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Tucows Reports Financial Results for Third Quarter 2020

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Tucows Inc.
·21 min read
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TORONTO, Nov. 05, 2020 (GLOBE NEWSWIRE) -- Tucows Inc. (NASDAQ:TCX, TSX:TC), a provider of network access, domain names and other Internet services, today reported its financial results for the third quarter ended September 30, 2020. All figures are in U.S. dollars.

COVID-19: Tucows shareholders and prospective investors are encouraged to read Tucows’ public statement regarding COVID-19, which is available here: https://bit.ly/2LavpOc.

Note on the Financial Impact of Tucows’ Sale of Ting Mobile Customer Relationships and Transition to Mobile Services Enabler Platform:

As previously announced, effective August 1, 2020 most of Tucows customers relationships were sold to DISH Networks (“DISH”) as part of Tucows’ transition of its mobile business to a Mobile Services Enabler (MSE) model from a Mobile Virtual Network Operator (MVNO) model, under which DISH became Tucows’s first MSE customer. Accordingly, the results of the Mobile Services business in our Network Access segment for the third quarter of 2020 reflect two months of operations under the new MSE model and one month of operations under the previous MVNO model. (All comparative prior-year periods are composed entirely of operations under Tucows’ previous MVNO model.)

Under the terms of the earn out arrangement for the Ting customer base acquired by DISH, the income generated by the customer base acquired by Dish are recognized (net of expenses) as “Other Income” under the heading “Gain on Sale of Ting Customer Assets”. As a result, revenue and gross margin for Mobile Services in the Network Access segment for the third quarter of 2020 are lower than those for the third quarter of 2019. Tucows will recognize fees paid by customers owned by DISH under the Ting brand, as well as customers under DISH’s Boost brand, that are added to Tucows’ MSE platform, as Mobile Platform Services revenue under the terms of the MSE Agreement signed with Dish. For more information, see Tucows’ Financial Statements and Management Discussion and Analysis for the third quarter of 2020.

Summary Financial Results
(In Thousands of US Dollars, Except Per Share Data)

3 Months ended September 30

9 Months ended September 30

2020
(Unaudited)

2019
(Unaudited)1

% Change

2020
(Unaudited)

2019
(Unaudited)

% Change

Net revenue

74,311

88,129

(15.7%)

240,418

251,199

(4.3%)

Gross Profit

19,941

27,574

(27.7%)

68,057

74,732

(8.9%)

Gain on Sale of Ting Customer Assets2

1,090

-

n/a

1,090

-

n/a

Net income

716

4,205

(83.0%)

3,707

9,620

(61.5%)

Basic Net earnings per common share

0.07

0.40

(82.5%)

0.35

0.90

(61.1%)

Adjusted EBITDA3

13,270

14,832

(10.5%)

38,124

35,749

6.6%

Net cash provided by operating activities

11,432

11,215

1.9%

34,444

27,185

26.7%

  1. Tucows financial results for the third quarter of 2019 include the contribution of the bulk sale of domain names in the Company’s Portfolio business (generating $1.9 million in revenue) as part of its exit from that business at the end of the year.

  2. Gain on Sale of Ting Customer Assets for the Third Quarter of 2020, proceeds of $4.6 million under the DISH earn-out arrangement offset by the loss on disposal of Ting Customer Assets totalling $3.5 million.

  3. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.

