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TUCOWS INC 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-31
  3. Ex-31
  4. Ex-32
  5. Ex-32
  6. Ex-32
tcx20130630_10q.htm

 

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 June 30, 2013

 

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)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).Yes ☒  No ☐

 

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

 

Large accelerated filer ☐

  

Accelerated filer ☐

 

  

  

Non-accelerated filer ☐

  

Smaller reporting company ☒

(Do not check if a smaller reporting company)

  

  

 

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 August 8, 2013, there were 43,317,674 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

1

 

  

  

 

Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012

1

 

  

  

 

Consolidated Statements of Operations and Comprehensive Income (unaudited) for the three and six months ended June 30, 2013 and 2012

2

 

  

  

 

Consolidated Statements of Cash Flows (unaudited) for the three and six months ended June 30, 2013 and 2012

3

 

  

  

 

Notes to Consolidated Financial Statements (unaudited)

4

 

  

  

Item 2.

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

15

 

  

  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

 

  

  

Item 4.

Controls and Procedures

33

 

  

  

PART II

OTHER INFORMATION 

 

  

  

Item 1.

Legal Proceedings

34

 

  

  

Item 1A.

Risk Factors

34

 

  

  

Item 4.

Mine Safety Disclosures

34

 

  

  

Item 6.

Exhibits

35

 

  

  

Signatures

  

36

 

TRADEMARKS, TRADE NAMES AND SERVICE MARKS

 

 

Tucows®, Butterscotch®, EPAG®, Hover®, OpenSRS®, Platypus®, Ting® 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 U.S. dollars)

 

   

June 30,

   

December 31,

 
   

2013

   

2012

 

 

 

(unaudited)

         

Assets

               
                 

Current assets:

               

Cash and cash equivalents

  $ 6,465,126     $ 6,415,679  

Accounts receivable, net of allowance for doubtful accounts of $91,474 as of June 30, 2013 and $73,970 as of December 31, 2012

    5,627,555       4,413,265  

Inventory

    187,424       587,104  

Prepaid expenses and deposits

    4,784,513       5,081,408  

Derivative instrument asset, current portion (note 4)

    -       412,944  

Prepaid domain name registry and ancillary services fees, current portion

    46,629,631       45,170,167  

Income taxes recoverable

    628,476       1,730,631  

Total current assets

    64,322,725       63,811,198  
                 

Derivative instrument asset, long-term portion (note 4)

    -       31,838  

Prepaid domain name registry and ancillary services fees, long-term portion

    12,242,246       12,318,723  

Property and equipment

    1,784,875       1,352,144  

Deferred tax asset, long-term portion (note 7)

    6,006,995       5,970,462  

Intangible assets (note 5)

    15,870,402       16,415,651  

Goodwill

    18,873,127       18,873,127  

Total assets

  $ 119,100,370     $ 118,773,143  
                 
                 

Liabilities and Stockholders' Equity

               
                 

Current liabilities:

               

Accounts payable

  $ 2,444,529     $ 1,928,459  

Accrued liabilities

    3,023,913       2,522,229  

Customer deposits

    4,668,101       4,955,671  

Derivative instrument liability, current portion (note 4)

    800,635       -  

Loan payable, current portion (note 6)

    7,500,000       3,700,000  

Deferred revenue, current portion

    57,003,871       54,997,887  

Accreditation fees payable, current portion

    535,311       512,847  

Deferred tax liability, current portion (note 7)

    795,741       914,429  

Income taxes payable (note 7)

    259,317       1,255,108  

Total current liabilities

    77,031,418       70,786,630  
                 

Deferred revenue, long-term portion

    15,973,216       16,002,464  

Accreditation fees payable, long-term portion

    139,045       145,592  

Deferred rent, long-term portion

    64,026       54,150  

Deferred tax liability, long-term portion (note 7)

    5,178,300       5,234,100  
                 

Stockholders' equity (note 11)

               

Preferred stock - no par value, 1,250,000 shares authorized; none issued and outstanding

    -       -  

Common stock - no par value, 250,000,000 shares authorized; 40,641,488 shares issued and outstanding as of June 30, 2013 and 44,322,159 shares issued and outstanding as of December 31, 2012

    9,755,391       10,084,417  

Additional paid-in capital

    28,207,230       33,931,529  

Deficit

    (16,845,634 )     (17,509,843 )

Accumulated other comprehensive income (loss)

    (402,622 )     44,104  

Total stockholders' equity

    20,714,365       26,550,207  

Total liabilities and stockholders' equity

  $ 119,100,370     $ 118,773,143  
                 

Commitments and contingencies (note 10)

               

Subsequent events (note 14)

               
  

See accompanying notes to unaudited consolidated financial statements

 

 
1

 

 

Tucows Inc.

