Tucows(TCX) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Presents Tucows Inc.'s unaudited consolidated financial statements, including balance sheets, income, cash flows, and detailed accounting notes Consolidated Balance Sheets (unaudited) - Total assets increased by $31.6 million (7.0%) from December 31, 2020, to June 30, 2021, primarily driven by increases in property and equipment and deferred costs of fulfillment[15] - Total liabilities increased by $33.1 million (9.5%) over the same period, mainly due to an increase in loan payable and current liabilities[16] Consolidated Balance Sheets (in thousands) | Metric | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Total Assets | $483,532 | $451,903 | | Total Current Assets | $146,435 | $141,200 | | Total Liabilities | $380,222 | $347,106 | | Total Current Liabilities | $170,697 | $162,965 | | Total Stockholders' Equity | $110,824 | $104,698 | Consolidated Statements of Operations and Comprehensive Income (unaudited) - Net revenues decreased by 9% for the three months and 12% for the six months ended June 30, 2021, primarily due to the sale of the majority of the Ting Mobile customer base[19] - Net income significantly increased for both the three and six months ended June 30, 2021, largely driven by a gain on the sale of Ting customer assets[19] Consolidated Statements of Operations and Comprehensive Income (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Revenues | $75,093 | $82,122 | $145,968 | $166,107 | | Gross Profit | $18,239 | $22,966 | $35,692 | $48,116 | | Income from Operations | $(2,034) | $1,537 | $(3,165) | $6,709 | | Net Income | $1,807 | $157 | $3,956 | $2,991 | | Basic EPS | $0.17 | $0.01 | $0.37 | $0.28 | | Diluted EPS | $0.17 | $0.01 | $0.37 | $0.28 | Consolidated Statements of Cash Flows (unaudited) - Cash provided by operating activities decreased by 23% for the six months ended June 30, 2021, compared to the prior year[22][303] - Cash used in investing activities increased by 22% due to significant investments in property and equipment for Fiber network expansion and an investment in securities[22][306] - Cash provided by financing activities significantly increased, primarily from $18.0 million in proceeds from the Amended 2019 Credit Facility drawdown[22][305] Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------- | :----------------------------- | :----------------------------- | | Operating Activities | $17,604 | $23,012 | | Investing Activities | $(37,834) | $(30,932) | | Financing Activities | $19,177 | $(3,614) | | Net Change in Cash | $(1,053) | $(11,534) | | Cash, End of Period | $7,258 | $8,859 | Notes to Consolidated Financial Statements (unaudited) Note 1. Organization of the Company - Tucows Inc. provides high-speed fixed Internet access, Mobile Service Enabler (MSE) solutions, retail mobile phone services, and global Internet services like domain name registration, digital certificates, and email[24] Note 2. Basis of Presentation - The unaudited interim consolidated financial statements reflect normal recurring adjustments and follow the same accounting policies as the 2020 Annual Report, with no material changes except for segment reporting and fair value measurement[25][26] Note 3. Recent Accounting Pronouncements - The company is evaluating ASU No. 2020-04, Reference Rate Reform, which provides optional guidance to ease the burden of reference rate reform on financial reporting, particularly for contracts based on LIBOR[27][28] Note 4. Acquisitions - On January 1, 2020, Tucows acquired Cedar Holdings Group, Incorporated, a fiber Internet provider business[29] Note 5. Derivative Instruments and Hedging Activities - Tucows uses derivative instruments, specifically foreign exchange forward contracts and an interest rate swap, to manage foreign exchange rate risk and interest rate risk, not for speculative purposes[30][31][32] - As of June 30, 2021, the notional amount of forward contracts to sell U.S. dollars for Canadian dollars was $10.8 million, with $9.2 million designated as hedges. The interest rate swap's notional amount remained $70 million[34][35] Fair Value of Derivative Instruments (in thousands) | Derivative Type | Balance Sheet Location | June 30, 2021 Fair Value Asset (Liability) | December 31, 2020 Fair Value Asset (Liability) | | :------------------------------------------------ | :--------------------- | :----------------------------------------- | :--------------------------------------------- | | Foreign