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TUCOWS INC 10-Q 2016

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
tcx20160401_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 March 31, 2016

 

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 May 5, there were 10,595,489 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 March 31, 2016 (unaudited) and December 31, 2015

1

  

  

  

  

Consolidated Statements of Operations and Comprehensive Income (unaudited) for the three months ended March 31, 2016 and 2015

2

  

  

  

  

Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2016 and 2015

3

  

  

  

  

Notes to Consolidated Financial Statements (unaudited)

4

  

  

  

Item 2.

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

23

  

  

  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

  

  

  

Item 4.

Controls and Procedures

43

  

  

  

PART II

OTHER INFORMATION

  

  

  

Item 1.

Legal Proceedings

44

  

  

  

Item 1A.

Risk Factors

44

  

  

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 44
     

Item 4.

Mine Safety Disclosures

44

  

  

  

Item 6.

Exhibits

45

  

  

  

Signatures   

46

 

TRADEMARKS, TRADE NAMES AND SERVICE MARKS

  

Tucows®, EPAG®, Hover®, OpenSRS®, Platypus®, RealNames®, 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)

(unaudited)

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 

Assets

               
                 

Current assets:

               

Cash and cash equivalents

  $ 10,010,849     $ 7,723,253  

Accounts receivable, net of allowance for doubtful accounts of $138,629 as of March 31, 2016 and $122,095 as of December 31, 2015

    8,061,898       7,171,388  

Inventory

    1,142,862       903,775  

Prepaid expenses and deposits

    5,320,714       5,067,790  

Derivative instrument asset, current portion (note 5)

    102,560       -  

Prepaid domain name registry and ancillary services fees, current portion

    45,281,450       44,708,041  

Income taxes recoverable (note 8)

    1,529,003       2,292,915  

Total current assets

    71,449,336       67,867,162  
                 

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

    11,265,440       11,040,929  

Property and equipment

    7,357,131       7,126,676  

Deferred tax asset (note 8)

    6,847,730       7,621,092  
Other assets (note 4)     6,054,546       -  

Intangible assets (note 6)

    14,371,943       14,469,677  

Goodwill (note 6)

    21,005,143       21,005,143  

Total assets

  $ 138,351,269     $ 129,130,679  
                 
                 

Liabilities and Stockholders' Equity

               
                 

Current liabilities:

               

Accounts payable

  $ 4,510,071     $ 4,166,135  

Accrued liabilities

    5,404,440       5,855,686  

Customer deposits

    4,956,986       5,136,909  

Derivative instrument liability, current portion (note 5)

    519,381       2,027,086  

Deferred rent, current portion

    20,742       19,463  

Loan payable (note 7)

    9,281,250       3,500,000  

Deferred revenue, current portion

    57,809,241       56,646,390  

Accreditation fees payable, current portion

    477,365       465,300  

Income taxes payable (note 8)

    906,595       444,053  

Total current liabilities

    83,886,071       78,261,022  
                 

Deferred revenue, long-term portion

    15,293,370       14,947,639  

Accreditation fees payable, long-term portion

    117,034       118,480  

Deferred rent, long-term portion

    111,500       100,864  

Other liabilities (note 13)

    1,331,140       1,459,960  

Deferred tax liability (note 8)

    4,860,191       4,876,691  
                 

Redeemable non-controlling interest (note 9)

    3,048,896       3,036,598  
                 

Stockholders' equity (note 14)

               

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

    -       -  

Common stock - no par value, 250,000,000 shares authorized;10,594,733 shares issued and outstanding as of March 31, 2016 and 10,685,599 shares issued and outstanding as of December 31, 2015

    14,445,114       14,530,633  

Additional paid-in capital

    6,676,096       8,526,395  

Retained earnings

    8,807,789       4,381,849  

Accumulated other comprehensive income (loss)

    (225,932 )     (1,109,452 )

Total stockholders' equity

    29,703,067       26,329,425  

Total liabilities and stockholders' equity

  $ 138,351,269     $ 129,130,679  
                 

Commitments and contingencies (note 12)

               
                 

Subsequent event (note 17)

               

 

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 March 31,  
   

2016

   

2015

 
                 
                 

Net revenues (note 11)

  $ 45,610,413     $ 40,467,833  
                 

Cost of revenues (note 11):

               

Cost of revenues

    28,850,473       26,821,374  

Network expenses

    1,232,931       1,222,096  

Depreciation of property and equipment

    346,753       199,642  

Amortization of intangible assets (note 6)

    11,532       3,924  

Total cost of revenues

    30,441,689       28,247,036  
                 

Gross profit

    15,168,724       12,220,797  
                 

Expenses:

               

Sales and marketing

    5,285,624       3,799,175  

Technical operations and development

    1,176,360       1,114,195  

General and administrative

    2,404,927       2,468,022  

Depreciation of property and equipment

    73,268       59,262  

Amortization of intangible assets (note 6)

    56,997       53,215  

Impairment of indefinite life intangible assets (note 6)

    20,985       12,493  

Loss (gain) on currency forward contracts (note 5)

    (110,757 )     304,024  

Total expenses

    8,907,404       7,810,386  
                 

Income from operations

    6,261,320       4,410,411  
                 

Other income (expense):

               

Interest expense, net

    (46,172 )     (24,775 )

Other income, net (note 13)

    128,820       -  

Total other income (expense)

    82,648       (24,775 )
                 

Income before provision for income taxes

    6,343,968       4,385,636  
                 

Provision for income taxes (note 8)

