Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

----

 

**FORM 10-Q**

 

**x****     ****QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2010**

 

**OR**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from          to         **

 

**Commission file number 1-32600**

 

**TUCOWSINC.**

(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)

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days:  Yes x  No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T §232.405 of this chapter during the preceding 12 months (or forsuch shorter period that the registrant was required to submit and post suchfiles). Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer o                |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act):  Yes o  No x

 

Asof November 12, 2010, there were 53,448,491 outstanding shares ofcommon stock, no par value, of the registrant.

 

 

 

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Table of Contents

 

**TUCOWS INC.**

**Form 10-Q Quarterly Report**

**INDEX**

 
| **PART I  FINANCIAL INFORMATION** |
|----------------------------------------|
|                                   |   |   |
| Item 1.                                | Consolidated  Financial Statements | 3 |
|                                   |   |   |
|                                   | Consolidated Balance Sheets as of September 30,  2010 (unaudited) and December 31, 2009 | 3 |
|                                   | Consolidated Statements of Operations (unaudited) for  the three and nine months ended September 30, 2010 and 2009 | 4 |
|                                   | Consolidated Statements of Cash Flows (unaudited) for  the three and nine months ended September 30, 2010 and 2009 | 5 |
|                                   |   |   |
|                                   | Notes to Consolidated Financial Statements (unaudited) | 6 |
|                                   |   |   |
| Item 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 17 |
|                                   |   |   |
| Item 3.                                | Quantitative  and Qualitative Disclosures About Market Risk | 33 |
|                                   |   |   |
| Item 4.                                | Controls and  Procedures | 34 |
|                                   |   |   |
| **PART II  OTHER INFORMATION**    |
|                                   |   |   |
| Item 1.                                | Legal Proceedings | 34 |
|                                   |   |   |
| Item 1A.                               | Risk Factors | 34 |
|                                   |   |   |
| Item 6.                                | Exhibits | 35 |
|                                   |   |   |
| Signatures                             |   | 36 |

 

**TRADEMARKS,TRADE NAMES AND SERVICE MARKS**

 

Tucows®, Butterscotch® and OpenSRS® are registered trademarks of Tucows, Inc.or its subsidiaries. Other service marks, trademarks and trade names ofTucows, 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 namesreferred to in this Quarterly Report are the property of their respectiveowners. Solely for convenience, any trademarks referred to in this QuarterlyReport may appear without the ® or TM symbol,but such references are not intended to indicate, in any way, that we or theowner of such trademark, as applicable, will not assert, to the fullest extentunder applicable law, our or its rights, or the right of the applicablelicensor, to these trademarks.

 

2

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Table of Contents

 

**PART I.**

**FINANCIAL INFORMATION**

 

**Item 1. Consolidated Financial Statements**

 

**Tucows Inc.**

**Consolidated Balance Sheets**

**(Dollar amounts in U.S. dollars)**

** **
| ** **                                                                                                                                                                                                      | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                                      | ** ** | **2010**               | ** **  | **2009**              | ** ** |
| ** **                                                                                                                                                                                                      | ** ** | **(unaudited)**        | ** **  | ** **            | ** ** |
| **Assets**                                                                                                                                                                                                      |       |                   |        |                  |       |
|                                                                                                                                                                                                            |       |                   |        |                  |       |
| Current assets:                                                                                                                                                                                                 |       |                   |        |                  |       |
| Cash and cash equivalents                                                                                                                                                                                       |       | $                      | 5,431,589   |                  | $          | 9,632,394 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $110,000 as of September 30, 2010 and December 31, 2009                                                                               |       | 3,332,277              |        | 2,822,045             |       |
| Prepaid expenses and deposits                                                                                                                                                                                   |       | 2,437,566              |        | 2,498,922             |       |
| Derivative instrument asset, current portion (note  6)                                                                                                                                                          |       | 576,581                |        | 2,107,825             |       |
| Prepaid domain name registry and ancillary  services fees, current portion                                                                                                                                      |       | 36,621,716             |        | 31,596,236            |       |
| Income taxes recoverable                                                                                                                                                                                        |       | 547,000                |        | 674,000               |       |
| Total current assets                                                                                                                                                                                            |       | 48,946,729             |        | 49,331,422            |       |
|                                                                                                                                                                                                            |       |                   |        |                  |       |
| Derivative instrument asset, long-term portion  (note 6)                                                                                                                                                        |       | 5,436                  |        | 112,553               |       |
| Prepaid domain name registry and ancillary  services fees, long-term portion                                                                                                                                    |       | 12,887,593             |        | 12,126,515            |       |
| Property and equipment                                                                                                                                                                                          |       | 1,410,195              |        | 1,986,768             |       |
| Deferred financing charges                                                                                                                                                                                      |       | 20,900                 |        | 41,000                |       |
| Deferred tax asset, long-term portion (note 7)                                                                                                                                                                  |       | 3,870,038              |        | 3,907,476             |       |
| Intangible assets (note 4)                                                                                                                                                                                      |       | 17,333,237             |        | 18,656,353            |       |
| Goodwill                                                                                                                                                                                                        |       | 17,990,807             |        | 17,990,807            |       |
| Total assets                                                                                                                                                                                                    |       | $                      | 102,464,935 |                  | $          | 104,152,894 |   |
|                                                                                                                                                                                                            |       |                   |        |                  |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                  |       |                   |        |                  |       |
|                                                                                                                                                                                                            |       |                   |        |                  |       |
| Current liabilities:                                                                                                                                                                                            |       |                   |        |                  |       |
| Accounts payable                                                                                                                                                                                                |       | $                      | 1,156,803   |                  | $          | 1,547,863 |   |
| Accrued liabilities                                                                                                                                                                                             |       | 1,625,663              |        | 1,889,980             |       |
| Customer deposits                                                                                                                                                                                               |       | 3,702,464              |        | 3,624,317             |       |
| Derivative instrument liability, current portion  (note 6)                                                                                                                                                      |       | 37,933                 |        | —                |       |
| Loan payable, current portion (note 5)                                                                                                                                                                          |       | 1,784,443              |        | 3,220,125             |       |
| Deferred revenue, current portion                                                                                                                                                                               |       | 45,475,807             |        | 40,211,766            |       |
| Accreditation fees payable, current portion                                                                                                                                                                     |       | 545,694                |        | 530,656               |       |
| Deferred tax liability, current portion (note 7)                                                                                                                                                                |       | 870,038                |        | 907,476               |       |
|                                                                                                                                                                                                            |       |                   |        |                  |       |
| Total current liabilities                                                                                                                                                                                       |       | 55,198,845             |        | 51,932,183            |       |
|                                                                                                                                                                                                            |       |                   |        |                  |       |
| Derivative instrument liability, long-term portion  (note 6)                                                                                                                                                    |       | 8,445                  |        | 15,708                |       |
| Deferred revenue, long-term portion                                                                                                                                                                             |       | 16,858,661             |        | 16,098,812            |       |
| Accreditation fees payable, long-term portion                                                                                                                                                                   |       | 168,464                |        | 169,620               |       |
| Deferred tax liability, long-term portion (note 7)                                                                                                                                                              |       | 4,840,000              |        | 4,840,000             |       |
|                                                                                                                                                                                                            |       |                   |        |                  |       |
| Stockholders’ equity (note 11)                                                                                                                                                                             |       |                   |        |                  |       |
| Preferred stock - no par value, 1,250,000 shares  authorized; none issued and outstanding                                                                                                                       |       | —                 |        | —                |       |
| Common stock - no par value, 250,000,000 shares  authorized; 57,362,236 shares issued and outstanding as of September 30,  2010 and 67,080,353 shares issued and outstanding as of December 31,  2009 |       | 12,107,580             |        | 14,030,384            |       |
| Additional paid-in capital                                                                                                                                                                                      |       | 42,623,860             |        | 47,287,351            |       |
| Deficit                                                                                                                                                                                                         |       | (29,340,920            | )           | (30,221,164           | )          |
| Total stockholders’ equity                                                                                                                                                                                 |       | 25,390,520             |        | 31,096,571            |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                 |       | $                      | 102,464,935 |                  | $          | 104,152,894 |   |

 

See accompanying notes to unaudited consolidated financial statements

 

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**Tucows Inc.**

**Consolidated Statements ofOperations**

**(Dollar amounts in U.S. dollars)**

** **
| ** **                                                           | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                           | ** ** | **(unaudited)**                                          | ** ** | **(unaudited)**                                         | ** ** |
|                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Net revenues (note 9)                                                |       | $                                                        | 21,209,468 |                                                    | $          | 20,496,129 |   | $ | 62,501,219 |   | $ | 60,609,673 |   |
|                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Cost of revenues:                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Cost of revenues (*)                                                 |       | 15,991,455                                               |       | 14,770,868                                              |       | 46,372,315 |   | 42,942,314 |   |
| Depreciation of property and equipment                               |       | 231,253                                                  |       | 347,619                                                 |       | 794,368 |   | 1,316,986 |   |
| Amortization of intangible assets (note 4)                           |       | 74,802                                                   |       | 29,199                                                  |       | 224,406 |   | 87,597 |   |
| Total cost of revenues (note 9)                                      |       | 16,297,510                                               |       | 15,147,686                                              |       | 47,391,089 |   | 44,346,897 |   |
|                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Gross profit                                                         |       | 4,911,958                                                |       | 5,348,443                                               |       | 15,110,130 |   | 16,262,776 |   |
|                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating expenses:                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Sales and marketing (*)                                              |       | 1,830,999                                                |       | 1,568,727                                               |       | 5,480,228 |   | 4,261,070 |   |
| Technical operations and development (*)                             |       | 1,053,768                                                |       | 1,142,331                                               |       | 3,486,718 |   | 3,421,825 |   |
| General and administrative (*)                                       |       | 633,457                                                  |       | 1,145,951                                               |       | 2,049,813 |   | 4,608,173 |   |
| Depreciation of property and equipment                               |       | 40,239                                                   |       | 47,249                                                  |       | 127,559 |   | 221,937 |   |
| Loss on disposition of property and equipment                        |       | —                                                   |       | 40,369                                                  |       | — |   | 40,369 |   |
| Amortization of intangible assets (note 4)                           |       | 360,540                                                  |       | 360,540                                                 |       | 1,081,620 |   | 1,081,620 |   |
| (Gain) loss on change in fair value of forward  exchange contracts   |       | (141,981                                                 | )          | (1,878,230                                              | )          | 1,669,031 |   | (3,902,394 | ) |
| Total expenses                                                       |       | 3,777,022                                                |       | 2,426,937                                               |       | 13,894,969 |   | 9,732,600 |   |
|                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Income from operations                                               |       | 1,134,936                                                |       | 2,921,506                                               |       | 1,215,161 |   | 6,530,176 |   |
|                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Other (expenses) income :                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest (expense) income, net                                       |       | (26,917                                                  | )          | (52,887                                                 | )          | (99,812 | ) | (178,669 | ) |
| Other income                                                         |       | —                                                   |       | 1,880,000                                               |       | — |   | 4,493,190 |   |
| Total other (expenses) income                                        |       | (26,917                                                  | )          | 1,827,113                                               |       | (99,812 | ) | 4,314,521 |   |
|                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Income before provision for income taxes                             |       | 1,108,019                                                |       | 4,748,619                                               |       | 1,115,349 |   | 10,844,697 |   |
|                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| (Recovery of) provision for income taxes (note 7)                    |       | 24,863                                                   |       | (447,455                                                | )          | 235,105 |   | 241,621 |   |
| Net income for the period                                            |       | $                                                        | 1,083,156  |                                                    | $          | 5,196,074 |   | $ | 880,244 |   | $ | 10,603,076 |   |
|                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic earnings per common share (note 8)                             |       | $                                                        | 0.02       |                                                    | $          | 0.08 |   | $ | 0.01 |   | $ | 0.15 |   |
|                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Shares used in computing basic earnings per common  share (note 8)   |       | 57,351,161                                               |       | 68,008,871                                              |       | 59,255,739 |   | 69,841,981 |   |
|                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Diluted earnings per common share (note 8)                           |       | $                                                        | 0.02       |                                                    | $          | 0.08 |   | $ | 0.01 |   | $ | 0.15 |   |
|                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Shares used in computing diluted earnings per  common share (note 8) |       | 59,185,793                                               |       | 68,874,517                                              |       | 61,223,369 |   | 70,156,521 |   |

 

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

 
| Cost of revenues                     |   | $      | 6,557  |   | $      | 3,860   |   | $       | 15,759 |   | $ | 12,227 |   |
|--------------------------------------|--------|--------|--------|--------|--------|---------|--------|---------|--------|--------|---|--------|--------|
| Sales and marketing                  |   | 30,358 |   | 12,807 |   | 71,589  |   | 42,764  |   |
| Technical operations and development |   | 19,058 |   | 12,395 |   | 51,903  |   | 34,116  |   |
| General and administrative           |   | 99,813 |   | 70,748 |   | 174,437 |   | 142,641 |   |

 

See accompanying notes to unaudited consolidated financial statements

 

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**Tucows Inc.**

**Consolidated Statements of CashFlows**

**(Dollar amounts in U.S. dollars)**

 
| ** **                                                              | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                              | ** ** | **(unaudited)**                                          | ** ** | **(unaudited)**                                         | ** ** |
| Cash provided by (used in):                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating activities:                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income for the period                                               |       | $                                                        | 1,083,156  |                                                    | $          | 5,196,074 |   | $ | 880,244 |   | $ | 10,603,076 |   |
| Items not involving cash:                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Depreciation of property and equipment                                  |       | 271,492                                                  |       | 394,868                                                 |       | 921,927 |   | 1,538,923 |   |
| Loss on disposition of property and equipment                           |       | —                                                   |       | 40,369                                                  |       | — |   | 40,369 |   |
| Amortization of deferred financing charges                              |       | 6,000                                                    |       | 9,100                                                   |       | 20,100 |   | 29,200 |   |
| Amortization of intangible assets                                       |       | 435,342                                                  |       | 389,739                                                 |       | 1,306,026 |   | 1,169,217 |   |
| Gain on disposal of investment in Afilias                               |       | —                                                   |       | (1,880,000                                              | )          | — |   | (3,890,395 | ) |
| Reduction in deferred tax liability                                     |       | —                                                   |       | (497,000                                                | )          | — |   | (497,000 | ) |
| Disposal of domain names                                                |       | 5,084                                                    |       | 649                                                     |       | 17,090 |   | 2,596 |   |
| Unrealized (gain) loss in the fair value of  forward exchange contracts |       | (141,981                                                 | )          | (1,878,230                                              | )          | 1,669,031 |   | (3,902,394 | ) |
| Stock-based compensation                                                |       | 155,786                                                  |       | 99,810                                                  |       | 313,688 |   | 231,748 |   |
| Changes in non-cash operating working capital:                          |       | —                                                   |       |                                                    |       |   |   |   |   |
| Accounts receivable                                                     |       | 53,373                                                   |       | (465,454                                                | )          | (510,232 | ) | (729,520 | ) |
| Prepaid expenses and deposits                                           |       | 489,843                                                  |       | 419,761                                                 |       | 61,356 |   | (469,462 | ) |
| Prepaid fees for domain name registry and  ancillary services fees      |       | (2,355,886                                               | )          | 33,425                                                  |       | (5,786,558 | ) | (2,588,476 | ) |
| Income tax recoverable                                                  |       | (165,000                                                 | )          | (835,398                                                | )          | 127,000 |   | — |   |
| Accounts payable                                                        |       | (244,194                                                 | )          | (977,967                                                | )          | (443,624 | ) | (597,560 | ) |
| Accrued liabilities                                                     |       | (231,633                                                 | )          | (115,362                                                | )          | (264,317 | ) | (111,719 | ) |
| Customer deposits                                                       |       | 240,907                                                  |       | 592,612                                                 |       | 78,147 |   | 445,079 |   |
| Deferred revenue                                                        |       | 2,287,739                                                |       | (398,657                                                | )          | 6,023,890 |   | 2,314,334 |   |
| Accreditation fees payable                                              |       | (14,435                                                  | )          | (46,762                                                 | )          | 13,882 |   | (2,457 | ) |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Net cash provided by operating activities                               |       | 1,875,593                                                |       | 81,577                                                  |       | 4,427,650 |   | 3,585,559 |   |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Financing activities:                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Proceeds received on exercise of stock options                          |       | —                                                   |       | —                                                  |       | 14,809 |   | 25,422 |   |
| Repurchase of common stock                                              |       | —                                                   |       | (570,335                                                | )          | (6,914,792 | ) | (2,381,514 | ) |
| Repayment of loan payable                                               |       | (478,561                                                 | )          | (478,561                                                | )          | (1,435,682 | ) | (2,160,682 | ) |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Net cash used in financing activities                                   |       | (478,561                                                 | )          | (1,048,896                                              | )          | (8,335,665 | ) | (4,516,774 | ) |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Investing activities:                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Cost of domain names acquired                                           |       | —                                                   |       | —                                                  |       | — |   | (5,900 | ) |
| Additions to property and equipment                                     |       | (33,111                                                  | )          | (281,282                                                | )          | (292,790 | ) | (426,292 | ) |
| Proceeds on disposal of investment in Afilias                           |       | —                                                   |       | 1,980,000                                               |       | — |   | 4,090,395 |   |
| Net cash (used in) provided by investing  activities                    |       | (33,111                                                  | )          | 1,698,718                                               |       | (292,790 | ) | 3,658,203 |   |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                        |       | 1,363,921                                                |       | 731,399                                                 |       | (4,200,805 | ) | 2,726,988 |   |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Cash and cash equivalents, beginning of period                          |       | 4,067,668                                                |       | 7,423,056                                               |       | 9,632,394 |   | 5,427,467 |   |
| Cash and cash equivalents, end of period                                |       | $                                                        | 5,431,589  |                                                    | $          | 8,154,455 |   | $ | 5,431,589 |   | $ | 8,154,455 |   |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Supplemental cash flow information:                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest paid                                                           |       | $                                                        | 27,001     |                                                    | $          | 52,983 |   | $ | 99,798 |   | $ | 181,012 |   |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Supplementary disclosure of non-cash investing  activity:               |       |                                                     |       |                                                    |       |   |   |   |   |
| Property and equipment acquired during the period  not yet paid for     |       | $                                                        | 146,158    |                                                    | $          | 343,777 |   | $ | 146,158 |   | $ | 343,777 |   |

 

See accompanying notes to unaudited consolidated financial statements

 

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**1. ORGANIZATION OF THE COMPANY:**

 

Tucows Inc., a Pennsylvania corporation (referred to throughoutthis report as the “Company”, “Tucows”, “we”, “us” or through similarexpressions), together with our consolidated subsidiaries, is a globaldistributor of Internet services, including domain name registration, securityand identity products through digital certificates and email through itsdistribution network of Internet Service Providers, web hosting companies andother providers of Internet services to end-users.

