10-Q 1 tcx20240930_10q.htm FORM 10-Q tcx20240930_10q.htm
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During the three and nine month ended September 30, 2024, the Company capitalized $0.1 million and $0.2 million of stock-based compensation directly attributable to the development of certain IUS assets. Comparatively, during the three and nine months ended September 30, 2023, the Company capitalized $0.1 million and $0.3 million of stock-based compensation directly attributable to the development of certain IUS assets. The Company capitalizes interest expenses directly attributable to the development of qualifying assets. Qualifying assets include internally use software (IUS), assets under construction (AUC), equipment, or other long-lived assets that meet the capitalization criteria prescribed by ASC 718. During the year ended December 31, 2023, the Company capitalized $2.4 million of interest expenses pertaining to the redeemable preferred units directly attributable to the development of certain AUC assets, respectively. During the three and nine months ended September 30, 2024, the Company capitalized $0.3 million and $1.0 million of interest expenses pertaining to the 2023 and 2024 Term Notes directly attributable to the development of certain AUC assets, respectively. 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

 

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

 

For the quarterly period ended September 30, 2024

 

OR

 

 

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

 

For the transition period from           to          

 

Commission file number 1-32600

 

TUCOWS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Pennsylvania

23-2707366

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

 

96 Mowat Avenue,

Toronto, Ontario M6K 3M1, Canada

(Address of Principal Executive Offices) (Zip Code)

 

(416) 535-0123

(Registrant's Telephone Number, Including Area Code)

 

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

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

TCX

 

NASDAQ

 

 

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

 

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

 

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

 

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 provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

As of November 4, 2024, there were 11,004,683 outstanding shares of common stock, no par value, of the registrant.

 

 

 

TUCOWS INC.

Form 10-Q Quarterly Report

INDEX

 

PART I

FINANCIAL INFORMATION

 

 

 

Item 1.

Consolidated Financial Statements

3

  

  

  

  

Consolidated Balance Sheets (unaudited) as of September 30, 2024 and December 31, 2023

3

  

  

  

  

Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2024 and 2023

4

  

  

  

  

Consolidated Statements of Cash Flows (unaudited) for the three and nine months ended September 30, 2024 and 2023

5

  

  

  

  

Notes to Consolidated Financial Statements (unaudited)

6

  

  

  

Item 2.

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

32

  

  

  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52

  

  

  

Item 4.

Controls and Procedures

53

  

  

  

PART II

OTHER INFORMATION

  

  

  

Item 1.

Legal Proceedings

54

  

  

  

Item 1A.

Risk Factors

54

  

  

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds 

  56

 

 

 

Item 3.

Defaults Upon Senior Securities

56

  

  

  

Item 4.

Mine Safety Disclosures

56

 

 

 

Item 5.

Other Information

56

  

  

  

Item 6.

Exhibits

57

  

  

  

Signatures

58


TRADEMARKS, TRADE NAMES AND SERVICE MARKS

 

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

 

 

 

PART I.    FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Tucows Inc.

Consolidated Balance Sheets

 

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

(unaudited)

 

  

September 30,

  

December 31,

 
  

2024

  

2023

 
         

Assets

        
         

Current assets:

        

Cash and cash equivalents

 $75,209  $92,687 

Restricted cash (note 7)

  4,303   3,639 

Accounts receivable, net of allowance for doubtful accounts of $497 as of September 30, 2024 and $511 as of December 31, 2023

  18,892   22,206 

Contract asset, net (note 10)

  -   1,417 

Inventory

  4,812   6,786 

Prepaid expenses and deposits

  16,453   17,387 

Derivative instrument asset (note 4)

  708   2,277 

Deferred costs of fulfillment, current portion (note 11)

  100,681   95,649 

Income taxes recoverable

  524   709 

Total current assets

  221,582   242,757 
         

Deferred costs of fulfillment, long-term portion (note 11)

  15,548   15,419 

Investments

  2,012   2,012 

Secured notes reserve funds (note 7)

  11,579   8,652 

Property and equipment, net

  355,689   339,644 

Right of use lease asset

  33,794   27,467 

Contract costs

  2,445   2,581 

Intangible assets, net (note 5)

  25,968   29,484 

Goodwill (note 5)

  130,410   130,410 

Total assets

 $799,027  $798,426 
         
         

Liabilities and Stockholders' Equity

        
         