Summary of Revenues and Gross profit
(In Thousands of US Dollars)

Revenue

Gross Profit

3 Months ended September 30

3 Months ended September 30

2020
(Unaudited)

2019
(Unaudited)

2020
(Unaudited)

2019
(Unaudited)

Network Access Services:

Mobile Services

Retail Mobile Services

7,019

21,722

3,579

10,551

Mobile Platform Services

376

-

376

-

Other Professional Services

1,457

-

190

-

Total Mobile Services

8,852

21,722

4,145

10,551

Fiber Internet Services

4,657

2,890

2,975

1,954

Total Network Access Services

13,509

24,612

7,120

12,505

Domain Services:

Wholesale

Domain Services

47,261

47,259

10,449

8,922

Value Added Services

4,674

5,154

3,950

4,381

Total Wholesale

51,935

52,413

14,399

13,303

Retail

8,652

8,713

4,354

4,354

Portfolio4

215

2,391

108

2,211

Total Domain Services

60,802

63,517

18,861

19,868

Network Expenses:

Network, other costs

-

-

(2,612

)

(2,254

)

Network, depreciation and amortization costs

-

-

(3,315

)

(2,545

)

Network, impairment

(113

)

-

Total Network expenses

-

-

(6,040

)

(4,799

)

Total

74,311

88,129

19,941

27,574

4. Beginning in the first quarter of 2020, portfolio revenue consisted of individual sales from Tucows’ surname portfolio following the sale of the Company’s remaining domain name portfolio in the fourth quarter of 2019.

“The third quarter was once again demonstrative of the consistency and cash generating ability of the Tucows business,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “Revenue and gross margin from our Domains and Ting Internet businesses, excluding the impact of a large bulk domains sale from our Domains Portfolio in the third quarter of last year, increased 2% and 10% year over year, respectively.”

“Our Domains business once again saw strong transaction activity, although softening from the first two quarters of this year, as micro- and small-sized businesses and start-ups continued to establish a web presence for the first time amid the pandemic, while we continued to benefit from our focus on the quality of our customer base for gross margin contribution. In our Mobile Services business, we generated our first fees under our new MSE agreement with DISH and we look forward to increasing that revenue in the future as DISH adds customers under the Ting Mobile brand and we migrate DISH’s Boost customers to the MSE platform. In the Ting Internet business, we achieved another record quarter for capital expenditure on the network, as we continued to add passed addresses, serviceable addresses and new customers, and grow revenue and gross margin.”

Financial Results

Net revenue for the third quarter of 2020 was $74.3 million, a decrease of 16% from $88.1 million for the third quarter of 2019. The majority of the decrease was due to the absence of Ting Mobile MVNO revenue for approximately two months of the third quarter of 2020 following the Company’s sale of its Ting Mobile customer relationships to DISH and the related earn out being recognized as Other Income. The decrease was also due to a $1.9 million bulk domain sale from the Domains Portfolio business in the third quarter of 2019 that was not repeated in the third quarter of 2020 as the Company exited its Portfolio business at the end of 2019. Excluding the Mobile Services business, as well as the impact of the bulk Domains sale in the third quarter of 2019, net revenue for the combined Domains and Ting Internet businesses for the third quarter of 2020 increased 2% year over year.

Gross profit for the third quarter of 2020 was $19.9 million, a decrease of 28% from $27.6 million for the third quarter of 2019. The decrease in gross profit is attributable to the same factors as the decline in revenue. Excluding the Mobile Services business, as well as the impact of the bulk Domains sale in the third quarter of 2019, gross margin for the combined Domains and Ting Internet businesses for the third quarter of 2020 increased 10% year over year.

Net income for the third quarter of 2020 was $0.7 million, or $0.07 per share, compared with $4.2 million, or $0.40 per share. Net income was impacted by the one-time $3.5 million non-cash write-down of certain assets related to the sale of the Ting Mobile customer relationships to DISH, which was netted from the $4.6 million Gain on Sale of Ting Customer Assets under Other Income. Excluding the after-tax impact of the write-down, net income would have been $3.4 million, or $0.33 per share, down 19% year over year.

Adjusted EBITDA1 for the third quarter of 2020 was $13.3 million compared with $14.8 million for the third quarter of 2019. Excluding the impact of an outsized Portfolio bulk domain name sale in the third quarter of 2019, Adjusted EBITDA grew 3%.

Cash and cash equivalents at the end of the third quarter of 2020 was $10.2 million compared with $8.9 million at the end of the second quarter of 2020 and $12.0 million at the end of the third quarter of 2019.

