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Note 2 - Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2018
Notes to Financial Statements |
New Accounting Pronouncements and Changes in Accounting Principles [Text Block] | 2. Significant Accounting Policies: The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are stated in U.S. dollars, except where otherwise noted. (a) Basis of presentation These consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation. The Company has reclassified certain prior period income statement amounts and related notes to conform to the financial statement presentation adopted in the current year. As a result of these reclassifications, there were no changes to previously reported Income from operations, Net income, Earnings per share, or on previously reported Consolidated Balance Sheets or Consolidated Statements of Cash Flows. Commencing with this annual report on Form 10 -K for the year ended December 31, 2018, all dollar values of current and comparative figures in the financial statements and accompanying tables have been rounded to the nearest thousand ( $000 ), except when otherwise indicated. (b) Use of estimates The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to amounts recognized for carrying values of revenues, bad debts, goodwill and intangible assets which require estimates of future cash flows and discount rates, income taxes, contingencies and litigation, and estimates of credit spreads for determination of the fair value of derivative instruments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances at the time they are made. Under different assumptions or conditions, the actual results will differ, potentially materially, from those previously estimated. Many of the conditions impacting these assumptions and estimates are outside of the Company’s control. (c) Cash and cash equivalents All highly liquid investments, with an original term to maturity of three months or less are classified as cash and cash equivalents. Cash and cash equivalents are stated at cost which approximates market value. (d) Inventory Inventory primarily consists of mobile devices, mobile sim cards and related accessories, and Internet optical network terminals and are stated at the lower of cost or net realizable value. Cost is determined based on actual cost of the mobile device, accessory shipped or optical network terminals. The net realizable value of inventory is analyzed on a regular basis. This analysis includes assessing obsolescence, sales forecasts, product life cycle, marketplace and other considerations. If assessments regarding the above factors adversely change, we may be required to write down the value of inventory. (e) 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:
|  | Rate |
Asset |  |  |  |  |  |  |
Computer equipment |  |  |  | 30 | % |  |
Computer software |  |  | 33 1/3 | - |  | 100 | %
Furniture and equipment |  |  |  | 20 | % |  |
Vehicles and tools |  |  |  | 20 | % |  |
Fiber network (years) |  |  |  | 15 |  |  |
Customer equipment and installations (years) |  |  |  | 3 |  |  |
Land |  |  |  | N/A |  |  |
Leasehold improvements |  | Over term of lease |
Assets under construction |  |  |  | N/A |  |  |
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 their eventual disposition is less than their carrying amount, they are 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. Additions to land are recorded at cost, and include any direct costs associated with the purchase, as well as any direct costs incurred to bring it to the condition necessary for its intended use, such as legal fees associated with the acquisition and the cost of permanent improvements. (f) Derivative Financial Instruments The Company uses 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 our 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 our 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. (g) Goodwill and Other Intangible assets Goodwill Goodwill represents the excess of purchase price over the fair values assigned to the net assets acquired in business combinations. The Company does not amortize goodwill. Impairment testing for goodwill is performed annually in the fourth quarter of each year or more frequently if impairment indicators are present. Impairment testing is performed at the operating segment level. The Company has determined that it has two operating segments, Domain Services and Network Access services. The Company performs a qualitative assessment to determine whether there are events or circumstances which would lead to a determination that it is more likely than not that goodwill has been impaired. If, after this qualitative assessment, the Company determines that it is not more likely than not that goodwill has been impaired, then no further quantitative testing is necessary. In performance of the qualitative test, an evaluation is made of the impact of various factors to the expected future cash flows attributable to its operating segments and to the assumed discount rate which would be used to present value those cash flows. Consideration is given to factors such as, macro-economic and industry and market conditions including the capital markets and the competitive environment amongst others. In the event that the qualitative tests indicate that there may be impairment, quantitative impairment testing is required. In performance of the quantitative test, the Company uses a discounted cash flow or income approach in which future expected cash flows at the operating segment level are converted to present value using factors that consider the timing and risk of the future cash flows. The estimate of cash flows used is prepared on an unleveraged debt-free basis. The discount rate reflects a market-derived weighted average cost of capital. The Company believes that this approach is appropriate because it provides a fair value estimate based upon the