    1,905,730       1,551,693  
                 

Net income before redeemable non-controlling interest

    4,438,238       2,833,943  
                 

Redeemable non-controlling interest

    (170,792 )     (21,482 )
                 

Net loss attributable to redeemable non-controlling interest

    170,792       21,482  
                 

Net income

    4,438,238       2,833,943  
                 

Other comprehensive income (loss), net of tax

               

Unrealized income (loss) on hedging activities (note 5)

    547,963       (983,448 )

Net amount reclassified to earnings (note 5)

    335,557       438,656  

Other comprehensive income (loss) net of tax of $483,704 and $319,878 for the three months ended March 31, 2016 and March 31, 2015

  $ 883,520     $ (544,792 )
                 

Comprehensive income for the year

  $ 5,321,758     $ 2,289,151  
                 
                 

Basic earnings per common share (note 10)

  $ 0.42     $ 0.25  
                 

Shares used in computing basic earnings per common share (note 10)

    10,674,036       11,142,628  
                 

Diluted earnings per common share (note 10)

  $ 0.41     $ 0.24  
                 

Shares used in computing diluted earnings per common share (note 10)

    10,861,582       11,580,047  

 

See accompanying notes to unaudited consolidated financial statements

 

 
2

 

 

Tucows Inc.

Consolidated Statements of Cash Flows

(Dollar amounts in U.S. dollars)

(unaudited)

 

    Three months ended March 31,  
   

2016

   

2015

 

Cash provided by:

               

Operating activities:

               

Net income for the period

  $ 4,438,238     $ 2,833,943  

Items not involving cash:

               

Depreciation of property and equipment

    420,021       258,904  

Amortization of intangible assets

    68,529       57,139  

Impairment of indefinite life intangible asset

    20,985       12,493  

Deferred income taxes (recovery)

    273,159       (164,250 )

Amortization of deferred rent

    11,915       (2,492 )

Disposal of domain names

    8,220       6,328  

Other income

    (128,820 )     -  

Loss (gain) on change in the fair value of forward contracts

    (243,042 )     158,793  

Stock-based compensation

    200,228       125,048  

Change in non-cash operating working capital:

               

Accounts receivable

    (890,510 )     (168,585 )

Inventory

    (239,087 )     (113,150 )

Prepaid expenses and deposits

    (252,924 )     (1,299,778 )

Prepaid domain name registry and ancillary services fees

    (797,920 )     (1,462,844 )

Income taxes recoverable

    1,226,454       661,768  

Accounts payable

    549,796       117,566  

Accrued liabilities

    (451,246 )     (59,220 )

Customer deposits

    (179,923 )     (136,443 )

Deferred revenue

    1,508,582       2,061,510  

Accreditation fees payable

    10,619       51,027  

Net cash provided by operating activities

    5,553,274       2,937,757  
                 

Financing activities:

               

Proceeds received on exercise of stock options

    19,558       247,983  

Payment of tax obligations resulting from net exercise of stock options

    (36,685 )     -  

Excess tax benefits from share-based compensation expense

    61,360       412,642  

Repurchase of common stock

    (2,180,279 )     (7,712,145 )

Proceeds received on loan payable

    6,000,000       3,500,000  

Repayment of loan payable

    (218,750 )     -  

Net cash provided by (used in) financing activities

    3,645,204       (3,551,520 )
                 

Investing activities:

               

Additions to property and equipment

    (856,336 )     (191,762 )

Deposit on Melbourne IT assets (note 4)

    (6,054,546 )     -  

Gross proceeds from the waiver of rights to .online registry (note 16)

    -       6,619,832  

Remaining payment for the acquisition of Ting Virginia, LLC., net of cash of $21,423 (note 3)

    -       (407,493 )

Net cash provided by (used in) investing activities

    (6,910,882 )     6,020,577  
                 

Increase in cash and cash equivalents

    2,287,596       5,406,814  
                 

Cash and cash equivalents, beginning of period

    7,723,253       8,271,377  

Cash and cash equivalents, end of period

  $ 10,010,849     $ 13,678,191  
                 
                 
                 

Supplemental cash flow information:

               

Interest paid

  $ 46,381     $ 38,893  

Income taxes paid, net

  $ 329,169     $ 564,139  

Supplementary disclosure of non-cash investing and financing activities:

               

Property and equipment acquired during the period not yet paid for

  $ 11,338     $ 66,798  

 

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 provider of retail mobile phone service and fixed Internet access as well as a global distributor of Internet Services, such as domain name registration, digital certificates and email. The Company’s Internet Services are distributed through its global Internet-based distribution network of Internet service providers, web hosting companies and other companies that provide 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. Our common stock is listed on NASDAQ under the symbol “TCX” and on the Toronto Stock Exchange under the symbol “TC”.

 

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 March 31, 2016 and the results of operations and cash flows for the interim periods ended March 31, 2016 and 2015. 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, 2015 included in Tucows' 2015 Annual Report on Form 10-K filed with the SEC on March 9, 2016.

 

In the prior period, the Company recorded the effective portion of the gain or loss upon settlement of hedged currency forward contracts in “Loss on currency forward contracts” and reclassified the same amount from “General and administrative expense” to the income statement line item for the hedged item. The Company has determined that the reclassification of the effective portion of gain or loss upon settlement amounts are more appropriately reclassified from “Loss on currency forward contracts” to the income statement line item for the hedged item. As a result, a gain of $0.7 million for the three months ended March 31, 2015 has been reclassified to “General and administrative expense” from “Loss (gain) on currency forward contracts”. As a result of this reclassification, there was no change to previously reported net income, comprehensive income, income from operations, net revenues, gross profit, reported cash flows or the amounts recorded in the consolidated balance sheets.