Consolidated Statements of Operations and Comprehensive Income

(Dollar amounts in U.S. dollars)

(unaudited)

 

    Three months ended June 30,     Six months ended June 30,  
   

2013

   

2012

   

2013

   

2012

 
      (unaudited)       (unaudited)  
                                 

Net revenues (note 9)

  $ 31,173,357     $ 28,152,614     $ 61,158,379     $ 55,689,920  
                                 

Cost of revenues (note 9):

                               

Cost of revenues

    23,007,506       20,120,211       45,085,405       39,387,336  

Network expenses (*)

    1,269,808       1,213,864       2,524,021       2,470,754  

Depreciation of property and equipment

    151,356       155,638       288,428       303,056  

Amortization of intangible assets (note 5)

    35,910       35,910       71,820       71,820  

Total cost of revenues

    24,464,580       21,525,623       47,969,674       42,232,966  
                                 

Gross profit

    6,708,777       6,626,991       13,188,705       13,456,954  
                                 

Expenses:

                               

Sales and marketing (*)

    2,946,586       2,065,729       5,793,672       4,250,364  

Technical operations and development (*)

    748,137       1,105,575       1,881,967       2,218,720  

General and administrative (*)

    1,698,697       1,748,402       3,397,329       3,531,855  

Depreciation of property and equipment

    54,922       45,522       105,861       92,937  

Amortization of intangible assets (note 5)

    219,030       219,030       438,060       438,060  

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

    146,639       383,838       381,277       (178,271 )

Total expenses

    5,814,011       5,568,096       11,998,166       10,353,665  
                                 

Income from operations

    894,766       1,058,895       1,190,539       3,103,289  
                                 

Other income (expense):

                               

Interest expense, net

    (93,428 )     (54,513 )     (192,790 )     (95,482 )

Other income, net

    -       20,911       -       529,711  

Total other income (expense)

    (93,428 )     (33,602 )     (192,790 )     434,229  
                                 

Income before provision for income taxes

    801,338       1,025,293       997,749       3,537,518  
                                 

Provision for income taxes (note 7)

    213,708       329,295       333,540       1,177,901  
                                 

Net income

    587,630       695,998       664,209       2,359,617  
                                 

Other comprehensive loss net of tax of $133,761 for the three months ended June 30, 2013, and $230,538 for the six months ended June 30, 2013

    260,941       -       446,726       -  
                                 

Comprehensive income for the period

  $ 326,689     $ 695,998     $ 217,483     $ 2,359,617  
                                 
                                 

Basic earnings per common share (note 8)

  $ 0.01     $ 0.02     $ 0.02     $ 0.05  
                                 

Shares used in computing basic earnings per common share (note 8)

    40,323,261       45,912,458       40,327,324       47,003,016  
                                 

Diluted earnings per common share (note 8)

  $ 0.01     $ 0.01     $ 0.01     $ 0.05  
                                 

Shares used in computing diluted earnings per common share (note 8)

    44,278,852       49,449,430       44,294,015       50,203,163  
                                 

(*) Stock-based compensation has been included in operating expenses as follows:

                               

Network expenses

  $ 7,932     $ 6,329     $ 14,058     $ 12,375  

Sales and marketing

  $ 33,909     $ 20,149     $ 60,319     $ 42,931  

Technical operations and development

  $ 20,370     $ 15,047     $ 35,617     $ 27,890  

General and administrative

  $ 29,044     $ 21,571     $ 56,103     $ 42,365  

 

See accompanying notes to consolidated financial statements

 

 
2

 

  

Tucows Inc.

Consolidated Statements of Cash Flows

(Dollar amounts in U.S. dollars)

(unaudited)

 

    Three months ended June 30,     Six months ended June 30,  
   

2013

   

2012

   

2013

   

2012

 
    (unaudited)     (unaudited)  

Cash provided by:

                               

Operating activities:

                               

Net income for the period

  $ 587,630     $ 695,998     $ 664,209     $ 2,359,617  

Items not involving cash:

                               

Depreciation of property and equipment

    206,278       201,160       394,289       395,993  

Amortization of deferred financing charges

    -       700       -       2,200  

Amortization of intangible assets

    254,940       254,940       509,880       509,880  

Deferred income taxes (recovery)

    113,748       (107,146 )     21,683       104,942  

Deferred rent

    4,372       5,931       9,876       13,200  

Acquisition of domain names

    -       -       -       (3,664 )

Disposal of domain names

    20,876       7,301       35,369       23,039  

Gain on disposition of intangible assets

    -       -       -       (508,800 )

(Gain) loss on change in the fair value of forward contracts

    114,846       245,477       565,987       (456,366 )

Stock-based compensation

    91,255       63,096       166,097       125,561  

Change in non-cash operating working capital:

                               

Accounts receivable

    (665,972 )     (22,102 )     (1,214,290 )     (1,036,831 )