Notes:

1. Adjusted EBITDA

Tucows reports all financial information required in accordance with United States generally accepted accounting principles (GAAP). Along with this information, to assist financial statement users in an assessment of our historical performance, the Company typically discloses and discusses a non-GAAP financial measure, adjusted EBITDA, in press releases and on investor conference calls and related events that exclude certain non-cash and other charges as the Company believes that the non-GAAP information enhances investors' overall understanding of our financial performance.

The Company believes that the provision of this supplemental non-GAAP measure allows investors to evaluate the operational and financial performance of the Company’s core business using similar evaluation measures to those used by management. The Company uses adjusted EBITDA to measure its performance and prepare its budgets. Since adjusted EBITDA is a non-GAAP financial performance measure, the Company’s calculation of adjusted EBITDA may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. Because adjusted EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a liquidity measure. Non-GAAP financial measures do not reflect a comprehensive system of accounting and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies and/or analysts and may differ from period to period. The Company endeavors to compensate for these limitations by providing the relevant disclosure of the items excluded in the calculation of adjusted EBITDA to net income based on U.S. GAAP, which should be considered when evaluating the Company's results. Tucows strongly encourages investors to review its financial information in its entirety and not to rely on a single financial measure.

The Company’s adjusted EBITDA definition excludes depreciation, amortization of intangible assets, income tax provision, interest expense (net), accretion of contingent consideration, stock-based compensation, loss on disposal of Ting Mobile customer assets, gains and losses from unrealized foreign currency transactions and infrequently occurring items, including acquisition and transition costs. Gains and losses from unrealized foreign currency transactions removes the unrealized effect of the change in the mark-to-market values on outstanding unhedged foreign currency contracts, as well as the unrealized effect from the translation of monetary accounts denominated in non-U.S. dollars to U.S. dollars.

The following table reconciles net income to adjusted EBITDA (dollars in thousands):

3 months ended September 30

9 months ended September 30

2020 (Unaudited)

2019 (Unaudited)

2020 (Unaudited)

2019 (Unaudited)

Net income for the period

716

4,205

3,707

9,620

Depreciation of property and equipment

3,110

2,348

9,255

6,445

Impairment of property and equipment

113

-

1,638

-

Loss on disposition of property and equipment

-

73

-

73

Amortization of intangible assets

2,645

2,858

8,776

7,463

Impairment of definite life intangible assets

-

-

1,431

-

Disposal of Ting Mobile customer assets

3,513

-

3,513

-

Interest expense, net

760

1,263

2,756

3,549

Accretion of contingent consideration

86

-

258

-

Provision for income taxes

840

3,133

2,390

6,209

Stock-based compensation

1,016

830

2,664

2,040

Unrealized loss (gain) on change in fair value of forward contracts

(175

)

(16

)

(263

)

(204

)

Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities

81

88

479

(402

)

Acquisition and transition costs*

565

50

1,520

956

Adjusted EBITDA

13,270

14,832

38,124

35,749

*Acquisition and other costs represent transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to our acquisition of Ascio in March 2019 and Cedar in January 2020 and disposition of certain Ting Mobile assets in August 2020. Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.

Conference Call

Concurrent with the dissemination of its quarterly financial results news release at 5:05 pm ET on Thursday, November 5, management’s pre-recorded audio commentary (and transcript) discussing the quarter and outlook for the Company, will be posted to the Tucows website at http://www.tucows.com/investors/financials. In lieu of a live question and answer period, for the subsequent five days, until Tuesday, November 10, shareholders, analysts and prospective investors can submit questions to Tucows’ management at ir@tucows.com. Management will post responses to questions of general interest (audio recording and transcript) to the Company’s website at http://www.tucows.com/investors/financials/ on Tuesday, November 17 at approximately 4 pm ET. All questions will receive a response, however, questions of a more specific nature may be responded to directly.

