Tucows(US:TCX)2020-11-05 22:06PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements The consolidated financial statements present Tucows Inc.'s financial position, operations, and cash flows, reflecting strategic acquisitions and asset sales Consolidated Balance Sheets Total assets increased to $444.9 million by September 30, 2020, driven by property and goodwill growth, while cash decreased Consolidated Balance Sheet Highlights (in thousands of U.S. dollars) | Account | Sep 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash and cash equivalents | $10,155 | $20,393 | ($10,238) | | Property and equipment | $109,767 | $82,121 | $27,646 | | Goodwill | $116,270 | $109,818 | $6,452 | | Total Assets | $444,923 | $425,918 | $18,005 | | Liabilities & Equity | | | | | Deferred revenue, current portion | $128,569 | $123,101 | $5,468 | | Loan payable | $113,672 | $113,503 | $169 | | Total Liabilities | $344,542 | $331,724 | $12,818 | | Total Stockholders' Equity | $100,381 | $94,194 | $6,187 | Consolidated Statements of Operations and Comprehensive Income Net revenues and income declined in Q3 and YTD 2020, primarily due to the Ting Mobile asset sale and Roam Mobility shutdown Key Performance Indicators (in thousands of U.S. dollars, except per share data) | Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $74,311 | $88,129 | $240,418 | $251,199 | | Gross Profit | $19,941 | $27,574 | $68,057 | $74,732 | | Income from Operations | $1,312 | $8,601 | $8,021 | $19,378 | | Net Income | $716 | $4,205 | $3,707 | $9,620 | | Diluted EPS | $0.07 | $0.39 | $0.35 | $0.89 | - A gain of $1.09 million was recognized on the sale of Ting customer assets during the third quarter of 202013 Consolidated Statements of Cash Flows Operating cash flow increased to $34.4 million, but significant investing activities led to a $10.2 million net decrease in cash Cash Flow Summary for the Nine Months Ended Sep 30 (in thousands of U.S. dollars) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $34,444 | $27,185 | | Net cash used in investing activities | ($41,568) | ($62,747) | | Net cash (used in) provided by financing activities | ($3,114) | $34,914 | | Increase (decrease) in cash | ($10,238) | ($648) | - Key investing activities in 2020 included $32.7 million for property and equipment additions and $8.8 million (net of cash) for the acquisition of Cedar Holdings Group17 - Financing activities in 2020 included $3.3 million for the repurchase of common stock, compared to $5.0 million in the same period of 201916 Notes to Consolidated Financial Statements Notes detail key accounting policies, the Cedar acquisition, Ting Mobile asset sale, Roam Mobility discontinuation, and revenue disaggregation by segment - On January 1, 2020, the company acquired Cedar Holdings Group, a fiber Internet provider, for a net purchase consideration of $13.9 million, including $9.0 million in cash, $2.0 million in stock, and $3.1 million in contingent consideration. The acquisition resulted in $6.5 million of goodwill2729 - On August 1, 2020, the company sold its Ting Mobile customer accounts to DISH Wireless L.L.C. In return, Tucows will receive a monthly fee for 10 years based on the net revenue from these customers. This resulted in a Q3 2020 gain of $1.09 million133134135 - In June 2020, the company discontinued its Roam Mobility operations due to the impact of the COVID-19 pandemic on travel, resulting in an impairment loss of $1.4 million on customer relationship intangible assets for the nine months ended Sep 30, 202048 Disaggregation of Revenue for Nine Months Ended Sep 30 (in thousands of U.S. dollars) | Segment/Service | 2020 | 2019 | | :--- | :--- | :--- | | Network Access Services | | | | Retail mobile services | $44,734 | $63,516 | | Mobile platform services | $376 | $0 | | Other professional services | $1,457 | $0 | | Fiber Internet Services | $13,379 | $7,977 | | Total Network Access | $59,946 | $71,493 | | Domain Services | | | | Wholesale | $153,845 | $150,449 | | Retail | $25,669 | $26,138 | | Portfolio | $958 | $3,119 | | Total Domain Services | $180,472 | $179,706 | | Total Net Revenues | $240,418 | $251,199 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the strategic pivot in Network Access, revenue impacts from asset sales, growth in Domain Services, and liquidity outlook Overview and Key Business Metrics The company's two segments, Network Access and Domain Services, saw a strategic shift in mobile and growth in fiber internet and domains - The company is organized into two segments: Network Access Services and Domain Services142 - On August 1, 2020, the company sold substantially all of its retail mobile customer relationships to DISH, pivoting its mobile strategy towards a Mobile Services Enabler (MSE) platform145 Key Business Metrics Growth (YoY) | Metric | Sep 30, 2020 | Sep 30, 2019 | Change | | :--- | :--- | :--- | :--- | | Ting Internet accounts (in '000s) | 14 | 10 | +40% | | Ting Internet serviceable addresses (in '000s) | 50 | 34 | +47% | | Total domains under management (in '000s) | 25,027 | 23,858 | +4.9% | Opportunities, Challenges and Risks (including COVID-19) Key risks include foreign exchange and competition, while COVID-19 had mixed impacts, leading to Roam Mobility shutdown but boosting domain services - The company faces significant foreign exchange risk as revenues are primarily in USD while a major portion of operating expenses are in CAD166 - The COVID-19 pandemic had a mixed impact. It led to the shutdown of the Roam Mobility brand due to reduced travel, but spurred growth in the Domain Services segment as businesses increased their online presence147188189 - The company has