million domain names is related to the bulk transfer domain names in the third quarter of 2019, which were registered to a single, low margin hosted customer. A further decrease of 0.5 million domain names was related to the erosion of registrations related to non-core customers.

 

Our value-added services include hosted email which provides email delivery and webmail access to millions of mailboxes, Internet security services, Internet hosting, WHOIS privacy, publishing tools and other value-added services. All of these services are made available to end-users through a network of 36,000 web hosts, ISPs and other resellers around the world. In addition, we also derive revenue by monetizing domain names which are near the end of their lifecycle through advertising revenue or auction sale.

 

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

 

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

 

 

KEY BUSINESS METRICS and Non-GAAP Measure

 

We regularly review a number of business metrics, including the following key metrics and non-GAAP measure, to assist us in evaluating our business, measure the performance of our business model, identify trends impacting our business, determine resource allocations, formulate financial projections and make strategic business decisions. The following tables set forth the key business metrics which we believe are the primary indicators of our performance for the periods presented:

 

Adjusted EBITDA

 

Tucows reports all financial information in accordance with United States generally accepted accounting principles (“GAAP”). Along with this information, to assist financial statement users in an assessment of our historical performance, we typically disclose and discuss a non-GAAP financial measure, adjusted EBITDA, on investor conference calls and related events that exclude certain non-cash and other charges as we believe that the non-GAAP information enhances investors’ overall understanding of our financial performance. Please see discussion of adjusted EBITDA in the Results of Operations section below.

 

Ting Mobile

 

For the year ended December 31,(1)

 
   

2019

   

2018

   

2017

 
           

(in '000's)

         

Ting mobile accounts under management

    160       163       166  

Ting mobile subscribers under management

    289       296       282  

 

 

(1)

For a discussion of these period-to-period changes in subscribers and devices under management and how they impacted our financial results, see the Net Revenues discussion below.

 

Ting Internet

 

For the year ended December 31,

 
   

2019

   

2018

   

2017

 
           

(in '000's)

         

Ting Internet accounts under management

    10       7       N/A  

Ting Internet serviceable addresses (1)

    36       28       N/A  

 

 

(1)

Defined as premises to which Ting has the capability to provide a customer connection in a service area.

 

 

Domain Services

 

For the year ended December 31,(1)

 
   

2019

   

2018

   

2017

 
           

(in 000's)

         

Total new, renewed and transferred-in domain name registrations provisioned(2)

    17,285       17,358       19,361  

Domains under management

                       

Registered using Registrar Accreditation belonging to the Tucows Group

    19,233       18,537       22,300  

Registered using Registrar Accreditation belonging to Resellers

    4,540       4,772       5,400  

Total domain names under management(2)

    23,773       23,309       27,700  

 


 

 

(1)

For a discussion of these period-to-period changes in the domains provisioned and domains under management and how they impacted our financial results see the Net Revenues discussion below.

 

(2)

Throughout 2018, the Company completed bulk transfers of 2.89 million names, for domain names under management related to Namecheap.

 

 

OPPORTUNITIES, CHALLENGES AND RISKS

 

As a MVNO our Ting Mobile service is reliant on our Mobile Network Operators (“MNOs”) providing competitive networks. Our MNOs each continue to invest in network expansion and modernization to improve their competitive positions. Deployment of new and sophisticated technology on a very large-scale entails risks. Should they fail to implement, maintain and expand their network capacity and coverage, adapt to future changes in technologies and continued access to and deployment of adequate spectrum successfully, our ability to provide wireless services to our subscribers, to retain and attract subscribers and to maintain and grow our subscriber revenues could be adversely affected, which would negatively impact our operating margins.

 

Ting Mobile enjoyed rapid growth in its first four years of operation with the growth slowing for the past two years. During the rapid growth phase, we were able to continue to grow gross customer additions and maintain a consistent churn rate, which allowed us to maintain net new customer additions despite the impact of churn on a fast-growing customer base.  We have also been able to supplement organic growth with bulk migrations of customer bases of other MVNOs.   We expect price competition to grow more intense in the industry which could result in increased customer churn or reductions of customer acquisition rates either of which could result in a further slowing growth rate or in certain cases, our ability to maintain growth.

 

On June 6, 2018, our current MNOs, T-Mobile and Sprint, submitted a formal merger application to the Federal Communications Commission (“FCC”), which has since been approved. As of February 11, 2020, the merger between T-Mobile and Sprint is expected to be finalized as early as April 1, 2020, subject also to resolution of a lawsuit filed by certain state attorneys general. If T-Mobile and Sprint successfully consummate the merger, the consolidation of our MNOs could hinder our ability in the future to negotiate favourable rates and access to mobile services. On July 9, 2019, the Company announced that it will offer service with a new MNO partner, Verizon. 

 

As an ISP, we have invested and expect to continue to invest in new fiber to the home (“FTTH”) deployments in select markets in the United States. The investments are a reflection of our ongoing efforts to build FTTH network via public-private partnerships in communities we identify as having strong, unmet demand for FTTH services.   Given the significant upfront build and operational investments for these FTTH deployments, there is risk that future technological and regulatory changes as well as competitive responses from incumbent local providers, may result in us not fully recovering these investments.

  

The communications industry continues to compete on the basis of network reach and performance, types of services and devices offered, and price.

 

The increased competition in the market for Internet services in recent years, which we expect will continue to intensify in the short and long term, poses a material risk for us. As new registrars are introduced, existing competitors expand service offerings and competitors offer price discounts to gain market share, we face pricing pressure, which can adversely impact our revenues and profitability. To address these risks, we have focused on leveraging the scalability of our infrastructure and our ability to provide proactive and attentive customer service to aggressively compete to attract new customers and to maintain existing customers.

  

Substantially all of our Domain Services revenue is derived from domain name registrations and related value-added services from wholesale and retail customers using our provisioning and management platforms. The market for wholesale registrar services is both price sensitive and competitive and is evolving with the introduction of new gTLDs, particularly for large volume customers, such as large web hosting companies and owners of large portfolios of domain names. We have a relatively limited ability to increase the pricing of domain name registrations without negatively impacting our ability to maintain or grow our customer base. Growth in our Domain Services revenue is dependent upon our ability to continue to attract and retain customers by maintaining consistent domain name registration and value-added service renewal rates and to grow our customer relationships through refining, evolving and improving our provisioning platforms and customer service for both resellers and end-users. In addition, we also generate revenue through pay-per-click advertising and the sale of names from our portfolio of domain names and through the OpenSRS Domain Expiry Stream. The revenue associated with names sales and advertising has recently experienced flat to declining trends due to the uncertainty around the implementation of ICANN’s New gTLD Program, lower traffic and advertising yields in the marketplace, which we expect to continue.

  

From time-to-time certain of our vendors provide us with market development funds to expand or maintain the market position for their services. Any decision by these vendors to cancel or amend these programs for any reason may result in payments in future periods not being commensurate with what we have achieved during past periods.

  

Sales of domain names from our domain portfolio have a negative impact on our advertising revenue as these names are no longer available for advertising purposes. In addition, the timing of larger domain names portfolio sales is unpredictable and may lead to significant quarterly and annual fluctuations in our Portfolio revenue. In the fourth quarter of 2019, the Company disposed of its remaining domain portfolio, excluding surname domains used in the Realnames email service. The Company expects portfolio revenue to materially decline in Fiscal 2020 and thereafter.