Current liabilities:

        

Accounts payable

 $9,128  $12,676 

Accrued liabilities

  29,859   35,356 

Customer deposits

  17,187   19,335 

Operating lease liability, current portion (note 12)

  5,551   5,397 

Deferred revenue, current portion (note 10)

  134,745   126,733 

Accreditation fees payable

  627   609 

Income taxes payable

  1,775   1,235 

Total current liabilities

  198,872   201,341 
         

Deferred revenue, long-term portion (note 10)

  21,284   21,350 

Operating lease liability, long-term portion (note 12)

  23,949   18,255 

Syndicated revolver (note 6)

  196,261   210,354 

Notes payable (note 7)

  286,641   222,895 

Redeemable preferred units - no par value, 33,333,333 units authorized; 15,243,600 units issued and outstanding as of September 30, 2024 and December 31, 2023 (note 18)

  122,128   111,390 

Deferred tax liability

  2,966   2,966 

Stockholders' deficit (note 14)

        

Common stock - no par value, 250,000,000 shares authorized; 10,985,238 shares issued and outstanding as of September 30, 2024 and 10,903,405 shares issued and outstanding as of December 31, 2023 (note 14)

  36,142   34,373 

Additional paid-in capital

  17,930   14,072 

Accumulated deficit

  (107,683)  (40,298)

Accumulated other comprehensive income (note 4)

  537   1,728 

Total stockholders' deficit

  (53,074)  9,875 

Total liabilities and stockholders' deficit

 $799,027  $798,426 
         

Contingencies (note 20)

          

Subsequent events (note 21)

        

 

See accompanying notes to consolidated financial statements 

 

 

 

Tucows Inc.

Consolidated Statements of Operations and Comprehensive Loss 

 

(Dollar amounts in thousands of U.S. dollars, except per share amounts) 

(unaudited)

 

  

For the Three Months Ended September 30,

  

For the Nine Months Ended September 30,

 
  

2024

  

2023

  

2024

  

2023

 
                 
                 

Net revenues (note 10)

 $92,297  $86,971  $269,177  $252,379 
                 

Cost of revenues (note 10)

                

Direct cost of revenues

 52,613   50,717  155,735   150,750 

Network, other costs

 6,864   7,322  20,790   20,638 

Network, depreciation of property and equipment

 9,414   9,138  29,336   26,331 

Network, amortization of intangible assets (note 5)

 366   378  1,097   1,135 

Network, impairment of property and equipment

 852   2,663  905   4,679 

Total cost of revenues

 70,109   70,218  207,863   203,533 
                 

Gross profit

 22,188   16,753  61,314   48,846 
                 

Expenses:

                

Sales and marketing

 15,180   17,295  48,491   49,052 

Technical operations and development

 4,615   4,818  14,153   14,214 

General and administrative

 11,485   9,399  30,491   25,674 

Depreciation of property and equipment

 112   137  350   439 

Amortization of intangible assets (note 5)

 843   2,242  2,992   6,966 

Loss (gain) on currency forward contracts (note 4)

 -   29  -   52 

Total expenses

 32,235   33,920  96,477   96,397 
                 

Loss from operations

 (10,047)  (17,167) (35,163)  (47,551)
                 

Other income (expenses):

                

Interest expense, net

 (13,095)  (10,739) (37,527)  (29,120)

Loss on debt extinguishment (note 18)

 -   -  -   (14,680)

Income earned on sale of transferred assets, net (note 17)

 3,853   4,312  10,831   12,971 

Other income (expense), net

 66   -  542   - 

Total other income (expenses)

 (9,176)  (6,427) (26,154)  (30,829)
                 

Loss before provision for income taxes

 (19,223)  (23,594) (61,317)  (78,380)
                 

Provision (recovery) for income taxes (note 8)

 3,074   (822) 6,068   (5,557)
                 

Net loss for the period

 (22,297)  (22,772) (67,385)  (72,823)
                 

Other comprehensive income (loss), net of tax

                

Unrealized income (loss) on hedging activities (note 4)

 415   (483) (1,015)  163 

Net amount reclassified to earnings (note 4)

 (7)  (181) (176)  (807)

Other comprehensive income (loss) net of tax expense (recovery) of $134 and ($211) for the three months ended September 30, 2024 and September 30, 2023, ($376) and ($204) for the nine months ended September 30, 2024 and September 30, 2023 (note 4)

 408   (664) (1,191)  (644)
                 

Comprehensive loss, for the period

 $(21,889) $(23,436) $(68,576) $(73,467)
                 
                 

Basic and diluted loss per common share (note 9)

 $(2.03) $(2.09) $(6.15) $(6.71)
                 

Shares used in computing basic and diluted loss per common share (note 9)

 

10,982,820

   10,874,659  

10,953,778

   10,852,079 


See accompanying notes to consolidated financial statements 

 

 

 

Tucows Inc.