 

Wewere incorporated under the laws of the Commonwealth of Pennsylvania inNovember 1992 under the name Infonautics, Inc. In August 2001,we completed our acquisition of Tucows Inc., a Delaware corporation, and wechanged our name from Infonautics, Inc. to Tucows Inc. Our principalexecutive office is located in Toronto, Ontario and we have other offices inthe United Kingdom and the United States.

 

**2.BASIS OF PRESENTATION:**

 

Theaccompanying unaudited interim consolidated balance sheets, and the relatedconsolidated statements of operations and cash flows reflect all adjustments,consisting of normal recurring adjustments, that are, in the opinion ofmanagement, necessary for a fair presentation of the financial position ofTucows and its subsidiaries as at September 30, 2010 and the resultsof operations and cash flows for the interim periods endedSeptember 30, 2010 and 2009. The results of operations presented inthis Quarterly Report on Form 10-Q are not necessarily indicative of theresults of operations that may be expected for future periods.

 

Theaccompanying unaudited interim consolidated financial statements have beenprepared by Tucows in accordance with the rules and regulations of theSecurities and Exchange Commission (the “SEC”). Certain information andfootnote disclosure normally included in the Company’s annual auditedconsolidated financial statements and accompanying notes have been condensed oromitted. These interim consolidated financial statements and accompanying notesfollow the same accounting policies and methods of application used in theannual financial statements and should be read in conjunction with the Company’saudited consolidated financial statements and notes thereto for the year endedDecember 31, 2009 included in Tucows’ 2009 Annual Report onForm 10-K filed with the SEC on March 22, 2010.

 

Therehave been no material changes to our significant accounting policies during thenine months ended September 30, 2010 as compared to the significantaccounting policies described in our Annual Report on Form 10-K for thefiscal year ended December 31, 2009.

 

Duringfiscal 2010, the Company recorded out-of-period adjustments relating to rentexpense and the amortization of intangible assets. These immaterial correctionsof errors reduced net income after taxes by $35,000 for the three months endedSeptember 30, 2010 and by $0.1 million for the nine months endedSeptember 30, 2010.

 

TheCompany recognizes the effects of events or transactions that occur after thebalance sheet date but before financial statements are issued (“subsequentevents”) if there is evidence that conditions related to the subsequent eventexisted at the date of the balance sheet date, including the impact of suchevents on management’s estimates and assumptions used in preparing thefinancial statements. Other significant subsequent events that are notrecognized in the financial statements, if any, are disclosed to the notes tothe unaudited interim consolidated financial statements.

 

**3. NEWACCOUNTING POLICIES:**

 

*Recent Accounting Pronouncements Adopted*

 

Nonew accounting pronouncements have been adopted during the three and ninemonths ended September 30, 2010.

 

*Recent Accounting Pronouncement Not Yet Adopted*

 

InOctober 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update 2009-13, “Revenue Recognition (Topic 605):Multiple-Deliverable Revenue Arrangements” (“Update 2009-13”). Update 2009-13applies to multiple-deliverable revenue arrangements that are currently withinthe scope of FASB ASC Subtopic 605-25 (previously included in Emerging IssuesTask Force Issue no. 00-21, “Revenue Arrangements with Multiple Deliverables”).Update 2009-13 provides principles and application guidance on whether multipledeliverables exist, how the arrangement should be separated, and theconsideration allocated. It also requires an entity to allocate revenue in anarrangement using estimated selling prices of deliverables if a vendor does nothave vendor-specific objective evidence or third-party evidence of sellingprice. The guidance eliminates the use of 

 

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theresidual method, requires entities to allocate revenue using therelative-selling-price method, and significantly expands the disclosurerequirements for multiple-deliverable revenue arrangements. Update 2009-13 iseffective on a prospective basis for revenue arrangements entered into ormaterially modified in fiscal years beginning on or after June 15, 2010.We are currently assessing the impact of Update 2009-13 on our futureconsolidated financial statements.

 

*Regulatory Update*

 

InOctober 2009, the SEC issued Press Release 2009-213, “Small PublicCompanies to Begin Providing Audited Assessment of Internal Controls overFinancial Reporting in Nine Months” (“Press Release 2009-213”). Press Release2009-213 requires public companies with a public float below $75 millionbegin to comply with Section 404(b) of the Sarbanes-Oxley Act of 2002for annual reports with fiscal years ending on or after June 15, 2010.Section 404(b) requires that companies report on the effectiveness oftheir internal control over financial reporting.

 

OnJuly 21, 2010, President Obama signed into law the Dodd-Frank Wall StreetReform and Consumer Protection Act (the “Financial Reform Act”).Section 989G of the Financial Reform Act exempts companies with a publicfloat below $75 million from compliance with Section 404(b) of theSarbanes-Oxley Act of 2002. Accordingly, Tucows will only be required toprovide auditor attestation of the effectiveness of its internal control overfinancial reporting for fiscal years in which its public float exceeds$75 million on June 30th of such fiscal year.

 

**4****.****INTANGIBLEASSETS****:**

 

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

 

Asummary of acquired intangible assets for the three months endedSeptember 30, 2010 is as follows:

** **
| ** **                                    | ** ** | **Technology**                 | ** ** | **Brand**        | ** ** | **Customer  relationships**    | ** ** | **Surname domain  names** | ** ** | **Direct navigation  domain names** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|------------------|------------|--------------------------------|------------|--------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| **Amortization period**                  | ** ** | **2 - 7 years** | ** ** | **7 years** | ** ** | **4 - 7 years** | ** ** | **indefinite life**       | ** ** | **indefinite life**                      | ** ** | **Total**  | ** ** |
|                                          |       |                           |       |             |       |                           |       |                           |       |                                          |       |       |       |
| Net  book value, June 30, 2010           |       | $                              | 175,324    |             | $          | 603,300                        |       | $                              | 2,770,820  |                                          | $          | 12,130,461 |       | $ | 2,093,758 |   | $ | 17,773,663 |   |
| Sale  of domain names                         |       | —                         |       | —           |       | —                         |       | (2,596                         | )          | (2,488                                        | )          | (5,084     | )          |
| Amortization  expense                         |       | (74,802                        | )          | (41,760          | )          | (318,780                       | )          | —                         |       | —                                        |       | (435,342   | )          |
| Net  book value, September 30, 2010 |       | $                              | 100,522    |             | $          | 561,540                        |       | $                              | 2,452,040  |                                          | $          | 12,127,865 |       | $ | 2,091,270 |   | $ | 17,333,237 |   |

 

Asummary of acquired intangible assets for the nine months endedSeptember 30, 2010 is as follows:

 
| ** **                                    | ** ** | **Technology**                 | ** ** | **Brand**        | ** ** | **Customer  relationships**    | ** ** | **Surname domain  names** | ** ** | **Direct navigation  domain names** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|------------------|------------|--------------------------------|------------|--------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| **Amortization period**                  | ** ** | **2 - 7 years** | ** ** | **7 years** | ** ** | **4 - 7 years** | ** ** | **indefinite life**       | ** ** | **indefinite life**                      | ** ** | **Total**  | ** ** |
|                                          |       |                           |       |             |       |                           |       |                           |       |                                          |       |       |       |
| Net  book value, December 31, 2009  |       | $                              | 324,928    |             | $          | 686,820                        |       | $                              | 3,408,380  |                                          | $          | 12,132,408 |       | $ | 2,103,817 |   | $ | 18,656,353 |   |
| Sale  of domain names                         |       | —                         |       | —           |       | —                         |       | (4,543                         | )          | (12,547                                       | )          | (17,090    | )          |
| Amortization  expense                         |       | (224,406                       | )          | (125,280         | )          | (956,340                       | )          | —                         |       | —                                        |       | (1,306,026 | )          |
| Net  book value, September 30, 2010 |       | $                              | 100,522    |             | $          | 561,540                        |       | $                              | 2,452,040  |                                          | $          | 12,127,865 |       | $ | 2,091,270 |   | $ | 17,333,237 |   |

 

**5. LOANPAYABLE:**

 

The Company entered into a non-revolving, reducing credit facility (the“credit facility”) in the amount of $9.6 million with the Bank of Montreal (the“Bank”) to finance the purchase of Innerwise, Inc. in July 2007. On September 10,2010, the Company amended the credit facility (as amended, the “Amended CreditFacility”), the terms of which are more fully described in the Company’sCurrent Report on Form 8-K, filed with the SEC onSeptember 13, 2010.

 

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The Company’s Amended Credit Facility continues to provide forrepayment of the $ 1,784,443 outstanding balance under the existing non-revolving,reducing demand loan with the Bank (the “Existing Demand Loan”). In addition,the Bank has made available an additional $2,000,000 non-revolving, reducingdemand loan to the Company (the “Additional Demand Loan”) to finance therepurchase of shares of the Company’s common stock., and the Amended CreditFacility continues to provide for the existing $3,500,000 Treasury RiskManagement Facility (the “TR Loan”, and together with the Existing Demand Loan,the “Existing Loans”). The Existing Loans are governed by the terms of the LoanAgreement, dated as of July 25, 2007 (as amended from time to time, the “2007Loan Agreement”) by and among the Company, Tucows.com Co., a wholly ownedsubsidiary of Tucows Inc. (“Borrower”), and certain subsidiaries of the Companynamed therein (the “Guarantors”), and the Financing Commitment, dated as of July 19,2007, by and between Borrower and Bank (the “Term Sheet” and together with the2007 Loan Agreement, the “2007 Loan Documents”). The terms of the 2007 LoanDocuments have been described more fully in the Company’s Current Report on Form 8-K,filed with the Securities and Exchange Commission on July 31, 2007, andsuch description is incorporated herein by reference.

 

The Amended Credit Facility also provides for a new $1,000,000operating demand loan (the “Operating Demand Loan Facility”) to fundoperational requirements pursuant to the terms of the Operating Loan Agreementwith the Bank, which such terms are described in the Offer Letter, dated as of August 30,2010, by and between the Company and the Bank (the “Offer Letter” and togetherwith the Operating Loan Agreement, the “2010 Loan Documents”).

 

Under the Amended Credit Facility, the $1,738,443 outstanding balanceon the Existing Demand Loan is to be repaid in equal monthly installments of$159,520 plus interest. Any advances under the Additional Demand Loan are to bepaid in equal monthly installments over 60 months. For both the Existing DemandLoan and the Additional Demand Loan the Company can elect to pay interesteither at the Bank of Montreal (“BMO”) U.S. Base Rate plus 1.30% (amended fromplus 1.50%) or at LIBOR plus 3.25%. All interest is payable monthly in arrearsas incurred. The Additional Demand Loan is subject to an undrawn aggregatestandby fee of 0.20% following the first draw which is payable quarterly inarrears.  The Borrower will continue tomake annual cash sweep payments to the Bank based on the Company’s annualaudited financial statements. The cash sweep payments will be applied tooutstanding amounts under the Existing Demand Loan and Additional Demand Loan.

 

Under the 2010 Loan Documents, the Borrower has agreed to pay to theorder of the Bank any outstanding principal amounts under the Operating DemandLoan Facility plus interest, at a rate of BMO U.S. Base Rate plus 1.30%Interest is payable monthly in arrears with any borrowing under the facilityfluctuating widely with periodic clean-up, at a minimum on an annual basis. TheBorrower has also agreed to pay to the Bank a monthly monitoring fee of $500.The Operating Demand Loan Facility is payable on demand at any time, at thesole discretion of the Bank, with or without cause.

 

All obligations under the Amended Credit Facility are guaranteed by theCompany pursuant to a Guaranty, dated July 25, 2007 (the “Guaranty”),executed by the Company in favor of the Bank, and are secured by a securityinterest in substantially all of the Company’s assets granted under theSecurity Agreement (the “Security Agreement”), dated July 25, 2007,executed by the Company in favor of the Bank. Each other Guarantor hassimilarly guaranteed and secured the Borrowers’ obligations and have enteredinto similar Guaranty and Security Agreements in favor of the Bank.

 

The Bank, at its sole option, with or without cause, may acceleratepayment of any obligations under the 2010 Loan Documents and may terminate theOperating Demand Loan Facility at any time. The Bank may refuse to honor anycheck or permit any transfer or withdrawal upon (i) any default by theBorrower under any agreement between the Borrower and the Bank; (ii) thedeath of any Guarantor or termination of any guaranty of amounts owed under theAmended Credit Facility; (iii) the Operating Demand Loan Facilityexceeding the $1,000,000 limit; or (iv) any demand made for payment of theOperating Demand Loan Facility.

 

Pursuant to the 2010 Loan Documents, the Borrower has agreed to complywith certain customary non-financial covenants regarding maintenance ofinsurance; payment of taxes; disposition of major assets; compliance withstatutes and with environmental standards; reporting requirements; timelyprovision of notices of default; absence of material judgments; access to booksand records; prohibition on assumption of additional debt or guaranteeobligations by the Borrower, subject to certain exceptions for capitalexpenditures; and prohibition on the payment of dividends.

 

The 2010 Loan Documents, the Existing Demand Loan and the AdditionalDemand Loan require that Borrower comply with the following financialcovenants: (i) Maximum Senior Funded Debt to EBITDA of 2.00:1; (ii) MaximumTotal Funded Debt to EBITDA of 2.50:1; and (iii) Minimum Fixed ChargeCoverage of 1.25:1. Further, the Borrower’s Maximum Annual Capital Expenditurescannot exceed $3,600,000 per year, which such limit will be reviewed on anannual basis. As of September 30, 2010, the Company has continued tocomply with all covenants under the Amended Credit Facility, and the interestrate at September 30, 2010 was 3.59%.

 

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Under the 2010 Loan Documents the Borrower is prohibited from, amongother things: (i) amalgamating, merging or reorganizing with anycorporation; (ii) entering into a transaction that effects a change incontrol of the Borrower and /or a loan guarantor, subject to certain statedexceptions; (iii) selling, assigning or otherwise disposing of any fixedasset, machinery, equipment or immovable property subject to the Bank’ssecurity interest; (iv) creating, assuming or permitting to exist anysecurity interest or other encumbrances on any of its assets ranking prior toor pari passu with or after the assets secured under the Security Agreement,except for permitted encumbrances; and (v) incurring any new debt otherthan the Loan.

 

The foregoing summary of the Amended Credit Facility, 2010 LoanAgreement, Offer Letter, 2007 Loan Agreement, Guaranty and Security Agreementdoes not purport to be complete and is qualified in its entirety by referenceto the full text of each of the Operating Loan Agreement, Offer Letter, 2007Loan Agreement, Guaranty and Security Agreement, which are included as Exhibits10.1, 10.2, 10.3, 10.4 and 10.5, respectively, to this Quarterly Report on Form 10-Qand are incorporated herein by reference.

 

To estimate the fair value of the Company’s loans payable under theAmended Credit Facility, the Company uses interest rates that are currentlyavailable to the Company for issuance of loans on similar terms and remainingmaturities. The estimated fair value of the Company’s loan payable atSeptember 30, 2010 was $1,766,283, compared to a carrying amount of$1,784,443 at September 30, 2010.

 

**6.********DERIVATIVEINSTRUMENT ASSETS AND LIABILITIES****:**

 

The Company enters into foreign currency contracts to hedge a portionof the Company’s expected Canadian dollar requirements. All derivativefinancial instruments are recorded at fair value on our consolidated balancesheet. The fair value of our foreign currency contracts at September 30,2010 was a net unrealized gain of $0.5 million as compared to a netunrealized gain of $2.2 million at December 31, 2009. The netunrealized gain is a result of fluctuations in foreign exchange rates between thedate the currency forward contracts were entered into and the valuation date atperiod end.