Inventory

    121,380       -       399,680       -  

Prepaid expenses and deposits

    635,193       (783,370 )     296,895       (1,891,468 )

Prepaid domain name registry and ancillary services fees

    (341,273 )     (1,378,771 )     (1,382,987 )     (4,298,194 )

Income taxes recoverable/payable

    (2,789 )     (378,492 )     106,364       240,581  

Accounts payable

    1,797       (308,892 )     607,721       605,077  

Accrued liabilities

    1,025,886       255,254       501,684       524,165  

Customer deposits

    273,851       (191,402 )     (287,570 )     65,598  

Deferred revenue

    557,152       1,460,816       1,976,736       5,284,648  

Accreditation fees payable

    (28,082 )     (16,775 )     15,917       25,179  

Net cash provided by operating activities

    2,971,088       3,723       3,387,540       2,084,357  
                                 

Financing activities:

                               

Proceeds received on exercise of stock options

    279,685       219,000       318,194       349,712  

Repurchase of common stock

    -       (1,591,743 )     (6,537,616 )     (7,485,190 )

Proceeds received on loan payable

    -       -       5,200,000       4,000,000  

Repayment of loan payable

    (600,000 )     (311,667 )     (1,400,000 )     (850,000 )

Net cash used in financing activities

    (320,315 )     (1,684,410 )     (2,419,422 )     (3,985,478 )
                                 

Investing activities:

                               

Additions to property and equipment

    (471,966 )     (174,054 )     (918,671 )     (504,327 )

Proceeds on disposal of intangible assets

    -       -       -       508,800  

Net cash (used in) provided by investing activities

    (471,966 )     (174,054 )     (918,671 )     4,473  
                                 

Increase (decrease) in cash and cash equivalents

    2,178,807       (1,854,741 )     49,447       (1,896,648 )
                                 

Cash and cash equivalents, beginning of period

    4,286,319       6,366,302       6,415,679       6,408,209  

Cash and cash equivalents, end of period

  $ 6,465,126     $ 4,511,561       6,465,126       4,511,561  
                                 

Supplemental cash flow information:

                               

Interest paid

  $ 97,369     $ 54,655       196,873       95,831  

Supplementary disclosure of non-cash investing and financing activities:

                               

Property and equipment acquired during the period not yet paid for

  $ 4,864     $ 42,343       4,864       42,343  

 

See accompanying notes to unaudited consolidated financial statements

 

 
3

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION OF THE COMPANY:

 

Tucows Inc., a Pennsylvania corporation (referred to throughout this report as the “Company”, “Tucows”, “we”, “us” or through similar expressions), together with our consolidated subsidiaries, is a global distributor of Internet services, including domain name registration, security and identity products through digital certificates, email and mobile telephony services through its global Internet-based network of Internet Service Providers, web hosting companies and other providers of Internet services to end-users.

 

We were incorporated under the laws of the Commonwealth of Pennsylvania in November 1992 under the name Infonautics, Inc. In August 2001, we completed our acquisition of Tucows Inc., a Delaware corporation, and we changed our name from Infonautics, Inc. to Tucows Inc. Our principal executive office is located in Toronto, Ontario and we have other offices in the Netherlands, Germany and the United States.

 

2. BASIS OF PRESENTATION:

 

The accompanying unaudited interim consolidated balance sheets, and the related consolidated statements of operations and comprehensive income 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 at June 30, 2013 and the results of operations and cash flows for the interim periods ended June 30, 2013 and 2012. 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 Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosure 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, 2012 included in Tucows' 2012 Annual Report on Form 10-K filed with the SEC on March 15, 2013.

 

There have been no material changes to our significant accounting policies during the three and six months ended June 30, 2013 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

The Company recognizes the effects of events or transactions that occur after the balance sheet date but before financial statements are issued (“subsequent events”) if there is evidence that conditions related to the subsequent event existed at the date of the balance sheet date, including the impact of such events on management's estimates and assumptions used in preparing the financial statements. Other significant subsequent events that are not recognized in the financial statements, if any, are disclosed in the notes to the unaudited interim consolidated financial statements.

 

3. NEW ACCOUNTING POLICIES:

 

Recent Accounting Pronouncements Adopted

 

Testing Indefinite-Lived Intangible Assets for Impairment

 

On January 1, 2013, the Company adopted Accounting Standards Update No. 2012-02, Intangibles —Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”) which allows entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU 2012-02 allows an entity to first perform a qualitative assessment to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that this is the case, it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. The adoption of ASU 2012-02 did not materially impact the carrying value of our recorded indefinite-lived intangible assets. The Company will perform its next annual indefinite-lived intangible asset impairment test on December 31, 2013.