  

Our revenue is primarily realized in U.S. dollars and a major portion of our operating expenses are paid in Canadian dollars. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar may have a material effect on our business, financial condition and results from operations. In particular, we may be adversely affected by a significant weakening of the U.S. dollar against the Canadian dollar on a quarterly and an annual basis. Our policy with respect to foreign currency exposure is to manage our financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some or all of the impact of foreign currency exchange movements by entering into foreign exchange forward contracts to mitigate the exchange risk on a portion of our Canadian dollar exposure. We may not always enter into such forward contracts and such contracts may not always be available and economical for us. Additionally, the forward rates established by the contracts may be less advantageous than the market rate upon settlement.

 

 

Net Revenues

 

Network Access Services

 

The Company generates Network Access Services revenues primarily through the provisioning of mobile services. Other sources of revenue include the provisioning of fixed high-speed Internet access as well as billing solutions to ISPs.

 

Mobile

 

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

 

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

 

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

 

Other services

 

Other services derive revenues from providing Ting Internet to individuals and small businesses in select cities. In addition, we provide billing, provisioning and customer care software solutions to Internet Service Providers (“ISPs”) through our Platypus billing software. Ting Internet access contracts provide customers Internet access at their home or business through the installation and use of our fiber optic network. Ting Internet contracts are generally prepaid and grant customers with unlimited bandwidth based on a fixed price per month basis. Since consideration is collected before the service period, revenue is initially deferred and recognized as the Company performs its obligation to provide Internet access.

 

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

 

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

 

  

Domain Services

 

Wholesale

 

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

 

Historically, our wholesale domain service has constituted the largest portion of our business and encompasses all of our services as an accredited registrar related to the registration, renewal, transfer and management of domain names. In addition, this service fuels other revenue categories as it often is the initial service for which a reseller will engage us, enabling us to follow on with other services and allowing us to add to our portfolio by purchasing names registered through us upon their expiration. Domain services will continue to be the largest portion of our business and will further fuel our ability to sell add-on services.

 

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

 

Wholesale – Value-Added Services

 

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

 

We also derive revenue from other value-added services, which primarily consists of Internet hosting services on the OpenSRS and eNom domain expiry streams.

 

Retail

 

We derive revenues from Hover and eNom’s retail properties through the sale of retail domain name registration and email services to individuals and small businesses.

 

Portfolio

 

The Company sells the rights to the its portfolio domains or names acquired through the Company’s domain expiry stream. Revenue generated from sale of domain name contracts, containing a distinct performance obligation to transfer the domain name rights under the Company’s control, is generally recognized once the rights have been transferred and payment has been received in full. Domain portfolio names are sold through our premium domain name service, auctions or in negotiated sales. The size of our domain name portfolio varies over time, as we acquire and sell domains on a regular basis to maximize the overall value and revenue generation potential of our portfolio. In evaluating names for sale, we consider the potential foregone revenue from pay-per-click advertising, as well as other factors. The name will be offered for sale if, based on our evaluation, the name is deemed non-essential to our business and management believes that deriving proceeds from the sale is strategically more beneficial to the Company. In the fourth quarter of 2019, the Company disposed of its entire domain portfolio, excluding surname domains used in the Realnames email service. The Company expects portfolio revenue to materially decline in Fiscal 2020 and thereafter.

 

Critical Accounting Policies

 

The following is a discussion of our critical accounting policies and methods. Critical accounting policies are defined as those that are both important to the portrayal of our financial condition and results of operations and are reflective of significant judgments and uncertainties made by management that may result in materially different results under different assumptions and conditions. “Note 2 – Significant Accounting Policies” of the Notes to the Consolidated Financial Statements for the year ended December 31, 2019 (“Fiscal 2019”) included in Part II, Item 8 of this Annual Report, includes further information on the significant accounting policies and methods used in the preparation of our consolidated financial statements.

 

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate the application of these estimates, including those related to the recoverability of useful lives and valuation of intangible assets, valuation of goodwill, fair value measurement of assets and liabilities, product development costs, revenue recognition and deferred revenue and accounting for income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts could differ significantly from these estimates.

 

 

Revenue Recognition Policy

 

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

 

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

 

Nature of goods and services

 

The following is a description of principal activities – separated by reportable segments – from which the Company generates its revenue. For more detailed information about reportable segments. See “Note 19 – Segment Reporting” of the Notes to the Consolidated Financial Statements included in this report for more information.

 

 

(a)

Network Access Services 

 

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

 

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

 

Ting Internet contracts provide customers Internet access at their home or business through the installation and use of our fiber optic network. Ting Internet contracts are generally prepaid and grant customers with unlimited bandwidth based on a fixed price-per-month basis. Because consideration is collected before the service period, revenue is initially deferred and recognized as the Company performs its obligation to provide Internet access.

 

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

 

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

 

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

 

 

(b)

Domain Services

   

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

 

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

 

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

 

 

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

 

 

Valuation of Goodwill, Intangible Assets and Long-Lived Assets

 

The excess of the purchase price over the fair values of the identifiable assets and liabilities from our acquisitions is recorded as goodwill. At December 31, 2019, we had $109.8 million in goodwill related to our acquisitions and $57.7 million in intangible assets comprised of indefinite life intangibles of $12.3 million and finite life intangible assets of $45.4 million. At December 31, 2018, we had $90.1 million in goodwill related to our acquisitions and $49.4 million in intangible assets comprised of indefinite life intangibles of $12.4 million and finite life intangible assets of $37.0 million. We report our financial results as two operating segments, Domain Services, being wholesale and retail domain name registration services, value added services and portfolio, and Network Access which derives revenue from the sale of retail mobile phones, telephony services, fixed high speed internet access, Internet hosting and network consulting services. Ninety-eight percent of goodwill relates to our Domain Services operating segment and 2% of goodwill relates to our Network Access segment. Of our goodwill balance, $81.0 million is not deductible for tax purposes. Ninety percent of intangible assets relate to our Domain Services operating segment and 10% of intangible assets relate to our Network Access operating segment.

 

We account for goodwill and indefinite life intangible assets in accordance with the Financial Accounting Standards Board’s (“FASB’s”) authoritative guidance, which requires that goodwill and indefinite life intangible assets are not amortized, but are subject to an annual impairment test. We complete our impairment test on an annual basis, during the fourth quarter of our fiscal year, or more frequently, if changes in facts and circumstances indicate that impairment indicators are present.

 

Our indefinite life intangible assets consist of surname domain names and direct navigation domain names. In order to maintain our rights to these domain names, we pay annual renewal fees to the applicable domain name registries. Over the course of time, we sometimes decide not to renew certain under-performing domain names and incur an impairment charge associated with such non-renewal. We recorded an impairment charge of nil for both 2019 and 2018 respectively and $0.1 million in 2017.

 

With regard to long-lived assets comprised of property and equipment and finite life intangible assets, we continually evaluate whether events or circumstances have occurred that indicate the remaining estimated useful lives of our definite-life intangible assets may warrant revision or whether the carrying amount of such assets may not be recoverable and exceed their fair value. We use an estimate of the related undiscounted cash flows over the remaining life of the asset in measuring whether the asset is recoverable. There was no impairment recorded on definite-life intangible assets and property and equipment during 2019, 2018 or 2017.

 

We performed a qualitative assessment to determine whether there were events or circumstances which would lead to a determination, whether it is more likely than not, that goodwill and indefinite life intangible assets have been impaired. In performing the qualitative testing, we made an evaluation of the impact of various factors to the expected future cash flows attributable to our operating segments and to the assumed discount rate which would be used to present value those cash flows. Consideration was given to factors such as macro-economic, industry and market conditions including the capital markets and the competitive environment amongst others. We concluded that there were no indications of impairment under the qualitative approach. The analysis was consistent with the approach we utilized in our analysis performed in prior years.