Currency Forward Contracts (designated) | Derivative instruments | $1,456 | $3,254 | | Interest Rate Swap Contract (designated) | Derivative instruments | $(26) | $(213) | | Foreign Currency Forward Contracts (not designated) | Derivative instruments | $247 | $606 | | Total | Derivative instruments | $1,677 | $3,647 | Note 6. Goodwill and Other Intangible Assets - Goodwill remained stable at $116.3 million as of June 30, 2021, with 93% allocated to Domain Services and 7% to Fiber Internet Services. No impairment was recognized[42][43] - Amortization expense for intangible assets was $2.3 million for the three months and $5.0 million for the six months ended June 30, 2021[46] Net Book Value of Acquired Intangible Assets (in thousands) | Asset Type | Amortization Period | June 30, 2021 | December 31, 2020 | | :------------------- | :------------------ | :------------ | :---------------- | | Surname domain names | Indefinite life | $11,156 | $11,157 | | Navigation domain names | Indefinite life | $1,135 | $1,135 | | Brand | 7 years | $5,986 | $7,021 | | Customer relationships | 3 - 7 years | $23,273 | $26,664 | | Technology | 2 - 7 years | $- | $274 | | Network rights | 15 years | $1,145 | $1,193 | | Total | | $42,695 | $47,444 | Note 7. Loan Payable - The Amended 2019 Credit Facility provides up to $240 million, maturing on June 13, 2023, and is secured by company assets. Borrowings accrue interest based on the Total Funded Debt to Adjusted EBITDA ratio[48][49][52] - The company was in compliance with all financial covenants (Total Funded Debt to Adjusted EBITDA Ratio, Interest Coverage Ratio, and Capital Expenditures limit) for the periods ended June 30, 2021 and 2020[51] Loan Payable Summary (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Revolver outstanding | $140,400 | $122,400 | | Less: unamortized debt discount | $(533) | $(667) | | Total Loan Payable | $139,867 | $121,733 | Note 8. Income Taxes - For the three months ended June 30, 2021, the company recorded an income tax recovery of $0.1 million, including a $0.4 million tax recovery related to ASU 2016-09[53] - For the six months ended June 30, 2021, the company recorded an income tax expense of $1.0 million, including a $0.2 million tax recovery related to ASU 2016-09[55] Provision for Income Taxes (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Provision for income taxes | $(119) | $449 | $964 | $1,550 | | Effective tax rate | -7% | 74% | 20% | 34% | Note 9. Basic and Diluted Earnings per Common Share - Basic and diluted EPS significantly increased for both the three and six months ended June 30, 2021, compared to the prior year, reflecting higher net income[61] - Fewer stock options were excluded from diluted EPS computation in 2021 compared to 2020, indicating more in-the-money options[61][62] Basic and Diluted EPS (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income for the period | $1,807 | $157 | $3,956 | $2,991 | | Basic weighted average shares outstanding | 10,633,601 | 10,567,382 | 10,625,748 | 10,589,806 | | Diluted weighted average shares outstanding | 10,797,921 | 10,653,527 | 10,794,523 | 10,684,304 | | Basic earnings per common share | $0.17 | $0.01 | $0.37 | $0.28 | | Diluted earnings per common share | $0.17 | $0.01 | $0.37 | $0.28 | Note 10. Revenue - Tucows generates revenue from Fiber Internet Services, Mobile Services (wholesale platform and retail), and Domain Services (wholesale and retail domain name registration, value-added services, and portfolio services)[63][67][71][79] - Deferred revenue increased by $2.7 million to $154.9 million at June 30, 2021, primarily driven by Domain Services ($3.4 million increase) offset by Mobile Services ($1.0 million decrease)[91][209] Revenue by Segment (in thousands) | Segment (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Fiber Internet Services | $5,825 | $4,414 | $11,196 | $8,722 | | Mobile Services | $7,006 | $17,567 | $11,286 | $37,715 | | Domain Services | $62,262 | $60,141 | $123,486 | $119,670 | | Total Net Revenues | $75,093 | $82,122 | $145,968 | $166,107 | Note 11. Costs to obtain and fulfill a Contract - Deferred costs to fulfill contracts, primarily domain registration costs, increased by $3.5 million (3%) to $114.6 million at June 30, 2021[95][97][241] - For the six months ended June 30, 2021, the company deferred $92.3 million and amortized $88.7 million of