 

 
4

 

 

Reclassification Out of Accumulated Other Comprehensive Income

 

The Company adopted Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220): “Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” (“ASU 2013-02”), effective January 1, 2013. ASU 2013-02 was applied prospectively, which requires expanded disclosures for amounts reclassified out of accumulated other comprehensive income by component. The guidance requires the presentation of amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, a cross-reference to other disclosures that provide additional detail about those amounts is required. The adoption of ASU 2013-02 did not materially impact the Company’s consolidated financial statements.

 

4. Derivative instruments and hedging activities:

 

Foreign currency forward contracts

 

In October 2012, the Company entered into a hedging program with a Canadian chartered bank to limit the potential foreign exchange fluctuations in its future cash flows related to a portion of payroll, rent and payments to a Canadian domain name registry supplier that are denominated in Canadian dollars and are expected to be paid by its Canadian operating subsidiary. As part of its risk management strategy, the Company uses derivative instruments to hedge a portion of the foreign exchange risk associated with these costs. The Company does not use these forward contracts for trading or speculative purposes. These forward contracts typically mature between one and eighteen months.

 

The Company has designated these transactions as cash flow hedges of forecasted transactions under ASC Topic 815 “Derivatives and Hedging” (ASC Topic 815). 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 or cash flows attributable to the risk of being hedged are expected to completely offset at inception and on an ongoing basis. Accordingly, quarterly unrealized gains or losses on the effective portion of these contracts have been included within other comprehensive income. The fair value of the contracts, as of June 30, 2013, is recorded as derivative instrument assets and liabilities.

 

As of June 30, 2013, the notional amount of forward contracts that the Company held to sell U.S. dollars in exchange for Canadian dollars was $18.1 million, of which $15.1 million met the requirements of ASC Topic 815 and were designated as hedges (June 30, 2012 - $20.2 million of which none were designated as hedges).

 

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

 

The effect of these derivative instruments on our consolidated financial statements as of, and for the six months ended June 30, 2013, were as follows (amounts presented do not include any income tax effects).

 

Fair value of derivative instruments in the consolidated balance sheets

 

     

As of June 30,

2013

   

As of December 31,

2012

 
               
 

Balance Sheet

 

Fair Value

Asset 

   

Fair Value

Asset 

 

Derivatives

Location

 

(Liability)

   

(Liability)

 
                   

Foreign currency forward contracts designated as cash flow hedges

Derivative instruments

  $ (612,351 )   $ 377,703  
                   

Foreign currency forward contracts not designated as cash flow hedges

Derivative instruments

  $ (188,284 )   $ 67,079  
                   

Total foreign currency forward contracts

Derivative instruments

  $ (800,635 )   $ 444,782  

 

 
5

 

 

Effects of derivative instruments on income and other comprehensive income (OCI) for the three and six months ended June 30, 2013 is as follows:

 

Derivatives in Cash Flow

Hedging Relationship 

 

Amount of

Gain or (Loss)

Recognized in

OCI on

Derivative

(Effective

Portion)

 

Location of

Gain or (Loss)

Reclassified

from

Accumulated

OCI into

Income

(Effective

Portion)

 

Amount of

Gain or (Loss)

Reclassified

from

Accumulated

OCI into

Income

(Effective

Portion)

   

Location of

Gain or (Loss) Recognized in Income on

Derivative (ineffective

Portion and

Amount

Excluded from Effectiveness Testing)

   

Amount of

Gain or (Loss) Recognized in Income on

Derivative (ineffective

Portion and

Amount

Excluded from Effectiveness Testing)

 
                                   

Foreign currency forward contracts for the three months ended June 30, 2013

  $ (256,782 )

Operating

expenses

  $ ( 38,715 )            
       

Cost of

revenues

  $ ( 2,242 )            
                                   

Foreign currency forward contracts for the six months ended June 30, 2013

  $ (442,567 )

Operating

expenses

  $ ( 38,715 )            
       

Cost of

revenues

  $ ( 2,242 )            

 

In addition to the above, for those foreign currency forward contracts not designated as hedged, the Company has recorded a loss (gain) of $0.1 million and $0.4 million for the three months ended June 30, 2013 and June 30, 2012 respectively, and a loss (gain) of $0.4 million and $(0.2) million for the six months ended June 30, 2013 and June 30, 2012 respectively, in the consolidated statement of operations and comprehensive income.

 

5. INTANGIBLE ASSETS:

 

Intangible assets consist of acquired technology, brand, customer relationships, surname domain names and our portfolio of domain names. As reflected in the table below, these balances are being amortized on a straight-line basis over the life of the intangible assets, except for the surname domain names and portfolio domain names; which have been determined to have an indefinite life and which are tested annually for impairment.