 

Any changes to our key assumptions about our businesses and our prospects, or changes in market conditions, could cause the fair value of our operating segments to fall below its carrying value, resulting in a potential impairment charge. In addition, changes in our organizational structure or how our management allocates resources and assesses performance, could result in a change in our operating segments, requiring a reallocation and updated impairment analysis of goodwill and indefinite life intangible assets. A goodwill or intangible asset impairment charge could have a material effect on our consolidated financial statements because of the significance of goodwill and intangible assets to our consolidated balance sheet. There was no further impairment of goodwill or intangible assets as a result of the annual impairment tests completed during the fourth quarters of 2019, 2018 or 2017.

 

 

Accounting for Income Taxes

 

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We apply a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if on the weight of available evidence, it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit that is more than 50% likely to be realized upon settlement.

 

Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate based on new information that may become available. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.

 

As we account for income taxes under the asset and liability method, we recognize deferred tax assets or liabilities for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities. We record a valuation allowance to reduce the net deferred tax assets when it is more likely than not that the benefit from the deferred tax assets will not be realized. In assessing the need for a valuation allowance, historical and future levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies are considered. In the event that it is determined that the deferred tax assets to be realized in the future would be in excess of the net recorded amount, an adjustment to the deferred tax asset valuation allowance would be recorded. This adjustment would increase income in the period that such determination was made. Likewise, should it be determined that all or part of a recorded net deferred tax asset would not be realized in the future, an adjustment to increase the deferred tax asset valuation allowance would be charged to income in the period that such determination would be made. At December 31, 2019, the valuation allowance of $9.4 million was related to foreign tax credits, R&D tax credits and net operating losses that we are not expected to realize.

 

On a periodic basis, we evaluate the probability that our deferred tax asset balance will be recovered to assess its realizability. To the extent we believe it is more likely than not that some portion of our deferred tax assets will not be realized, we will increase the valuation allowance against the deferred tax assets. Realization of our deferred tax assets is dependent primarily upon future taxable income. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require possible material adjustments to these deferred tax assets, impacting net income or net loss in the period when such determinations are made.

 

In connection with the eNom acquisition in 2017, we acquired deferred tax liabilities primarily composed of prepaid registry fees. As a result, we aligned our tax methodology pertaining to the deductibility of prepaid registry fees for our legacy domain services. In the first quarter of 2019, we determined that we were in technical violation with respect to the administrative application of the accounting method change relating to the deductibility of prepaid registry fees. In the fourth quarter of 2019, the Internal Revenue Service granted the Company relief with respect to the technical violation to the administrative application of the accounting method change. Based on the Company’s filing position on the accounting method change itself, relating to the deductibility of prepaid registry fees, we believe that on a more likely than not basis that our tax position will be sustained. If the position is not sustained, then the accounting method change would be deferred into the following taxation period and we may be subject to incremental taxes as well as interest and penalties.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. For the year ended December 31, 2017, we recorded in our provision for income taxes a net $5.8 million reduction to income tax expense related to the implementation impact of the Act. The net positive impact amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $10.0 million. This positive impact was offset by us recording a valuation allowance of $1.3 million related to prior year foreign tax credits as we have determined there is insufficient foreign source income projected to utilize these credits. The amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was less than $0.1 million.

 

 

Recently Issued Accounting Standards

 

See “Note 2 – Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for information regarding recently issued accounting standards.

 

 

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2019 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2018

 

 

The Company has initially applied Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842) on January 1, 2019, which was adopted using the modified retrospective basisAccordingly, comparative figures have not been restated.

 

NET REVENUES

 

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

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2019

   

2018

 
                 

Network Access Services:

               

Mobile Services

  $ 84,657     $ 89,340  

Other Services

    11,006       7,984  

Total Network Access Services

    95,663       97,324  
                 

Domain Services:

               

Wholesale

               

Domain Services

    182,957       189,434  

Value Added Services

    18,922       17,756  

Total Wholesale

    201,879       207,190  
                 

Retail

    34,786       34,524  

Portfolio

    4,817       6,975  

Total Domain Services

    241,482       248,689  
                 
    $ 337,145     $ 346,013  

(Decrease) increase over prior period

  $ (8,868 )        

(Decrease) increase - percentage

    (3 )%        

 

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

 

   

Year ended December 31,

 
   

2019

   

2018

 
                 

Network Access Services:

               

Mobile Services

    25 %     26 %

Other Services

    3 %     2 %

Total Network Access Services

    28 %     28 %
                 

Domain Services:

               

Wholesale

               

Domain Services

    55 %     55 %

Value Added Services

    6 %     5 %

Total Wholesale

    61 %     60 %
                 

Retail

    10 %     10 %

Portfolio

    1 %     2 %

Total Domain Services

    72 %     72 %
                 
      100 %     100 %

 

 

Total net revenues for Fiscal 2019 decreased by $8.9 million, or 3%, to $337.1 million from $346.0 million for the fiscal year ended December 31, 2019 (“Fiscal 2019”). The overall decrease in revenue was primarily driven by the $16.9 million acceleration of revenue related to the Namecheap bulk transfer of 2.89 million names throughout Fiscal 2018. Wholesale and domain revenue decreased a further $5.8 million during Fiscal 2019 related an erosion in Wholesale domain registrations by non-core customers. Ting Mobile handset and mobile usage revenue decreased $4.6 million due to a decrease in mobile subscribers, and portfolio revenue decreased $2.2 million. The decreases in revenues were offset by a $17.4 million increase related to the acquisition of Ascio, a domain registrar business acquired on March 18, 2019, an increase in Wholesale domain revenue related to price increases, as well as a $3.0 million increase in revenue related to the expanding Ting Internet footprint. Deferred revenue from domain name registrations and other Internet services at December 31, 2019 increased to $149.3 million from $143.7 million at December 31, 2018, primarily due to the acquisition of Ascio.

 

No customer accounted for more than 10% of revenue during Fiscal 2019 or Fiscal 2018, and no customers accounted for more than 10% of accounts receivable as of December 31, 2019 and 2018. Management judgment is required at the time of recording of revenue to assess whether the collection of the resulting receivables is reasonably assured. On an ongoing basis, we assess the ability of our customers to make required payments. Based on this assessment, we expect the carrying amount of our outstanding receivables, net of allowance for doubtful accounts, to be fully collected.

 

 

Network Access Services

 

Mobile and Other Services

 

Net revenues from mobile phone equipment and services for Fiscal 2019, as compared to Fiscal 2018, decreased by $4.6 million or 5% to $84.7 million. The overall decrease in revenue was primarily related to a decline in mobile service revenue, which decreased by $2.2 million compared to Fiscal 2018, to $78.2 million, as a result of a decline in mobile subscribers. Revenues from the sale of mobile hardware and related accessories decreased by $2.4 million compared to Fiscal 2018, to $6.5 million. The decrease in device revenue was primarily driven by reduced demand for higher-priced devices compared to Fiscal 2018.   

 

Other revenues from Ting Internet and billing solutions generated $11.0 million in revenue during Fiscal 2019, up $3.0 million or 38% compared to Fiscal 2018. Growth in Ting Internet revenues was as a result of the increased Ting Internet footprint in existing Ting towns throughout the United States, as well as the addition of Fuquay-Varina, NC in the first quarter of 2019.  

 

As of December 31, 2019, Ting Mobile had 160,000 mobile subscribers and 289,000 mobile devices under its management compared to 163,000 subscribers and 296,000 devices under its management as of December 31, 2018.

 

As of December 31, 2019, Ting Internet had access to 36,000 serviceable addresses and 10,000 active accounts under its management compared to having access to 28,000 serviceable addresses and 7,000 active accounts under its management as of December 31, 2018.