Consolidated Statements of Cash Flows

 

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

(unaudited)

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 
   

2024

   

2023

   

2024

   

2023

 

Cash provided by:

                               

Operating activities:

                               

Net loss for the period

  $ (22,297 )   $ (22,772 )   $ (67,385 )   $ (72,823 )

Items not involving cash:

                               

Depreciation of property and equipment

    9,526       9,275       29,686       26,770  

Impairment of property and equipment

    852       2,663       905       4,679  

Amortization of debt discount and issuance costs

    1,159       1,140       3,301       2,271  

Amortization of intangible assets

    1,209       2,620       4,089       8,101  

Net amortization contract costs

    16       (255 )     136       (612 )

Deferred income taxes (recovery)

    (129 )     (3,258 )     350       (9,381 )

Net Right of use operating assets/Operating lease liability

    (80 )     (220 )     (479 )     (317 )

Disposal of domain names

    1       3       3       3  

Accretion of redeemable preferred units

    1,863       2,872       9,758       9,247  

Loss on debt extinguishment

    -       -       -       14,680  

Write off of debt discount and issuance cost

    -       277       -       277  

Loss on change in the fair value of forward contracts

    -       -       -       1,624  

Amortization of discontinued cash flow hedge

    -       -       -       (1,144 )

Stock-based compensation expense

    1,808       2,308       5,383       6,606  

Undistributed earnings of equity method investee

    (28 )     -       (378 )     -  

Change in non-cash operating working capital:

                               

Accounts receivable

    (927 )     (677 )     3,314       (5,785 )

Contract assets

    31       1,293       1,417       4,177  

Inventory

    732       12       1,974       (504 )

Prepaid expenses and deposits

    4,693       1,049       1,312       (2,394 )

Deferred costs of fulfillment

    (212 )     1,520       (5,161 )     (1,964 )

Income taxes recoverable

    1,376       1,445       753       589  

Accounts payable

    (2,624 )     (334 )     (4,151 )     (5,433 )

Accrued liabilities

    (749 )     (4,000 )     (5,593 )     293  

Customer deposits

    (1,250 )     (708 )     (2,148 )     2,957  

Deferred revenue

    455       (1,216 )     7,946       4,623  

Accreditation fees payable

    11       27       18       (314 )

Net cash provided by (used in) operating activities

    (4,564 )     (6,936 )     (14,950 )     (13,774 )
                                 

Financing activities:

                               

Proceeds from issuance of notes payable

    62,991       -       62,991       227,258  

Redeemable preferred units redemption

    -       -       -       (45,718 )

Proceeds from redeemable preferred units

    -       -       -       35,000  

Deferred notes payable financing costs

    (2,011 )     70       (2,011 )     (6,675 )

Deferred preferred financing costs

    -       -       -       145  

Contingent payments for acquisitions

    -       -       -       (1,600 )

Proceeds received on syndicated revolver

    -       52,382       -       52,382  

Repayment of syndicated revolver

    (2,500 )     (58,852 )     (14,500 )     (68,652 )

Payment of syndicated revolver costs

    (29 )     (1,238 )     (48 )     (1,554 )

Net cash provided by (used in) financing activities

    58,451       (7,638 )     46,432       190,586  
                                 

Investing activities:

                               

Additions to property and equipment

    (14,516 )     (22,572 )     (44,793 )     (77,476 )

Acquisition of intangible assets

    (478 )     (32 )     (576 )     (415 )

Net cash provided by (used in) investing activities

    (14,994 )     (22,604 )     (45,369 )     (77,891 )
                                 

Increase (decrease) in cash and cash equivalents, restricted cash, and restricted cash equivalents

    38,893       (37,178 )     (13,887 )     98,921  
                                 

Cash and cash equivalents, restricted cash, and restricted cash equivalents beginning of period