 

A summary of acquired intangible assets for the three months ended June 30, 2013 is as follows:

 

   

Technology

2 – 7 years 

   

Brand

7 years 

   

Customer relationships

4 – 7 years 

   

Surname

domain

names

indefinite

life 

   

Direct

navigation

domain

names

indefinite

life 

   

Total

 
                                                 

Net book value, March 31, 2013

  $ 47,880     $ 354,880     $ 1,634,560     $ 12,108,070     $ 2,000,828     $ 16,146,218  

Sales of domain names

                      (5,192

)

    (15,684

)

    (20,876

)

Amortization expense

    (35,910

)

    (43,410

)

    (175,620

)

                (254,940

)

Net book value, June 30, 2013

  $ 11,970     $ 311,470     $ 1,458,940     $ 12,102,878     $ 1,985,144     $ 15,870,402  

 

 
6

 

 

A summary of acquired intangible assets for the six months ended June 30, 2013 is as follows:

 

   

Technology

2 – 7 years 

   

Brand

7 years 

   

Customer relationships

4 – 7 years 

   

Surname

domain

names

indefinite

life 

   

Direct

navigation

domain

names

indefinite

life 

   

Total

 
                                                 

Net book value, December 31, 2012

  $ 83,790     $ 398,290     $ 1,810,180     $ 12,110,017     $ 2,013,374     $ 16,415,651  

Sales of domain names

                      (7,139

)

    (28,230

)

    (35,369

)

Amortization expense

    (71,820

)

    (86,820

)

    (351,240

)

                (509,880

)

Net book value, June 30, 2013

  $ 11,970     $ 311,470     $ 1,458,940     $ 12,102,878     $ 1,985,144     $ 15,870,402  

 

As of June 30, 2013, the accumulated amortization for the definite life intangibles was $4.6 million.

 

6. LOAN PAYABLE:

 

The Company has credit agreements (collectively the “Amended Credit Facility”) with the Bank of Montreal (the “Bank” or “BMO”) that were amended on November 19, 2012, and which provide it with access to two revolving demand loan facilities (the “2012 Demand Loan Facilities”), a treasury risk management facility and an operating demand loan.

 

Two Revolving Demand Loan Facilities.

 

The 2012 Demand Loan Facilities are governed by the terms of the Offer Letter, dated November 19, 2012, between the Company and the Bank.

 

Under the terms of the Amended Credit Facility, our prior demand loan facilities have been amended to provide an aggregate of $14 million in funds available through the 2012 Demand Loan Facilities, which consist of a demand loan revolving facility (the “2012 DLR Loan”) and a demand loan revolving reducing facility (the “2012 DLRR Loan”). The 2012 DLR Loan accrues interest at the Bank’s U.S. Base Rate plus 1.25%. The Company may elect to pay interest on the 2012 DLRR Loan either at the Bank’s U.S. Base Rate plus 1.25% or LIBOR plus 2.50%. Aggregate advances under the 2012 Demand Loan Facilities may not exceed $14.0 million and no more than $2.0 million of such advances may be used to finance repurchases of Company common stock. The 2012 Demand Loan Facilities are subject to an undrawn aggregate standby fee of 0.20% following the first draw, which such fee is payable quarterly in arrears.

 

Repayment of advances under the 2012 DLR Loan consist of interest only payments made monthly in arrears and prepayment is permitted without penalty. The outstanding balance under the 2012 DLR Loan as of December 31st of each year is to be fully repaid within 30 days of December 31st through an equivalent advance made under the 2012 DLRR Loan. Advances under the 2012 DLRR Loan will be made annually and solely for such purpose. Each advance under the 2012 DLRR Loan is to be repaid in equal monthly principal payments plus interest, over a period of four years from the date of such advance.

 

At December 31, 2012, the outstanding balance under the 2012 DLR Loan was $3.7 million. In accordance with the terms of the Amended Credit Facility, on January 1, 2013, the outstanding balance under the 2012 DLR Loan was fully repaid through an equivalent advance made under the 2012 DLRR Loan. Under the terms of the 2012 DLRR Loan this balance is to be repaid in equal monthly principal payments plus interest through December 31, 2016. At June 30, 2013, the outstanding balance under the 2012 DLRR Loan was $2.3 million.

 

On January 7, 2013, the Company successfully concluded a modified “Dutch auction tender offer”, which was funded from available cash and an advance under the 2012 DLR Loan in the amount of $5.2 million. Under the terms of the offer, the Company repurchased an aggregate of 4,114,121 shares of its common stock at a purchase price of $1.50 per share, for a total of $6,171,656, excluding transaction costs of approximately $106,000. At June 30, 2013, the outstanding balance under the 2012 DLR Loan was $5.2 million.

 

 
7

 

 

Treasury Risk Management Facility 

 

The Amended Credit Facility also provides for a $3.5 million settlement risk line to assist the Company with hedging Canadian dollar exposure through foreign exchange forward contracts and/or currency options. Under the terms of the Amended Credit Facility, the Company may enter into such agreements at market rates with terms not to exceed 18 months. As of June 30, 2013, the Company held contracts in the amount of $18.1 million to trade U.S. dollars in exchange for Canadian dollars.