 

 

Domain Services

 

Wholesale

 

During Fiscal 2019, Wholesale domain services revenue decreased by $6.4 million or 3% to $183.0 million. The decrease in revenue compared to Fiscal 2018 was primarily driven by the $16.9 million acceleration of revenue related to the Namecheap bulk transfer of 2.89 million domain names during 2018. Wholesale domain revenue decreased a further $10.1 million related to the erosion of registrations by non-core customers during Fiscal 2019. The overall decrease in Wholesale domain revenues was partially offset by a $17.4 million increase in revenue related to the acquisition of Ascio and a $3.2 million increase in revenue related to price increases. 

 

The number of overall transactions from new, renewed and transferred-in domain name registrations for Fiscal 2019, as compared to Fiscal 2018, decreased by 0.1 million to 17.3 million. The decrease was primarily driven by the departure of a few large, low margin customers, including Namecheap. The overall decrease was partially offset by an increase in new, renewed and transferred-in domain name registrations related to the acquisition of Ascio. While we anticipate that the number of new, renewed and transferred-in domain name registrations will continue to incrementally increase in the long term, the volatility of these factors could affect the growth of domain names that we manage.

 

Net revenues from value-added services increased by $1.1 million to $18.9 million compared to Fiscal 2018. The increase in value-added service revenue over Fiscal 2018 was primarily driven by an increase in expiry stream revenue.

 

Retail

 

Net revenues from retail increased by $0.3 million to $34.8 million compared to Fiscal 2018. Revenue increased, because Fiscal 2018 revenue was negatively impacted by the fair value effect of deferred revenue acquired in the eNom acquisition to a greater extent than in Fiscal 2019.

 

 

   

 

Portfolio

 

Portfolio revenues decreased by $2.2 million to $4.8 million compared to Fiscal 2018. The decrease is due to a decrease in the volume of portfolio sales in Fiscal 2019. In the fourth quarter of 2019, the Company disposed of its entire domain portfolio, excluding surname domains used in the Realnames email service. The Company expects portfolio revenue to materially decline in Fiscal 2020 and thereafter.

 

 

COST OF REVENUES

 

Network Access Services

 

Mobile

 

Cost of revenues for mobile services includes the costs of provisioning mobile services, which is primarily our customers' voice, messaging, data usage provided by our Network Operators, and the costs of providing mobile phone hardware, which is the cost of mobile phone devices and SIM cards sold to our customers, order fulfillment related expenses, and inventory write-downs.

 

Other Services

 

Cost of revenues for other services primarily includes the costs for provisioning high speed Internet access, which is comprised of network access fees and software licenses and the costs of providing hardware. Hardware costs are comprised of network routers sold to our customers, order fulfillment related expenses, inventory write-downs and fees paid to third-party service providers primarily for printing services in connection with billing services to ISPs.

 

Wholesale

 

Domain Service

 

Cost of revenues for domain registrations represents the amortization of registry and accreditation fees on a basis consistent with the recognition of revenues from our customers, namely rateably over the term of provision of the service. Registry fees, the primary component of cost of revenues, are paid in full when the domain is registered, and are initially recorded as prepaid domain registry fees. This accounting treatment reasonably approximates a recognition pattern that corresponds with the provision of the services during the period. Market development funds that do not represent a payment for distinct goods or services provided by the Company, and thus do not meet the criteria for revenue recognition under ASU 2014-09, are reflected as cost of goods sold and are recognized as earned.

 

Value-Added Services

 

Costs of revenues for value-added services include licensing and royalty costs related to the provisioning of certain components of related to hosted email and fees paid to third-party hosting services. Fees payable for trust certificates are amortized on a basis consistent with the provision of service, generally one year, while email hosting fees and monthly printing fees are included in cost of revenues in the month they are incurred.

 

Retail

 

Costs of revenues for our provision and management of Internet services through our retail sites, Hover.com and the eNom branded sites, include the amortization of registry fees on a basis consistent with the recognition of revenues from our customers, namely rateably over the term of provision of the service. Registry fees, the primary component of cost of revenues, are paid in full when the domain is registered, and are recorded as prepaid domain registry fees.

 

Portfolio

 

Costs of revenues for our portfolio represent the amortization of registry fees for domains added to our portfolio over the renewal period, which is generally one year, the value attributed under intangible assets to any domain name sold and any impairment charges that may arise from our assessment of our domain name intangible assets. Payments for domain registrations are payable for the full term of service at the time of activation of service and are recorded as prepaid domain registry fees and are expensed rateably over the renewal term.

 

 

Network expenses

 

Network expenses include personnel and related expenses, depreciation and amortization, communication costs, equipment maintenance, stock-based compensation and employee and related costs directly associated with the management and maintenance of our network. Communication costs include bandwidth, co-location and provisioning costs we incur to support the supply of all our services.

 

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

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2019

   

2018

 
                 

Network Access Services:

               

Mobile Services

  $ 44,415     $ 46,061  

Other Services

    3,928       3,994  

Total Network Access Services

    48,343       50,055  
                 

Domain Services:

               

Wholesale

               

Domain Services

    148,530       160,216  

Value Added Services

    2,986       3,154  

Total Wholesale

    151,516       163,370  
                 

Retail

    17,093       17,725  

Portfolio

    627       953  

Total Domain Services

    169,236       182,048  
                 

Network Expenses:

               

Network, other costs

    9,190       9,846  

Network, depreciation and amortization costs

    9,599       7,294  
      18,789       17,140  
                 
    $ 236,368     $ 249,243  

(Decrease) increase over prior period

  $ (12,875 )        

(Decrease) increase - percentage

    -5 %        

 

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

 

   

Year ended December 31,

 
   

2019

   

2018

 
                 

Network Access Services:

               

Mobile Services

    19 %     18 %

Other Services

    2 %     2 %

Total Network Access Services

    21 %     20 %
                 

Domain Services:

               

Wholesale

               

Domain Services

    63 %     65 %

Value Added Services

    1 %     1 %

Total Wholesale

    64 %     66 %
                 

Retail

    7 %     7 %

Portfolio

    0 %     0 %

Total Domain Services

    71 %     73 %
                 

Network Expenses:

               

Network, other costs

    4 %     4 %

Network, depreciation and amortization costs

    4 %     3 %
      8 %     7 %
                 
      100 %     100 %

 

Total cost of revenues for Fiscal 2019 decreased by $12.8 million, or 5%, to $236.4 million from $249.2 million in Fiscal 2018. The decrease was primarily driven by the $16.8 million acceleration of costs related to the Namecheap bulk transfer of 2.89 million names during Fiscal 2018. Wholesale domain and value added service costs decreased a further $9.9 million related to an erosion in registrations by non-core customers. Retail domain costs decreased $0.6 million related to the churn of low margin customers and portfolio costs decreased by $0.4 million. Cost of revenue decreased a further $1.7 million due to a decline in mobile subscribers. The overall decrease in cost of revenue was offset by an increase of $14.8 million of costs related to the acquisition of Ascio, and an increase of $1.7 million in Network Expenses associated with the expanding Ting Internet footprint. Prepaid domain registration and other Internet services fees as of December 31, 2019 increased by $2.7 million, or 3%, to $109.2 million from $106.5 million at December 31, 2018 primarily from the acquisition of Ascio.