transitioned to a remote work model for most employees and implemented safety protocols for field teams, expecting no major productivity issues or material expenditures for business continuity176177184 - Management does not anticipate material impairments to goodwill, intangible assets, or other long-lived assets due to COVID-19 at this time193 Results of Operations Q3 2020 net revenues declined 16% due to mobile service changes, partially offset by fiber internet growth, impacting operating income and Adjusted EBITDA Net Revenue Change by Service (Q3 2020 vs Q3 2019, in millions) | Service Area | Q3 2020 Revenue | Q3 2019 Revenue | Change | | :--- | :--- | :--- | :--- | | Mobile Services | $8.9 | $21.7 | ($12.8) | | Fiber Internet Services | $4.7 | $2.9 | $1.8 | | Domain Services | $60.8 | $63.5 | ($2.7) | | Total | $74.3 | $88.1 | ($13.8) | - The decrease in Mobile Services revenue was driven by the sale of the Ting Mobile customer base to DISH on August 1, 2020, and the shutdown of Roam Mobility214218 - Fiber Internet revenue grew 62% YoY in Q3, driven by the Cedar acquisition ($1.1 million contribution) and organic expansion ($0.7 million)220 Reconciliation of Net Income to Adjusted EBITDA (Q3 2020 vs Q3 2019, in thousands) | Metric | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Net income | $716 | $4,205 | | Adjustments (Depreciation, Amortization, Taxes, Interest, etc.) | $12,554 | $10,627 | | Adjusted EBITDA | $13,270 | $14,832 | - The decrease in Q3 Adjusted EBITDA was primarily due to a lower contribution from outsized Portfolio sales that occurred in Q3 2019, partially offset by growth from wholesale domains and Ting Fiber298 Liquidity and Capital Resources Cash decreased to $10.2 million due to significant investing activities, primarily fiber network expansion and acquisitions, despite strong operating cash flow - Cash decreased by $10.2 million during the first nine months of 2020, ending at $10.2 million305 - Cash from operations was strong at $34.4 million for the nine-month period312 - Major uses of cash included $32.7 million for capital expenditures, primarily for the Ting Fiber network build-out, and $8.8 million for the Cedar acquisition315 - The company has an outstanding balance of $114.4 million on its $240 million Amended 2019 Credit Facility306329 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages foreign currency and interest rate risks through hedging instruments, with a hypothetical 10% CAD/USD adverse movement impacting net income by $3.3 million - The company uses foreign exchange forward contracts to mitigate risk from Canadian dollar expenses. As of Sep 30, 2020, it held contracts with a notional value of $41.4 million323324 - 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 million321 - A sensitivity analysis indicates a hypothetical 10% adverse movement in the CAD/USD exchange rate would decrease net income by approximately $3.3 million for the nine-month period, before hedging325 Item 4. Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2020, excluding the recently acquired Cedar business, with no material changes to internal controls - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2020330 - The evaluation of internal controls excluded Cedar, which was acquired in Q1 2020. Cedar's total assets were $15.5 million and its nine-month revenues were $3.5 million330 - No material changes were made to internal controls over financial reporting during the third quarter of 2020331 PART II OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal matters arising from normal business operations, none of which are expected to be materially harmful - The company is involved in various legal matters arising from normal business operations, none of which are expected to be materially harmful332 Item 1A. Risk Factors Updated risk factors include COVID-19 impacts, contingent payments from the DISH asset sale, brand confusion, and customer concentration in the new MSE business - The COVID-19 pandemic has adversely impacted the business, particularly the Network Access segment, through the shutdown of Roam Mobility and reduced usage/increased churn for Ting Mobile334335 - A new risk is that the 10-year payment stream from DISH is contingent on the profitability of the transferred subscriber base, which is now controlled by DISH338 - Sharing the 'Ting' brand with DISH (for mobile) while Tucows uses it for fiber internet could cause consumer confusion and reputational risk339340 - The new MSE business is initially 100% concentrated with one customer, DISH, creating significant dependency risk341 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company's $40 million stock buyback program saw $3.3 million in repurchases for the nine months ended September 30, 2020, with $36.7 million remaining - The company did not repurchase any shares during the three months ended September 30, 2020343 - For the nine months ended September 30, 2020, the company repurchased 70,238 shares for a total of $3.3 million under its $40 million buyback program344 - As of September 30, 2020, $36.7 million remained authorized for repurchase under the current program343 Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - None345 Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Not applicable346 Item 5. Other Information No other material information was reported - None347 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including key agreements with DISH and various certifications - Key exhibits filed include the Asset Purchase Agreement and the Mobile Virtual Network Enabler (MVNE) Master Services Agreement with DISH WIRELESS L.L.C., both dated August 1, 2020352