 

Operating Demand Loan

 

The Amended Credit Facility also provides the Company with a $1.0 million operating demand loan facility to assist in meeting its operational needs (the “Operating Demand Loan”). The Operating Demand Loan accrues interest at the Bank’s U.S. Base Rate plus 1.25%. Interest is payable monthly in arrears with any borrowing under the Operating Demand Loan fluctuating widely with periodic clean-up, at a minimum on an annual basis. The Company has also agreed to pay to the Bank a monthly monitoring fee of US$500 with respect to this loan. The Operating Demand Loan is payable on demand at any time, at the sole discretion of the Bank, with or without cause, and the Bank may terminate the Operating Demand Loan at any time. As of June 30, 2013, the Company had no amounts outstanding under its Operating Demand Loan.

 

General Terms

 

The Company’s Amended Credit Facility contains customary representations and warranties, affirmative and negative covenants, and events of default. The Company’s obligations under the Amended Credit Facility are guaranteed and secured by a security interest in substantially all of its assets. The Amended Credit Facility also requires that the Company comply with certain non-financial covenants and restrictions. In addition, the Company has agreed to comply with the following financial covenants at all times, which are to be calculated on a rolling four quarter basis: (i) Maximum Total Funded Debt to EBITDA of 2.00:1; and (ii) Minimum Fixed Charge Coverage of 1.20:1. Further, its Maximum Annual Capital Expenditures cannot exceed $3.6 million per year, which limit will be reviewed on an annual basis. As of June 30, 2013, the Company was in compliance with these covenants.

 

Scheduled principal loan repayments are as follows:

 

Remainder of 2013

   500,000    

2014

   2,300,000    

2015

   2,100,000    

2016

   1,300,000    

2017

   1,300,000    

 

7. INCOME TAXES

 

For the six months ended June 30, 2013, the Company recorded a provision for income taxes of $0.3 million on income before income taxes of $1.0 million, using an estimated effective tax rate for its 2013 fiscal year adjusted for certain minimum state taxes. Comparatively, for the six months ended June 30, 2012, the Company recorded a provision for income taxes of $1.2 million on income before taxes of $3.5 million, using an estimated effective tax rate for its 2012 fiscal year.

 

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. The Company considers projected future taxable income, uncertainties related to the industry in which they operate, and tax planning strategies in making this assessment.

 

The Company follows the provisions of FASB ASC Topic 740, Income Taxes to account for income tax exposures. The application of this interpretation requires a two-step process that separates recognition of uncertain tax benefits from measurement thereof.

 

The Company had approximately $0.3 million of total gross unrecognized tax benefit as of June 30, 2013 and $0.4 million of total gross unrecognized tax benefit as of December 31, 2012, which if recognized would favorably affect its income tax rate in future periods. The unrecognized tax benefit relates primarily to prior year Pennsylvania state franchise taxes and prior year German income tax. The decrease of $0.1 million from December 31, 2012 relates to the Company completing its 2012 scientific and research and development claim. The Company recognizes accrued interest and penalties related to income taxes in income tax expense. The Company did not have significant interest and penalties accrued at June 30, 2013 and December 31, 2012, respectively. The Company believes that it is reasonably possible that all of the unrecognized tax benefits will decrease in the next twelve months as it is anticipated that the tax authorities will finalize their review of prior taxes owing in Pennsylvania and Germany.

 

 
8

 

 

8. BASIC AND DILUTED EARNINGS PER COMMON SHARE:

 

Basic earnings per common share has been calculated by dividing net income for the period by the weighted average number of common shares outstanding during each period. Diluted earnings per share has been calculated by dividing net income for the period by the weighted average number of common shares and potentially dilutive common shares outstanding during the period. In computing diluted earnings per share, the treasury stock method is used to determine the number of shares assumed to be purchased from the conversion of common shares equivalents or the proceeds of option exercises.

 

The following table is a summary of the basic and diluted earnings per common share:

 

   

Three months

ended

June 30, 2013

   

Three months

ended

June 30, 2012

   

Six months

ended

June 30, 2013

   

Six months

ended

June 30, 2012

 

Numerator for basic and diluted earnings per common share:

                               

Net income for the period

  $ 587,630     $ 695,998     $ 664,209     $ 2,359,617  

Denominator for basic and diluted earnings per common share:

                               

Basic weighted average number of common shares outstanding

    40,323,261       45,912,458       40,327,324       47,003,016  

Effect of outstanding stock options

    3,955,591       3,536,972       3,966,691       3,200,147  

Diluted weighted average number of shares outstanding

    44,278,852       49,449,430       44,294,015       50,203,163  

Basic earnings per common share

  $ 0.01     $ 0.02     $ 0.02     $ 0.05  

Diluted earnings per common share

  $ 0.01     $ 0.01     $ 0.01     $ 0.05  

 

For the three months ended June 30, 2013, outstanding options to purchase 478,000 common shares were not included in the computation of diluted income per common share because all such options had exercise prices greater than the average market price of the common shares.