 

Network Access Services

 

Mobile and Other Services

 

Cost of revenues from mobile phone equipment and services for Fiscal 2019, as compared to Fiscal 2018, decreased by $1.7 million or 4% to $44.4 million. The decrease in mobile usage charges was primarily driven by a decrease in Roam Mobility brands related costs of $1.8 million related to lower network operator costs in the current period and restructuring charges that were incurred during Fiscal 2018. The decrease was also driven by lower mobile hardware and related accessories costs, which decreased $2.1 million as compared to Fiscal 2018. The decrease in hardware sales was primarily driven by reduced demand for higher-priced devices compared to Fiscal 2018. The decrease in mobile usage costs were offset by an increase in Ting mobile service related costs of $2.2 million related to increased minimum charges with network operators.

 

In Fiscal 2019, costs related to provisioning high speed Internet access and billing solutions decreased $0.1, or 3%, to $3.9 million as compared to $4.0 million during Fiscal 2018. The decrease in costs was primarily due to the fact that overhead resources have been increasingly focused on capital activities as compared to Fiscal 2018. 

  

Domain Services

 

Wholesale

 

Domain Service

 

Costs for wholesale domain services for Fiscal 2019 decreased by $11.7 million to $148.5 million, when compared to Fiscal 2018. The decrease was primarily driven by the accelerated recognition of $16.8 million domains revenue associated with the Namecheap bulk transfer of 2.89 million names throughout Fiscal 2018. Wholesale domain costs decreased a further $9.7 million related to an erosion in registrations by non-core customers. The decreases were partially offset by a $14.8 million increase related to the acquisition of Ascio.

 

Value-Added Services

 

Costs for wholesale value-added services for Fiscal 2019 decreased by $0.2 million to $3.0 million, when compared to Fiscal 2018. The decrease in cost of revenue is primarily related to an overall decline in certification and email sales during Fiscal 2018.

 

Retail

 

Costs for retail for Fiscal 2019 decreased by $0.6 million, to $17.1 million, when compared to Fiscal 2018. The decrease was a result of an overall declining volume of transactions related to certain retail brands.

 

Portfolio

 

Costs for portfolio decreased by $0.4 million for Fiscal 2019, to $0.6 million when compared to Fiscal 2018, the decrease in cost is primarily driven by a lower volume of portfolio sales compared to Fiscal 2018. In the fourth quarter of 2019, the Company disposed of its entire domain portfolio, excluding surname domains used in the Realnames email service. The Company expects portfolio cost of revenue to materially decline in Fiscal 2020 and thereafter inline with the expected decline in revenue.

 

Network Expenses

 

Network costs for Fiscal 2019 increased by $1.7 million to $18.8 million when compared to Fiscal 2018, which is primarily driven by the increase in network costs and depreciation of the fiber assets associated with the continuing expansion of the Ting Fiber footprint.

 

 

SALES AND MARKETING

 

Sales and marketing expenses consist primarily of personnel costs. These costs include commissions and related expenses of our sales, product management, public relations, call center, support and marketing personnel. Other sales and marketing expenses include customer acquisition costs, advertising and other promotional costs.

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2019

   

2018

 

Sales and marketing

  $ 34,270     $ 33,063  

Increase over prior period

  $ 1,207          

Increase - percentage

    4

%

       

Percentage of net revenues

    10

%

    10

%

  

Sales and marketing expenses for Fiscal 2019 increased by $1.2 million, or 4%, to $34.3 million as compared to Fiscal 2018. This increase primarily related to a $1.3 million increase in people costs acquired in the acquisition of Ascio in the first quarter of 2019. Stock-based compensation expenses also increased $0.2 million in Fiscal 2019 to attract and retain labor. The overall increase in sales and marketing expense was partially offset by a decrease in other marketing expenses of $0.3 million.

 

Excluding movements in exchange rates, we expect sales and marketing expenses for the fiscal year ending December 31, 2020 (“Fiscal 2020”) to increase in absolute dollars, as we adjust our marketing programs and sales and customer support personnel costs to support our network access services marketing and customer service needs.

 

TECHNICAL OPERATIONS AND DEVELOPMENT

 

Technical operations and development expenses consist primarily of personnel costs and related expenses required to support the development of new or enhanced service offerings and the maintenance and upgrading of existing infrastructure. This includes expenses incurred in the research, design and development of technology that we use to register domain names, network access services, email, retail, domain portfolio and other Internet services, as well as to distribute our digital content services. Editorial costs relating to the rating and review of the software content libraries are included in the costs of product development. All technical operations and development costs are expensed as incurred.

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2019

   

2018

 

Technical operations and development

  $ 9,717     $ 8,748  

Increase over prior period

  $ 969          

Increase - percentage

    11

%

       

Percentage of net revenues

    3

%

    3

%

 

 

Technical operations and development expenses for Fiscal 2019 increased by $1.0 million, or 11%, to $9.7 million. The increase in costs relates primarily to a $0.7 million increase related to the Ascio acquisition, with a further increase of $0.3 million related to increased salaries and benefits driven by an expanding workforce and wage inflation.

 

Excluding movements in exchange rates, we expect technical operations and development expenses for Fiscal 2020, in absolute dollars, to increase when compared to Fiscal 2019 to support the ongoing growth in our operations.

 

GENERAL AND ADMINISTRATIVE

 

General and administrative expenses consist primarily of compensation and related costs for managerial and administrative personnel, fees for professional services, public listing expenses, rent, foreign exchange and other general corporate expenses.

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2019

   

2018

 

General and administrative

  $ 17,880     $ 17,710  

Increase over prior period

  $ 170          

Increase - percentage

    1

%

       

Percentage of net revenues

    5

%

    5

%

 

General and administrative expenses for Fiscal 2019 increased by $0.2 million, or 1%, to $17.9 million as compared to Fiscal 2018. The overall increase in general and administrative expense was primarily driven by a $0.7 million increase related to Ascio expenses. The overall increase in general and administrative expenses was partially offset by a foreign exchange gain of $0.5 million.

 

Excluding movements in exchange rates, we expect general and administrative expenses for Fiscal 2020, in absolute dollars, to increase when compared to Fiscal 2019 largely to support the growth of our business.

 

 

DEPRECIATION OF PROPERTY AND EQUIPMENT

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2019

   

2018

 

Depreciation of property and equipment

  $ 486     $ 424  

Increase over prior period

  $ 62          

Increase - percentage

    15

%

       

Percentage of net revenues

    0

%

    0

%

  

Depreciation costs for Fiscal 2019 increased to $0.5 million when compared to $0.4 million for Fiscal 2018. The increase is driven by an increase in computer hardware assets, compared to Fiscal 2018.

 

 

LOSS ON DISPOSAL OF PROPERTY AND EQUIPMENT

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2019

   

2018

 

Loss on disposition of property and equipment

  $ 73     $ -  

Increase over prior period

  $ 73          

Increase - percentage

    N/A

 

       

Percentage of net revenues

    0

%

    -

%

 

Loss on disposal costs were $0.1 million during the Fiscal 2019 related to equipment disposal from the Kirkland office.

 

 

AMORTIZATION OF INTANGIBLE ASSETS

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2019

   

2018

 

Amortization of intangible assets

  $ 9,209     $ 7,247  

Increase over prior period

  $ 1,962          

Increase - percentage

    27

%

       

Percentage of net revenues

    3

%

    2

%

 

Amortization of intangible assets increased $2.0 million for Fiscal 2019, to $9.2 million. The increase is primarily driven by the acquisition of Ascio.

 

Network rights, brand and customer relationships acquired in connection with the acquisitions eNom in January 2017, Roam Mobility brands in September of 2017 and Ascio in March of 2019 are amortized on a straight-line basis over a range of two to seven years.