contract costs, with no impairment loss recognized[95] Note 12. Leases - Tucows leases datacenters, corporate offices, and fiber-optic cables under operating leases with terms ranging from 1 to 20 years[98] - The weighted average remaining lease term is 7.87 years, with a weighted average discount rate of 3.30% as of June 30, 2021[100] Total Lease Cost (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Lease Cost | $702 | $802 | $1,463 | $1,721 | Note 13. Segment Reporting - Effective Q1 2021, Tucows reorganized its reporting structure into three operating segments: Fiber Internet Services, Mobile Services, and Domain Services, reflecting a shift in business and management structures[105][106] - Key measures of segment performance are Segment Gross Margin and Segment Adjusted EBITDA, which exclude certain corporate costs and non-cash items[110][113] Segment Adjusted EBITDA (in thousands) | Segment (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Fiber Internet Services | $(3,320) | $(1,071) | $(5,913) | $(2,133) | | Mobile Services | $5,284 | $3,868 | $9,763 | $8,856 | | Domain Services | $12,750 | $12,351 | $26,570 | $23,898 | | Consolidated Totals | $11,158 | $12,175 | $23,881 | $24,856 | Note 14. Stockholders' Equity - Total stockholders' equity increased by $6.1 million to $110.8 million from December 31, 2020, to June 30, 2021, driven by net income and stock-based compensation, partially offset by other comprehensive loss[121] - The company did not repurchase shares under its 2021 stock buyback program for the three and six months ended June 30, 2021[122] Stockholders' Equity Transactions (in thousands, except share count) | Metric | Balances, Dec 31, 2020 | Exercise of Stock Options | Shares Deducted for Taxes | Stock-based Compensation | Net Income | Other Comprehensive Income (Loss) | Balances, June 30, 2021 | | :-------------------------------- | :--------------------- | :------------------------ | :------------------------ | :----------------------- | :--------- | :-------------------------------- | :---------------------- | | Common Stock (Number) | 10,612,414 | 73,875 | (20,775) | - | - | - | 10,665,514 | | Common Stock (Amount) | $20,798 | $2,659 | - | - | - | - | $23,457 | | Additional Paid-in Capital | $1,458 | $(1,183) | $(298) | $2,231 | - | - | $2,208 | | Retained Earnings | $80,106 | - | - | - | $3,956 | - | $84,062 | | Accumulated Other Comprehensive Income (Loss) | $2,336 | - | - | - | - | $(1,239) | $1,097 | | Total Stockholders' Equity | $104,698 | $1,476 | $(298) | $2,231 | $3,956 | $(1,239) | $110,824 | Note 15. Share-based Payments - Total unrecognized compensation cost for unvested stock options was approximately $11.2 million as of June 30, 2021, to be recognized over a weighted average period of 2.2 years[128] - Stock-based compensation expense was $1.2 million for the three months and $2.2 million for the six months ended June 30, 2021, an increase from the prior year periods[129][130] Stock Option Activity (Number of Shares) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Outstanding, beginning | 808,469 | 730,037 | 845,020 | 754,497 | | Granted | 239,050 | 190,025 | 239,050 | 195,525 | | Exercised | (45,538) | (16,922) | (73,875) | (41,935) | | Forfeited | (9,498) | (4,826) | (17,562) | (8,315) | | Expired | (1,386) | (1,036) | (1,536) | (2,494) | | Outstanding, end | 991,097 | 897,278 | 991,097 | 897,278 | | Exercisable, end | 438,437 | 390,868 | 438,437 | 390,868 | Note 16. Fair Value Measurement - The company uses a valuation hierarchy (Level 1, 2, 3) for fair value measurements, with derivative instruments primarily classified under Level 2[132][134] Fair Value of Derivative Instruments (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :-------------------------- | :------------ | :---------------- | | Derivative instrument asset, net | $1,677 | $3,647 | | Total assets, net | $1,677 | $3,647 | Note 17. Other income - Tucows recognized a gain of $4.8 million for the three months and $10.2 million for the six months ended June 30, 2021, from the sale of Ting customer assets to DISH Wireless, L.L.C. in August 2020[135][136] - This income is a 10-year payment stream based on the margin generated by the transferred subscribers[135] Note 18. Contingencies - Management believes that the resolution of current legal claims and lawsuits will not have a material adverse effect on the company's financial