 

For the six months ended June 30, 2013, outstanding options to purchase 955,000 common shares were not included in the computation of diluted income per common share because all such options had exercise prices greater than the average market price of the common shares.

 

During the six months ended June 30, 2013, 4,114,121 common shares were repurchased and cancelled under the terms of a modified Dutch auction tender offer announced in December 2012.

 

During the six months ended June 30, 2013, 143,073 common shares were repurchased and cancelled under the terms of our stock repurchase program announced in March 2013.

 

During the three months ended June 30, 2012, 1,115,304 common shares were repurchased and cancelled under the terms of our stock repurchase program announced in November 2011.

 

During the three months ended March 31, 2012, 7,570,236 common shares were repurchased and cancelled under the terms of a modified Dutch auction tender offer announced in December 2011.

 

The computation of earnings per share and diluted earnings per share for the three and six months ended June 30, 2013 and 2012 include reductions in the number of shares outstanding due to these repurchases.

 

 
9

 

 

9. SUPPLEMENTAL INFORMATION:

 

(a)           The following is a summary of the Company’s revenue earned from each significant revenue stream:

 

    Three months ended June 30,     Six months ended June 30,  
   

2013

   

2012

   

2013

   

2012

 
                                 

Wholesale

                               

Domain Services

  $ 21,800,101     $ 21,667,630     $ 43,696,001     $ 42,775,606  

Value Added Services

    2,559,427       2,588,983       5,248,117       5,277,701  

Total Wholesale

    24,359,528       24,256,613       48,944,118       48,053,307  
                                 

Retail

    5,735,330       2,298,285       10,002,037       4,147,880  

Portfolio

    1,078,499       1,597,716       2,212,224       3,488,733  
    $ 31,173,357     $ 28,152,614     $ 61,158,379     $ 55,689,920  

 

                 During the three and six months ended June 30, 2013 and 2012, no customer accounted for more than 10% of total revenue. As at June 30, 2013, no customer accounted for more than 10% of accounts receivable, while as at June 30, 2012, one customer accounted for 10% of accounts receivable.

 

(b)           The following is a summary of the Company’s cost of revenues from each significant revenue stream:

 

    Three months ended June 30,     Six months ended June 30,  
   

2013

   

2012

   

2013

   

2012

 
                                 

Wholesale

                               

Domain Services

  $ 18,484,667     $ 18,011,032     $ 36,938,969     $ 35,631,091  

Value Added Services

    520,456       536,781       1,082,494       1,043,932  

Total Wholesale

    19,005,123       18,547,813       38,021,463       36,675,023  
                                 

Retail

    3,772,955       1,356,514       6,633,536       2,286,274  

Portfolio

    229,428       215,884       430,406       426,039  

Network, other costs

    1,269,808       1,213,864       2,524,021       2,470,754  

Network, depreciation and amortization costs

    187,266       191,548       360,248       374,876  
    $ 24,464,580     $ 21,525,623     $ 47,969,674     $ 42,232,966  

 

(c)           The following is a summary of the Company’s property and equipment by geographic region:

 

 

 

   

June 30,

2013

   

December 31,

2012

 

Canada

  $ 1,349,942     $ 1,026,570  

United States

    419,137       306,679  

Germany

    15,796       18,895  
    $ 1,784,875     $ 1,352,144  

 

 

 

(d)           The following is a summary of the Company’s amortizable intangible assets by geographic region:

 

 

 

   

June 30,

2013

   

December 31,

2012

 

Canada

  $ 726,700     $ 1,062,100  

Germany

    1,055,680       1,230,160  
    $ 1,782,380     $ 2,292,260  

 

 
10

 

 

(e)           The following is a summary of the Company’s deferred tax asset, net of valuation allowance, by geographic region:

 

 

 

   

June 30,

2013

   

December 31,

2012

 

Canada

  $ 6,006,995     $ 5,970,462  
    $ 6,006,995     $ 5,970,462  

 

 

 

10. COMMITMENTS AND CONTINGENCIES:

 

The Company is involved in various legal claims and lawsuits in connection with its ordinary business operations. The Company intends to vigorously defend these claims. While the final outcome with respect to any actions or claims outstanding or pending as of June 30, 2013 cannot be predicted with certainty, management does not believe that the resolution of these claims, individually or in the aggregate, will have a material adverse effect on the Company's financial position.