 

 

LOSS (GAIN) ON CURRENCY FORWARD CONTRACTS

 

Although our functional currency is the U.S. dollar, a major portion of our fixed expenses are incurred in Canadian dollars. Our goal with regard to foreign currency exposure is, to the extent possible, to achieve operational cost certainty, manage financial exposure to certain foreign exchange fluctuations and to neutralize some of the impact of foreign currency exchange movements. Accordingly, we enter into foreign exchange contracts to mitigate the exchange rate risk on portions of our Canadian dollar exposure.

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2019

   

2018

 

Loss (gain) on currency forward contracts

  $ (198 )   $ 254  

Decrease over prior period

  $ (452 )        

Decrease - percentage

    178

%

       

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 2019. During Fiscal 2019, the Company recorded a net gain of $0.3 million on the change in fair value of outstanding contracts as well as a $0.1 million realized loss on matured contracts. In Fiscal 2018 the Company recorded a net loss of $0.2 million for the change in fair value of outstanding contracts and a loss of less than $0.1 million of settlements of contracts not designated as hedges.

 

At December 31, 2019, our balance sheet reflects a derivative instrument asset of $0.7 million as a result of our existing foreign exchange contracts. Until their respective maturity dates, these contracts will fluctuate in value in line with movements in the Canadian dollar relative to the U.S. dollar. 

 

 

OTHER INCOME (EXPENSES)

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2019

   

2018

 

Other income (expense), net

  $ (4,769 )   $ (3,169 )

Increase over prior period

  $ (1,600 )        

Increase - percentage

    50

%

       

Percentage of net revenues

    1

%

    1

%

 

Other expenses increased by $1.6 million when compared to Fiscal 2018 primarily due to interest incurred on our credit facility with the majority of the borrowings on the credit facility to support the build-out of the Ting Fiber network. Other expense consists primarily of the interest we incur in connection with our Amended 2019 Credit Facility. The interest incurred primarily relates to our loan balances obtained to fund the acquisition of eNom, the acquisition of Ascio and funding for expenditures associated with the Company’s Fiber to the Home program. Costs in 2018 were partially offset by income of $0.5 million from the amortization of a $1.5 million Joint Marketing Agreement commencing in November 2015, which fully amortized in the fourth quarter of 2018.

 

INCOME TAXES

 

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

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2019

   

2018

 

Provision for income taxes

  $ 9,173     $ 9,020  

Increase in provision over prior period

  $ 153          

Increase - percentage

    2

%

       

Effective tax rate

    37

%

    34

%

 

We operate in various tax jurisdictions, and accordingly, our income is subject to varying rates of tax. Losses incurred in one jurisdiction cannot be used to offset income taxes payable in another jurisdiction. Our ability to use income tax loss carry forwards and future income tax deductions is dependent upon our operations in the tax jurisdictions in which such losses or deductions arise. Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement carrying values and tax base of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

Fiscal 2019 includes tax on profits of $24.6 million compared to $26.2 million for Fiscal 2018. Our Fiscal 2019 income tax expense benefited from the inclusion of a $0.6 million tax recovery related to the adoption of ASU 2016-09, which requires all excess tax benefits and tax deficiencies related to employee share-based payments to be recognized through income tax expense on a prospective basis. The Fiscal 2018 tax recovery related to excess tax benefits related to employee share-based compensation was $0.7 million.

 

On December 22, 2017, the Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, bonus depreciation that will allow for full expensing of qualified property, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings.

 

In Fiscal 2019, the Company was able to utilize the bonus depreciation with respect to its continued investment in the Ting Internet business. The impact of this, together with the reduction in tax rate to 21%, make it unlikely we will ultimately be able to fully claim the Fiscal 2019 foreign taxes paid in future years. As such, we have taken a valuation allowance for foreign tax credits and R&D tax credits not utilized for 2019 income tax purposes and net operating losses not expected to be utilized in the future, the net negative effect of which is a $5.3 million addition to income tax expense, as compared to $2.8 million additional tax expense in Fiscal 2018.

 

A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in “Note 9 – Income Taxes” of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

 

 

ADJUSTED EBITDA

 

We believe that the provision of this supplemental non-GAAP measure allows investors to evaluate the operational and financial performance of our core business using similar evaluation measures to those used by management. We use adjusted EBITDA to measure our performance and prepare our budgets. Since adjusted EBITDA is a non-GAAP financial performance measure, our calculation of adjusted EBITDA may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. Because adjusted EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a liquidity measure. See the Consolidated Statements of Cash Flows included in the attached financial statements. Non-GAAP financial measures do not reflect a comprehensive system of accounting and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies and/or analysts and may differ from period to period. We endeavor to compensate for these limitations by providing the relevant disclosure of the items excluded in the calculation of adjusted EBITDA to net income based on U.S. GAAP, which should be considered when evaluating the Company's results. Tucows strongly encourages investors to review its financial information in its entirety and not to rely on a single financial measure.

 

Our adjusted EBITDA definition excludes depreciation, amortization of intangible assets, income tax provision, interest expense (net), stock-based compensation, asset impairment, gains and losses from unrealized foreign currency transactions and infrequently occurring items. Gains and losses from unrealized foreign currency transactions removes the unrealized effect of the change in the mark-to-market values on outstanding unhedged foreign currency contracts, as well as the unrealized effect from the translation of monetary accounts denominated in non-U.S. dollars to U.S. dollars.

 

The following table reconciles net income to adjusted EBITDA:

 

Reconciliation of Net income to Adjusted EBITDA

 

Twelve months ended December 31,

 

(In Thousands of US Dollars)

 

2019

   

2018

   

2017

 

(unaudited)

 

(unaudited)

   

(unaudited)

   

(unaudited)

 
                         

Net income for the period

  $ 15,398     $ 17,135     $ 22,327  

Depreciation of property and equipment

    8,961       5,722       3,728  

Loss on disposition of property and equipment

    73       -       -  

Amortization of intangible assets

    10,333       9,243       8,400  

Impairment of intangible assets

    -       -       111  

Interest expense, net

    4,769       3,687       3,567  

Provision for income taxes

    9,173       9,020       1,748  

Stock-based compensation

    2,876       2,574       1,457  

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

    (313 )     207       17  

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

    (581 )     940       (805 )

Acquisition and other costs1

    1,216       1,526       806  
                         

Adjusted EBITDA

  $ 51,905     $ 50,054     $ 41,356  

 

1Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to our acquisition of eNom in January 2017 and Ascio in March 2019. Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.

  

Adjusted EBITDA for the year ended December 31, 2019 increased by $1.8 million, or 4% to $51.9 million when compared to the year ended December 31, 2018 The increase in adjusted EBITDA from period-to-period was primarily driven by an increase in contribution from eNom, which is the result of increased operating cost synergies realized during Fiscal 2019, as well as an increased contribution from Ting Fiber. The overall increase in EBITDA was partially offset by a lower contribution from Ting Mobile, related to a decreasing subscriber base and minimum carrier fees, as well as a decreased contribution from domain Portfolio sales. 

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

To mitigate the impact of the change in fair value of our foreign exchange contracts on our financial results, in October 2012 we begun applying hedge accounting for the majority of the contracts we need to meet our Canadian dollar requirements on a prospective basis. The impact of the fair value adjustment on outstanding hedged contracts for Fiscal 2019 was a net gain in other comprehensive income of $1.3 million compared to a net loss of $0.8 million for Fiscal 2018.