 

There have been no material changes to our significant accounting policies during the three months ended March 31, 2016 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, except for the adoption of Accounting Standard Update No. 2015-17, Income Taxes (Topic 740).

 

The Company's most significant accounting policies are revenue recognition, property and equipment and derivative financial instruments and are included below:

 

(a) Revenue recognition

 

The Company’s revenues are derived from domain name registration fees on both a wholesale and retail basis, the sale of domain names, the provisioning of other Internet services and advertising and other revenue. Amounts received in advance of meeting the revenue recognition criteria described below are recorded as deferred revenue. 

 

 
4

 

  

The Company earns registration fees in connection with each new, renewed and transferred-in registration and from providing provisioning of other Internet services to resellers and registrars on a monthly basis. Service has been provided in connection with registration fees once the Company has confirmed that the requested domain name has been appropriately recorded in the registry under contractual performance standards.

 

Domain names are generally purchased for terms of one to ten years. Registration fees charged for domain name registration and provisioning services are recognized on a straight-line basis over the life of the contracted term. Other Internet services that are provisioned for annual periods or longer, are recognized on a straight-line basis over the life of the contracted term. Other Internet services that are provisioned on a monthly basis are recognized as services are provided. 

 

For arrangements with multiple deliverables, the Company allocates revenue to each deliverable if the delivered item(s) has value to the customer on a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. The fair value of the selling price for a deliverable is determined using a hierarchy of (1) Company specific objective and reliable evidence, then (2) third-party evidence, then (3) best estimate of selling price. The Company allocates any arrangement fee to each of the elements based on their relative selling prices. 

 

Revenue generated from the sale of domain names, earned from transferring the rights to domain names under the Company’s control, are recognized once the rights have been transferred and payment has been received in full.   

 

The Company derives revenues from the provisioning of mobile phone and fixed Internet access services primarily through its Ting website. These revenues are recognized once services have been provided. Revenues for wireless services are billed based on the actual amount of monthly services utilized by each customer during their billing cycle on a postpaid basis. The Company’s billing cycle for each customer is computed based on the customer’s activation date. As a result, the Company estimates the amount of revenues earned but not billed from the end of each billing cycle to the end of each reporting period. In addition, revenues associated with the sale of wireless devices and accessories to subscribers is recognized when title and risk of loss is transferred to the subscriber and shipment has occurred. Incentive marketing credits given to customers are recorded as a reduction of revenue. 

 

The Company also generates advertising and other revenue through its online libraries of shareware, freeware and online services presented on its website. Advertising revenue includes revenue derived from cost per action advertising links we display on third party websites who provide syndicated pay-per-click advertising on OpenSRS Domain Expiry Stream domains and the Company’s Portfolio Domains. In addition, the Company uses third party partners to derive pay-per-click advertising on the Tucows.com website. Advertising revenue is recognized on a monthly basis based on the number of cost-per-action services that were provided in the month. 

 

Impression based advertising revenue and other revenues are recognized ratably over the period in which it is presented. To the extent that minimum guaranteed impressions are not met, the Company defers recognition of the corresponding revenues until the guaranteed impressions are achieved. 

 

In those cases where payment is not received at the time of sale, additional conditions for recognition of revenue are that the collection of the related accounts receivable is reasonably assured and the Company has no further performance obligations. The Company records costs that reflect expected refunds, rebates and credit card charge-backs as a reduction of revenues at the time of the sale based on historical experiences and current expectations. 

 

The Company establishes provisions for possible uncollectible accounts receivable and other contingent liabilities which may arise in the normal course of business. Historically, credit losses have been within the Company’s expectations and the provisions the Company has established have been appropriate. However, the Company has, on occasion, experienced issues which have led to accounts receivable not being fully collected. Should these issues occur more frequently, additional provisions may be required.

 

 
5

 

  

(b) Property and equipment

 

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided on a straight-line basis so as to depreciate the cost of depreciable assets over their estimated useful lives at the following rates:

 

Asset

 

Rate

 

Computer equipment

    30

%

Computer software

    100

%

Furniture and equipment

    20

%

Vehicles and tools

    20

%

Fiber network (years)

    15  

Customer equipment and installations (years)

    3  

Leasehold improvements

 

Over term of lease

 

 

The Company reviews the carrying values of its property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated undiscounted future cash flows expected to result from the use of the group of assets and its eventual disposition is less than its carrying amount, it is considered to be impaired. The amount of the impairment loss recognized is measured as the amount by which the carrying value of the asset exceeds the fair value of the asset, with fair value being determined based upon discounted cash flows or appraised values, depending on the nature of the assets.

 

Additions to the fiber network are recorded at cost, including all material, labor, vehicle and installation and construction costs and certain indirect costs associated with the construction of cable transmission and distribution facilities. While the Company’s capitalization is based on specific activities, once capitalized, costs are tracked by fixed asset category at the fiber network level and not on a specific asset basis. For assets that are retired, the estimated historical cost and related accumulated depreciation is removed.

 

(c) Derivative Financial Instruments

 

During the three months ended March 31, 2016 and the year ended December 31, 2015 ("Fiscal 2015"), the Company used derivative financial instruments to manage foreign currency exchange risk. The Company accounts for these instruments in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 815, “Derivatives and Hedging” ("Topic 815"), which requires that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value as of the reporting date. Topic 815 also requires that changes in the derivative financial instruments’ fair values be recognized in earnings, unless specific hedge accounting and documentation criteria are met (i.e. the instruments are accounted for as hedges). The Company recorded the effective portions of the gain or loss on derivative financial instruments that were designated as cash flow hedges in accumulated other comprehensive income in the accompanying Consolidated Balance Sheets. Any ineffective or excluded portion of a designated cash flow hedge, if applicable, is recognized in net income.