    52,198       159,595       104,978       23,496  

Cash and cash equivalents, restricted cash, and restricted cash equivalents end of period

  $ 91,091     $ 122,417     $ 91,091     $ 122,417  
                                 

Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents within the interim consolidated balance sheets to the amounts shown in the interim consolidated statements of cash flows above:

                               

Cash and cash equivalents

    75,209       110,736       75,209       110,736  

Restricted cash included in funds held by trustee

    4,303       3,138       4,303       3,138  

Restricted cash included in secured notes reserve funds

    11,579       8,543       11,579       8,543  

Total Cash and cash equivalents, restricted cash, and restricted cash equivalents end of period

  $ 91,091     $ 122,417     $ 91,091     $ 122,417  
                                 

Supplemental cash flow information:

                               

Interest paid

  $ 11,352     $ 5,483     $ 28,856     $ 15,810  

Income taxes paid, net

  $ 2,451     $ 1,367     $ 5,278     $ 3,342  

Supplementary disclosure of non-cash investing and financing activities:

                               

Property and equipment acquired during the period not yet paid for

  $ 5,907     $ 74     $ 5,907     $ 74  

 

See accompanying notes to consolidated financial statements

 

 

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

 

1. Organization of the Company:

 

Tucows Inc. (referred to throughout this report as the “Company”, “Tucows”, “we”, “us” or through similar expressions) is a corporate parent, allocating capital and providing efficient shared services to its three businesses Ting, Wavelo and Tucows Domains Services. Ting provides US consumers and small businesses with high-speed fixed Internet access in selected towns. Wavelo offers platform services which provide solutions to support Communication Service Providers ("CSPs") including subscription and billing management, network orchestration and provisioning, individual developer tools, and other professional services. Tucows Domains Services is a global distributor of Internet services, including domain name registration, digital certificates, and email. It provides these services primarily through a global Internet-based distribution network of Internet Service Providers, web hosting companies and other providers of Internet services to end-users.

 

 

2. Basis of Presentation:

 

The accompanying unaudited interim consolidated balance sheets, and the related consolidated statements of operations and comprehensive loss and cash flows reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of the financial position of Tucows and its subsidiaries as of September 30, 2024 and the results of operations and cash flows for the interim periods ended September 30, 2024 and 2023. The results of operations presented in this Quarterly Report on Form 10-Q are not necessarily indicative of the results of operations that may be expected for future periods.

 

The accompanying unaudited interim consolidated financial statements have been prepared by Tucows in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and U.S. Generally Accepted Accounting Principles issued by the Financial Accounting Standards Board. Certain information and footnote disclosures normally included in the Company's annual audited consolidated financial statements and accompanying notes have been condensed or omitted. These interim consolidated financial statements and accompanying notes follow the same accounting policies and methods of application used in the annual financial statements and should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2023 included in Tucows' 2023 Annual Report on Form 10-K filed with the SEC on April 1, 2024 (the “2023 Annual Report”). There have been no material changes to our significant accounting policies and estimates during the three and nine months ended September 30, 2024 as compared to the significant accounting policies and estimates described in our 2023 Annual Report.

 

 

3. Recent Accounting Pronouncements:

 

Recent Accounting Pronouncements Not Yet Adopted

 

In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." The amendments in ASU 2023-07 improve financial reporting by requiring disclosure of incremental segment information, including significant segment expenses, on an annual and interim basis for all public entities to enable investors to develop more useful financial analyses. Currently, Topic 280 requires that a public entity disclose certain information about its reportable segments. For example, a public entity is required to report a measure of segment profit or loss that the Chief Operating Decision Maker (“CODM”) uses to assess segment performance and make decisions about allocating resources. Topic 280 also requires other specified segment information, such as depreciation, amortization and depletion expense amounts, to be disclosed under certain circumstances. The amendments in ASU 2023-07 do not change or remove those disclosure requirements. The amendments in ASU 2023-07 also do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. Early adoption is permitted. A public entity should apply the amendments in ASU 2023- 07 retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

 

In December 2023, the FASB issued ASU 2023-09 "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." ASU 2023-09 is intended to improve the disclosures for income taxes to allow investors to better assess, in their capital allocation decisions, how an entity's worldwide operations and related tax risks and tax planning and operational opportunities affect its income tax rate and prospects for future cash flows. The amendments in ASU 2023-09 require consistent categories and greater disaggregation of information in the rate reconciliation disclosure as well as disclosure of income taxes paid disaggregated by jurisdiction. The amendments of ASU 2023-09 are effective for annual periods beginning after December 15, 2024, with early adoption permitted for annual financial statements that have not yet been issued or made available for issuance. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.