 

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

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2019

   

2018

 

Other comprehensive income (loss)

  $ 1,283     $ (810 )

Increase over prior period

  $ 2,093          

Increase - percentage

    (258

)%

       

Percentage of net revenues

    0

%

    (0

)%

 

The impact of the fair value adjustments on outstanding hedged contracts during 2019 was a gain in OCI of $1.1 million as compared to a loss of $1.0 million during 2018

 

The net amount reclassified to earnings during 2019 was a loss of $0.2 million compared to a loss of $0.2 million during 2018

 

 

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2018 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2017

 

The Company has reclassified certain prior year income statement amounts to conform the current year presentation. As a result of these reclassifications, there were no changes to previously reported net income, comprehensive income and income from operations.

 

The Company has initially applied ASC 2014-09 (Topic 606) on January 1, 2018 using the modified retrospective method. Under this method, the comparative information is not restated.

 

NET REVENUES

 

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

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2018

   

2017

 
                 

Network Access Services:

               

Mobile Services

  $ 89,340     $ 83,885  

Other Services

    7,984       5,567  

Total Network Access Services

    97,324       89,452  
                 

Domain Services:

               

Wholesale

               

Domain Services

    189,434       183,731  

Value Added Services

    17,756       17,832  

Total Wholesale

    207,190       201,563  
                 

Retail

    34,524       31,649  

Portfolio

    6,975       6,757  

Total Domain Services

    248,689       239,969  
                 
    $ 346,013     $ 329,421  

Increase over prior period

  $ 16,592          

Increase - percentage

    5 %        

 

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

 

   

Year ended December 31,

 
   

2018

   

2017

 
                 

Network Access Services:

               

Mobile Services

    26 %     25 %

Other Services

    2 %     2 %

Total Network Access Services

    28 %     27 %
                 

Domain Services:

               

Wholesale

               

Domain Services

    55 %     56 %

Value Added Services

    5 %     5 %

Total Wholesale

    60 %     61 %
                 

Retail

    10 %     10 %

Portfolio

    2 %     2 %

Total Domain Services

    72 %     73 %
                 
      100 %     100 %

 

Total net revenues for Fiscal 2018 increased by $16.6 million, or 5%, to $346.0 million from $329.4 million for the fiscal year ended December 31, 2017 (“Fiscal 2017”). The overall increase in revenue was primarily driven by full year impact of the 2017 acquisitions of Enom and Roam Mobility, the expanding footprint of Ting Internet, organic growth in both Ting Mobile services and wholesale domain services and the $16.9 million acceleration of revenue related to the Namecheap bulk transfer of 2.89 million names throughout 2018, a portion of which would have otherwise been recognized after Fiscal 2018. Revenue also increased as compared to fiscal 2017 because eNom revenues 2017 were negatively impacted by amortizing into revenue, deferred revenue that was recorded at fair value at the acquisition date which was approximately 10% lower than the historical cost basis of eNom. The increase in revenue was partially offset by a subsequent decline in ongoing domain registrations related to the departure of Namecheap and lower mobile device sales due to reduced demand for higher priced devices. Deferred revenue from domain name registrations and other Internet services at December 31, 2018 decreased to $143.7 million from $160.6 million at December 31, 2017, primarily due to the bulk transfers discussed above.

 

No customer accounted for more than 10% of revenue during Fiscal 2018 or Fiscal 2017, and no customers accounted for more than 10% of accounts receivable as of December 31, 2018 and 2017. Management judgment is required at the time of recording of revenue to assess whether the collection of the resulting receivables is reasonably assured. On an ongoing basis, we assess the ability of our customers to make required payments. Based on this assessment, we expect the carrying amount of our outstanding receivables, net of allowance for doubtful accounts, to be fully collected.

 

 

Network Access Services

 

Mobile and Other Services

 

Net revenues from mobile phone equipment and services for Fiscal 2018, as compared to Fiscal 2017, increased by $5.5 million or 7% to $89.3 million. This increase primarily reflects the growth in service revenue, which grew by $6.9 million to $80.4 million as compared to Fiscal 2017. Revenues from the sale of mobile hardware and related accessories decreased by $1.4 million to $8.9 million in Fiscal 2018. The decrease in device revenue was primarily driven by reduced demand for higher-priced devices compared to the Fiscal 2017.   

 

High speed Internet access, and network consulting services generated $8.0 million in revenue during Fiscal 2018, up $2.4 million from Fiscal 2017. Growth in Ting Internet revenues was as a result of the increased Ting Internet footprint in Charlottesville, VA, Westminster, MD and Holly Springs, NC.  The Company began offering Ting Internet in Sandpoint, ID in the second quarter of 2018 and in Centennial, CO in the third quarter of 2018. 

 

As of December 31, 2018, Ting Mobile had 163,000 mobile subscribers and 296,000 mobile devices under its management compared to 166,000 subscribers and 282,000 devices under its management as of December 31, 2017.

 

Domain Services

 

Wholesale

 

During Fiscal 2018, wholesale domain services revenue increased by $5.7 million to $189.4 million. The increase was driven by the accelerated recognition of $16.9 million in domain revenue associated with the Namecheap bulk transfer of 2.8 million names during 2018, of which approximately $5.0 million would have been otherwise recognized after Fiscal 2018. The increase in wholesale domain revenue was also driven by the organic growth and price increases associated with the Company’s existing customer base of $4.9 million. Revenue also increased compared to Fiscal 2017 because eNom revenues and gross margins in 2017 were negatively impacted by amortizing into revenue, deferred revenue that was recorded at fair value at the acquisition date which was approximately 10% lower than the historical cost basis of eNom. The increase in revenue was partially offset by a decrease in revenue associated with a decline in the number of overall transactions from new, renewed and transferred-in domain name registrations, which has decreased to 17.4 million from 19.4 million when compared to Fiscal 2017. The overall decrease in new, renewed and transferred-in domain name registrations was primarily driven by the migration of Namecheap, a low margin customer who moved their domain management and domain transaction processing to their own accreditation and in-house system. We anticipate that the number of new, renewed and transferred-in domain name registrations will continue to be impacted by decisions that large volume customers make with regard to acquiring their own accreditations, as well as the impact on the market, of the significant expansion in the number of new gTLDs added pursuant to the implementation of ICANN’s new gTLD Program. While we anticipate that the number of new, renewed and transferred-in domain name registrations will continue to incrementally increase in the long term, the volatility of these factors could affect the growth of domain names that we manage.

 

Value-added services decreased by $0.1 million to $17.8 million when compared to Fiscal 2017. The decrease in revenue from Fiscal 2017 was primarily driven by decreased expiry stream revenue.

 

Retail

 

Net revenues from retail for Fiscal 2018, as compared to Fiscal 2017, increased by $2.9 million to $34.5 million. This increase was primarily due to the full year impact of the acquisition of eNom and to a lesser extent growth in our incumbent retail operations, Hover.

 

Portfolio

 

Net revenues from portfolio for Fiscal 2018, as compared to Fiscal 2017, increased by $0.2 million to $7.0 million. The increase is primarily due to a large bulk sale of names in the fourth quarter of 2018.