 

For certain contracts, the Company has not complied with the documentation standards required for its forward foreign exchange contracts to be accounted for as hedges and has, therefore, accounted for such forward foreign exchange contracts at their fair values with the changes in fair value recorded in net income.

 

The fair value of the forward exchange contracts is determined using an estimated credit adjusted mark-to-market valuation which takes into consideration the Company's and the counterparty's credit risk. The valuation technique used to measure the fair values of the derivative instruments is a discounted cash flow technique, with all significant inputs derived from or corroborated by observable market data, as no quoted market prices exist for the derivative instruments. The discounted cash flow techniques use observable market inputs, such as foreign currency spot and forward rates.

 

3. Recent accounting pronouncements:

  

Recent Accounting Pronouncements Adopted

 

On January 1, 2016, the Company adopted Accounting Standards Updates ("ASU") No. 2015-16, Business Combinations (Topic 805), No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement and Nos. 2015-03 and 2015-15, Interest - Imputation of Interest (Subtopic 835-30). The adoption of these Accounting Standards Updates did not have a significant impact on the consolidated financial statements.

 

 
6

 

 

On January 1, 2016, the Company elected to early adopt Accounting Standard Update No. 2015-17, Income Taxes (Topic 740), which simplifies the presentation of deferred income taxes, such that deferred tax liabilities and assets be classified as non-current on a balance sheet. The impact of the change on the consolidated balance sheet at December 31, 2015 is the reclassification of $3,243,718 from the deferred tax asset, current portion to deferred tax asset long-term portion.

  

 

Recent Accounting Pronouncements Not Yet Adopted

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”). The areas for modification under ASU No. 2016-9 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016 (January 1, 2017 for the Company). Early adoption of the standard is permitted as of the beginning of an interim or annual reporting period. Dependent upon the specific amendment, the implementation of the amendments in ASU 2016-05 are to be made on a prospective, retrospective or modified retrospective basis after the date of adoption. The Company is currently in the process of evaluating the impact that the adoption of ASU 2016-09 will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815) (“ASU 2016-05”). The amendments in ASU 2016-05 clarifies the effect of derivative contract novations on existing hedge accounting relationships whereby a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016 (January 1, 2017 for the Company). Early adoption of the standard is permitted as of the beginning of an interim or annual reporting period. The implementation of the amendments in ASU 2016-05 are to be made on a prospective or modified retrospective basis after the date of adoption. The Company is currently in the process of evaluating the impact that the adoption of ASU 2016-05 will have on its consolidated financial statements.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. ASU 2016-02 requires the recognition on the balance sheet of a lease liability to make lease payments by lessees and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance will also require significant additional disclosure about the amount, timing and uncertainty of cash flows from leases. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018 (January 1, 2019 for the Company). The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company will adopt this guidance in the first quarter of fiscal 2019 and is in the process of evaluating the impact of the adoption of ASU 2016-02 will have on its consolidated financial statements.

 

In January 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-01, Financial Instruments – Overall (Subtopic 825-10) which relates to the recognition and measurement of financial assets and financial liabilities. ASU 2016-01 requires that all equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. The new guidance requires the performance of a qualitative assessment for equity investments without readily determinable fair values. The update also requires an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017 (January 1, 2018 for the Company). Earlier adoption is not permitted. The Company is in the process of evaluating the impact that the adoption of ASU 2016-1 will have on its consolidated financial statements.

 

 
7

 

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP.  The new standard provides a single principles-based, five-step model to be applied to all contracts with customers, which steps are to (1) identify the contract(s) with the customer, (2) identify the performance obligations in the contracts, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contracts and (5) recognize revenue when each performance obligation is satisfied. More specifically, revenue will be recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services.  ASU 2014-09 was set to be effective for interim and annual periods beginning after December 15, 2016. On July 9, 2015, the FASB voted to defer the effective date by one year, such that the new standard will be effective for the Company for the interim and annual reporting periods beginning after December 15, 2017 (January 1, 2018 for the Company). In March 2016, FASB issued ASU No. 2016-08 clarifying the implementation guidance on principal versus agent considerations. In April 2016, FASB issued ASU. No 2016-10 providing further guidance on identifying performance obligations and licensing. Early adoption of these standards is permitted but not before the original effective date. Companies can transition to the standards either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company does not intend to adopt the standards early and is currently in the process of evaluating the impact that the adoption of ASU 2014-09, ASU 2016-08 and ASU 2016-10 will have on its consolidated financial statements and the selected method of transition to the new standard.

 

 

4. Other Assets:

 

Other assets are comprised of the following:

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 

Assets

               
                 

Advance funding for April 1, 2016 acquisition of the international wholesale domain reseller customer base from Melbourne IT Limited (note 17)

  $ 6,054,546     $ -  
    $ 6,054,546     $ -  

 

5. 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 incurred on its future cash flows related to a portion of payroll, rent and payments to Canadian domain name registry suppliers that are denominated in Canadian dollars and are expected to be paid by its Canadian operating subsidiary. 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 certain of these transactions as cash flow hedges of forecasted transactions under ASC Topic 815. For certain contracts, as the critical terms of the hedging instrument, and of the entire hedged forecasted transaction, are the same, in accordance with ASC Topic 815, the Company has been able to conclude that changes in fair value and cash flows attributable to the risk of being hedged are expected to completely offset at inception and on an ongoing basis. Accordingly, 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 March 31, 2016, is recorded as derivative instrument assets and derivative instrument liabilities.