 

In February 2024, the FASB issued ASC 2024-02 "Codifications Improvements - Amendments to Remove References to the Concepts Statements." ASU 2024-02 amends the codification to remove references to various concepts statements and impacts a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities. ASU 2024-02 is effective January 1, 2025 and is not expected to have a significant impact on our financial consolidated statements. 

 

In March 2024, the SEC adopted new rules relating to the disclosure of a range of climate-change-related physical and transition risks, data, and opportunities. The adopted rule contains several new disclosure obligations, including, (i) disclosure on how the board of directors and management oversee climate-related risks and certain climate-related governance items, (ii) disclosure of information related to a registrant’s climate-related targets, goals, and/or transition plans, and (iii) disclosure on whether and how climate-related events and transition activities impact line items above a threshold amount on a registrant’s consolidate financial statements, including the impact of the financial estimates and the assumptions used. We are in the process of assessing the impact on our consolidated financial statements and disclosures. On April 4, 2024, the SEC voluntarily stayed the new rule pending the completion of the judicial review of the consolidated petitions for review in the U.S. Court of Appeals for the Eight Circuit. Although it is uncertain when the judicial review will be completed, pursuant to the implementation dates outlined in the rule, this new rule could first be effective in our annual disclosures for the year ending December 31, 2027.

 

6

 
 

4. Derivative Instruments and Hedging Activities:

 

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

 

Since October 2012, the Company has employed a hedging program with a Canadian chartered bank to limit the potential foreign exchange fluctuations incurred on its future cash flows related to a portion of payroll, taxes, rent and payments to Canadian domain name registry suppliers that are denominated in Canadian dollars and are expected to be paid by its Canadian operating subsidiary. In May 2020, the Company entered into a pay-fixed, receive-variable interest rate swap with a Canadian chartered bank to limit the potential interest rate fluctuations incurred on its future cash flows related to variable interest payments on the Second Amended 2019 Credit Facility. The notional value of the interest rate swap was $70 million. During the third quarter of fiscal year 2022, the Company elected to discontinue its application of hedge accounting to its interest rate swaps prospectively. Until the interest rate swaps matured in June 2023, the derivatives continued to be carried at fair value in the accompanying Consolidated Balance Sheets with changes in their fair value from the date of discontinuance recognized in current period earnings in Interest expense, net in the Consolidated Statements of Operations and Comprehensive Loss. Unrealized gains and losses in Accumulated other comprehensive income (AOCI) as of the date of discontinuance were realized in net income over the remaining term of the underlying forecasted interest payments into interest expense over the original term of the hedged debt. Prior to the discontinuance, for the interest rate swap contracts, unrealized gains or losses on the effective portion of these contracts had been included in other comprehensive income (OCI) and reclassified to earnings when the hedged transaction settled. As of September 30, 2024, there are no interest swaps held by the Company.

 

The Company does not use hedging forward contracts for trading or speculative purposes. The foreign exchange contracts typically mature between one and twelve months, and the interest rate swap fully matured as of June 30, 2023.

 

The Company has designated certain of these foreign exchange transactions as cash flow hedges of forecasted transactions under ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASC Topic 815”). For certain contracts, as the critical terms of the hedging instrument, and of the entire hedged forecasted transaction, are the same, in accordance with ASC Topic 815, the Company has been able to conclude that changes in fair value and cash flows attributable to the risk being hedged are expected to completely offset at inception and on an ongoing basis. The Company designated the interest rate swap as a cash flow hedge of expected future interest payments at the inception of the contract. Accordingly, for the foreign exchange, unrealized gains or losses on the effective portion of these contracts were included within other comprehensive income and reclassified to earnings when the hedged transaction is settled. Cash flows from hedging activities were classified under the same category as the cash flows from the hedged items in the consolidated statements of cash flows. The fair value of the foreign exchange contract, as of  September 30, 2024 and December 31, 2023, is recorded as derivative instrument assets or liabilities. For certain contracts where the hedged transactions are no longer probable to occur, the loss on the associated forward contract is recognized in earnings.