 

At September 30, 2010, the Company had the following outstandingforward exchange contracts to trade U.S. dollars in exchange for Canadiandollars:

 
| ** **                        | ** ** | **Notional**          | ** ** | **Weighted  average**          | ** ** | ** **          | ** ** |
|-----------------------------------|------------|-----------------------|------------|--------------------------------|------------|---------------------|------------|
| ** **                        | ** ** | **amount of**    | ** ** | **exchange rate of** | ** ** | ** **          | ** ** |
| **Maturity date**            | ** ** | **U.S. dollars** | ** ** | **U.S. dollars**          | ** ** | **Fair value** | ** ** |
|                              |       |                  |       |                           |       |                |       |
| October - December 2010 |       | 5,400,000             |       | 0.9236                         |       | 280,870             |       |
| 2010                              |       | 5,400,000             |       | 0.9236                         |       | 280,870             |       |
|                              |       |                  |       |                           |       |                |       |
| January - March 2011    |       | 5,400,000             |       | 0.9307                         |       | 225,103             |       |
| April - June 2011       |       | 3,900,000             |       | 0.9635                         |       | 14,779              |       |
| June - September 2011   |       | 3,900,000,            |       | 0.9604                         |       | 17,896              |       |
| October - December 2011 |       | 1,950,000             |       | 0.9644                         |       | (3,009              | )          |
| 2011                              |       | 15,150,000            |       | 0.9508                         |       | 254,769             |       |
|                              |       |                  |       |                           |       |                |       |
| Total                             |       | $                     | 20,550,000 |                           | 0.9435     |                | $          | 535,639 |   |
|                                   |            |                       |            |                                |            |                     |            |  |  |

 

During the nine months ended September 30, 2010, the Companyentered into a series of foreign exchange forward contracts to hedge a portionof our 2011 fiscal year expected Canadian dollar requirements. These contracts,collectively, have a notional value of US$10.0 million, whereby amounts ofUS$250,000, US$400,000 or US$650,000 are converted into Canadian dollars on asemi-monthly basis from January 2011 to November 2011 at an averageforeign exchange rate of US$1.00:Cdn$1.0437.

 

The Company does not apply hedge accounting and, therefore, for thethree months ended September 30, 2010, the Company recorded a gain of$0.1 million in the fair value of forward contracts in its consolidatedstatements of operations. For the nine months ended September 30, 2010,the Company recorded a loss of $1.7 million in the fair value of forwardcontracts in its consolidated statements of operations. For the three and ninemonths ended September 30, 2009, the Company recorded a gain onforward contracts of $1.9 million and $3.9 million respectively.

 

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**7.INCOME TAXES**

 

For the nine months ended September 30, 2010, the Company recordeda provision for income taxes of $0.2 million on income before income taxesof $1.1 million, using an estimated effective tax rate for its 2010 fiscalyear adjusted for certain foreign exchange losses for which the Company doesnot anticipate obtaining a current tax benefit. Included in the provision forincome taxes is a recovery of $0.1 million in respect of refundableOntario research tax credits. Comparatively, for the nine months ended September 30,2009, the Company recorded a current tax expense of $0.2 million on incomebefore income taxes of 10.8 million, using an estimated effective tax rate forits 2009 fiscal year that accounts for the utilization of remaining netoperating loss carry forwards and alternative minimum tax credits available tothe Company.

 

As of December 31, 2009, the Company recorded a valuationallowance of $4.3 million and a net deferred tax asset of $3.0 million. As of September 30,2010 the Company has recorded a non-current deferred tax asset of $3.9 millionand current deferred tax liabilities of $0.9 million. As of September 30,2010 and December 31, 2009, the Company has also recorded a non-currentdeferred tax liability related to the temporary difference arising onindefinite life intangibles of $4.8 million.

 

The Company analyzes the carrying value of its deferred tax asset on aregular basis. In determining future taxable income, assumptions are made toforecast federal, state and international operating income, the reversal oftemporary timing differences, and the implementation of any feasible andprudent tax planning strategies. The assumptions require significant judgmentregarding the forecasts of future taxable income, and are consistent with otherforecasts used to manage the business. During the nine months ended September 30,2010, there was no reversal of the valuation allowance. The valuation allowancewill be maintained until sufficient evidence exists to support a reversal of,or decrease in, the valuation allowance.

 

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

 

The Company had approximately $0.1 million of total gross unrecognizedtax benefit as of September 30, 2010 and $0.1 million of total grossunrecognized tax benefit as of December 31, 2009, which if recognizedwould favorably affect our income tax rate in future periods. The unrecognizedtax benefit relates primarily to prior year Pennsylvania state franchise taxesand other insignificant US state taxes. The unrecognized tax benefit hasdecreased by $17,000 as of September 30, 2010 when compared to thegross unrecognized tax benefits as of December 31, 2009 as we have nowsettled the claim for the Pennsylvania franchise taxes for the years December 31,1996 to December 31, 2000. The Company does not expect the unrecognizedtax benefit for its 2010 research and development claim to be significant. TheCompany recognizes accrued interest and penalties related to taxes in taxexpense. The Company did not have significant interest and penalties accrued asof September 30, 2010 and December 31, 2009, respectively.The Company believes it is reasonably possible that $0.1 million of theunrecognized tax benefit will decrease in the next twelve months as it isanticipated that the U.S. tax authorities will finalize their review of priortaxes owing in Pennsylvania within the period and certain other prior yearstate tax returns will be filed.

 

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**8.BASIC AND DILUTED EARNINGS PER COMMON SHARE:**

 

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

 

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

 
| ** **                                                    | ** ** | **Three months  ended  September 30,  2010** | ** ** | **Three months  ended  September 30,  2009** | ** ** | **Nine months  ended  September 30,  2010** | ** ** | **Nine months  ended  September 30,  2009** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Numerator for basic and diluted earnings per  common share:   |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Net income for the period                                     |       | $                                                      | 1,083,156  |                                                   | $          | 5,196,074                                             |       | $                                                     | 880,244    |   | $ | 10,603,076 |   |
| Denominator for basic and diluted earnings per  common share: |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Basic weighted average number of common shares  outstanding   |       | 57,351,161                                             |       | 68,008,871                                             |       | 59,255,739                                            |       | 69,841,981                                            |       |
| Effect of outstanding stock options                           |       | 1,834,632                                              |       | 865,646                                                |       | 1,967,630                                             |       | 314,540                                               |       |
| Diluted weighted average number of shares  outstanding        |       | 59,185,793                                             |       | 68,874,517                                             |       | 61,223,369                                            |       | 70,156,521                                            |       |
| Basic earnings per common share                               |       | $                                                      | 0.02       |                                                   | $          | 0.08                                                  |       | $                                                     | 0.01       |   | $ | 0.15 |   |
| Diluted earnings per common share                             |       | $                                                      | 0.02       |                                                   | $          | 0.08                                                  |       | $                                                     | 0.01       |   | $ | 0.15 |   |

 

Forthe three months ended September 30, 2010, outstanding options topurchase 3,755,000 shares were not included in the computation of dilutedincome per common share because all such options had exercise prices greaterthan the average market price of the common shares. During the three monthsended September 30, 2009, outstanding options to purchase 3,468,420common shares were not included in the computation of diluted income per commonshare because all such options had exercise prices greater than the averagemarket price of the common shares

 

Forthe nine months ended September 30, 2010, outstanding options topurchase 3,023,500 common shares were not included in the computation ofdiluted income per common share because all such options had exercise pricesgreater than the average market price of the common shares. During the ninemonths ended September 30, 2009, outstanding options to purchase 4,015,587common shares, were not included in the computation of diluted income percommon share because all such options had exercise prices greater than theaverage market price of the common shares.

 

OnJanuary 13, 2010, 6,341,470 common shares were repurchased andcancelled under the terms of a modified Dutch auction tender offer.

 

Duringthe nine months ended September 30, 2010, 3,409,300 common shareswere repurchased and cancelled under the terms of our stock repurchase programannounced in February 2010. No shares were repurchased under this programduring the three months ended September 30, 2010.

 

Thecomputation of earnings per share and diluted earnings per share for the threeand nine months ended September 30, 2010 include reductions in the number ofshares outstanding due to these purchases (see note 11).

 

**9.SUPPLEMENTAL INFORMATION:**

 

Thefollowing is a summary of the Company’s revenue earned from each significantrevenue stream:

** **
| ** **             | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **             | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| OpenSRS :              | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Domain Services        |       | $                                                        | 16,517,427 |                                                    | $          | 15,097,640 |   | $ | 47,669,347 |   | $ | 44,037,596 |   |
| Email Services         |       | 577,606                                                  |       | 842,262                                                 |       | 1,796,452 |   | 2,838,052 |   |
| Other Services         |       | 1,086,102                                                |       | 1,109,341                                               |       | 3,264,758 |   | 3,295,789 |   |
| Total OpenSRS Services |       | 18,181,135                                               |       | 17,049,243                                              |       | 52,730,557 |   | 50,171,437 |   |
|                   |       |                                                     |       |                                                    |       |   |   |   |   |
| YummyNames             |       | 1,249,128                                                |       | 1,781,725                                               |       | 4,592,297 |   | 5,102,315 |   |
| Hover                  |       | 1,147,576                                                |       | 1,203,742                                               |       | 3,388,036 |   | 3,763,155 |   |
| Butterscotch           |       | 631,629                                                  |       | 461,419                                                 |       | 1,790,329 |   | 1,572,766 |   |
|                   |       | $                                                        | 21,209,468 |                                                    | $          | 20,496,129 |   | $ | 62,501,219 |   | $ | 60,609,673 |   |

 

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Nocustomer accounted for more than 10% of the Company’s revenue for the three andnine months ended September 30, 2010 or the three and nine months endedSeptember 30, 2009. Significant management judgment is required atthe time revenue is recorded to assess whether the collection of the resultingreceivables is reasonably assured. On an ongoing basis, we assess the abilityof our customers to make required payments. Based on this assessment, we expectthe carrying amount of our outstanding receivables, net of allowance for doubtfulaccounts, to be fully collected.

 

Asof September 30, 2010, two customers accounted for 29% of accountsreceivable, all of which has been paid subsequent toSeptember 30, 2010. As of September 30, 2009, no customeraccounted for more than 10% of accounts receivable.

 

The following is a summary of the Company’scost of revenues from each significant revenue stream:

** **
| ** **                                   | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| OpenSRS :                                    | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Domain Services                              |       | $                                                        | 13,817,541 |                                                    | $          | 12,325,620 |   | $ | 39,523,115 |   | $ | 35,624,222 |   |
| Email Services                               |       | 97,001                                                   |       | 103,071                                                 |       | 321,459 |   | 436,216 |   |
| Other Services                               |       | 416,938                                                  |       | 411,949                                                 |       | 1,204,403 |   | 1,212,087 |   |
| Total OpenSRS Services                       |       | 14,331,480                                               |       | 12,840,640                                              |       | 41,048,977 |   | 37,272,525 |   |
|                                         |       |                                                     |       |                                                    |       |   |   |   |   |
| YummyNames                                   |       | 179,894                                                  |       | 218,371                                                 |       | 636,389 |   | 654,456 |   |
| Hover                                        |       | 380,262                                                  |       | 493,181                                                 |       | 1,129,996 |   | 1,481,761 |   |
| Butterscotch                                 |       | 11,889                                                   |       | 25,491                                                  |       | 56,127 |   | 33,341 |   |
| Network, other costs                         |       | 1,087,930                                                |       | 1,193,185                                               |       | 3,500,826 |   | 3,500,231 |   |
| Network, depreciation and amortization costs |       | 306,055                                                  |       | 376,818                                                 |       | 1,018,774 |   | 1,404,583 |   |
|                                         |       | $                                                        | 16,297,510 |                                                    | $          | 15,147,686 |   | $ | 47,391,089 |   | $ | 44,346,897 |   |

 

Thefollowing is a summary of the Company’s property and equipment by geographicregion:

 
| ** **     | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------|------------|----------------------------------|------------|---------------------------------|------------|
|           |       |                             |       |                            |       |
| Canada         |       | $                                | 994,170    |                            | $          | 1,475,056 |   |
| United States  |       | 416,025                          |       | 506,533                         |       |
| United Kingdom |       | —                           |       | 5,179                           |       |
|           |       | $                                | 1,410,195  |                            | $          | 1,986,768 |   |

 

**10.COMMITMENTS AND CONTINGENCIES:**

 

The Company is involved in various legal claims and lawsuits inconnection with its ordinary business operations. The Company intends tovigorously defend these claims. While the final outcome with respect to anyactions or claims outstanding or pending as of September 30, 2010 cannotbe predicted with certainty, management believes that their resolution will nothave a material adverse effect on the Company’s financial position.

 

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**11.STOCKHOLDERS’ EQUITY:**

 

Thefollowing unaudited table summarizes stockholders’ equity transactions for thenine month period ended September 30, 2010:

 
| ** **                                                           | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional** | ** ** | ** **             | ** ** | **Total**  | ** **  |
|----------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|----------------|------------|------------------------|------------|------------|-------------|
| ** **                                                           | ** ** | **Common stock** | ** ** | **paid in** | ** ** | ** **     | ** ** | **stockholders’** | ** ** |
| ** **                                                           | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **capital**    | ** ** | **Deficit**            | ** ** | **equity** | ** **  |
|                                                                 |       |                  |       |             |       |           |       |                   |       |       |        |
| Balances, December 31, 2009                                     |       | 67,080,353            |       | $                | 14,030,384 |           | $          | 47,287,351             |       | $          | (30,221,164 | ) | $ | 31,096,571 |   |
| Exercise of stock options                                            |       | 33,678                |       | 27,350           |       | (12,540        | )          | —                 |       | 14,810     |        |
| Repurchase and retirement of shares — Dutch  Auction            |       | (6,341,470            | )          | (1,268,294       | )          | (3,222,692     | )          | —                 |       | (4,490,986 | )           |
| Repurchase and retirement of shares — Normal  course issuer bid |       | (3,409,300            | )          | (681,860         | )          | (1,741,947     | )          | —                 |       | (2,423,807 | )           |
| Stock-based compensation                                             |       | —                |       | —           |       | 157,902        |       | —                 |       | 157,902    |        |
| Cancellation of restricted stock                                     |       | (650                  | )          | —           |       | —         |       | —                 |       | —     |        |
| Net loss for the period                                              |       | —                |       | —           |       | —         |       | (202,912               | )          | (202,912   | )           |
| Balances, June 30, 2010                                         |       | 57,362,611            |       | 12,107,580       |       | 42,468,074     |       | (30,424,076            | )          | 24,151,578 |        |
|                                                                 |       |                  |       |             |       |           |       |                   |       |       |        |
| Stock-based compensation                                             |       | —                |       | —           |       | 155,786        |       | —                 |       | 155,786    |        |
| Cancellation of restricted stock                                     |       | (450                  | )          | —           |       | —         |       | —                 |       | —     |        |
| Net income for the period                                            |       | —                |       | —           |       | —         |       | 1,083,156              |       | 1,083,156  |        |
| Balances, September 30, 2010                                    |       | 57,362,161            |       | $                | 12,107,580 |           | $          | 42,623,860             |       | $          | (29,340,920 | ) | $ | 25,390,520 |   |

 

Thefollowing unaudited table summarizes stockholders’ equity transactions for thenine month period ended September 30, 2009.

 
| ** **                          | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional** | ** ** | ** **             | ** ** | **Total**  | ** **  |
|-------------------------------------|------------|-----------------------|------------|------------------|------------|----------------|------------|------------------------|------------|------------|-------------|
| ** **                          | ** ** | **Common stock** | ** ** | **paid in** | ** ** | ** **     | ** ** | **stockholders’** | ** ** |
| ** **                          | ** ** | **Number**            | ** ** | **Amount**       | ** ** | **capital**    | ** ** | **Deficit**            | ** ** | **equity** | ** **  |
|                                |       |                  |       |             |       |           |       |                   |       |       |        |
| Balances, December 31, 2008    |       | 73,073,782            |       | $                | 15,198,358 |           | $          | 48,714,676             |       | $          | (42,462,370 | ) | $ | 21,450,664 |   |
| Exercise of stock options           |       | 68,707                |       | 46,858           |       | (21,436        | )          | —                 |       | 25,422     |        |
| Repurchase and retirement of shares |       | (4,185,769            | )          | (837,138         | )          | (974,041       | )          | —                 |       | (1,811,179 | )           |
| Stock-based compensation            |       | —                |       | —           |       | 131,938        |       | —                 |       | 131,938    |        |
| Issuance of restricted stock        |       | 12,600                |       | —           |       | —         |       | —                 |       | —     |        |
| Cancellation of restricted stock    |       | (100                  | )          | —           |       | —         |       | —                 |       | —     |        |
| Net income for the period           |       | —                |       | —           |       | —         |       | 5,407,002              |       | 5,407,002  |        |
| Balances, June 30, 2009        |       | 68,969,220            |       | 14,408,078       |       | 47,851,137     |       | (37,055,368            | )          | 25,203,847 |        |
|                                |       |                  |       |             |       |           |       |                   |       |       |        |
| Stock-based compensation            |       | —                |       | —           |       | 99,810         |       | —                 |       | 99,810     |        |
| Cancellation of restricted stock    |       | (300                  | )          | —           |       | —         |       | —                 |       | —     |        |
| Repurchase and retirement of shares |       | (1,103,824            | )          | (220,765         | )          | (349,570       | )          | —                 |       | (570,335   | )           |
| Net income for the period           |       | —                |       | —           |       | —         |       | 5,196,074              |       | 5,196,074  |        |
| Balances, September 30, 2009   |       | 67,865,096            |       | $                | 14,187,313 |           | $          | 47,601,377             |       | $          | (31,859,294 | ) | $ | 29,929,396 |   |

 

OnJanuary 13, 2010, the Company announced that it successfully concluded amodified “Dutch auction tender offer” that was previously announced onDecember 14, 2009. Under the terms of the offer, the Company repurchasedan aggregate of 6,341,470 shares of its common stock at a purchase price of$0.70 per share, for a total of $4,439,029, excluding transaction costs of$51,957. The purchase price was funded from available cash. Of the 6,341,470shares purchased, 5,000,000 were shares the Company offered to purchase in theoffer and 1,341,470 where shares purchased pursuant to the Company’s right topurchase up to an additional 2% of the shares outstanding immediately prior tothe commencement of the tender offer. Due to over-subscription, the finalproration factor for shares tendered at or below $0.70 per share wasapproximately 99.9%. For this purpose, shares tendered at $0.70 per shareincluded shares tendered by those persons who indicated, in their letter oftransmittal, that they were willing to accept the price determined in theoffer. All shares purchased in the tender offer received the same price.