 

As of March 31, 2016, the notional amount of forward contracts that the Company held to sell U.S. dollars in exchange for Canadian dollars was $17.0 million, of which $14.3 million met the requirements of ASC Topic 815 and were designated as hedges (March 31, 2015 - $19.5 million of which $16.5 million were designated as hedges).

 

As of March 31, 2016, we had the following outstanding forward exchange contracts to trade U.S. dollars in exchange for Canadian dollars: 

 

                   

Maturity date

 

Notional amount

of U.S. dollars

   

Weighted

average

exchange rate of

U.S. dollars

   

Fair value

 
                         

April

- June 2016   $ 6,002,500       1.2556     $ (192,223 )

July

- September 2016     6,002,500       1.2554       (192,596 )

October

- December 2016     4,952,500       1.2885       (32,002 )
    $ 16,957,500       1.2651     $ (416,821 )

 

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 three months ended March 31, 2016, were as follows (amounts presented do not include any income tax effects).

 

 
8

 

  

Fair value of derivative instruments in the consolidated balance sheets

 

       

As of

March 31,

2016

   

As of

December 31,

2015

 

Derivatives

 

Balance Sheet
Location

 

Fair Value

Asset

(Liability)

   

Fair Value

Asset

(Liability)

 
                     

Foreign currency forward contracts designated as cash flow hedges

 

Derivative instruments

  $ (354,459

)

  $ (1,721,683

)

                     

Foreign currency forward contracts not designated as cash flow hedges

 

Derivative instruments

  $ (62,362

)

  $ (305,403

)

                     

Total foreign currency forward contracts

 

Derivative instruments

  $ (416,821

)

  $ (2,027,086

)

 

Movement in Accumulated Other Comprehensive Income ("AOCI") balance for the three months ended March 31, 2016:

 

   

Gains and

losses on cash

flow hedges

   

Tax impact

   

Total AOCI

 

Opening AOCI balance – December 31, 2015

  $ (1,721,683

)

  $ 612,231     $ (1,109,452

)

                         

Other comprehensive income (loss) before reclassifications

    840,777       (292,814

)

    547,963  

Amount reclassified from accumulated other comprehensive income

    526,447       (190,890

)

    335,557  

Other comprehensive income (loss) for the three months ended March 31, 2016

    1,367,224       (483,704

)

    883,520  
                         

Ending AOCI balance – March 31, 2016

  $ (354,459

)

  $ 128,527     $ (225,932

)

  

 
9

 

 

Effects of derivative instruments on income and other comprehensive income (OCI) for the three months ended March 31, 2016 and March 31, 2015 are as follows:

 

Derivatives in Cash Flow 

Hedging Relationship

 

Amount of

Gain or

(Loss)

Recognized

in OCI, net of

tax, 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)

 
                             
         

Operating expenses

  $ (372,390

)

Operating expenses

  (47,240

)

Foreign currency forward contracts for the three months ended March 31, 2016

  $ 883,520  

Cost of revenues

    (106,817

)

Cost of revenues

     
                             
                             
         

Operating expenses

  $ (468,016

)

Operating expenses

  (23,928

)

Foreign currency forward contracts for the three months ended March 31, 2015

  $ (544,792

)

Cost of revenues

    (177,660

)

Cost of revenues

     

  

 

In addition to the above, for those foreign currency forward contracts not designated as hedges, the Company has recorded a loss of $0.1 million upon settlement and a gain of $0.2 million for the change in fair value of outstanding contracts for the three months ended March 31, 2016, in the consolidated statement of operations and comprehensive income. The Company has recorded a loss of $0.1 million upon settlement and a loss of $0.2 million for the change in fair value of outstanding contracts for the three months ended March 31, 2015, in the consolidated statement of operations and comprehensive income.

 

 

6. Goodwill and Other Intangible Assets:

 

Goodwill

 

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

 

 
10

 

  

Goodwill consists of the following:

 

   

March 31,

2016

   

December 31,

2015

 
                 

Boardtown Corporation

  $ 2,044,847     $ 2,044,847  

Hosted Messaging Assets of Critical Path

    4,072,297       4,072,297  

Innerwise Inc.

    5,801,040       5,801,040  

Mailbank.com Inc.

    6,072,623       6,072,623  

EPAG Domainservices GmbH

    882,320       882,320  

Ting Fiber Inc.

    1,426,893       1,426,893  

Ting Virginia Inc.

    705,123       705,123  

Total

  $ 21,005,143     $ 21,005,143  

 

The Company’s goodwill relates 90% to its Domain Services operating segment and 10% to its Network Access Services operating segment.

 

Goodwill is not amortized, but is subject to an annual impairment test.