 

As of September 30, 2024, the notional amount of forward contracts that the Company held to sell U.S. dollars in exchange for Canadian dollars was $43.2 million, of which $43.2 million met the requirements of ASC Topic 815 and were designated as accounting hedges.

 

As of December 31, 2023, the notional amount of forward contracts that the Company held to sell U.S. dollars in exchange for Canadian dollars was $61.4 million, of which $61.4 million met the requirements of ASC Topic 815 and were designated as hedges.

 

As of September 30, 2024, we had the following outstanding forward contracts to trade U.S. dollars in exchange for Canadian dollars:

 

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

 

Notional amount of U.S. dollars

  

Weighted average exchange rate of U.S. dollars

  

Fair value
Asset

 
             

October - December 2024

 $13,795  $1.3686  $196 

January - March 2025

  18,218   1.3697   306 

April - June 2025

  11,181   1.3692   206 
  $43,194   1.3692  $708 

 

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

 

The effect of these derivative instruments on our consolidated financial statements were as follows (amounts presented do not include any income tax effects).

 

7

 

Fair value of derivative instruments in the consolidated balance sheets 

 

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

 

Balance Sheet Location

 As of September 30, 2024 Fair Value Asset  As of December 31, 2023 Fair Value Asset 

Foreign Currency forward contracts designated as cash flow hedges 

 

Derivative instruments

 $708  $2,277 

Total foreign currency forward contracts 

 

Derivative instruments

 $708  $2,277 

 

Movement in AOCI balance for the three months ended September 30, 2024 (Dollar amounts in thousands of U.S. dollars)

 

  

Gains and losses on cash flow hedges

  

Tax impact

  

Total AOCI

 

Opening AOCI Balance - June 30, 2024

 $166  $(37) $129 

Other comprehensive income (loss) before reclassifications

  551   (136)  415 

Amount reclassified from AOCI

  (9)  2   (7)

Other comprehensive income (loss) for the three months ended September 30, 2024

  542   (134)  408 
             

Ending AOCI Balance - September 30, 2024

 $708  $(171) $537 

 

Movement in AOCI balance for the nine months ended September 30, 2024 (Dollar amounts in thousands of U.S. dollars)

 

  

Gains and losses on cash flow hedges

  

Tax impact

  

Total AOCI

 

Opening AOCI balance - December 31, 2023

 $2,275  $(547) $1,728 

Other comprehensive income (loss) before reclassifications

  (1,336)  321   (1,015)

Amount reclassified from AOCI

  (231)  55   (176)

Other comprehensive income (loss) for the nine months ended September 30, 2024

  (1,567)  376   (1,191)
             

Ending AOCI Balance - September 30, 2024

 $708  $(171) $537 

 

Effects of derivative instruments on income and OCI for the three months ended September 30, 2024 and 2023 are as follows (Dollar amounts in thousands of U.S. dollars) 
 

Derivatives in Cash Flow Hedging Relationship

 Amount of Gain or (Loss) Recognized in OCI, net of tax, on Derivative 

Location of Gain or (Loss) Reclassified from AOCI into Income

 Amount of Gain or (Loss) Reclassified from AOCI into Income 
     

Operating expenses

 $7 

Foreign currency forward contracts for the three months ended September 30, 2024

 $415 

Cost of revenues

 $2 
          
     

Operating expenses

 $198 

Foreign currency forward contracts for the three months ended September 30, 2023

 $(483)

Cost of revenues

 $40 
          

 

Effects of derivative instruments on income and OCI for the nine months ended September 30, 2024 and 2023 are as follows (Dollar amounts in thousands of U.S. dollars) 

 

Derivatives in Cash Flow Hedging Relationship

 

Amount of Gain or (Loss) Recognized in OCI, net of tax, on Derivative

 

Location of Gain or (Loss) Reclassified from AOCI into Income

 

Amount of Gain or (Loss) Reclassified from AOCI into Income

 
     

Operating expenses

 $190 

Foreign currency forward contracts for the nine months ended September 30, 2024

 $(1,015)

Cost of revenues

 $41 
          
     

Operating expenses

 $(38)

Foreign currency forward contracts for the nine months ended September 30, 2023

 $163 

Cost of revenues

 $(17)
          

 

 

5. Goodwill and Other Intangible Assets:

 

Goodwill:

 

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

 

The Company's Goodwill balance remained consistent at $130.4 million as of  September 30, 2024 and December 31, 2023. The Company's goodwill relates 83% ($107.7 million) to the Tucows Domains operating segment and 17% ($22.7 million) to the Ting operating segment. 