 

OnFebruary 16, 2010, the Company’s Board of Directors authorized therepurchase of up to $10 million of the Company’s common stock at the Company’sdiscretion. Under this repurchase program, the Company did not repurchase anyshares during the three months ended September 30, 2010, andrepurchased 3,409,300 shares during the nine months endedSeptember 30, 2010. This 

 

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repurchaseprogram was terminated on September 9, 2010 when Tucows announced itsintention to commence a Dutch Auction Tender Offer.

 

**12.SHARE-BASED PAYMENTS**

 

(a)                                  Stock options

 

The Company’s 1996 Stock Option Plan (the “1996 Plan”) was establishedfor the benefit of the employees, officers, directors and certain consultantsof the Company. The maximum number of common shares which may be set aside forissuance under the 1996 Plan was 11,150,000 shares, provided that the Board ofDirectors of the Company has the right, from time to time, to increase suchnumber subject to the approval of the stockholders of the Company when requiredby law or regulatory authority. Generally, options issued under the 1996 Planvest over a four-year period. The 1996 Plan expired on February 25, 2006and no options have been issued from the 1996 Plan after that date.

 

The Company’s Amended and Restated 2006 Equity Compensation Plan (the “2006Plan”), serves as a successor to the 1996 Plan. The 2006 Plan was establishedfor the benefit of the employees, officers, directors and certain consultantsof the Company. The Plan was amended and restated at the Annual General Meetingof the Stockholders on September 7, 2010 to extend the term thereofto September 6, 2020 and to increase the number of shares of common stockauthorized for issuance thereunder from 5,000,000 to 6,900,000. The 6,900,000common shares that have been set aside for issuance under the 2006 Plan are toprovide eligible persons with the opportunity to acquire a proprietaryinterest, or otherwise increase their proprietary interest, in Tucows.Generally, options issued under the 2006 Plan vest over a four-year period andhave a term not exceeding seven years.

 

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

 

During the three months ended September 30, 2010, stockoptions to purchase 220,000 common shares were granted, compared to 200,000common shares granted during the three months endedSeptember 30, 2009.

 

During the nine months ended September 30, 2010, stockoptions to purchase 1,794,000 common shares were granted, compared to 245,000common shares granted during the three months endedSeptember 30, 2009. During the nine months endedSeptember 30, 2009, the only stock option grants made were formulagrants to Independent Directors.

 

The stock options granted during the three and nine months endedSeptember 30, 2010 expire on various dates through 2017.

 

Details of stock option transactions for the three months endedSeptember 30, 2010 and September 30, 2009 are as follows:

 
| ** **                         | ** ** | **Three months ended  September 30, 2010** | ** ** | **Three months ended  September 30, 2009** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                         | ** ** | **Number of  shares**                                     | ** ** | **Weighted  average  exercise price  per share**     | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise price  per share** | ** ** |
| Outstanding, beginning of period   |       | 8,224,083                                                      |       | $                                                              | 0.56       |   | 7,029,258 |   | $ | 0.56 |   |
| Granted                            |       | 220,000                                                        |       | 0.62                                                           |       | 200,000 |   | 0.56 |   |
| Exercised                          |       | —                                                         |       | —                                                         |       | — |   | — |   |
| Forfeited                          |       | (61,042                                                        | )          | 0.65                                                           |       | (35,656 | ) | 0.72 |   |
| Expired                            |       | —                                                         |       | —                                                         |       | — |   | — |   |
| Outstanding, end of period         |       | 8,383,041                                                      |       | $                                                              | 0.56       |   | 7,193,602 |   | $ | 0.56 |   |
| Options exercisable, end of period |       | 6,267,541                                                      |       | $                                                              | 0.51       |   | 6,060,574 |   | $ | 0.53 |   |

 

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Details of stock option transactions for the nine months endedSeptember 30, 2010 and September 30, 2009 are as follows:

 
| ** **                         | ** ** | **Nine months ended  September 30, 2010** | ** ** | **Nine months ended  September 30, 2009** | ** ** |
|------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                         | ** ** | **Number of  shares**                                    | ** ** | **Weighted  average  exercise price  per share**    | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise price  per share** | ** ** |
| Outstanding, beginning of period   |       | 7,203,977                                                     |       | $                                                             | 0.56       |   | 7,282,777 |   | $ | 0.56 |   |
| Granted                            |       | 1,794,000                                                     |       | 0.69                                                          |       | 225,000 |   | 0.54 |   |
| Exercised                          |       | (33,678                                                       | )          | 0.44                                                          |       | (68,707 | ) | 0.37 |   |
| Forfeited                          |       | (99,167                                                       | )          | 0.66                                                          |       | (203,968 | ) | 0.58 |   |
| Expired                            |       | (482,091                                                      | )          | 1.02                                                          |       | (41,500 | ) | 0.80 |   |
| Outstanding, end of period         |       | 8,383,041                                                     |       | $                                                             | 0.56       |   | 7,193,602 |   | $ | 0.56 |   |
| Options exercisable, end of period |       | 6,267,541                                                     |       | $                                                             | 0.51       |   | 6,060,574 |   | $ | 0.53 |   |

 

As of September 30, 2010, the exercise prices, weighted averageremaining contractual life and intrinsic values of outstanding options were asfollows:

 
| ** **              | ** ** | **Options outstanding** | ** ** | **Options exercisable**                               | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------------------------------------|------------|
| **Exercise price** | ** ** | **Number  outstanding**      | ** ** | **Weighted  average  exercise price  per share** | ** ** | **Weighted  average  remaining  contractual  life (years)** | ** ** | **Aggregate  intrinsic  value** | ** ** | **Number  exercisable** | ** ** | **Weighted  average  exercise price  per share** | ** ** | **Aggregate  intrinsic  value** | ** ** |
| $0.31-$0.49             |       | 3,691,087                    |       | $                                                          | 0.38       |   | 2.8 |   | $ | 1,063,006 |   | 3,691,087 |   | $ | 0.38 |   | $ | 1,063,006 |   |
| $0.56-$0.70             |       | 3,531,704                    |       | $                                                          | 0.64       |   | 5.2 |   | 149,338 |   | 1,646,204 |   | $ | 0.60 |   | 123,823 |   |
| $0.80-$0.99             |       | 1,160,250                    |       | $                                                          | 0.86       |   | 3.3 |   | — |   | 930,250 |   | $ | 0.86 |   | — |   |
|                    |       | 8,383,041                    |       | $                                                          | 0.56       |   | 3.9 |   | $ | 1,212,344 |   | 6,267,541 |   | $ | 0.51 |   | $ | 1,186,829 |   |

 

Total unrecognized compensation cost relating to unvested stock optionsat September 30, 2010, prior to the consideration of expectedforfeitures, was approximately $647,000 and is expected to be recognized over aweighted average period of 2.9 years.

 

The Company recorded stock-based compensation of $155,570 and $99,589for the three months ended September 30, 2010 and 2009, respectively,and stock-based compensation of $313,055 and $231,297 for the nine months endedSeptember 30, 2010 and 2009, respectively.

 

TheCompany has not capitalized any stock-based compensation expense as part of thecost of an asset.

 

(b)                               Restricted stock awards

 

During the three and nine months ended September 30, 2010, norestricted stock awards were granted to any employees of the Company.

 

Restricted stock awards generally vest annually over a four yearperiod. Holders of restricted stock may not sell, assign, transfer, pledge orotherwise dispose of an unvested stock. Unvested shares of restricted stock areheld in escrow by the Company until the holder’s interest in such shares vests.

 

Holders of restricted stock have full stockholder rights with respectto any shares of Company stock issued to the participant under a stock award,whether or not the holder’s interest in those shares is vested. Accordingly,the holder has the right to vote such shares and to receive any regular cashdividends paid on such shares.

 

Total unrecognized compensation cost relating to unvested restrictedstock awards at September 30, 2010, prior to the consideration ofexpected forfeitures, was approximately $2,000 and is expected to be recognizedover a weighted average period of 2.5 years.

 

The Company recorded stock-based compensation associated withrestricted stock awards of $216 and $221 for the three months endedSeptember 30, 2010 and 2009, respectively.

 

The Company recorded stock-based compensation associated withrestricted stock awards of $633 and $451 for the nine months endedSeptember 30, 2010 and 2009, respectively.

 

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**13.FAIR VALUE MEASUREMENT**

 

ASC Topic 820, “*Fair Value Measurementsand Disclosures”*establishes a valuation hierarchy for disclosure ofthe inputs to valuation used to measure fair value. This hierarchy prioritizesthe inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted)in active markets for identical assets or liabilities. Level 2 inputs arequoted prices for similar assets and liabilities in active markets or inputsthat are observable for the asset or liability, either directly or indirectlythrough market corroboration, for substantially the full term of the financialinstrument. Level 3 inputs are unobservable inputs based on the Company’s ownassumptions used to measure assets and liabilities at fair value. A financialasset or liability’s classification within the hierarchy is determined based onthe lowest level input that is significant to the fair value measurement.

 

Thefollowing table provides a summary of the fair values of the Company’sderivative instrument assets and liabilities measured at fair value on arecurring basis at September 30, 2010:

 
| ** **                      | ** ** | **September 30, 2010**                 | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|
| ** **                      | ** ** | **Fair Value Measurements Using** | ** ** | **Assets at** | ** ** |
| ** **                      | ** ** | **Level 1**                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Fair Value** | ** ** |
|                            |       |                                             |       |   |   |   |   |   |   |
| Derivative instrument asset     |       | $                                                | —     |   | $ | 582,017 |   | $ | — |   | $ | 582,017 |   |
| Total Assets                    |       | $                                                | —     |   | $ | 582,017 |   | $ | — |   | $ | 582,017 |   |
|                            |       |                                             |       |   |   |   |   |   |   |
| Derivative instrument liability |       | $                                                | —     |   | $ | (46,378 | ) | $ | — |   | $ | (46,378 | ) |
| Total Liabilities               |       | $                                                | —     |   | $ | (46,378 | ) | $ | — |   | $ | (46,378 | ) |

 

The following table provides a summary of the fair values of theCompany’s derivative instrument assets measured at fair value on a recurringbasis as at December 31, 2009:

 
| ** **                      | ** ** | **December 31, 2009**                  | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|
| ** **                      | ** ** | **Fair Value Measurements Using** | ** ** | **Assets at** | ** ** |
| ** **                      | ** ** | **Level 1**                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Fair Value** | ** ** |
|                            |       |                                             |       |   |   |   |   |   |   |
| Derivative instrument asset     |       | $                                                | —     |   | $ | 2,220,378 |   | $ | — |   | $ | 2,220,378 |   |
| Total Assets                    |       | $                                                | —     |   | $ | 2,220,378 |   | $ | — |   | $ | 2,220,378 |   |
|                            |       |                                             |       |   |   |   |   |   |   |
| Derivative instrument liability |       | $                                                | —     |   | $ | (15,708 | ) | $ | — |   | $ | (15,708 | ) |
| Total Liabilities               |       | $                                                | —     |   | $ | (15,708 | ) | $ | — |   | $ | (15,708 | ) |

 

**14.SUBSEQUENT EVENTS**

 

OnOctober 13, 2010, the Company announced that it successfully concluded amodified “Dutch auction tender offer” that was previously announced onSeptember 9, 2010. Under the terms of the offer, the Company repurchasedan aggregate of 3,913,670 shares of its common stock at a purchase price of $0.70per share, for a total of $2,739,569, excluding transaction costs of $50,000.The purchase price and all transaction costs were funded from available cash.All shares purchased in the tender offer received the same price and all sharesrepurchased were immediately retired. As a result of the completion of thetender offer, as of October 13, 2010, the Company had 53,448,566 sharesissued and outstanding.

 

OnOctober 19, 2010, the Company entered into a Lease Extending and AmendingAgreement on its Toronto, Canada office space as more fully described in the Form 8-Kdated October 21 2010. The Lease Extending and Amending Agreementextends the term of the Lease for a period of nine years commencing onJanuary 1, 2012 and expiring on December 31, 2020; and sets the BasicRent (as defined in the Lease) for the period from January 1, 2011 toDecember 31, 2015 at $17.50 per square foot, and sets the Basic Rent forthe period from January 1, 2016 to December 31, 2020 at $19.50 persquare foot.

 

**15.RECLASSIFICATION**

 

Certain of the prior periods’ comparative figures have beenreclassified to conform with the presentation adopted in the current period.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

ThisQuarterly Report on Form 10-Q contains, in addition to historicalinformation, forward-looking statements by us with regard to our expectationsas to financial results and other aspects of our business that involve risksand uncertainties and may constitute forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,”“should,” “anticipate,” “believe,” “plan,” “estimate,” “expect” and “intend,”and other similar expressions are intended to identify forward-lookingstatements. The forward-looking statements contained in this report includestatements regarding, among other things, the Company’s foreign currencyrequirements, specifically for the Canadian dollar; the number of new, renewedand transferred-in domain names, our valuations of certain deferred tax assets,our expectation to collect our outstanding receivables, net of our allowancefor doubtful accounts; the potential impact of current and pending claims onour business; our expectation regarding fluctuations in certain expense andcost categories; our expectations regarding future revenue from our patentassignments, our expectations regarding our unrecognized tax benefit and thetiming or completion of certain audits of our US tax returns, our expectationsregarding cash from operations to fund our business, our belief that the marketfor domain name registration will trend upward gradually and may be affected bymarket volatility; our belief that a slowing economy may lead to a decrease inadvertising spending and the effect of changes in our contractual relationshipson our revenue These statements are based on management’s current expectationsand are subject to a number of uncertainties and risks that could cause actualresults to differ materially from those described in the forward-lookingstatements. Many factors affect our ability to achieve our objectives and tosuccessfully develop and commercialize our services including:

 

·                  Our ability tocontinue to generate sufficient working capital to meet our operatingrequirements;

 

·                  Our ability tomaintain a good working relationship with our vendors and customers;

 

·                  The ability ofvendors to continue to supply our needs;

 

·                  Actions by ourcompetitors;

 

·                  Our ability toachieve gross profit margins at which we can be profitable;

 

·                  Our ability toattract and retain qualified personnel in our business;

 

·                  Our ability toeffectively manage our business;

 

·                  Our ability toobtain and maintain approvals from regulatory authorities on regulatory issues;

 

·                  Pending or newlitigation; and

 

·                  Factors setforth under the caption “Item 1A Risk Factors” in our Annual Report onForm 10-K for the fiscal year ended December 31, 2009.

 

This list of factors that may affect our future performance andfinancial and competitive position and also the accuracy of forward-lookingstatements is illustrative, but it is by no means exhaustive. Accordingly, allforward-looking statements should be evaluated with the understanding of theirinherent uncertainty. All forward-looking statements included in this documentare based on information available to us as of the date of this document, andwe assume no obligation to update these cautionary statements or anyforward-looking statements except to the extent of any obligations under theSecurities Exchange Act of 1934 or the Securities Act of 1933. These statementsare not guarantees of future performance.

 

We qualify all the forward-looking statements contained in thisForm 10-Q by the foregoing cautionary statements.

 

**OVERVIEW**

 

Our mission is to provide simple useful services that help peopleunlock the power of the Internet. We accomplish this by reducing the complexityour customers’ experience as they acquire, deliver or use Internet servicessuch as domain name registration, email and other Internet services.

 

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Our primary distribution channel is a global network of more than 10,000resellers in more than 100 countries who typically provide their customers, theend-users of the Internet, with a critical component for establishing andmaintaining an online presence. Our primary focus is serving the needs of thisnetwork of resellers by providing superior services, easy-to-use interfaces,proactive and attentive customer service, reseller-oriented technology andagile design and development processes. We seek to provide superior customerservice to our resellers by anticipating their business needs and technicalrequirements. This includes providing easy-to-use interfaces that enableresellers to quickly and easily integrate our services into their individualbusiness processes, and offering brandable end-user interfaces that emphasize simplicityand visual appeal.  We also provide “secondtier” support to our resellers by email and phone in the event resellersexperience issues or problems with our services. In addition, our NetworkOperating Center provides proactive support to our resellers by monitoring allservices and network infrastructure to address deficiencies before customerservices are impacted.

 

We believe that the underlying platforms for our services are one ofthe most mature, reliable and functional reseller-oriented provisioning andmanagement platforms in our industry, and we continue to refine, evolve andimprove these services for both resellers and end-users.