position[137] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Tucows' financial condition and results for Q2 2021, covering segment performance, risks, COVID-19 impact, and liquidity SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS - The report contains forward-looking statements regarding financial results and business aspects, subject to risks and uncertainties that could cause actual results to differ materially[139] - Key factors affecting performance include working capital, debt servicing, vendor/customer relationships, competition, personnel retention, effective business management, goodwill impairment, regulatory approvals, fiber network investments, tax consequences, acquisition integration, COVID-19 impacts, and anticipated payments from DISH - All forward-looking statements are based on information available as of the document date, with no obligation to update except as required by law[139][141] OVERVIEW - Tucows' mission is to provide simple, useful Internet services, reducing complexity for customers accessing the Internet and using services like domain name registration and email[143][144] - In Q1 2021, the company reorganized into three operating segments: Fiber Internet Services, Mobile Services, and Domain Services, with the CEO now reviewing these as distinct segments[144][145] - Fiber Internet Services: Provides fixed high-speed Internet access (Ting Internet) in select U.S. towns, with 20,000 active subscribers and 71,000 serviceable addresses as of June 30, 2021[147][148][149][150] - Mobile Services: Includes Mobile Service Enabler (MSE) platform and professional services, plus retail mobile phone services for a small customer subset after selling most of its legacy retail mobile customer relationships to DISH in August 2020[151][152][156][157] - Domain Services: Offers wholesale and retail domain name registration, value-added services (e.g., hosted email, WHOIS privacy), and portfolio services through brands like OpenSRS, eNom, Ascio, EPAG, and Hover, managing 25.6 million domains[158][161][165] Net Revenues (in millions) | Period | 2021 (in millions) | 2020 (in millions) | | :-------------------- | :----------------- | :----------------- | | Three months ended June 30 | $75.1 | $82.1 | | Six months ended June 30 | $146.0 | $166.1 | OPPORTUNITIES, CHALLENGES AND RISKS - Foreign Currency Risk: Fluctuations in USD/CAD exchange rates can materially affect financial results, with hedging programs in place to mitigate risk[167] - Fiber Internet Services: Significant upfront investments in FTTH deployments carry risks of non-recovery due to technological, regulatory, and competitive changes[168] - Mobile Services: High concentration risk with DISH as the sole MSE platform customer, and profitability tied to DISH's subscriber volumes. The 10-year payment stream from the Ting customer asset sale is also subject to churn and profitability risks. The company also retains minimum revenue commitments with an excluded MNO agreement[170][171][172][173] - Domain Services: Intense competition and pricing pressure in the domain market, requiring focus on scalability, customer service, and maintaining renewal rates. Revenue from domain name sales and advertising faces flat to declining trends[174][175] Critical Accounting Policies - No material changes to critical accounting policies and estimates were reported, as previously disclosed in the 2020 Annual Report[177] Current COVID-19 Response - Employees: Tucows continues its remote work policy, with field teams (e.g., Fiber installation) following social distancing and safety protocols[178] - Customers: Uninterrupted service for Domain and Mobile segments. Fiber Internet upgraded lower-tier customers to gigabit access at no charge. New customer acquisition for Fiber Internet remains slower due to modified safe-install solutions and customer reluctance for in-home visits[179][180] - Community: Established free, fiber-fed, drive-up Wi-Fi hotspots in Ting Fiber network cities to provide Internet access for critical services[181] - Financial & Operational Impacts: Limited impact in 2021, with trends stabilizing. Fiber Internet sees returned growth in subscribers and serviceable addresses. Mobile Services demand impacted, but usage normalizing. Domain Services experienced growth due to increased online presence during the pandemic, but this growth may not be sustained. No significant change to liquidity or credit risk[183][184][185][186] - Tucows