About Tucows

Tucows is a provider of network access, mobile technology services, domain names and other Internet services. Ting Internet (https://ting.com/internet) delivers fixed fiber Internet access with outstanding customer support. Tucows’ mobile services enabler (MSE) platform provides network access, provisioning and billing services for mobile virtual network operators (MVNOs). OpenSRS (https://opensrs.com), Enom (https://www.enom.com) and Ascio (https://ascio.com) combined manage approximately 25 million domain names and millions of value-added services through a global reseller network of over 36,000 web hosts and ISPs. Hover (https://hover.com) makes it easy for individuals and small businesses to manage their domain names and email addresses. More information can be found on Tucows’ corporate website (https://tucows.com).

This release includes forward-looking statements as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, including statements regarding our expectations regarding our future financial results and, including, without limitation, our expectations regarding our ability to realize synergies from the Enom acquisition and our expectation for growth of Ting Internet. These statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Information about other potential factors that could affect Tucows’ business, results of operations and financial condition is included in the Risk Factors sections of Tucows’ filings with the Securities and Exchange Commission. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All forward-looking statements are based on information available to Tucows as of the date they are made. Tucows assumes no obligation to update any forward-looking statements, except as may be required by law.

Tucows, Ting, OpenSRS, Enom, Ascio and Hover are registered trademarks of Tucows Inc. or its subsidiaries.

Tucows Inc.

September 30,

December 31,

Consolidated Balance Sheets

2020

2019

(Dollar amounts in thousands of U.S. dollars)

(unaudited)

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

10,155

$

20,393

Accounts receivable

12,623

14,564

Inventory

1,139

3,457

Prepaid expenses and deposits

13,703

13,478

Derivative instrument asset, current portion

2,402

731

Prepaid domain name registry and ancillary services fees, current portion

95,694

91,252

Income taxes recoverable

3,553

1,800

Total current assets

139,269

145,675

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

17,546

17,915

Property and equipment

109,767

82,121

Right of use operating lease asset

11,625

11,335

Contract costs

359

1,400

Intangible assets

50,087

57,654

Goodwill

116,270

109,818

Total assets

$

444,923

$

425,918

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

8,552

$

6,671

Accrued liabilities

9,525

9,373

Customer deposits

14,372

14,074

Derivative instrument liability

135

-

Operating lease liability, current portion

1,692

1,413

Deferred revenue, current portion

128,569

123,101

Accreditation fees payable, current portion

975

952

Income taxes payable

881

1,324

Total current liabilities

164,701

156,908

Derivative instrument liability

112

-

Deferred revenue, long-term portion

25,661

26,202

Accreditation fees payable, long-term portion

200

216

Operating lease liability, long-term portion

9,679

9,424

Loan payable

113,672

113,503

Other long-term liability

3,330

-

Deferred tax liability

27,187

25,471

Stockholders' equity:

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

-

-

Common stock - no par value, 250,000,000 shares authorized; 10,593,514 shares issued and outstanding as of September 30, 2020 and 10,585,159 shares issued and outstanding as of December 31, 2019

19,989

16,633

Additional paid-in capital

983

880

Retained earnings

78,038

76,208

Accumulated other comprehensive income (loss)

1,371

473

Total stockholders' equity

100,381

94,194

Total liabilities and stockholders' equity

$

444,923

$

425,918


Tucows Inc.