 

Other Intangible Assets:

 

Intangible assets consist of network rights, brand, customer relationships, surname domain names, non-competition agreements 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 direct navigation 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 March 31, 2016 is as follows:

 

   

Surname

domain names

   

Direct

navigation

domain names

   

Brand

   

Customer relationships

   

Network rights

   

Total

 

Amortization period

 

indefinite life

   

indefinite life

   

7 years

   

4 - 7 years

   

15 years

         
                                                 

Balances, December 31, 2015

  $ 11,339,355     $ 1,897,318     $ 79,670     $ 499,854     $ 653,480     $ 14,469,677  
                                                 

Additions to/(disposals from) domain portfolio, net

    (1,947 )     (6,273 )     -       -       -       (8,220 )

Impairment of indefinite life intangible assets

    (17,848 )     (3,137 )     -       -       -       (20,985 )

Amortization expense

    -       -       (7,710 )     (49,287 )     (11,532 )     (68,529 )

Balance March 31, 2016

  $ 11,319,560     $ 1,887,908     $ 71,960     $ 450,567     $ 641,948     $ 14,371,943  

 

 

 

The following table shows the estimated amortization expense for each of the next 5 years, assuming no further additions to acquired intangible assets are made:

 

   

Year ending December, 31,

 
         

Remainder of 2016

  $ 205,587  

2017

    274,116  

2018

    169,676  

2019

    46,128  

2020

    46,128  

Thereafter

    422,840  

Total

  $ 1,164,475  

  

 
11

 

 

As of March 31, 2016, the accumulated amortization for the definite life intangible assets was $6.0 million.

 

With regard to indefinite life intangible assets, as part of our normal renewal process we assessed that certain domain names that were acquired in the June 2006 acquisition of Mailbank.com Inc. and that were up for renewal should not be renewed. Accordingly, for the three months ended March 31, 2016, domain names, with a book value of $20,985 (three months ended March 31, 2015 - $12,493) were not renewed and were recorded as an impairment of indefinite life intangible assets.

 

7. 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 as of November 19, 2012, by and between the Company and the Bank and filed with the SEC on November 21, 2012.

 

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 million and no more than $2 million of such advances may be used to finance repurchases of the Company’s 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. During the three months ended March 31, 2016, $6.0 million was drawn down on the 2012 DLR Loan to support the April 1, 2016 acquisition of the international wholesale reseller channel of Melbourne IT Limited. At March 31, 2016, the outstanding balance under the 2012 DLR Loan was $6.0 million (December 31, 2015 - $3.5 million).

 

At March 31, 2016, the outstanding balance under the 2012 DLRR Loan was $3.3 million (December 31, 2015 – nil). This financing arrangement remains available to fund future operations of the Company, with no set expiry date.

 

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 March 31, 2016, the Company held contracts in the amount of $17.0 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 March 31, 2016, the Company had no amounts outstanding under its Operating Demand Loan.

  

 
12

 

 

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 customary 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 $5 million per year, which limit will be reviewed on an annual basis. As at and for the period ended March 31, 2016, the Company was in compliance with these covenants.

 

8. Income taxes

 

For the three months ended March 31, 2016, the Company recorded a provision for income taxes of $1.9 million on income before income taxes of $6.3 million, using an estimated effective tax rate for the fiscal year ending December 31, 2016 (“Fiscal 2016”) adjusted for certain minimum state taxes. Comparatively, for the three months ended March 31, 2015, the Company recorded a provision for income taxes of $1.6 million on income before taxes of $4.4 million, using an estimated effective tax rate for the 2015 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 we 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 $0.1 million of total gross unrecognized tax benefit as of March 31, 2016 and as of December 31, 2015, 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. 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 March 31, 2016 and December 31, 2015, respectively.

 

9. Acquisitions:

 

On February 27, 2015, Ting Fiber, Inc., one of our wholly owned subsidiaries, acquired a 70% ownership interest in the newly formed Ting Virginia, LLC and its subsidiaries, Blue Ridge Websoft, LLC (doing business as Blue Ridge Internet Works), Fiber Roads, LLC and Navigator Network Services, LLC (the “BRI Group”) for consideration of approximately $3.5 million. The Company advanced in escrow $3,125,000 during the year ended December 31, 2014, and paid the remaining purchase price of $357,492 during the year ended December 31, 2015. Ting Virginia, LLC was an independent Internet service provider in Charlottesville, Virginia, doing business primarily as Blue Ridge Internet Works. The BRI Group provides high speed internet access, Internet hosting and network consulting services to over 3,000 customers in central Virginia. The purchase price was primarily satisfied through an advance under our 2012 DLR Loan facility.

 

Ting Fiber Inc. and the selling shareholders (the “Minority Shareholders”) also agreed to certain put and call options with regard to the remaining 30% interest in Ting Virginia, LLC retained by the Minority Shareholders. On the second anniversary of the closing date, Ting Fiber, Inc. may exercise a call option to purchase an additional 20% ownership interest in Ting Virginia, LLC. Contingent upon the exercise of the call option by Ting Fiber, Inc., the Minority Shareholders may exercise a put option within 7 days following the exercise of the call option by Ting Fiber, Inc., to sell their remaining 10% ownership interest in Ting Virginia, LLC. The consideration to be exchanged for the shares acquired or sold under the options shall be $100,000 per percentage point of the additional equity interest acquired.

 

In addition, on the fourth anniversary of the closing date, the Minority Shareholders may exercise a put option under which Ting Fiber, Inc. shall be obligated to purchase the Minority Shareholders’ remaining interest for $120,000 per percentage point of the additional equity interest acquired.

 

 
13

 

  

The Company has determined that the put options described above are embedded within the non-controlling interest shares that are subject to the put options. The redemption feature requires classification of the Minority Shareholders’ Interest in the Consolidated Balance Sheets outside of equity under the caption “Redeemable non-controlling interest”. The present value of the liability at the acquisition date was $3,000,000 and is being accreted to the estimated liability amount using a discount rate of 5% over a period of four years from the acquisition date. During the three months ended March 31, 2016, this amount was increased by $12,298 (the amount was $0 for the three months ended March 31, 2015) to $3,048,896, to reflect the present value of this Redeemable non-controlling interest as at March 31, 2016.