does not anticipate a material impairment with respect to goodwill, intangible assets, long-lived assets, or right-of-use assets due to COVID-19[189] RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AS COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 NET REVENUES - Total net revenues decreased by $7.0 million (9%) for the three months and $20.1 million (12%) for the six months ended June 30, 2021, primarily due to a $10.6 million (three months) and $26.4 million (six months) reduction in Mobile Services revenue[207][208] - Mobile Services revenue decline was driven by the sale of Ting Mobile customer base to DISH and the shutdown of Roam Mobility brands. New Mobile Platform Services and Other Professional Services revenue streams emerged post-DISH agreement[211][212] - Fiber Internet Services revenue increased by $1.4 million (32%) for three months and $2.5 million (29%) for six months, driven by subscriber growth and network expansion[215][216] - Domain Services revenue increased by $2.1 million for three months and $3.8 million for six months, reflecting continued wholesale registration growth due to the COVID-19 pandemic[219][220][221][222] Net Revenues by Segment (in thousands) | Segment (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Fiber Internet Services | $5,825 | $4,414 | $11,196 | $8,722 | | Mobile Services | $7,006 | $17,567 | $11,286 | $37,715 | | Domain Services | $62,262 | $60,141 | $123,486 | $119,670 | | Total Net Revenues | $75,093 | $82,122 | $145,968 | $166,107 | COST OF REVENUES - Total cost of revenues decreased by $2.3 million (4%) for the three months and $7.7 million (7%) for the six months ended June 30, 2021, primarily due to a $5.3 million (three months) and $12.4 million (six months) reduction in Mobile Services costs[239][240] - Mobile Services cost reduction is a direct result of the transition from MVNO to MSE, including the sale of Ting Mobile customer base and Roam Mobility shutdown[242][243] - Fiber Internet Services costs increased by $1.3 million (76%) for three months and $2.3 million (68%) for six months, driven by network expansion and upfront investments[244][246] - Domain Services costs increased by $1.3 million for three months and $0.5 million for six months, aligned with strong performance and domain additions due to COVID-19[247][249] - Network expenses increased by $0.3 million for three months and $2.0 million for six months, due to Fiber and Mobile service line expansion and increased depreciation, partially offset by lower impairment charges[250][251][256][257] Cost of Revenues by Segment (in thousands) | Segment (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Fiber Internet Services | $3,026 | $1,665 | $5,661 | $3,381 | | Mobile Services | $3,320 | $8,660 | $6,098 | $18,517 | | Domain Services | $42,787 | $41,465 | $83,561 | $83,080 | | Network Expenses | $7,721 | $7,366 | $14,956 | $13,013 | | Total Cost of Revenues | $56,854 | $59,156 | $110,276 | $117,991 | SALES AND MARKETING - Sales and marketing expenses increased by $0.2 million (2%) for the three months, driven by increased stock-based compensation and Fiber Internet expansion costs, partially offset by Mobile Services marketing savings[260] - For the six months, expenses decreased by $0.5 million (3%), primarily due to Mobile Services marketing savings, partially offset by increased stock-based compensation[260][261] Sales and Marketing Expenses (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Sales and marketing | $9,376 | $9,218 | $17,687 | $18,203 | TECHNICAL OPERATIONS AND DEVELOPMENT - Expenses increased by $0.1 million (3%) for the three months, due to higher stock-based compensation and external contractor spending for MSE platform development[263] - For the six months, expenses increased by $0.5 million (8%), driven by increased salaries, wage inflation, and external contractors for MSE platform development[263][264] Technical Operations and Development Expenses (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Technical operations and development | $3,170 | $3,067 | $6,302 | $5,818 | GENERAL AND ADMINISTRATIVE - Expenses decreased by $0.3 million (5%) for the three months, due to reduced Mobile Services credit card fees and bad debt charges post-DISH agreement, and lower foreign exchange expenses, partially offset by increased personnel and stock-based compensation[267] - For the six months, expenses remained flat at $10.2 