Company’s expected long-term operating and cash flow performance for its operating segment. The projections are based upon the Company’s best estimates of projected economic and market conditions over the related period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital. If assumptions and estimates used to allocate the purchase price or used to assess impairment prove to be inaccurate, future asset impairment charges could be required. Intangibles Assets Not Subject To Amortization Intangible assets not subject to amortization consist of surname domain names and direct navigation domain names. While the domain names are renewed annually, through payment of a renewal fee to the applicable registry, the Company has the exclusive right to renew these names at its option. Renewals occur routinely and at a nominal cost. Moreover, the Company has determined that there are currently no legal, regulatory, contractual, economic or other factors that limit the useful life of these domain names on an aggregate basis and accordingly treat the portfolio of domain names as indefinite life intangible assets. The Company re-evaluates the useful life determination for domain names in the portfolio each year to determine whether events and circumstances continue to support an indefinite useful life. The Company reviews individual domain names in the portfolio for potential impairment throughout the fiscal year in determining whether a particular name should be renewed. Impairment is recognized for names that are not renewed. Intangible Assets Subject to Amortization Intangible assets subject to amortization, consist of brand, customer relationships, technology and network rights and are amortized on a straight-line basis over their estimated useful lives as follows:
|  | (in years) |
Technology |  |  |  | 2 |  |
Brand |  |  |  | 7 |  |
Customer relationships |  |  | 3 | - | 7 |
Network rights |  |  |  | 15 |  |
The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated useful lives of its intangible assets subject to amortization may warrant revision or that the remaining balance of such assets may not be recoverable. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the asset in measuring whether the asset is recoverable. (h) Revenue recognition See Note 10 - Revenue for a description of the Company’s Revenue recognition policy and a further description of the principal activities – separated by reportable segments – from which the Company generates its revenue. (i) Deferred revenue Deferred revenue primarily relates to the unearned portion of revenues received in advance related to the unexpired term of registration fees from domain name registrations and other domain related Internet services, on both a wholesale and retail basis, net of external commissions. (j) Contract Costs See Note 11 – Contract Costs for a description of the Company’s Contract Cost recognition policy. ( k ) Accreditation fees payable In accordance with ICANN rules, the Company has elected to pay ICANN fees incurred on the registration of Generic Top-Level Domains on an annual basis. Accordingly, accreditation fees that relate to registrations completed prior to ICANN rendering a bill are accrued and reflected as accreditation fees payable. ( l ) Prepaid domain name registry fees Prepaid domain name registry and other Internet services fees represent amounts paid to registries, and country code domain name operators for updating and maintaining the registries, as well as to suppliers of other Internet services. Domain name registry and other Internet services fees are recognized on a straight-line basis over the life of the contracted registration term. ( m ) Translation of foreign currency transactions The Company’s functional currency is the United States dollar. Monetary assets and liabilities of the Company and of its wholly owned subsidiaries that are denominated in foreign currencies are translated into United States dollars at the exchange rates prevailing at the balance sheet dates. Non-monetary assets and liabilities are translated at the historical exchange rates. Transactions included in operations are translated at the rate at the date of the transactions. ( n ) Income taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income in the year that includes the enactment date. A valuation allowance is recorded if it is not “more likely than not” that some portion of or all of a deferred tax asset will be realized. The Company recognizes the impact of an uncertain income tax position at the largest amount that is more-likely-than- not to be sustained upon audit by the relevant taxing authority and includes consideration of interest and penalties. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The liability for unrecognized tax benefits is classified as non-current unless the liability is expected to be settled in cash within 12 months of the reporting date. ( o ) Stock-based compensation Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest, reduced for estimated forfeitures. ( p ) Earnings per common share Basic earnings per common share has been calculated on the basis of net income for the year divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share gives effect to all dilutive potential common shares outstanding at the end of the year assuming that they had been issued, converted or exercised at the later of the beginning of the year or their date of issuance. 