 

To assist us in forecasting growth and to help us monitor theeffectiveness of our operational strategies, we categorize our revenue into thefollowing services:

 

OpenSRS, our wholesale service, manages over ten million domain names,under its ICANN accreditation, as well as names Tucows manages for otherregistrars under their own accreditations, millions of mailboxes and tens ofthousands of digital certificates through a network of over 10,000 webhosts, Internet service providers, or ISPs, and other resellers around theworld.

 

Platypus, our billing service, provides ISPs with an industry-specificsolution for billing, service provisioning and customer account management.

 

Hover, our retail service, offers services similar to those of OpenSRSto consumers and small businesses.

 

YummyNames, our domain portfolio service, manages tens of thousands ofdomain names, most of which generate advertising revenue and many of which weoffer for resale via our reseller network and other channels. Included in theYummyNames domain portfolio are over 42,000 domains that allow over two-thirdsof Americans to purchase a domain or email address based on their name.

 

Butterscotch, our content service, operates two advertising-supportedwebsites, butterscotch.com and tucows.com, which provide content to helpconsumers overcome the complexity of modern technology and the Internet, in theform of over 3,600 videos and over 300,000 software and mobile listings andarticles. Additionally, Butterscotch provides custom video production servicesfor technology manufacturers and ISPs.

 

Our business model is characterized by non-refundable, up-frontpayments, which lead to recurring revenue and positive operating cash flow. Weare an ICANN-accredited registrar and manage over ten million domains under ourICANN accreditation, as well as names we manage for other registrars undertheir own accreditations.

 

**NetRevenues**

 

*OpenSRS*

 

We derive revenue from our reseller network by providing them withreseller services that comprise (a) domain service, (b) email serviceand (c) other services. Other services primarily consist of secure socketslayer, or SSL, certificates and also include blogware and website buildingtools that are used by our resellers to create bundles of Internet services fortheir end-users along with billing solutions for ISPs.

 

OpenSRS Domain Service

 

Historically, our OpenSRS domain service has constituted the largestportion of our business and encompasses all of our services as an accreditedregistrar related to the registration, renewal, transfer and management ofdomain names. In addition, this service fuels other revenue categories as itoften is the initial service for which a customer will engage us, enabling usto follow on with other services and allowing us to add to our domain portfolioby purchasing names registered through us upon their expiration. We alsoprovide resellers with the ability to sell personal names. This service allowsresellers the opportunity to sell email addresses based on our domain portfolioof surname domain names.

 

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As of September 30, 2010, we offer registration services for thegeneric top-level domain (“gTLDs”) .com, .net, .org, .info, .name, .biz, .tel,..mobi and .asia and for the country code top-level domains (:ccTLDs”) .at, .au,..be, .bz, .ca, .co, .cc, .ch, .cn, .de, .dk, .es, .eu, .fr, .in, .it, .li, .me,..mx .nl, .tv, .uk, .ws, and .us.

 

With respect to the sale of domain registrations, our pricing structurefor domain names provides visibility into the various fees that make up thecost of a domain name by breaking out the cost of the registry and ICANN feesseparately from our management fee. Effective July 2010, registry fees forthe .com and .net registrations were increased by the registry by an additional7%. The management fee provides our resellers with access to our provisioningand management tools to enable them to register and administer domain names andaccess to additional services like WHOIS privacy and DNS services, enhanceddomain name suggestion tools and access to our Premium Domain name services. Weearn fees in connection with each new, renewed and transferred-in registrationand from providing provisioning services to resellers and registrars on amonthly basis. Domain registrations are generally purchased for terms of one toten years, with a majority having a one-year term. Except for certain largecustomers with whom we have negotiated alternative arrangements, payments forthe full term of service, or billed revenue, is received at the time ofactivation of service. All fees received in connection with domain nameregistration are non-refundable, and where appropriate, are recorded asdeferred revenue and recognized as earned ratably over the term of provision ofservice. This accounting treatment reasonably approximates a recognitionpattern that corresponds with the provision of the services during the quartersand the year.

 

OpenSRS Email Service

 

We derive revenue from our hosted email service through our globaldistribution network. Our email service is offered on a per account, per monthbasis, and provides resellers with a reliable, scalable “white label” hostedemail solutions that can be customized to their branding and business modelrequirements. The email service also includes spam and virus filtering on allaccounts. End-users can access the email service via a full-featured,multi-language AJAX-enabled web interface, a WAP mobile interface, or throughtraditional desktop email clients, such as Microsoft Outlook or Apple Mail,using IMAP or POP/SMTP and 2GB of email storage.

 

We earn fees for email services when such services are activated. Emailservices are generally purchased monthly and, at month-end, are either deductedon a pre-authorized basis from reseller’s deposit account, or are invoiced.

 

Other OpenSRS Services

 

We derive revenue from other services primarily from provisioning SSLcertificates. In addition, we provision blogware and website building toolsthat are used by our resellers to create bundles of Internet services for theirend-users, as well as the provision of billing, provisioning and customer caresoftware solutions to ISPs through our Platypus billing software.

 

We earn fees from such services when a service is activated. Theseservices are generally purchased for terms of one month to three years.Platypus software is generally purchased for terms of one month to one year.Payments for services are for the full term of all services at the time ofactivation of service, are non-refundable and, where appropriate, are recordedas deferred revenue and recognized as earned ratably over the service term.This accounting treatment reasonably approximates a recognition pattern thatcorresponds with the provision of the services during the quarters and theyear.

 

*YummyNames*

 

We derive revenue from our portfolio of domain names by displayingadvertising on the domains and by making them available for sale or lease. Inaddition we display advertising on “parked pages” within OpenSRS. Parkedpages are domain names registered with us that do not yet contain anactive website. When a user types one of these domain names into a web browser,they are presented with dynamically generated links that are pay-per-clickadvertising. Every time a user clicks on one of these links, it generatesrevenue for us through our partnership with third-parties who providesyndicated pay-per-click advertising.

 

Portfolio names are sold through our premium domain name service,auctions or in negotiated sales. The size of our domain name portfolio variesover time, as we acquire and sell domains on a regular basis to maximize theoverall value and revenue generation potential of our portfolio. In evaluatingnames for sale, we consider the potential foregone revenue from pay-per-clickadvertising, as well as other factors. The name will be offered for sale if,based on our evaluation, the name is deemed non-essential to our business andmanagement believes that deriving proceeds from the sale is strategically morebeneficial to the Company.

 

Portfolio names that have been acquired from third-parties or throughacquisition are included as intangible assets with indefinite lives on ourconsolidated balance sheet.

 

In addition, we also offer the same services to our customers, allowingthem to make available names registered by them for monetization on a similarbasis. For customer names, we earn a referral fee for premium names or namessold or leased, and participate on a revenue share basis for names offeredthrough our pay-per-click advertising program.

 

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We recognize revenue from these services, net of any fees payable toresellers or customers, immediately upon completion of the service, or in thecase of advertising revenue, on a monthly basis once the advertising has beenserved.

 

*Hover*

 

We derive revenues from the providing and managing Internet services,on a retail basis, to consumers and small businesses through our Hover.comwebsite. These services include domain registration and other Internet servicessuch as email and personalized email through our portfolio of surname-baseddomain names, as well as an easy-to-use interface that allows users to connectdomain names to websites and email addresses through a unique DNS forwardingsystem. Depending on the service offered, we typically receive fees for ourservices.

 

Our customers generally purchase services for terms of one to tenyears, with a majority of services purchased for a one-year term. Certainservices are also offered on a monthly basis. Payments for the full term of allservices, or billed revenue, are received at the time of service activationand, where appropriate, are recorded as deferred revenue and recognized asearned ratably over the term of provision of service. This accounting treatmentreasonably approximates a recognition pattern that corresponds with theprovision of the services during quarterly and annual periods.

 

*Butterscotch*

 

We also generate advertising and other revenue through two ad-supportedcontent sites, butterscotch.com and tucows.com.

 

Butterscotch.com derives revenue from banner and text advertising onthe site, as well as from video advertising and product placement within thevideos that make up the bulk of the site. In addition, revenue is earnedthrough custom video production for technology manufacturers and Internetservices customers.

 

Tucows.com advertising revenue is generated from third-party advertisersand from software developers who rely on us as a primary source ofdistribution. Software developers use our Author Resource Center to submittheir products for inclusion on our site and to purchase promotional placementof their software. Software developers may also purchase other promotionalservices on a cost-per-click or flat rate basis. Software developers are ableto promote their software through advertising services including keyword searchplacements, banners, promotional placements, expedited reviews and premium dataservices. Revenue is also generated from companies that contract with us toprovide them with co-branded content.

 

Advertising and other revenue is recognized ratably over the period inwhich it is presented. To the extent that we do not meet the minimum number ofpost-presentation impressions that we guarantee to customers, we deferrecognition of the corresponding revenues until the guaranteed impressions areachieved. Custom video production revenue is recognized on acceptance of thecompleted video by the customer.

 

**CriticalAccounting Policies**

 

The following is a discussion of our critical accounting policies andmethods. Critical accounting policies are defined as those that are bothimportant to the portrayal of our financial condition and results of operationsand are reflective of significant judgments and uncertainties made bymanagement that may result in materially different results under differentassumptions and conditions. Note 2 to the consolidated financial statementsfor the year ended December 31, 2009, or Fiscal 2009, includes furtherinformation on the significant accounting policies and methods used in thepreparation of our consolidated financial statements.

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the U.S. requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anon-going basis, we evaluate the application of these estimates, including thoserelated to the useful lives and valuation of intangible assets, valuation ofgoodwill, fair value measurement of assets and liabilities, product developmentcosts, revenue recognition and deferred revenue and accounting for incometaxes. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual amounts could differ significantly from these estimates.

 

**Revenuerecognition policy**

 

We earn revenues from the following services:

 

·                  OpenSRS (Domain, Email andOther Services);

·                  YummyNames;

·                  Hover; and

·                  Butterscotch.

 

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With respect to the sale of domain registrations and other Internetservices, we earn registration fees in connection with each new, renewed andtransferred-in registration and from providing provisioning services toresellers and registrars on a monthly basis. We also enter into revenuearrangements in which a reseller may purchase a combination of services(multiple element arrangements). When fair value exists for all elements, weallocate revenue to each element based on the relative fair value of each ofthe elements. Fair value is established by the price charged when that elementis sold separately. For arrangements where fair value exists only for theundelivered elements, we defer the fair value of the undelivered elements andrecognize the difference between the total arrangement fee and the amountdeferred for the undelivered items as revenue related to the delivered items,assuming all other criteria for revenue recognition have been met. Payments forthe full term of all services, or billed revenue, are received at the time ofactivation of service and where appropriate are recorded as deferred revenueand are recognized as earned ratably over the term of provision of service.This accounting treatment reasonably approximates a recognition pattern thatcorresponds with the provision of the services during the quarters and theyear.

 

Revenue from the sale of domain names consists primarily of amountsearned for the transfer of rights to domain names that are currently under theCompany’s control. Collectability of revenues generated is subject to a highlevel of uncertainty; accordingly revenues are recognized only when payment isreceived, except where a fixed contract has been negotiated, in which caserevenues are recognized once all the terms of the contract have been satisfied.

 

We also generate advertising and other revenue through our onlinelibraries of shareware, freeware and online services presented at our websites,tucows.com and butterscotch.com. Advertising and other revenue is recognizedratably over the period in which it is presented. To the extent that theminimum number of post-presentation impressions we guarantee to customers isnot met, we defer recognition of the corresponding revenues until theguaranteed impressions are achieved. Custom video production revenue isrecognized on acceptance of the completed video by the customer.

 

Changes to contractual relationships in the future could impact theamounts and timing of revenue recognition.

 

In those cases where payment is not received at the time of sale,additional conditions for recognition of revenue apply. The conditions are(i) that the collection of sales proceeds is reasonably assured and(ii) that we have no further performance obligations. We record expectedrefunds, rebates and credit card charge-backs as a reduction of revenues at thetime of the sale based on historical experiences and current expectations.Should these expectations not be met, adjustments will be required in futureperiods.

 

We establish reserves for possible uncollectible accounts receivableand other contingent liabilities which may arise in the normal course ofbusiness. The allowance for doubtful accounts is calculated by taking intoaccount factors such as our historical collection and write-off experience, thenumber of days the customer is past due and the status of the customer’saccount with respect to whether or not the customer is continuing to receiveservice. The contingent liability estimates are based on management’shistorical experience and various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the reported amounts of liabilities and expenses thatare not readily apparent from other sources. Historically, credit losses havebeen within our expectations and the reserves we have established have beenappropriate. However, we have, on occasion, experienced issues which have ledto accounts receivable not being fully collected. Should these issues occurmore frequently, additional reserves may be required.

 

**Valuationof Intangible Assets, Goodwill and Long-lived Assets**

 

Goodwill represents the excess of purchase price over the fair valuesassigned to the net assets acquired in business combinations. Intangible assetsconsist of acquired technology, brand, customer relationships, non-competitionagreements, surname domain names and direct navigation domain names. Intangibleassets, which include technology, brand value, customer relationships andnon-competition arrangements related to the acquisition of BoardtownCorporation in April 2004, the acquisition of the Hosted MessagingBusiness of Critical Path, Inc. in January 2006, the acquisition ofMailbank.com Inc. in June 2006 and the acquisition of Innerwise, Inc.in July 2007, are being amortized on a straight-line basis over periods oftwo to seven years.

 

Goodwill and indefinite life intangibles are not be amortized, but aretested for impairment annually or more frequently if circumstances indicatepotential impairment, through a comparison of fair value to carrying amount.Goodwill and indefinite life intangibles are tested for impairment annually atthe same time every year, and when an event occurs or circumstances change suchthat it is reasonably possible that impairment may exist. We review goodwilland indefinite life intangibles at least annually for possible impairment inthe fourth quarter of each year.

 

We have other finite life intangible assets consisting of patented andnon-patented technologies. These intangible assets are amortized over theirexpected economic lives. The lives are determined based upon the expected useof the asset, the estimated average life of the replacement parts of thereporting units products, the stability of the industry, expected changes inand replacement value of distribution networks and other factors deemedappropriate.

 

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With regards to property, equipment and definite life intangibleassets, we continually evaluate whether events or circumstances have occurredthat indicate the remaining estimated useful lives of its definite-lifeintangible assets may warrant revision or that the remaining balance of suchassets may not be recoverable. We use an estimate of the related undiscountedcash flows over the remaining life of the asset in measuring whether the assetis recoverable. There was no impairment recorded on definite-life intangible assetsand property and equipment during the three months endedSeptember 30, 2010 or during the three months endedSeptember 30, 2009.

 

Determining the number of reporting units and the fair value of areporting unit requires us to make judgments and involves the use ofsignificant estimates and assumptions. These estimates and assumptions includerevenue growth rates and operating margins used to calculate projected futurecash flows, risk-adjusted discount rates, future economic and marketconditions, and determination of appropriate market comparables. We base ourfair value estimates on assumptions we believe to be reasonable but that areunpredictable and inherently uncertain. The long-term financial forecastrepresents the best estimate that we have at this time and we believe that itsunderlying assumptions are reasonable. However, actual performance in thenear-term and longer-term could be materially different from these forecasts,which could impact future estimates of fair value of our reporting units andmay result in a charge to earnings in future periods due to the potential for awrite-down of goodwill in connection with such tests.

 

**Accountingfor Income Taxes**

 

We are subject to income taxes in the U.S. and numerous foreignjurisdictions. Significant judgment is required in evaluating our uncertain taxpositions and determining our provision for income taxes. We apply a two-stepapproach to recognizing and measuring uncertain tax positions. The first stepis to evaluate the tax position for recognition by determining if on the weightof available evidence; it is more likely than not that the position will besustained on audit, including resolution of related appeals or litigationprocesses, if any. The second step is to measure the tax benefit that is morethan 50% likely to be realized upon settlement.

 

Although we believe we have adequately reserved for our uncertain taxpositions, no assurance can be given that the final tax outcome of thesematters will not be different. We adjust these reserves in light of changingfacts and circumstances, such as the closing of a tax audit or the refinementof an estimate. To the extent that the final tax outcome of these matters isdifferent than the amounts recorded, such differences will impact the provisionfor income taxes in the period in which such determination is made.

 

As we account for income taxes under the asset and liability method, werecognize deferred tax assets or liabilities for the anticipated future taxeffects of temporary differences between the financial statement basis and thetax basis of our assets and liabilities. We record a valuation allowance toreduce the net deferred tax assets when it is more likely than not that thebenefit from the deferred tax assets will not be realized. In assessing theneed for a valuation allowance, historical and future levels of income,expectations and risks associated with estimates of future taxable income andongoing tax planning strategies are considered. In the event that it isdetermined that the deferred tax assets to be realized in the future would bein excess of the net recorded amount, an adjustment to the deferred tax assetvaluation allowance would be recorded. This adjustment would increase income inthe period that such determination was made. Likewise, should it be determinedthat all or part of a recorded net deferred tax asset would not be realized inthe future, an adjustment to increase the deferred tax asset valuationallowance would be charged to income in the period that such determinationwould be made.