 

Goodwill is not amortized, but is subject to an annual impairment test, or more frequently if impairment indicators are present. No impairment charge was recognized during the three and nine months ended September 30, 2024 and 2023.

 

8

 

Other Intangible Assets:

 

Intangible assets consist of acquired brand, technology, customer relationships, surname domain names, direct navigation domain names and network rights. The Company considers its intangible assets consisting of surname domain names and direct navigation domain names as indefinite life intangible assets. The Company has the exclusive right to these domain names as long as the annual renewal fees are paid to the applicable registry. Renewals occur routinely and at a nominal cost. The indefinite life intangible assets are not amortized but are subject to impairment assessments performed throughout the year. As part of the normal renewal evaluation process during the periods ended  September 30, 2024 and September 30, 2023, the Company assessed that all domain names that were originally acquired in the June 2006 acquisition of Mailbank.com Inc. that were up for renewal, should be renewed. 

 

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

 

For the three and nine months ended September 30, 2024 the Company acquired customer relationship assets through hosting agreements for $0.5 million and $0.6 million. These assets are being amortized over seven years.

 

Net book value of acquired intangible assets consist of the following (Dollar amounts in thousands of U.S. dollars):

 

  

Surname domain names

  

Direct navigation domain names

  

Brand

  

Customer relationships

  

Technology

  

Network rights

  

Total

 

Amortization period

 

indefinite life

  

indefinite life

  

7 years

  

3 - 7 years

  

2 - 7 years

  

15 years

     
                             

Balances, June 30, 2024

 $11,149  $1,128  $573  $11,178  $1,838  $834  $26,700 

Acquisition of customer relationships

  -   -   -   478   -   -   478 

Additions to/(disposals from) domain portfolio, net

  (1)  -   -   -   -   -   (1)

Amortization expense

  -   -   (75)  (953)  (156)  (25)  (1,209)

Balances, September 30, 2024

 $11,148  $1,128  $498  $10,703  $1,682  $809  $25,968 

 

  

Surname domain names

  

Direct navigation domain names

  

Brand

  

Customer relationships

  

Technology

  

Network rights

  

Total

 

Amortization period

 

indefinite life

  

indefinite life

  

7 years

  

3 - 7 years

  

2 - 7 years

  

15 years

     
                             

Balances, December 31, 2023

 $11,151  $1,128  $870  $13,303  $2,148  $884  $29,484 

Acquisition of customer relationships

  -   -   -   576   -   -   576 

Additions to/(disposals from) domain portfolio, net

  (3)  -   -   -   -   -   (3)

Amortization expense

  -   -   (372)  (3,176)  (466)  (75)  (4,089)

Balances, September 30, 2024

 $11,148  $1,128  $498  $10,703  $1,682  $809  $25,968 

 

The following table shows the estimated amortization expense for each of the next 5 years and thereafter, assuming no further additions to acquired intangible assets are made (Dollar amounts in thousands of U.S. dollars): 

 

  Year ending 
  December 31, 

Remainder of 2024

 $5,777 

2025

  3,236 

2026

  1,699 

2027

  1,634 

2028

  386 

Thereafter

  960 

Total

 $13,692 

 

9

 
 

6. Syndicated Revolver:

 

2023 Credit Facility
 
On September 22, 2023, the Company and its wholly owned subsidiaries, Tucows.com Co., Ting Inc., Tucows (Delaware) Inc., Wavelo, Inc. and Tucows (Emerald), LLC (each, a “Borrower” and together, the “Borrowers,” collectively with the Company, “Tucows”) and certain other subsidiaries of the Company, as guarantors, entered into a Credit Agreement (the “2023 Credit Agreement”) with Bank of Montreal, as administrative agent (“BMO” or the “Agent”), and the lenders party thereto, to, among other things, provide the Borrowers with a revolving credit facility in an aggregate amount not to exceed $240 million (the “2023 Credit Facility”). The Borrowers may request an increase to the Credit Facility through new commitments of up to $60 million if the Total Funded Debt to Adjusted EBITDA Ratio (as defined in the Credit Agreement) is less than 3.75:1.00.  The Credit Facility expires on September 22, 2026, which is the third anniversary of the effective date of the Credit Agreement. 
 