Three months ended September 30,

Nine months ended September 30,

Consolidated Statements of Operations and Comprehensive Income

2020

2019

2020

2019

(Dollar amounts in thousands of U.S. dollares)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Net revenues

$

74,311

$

88,129

$

240,418

$

251,199

Cost of revenues:

Cost of revenues

48,330

55,756

153,308

162,561

Network expenses (*)

2,612

2,254

7,513

7,034

Depreciation of property and equipment

2,985

2,231

8,892

6,070

Amortization of intangible assets

330

314

1,010

802

Impairment of property and equipment

113

-

1,638

-

Total cost of revenues

54,370

60,555

172,361

176,467

Gross profit

19,941

27,574

68,057

74,732

Expenses:

Sales and marketing (*)

8,318

8,769

26,521

26,366

Technical operations and development (*)

3,162

2,876

8,980

8,151

General and administrative (*)

4,868

4,574

15,074

13,818

Depreciation of property and equipment

125

117

363

375

Loss on disposition of property and equipment

-

73

-

73

Amortization of intangible assets

2,315

2,544

7,766

6,661

Impairment of definite life intangible assets

-

-

1,431

-

Loss (gain) on currency forward contracts

(159

)

20

(99

)

(90

)

Total expenses

18,629

18,973

60,036

55,354

Income from operations

1,312

8,601

8,021

19,378

Other income (expenses):

Interest expense, net

(760

)

(1,263

)

(2,756

)

(3,549

)

Gain on sale of Ting Customer Assets, net

1,090

-

1,090

-

Other income

(86

)

-

(258

)

-

Total other income (expenses)

244

(1,263

)

(1,924

)

(3,549

)

Income before provision for income taxes

1,556

7,338

6,097

15,829

Provision for income taxes

840

3,133

2,390

6,209

Net income for the period

716

4,205

3,707

9,620

Other comprehensive income, net of tax

Unrealized income (loss) on hedging activities

729

(175

)

609

614

Net amount reclassified to earnings

46

26

289

167

Other comprehensive income (loss) net of tax expense (income) of $230 and ($47) for the three months ended September 30, 2020 and September 30, 2019 and $261 and $250 for the six months ended September 30, 2020 and September 30, 2019

775

(149

)

898

781

Comprehensive income, net of tax for the period

$

1,491

$

4,056

$

4,605

$

10,401

Basic earnings per common share

$

0.07

$

0.40

$

0.35

$

0.90

Shares used in computing basic earnings per common share

10,577,731

10,626,754

10,585,785

10,639,544

Diluted earnings per common share

$

0.07

$

0.39

$

0.35

$

0.89

Shares used in computing diluted earnings per common share

10,682,808

10,745,834

10,679,162

10,798,099

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

Network expenses

$

138

$

95

$

333

$

224

Sales and marketing

$

456

$

363

$

1,203

$

857

Technical operations and development

$

208

$

179

$

558

$

428

General and administrative

$

214

$

193

$

570

$

531


Tucows Inc.

Three months ended September 30,

Nine months ended September 30,

Consolidated Statements of Cash Flows

2020

2019

2020

2019

(Dollar amounts in thousands of U.S. dollars)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Cash provided by:

Operating activities:

Net income for the period

$

716

$

4,205

$

3,707

$

9,620

Items not involving cash:

Depreciation of property and equipment

3,110

2,348

9,255

6,445

Loss on write off/impairment of property and equipment

113

120

1,638

142

Amortization of debt discount and issuance costs

68

64

202

232

Amortization of intangible assets

2,645

2,858

8,776

7,463

Net amortization contract costs

(15

)

(61

)

109

(8

)

Accretion of contingent consideration

86

-

258

-

Impairment of definite life intangible asset

-

-

1,431

-

Foreign exchange impact of impairment of definite life intangible asset

-

-

223

-

Deferred income taxes (recovery)

180

(170

)

(927

)

1,741

Excess tax benefits on share-based compensation expense

(164

)

(53

)

(508

)

(790

)

Net Right of use operating assets/Operating lease liability

137

(54

)

249

(5

)

Loss on disposal of domain names

-

66

15

72

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

(175

)

(16

)

(263

)

(204

)

Disposal of Ting Mobile customer assets

3,513

-

3,513

-

Stock-based compensation

1,016

830

2,664

2,040

Change in non-cash operating working capital:

Accounts receivable

118

(1,763

)

2,670

(1,920

)

Inventory

(123

)

(644

)

1,681

(128

)