million[267][268] General and Administrative Expenses (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | General and administrative | $5,210 | $5,465 | $10,163 | $10,206 | DEPRECIATION OF PROPERTY AND EQUIPMENT - Depreciation costs remained relatively flat for both the three and six months ended June 30, 2021, compared to the prior year periods[270][271] Depreciation of Property and Equipment (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Depreciation of property and equipment | $127 | $125 | $248 | $238 | AMORTIZATION OF INTANGIBLE ASSETS - Amortization decreased by $0.2 million (7%) for the three months and $0.8 million (15%) for the six months, driven by write-offs of Mobile Services related intangible assets (Ting Mobile sale, Roam Mobility shutdown) in the prior year[272] - This was partially offset by an increase related to the Cedar acquisition[272][273] Amortization of Intangible Assets (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Amortization of intangible assets | $2,322 | $2,504 | $4,642 | $5,451 | IMPAIRMENT OF DEFINITE LIFE INTANGIBLE ASSETS - Impairment decreased by $1.4 million for both periods, as the prior year included a write-off of Roam Mobility brands customer relationships due to business shutdown[274] Impairment of Definite Life Intangible Assets (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Impairment of definite life intangible assets | $- | $1,431 | $- | $1,431 | LOSS (GAIN) ON CURRENCY FORWARD CONTRACTS - The company recorded a net loss of $0.1 million for the three months ended June 30, 2021, compared to a net gain of $0.4 million in the prior year[276] - For the six months, a net gain of $0.2 million was recorded, compared to a net loss of $0.1 million in the prior year[276][277] - As of June 30, 2021, the balance sheet reflected a derivative instrument asset of $1.8 million and a liability of $0.1 million from foreign exchange contracts[278] Loss (Gain) on Currency Forward Contracts (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Loss (gain) on currency forward contracts | $63 | $(381) | $(190) | $60 | OTHER INCOME (EXPENSES) - Other income increased by $4.7 million for the three months and $10.3 million for the six months, primarily due to the gain on sale of Ting Customer Assets to DISH ($4.8 million and $10.2 million, respectively)[280] - This increase was partially offset by higher interest expense on the Amended 2019 Credit Facility for the three-month period, though interest was lower for the six-month period due to lower variable rates[280][281] Other Income (Expenses), Net (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Other income (expense), net | $3,722 | $(931) | $8,085 | $(2,168) | INCOME TAXES - Income tax recovery of $0.1 million for the three months ended June 30, 2021, compared to an expense of $0.4 million in the prior year, influenced by ASU 2016-09 tax recovery and discrete adjustments[284] - Income tax expense of $1.0 million for the six months ended June 30, 2021, compared to $1.6 million in the prior year, also impacted by ASU 2016-09 and discrete adjustments[285] Provision for Income Taxes (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Provision for income taxes | $(119) | $449 | $964 | $1,550 | | Effective tax rate | -7% | 74% | 20% | 34% | ADJUSTED EBITDA - Adjusted EBITDA decreased by $1.0 million for both the three and six months ended June 30, 2021[293] - The decrease was primarily driven by increased investment in Ting Fiber due to network build and expansion, partially offset by increased contributions from Mobile Services (gain on Ting Customer Assets sale and new MSE Platform revenues) and Domain Services (strong performance)[294] Adjusted EBITDA (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Adjusted EBITDA | $11,158 | $12,175 | $23,881 | $24,856 | OTHER COMPREHENSIVE INCOME (LOSS) - Other comprehensive income (loss) decreased significantly for both periods, with a loss of $0.8 million for three months and $1.2 million for six months in 2021[297] - This was due to changes in fair value adjustments on outstanding hedged contracts and net amounts reclassified to earnings[297][298][299] Other Comprehensive Income (Loss) (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Other comprehensive income (loss) | $(773) | $1,314 | $(1,239) | $123 | LIQUIDITY AND CAPITAL RESOURCES - Cash and cash equivalents decreased by $1.0 million as of June 30, 2021, compared to