In connection with the 2023 Credit Facility, the Company incurred $0.9 million of fees paid to the Lenders and $0.3 million of legal fees related to the debt issuance. These fees have been reflected as a reduction to the carrying amount of the loan payable and will be amortized over the term of the credit facility agreement. The Company evaluated the issuance of the 2023 Credit Facility and the termination of the 2019 Credit Facility (collectively referred to as the "Debt Transactions") under the loan modification and extinguishment guidance within ASC 470. The Debt Transactions were accounted for as a partial modification, partial extinguishment and new debt issuance at the syndicated lender level. Based on the application of the loan modification and extinguishment guidance within ASC 470 to the Debt Transactions, the Company has treated $50.9 million of the loan principal under the 2019 Credit Facility as an extinguishment of debt and $50.9 million of the loan principal under the 2023 Credit Facility as issuance of new debt. The remaining loan principal on the 2023 Credit Facility was treated as a loan modification within the guidance of ASC 470. In accordance with the debt extinguishment, the Company expensed $0.1 million of the unamortized debt issuance costs to Interest expense, net in the Consolidated Statements of Operation. 
 
During the three and  nine months ended  September 30,  2024,  the Company made repayments of $2.5 million and $14.5 million on the 2023 Credit Facility.  
 

Third Amended 2019 Credit Facility 

 

In connection with entering into the 2023 Credit Facility, on September 22, 2023, the Company paid off the principal balance, including accrued interest thereon, of the revolving loans outstanding under the Third Amended and Restated Credit Agreement (the “RBC Credit Agreement”), dated as of August 8, 2022, as amended, by and among the Company, certain subsidiaries of the Company as borrowers, certain other subsidiaries of the Company as guarantors, Royal Bank of Canada, as administrative agent (“RBC”), and the lenders party thereto, pursuant to which Tucows’ prior credit facility that provided the Borrowers with a $240 million revolving credit facility (the "2019 Credit Facility").  The RBC Credit Agreement automatically terminated upon the receipt by RBC of certain backstop letters of credit delivered by BMO.  

 

2023 Credit Facility Terms

 

The 2023 Credit Agreement contains customary representations and warranties, affirmative and negative covenants, and events of default. The 2023 Credit Agreement requires that the Company comply with certain customary non-financial covenants and restrictions. In addition, the Company has agreed to comply with the following financial covenants: (1) a leverage ratio by maintaining at all times a Total Funded Debt to Adjusted EBITDA Ratio of not more than (i) 4.50:1:00 at any time from and after the Closing Date to and including December 30, 2023; (ii) 4.25:1:00 from December 31, 2023 to and including March 30, 2024; (iii) 4.00:1.00 from March 31, 2024 to and including June 29, 2024; and (iv) 3.75:1.00 thereafter; and (2) an interest coverage ratio by maintaining as of the end of each rolling four financial quarter period, an Interest Coverage Ratio (as defined in the Credit Agreement) of not less than 3.00:1.00. The required principal repayment of $197.4 million is due in September 2026.

 

During the three and nine months ended September 30, 2024, and the three and nine months ended September 30, 2023 the Company was in compliance with the covenants under its credit agreements in effect at the time.  

 

Borrowings under the 2023 Credit Agreement will accrue interest and standby fees based on the Company's Total Funded Debt to Adjusted EBITDA ratio and the availment type as follows: 

 

  

If Total Funded Debt to EBITDA is:

 

Availment type or fee

 

Less than 2.00

  

Greater than or equal to 2.00 and less than 2.75

  

Greater than or equal to 2.75 and less than 3.50

  

Greater than or equal to 3.50 and less than 4.00

  

Greater than or equal to 4.00

 

Canadian dollar borrowings based on the Canadian overnight repo rate average or U.S. dollar borrowings based on SOFR and letter of credit fees (Margin)

  1.50%  2.00%  2.50%  3.00%  3.50%

Canadian borrowings based on Prime Rate or Canadian or U.S. dollar borrowings based on Base Rate (Margin)

  0.25%  0.75%  1.25%  1.75%  2.25%

Standby fees

  0.30%  0.40%  0.50%  0.60%  0.70%

 

10

 

The following table summarizes Excluding-Ting's borrowings under the credit facilities (Dollar amounts in thousands of U.S. dollars): 

 

  

September 30, 2024

  

December 31, 2023