 

The purchase consideration is comprised as follows:

 

Cash

  $ 3,135,140  

Less refund from working capital adjustment

    (50,000

)

Repayment of debt

    418,775  

Redeemable non-controlling interest

    3,000,000  
    $ 6,503,915  

 

The following table represents the finalized purchase price allocation based on the fair values of the assets

 

Current assets (including cash of $21,423)

  $ 338,577  

Current liabilities

    (529,702

)

         

Property and equipment, including:

       

Fiber network

    3,456,024  

Computer equipment

    200,000  

Furniture and equipment

    5,000  

Vehicles

    92,000  

Leasehold improvements

    50,000  
         

Intangible assets, including:

       

Network rights

    692,000  

Customer equipment and installations

    68,000  
         

Goodwill

    2,132,016  
         

Net assets acquired

  $ 6,503,915  

 

10. 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.

 

 
14

 

  

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

 

    Three months ended March 31,  
   

2016

   

2015

 
                 

Numerator for basic and diluted earnings per common share:

               

Net income for the period

  $ 4,438,238     $ 2,833,943  
                 

Denominator for basic and diluted earnings per scommon share:

               

Basic weighted average number of common shares outstanding

    10,674,036       11,142,628  

Effect of outstanding stock options

    187,546       437,419  

Diluted weighted average number of shares outstanding

    10,861,582       11,580,047  
                 

Basic earnings per common share

  $ 0.42     $ 0.25  
                 

Diluted earnings per common share

  $ 0.41     $ 0.24  

 

For the three months ended March 31, 2016, outstanding options to purchase 130,475 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 three months ended March 31, 2016, 98,178 common shares were repurchased and cancelled under the terms of our stock repurchase program announced in February 2016.

 

During the three months ended March 31, 2015, 214,089 common shares were repurchased and cancelled under the terms of our stock repurchase program announced in February 2015.

 

During the three months ended March 31, 2015, 193,907 common shares were repurchased and cancelled under the terms of a modified Dutch auction tender offer announced in December 2014 and concluded in January 2015.

 

The computation of earnings per share and diluted earnings per share for the three months ended March 31, 2016 and 2015 include reductions in the number of shares outstanding due to these repurchases.

 

11. Segment reporting:

 

(a)     We are organized and managed based on three operating segments which are differentiated primarily by their services, the markets they serve and the regulatory environments in which they operate and are described as follows:

 

1.     Network Access - Mobile Services - This segment derives revenue from the sale of mobile phones and telephony services to individuals and small businesses through the Ting website, as well as other network access services, including high speed Internet access, Internet hosting and network consulting services. Revenues are generated in the United States.

 

2.     Network Access - Other Services - This segment derives revenue from the provisioning of high speed Internet access, Internet hosting and consulting services.

 

3.     Domain Services – This segment includes wholesale and retail domain name registration services, value added services and portfolio services. The Company primarily earns revenues from the registration fees charged to resellers in connection with new, renewed and transferred domain name registrations; the sale of retail Internet domain name registration and email services to individuals and small businesses; and by making its portfolio of domain names available for sale or lease. Domain Services revenues are attributed to the country in which the contract originates, primarily Canada.

 

The Chief Executive Officer is the chief operating decision maker and regularly reviews the operations and performance by segment. The chief operating decision maker reviews gross profit as a key measure of performance for each segment and to make decisions about the allocation of resources. Sales and marketing expenses, technical operations and development expenses, general and administrative expenses, depreciation of property and equipment, amortization of intangibles assets, impairment of indefinite life intangible assets, loss (gain) on currency forward contracts, other income (expense), and provision for income taxes, are organized along functional lines and are not included in the measurement of segment profitability. Total assets and total liabilities are centrally managed and are not reviewed at the segment level by the chief operating decision maker.

 

 
15

 

 

Information by reportable segments, which is regularly reported to the chief operating decision maker is as follows:

 

    Network Access (1)    

Domain Name

Services

   

Consolidated

Totals

 
                                 

Three months ended March 31, 2016

 

Mobile Services

   

Other Services

                 
                                 

Net Revenues

  $ 16,944,070       895,062       27,771,281     $ 45,610,413  
                                 

Cost of revenues

                               

Cost of revenues

    8,548,295       440,737       19,861,441       28,850,473  

Network expenses

    37,150       177,374       1,018,407       1,232,931  

Depreciation of property and equipment

    -       185,680       161,073       346,753  

Amortization of intangible assets

    -       11,532       -       11,532  

Total cost of revenues

    8,585,445       815,323       21,040,921       30,441,689  

Gross Profit

    8,358,625       79,739       6,730,360       15,168,724  
                                 

Expenses:

                               

Sales and marketing

                            5,285,624  

Technical operations and development

                            1,176,360  

General and administrative

                            2,404,927  

Depreciation of property and equipment

                            73,268  

Amortization of intangible assets

                            56,997  

Impairment of indefinite life intangible assets

                            20,985  

Loss on currency forward contracts

                            (110,757 )

Income from operations

                            6,261,320  

Other income (expensees), net

                            82,648  

Income before provision for income taxes

                          $ 6,343,968  

 

(1) Network access includes Mobile Services and Other Services. Other Services includes the provisioning of high speed Internet access, Internet hosting and network consulting services. 