December 31, 2020[300] - Principal uses of cash: $21.7 million for property and equipment (Fiber expansion) and $2.0 million for an investment in an unrelated entity - Offset by: $18.0 million from Amended 2019 Credit Facility drawdown, $3.5 million from operating activities, and $1.2 million from stock option exercises[300] - Net cash inflows from operating activities decreased by 23% to $17.6 million for the six months ended June 30, 2021[303] - Net cash inflows from financing activities increased by 633% to $19.2 million, driven by Credit Facility drawdown[305] - Net cash used in investing activities increased by 22% to $37.8 million, primarily for Fiber network expansion[306] - Management believes cash flow from operations will be adequate for working capital, capital expenditures, and loan repayments for at least the next 12 months[307] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses Tucows' exposure to market risks, primarily foreign currency exchange rate risk and interest rate risk, and mitigation strategies - Foreign Currency Risk: Significant portion of expenses incurred in Canadian dollars, while sales are primarily in U.S. dollars. Foreign exchange forward contracts are used to mitigate this risk[311][312] - Interest Rate Risk: Exposure related to the Amended 2019 Credit Facility. An interest rate swap with a notional value of $70 million is in place to limit fluctuations on variable interest payments[314][315] - Sensitivity Analysis: A hypothetical 10% adverse movement in foreign currency exchange rates would decrease net income by approximately $1.4 million for the three months ended June 30, 2021, before hedging effects[316] - LIBOR Transition: The company is monitoring the discontinuation of LIBOR and will amend credit facility and interest rate swap agreements accordingly, potentially adopting practical expedients from ASU 2020-04[319][320] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures as of June 30, 2021, concluding they were effective with no material changes to internal controls - Disclosure controls and procedures were deemed effective at the reasonable assurance level as of June 30, 2021[321] - No material changes in internal controls over financial reporting occurred during the three months ended June 30, 2021[321] PART II. OTHER INFORMATION Item 1. Legal Proceedings Tucows is involved in various legal investigations, claims, and lawsuits, none of which management believes will materially harm the business - The company is involved in various legal proceedings, but management does not believe they will have a material adverse effect on the business[324] Item 1A. Risk Factors This section states that there are no new material risk factors to report for the current period, referring to the 2020 Annual Report - No new material risk factors are applicable for this reporting period; refer to the 2020 Annual Report for previously disclosed risks[325] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The 2021 Buyback Program was approved for up to $40 million, but no shares were repurchased under any program during the reporting period - The 2021 Buyback Program, approved for up to $40 million, commenced on February 10, 2021, and terminates on or before February 9, 2022[327] - No shares were repurchased under either the 2020 or 2021 Buyback Programs for the three and six months ended June 30, 2021[327] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[328] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable[329] Item 5. Other Information This section states that there is no other information to report for the period - No other information to report[330] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, certifications, and Inline XBRL documents - Includes Fourth Amended and Restated Articles of Incorporation and Articles of Amendment - Includes Second Amended and Restated Bylaws and Amendment No. 1 - Contains CEO and CFO Rule 13a-14(a)/15d-14(a) Certifications and Section 1350 Certifications - Includes Inline XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, Presentation Linkbase, and Cover Page Interactive Data File[333] Signatures This section contains the signatures of the registrant's authorized officers, Elliot Noss and Davinder Singh, certifying the report on August 5, 2021 - The report was signed by Elliot Noss, President and Chief Executive Officer, and Davinder Singh, Chief Financial Officer, on August 5, 2021[336]