Tucows(US:TCX)2020-08-06 21:05PART I FINANCIAL INFORMATION Consolidated Financial Statements This section presents Tucows Inc.'s unaudited interim consolidated financial statements as of June 30, 2020, and for the three and six-month periods then ended Consolidated Balance Sheet Highlights (in thousands of U.S. dollars) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $442,191 | $425,918 | | Total Current Assets | $141,634 | $145,675 | | Goodwill | $116,270 | $109,818 | | Total Liabilities | $344,817 | $331,724 | | Total Current Liabilities | $165,093 | $156,908 | | Loan payable, long-term portion | $113,608 | $113,503 | | Total Stockholders' Equity | $97,374 | $94,194 | Consolidated Statement of Operations Highlights (in thousands of U.S. dollars) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $82,122 | $84,117 | $166,107 | $163,070 | | Gross Profit | $22,966 | $24,507 | $48,116 | $47,158 | | Income from Operations | $1,537 | $5,749 | $6,709 | $10,777 | | Net Income | $157 | $2,616 | $2,991 | $5,415 | Consolidated Statement of Cash Flows Highlights (in thousands of U.S. dollars) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $23,012 | $15,970 | | Net cash used in investing activities | ($30,932) | ($51,401) | | Net cash (used in) provided by financing activities | ($3,614) | $34,797 | | Net (decrease) in cash and cash equivalents | ($11,534) | ($634) | Note 4: Acquisitions On January 1, 2020, the company acquired Cedar Holdings Group, a fiber Internet provider, for a net purchase consideration of $13.9 million, adding $6.5 million in goodwill Cedar Acquisition Purchase Price Allocation (in thousands of U.S. dollars) | Component | Amount | | :--- | :--- | | Cash Consideration | $8,836 | | Share-based payment | $2,000 | | Fair value of contingent payments | $3,072 | | Total estimated purchase price | $13,908 | | Total net assets assumed | $7,456 | | Total goodwill | $6,452 | - The acquisition of Cedar contributed $2.4 million in revenue and a net loss of $0.2 million for the six months ended June 30, 20203536 Note 6: Goodwill and Other Intangible Assets As of June 30, 2020, Goodwill stood at $116.3 million, with 93% allocated to Domain Services, and a $1.4 million impairment loss was recorded for Roam Mobility customer relationships - Goodwill balance was $116.3 million as of June 30, 2020, up from $109.8 million at year-end 2019, with no impairment recognized during the period47 - Due to the impact of COVID-19 on the travel industry, the company decided to discontinue its Roam Mobility operations, resulting in a $1.4 million impairment loss on associated customer relationships50 - In June 2020, the company committed to a plan to sell its Ting Mobile customer base, reclassifying mobile customer relationships valued at $2.6 million as assets held-for-sale51 Note 9: Assets and liabilities held-for-sale In June 2020, the company reclassified $9.0 million in assets and $0.8 million in liabilities as held-for-sale due to the planned sale of its Ting Mobile customer base, which was completed on August 1, 2020 Assets and Liabilities Held-for-Sale as of June 30, 2020 (in thousands of U.S. dollars) | Category | Amount | | :--- | :--- | | Assets held for sale | $9,027 | | Accounts receivable | $4,554 | | Customer relationship intangible assets (net) | $2,581 | | Other assets | $1,892 | | Liabilities held for sale | $751 | - No impairment loss was recorded as a result of classifying these assets as held-for-sale75 Note 11: Revenue The company generates revenue from Network Access Services and Domain Services, with total revenue of $166.1 million for the six months ended June 30, 2020 Disaggregation of Revenue (in thousands of U.S. dollars) | Revenue Stream | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Network Access Services | $21,981 | $23,630 | $46,437 | $46,882 | | Mobile Services | $17,567 | $20,986 | $37,715 | $41,795 | | Other Services (Fiber) | $4,414 | $2,644 | $8,722 | $5,087 | | Domain Services | $60,141 | $60,487 | $119,670 | $116,188 | | Wholesale | $51,240 | $51,260 | $101,910 | $98,035 | | Retail | $8,567 | $8,783 | $17,017 | $17,425 | | Portfolio | $334 | $444 | $743 | $728 | | Total Net Revenues | $82,122 | $84,117 | $166,107 | $163,070 | Note 14: Segment Reporting The company operates in Network Access Services and Domain Services segments, generating $48.1 million in consolidated gross profit on $166.1 million in revenue for the six months