 

On a periodic basis, we evaluate the probability that our deferred taxassets will be recovered to assess its realizability. To the extent we believeit is more likely than not that some portion of our deferred tax assets willnot be realized, we will increase the valuation allowance against the deferredtax assets. Realization of our deferred tax assets is dependent primarily uponfuture taxable income. Our judgments regarding future profitability may changedue to future market conditions, changes in U.S. or international tax laws andother factors. These changes, if any, may require possible material adjustmentsto these deferred tax assets, impacting net income or net loss in the periodwhen such determinations are made.

 

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**RESULTSOF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010AS COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009**

 

The following table presents our net revenues, by revenue source:

 
| ** **                       | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                       | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| OpenSRS :                        | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Domain Services                  |       | $                                                        | 16,517,427 |                                                    | $          | 15,097,640 |   | $ | 47,669,347 |   | $ | 44,037,596 |   |
| Email Services                   |       | 577,606                                                  |       | 842,262                                                 |       | 1,796,452 |   | 2,838,052 |   |
| Other Services                   |       | 1,086,102                                                |       | 1,109,341                                               |       | 3,264,758 |   | 3,295,789 |   |
| Total OpenSRS Services           |       | 18,181,135                                               |       | 17,049,243                                              |       | 52,730,557 |   | 50,171,437 |   |
|                             |       |                                                     |       |                                                    |       |   |   |   |   |
| YummyNames                       |       | 1,249,128                                                |       | 1,781,725                                               |       | 4,592,297 |   | 5,102,315 |   |
| Hover                            |       | 1,147,576                                                |       | 1,203,742                                               |       | 3,388,036 |   | 3,763,155 |   |
| Butterscotch                     |       | 631,629                                                  |       | 461,419                                                 |       | 1,790,329 |   | 1,572,766 |   |
|                             |       | $                                                        | 21,209,468 |                                                    | $          | 20,496,129 |   | $ | 62,501,219 |   | $ | 60,609,673 |   |
| Increase over comparative period |       | $                                                        | 713,339    |                                                    |       |   | $ | 1,891,546 |   |   |   |
| Increase - percentage            |       | 3                                                        | %          |                                                    |       | 3 | % |   |   |

 

The following table presents our revenues, by revenue source, as apercentage of total revenues:

 
| ** **             | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **             | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| OpenSRS :              |       |                                                     |       |                                                    |       |   |   |   |   |
| Domain Services        |       | 78                                                       | %          | 74                                                      | %          | 77 | % | 73 | % |
| Email Services         |       | 3                                                        | %          | 4                                                       | %          | 3 | % | 5 | % |
| Other Services         |       | 5                                                        | %          | 5                                                       | %          | 5 | % | 5 | % |
| Total OpenSRS Services |       | 86                                                       | %          | 83                                                      | %          | 85 | % | 83 | % |
|                   |       |                                                     |       |                                                    |       |   |   |   |   |
| YummyNames             |       | 6                                                        | %          | 9                                                       | %          | 7 | % | 8 | % |
| Hover                  |       | 5                                                        | %          | 6                                                       | %          | 5 | % | 6 | % |
| Butterscotch           |       | 3                                                        | %          | 2                                                       | %          | 3 | % | 3 | % |
|                   |       | 100                                                      | %          | 100                                                     | %          | 100 | % | 100 | % |

 

Deferred revenue from domain name registrations and other services atSeptember 30, 2010 increased to $62.3 million from $56.5 millionat September 30, 2009.

 

No customer accounted for more than 10% of revenue during the three andnine months ended September 30, 2010 and, atSeptember 30, 2010, two customers accounted for 29% of accountsreceivable all of which has been paid subsequent toSeptember 30, 2010. Significant management judgment is required atthe time revenue is recorded to assess whether the collection of the resultingreceivables is reasonably assured. On an ongoing basis we assess the ability ofour customers to make required payments. Based on this assessment, we expectthe carrying amount of our outstanding receivables, net of allowance fordoubtful accounts, to be fully collected.

 

***OpenSRS***

 

Net revenues from OpenSRS services for the three months endedSeptember 30, 2010 as compared to the three months endedSeptember 30, 2009, increased by $1.1 million to $18.2 million.This increase resulted from an increase in domain services revenue of$1.4 million to $16.5 million, primarily resulting from increased activityfrom our reseller base. In addition, OpenSRS services increased as weexperienced an increase in registration fees paid to registries that wereimplemented in July 2010.

 

This increase in domain services revenue was partially offset by adecrease in email services revenue of $0.3 million, primarily resulting fromthe loss of certain media portal email customers during 2009. Our marketingefforts to date have generated revenues that only partially offset thesecustomer losses, which continue to adversely impact our results of operationsfor email services.

 

During the three months ended September 30, 2010, the numberof transactions from all new, renewed and transferred-in domain nameregistrations that we processed increased by 0.2 million transactions to1.8 million transactions as compared to the three months endedSeptember 30, 2009. In addition, domain services revenue increased aswe experienced an increase in registration fees paid to registries that wereimplemented in July 2010.

 

Net revenues from OpenSRS services for the nine months endedSeptember 30, 2010 as compared to the nine months endedSeptember 30, 2009, increased by $2.6 million to $52.7 million,primarily the result of domain services net revenues increasing by$3.6 million to $47.7 million being partially offset by email servicesdecreasing by $1.0 million for the reasons noted above.

 

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During the nine months ended September 30, 2010, the numberof transactions from all new, renewed and transferred-in domain name registrationsthat we processed increased by 0.6 million transactions to5.6 million transactions as compared to the nine months endedSeptember 30, 2009. In addition, domain services revenue increased aswe experienced an increase in registration fees paid to registries that wereimplemented in July 2010.

 

While we anticipate that the number of new, renewed and transferred-indomain name registrations will continue to incrementally increase, thevolatility in the market could affect the growth of domain names that wemanage. As of September 30, 2010, the total domain names under ourmanagement increased by 0.7 million to 8.7 million, when compared toSeptember 30, 2009. In addition, we provide provisioning services on amonthly basis to accredited registrars who use our technical systems to processdomain registrations with their own accreditation. As of September 30,2010, we managed 1.7 million domain names on behalf of other accreditedregistrars, an increase of 0.5 million compared to the 1.2 millionmanaged for accredited registrars as of September 30, 2009.

 

***YummyNames***

 

Net revenues from our YummyNames domain portfolio service for the threemonths ended September 30, 2010 as compared to the three months endedSeptember 30, 2009 decreased by $0.5 million, or 30%, to$1.2 million.

 

During the three months ended September 30, 2010, we earned $1.0million by making domain names in our portfolio available for sale or leasecompared to $1.3 million during the three months ended September 30, 2009.In addition we earned $0.3 million from our pay-per-click advertising or parkedpages program during the three months ended September 30, 2010compared to $0.5 million for the three months ended September 30, 2009.

 

The decrease in portfolio sales primarily reflects the timing of largerportfolio sales of domain names and the decrease in the delivery of third-partyadvertisements on parked pages primarily resulted from the impact oursales of non-strategic names has on our inventory of names available forparking purposes.

 

Net revenues from our YummyNames domain portfolio service for the ninemonths ended September 30, 2010 as compared to the nine months endedSeptember 30, 2009 decreased by $0.5 million, or 10%, to$4.6 million, primarily as a result of a $0.7 million reduction inour pay-per-click advertising or parked pages revenue to$1.0 million. This decrease was partially offset by an increase of$0.2 million as a result of improved revenues from the sale of domainnames from our portfolio.

 

The market for monetization of domain names is rapidly evolving andthere is no guarantee that we will be able to continue to acquire the samecaliber of names for our portfolio from future expiring domains or that nameswe acquire in future will provide the same revenue impact as we haveexperienced from past acquisitions. In addition, the revenue we derive fromdomain portfolio services is driven by general macroeconomic factors thataffect internet advertising. Our advertising expenditures are typicallysensitive to economic conditions and tend to decline in recessionary periodsand other periods of economic uncertainty.

 

***Hover***

 

Net revenues from Hover for the three months endedSeptember 30, 2010 as compared to the three months endedSeptember 30, 2009 decreased by $0.1 million, or 5%, to$1.1 million.

 

Net revenues from Hover for the nine months endedSeptember 30, 2010 as compared to the nine months endedSeptember 30, 2009 decreased by $0.4 million, or 10%, to$3.4 million, primarily as a result of the significant development effortsthat Hover undertook during Fiscal 2009. These development efforts resulted ina decrease in the deferred revenue balance during Fiscal 2009 as cash receiptsadded to deferred revenue during Fiscal 2009 were lower than the revenue beingrecognized from prior periods. Consequently, although cash receipts for thethree and nine months ended September 30, 2010 increased as comparedto the three and nine months ended September 30, 2009, net revenuedecreased.

 

***Butterscotch***

 

Net revenues from Butterscotch for the three and nine months endedSeptember 30, 2010 as compared to the three and nine months endedSeptember 30, 2009 each increased by $0.2 million respectively to$0.6 million and $1.8 million, respectively.

 

These increases are primarily the result of increases in videoadvertising and corporate video revenue as advertisers continue to migratetheir advertising spend towards more content rich websites such asButterscotch.com. This increases has been partially offset by the decline inour Author Resource Center revenues as advertisers continue to show apreference for more content rich traffic, as well as the significant decreasewe have experienced in Ad Sense revenue, the result of Google’s elimination oftheir enterprise level AdSense program.

 

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**COST OFREVENUES**

 

***OpenSRS***

 

OpenSRS Domain Service

 

Cost of revenues for domain registrations represents the amortizationof registry fees on a basis consistent with the recognition of revenues fromour customers, namely ratably over the term of provision of the service.Registry fees, the primary component of cost of revenues, are paid in full whenthe domain is registered, and are initially recorded as prepaid domain registryfees. This accounting treatment reasonably approximates a recognition patternthat corresponds with the provision of the services during the period.

 

OpenSRS Email Service

 

Cost of revenues for email services are payable to third-partyproviders for licensing and royalty costs related to the provision of certaincomponents of our email services. Fees payable for these components areincluded in the cost of revenues in the month they are incurred.

 

Other OpenSRS Services

 

Costs of revenues for other reseller services include fees paid tothird-party service providers, primarily for SSL certificates and for printingservices in connection with Platypus. Fees payable for SSL certificates areamortized on a basis consistent with the provision of service, generally oneyear, while monthly printing fees are included in cost of revenues in the monththey are incurred.

 

***YummyNames***

 

Costs of revenues for our domain portfolio service represent theamortization of registry fees for domains added to our portfolio over therenewal period, which is generally one year, the value attributed underintangible assets to any domain name sold and any impairment charges that mayarise from our assessment of our domain name intangible assets. As the totalnames in our portfolio continue to grow, this cost will become a moresignificant component of our cost of revenues. Payments for domainregistrations are payable for the full term of service at the time of activationof service and are recorded as prepaid domain registry fees and are expensedratably over the renewal term.

 

***Hover***

 

Costs of revenues for our provision and management of Internet serviceson a retail basis include the amortization of registry fees on a basisconsistent with the recognition of revenues from our customers, namely ratablyover the term of provision of the service and includes the amortization ofregistry fees payable to renew the domains in our surname portfolio. Registryfees, the primary component of cost of revenues, are paid in full when thedomain is registered, and are recorded as prepaid domain registry fees.

 

***Butterscotch***

 

Costs of revenues for our ad-supported content sites include the feespaid to third-party service providers, primarily for digital certificates soldthrough our content sites and content license fees.

 

***Network costs***

 

Network costs include personnel and related expenses, depreciation andamortization, communication costs, equipment maintenance, stock-basedcompensation and employee and related costs directly associated with themanagement and maintenance of our network. Communication costs includebandwidth, co-location and provisioning costs we incur to support the supply ofall our services.

 

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The following table presents our cost of revenues, by revenue source:

 
| ** **                                    | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| OpenSRS :                                     | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** |   | ** ** |
| Domain Services                               |       | $                                                        | 13,817,541 |                                                    | $          | 12,325,620 |   | $ | 39,523,115 |   | $ | 35,624,222 |   |
| Email Services                                |       | 97,001                                                   |       | 103,071                                                 |       | 321,459 |   | 436,216 |   |
| Other Services                                |       | 416,938                                                  |       | 411,949                                                 |       | 1,204,403 |   | 1,212,087 |   |
| Total OpenSRS  Services                       |       | 14,331,480                                               |       | 12,840,640                                              |       | 41,048,977 |   | 37,272,525 |   |
|                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| YummyNames                                    |       | 179,894                                                  |       | 218,371                                                 |       | 636,389 |   | 654,456 |   |
| Hover                                         |       | 380,262                                                  |       | 493,181                                                 |       | 1,129,996 |   | 1,481,761 |   |
| Butterscotch                                  |       | 11,889                                                   |       | 25,491                                                  |       | 56,127 |   | 33,341 |   |
| Network, other  costs                         |       | 1,087,930                                                |       | 1,193,185                                               |       | 3,500,826 |   | 3,500,231 |   |
| Network,  depreciation and amortization costs |       | 306,055                                                  |       | 376,818                                                 |       | 1,018,774 |   | 1,404,583 |   |
|                                          |       | $                                                        | 16,297,510 |                                                    | $          | 15,147,686 |   | $ | 47,391,089 |   | $ | 44,346,897 |   |
| Increase over  comparative period             |       | $                                                        | 1,149,824  |                                                    |       |   | $ | 3,044,192 |   |   |   |
| Increase -  percentage                        |       | 8                                                        | %          |                                                    |       | 7 | % |   |   |

 

The following table presents our cost of revenues, as a percentage oftotal revenues:

** **
| ** **                                   | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| OpenSRS :                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Domain Services                              |       | 66                                                       | %          | 60                                                      | %          | 63 | % | 60 | % |
| Email Services                               |       | 0                                                        | %          | 1                                                       | %          | 1 | % | 1 | % |
| Other Services                               |       | 2                                                        | %          | 2                                                       | %          | 2 | % | 2 | % |
| Total OpenSRS Services                       |       | 68                                                       | %          | 63                                                      | %          | 66 | % | 63 | % |
|                                         |       |                                                     |       |                                                    |       |   |   |   |   |
| YummyNames                                   |       | 1                                                        | %          | 1                                                       | %          | 1 | % | 1 | % |
| Hover                                        |       | 2                                                        | %          | 2                                                       | %          | 2 | % | 2 | % |
| Butterscotch                                 |       | 0                                                        | %          | 0                                                       | %          | 0 | % | 0 | % |
| Network, other costs                         |       | 5                                                        | %          | 6                                                       | %          | 5 | % | 6 | % |
|                                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Network, depreciation and amortization costs |       | 1                                                        | %          | 2                                                       | %          | 2 | % | 1 | % |
|                                         |       | 77                                                       | %          | 74                                                      | %          | 76 | % | 73 | % |

 

Prepaid domain registration and other Internet services fees as ofSeptember 30, 2010 increased by $5.9 million, or 13%, to$49.5 million from $43.6 million at September 30, 2009.

 

***OpenSRS***

 

Costs for OpenSRS for the three months endedSeptember 30, 2010 increased by $1.5 million, or 12%, to$14.3 million, when compared to the three months endedSeptember 30, 2009.

 

This increase was primarily the result of increased domain registrationvolumes and increases in registration fees paid to the registries that wereimplemented in July 2010 experienced during the three months endedSeptember 30, 2010 when compared to the three months endedSeptember 30, 2009.

 

Costs for OpenSRS for the nine months endedSeptember 30, 2010 increased by $3.8 million, or 10%, to$41.0 million, when compared to the nine months endedSeptember 30, 2009.

 

This increase was primarily a result of increased domain registrationvolume and increases in registration fees paid to the registries that wereimplemented in July 2010 experienced during the nine months endedSeptember 30, 2010 when compared to the nine months endedSeptember 30, 2009. This increase was partially offset by certainone-time email service costs we incurred during the nine months endedSeptember 30, 2009.

 

***YummyNames***

 

Costs for YummyNames for the three and nine months endedSeptember 30, 2010 as compared to the three and nine months endedSeptember 30, 2009 remained relatively flat at $0.2 million and$0.6 million, respectively.

 

***Hover***

 

Costs for Hover for the three months ended September 30, 2010as compared to the three months ended September 30, 2009 decreased by$0.1 million, to $0.4 million.

 

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Costs for Hover for the nine months ended September 30, 2010as compared to the nine months ended September 30, 2009 decreased by$0.4 million, to $1.1 million.

 

These decreases resulted primarily from the introduction of new emailservice products, such as our family plan, which have resulted in a change inour sales mix such that email services, which have a relatively lower cost ofsales, account for an increasing proportion of our Hover services as comparedto our domain name services.

 

***Network costs***

 

Networkcosts before depreciation and amortization for the three months endedSeptember 30, 2010 remained relatively flat at $1.1 million ascompared to the three months ended September 30, 2009, despite thesignificant strengthening, on average, of the Canadian dollar relative to theU.S. dollar by approximately 5% as compared to the three months endedSeptember 30, 2009, and reflects our improved efficiency in operatingand managing our co-location facilities.

 

Networkcosts before depreciation and amortization for the nine months endedSeptember 30, 2010 remained relatively flat at $3.5 million ascompared to the nine months ended September 30, 2009, despite the significantstrengthening, on average, of the Canadian dollar relative to the U.S. dollarby approximately 11% as compared to the nine months endedSeptember 30, 2009, and reflects our improved efficiency in operatingand managing our co-location facilities.