Prepaid expenses and deposits

2,905

(329

)

(317

)

(3,243

)

Prepaid domain name registry and ancillary services fees

984

3,819

(4,073

)

3,754

Income taxes recoverable

(2,475

)

1,576

(1,681

)

(1,299

)

Accounts payable

509

(2,394

)

759

(2,778

)

Accrued liabilities

(668

)

3,687

(334

)

7,274

Customer deposits

69

1,394

463

873

Deferred revenue

(1,070

)

(4,200

)

4,927

(2,062

)

Accreditation fees payable

(47

)

(68

)

7

(34

)

Net cash provided by operating activities

11,432

11,215

34,444

27,185

Financing activities:

Proceeds received on exercise of stock options

632

118

678

312

Payment of tax obligations resulting from net exercise of stock options

(132

)

(20

)

(479

)

(544

)

Repurchase of common stock

-

(4,986

)

(3,281

)

(4,986

)

Proceeds received on loan payable

-

5,000

-

45,371

Repayment of loan payable

-

3

-

(4,600

)

Payment of loan payable costs

-

2

(32

)

(639

)

Net cash (used in) provided by financing activities

500

117

(3,114

)

34,914

Investing activities:

Additions to property and equipment

(10,636

)

(10,308

)

(32,729

)

(31,157

)

Acquisition of Cedar Holdings Group (net of cash of $66)

-

-

(8,770

)

-

Acquisition of Ascio Technologies (net of cash of $1)

-

-

-

(28,024

)

Acquisition of intangible assets

-

(1,038

)

(69

)

(3,566

)

Net cash used in investing activities

(10,636

)

(11,346

)

(41,568

)

(62,747

)

Increase (decrease) in cash and cash equivalents

1,296

(14

)

(10,238

)

(648

)

Cash and cash equivalents, beginning of period

8,859

12,003

20,393

12,637

Cash and cash equivalents, end of period

$

10,155

$

11,989

$

10,155

$

11,989

Supplemental cash flow information:

Interest paid

$

635

$

1,267

$

2,638

$

3,561

Income taxes paid, net

$

3,249

$

1,959

$

5,449

$

6,123

Supplementary disclosure of non-cash investing and financing activities:

Property and equipment acquired during the period not yet paid for

$

1,697

$

991

$

1,697

$

991

Fair value of shares issued for acquisition of Cedar Holdings Group

$

-

$

-

$

2,000

$

-

Fair value of contingent consideration for acquisition of Cedar Holdings Group

$

-

$

-

$

3,072

$

-

Acquisition of intangible assets transferred from other assets

$

-

$

2,501

$

-

$

-


Tucows Inc.

Three months ended September 30,

Nine months ended September 30,

Reconciliation of Net income to Adjusted EBITDA

2020

2019

2020

2019

(Dollar amounts in thousands of U.S. dollars)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Net income for the period

$

716

$

4,205

$

3,707

$

9,620

Depreciation of property and equipment

3,110

2,348

9,255

6,445

Impairment of property and equipment

113

-

1,638

-

Loss on disposiiton of property and equipment

-

73

-

73

Amortization of intangible assets

2,645

2,858

8,776

7,463

Disposal of Ting Mobile customer assets

3,513

-

3,513

-

Impairment of definite life intangible asset

-

-

1,431

-

Interest expense, net

760

1,263

2,756

3,549

Accretion of contingent consideration

86

-

258

-

Provision for income taxes

840

3,133

2,390

6,209

Stock-based compensation

1,016

830

2,664

2,040

Unrealized loss (gain) on change in fair value of forward contracts

(175

)

(16

)

(263

)

(204

)

Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities

81

88

479

(402

)

Acquisition and other costs1

565

50

1,520

956

Adjusted EBITDA

$

13,270

$

14,832

$

38,124

$

35,749

1Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to our acquisition of Ascio in March 2019 and Cedar in January 2020 and disposition of certain Ting Mobile assets in August 2020. Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.