ended June 30, 2020 Segment Performance - Six Months Ended June 30, 2020 (in thousands of U.S. dollars) | Segment | Net Revenues | Gross Profit | | :--- | :--- | :--- | | Network Access Services | $46,437 | $16,825 | | Domain Services | $119,670 | $31,291 | | Consolidated Total | $166,107 | $48,116 | Segment Performance - Six Months Ended June 30, 2019 (in thousands of U.S. dollars) | Segment | Net Revenues | Gross Profit | | :--- | :--- | :--- | | Network Access Services | $46,882 | $19,138 | | Domain Services | $116,188 | $28,020 | | Consolidated Total | $163,070 | $47,158 | Note 19: Subsequent Events On August 1, 2020, Tucows sold its Ting Mobile customer accounts to DISH Wireless L.L.C., including a 10-year payment stream and a concurrent Mobile Service Enabler agreement - On August 1, 2020, Tucows sold its Ting Mobile customer accounts to DISH Wireless L.L.C132 - The purchase price includes a working capital payment and a 10-year payment stream based on net revenue from the transferred customer accounts134 - Tucows entered into a services agreement to act as a mobile service enabler (MSE) for DISH, retaining the technology platforms and intellectual property necessary for these services135 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a 2% increase in H1 2020 revenue to $166.1 million, driven by Domain Services and Fiber growth, offset by Mobile Services declines due to COVID-19, with Adjusted EBITDA increasing 19% to $24.9 million Overview & Key Business Metrics The company operates Network Access Services and Domain Services segments, with Ting Mobile managing 257,000 subscribers and Ting Internet growing to 13,000 accounts as of June 30, 2020 Ting Mobile Metrics (in '000s) | Metric | June 30, 2020 | June 30, 2019 | | :--- | :--- | :--- | | Accounts under management | 150 | 157 | | Subscribers under management | 257 | 280 | Ting Internet Metrics (in '000s) | Metric | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Accounts under management | 13 | 9 | | Serviceable addresses | 49 | 34 | Domain Services Metrics (in '000s) | Metric | H1 2020 | H1 2019 | | :--- | :--- | :--- | | Total new, renewed & transferred-in registrations | 9,503 | 8,939 | | Total domains under management (at June 30) | 24,592 | 25,010 | COVID-19 Response and Impact The COVID-19 pandemic significantly impacted the Network Access segment, leading to the shutdown of Roam Mobility with a $1.43 million impairment charge, while Domain Services experienced growth - The company shut down its Roam Mobility brands effective June 30, 2020, due to a lack of demand caused by the halt in business and leisure travel, leading to a $1.43 million impairment charge183191 - Ting Mobile experienced a moderate drop in data usage and increased churn from low-margin business accounts as customers worked from home and businesses halted operations190 - The Domain Services segment saw growth, with total domains under management in the OpenSRS brand increasing by 807,000 since March 31, 2020, as more businesses established an online presence193 Results of Operations Net revenues decreased 2% YoY to $82.1 million in Q2 2020, while H1 2020 revenues increased 2% to $166.1 million, with Adjusted EBITDA for Q2 2020 rising 6% to $12.2 million Net Revenue Change Analysis (Q2 2020 vs Q2 2019) | Category | Change (in millions) | Reason | | :--- | :--- | :--- | | Mobile Services | ($3.4) | Reduced subscribers and usage (COVID-19) | | Fiber (Other Services) | $1.8 | Acquisition of Cedar and organic growth | | Domain Services | ($0.3) | Decline in some brands offset by growth in others | | Total Net Revenue | ($2.0) | | - Cost of revenues for Q2 2020 included a $1.5 million impairment charge related to Ting TV, a product under development for Ting Fiber that was discontinued245260 - Amortization of intangible assets increased in H1 2020 by $1.3 million, primarily due to the acquisitions of Ascio, Cedar, and FreedomPop customer relationships280 - An impairment of definite life intangible assets of $1.4 million was recorded in Q2 2020 due to the write-off of Roam Mobility customer relationships upon the shutdown of the business281 Adjusted EBITDA Adjusted EBITDA for Q2 2020 increased by 6% to $12.2 million, and for H1 2020, it grew 19% to $24.9 million, driven by Ting Fiber and Ascio acquisition synergies Reconciliation of Net Income to Adjusted EBITDA (in thousands of U.S. dollars) | Line Item | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income | $157 | $2,616 | $2,991 | $5,415 | | Depreciation & Amortization | $7,510 | $4,737 | $13,707 | $8,702 | | Impairment of definite life intangible assets | $1,431 | - | $1,431 | - | | Interest expense, net | $846 | $1,314 | $1,996 | $2,286 | | Provision for income taxes | $449 | $1,819 | $1,550 | $3,076 | | Stock-based compensation | $847 | $685 | $1,648 | $1,210 | | Other adjustments | $850 | $315 | $1,263 | $228 | | Adjusted EBITDA | $12,175 | $11,486 | $24,856 | $20,917 | Liquidity and Capital Resources As of June 30, 2020, the company's cash balance was $8.9 million, a decrease of $11.5 million from year-end 2019, primarily due to capital expenditures and acquisitions, partially offset by operating cash flow - Cash from operating activities for H1 2020 was $23.0 million, a 44% increase from H1 2019310 - Investing activities used $30.9 million in H1 2020, including $22.1 million for property and equipment and $8.8 million for the Cedar acquisition313 - The company has an outstanding balance of $114.4 million on its Amended 2019 Credit Facility as of June 30, 2020329 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency and interest rate risks, which it mitigates using foreign exchange forward contracts and an interest rate swap with a notional value of $70 million - The company uses foreign exchange forward contracts to hedge its Canadian dollar expense exposure, holding contracts with a notional amount of $52.1 million as of June 30, 2020322323 - To manage interest rate risk on its credit facility, the company entered into a pay-fixed, receive-variable interest rate swap with a notional value of $70 million320 - A sensitivity analysis indicated that a hypothetical 10% adverse movement in the USD/CAD exchange rate would decrease net income by approximately $1.0 million for the quarter, before hedging effects326 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, excluding the recently acquired Cedar, with no material changes to internal controls during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2020330 - The assessment of disclosure controls excluded Cedar, which was acquired in Q1 2020330 - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls332 PART II OTHER INFORMATION Legal Proceedings The company is involved in various legal claims and lawsuits arising from the normal course of business, none of which are expected to have a material adverse effect - The company is involved in various investigations, claims, and lawsuits from normal business operations, none of which are expected to be individually or in the aggregate materially harmful333 Risk Factors This section updates risk factors, focusing on the adverse impacts of the COVID-19 pandemic and risks associated with the recent asset sale to DISH, including contingent consideration and brand sharing - The COVID-19 pandemic has adversely impacted business, leading to the shutdown of the Roam Mobility brand and reduced customer usage and increased churn for Ting Mobile336 - Contingent Consideration Risk: The 10-year payment stream from DISH is dependent on the revenue generated by transferred subscribers, which could be diminished by churn or lower profitability under DISH's control339 - Brand Sharing Risk: Sharing the 'Ting' brand with DISH for mobile services while Tucows uses it for fiber could cause consumer confusion and reputational damage to the Ting Fiber business340 - MNO Commitment Risk: Tucows retains an MNO contract not assigned to DISH and must meet its minimum revenue commitments, which may be challenging without a direct relationship with subscribers341 Unregistered Sales of Equity Securities and Use of Proceeds Under its $40 million stock buyback program, the company repurchased 3,500 shares for $0.2 million during Q2 2020, with approximately $36.7 million remaining available Share Repurchase Activity (Q2 2020) | Period | Total Shares Repurchased | Average Price Paid per share | Dollar value of shares that may yet be purchased | | :--- | :--- | :--- | :--- | | April 2020 | 3,500 | $46.87 | $36,719,000 | | May 2020 | - | - | $36,719,000 | | June 2020 | - | - | $36,719,000 | Defaults Upon Senior Securities None Mine Safety Disclosures Not applicable Other Information None Exhibits This section lists the exhibits filed with the report, including articles of incorporation, bylaws, and various certifications required by the SEC, as well as XBRL data files