 

Asignificant portion of our operating and network expenses are incurred inCanadian dollars. As a result, the strengthening of the Canadian dollarrelative to the U.S. dollar has negatively impacted all of our operating costs,during the three and nine months ended September 30, 2010 whencompared to the three and nine months ended September 30, 2009.Exchange rates are, however, subject to significant and rapid fluctuations, andwe therefore cannot predict the prospective impact of exchange rate fluctuationson our business, results of operations and financial condition.

 

Networkdepreciation and amortization costs for the three months endedSeptember 30, 2010 decreased by $0.1 million to$0.3 million, primarily as a result of certain of our older computerhardware now being fully depreciated.

 

Networkdepreciation and amortization costs for the nine months endedSeptember 30, 2010 decreased by $0.4 million to$1.1 million, primarily as a result of certain of our older computerhardware now being fully depreciated.

 

Excluding movements in exchange rates, we expect network costs todecrease slightly for the fiscal year ending December 31, 2010 as comparedto the fiscal year ended December 31, 2009.

 

**SALESAND MARKETING**

 

Sales and marketing expenses consist primarily of personnel costs.These costs include commissions and related expenses of our sales, productmanagement, public relations, call center, support and marketing personnel.Other sales and marketing expenses include customer acquisition costs, advertisingand other promotional costs.

** **
| ** **                       | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                       | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Sales and marketing              |       | $                                                        | 1,830,999  |                                                    | $          | 1,568,727 |   | $ | 5,480,228 |   | $ | 4,261,070 |   |
| Increase over comparative period |       | $                                                        | 262,272    |                                                    |       |   | $ | 1,219,158 |   |   |   |
| Increase - percentage            |       | 17                                                       | %          |                                                    |       | 29 | % |   |   |
| Percentage of net revenues       |       | 9                                                        | %          | 8                                                       | %          | 9 | % | 7 | % |
|                                  |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Sales and marketing expenses for the three months endedSeptember 30, 2010 increased by $0.3 million, or 17%, to$1.6 million when compared to the three months endedSeptember 30, 2009. This increase was primarily due to higherworkforce costs that resulted from additional people employed in both ourmarketing and customer service areas as well as the negative impact of theapproximately 5% strengthening, on average, in the Canadian dollar relative tothe U.S. dollar compared to the three months endedSeptember 30, 2009.

 

Sales and marketing expenses for the nine months endedSeptember 30, 2010 increased by $1.2 million, or 29%, to$5.5 million when compared to the nine months endedSeptember 30, 2009. This increase was primarily due to higherworkforce costs that resulted from an increase in the number of people employedin both our marketing and customer service departments, undertaking additionalmarketing campaigns, participating in additional trade shows and the negativeimpact of the approximate 11% strengthening, on average, in the Canadian dollarrelative to the U.S. dollar compared to the nine months endedSeptember 30, 2009.

 

Included in sales and marketing expenses for the nine months endedSeptember 30, 2010 is a non-recurring cost of approximately$0.1 million related to severance costs.

 

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Excluding movements in exchange rates, we expect sales and marketingexpenses to increase slightly during Fiscal 2010, in absolute dollars, as weadjust our marketing programs and sales and customer support strategies to meetfuture opportunities in the marketplace.

 

**TECHNICALOPERATIONS AND DEVELOPMENT**

 

Technical operations and development expenses consist primarily ofpersonnel costs and related expenses required to support the development of newor enhanced service offerings and the maintenance and upgrading of existinginfrastructure. This includes expenses incurred in the research, design anddevelopment of technology that we use to register domain names, email, retail,domain portfolio and other Internet services, as well as to distribute ourdigital content services. Editorial costs relating to the rating and review ofthe software content libraries are included in the costs of productdevelopment. Costs incurred during the application development stage are capitalizedand primarily include personnel costs for employees directly related to thedevelopment project. As no material expenditures for qualified applicationdevelopment stage initiatives were incurred during the three or nine monthsended September 31, 2010 or September 30, 2009, no amountshave been capitalized. All other costs are expensed as incurred.

** **
| ** **                                  | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                  | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Technical operations and development        |       | $                                                        | 1,053,768  |                                                    | $          | 1,142,331 |   | $ | 3,486,718 |   | $ | 3,421,825 |   |
| (Decrease) increase over comparative period |       | $                                                        | (88,563    | )                                                       |       |   | $ | 64,893 |   |   |   |
| (Decrease) increase - percentage            |       | (8                                                       | )%         |                                                    |       | 2 | % |   |   |
| Percentage of net revenues                  |       | 5                                                        | %          | 6                                                       | %          | 6 | % | 6 | % |
|                                             |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Technical operations and development expenses for the three monthsended September 30, 2010 remained relatively flat at$1.1 million when compared to the three months endedSeptember 30, 2009, primarily due to the productivity improvementsthat have resulted from our adoption of an agile development model, whichdeploys our development, quality assurance, product management and operationsemployees into smaller teams, offsetting the approximate 5% strengthening, onaverage, in the Canadian dollar relative to the U.S. dollar when compared tothe three months ended September 30, 2009.

 

Technical operations and development expenses for the nine months endedSeptember 30, 2010 increased by $0.1 million, or 2%, to$3.5 million when compared to the nine months endedSeptember 30, 2009, primarily due to the increase in workforce-relatedcosts, including contract and outside service cost increases and theapproximate 11% strengthening, on average, in the Canadian dollar relative tothe U.S. dollar when compared to the nine months endedSeptember 30, 2009.

 

Excluding movements in exchange rates, we expect technical operationsand development expenses, in absolute dollars, for the fiscal year endingDecember 31, 2010  to remainrelatively flat when compared to the fiscal year endedDecember 31, 2009.

 

**GENERALAND ADMINISTRATIVE**

 

General and administrative expenses consist primarily of compensationand related costs for managerial and administrative personnel, fees forprofessional services, public listing expenses, rent and other generalcorporate expenses.

** **
| ** **                       | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                       | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| General and administrative       |       | $                                                        | 633,457    |                                                    | $          | 1,145,951 |   | $ | 2,049,813 |   | $ | 4,608,173 |   |
| Decrease over comparative period |       | $                                                        | (512,494   | )                                                       |       |   | $ | (2,558,360 | ) |   |   |
| Decrease - percentage            |       | (45                                                      | )%         |                                                    |       | (56 | )% |   |   |
| Percentage of net revenues       |       | 3                                                        | %          | 6                                                       | %          | 3 | % | 8 | % |
|                                  |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

General and administrative expenses for the three months endedSeptember 30, 2010 decreased by $0.5 million, or 45%, to$0.6 million as compared to the three months endedSeptember 30, 2009. This was primarily as a result of our recording aforeign exchange gain of $0.6 million during the three months endedSeptember 30, 2010 as compared to a foreign exchange gain of $48,000during the three months ended September 30, 2009. This gain inforeign exchange was primarily the result of the strengthening, on average, ofthe Canadian dollar relative to the U.S. dollar by approximately 5% from thethree months ended September 30, 2009. This decrease was offsetmainly by an increase in professional fees of $0.1 million during the threemonths ended September 30, 2010, as compared to the three monthsended September 30, 2009.

 

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General and administrative expenses for the nine months endedSeptember 30, 2010 decreased by $2.6 million, or 56%, to$2.0 million as compared to the nine months endedSeptember 30, 2009. This was primarily as a result of our recording aforeign exchange gain of $1.9 million during the nine months endedSeptember 30, 2010 as compared to a foreign exchange loss of$1.0 million during the nine months ended September 30, 2009.This gain in foreign exchange was primarily the result of the strengthening, onaverage, of the Canadian dollar relative to the U.S. dollar by approximately11% from the nine months ended September 30, 2009. This decrease wasoffset mainly by an increase in workforce related costs, facility costs andprofessional services of $0.4million during the nine months endedSeptember 30, 2010, as compared to the nine months endedSeptember 30, 2009.

 

**DEPRECIATIONOF PROPERTY AND EQUIPMENT**

 

Property and equipment is depreciated on a straight-line basis over theestimated useful life of the assets.

 
| ** **                             | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                             | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Depreciation of property and equipment |       | $                                                        | 40,239     |                                                    | $          | 47,249 |   | $ | 127,559 |   | $ | 221,937 |   |
| Decrease over comparative period       |       | $                                                        | (7,010     | )                                                       |       |   | $ | (94,378 | ) |   |   |
| Decrease - percentage                  |       | (15                                                      | )%         |                                                    |       | (43 | )% |   |   |
|                                        |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Depreciationcosts for the three months ended September 30, 2010 decreased by$7,000, or 15%, to $40,000, primarily as a result of certain of our olderassets being fully depreciated.

 

Depreciationcosts for the nine months ended September30, 2010 decreased by $94,000, or43%, to $128,000, primarily as a result of certain of our older assets beingfully depreciated.

 

**LOSS ON DISPOSITION OF PROPERTY AND EQUIPMENT**

 
| ** **                                    | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Loss on disposition of property and equipment |       | $                                                        | —     |                                                    | $          | 40,369 |   | $ | — |   | $ | 40,369 |   |
|                                               |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Aspart of our ongoing initiatives to improve the efficiency of our productionenvironment, we retired some older computer hardware at our co-locationfacilities during the three months ended September 30, 2009, whichresulted in a loss of $40,000 on the disposition of such equipment.

 

**AMORTIZATION OF INTANGIBLE ASSETS**

** **
| ** **                        | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Amortization of intangible assets |       | $                                                        | 360,540    |                                                    | $          | 360,540 |   | $ | 1,081,620 |   | $ | 1,081,620 |   |
|                                   |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Amortization of intangible assets consists of amounts arising inconnection with the acquisition of Boardtown in April 2004, theacquisition of the hosted messaging assets of Critical Path Inc. inJanuary 2006, the acquisition of Mailbank.com Inc. in June 2006and the acquisition of IYD in July 2007.

 

Brand and customer relationships acquired in connection with theacquisition of Boardtown Corporation and IYD are amortized on a straight-linebasis over seven years.

 

Customer relationships acquired in connection with the acquisition ofMailbank.com Inc. and the hosted messaging assets of Critical Path Inc.are each amortized on a straight-line basis over five years.

 

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**LOSS (GAIN) ON CHANGE IN FAIR VALUE OF FORWARDEXCHANGE CONTRACTS**

 

Although our functional currency is the U.S. dollar, a major portion ofour fixed expenses are incurred in Canadian dollars. Our goal with regard toforeign currency exposure is, to the extent possible, to achieve operationalcost certainty, manage financial exposure to certain foreign exchangefluctuations and to neutralize some of the impact of foreign currency exchangemovements. Accordingly, we enter into foreign exchange contracts to mitigatethe exchange rate risk on portions of our Canadian dollar exposure.

 

As we are not required to comply with the documentation requirementsfor hedge accounting, we account for the fair value of the derivativeinstruments within the consolidated balance sheet as a derivative financialasset or liability and the corresponding change in fair value is recorded inthe consolidated statement of operations.

** **
| ** **                                                | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| (Gain) loss on change in fair value of forward  contracts |       | $                                                        | (141,981   | )                                                       | $          | (1,878,230 | ) | $ | 1,669,031 |   | $ | (3,902,394 | ) |
| Decrease over comparative period                          |       | $                                                        | 1,736,249  |                                                    |       |   | $ | 5,571,425 |   |   |   |
| Decrease - percentage                                     |       | (92                                                      | )%         |                                                    |       | (143 | )% |   |   |
| Percentage of net revenues                                |       | (1                                                       | )%         | -9                                                      | %          | 3 | % | -6 | % |
|                                                           |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

We have entered into forward exchange contracts to meet a portion ofour future Canadian dollar requirements through November 2011. The impactof the fair value adjustment on unrealized foreign exchange on these contractsfor the three months ended September 30, 2010 was a net gain of$0.1 million, as compared to a net gain of $1.9 million for the threemonths ended September 30, 2009. This net gain in fair value offorward contracts resulted from the impact of the change in foreign exchangerates over time and the settlement of forward exchange contracts as theymatured.

 

The impact of the fair value adjustment on unrealized foreign exchangeon these contracts for the nine months ended September 30, 2010 was anet loss of $1.7 million, as compared to a net gain of $3.9 millionfor the nine months ended September 30, 2009. This net loss in fairvalue of forward contracts resulted from the impact of the change in foreignexchange rates over time and the settlement of forward exchange contracts asthey matured.

 

At September 30, 2010, we reflect a net derivative instrumentasset of $0.5 million on our balance sheet as a result of our foreignexchange contracts. Until their respective maturity dates, these contracts willfluctuate in value in line with movements in the Canadian vs. U.S. dollar pair.As all of the remaining contracts pertaining to the 2010 fiscal year will havematured during the course of the 2010 fiscal year, a derivative instrumentasset pertaining to 2010 fiscal year contracts of $0.3 million willreverse during the three months ending December 31, 2010 and will resultin our recognizing an additional non-cash loss of this amount. This loss may,however, be impacted by any additional contracts, with maturity dates after September 30,2010, that we may enter into and fluctuations in the value of our existingcontracts that mature.

 

**OTHER INCOME AND EXPENSES**

** **
| ** **                       | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                       | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Other income (expenses), net     |       | $                                                        | (26,917    | )                                                       | $          | 1,827,113 |   | $ | (99,812 | ) | $ | 4,314,521 |   |
| Increase over comparative period |       | $                                                        | (1,854,030 | )                                                       |       |   | $ | (4,414,333 | ) |   |   |
| Increase - percentage            |       | (101                                                     | )%         |                                                    |       | (102 | )% |   |   |
| Percentage of net revenues       |       | —                                                   | %          | 9                                                       | %          | — | % | 7 | % |
|                                  |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Otherexpenses for the three and nine months ended September 30, 2010 primarilyrelate to interest payable pursuant to the terms of our Amended CreditFacility. As we have continued to reduce the amount outstanding under ourAmended Credit Facility through monthly principal payments, the interestpayable has decreased when compared to the three and nine months endedSeptember 30, 2009.

 

Otherincome for the three and nine months ended September 30, 2009 alsoincluded the receipt in April 2009 of $2.1 million from Afilias Inc. (“Afilias”)to complete the second closing under the terms of a stock redemption agreementsigned in November 2008, and an amount of $2.0 million in September 2009to complete the third and final closing in September 2009.

 

Inaddition, in June 2009, we received an additional payment of $0.6 millionin connection with Infonautics patents that we assigned in 2002 to a third partywho continues to commercialize these patents. In connection with the assignmentof these patents, we retained the right to share in certain revenue relating toany cash flow received by such third party. As the costs of commercializing thepatents have increased, we do not expect any future revenue received to bematerial.

 

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**INCOMETAXES**

 

The following table presents our provision for income taxes for theperiods presented:

 
| ** **                 | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Provision for income taxes |       | $                                                        | 24,863     |                                                    | $          | (447,455 | ) | $ | 235,105 |   | $ | 241,621 |   |
|                            |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

For the nine months ended September 30, 2010, we recorded aprovision for income taxes of $0.2 million on income before income taxesof $1.1 million, using an estimated effective tax rate for our 2010 fiscalyear adjusted for certain foreign exchange losses that we do not anticipateobtaining a current tax benefit for. Included in the provision for income taxesis a recovery of $0.1 million in respect of refundable Ontario researchtax credits. Comparatively, for the nine months endedSeptember 30, 2009, we recorded a current tax expense of$0.2 million on income before income taxes of 10.8 million, using anestimated effective tax rate for our 2009 fiscal year that accounts for theutilization of remaining net operating loss carry forwards and alternativeminimum tax credits available to us.

 

As of December 31, 2009, we recorded a valuation allowance of $4.3million and a net deferred tax asset of $3.0 million. As of September 30,2010 we had recorded a non-current deferred tax asset of $3.9 million andcurrent deferred tax liabilities of $0.9 million. As of September 30, 2010and December 31, 2009, we had also recorded a non current deferred taxliability related to the temporary difference arising on indefinite lifeintangibles of $4.8 million.

 

We analyze the carrying value of our deferred tax asset on a regularbasis. In determining future taxable income, assumptions are made to forecastfederal, state and international operating income, the reversal of temporarytiming differences, and the implementation of any feasible and prudent taxplanning strategies. The assumptions require significant judgment regarding theforecasts of future taxable income, and are consistent with other forecastsused to manage the business. During the nine months ended September 30,2010, there was no reversal of the valuation allowance. The valuation allowancewill be maintained until sufficient evidence exists to support a reversal of,or decrease in, the valuation allowance.

 

We follow the provisions of FASB ASC Topic 740, Income Taxes toaccount for income tax exposures. The application of this interpretationrequires a two-step process that separates recognition of uncertain taxbenefits from measurement thereof.

 

We have approximately $0.1 million of total gross unrecognized taxbenefit as of September 30, 2010 and $0.1 million of total grossunrecognized tax benefit as of December 31, 2009, which if recognizedwould favorably affect our income tax rate in future periods. The unrecognizedtax benefit relates primarily to prior year Pennsylvania state franchise taxesand other insignificant US state taxes. The unrecognized tax benefit hasdecreased by $17,000 when compared to the gross unrecognized tax benefits as ofDecember 31, 2009 as we have now settled the claim for the Pennsylvaniafranchise taxes for the years December 31, 1996 to December 31, 2000.We do not expect the unrecognized tax benefit for our 2010 research anddevelopment claim to be significant. We recognize accrued interest andpenalties related to taxes in tax expense. We did not have significant interestand penalties accrued as of September 30, 2010 andDecember 31, 2009, respectively. We believe it is reasonably possiblethat $0.1 million of the unrecognized tax benefit will decrease in thenext twelve months as it is anticipated that the U.S. tax authorities willfinalize their review of prior taxes owing in Pennsylvania within the periodand certain other prior year state tax returns will be filed.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

As of September 30, 2010, our principal sources of liquiditywere cash flows generated from operations and cash and cash equivalents of$5.4 million, as compared to $9.6 million at December 31, 2009.