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 share equivalents or the proceeds of the exercise of options. ( q ) Concentration of credit risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, accounts receivable and forward foreign exchange contracts. Cash equivalents consist of deposits with major commercial banks, the maturities of which are three months or less from the date of purchase. With respect to accounts receivable, the Company performs periodic credit evaluations of the financial condition of its customers and typically does not require collateral from them. The counterparty to any forward foreign exchange contracts is a major commercial bank which management believes does not represent a significant credit risk. Management assesses the need for allowances for potential credit losses by considering the credit risk of specific customers, historical trends and other information. ( r ) Fair value measurement Fair value of financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three -tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows: Level 1—Quoted prices in active markets for identical assets or liabilities Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities Level 3—No observable pricing inputs in the market Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. The fair value of cash and cash equivalents, accounts receivable, accounts payable, accreditation fees payable, customer deposits and accrued liabilities (level 2 measurements) approximate their carrying values due to the relatively short periods to maturity of the instruments. The fair value of the derivative financial instruments is determined using an estimated credit-adjusted mark-to-market valuation (a level 2 measurement) which takes into consideration the Company and the counterparty credit risk. ( s ) Investments The Company accounts for investment in entities over which it has the ability to exert significant influence, but does not control and is not the primary beneficiary of, using the equity method of accounting. The Company includes the proportionate share of earnings (loss) of the equity method investees in Other Income in the Consolidated Statements of Comprehensive Income. The proportional shares of affiliate earnings or losses accounted for under the equity method of accounting were not material for all periods presented. ( t ) Segment reporting The Company operates in two operating segments, Domain Services and Network Access Services. The Company’s Domain Services revenues are attributed to the country in which the contract originates. Revenues from domain names issued under the OpenSRS brand from the Toronto, Canada location are attributed to Canada because it is impracticable to determine the country of the customer. Revenues from domain names issued under the eNom brand from the Kirkland, Washington location are attributable to the United States because it is impracticable to determine the country of the customer. The Company’s Network Access Services which consist primarily of mobile telephony services, as well as the provisioning of high speed Internet access and consulting services, which are generated primarily through its business operations in the United States. The Company’s assets are located in Canada, the United States and Germany. ( u ) Recent Accounting Pronouncements Recent Accounting Pronouncements Adopted On January 1, 2018, the Company adopted Accounting Standards Updates ("ASU") No. 2017 - 01, Business Combinations (Topic 805 ): Clarifying the Definition of a Business and ASU 2015 - 16, Simplifying the Accounting for Measurement-Period Adjustments. The adoption of these updates did not have a significant impact on the consolidated financial statements. We also adopted ASU 2014 - 09 on January 1, 2018. The impact of such adoption is described in more detail below. ASU 2014 - 09: Adoption of Revenue from Contracts with Customers (Topic 606 ) On January 1, 2018, the Company adopted ASU 2014 - 09 using the modified retrospective method by recognizing the cumulative effect of initially applying ASU 2014 - 09 as an adjustment to the opening balance of equity as at January 1, 2018. The results for reporting periods beginning after January 1, 2018 are presented under ASU 2014 - 09, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policy, under Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition (ASC Topic 605 ). The adoption of ASU 2014 - 09 did not affect the Company’s cash flows from operating, investing, or financing activities. Furthermore, the impact on timing of revenue recognition was not material as the treatment of revenue for services rendered over time is consistent under ASU 2014 - 09 and ASC Topic 605. The details of the significant changes and quantitative impact of the changes are set out below. For a more comprehensive description of how the Company recognizes revenue under the new revenue standard in accordance with its performance obligations, see Note 10 – Revenue for more information. The Company previously recognized commission fees related to Ting Mobile, Ting Internet, eNom domain registration and eNom domain related value-added service contracts as selling expenses when they were incurred. Under ASU 2014 - 09, when these commission fees are deemed incremental and are expected to be recovered, the Company capitalizes as an asset such commission fees as costs of obtaining a contract. These commission fees are amortized into income consistently with the pattern of transfer of the good or service to which the asset relates. The amortization of deferred costs of acquisition are amortized into Sales and marketing expense. The estimation of the amortization period for the costs to obtain a contract requires judgement. Under ASU 2014 - 09, the Company has applied the following practical expedients:
| a) | When the amortization period for costs incurred to obtain a contract with a customer is less than one year, the Company has elected to apply a practical expedient to expense the costs as incurred; and
| b) | For mobile and internet access services, where the performance obligation is part of contracts that have an original expected duration of one year or less (typically one month), the Company has elected to apply a practical expedient to not disclose revenues expected to be recognized in the future related performance obligations that are unsatisfied (or partially unsatisfied).