 

 

COST OF REVENUES

 

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

 

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2018

   

2017

 
                 

Network Access Services:

               

Mobile Services

  $ 46,061     $ 45,335  

Other Services

    3,994       3,305  

Total Network Access Services

    50,055       48,640  
                 

Domain Services:

               

Wholesale

               

Domain Services

    160,216       161,013  

Value Added Services

    3,154       2,450  

Total Wholesale

    163,370       163,463  
                 

Retail

    17,725       17,346  

Portfolio

    953       1,151  

Total Domain Services

    182,048       181,960  
                 

Network Expenses:

               

Network, other costs

    9,846       9,324  

Network, depreciation and amortization costs

    7,294       4,976  
      17,140       14,300  
                 
    $ 249,243     $ 244,900  

Increase over prior period

  $ 4,343          

Increase - percentage

    2 %        

 

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

 

   

Year ended December 31,

 
   

2018

   

2017

 
                 

Network Access Services:

               

Mobile Services

    18 %     19 %

Other Services

    2 %     1 %

Total Network Access Services

    20 %     20 %
                 

Domain Services:

               

Wholesale

               

Domain Services

    65 %     66 %

Value Added Services

    1 %     1 %

Total Wholesale

    66 %     67 %
                 

Retail

    7 %     7 %

Portfolio

    0 %     0 %

Total Domain Services

    73 %     74 %
                 

Network Expenses:

               

Network, other costs

    4 %     4 %

Network, depreciation and amortization costs

    3 %     2 %
      7 %     6 %
                 
      100 %     100 %

 


Total cost of revenues for Fiscal 2018 increased by $4.3 million, or 2%, to $249.2 million from $244.9 million in Fiscal 2017. This increase primarily resulted from the increase in network and people costs associated with the continuing expansion of the Ting Fiber footprint and to a lesser extent, restructuring charges associated with terminating an unfavourable Roam Mobility service supply contract. Prepaid domain registration and other Internet services fees as of December 31, 2018 decreased by $20.5 million, or 16%, to $106.5 million from $127.0 million at December 31, 2017.

 

 

Network Access Services

 

Mobile and Other Services

 

Cost of revenues from mobile phone equipment and services for Fiscal 2018, as compared to Fiscal 2017, increased by $0.7 million or 2% to $46.1 million. This increase primarily reflects the impact of mobile service costs of revenue which grew by $2.3 million to $36.5 million as compared to Fiscal 2017. The increase in mobile service costs of revenue include restructuring charges associated with terminating an unfavourable Roam Mobility service supply contract for $0.4 million. Mobile hardware, shipping and related accessories costs decreased $1.6 million to $9.6 million. The decrease in device cost of revenue was primarily driven by reduced demand for higher-priced devices compared to the Fiscal 2017.

 

In addition, in Fiscal 2018, we incurred costs of $4.0 million in provisioning high speed Internet access and network consulting services as compared to $3.3 million during Fiscal 2017. The increase in costs was primarily due to the expansion of the Ting Fiber foot print and increasing subscriber base.

  

Domain Services

 

Wholesale

 

Domain Service

 

Costs for wholesale domain services for Fiscal 2018 decreased by $0.8 million to $160.2 million, when compared to Fiscal 2017. The decrease was driven by a $8.9 million decrease due to the decline in overall transactions from new, renewed and transferred-in domain name registrations to 17.4 million from 19.4 million when compared to Fiscal 2017. The overall decrease in new, renewed and transferred-in domain name registrations was primarily driven by the migration of Namecheap, a low margin customer who moved their domain management and domain transaction processing to their own accreditation and in-house system. The decrease was partially offset by the accelerated recognition of $16.7 million in cost of revenue associated with the Namecheap bulk transfer of 2.8 million names during 2018, of which approximately $4.9 million would have been otherwise recognized after Fiscal 2018. The decrease was also offset by organic growth in existing customers $3.2 million.

 

Value-Added Services

 

Costs for wholesale value-added services for Fiscal 2018 increased by $0.7 million to $3.2 million, when compared to Fiscal 2017. The increase in cost of revenue is primarily related to organic growth in certification and email sales during Fiscal 2018.

 

Retail

 

Costs for retail for Fiscal 2018 increased by $0.4 million, to $17.7 million, when compared to Fiscal 2017. This increase was primarily due to the full year impact of the acquisition of eNom and to a lesser extent growth in our incumbent retail operations, Hover.

 

Portfolio

 

Costs for portfolio decreased by $0.2 million for Fiscal 2018, to $1.0 million when compared to Fiscal 2017, the decrease in cost is primarily driven by a lower cost per name sold as compared to Fiscal 2017.

  

Network Expenses

 

Network costs for Fiscal 2018 increased by $2.8 million to $17.1 million when compared to Fiscal 2017, which is primarily driven by the increase in network costs and depreciation of the fiber assets associated with the continuing expansion of the Ting Fiber footprint.

 

 

SALES AND MARKETING

 

Sales and marketing expenses consist primarily of personnel costs. These costs include commissions and related expenses of our sales, product management, public relations, call center, support and marketing personnel. Other sales and marketing expenses include customer acquisition costs, advertising and other promotional costs.

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2018

   

2017

 

Sales and marketing

  $ 33,063     $ 29,423  

Increase over prior period

  $ 3,640          

Increase - percentage

    12

%

       

Percentage of net revenues

    10

%

    9

%

 

Sales and marketing expenses for Fiscal 2018 increased by $3.6 million, or 12%, to $33.1 million as compared to Fiscal 2017. This increase primarily related to a $3.3 million increase in workforce, travel, contract services and stock-based compensation, which was driven by the growth in network access initiatives. In addition, marketing and other expenses increased $0.3 million largely to support and acquire Ting Mobile and fixed Internet access subscribers.

 

 

TECHNICAL OPERATIONS AND DEVELOPMENT

 

Technical operations and development expenses consist primarily of personnel costs and related expenses required to support the development of new or enhanced service offerings and the maintenance and upgrading of existing infrastructure. This includes expenses incurred in the research, design and development of technology that we use to register domain names, network access services, email, retail, domain portfolio and other Internet services, as well as to distribute our digital content services. Editorial costs relating to the rating and review of the software content libraries are included in the costs of product development. All technical operations and development costs are expensed as incurred.

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2018

   

2017

 

Technical operations and development

  $ 8,748     $ 7,258  

Increase over prior period

  $ 1,490          

Increase - percentage

    21

%

       

Percentage of net revenues

    3

%

    2

%

 

Technical operations and development expenses for Fiscal 2018 increased by $1.5 million, or 21%, to $8.7 million. The increase in costs relate primarily to the full year impact of the eNom acquisition, increased salaries and benefits, contract services and stock-based compensation driven by an expanding workforce and wage inflation.

 

 

GENERAL AND ADMINISTRATIVE

 

General and administrative expenses consist primarily of compensation and related costs for managerial and administrative personnel, fees for professional services, public listing expenses, rent, foreign exchange and other general corporate expenses.

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2018

   

2017

 

General and administrative

  $ 17,710     $ 13,594  

Increase over prior period

  $ 4,116          

Increase - percentage

    30

%

       

Percentage of net revenues

    5

%

    4

%

 

General and administrative expenses for Fiscal 2018 increased by $4.1 million, or 30%, to $17.7 million as compared to Fiscal 2018. The increase was primarily the result of an increase in workforce, contract services and stock-based compensation related costs of $3.8 million due to expanding workforce, unfavourable foreign exchange impacts and wage inflation. The increase was also related to an increase in credit card processing fees and other administrative costs of $0.3 million.

 

 

DEPRECIATION OF PROPERTY AND EQUIPMENT

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2018

   

2017

 

Depreciation of property and equipment

  $ 424     $ 585  

Decrease over prior period

  $ (161 )        

Decrease - percentage

    (28

)%

       

Percentage of net revenues

    0

%

    0

%

 

Depreciation costs for Fiscal 2018 decreased to $0.4 million when compared to $0.6 million for Fiscal 2017. The decrease is driven by decreased purchases of equipment in 2018, compared to 2017 when the Company’s purchased equipment increased due to the acquisition of eNom.

 

 

AMORTIZATION OF INTANGIBLE ASSETS

 

(Dollar amounts in thousands of U.S. dollars)

 

Year ended December 31,

 
   

2018

   

2017

 

Amortization of intangible assets

  $ 7,247     $ 6,566  

Increase over prior period

  $ 681          

Increase - percentage