 

Net cash provided by operating activities for the nine months endedSeptember 30, 2010 increased by $0.8 million to $4.4 million, ascompared to $3.6 million for the nine months endedSeptember 30, 2009.

 

Net cash provided by operating activities, before changes in non-cashoperating working capital, decreased by $0.4 million to $4.9 million forthe nine months ended September 30, 2010 from $5.3 million for the ninemonths ended September 30, 2009. Net cash utilized by changes in non-cashoperating working capital, decreased by $1.2 million to $0.5 million forthe nine months ended September 30, 2010 compared to a decrease of $1.7million for the nine months ended September 30, 2009.

 

This improvement in non-cash working capital was primarily the resultof reductions in accounts receivable, deposits we maintain with our registrysuppliers and income taxes recoverable, and an increase in accounts payable of$1.2 million during the nine months ended September 30, 2010, ascompared to the nine months ended September 30 2009. In addition,deferred revenue, net of prepaid domain name registry and other Internetservices fees, increased by $0.5 million, as compared to the nine months endedSeptember 30 2009. These improvements were partially offset by anincrease in accruals and customer deposits of $0.6 million, as compared tothe nine months ended September 30, 2009.

 

Net cash used in financing activities during the nine months endedSeptember 30, 2010 totaled $8.3 million as compared to$4.5 million for the nine months ended September 30, 2009. Ofthis $8.3 million, $6.9 million was used to fund share repurchases asdescribed in the following paragraph and $1.4 million was used for principalrepayments under our Amended Credit Facility.

 

We used $4.5 million to repurchase 6.3 million of our sharespursuant to the terms of a Dutch auction tender offer completed duringJanuary 2010 and $2.4 million to repurchase 3.4 million of ourshares under the terms of our stock repurchase program announced inFebruary 2010. These initiatives have resulted in a 15 % reduction in ourissued and outstanding shares as compared to our issued and outstanding sharesat December 31, 2009. In connection with the amendment of our creditfacility, the Bank has waived the cash sweep payment based on our auditedresults for the year ended December 31, 2009. As a result, we havecontinued to make equal monthly principal repayments of approximately $160,000,for an aggregate payment during the nine months ended September 30, 2010of $1.4 million. This has reduced the balance owing under the AmendedCredit Facility as of September 30, 2010 to $1.8 million.

 

Investing activities used net cash of $0.3 million to acquireadditional property and equipment during the nine months endedSeptember 30, 2010, as compared to the $3.7 million in cashprovided by investing activities during the nine months endedSeptember 30, 2009. This provision of cash during the nine months endedSeptember 30, 2009 resulted from our receipt of $4.1 million inproceeds from the disposition of our investment in Afilias, which was partiallyoffset by $0.4 million invested to acquire additional property andequipment during the nine months ended September 30, 2009.

 

Based on our operations, we believe that our cash flow from operationswill be adequate to meet our anticipated requirements for working capital,capital expenditures and our loan repayments for at least the next12 months.

 

We may choose to raise additional funds or seek other financingarrangements to facilitate more rapid expansion, develop new or enhanceexisting products or services, respond to competitive pressures or acquire orinvest in complementary businesses, technologies, services or products.

 

If additional financing is required, we may not be able to raise it onacceptable terms, or at all, and additional financing may be dilutive toexisting investors. We may also evaluate potential acquisitions of otherbusinesses, products and technologies. To complete potential acquisitions, wemay issue additional securities or need additional equity or debt financing andany additional financing may be dilutive to existing investors. There arecurrently no material understandings, commitments or agreements regarding the acquisitionof other businesses.

 

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**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

We develop products in Canada and sell these services in North Americaand Europe. Our sales are primarily made in U.S. dollars, while a major portionof expenses are incurred in Canadian dollars. Our financial results could beaffected by factors such as changes in foreign currency exchange rates or weakeconomic conditions in foreign markets. Our interest income is sensitive tochanges in the general level of Canadian and U.S. interest rates, particularlysince the majority of our investments are in short-term instruments. Based onthe nature of our short-term investments, we have concluded that there is nomaterial interest rate risk exposure as of September 30, 2010. We arealso subject to market risk exposure related to changes in interest rates underour Amended Credit Facility. We do not expect that any changes in interestrates will be material, however, fluctuations in interest rates are beyond ourcontrol. We will continue to monitor and assess the risks associated withinterest expense exposure and may take additional actions in the future tomitigate these risks.

 

Although our functional currency is the U.S. dollar, a substantialportion of our fixed expenses are incurred in Canadian dollars. Our policy withrespect to foreign currency exposure is to manage financial exposure to certainforeign exchange fluctuations with the objective of neutralizing some of theimpact of foreign currency exchange movements. Exchange rates are, however,subject to significant and rapid fluctuations, and therefore we cannot predictthe prospective impact of exchange rate fluctuations on our business, resultsof operations and financial condition. Accordingly, we have entered intoforeign exchange contracts to mitigate the exchange rate risk on portions ofour Canadian dollar exposure.

 

At September 30, 2010, the Company had the following outstandingforward exchange contracts to trade U.S. dollars in exchange for Canadiandollars:

 
| ** **                        | ** ** | **Notional**          | ** ** | **Weighted  average**          | ** ** | ** **          | ** ** |
|-----------------------------------|------------|-----------------------|------------|--------------------------------|------------|---------------------|------------|
| ** **                        | ** ** | **amount of**    | ** ** | **exchange rate of** | ** ** | ** **          | ** ** |
| **Maturity date**            | ** ** | **U.S. dollars** | ** ** | **U.S. dollars**          | ** ** | **Fair value** | ** ** |
|                              |       |                  |       |                           |       |                |       |
| October - December 2010 |       | 5,400,000             |       | 0.9236                         |       | 280,870             |       |
| 2010                              |       | 5,400,000             |       | 0.9236                         |       | 280,870             |       |
|                              |       |                  |       |                           |       |                |       |
| January - March 2011    |       | 5,400,000             |       | 0.9307                         |       | 225,103             |       |
| April - June 2011       |       | 3,900,000             |       | 0.9635                         |       | 14,779              |       |
| June - September 2011   |       | 3,900,000,            |       | 0.9604                         |       | 17,896              |       |
| October - December 2011 |       | 1,950,000             |       | 0.9644                         |       | (3,009              | )          |
| 2011                              |       | 15,150,000            |       | 0.9508                         |       | 254,769             |       |
|                              |       |                  |       |                           |       |                |       |
| Total                             |       | $                     | 20,550,000 |                           | 0.9435     |                | $          | 535,639 |   |
|                                   |            |                       |            |                                |            |                     |            |  |  |

 

During the nine months ended September 30, 2010, the Companyentered into a series of foreign exchange forward contracts to hedge a portionof our 2011 fiscal year expected Canadian dollar requirements. These contracts,collectively, have a notional value of US$10.0 million, whereby amounts ofUS$250,000, US$400,000 or US$650,000 are converted into Canadian dollars on asemi-monthly basis from January 2011 to November 2011 at an averageforeign exchange rate of US$1.00: Cdn$1.0437.

 

The Company does not apply hedge accounting and, therefore, for thethree and nine months ended September 30, 2010, the Company recordeda gain of $0.1 million and a loss of $1.7 million respectively, inthe fair value of forward contracts in its consolidated statements ofoperations. For the three and nine months ended September 30, 2009,the Company recorded a gain on forward contracts of $1.9 million and$2.9 million respectively.

 

We have performed a sensitivity analysis model for foreign exchangeexposure over the three months ended September 30, 2010. The analysisused a modeling technique that compares the U.S. dollar equivalent of allexpenses incurred in Canadian dollars, at the actual exchange rate, to ahypothetical 10% adverse movement in the foreign currency exchange ratesagainst the U.S. dollar, with all other variables held constant. Foreigncurrency exchange rates used were based on the market rates in effect duringthe three months ended September 30, 2010. The sensitivity analysisindicated that a hypothetical 10% adverse movement in foreign currency exchangerates would result in a decrease in net income for the three months endedSeptember 30, 2010 of approximately $0.4 million. There can beno assurances that the above projected exchange rate decrease will materialize.Fluctuations of exchange rates are beyond our control. We will continue tomonitor and assess the risk associated with these exposures and may takeadditional actions in the future to hedge or mitigate these risks.

 

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** **

**Credit Risk**

 

Financial instruments that potentially subject us to concentrations ofcredit risk consist principally of cash equivalents, marketable securities,foreign exchange contracts and accounts receivable. Our cash, cash equivalentsand short-term investments are in high-quality securities placed with majorbanks and financial institutions whom we have evaluated as highly creditworthyand commercial paper. With respect to accounts receivable, we perform ongoingevaluations of our customers, generally granting uncollateralized credit termsto our customers, and maintaining an allowance for doubtful accounts based onhistorical experience and our expectation of future losses.

 

**Item 4. Controls andProcedures**

 

(a)           Evaluation of Disclosure Controls andProcedures

 

Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, evaluated the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation, our chief executive officer and chief financial officer concludedthat our disclosure controls and procedures as of the end of the period coveredby this report have been designed and are functioning effectively to providereasonable assurance that the information required to be disclosed by us inreports filed under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the SEC’srules and is accumulated and communicated to our management, including ourprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure. We believe that a controls system, no matter how well designed andoperated, cannot provide absolute assurance that the objectives of the controlssystem are met, and no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within a company havebeen detected.

 

(b)           Change in Internal Control overFinancial Reporting

 

Nochange in our internal control over financial reporting occurred during ourmost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

**PART II.OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Weare involved in various investigations, claims and lawsuits arising in thenormal conduct of our business, none of which, in our opinion, will harm ourbusiness. We cannot assure that we will prevail in any litigation. Regardlessof the outcome, any litigation may require us to incur significant litigationexpense and may result in significant diversion of our attention.

 

**Item 1A. Risk factors**

 

Inaddition to the other information set forth in this Quarterly Report, youshould also carefully consider the risk factors discussed in Part I, “Item1A. Risk Factors” in our Annual Report on Form 10-K for the year endedDecember 31, 2009, all of which could materially affect our business,financial condition or operating results and should be considered before makingan investment decision regarding our securities. The risks described in ourAnnual Report on Form 10-K are not the only risks facing the Company. Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial also may adversely affect our business, financial condition oroperating results.

 

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**Item 6. Exhibits**

 

(a) Exhibits.

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                       |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1              |       | Fourth  Amended and Restated Articles of Incorporation of Tucows Inc.  (Incorporated by reference to Exhibit 3.1 filed with Tucows’ current  report on Form 8-K, as filed with the SEC on November 29, 2007)                                                                                                                                                                                 |
| 3.2              |       | Second  Amended and Restated Bylaws of Tucows Inc. (Incorporated by reference to  Exhibit 3.2 filed with Tucows’ annual report on Form 10-K for the  year ended December 31, 2006, as filed with the SEC on March 29,  2007)                                                                                                                                                            |
| 10.1             |       | Operating  Loan Agreement, dated September 10, 2010, between Tucows.com Co. and the  Bank of Montreal (incorporated herein by reference to Exhibit 10.1 to  Tucows Inc.’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on September 13, 2010).                                                                                                             |
| 10.2             |       | Offer  Letter, dated August 30, 2010, between Tucows Inc. and the Bank of  Montreal (incorporated herein by reference to Exhibit 10.2 to Tucows  Inc.’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on September 13, 2010).                                                                                                                               |
| 10.3             |       | Loan  Agreement, dated as of June 25, 2007, by and among Tucows.com Co.,  Tucows (Delaware) Inc., Tucows Inc., Mailbank Nova Scotia Co., Tucows Domain  Holdings Co., Innerwise, Inc. and Bank of Montreal (incorporated  herein by reference to Exhibit 10.1 to Tucows Inc.’s Current Report on  Form 8-K, filed with the Securities and Exchange Commission on  July 31, 2007) . |
| 10.4             |       | Guaranty,  dated July 25, 2007, by Tucows Inc. in favor of the Bank of Montreal  (incorporated herein by reference to Exhibit 10.2 to Tucows Inc.’s  Current Report on Form 8-K, filed with the Securities and Exchange  Commission on July 31, 2007).                                                                                                                                       |
| 10.5             |       | Security  Agreement, dated July 25, 2007, by Tucows Inc. in favor of the Bank of  Montreal (incorporated herein by reference to Exhibit 10.3 to Tucows  Inc.’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on July 31, 2007).                                                                                                                             |
| 10.6             |       | Lease  Extending and Amending Agreement, executed as of October 19, 2010,  effective as of September 17, 2010, between 707932 Ontario Limited,  Tucows (Delaware) Inc. and Tucows.com Co. (incorporated herein by reference  to Exhibit 10.1 to Tucows Inc.’s Current Report on Form 8-K, filed  with the Securities and Exchange Commission on September 13, 2010).                    |
| 31.1             |       | Chief  Executive Officer’s Rule 13a-14(a)/15d-14(a) Certification *                                                                                                                                                                                                                                                                                                                                    |
| 31.2             |       | Chief  Financial Officer’s Rule 13a-14(a)/15d-14(a) Certification *                                                                                                                                                                                                                                                                                                                                    |
| 32.1             |       | Chief  Executive Officer’s Section 1350 Certification †                                                                                                                                                                                                                                                                                                                                                |
| 32.2             |       | Chief  Financial Officer’s Section 1350 Certification †                                                                                                                                                                                                                                                                                                                                                |

 

----

*Filed herewith.

†Furnished herewith.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Date:  November 12, 2010 | TUCOWS INC. |
|------------------------------------|------------------|
|                               |             |   |
|                               | By:              | /s/  Elliot Noss |
|                               |             | Elliot  Noss |
|                               |             | President  and Chief Executive Officer |
|                               |             |   |
|                               | By:              | /s/  Michael Cooperman |
|                               |             | Michael  Cooperman Chief Financial Officer |
|                               |             | (Principal  Financial and Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit No** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                       |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1                 |       | Fourth  Amended and Restated Articles of Incorporation of Tucows Inc.  (Incorporated by reference to Exhibit 3.1 filed with Tucows’ current  report on Form 8-K, as filed with the SEC on November 29, 2007)                                                                                                                                                                                 |
| 3.2                 |       | Second  Amended and Restated Bylaws of Tucows Inc. (Incorporated by reference to  Exhibit 3.2 filed with Tucows’ annual report on Form 10-K for the  year ended December 31, 2006, as filed with the SEC on March 29,  2007)                                                                                                                                                            |
| 10.1                |       | Operating  Loan Agreement, dated September 10, 2010, between Tucows.com Co. and the  Bank of Montreal (incorporated herein by reference to Exhibit 10.1 to  Tucows Inc.’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on September 13, 2010).                                                                                                             |
| 10.2                |       | Offer  Letter, dated August 30, 2010, between Tucows Inc. and the Bank of  Montreal (incorporated herein by reference to Exhibit 10.2 to Tucows  Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange  Commission on September 13, 2010).                                                                                                                               |
| 10.3                |       | Loan  Agreement, dated as of June 25, 2007, by and among Tucows.com Co.,  Tucows (Delaware) Inc., Tucows Inc., Mailbank Nova Scotia Co., Tucows Domain  Holdings Co., Innerwise, Inc. and Bank of Montreal (incorporated  herein by reference to Exhibit 10.1 to Tucows Inc.’s Current Report on  Form 8-K, filed with the Securities and Exchange Commission on  July 31, 2007) . |
| 10.4                |       | Guaranty,  dated July 25, 2007, by Tucows Inc. in favor of the Bank of Montreal  (incorporated herein by reference to Exhibit 10.2 to Tucows Inc.’s  Current Report on Form 8-K, filed with the Securities and Exchange  Commission on July 31, 2007).                                                                                                                                       |
| 10.5                |       | Security  Agreement, dated July 25, 2007, by Tucows Inc. in favor of the Bank of  Montreal (incorporated herein by reference to Exhibit 10.3 to Tucows  Inc.’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on July 31, 2007).                                                                                                                             |
| 10.6                |       | Lease  Extending and Amending Agreement, executed as of October 19, 2010,  effective as of September 17, 2010, between 707932 Ontario Limited,  Tucows (Delaware) Inc. and Tucows.com Co. (incorporated herein by reference  to Exhibit 10.1 to Tucows Inc.’s Current Report on Form 8-K, filed  with the Securities and Exchange Commission on September 13, 2010).                    |
| 31.1                |       | Chief  Executive Officer’s Rule 13a-14(a)/15d-14(a) Certification *                                                                                                                                                                                                                                                                                                                                    |
| 31.2                |       | Chief  Financial Officer’s Rule 13a-14(a)/15d-14(a) Certification *                                                                                                                                                                                                                                                                                                                                    |
| 32.1                |       | Chief  Executive Officer’s Section 1350 Certification †                                                                                                                                                                                                                                                                                                                                                |
| 32.2                |       | Chief  Financial Officer’s Section 1350 Certification †                                                                                                                                                                                                                                                                                                                                                |

 

----

*Filed herewith.

†Furnished herewith.

 

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