On January 1, 2018 as a result of adopting ASU 2014 - 09, the Company recorded a contract cost asset of $1.4 million with a corresponding increase to opening retained earnings and deferred tax liability of $1.1 million and $0.3 million, respectively, due to the deferral of costs of obtaining contracts. The impact of the changes to the Company’s financial statements in the current period are as follows (Dollar amounts in thousands of U.S. dollars) :
|  | December 31, 2018 |
|  |  |  |  |  |  |  |  |  | Balances without |
Consolidated Balance Sheet |  | As reported |  |  | Adjustments |  |  | adoption of Topic 606 |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Contract Costs (note 11) |  | $ | 1,390 |  |  | $ | (1,390 | ) |  | $ | - |
Total assets |  |  | 339,575 |  |  | $ | (1,390 | ) |  | $ | 338,185 |
Liabilities and Shareholders' Equity |  |  |  |  |  |  |  |  |  |  |  |
Deferred tax liability (note 9) |  | $ | 20,925 |  |  | $ | (338 | ) |  | $ | 20,587 |
Retained earnings |  |  | 60,810 |  |  |  | (1,052 | ) |  |  | 59,758 |
Total Liabilities and Shareholders' Equity |  | $ | 339,575 |  |  | $ | (1,390 | ) |  | $ | 338,185 |
|  | Year ended, December 31, 2018 |
|  |  |  |  |  |  |  |  |  | Balances without |
Consolidated Statements of Operations and Comprehensive Income |  | As reported |  |  | Adjustments |  |  | adoption of Topic 606 |
Expenses |  |  |  |  |  |  |  |  |  |  |  |
Sales and marketing |  | $ | 33,063 |  |  | $ | (14 | ) |  | $ | 33,049 |
Income before provision for income taxes |  |  | 26,155 |  |  |  | 14 |  |  |  | 26,169 |
Provision for income tax (note 9) |  |  | 9,020 |  |  |  | 3 |  |  |  | 9,023 |
Net income for the period |  | $ | 17,135 |  |  | $ | 11 |  |  | $ | 17,146 |
|  | Year ended, December 31, 2018 |
|  |  |  |  |  |  |  |  |  | Balances without |
Consolidated Statements of Cash Flows |  | As reported |  |  | Adjustments |  |  | adoption of Topic 606 |
Net income for the period |  | $ | 17,135 |  |  | $ | 11 |  |  | $ | 17,146 |
Items not involving cash |  |  |  |  |  |  |  |  |  |  |  |
Net amortization of contract costs |  |  | 14 |  |  |  | (14 | ) |  |  | - |
Deferred income taxes (recovery) |  |  | 1,038 |  |  |  | 3 |  |  |  | 1,041 |
All other items |  |  | 19,022 |  |  |  | - |  |  |  | 19,022 |
Net cash provided by operating activities |  | $ | 37,209 |  |  | $ | - |  |  | $ | 37,209 |
Recent Accounting Pronouncements Not Yet Adopted In February 2016, the FASB issued ASU No. 2016 - 02, Leases (Topic 842 ) (“ASU 2016 - 02” ). ASU 2016 - 02 requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. More specifically, 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, which begins on 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. The standard is expected to have a material impact on our consolidated balance sheets. The most significant impact will be the recognition of ROU assets and lease liabilities for operating leases. The Company is currently in the process of finalizing the quantification of the impact and the impact of transition methods. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting for administrative office operating leases. In August 2017, the FASB issued ASU No. 2017 - 12, Derivatives and Hedging (Topic 815 ): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017 - 12” ), which better aligns an entity’s risk management activities and financial reporting for hedging relationship through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The new standard expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and hedged item in the financial statements. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. The Company will adopt ASU 2017 - 12 in the first quarter of 2019, however we do not expect the new guidance to have a material impact on our consolidated financial statements. In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018 - 15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350 - 40 ): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2018 - 15” ). ASU 2018 - 15 helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance on accounting for implementation costs when the cloud computing arrangement does not include a licence and is accounted for as a service contract. The amendments in ASU 2018 - 15 require an entity (customer) in a hosting arrangement to assess which implementation costs to capitalize vs expense as it relates to a service contract. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. ASU 2018 - 15 will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently in the process of evaluating the quantitative impact of this Update and transition methods.

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