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Note 4 - Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2024

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

4. Derivative Instruments and Hedging Activities:

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are foreign exchange rate risk and formerly interest rate risk.

Since October 2012, the Company has employed 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, taxes, 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. In May 2020, the Company entered into a pay-fixed, receive-variable interest rate swap with a Canadian chartered bank to limit the potential interest rate fluctuations incurred on its future cash flows related to variable interest payments on the Second Amended 2019 Credit Facility. The notional value of the interest rate swap was $70 million. During the third quarter of fiscal year 2022, the Company elected to discontinue its application of hedge accounting to its interest rate swaps prospectively. Until the interest rate swaps matured in June 2023, the derivatives continued to be carried at fair value in the accompanying Consolidated Balance Sheets with changes in their fair value from the date of discontinuance recognized in current period earnings in Interest expense, net in the Consolidated Statements of Operations and Comprehensive Loss. Unrealized gains and losses in Accumulated other comprehensive income (AOCI) as of the date of discontinuance were realized in net income over the remaining term of the underlying forecasted interest payments into interest expense over the original term of the hedged debt. Prior to the discontinuance, for the interest rate swap contracts, unrealized gains or losses on the effective portion of these contracts had been included in other comprehensive income (OCI) and reclassified to earnings when the hedged transaction settled. As of June 30, 2024, there are no interest swaps held by the Company.

The Company does not use hedging forward contracts for trading or speculative purposes. The foreign exchange contracts typically mature between one and twelve months, and the interest rate swap fully matured as of June 30, 2023.

The Company has designated certain of these foreign exchange transactions as cash flow hedges of forecasted transactions under ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“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 being hedged are expected to completely offset at inception and on an ongoing basis. The Company designated the interest rate swap as a cash flow hedge of expected future interest payments at the inception of the contract. Accordingly, for the foreign exchange, unrealized gains or losses on the effective portion of these contracts were included within other comprehensive income and reclassified to earnings when the hedged transaction is settled. Cash flows from hedging activities were classified under the same category as the cash flows from the hedged items in the consolidated statements of cash flows. The fair value of the foreign exchange contract, as of June 30, 2024 and December 31, 2023, is recorded as derivative instrument assets or liabilities. For certain contracts where the hedged transactions are no longer probable to occur, the loss on the associated forward contract is recognized in earnings.

As of June 30, 2024, the notional amount of forward contracts that the Company held to sell U.S. dollars in exchange for Canadian dollars was $43.6 million, of which $43.6 million met the requirements of ASC Topic 815 and were designated as accounting hedges.

As of December 31, 2023, the notional amount of forward contracts that the Company held to sell U.S. dollars in exchange for Canadian dollars was $61.4 million, of which $61.4 million met the requirements of ASC Topic 815 and were designated as hedges.

As of June 30, 2024, we had the following outstanding forward contracts to trade U.S. dollars in exchange for Canadian dollars:

Maturity date (Dollar amounts in thousands of U.S. dollars)		Notional amount of U.S. dollars				Weighted average exchange rate of U.S. dollars				Fair value Asset

July - September 2024			16,974				1.3697				46
October - December 2024			13,795				1.3686				57
January - March 2025			9,128				1.3668				42
April - June 2025			3,731				1.3678				26
		$	43,628				1.3686			$	171

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

The effect of these derivative instruments on our consolidated financial statements were as follows (amounts presented do not include any income tax effects).

Fair value of derivative instruments in the consolidated balance sheets

Derivatives (Dollar amounts in thousands of U.S. dollars)		*Balance Sheet Location*		*As of June 30, 2024, Fair Value Asset*				*As of December 31, 2023, Fair Value Asset*
Foreign Currency forward contracts designated as cash flow hedges (net)		Derivative instruments		$	171			$	2,277
Total foreign currency forward contracts (net)		Derivative instruments		$	171			$	2,277

Movement in AOCI balance for the three months ended June 30, 2024 (Dollar amounts in thousands of U.S. dollars)

		*Gains and losses on cash flow hedges*				*Tax impact*				*Total AOCI*
Opening AOCI Balance - March 31, 2024			567				(134	)			433
Other comprehensive income (loss) before reclassifications			(401	)			97				(304	)
Amount reclassified from AOCI			-				-				-
Other comprehensive income (loss) for the three months ended June 30, 2024			(401	)			97				(304	)

Ending AOCI Balance - June 30, 2024		$	166			$	(37	)		$	129

Movement in AOCI balance for the six months ended June 30, 2024 (Dollar amounts in thousands of U.S. dollars)

		*Gains and losses on cash flow hedges*				*Tax impact*				*Total AOCI*
Opening AOCI balance - December 31, 2023		$	2,275			$	(547	)		$	1,728
Other comprehensive income (loss) before reclassifications			(1,886	)			456				(1,430	)
Amount reclassified from AOCI			(223	)			54				(169	)
Other comprehensive income (loss) for the six months ended June 30, 2024			(2,109	)			510				(1,599	)

Ending AOCI Balance - June 30, 2024		$	166			$	(37	)		$	129

Effects of derivative instruments on income and OCI for the three months ended June 30, 2024 and 2023 are as follows (Dollar amounts in thousands of U.S. dollars)

Derivatives in Cash Flow Hedging Relationship		*Amount of Gain or (Loss) Recognized in OCI, net of tax, on Derivative*			*Location of Gain or (Loss) Reclassified from AOCI into Income*		*Amount of Gain or (Loss) Reclassified from AOCI into Income*
					Operating expenses		$	-
Foreign currency forward contracts for the three months ended June 30, 2024		$	(304	)	Cost of revenues		$	-

					Operating expenses		$	(25	)
Foreign currency forward contracts for the three months ended June 30, 2023		$	578		Cost of revenues		$	(8	)

Effects of derivative instruments on income and OCI for the six months ended June 30, 2024 and 2023 are as follows (Dollar amounts in thousands of U.S. dollars)

Derivatives in Cash Flow Hedging Relationship		*Amount of Gain or (Loss) Recognized in OCI, net of tax, on Derivative*			*Location of Gain or (Loss) Reclassified from AOCI into Income*		*Amount of Gain or (Loss) Reclassified from AOCI into Income*
					Operating expenses		$	184
Foreign currency forward contracts for the six months ended June 30, 2024		$	(1,430	)	Cost of revenues		$	39

					Operating expenses		$	(235	)
Foreign currency forward contracts for the six months ended June 30, 2023		$	646		Cost of revenues		$	(57	)