 

    Network Access (1)    

Domain Name

Services

   

Consolidated

Totals

 

Three months ended March 31, 2015

 

Mobile Services

   

Other Services

                 
                                 

Net Revenues

  $ 12,559,231       367,783       27,540,819     $ 40,467,833  
                                 

Cost of revenues

                               

Cost of revenues

    7,129,811       215,346       19,476,217       26,821,374  

Network expenses

    11,903       61,513       1,148,680       1,222,096  

Depreciation of property and equipment

    -       28,890       170,752       199,642  

Amortization of intangible assets

    -       3,924       -       3,924  

Total cost of revenues

    7,141,714       309,673       20,795,649       28,247,036  

Gross Profit

    5,417,517       58,110       6,745,170       12,220,797  
                                 

Expenses:

                               

Sales and marketing

                            3,799,175  

Technical operations and development

                            1,114,195  

General and administrative

                            2,468,022  

Depreciation of property and equipment

                            59,262  

Amortization of intangible assets

                            53,215  

Impairment of indefinite life intangible assets

                            12,493  

Loss on currency forward contracts

                            304,024  

Income from operations

                            4,410,411  

Other income (expensees), net

                            (24,775 )

Income before provision for income taxes

                          $ 4,385,636  

 

(1) Network access includes Mobile Services and Other Services. Other Services includes the provisioning of high speed Internet access, Internet hosting and network consulting services.

 

 
16

 

 

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

 

    Three months ended March 31,  
   

2016

   

2015

 
                 

Network Access Services:

               

Mobile Services

    16,944,070       12,559,231  

Other Services

    895,062       367,783  

Total Network Access Services

    17,839,132       12,927,014  
                 

Domain Services:

               

Wholesale

               

Domain Services

  $ 21,270,865     $ 21,175,131  

Value Added Services

    2,302,433       2,241,998  

Total Wholesale

    23,573,298       23,417,129  
                 

Retail

    3,414,632       2,875,728  

Portfolio

    783,351       1,247,962  

Total Domain Services

    27,771,281       27,540,819  
                 
    $ 45,610,413     $ 40,467,833  

 

During the three months ended March 31, 2016 and 2015, no customer accounted for more than 10% of total revenue. As at March 31, 2016, one customer accounted for 10.6% of accounts receivable and no customer accounted for more than 10% of accounts receivable as at March 31, 2015.

 

 
17

 

 

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

 

    Three months ended March 31,  
   

2016

   

2015

 
                 

Network Access Services:

               

Mobile Services

    8,548,295       7,129,811  

Other Services

    440,737       215,346  

Total Network Access Services

    8,989,032       7,345,157  
                 

Domain Services:

               

Wholesale

               

Domain Services

  $ 17,642,771     $ 17,546,327  

Value Added Services

    479,382       536,132  

Total Wholesale

    18,122,153       18,082,459  
                 

Retail

    1,578,326       1,220,500  

Portfolio

    160,962       173,258  

Total Domain Services

    19,861,441       19,476,217  
                 

Network Expenses:

               

Network, other costs

    1,232,931       1,222,096  

Network, depreciation and amortization costs

    358,285       203,566  
      1,591,216       1,425,662  
                 
    $ 30,441,689     $ 28,247,036  

 

 

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

 

   

March 31, 2016

   

December 31, 2015

 
             
                 

Canada

  $ 1,078,561     $ 1,225,236  

United States

    6,231,488       5,847,666  

Germany

    47,082       53,774  
    $ 7,357,131     $ 7,126,676  

 

 

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

 

   

March 31, 2016

   

December 31, 2015

 
             
                 

United States

  $ 685,395     $ 702,594  

Germany

    479,080       530,410  
    $ 1,164,475     $ 1,233,004  

  

 
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(f)           The following is a summary of the Company’s deferred tax asset by geographic region:

 

   

March 31, 2016

   

December 31, 2015

 
             
                 

Canada

  $ 6,847,730     $ 7,621,092  
    $ 6,847,730     $ 7,621,092  

 

(g)           Valuation and qualifying accounts:

 

Allowance for doubtful accounts exclusding provision for credit notes

 

Balance at

beginning of period

   

Charged to

(recovered) costs and

expenses

   

Write-offs during

period

   

Balance at end of

period

 
                                 

Three months ended March 31, 2016

  $ 122,095     $ 16,534     $ -     $ 138,629  

Year ended December 31, 2015

  $ 125,766     $ (3,671 )   $ -     $ 122,095  

 

 

12. 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 March 31, 2016 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.

 

13. Other income, net: 

In February 2015, we waived our rights under the proposed joint venture to operate the .online registry and instead entered into a Joint Marketing agreement with our venture partners under which our original capital contributions have been returned and a set of go-forward marketing arrangements have been created instead. Under the terms of the agreement, the Company has undertaken to provide certain marketing support for .online registry and has agreed to certain volume commitments during the term of the agreement. The Joint Marketing Agreement is for a term of three years and commenced in November 2015. The Company generated a gain of $1.5 million for waiving its rights and entering the Joint Marketing Agreement. The gain is being recognized over the term of three years. An amount of $0.1 million of this gain was recognized during the three months ended March 31, 2016 (the amount was $0 for the three months ended March 31, 2015).

 

14. Stockholders’ Equity:

 

The following unaudited table summarizes stockholders' equity transactions for the three-month period ended March 31, 2016: 

 

                                   

Accumulated

         
                   

Additional

   

Retained

   

other

   

Total

 
    Common stock    

paid in

   

earnings

   

comprehensive

   

stockholders'

 
   

Number

   

Amount

   

capital

   

(deficit)

   

income (loss)

   

equity

 
                                                 

Balances, December 31, 2015

    10,685,599     $ 14,530,633     $ 8,526,395     $ 4,381,849     $ (1,109,452 )   $ 26,329,425  

Exercise of stock options

    11,574       48,737       (29,179 )     -       -       19,558  

Shares deducted from exercise of stock options for payment of witholding taxes and exercise consideration