 

11. STOCKHOLDERS' EQUITY:

 

The following unaudited table summarizes stockholders' equity transactions for the three month period ended June 30, 2013:

 

   

Common stock 

   

Additional

paid in 

           

Accumulated

Other

Comprehensive 

   

Total

stockholders' 

 
   

Number

   

Amount

   

capital

   

Deficit

   

Income

   

equity

 
                                                 

Balances, March 31, 2013

    40,121,797     $ 9,297,924     $ 28,293,757     $ (17,433,264

)

  $ (141,681 )   $ 20,016,736  
                                                 

Exercise of stock options

    519,716       457,467       (177,782

)

                279,685  

Cancellation of restricted stock

    (25

)

                             

Stock-based compensation

                91,255                   91,255  

Net income for the period

                      587,630             587,630  

Unrealized loss on foreign currency forward contracts treated as hedges

                            (256,782 )     (256,782 )

Reclassification to net income due to settlement of foreign currency forward contracts treated as hedges

                            (4,159 )     (4,159 )
                                                 

Balances, June 30, 2013

    40,641,488     $ 9,755,391     $ 28,207,230     $ (16,845,634

)

  $ (402,622 )   $ 20,714,365  

 

The following unaudited table summarizes stockholders' equity transactions for the six month period ended June 30, 2013:

 

   

Common stock 

   

Additional

paid in 

           

Accumulated

Other

Comprehensive 

   

Total

stockholders' 

 
   

Number

   

Amount

   

capital

   

Deficit

   

Income

   

equity

 
                                                 

Balances, December 31, 2012

    44,322,159     $ 10,084,417     $ 33,931,529     $ (17,509,843

)

  $ 44,104     $ 26,550,207  
                                                 

Exercise of stock options

    576,573       522,476       (204,282

)

                318,194  

Repurchase and retirement of shares

    (4,114,121

)

    (822,887

)

    (5,454,854

)

                (6,277,741

)

Normal Course Issuer Bid

    (143,073 )     (28,615 )     (231,260 )                 (259,875 )

Cancellation of restricted stock

    (50

)

                             

Stock-based compensation

                166,097                   166,097  

Net income for the period

                      664,209             664,209  

Unrealized loss on foreign currency forward contracts treated as hedges

                            (442,567 )     (442,567 )

Reclassification to net income due to settlement of foreign currency forward contracts treated as hedges

                            (4,159 )     (4,159 )
                                                 

Balances, June 30, 2013

    40,641,488     $ 9,755,391     $ 28,207,230     $ (16,845,634

)

  $ (402,622 )   $ 20,714,365  

 

 
11

 

 

On January 7, 2013, the Company announced that it successfully concluded a modified “Dutch auction tender offer” that was previously announced on November 21, 2012. Under the terms of the offer, the Company repurchased an aggregate of 4,114,121 shares of its common stock at a purchase price of $1.50 per share, for a total of $6,171,656, excluding transaction costs of approximately $106,000. The purchase price and all transaction costs were funded from available cash and an additional advance under its Amended Credit Facility from the Bank in the amount of $5.2 million. All shares purchased in the tender offer received the same price and all shares repurchased were immediately retired. As a result of the completion of the tender offer, as of January 31, 2013, the Company had 40,226,875 shares issued and outstanding.

 

On March 1, 2013, the Company announced a stock buyback program. Under this buyback program, the Company may repurchase up to $10 million of the Company's common stock over the 12-month period that commenced on March 1, 2013. The Company repurchased 143,073 shares under this program during the three and six month periods ended June 30, 2013 for a total of $259,875.

 

12. SHARE-BASED PAYMENTS

 

(a)    Stock options

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model, consistent with the guidance on stock compensation. Because option-pricing models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options. The assumptions presented in the table below represent the weighted average of the applicable assumption used to value stock options at their grant date. The Company calculates expected volatility based on historical volatility of the Company's common shares. The expected term, which represents the period of time that options granted are expected to be outstanding, is estimated based on historical exercise experience. The Company evaluated historical exercise behavior when determining the expected term assumptions. The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The Company determines the expected dividend yield percentage by dividing the expected annual dividend by the market price of our common shares at the date of grant.

 

During the three months ended June 30, 2013, stock options to purchase 331,500 common shares were granted. During the three months ended June 30, 2012, stock options to purchase 504,000 common shares were granted.

 

During the six months ended June 30, 2013, stock options to purchase 481,500 common shares were granted. During the six months ended June 30, 2012, stock options to purchase 549,000 common shares were granted.

 

The stock options granted during the three and six months ended June 30, 2013 expire in 2020.

 

Details of stock option transactions for the three months ended June 30, 2013 and June 30, 2012 are as follows:

 

   

Three months ended

   

Three months ended

 
   

June 30, 2013

   

June 30, 2012

 
           

Weighted

           

Weighted

 
           

Average

           

Average