Note 4 - Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2023

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

4. Derivative Instruments and Hedging Activities:

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

Since October 2012, the Company has employed a hedging program with a Canadian chartered bank to limit the potential foreign exchange fluctuations incurred on its future cash flows related to a portion of payroll, taxes, rent and payments to Canadian domain name registry suppliers that are denominated in Canadian dollars and are expected to be paid by its Canadian operating subsidiary. In May 2020, the Company entered into a pay-fixed, receive-variable interest rate swap with a Canadian chartered bank to limit the potential interest rate fluctuations incurred on its future cash flows related to variable interest payments on the Second Amended 2019 Credit Facility. The notional value of the interest rate swap was $70 million.

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

The Company has designated certain of these foreign exchange transactions as cash flow hedges of forecasted transactions under ASU 2017-12, Derivatives and Hedging (Topic 815) (“ASC Topic 815”). For certain contracts, as the critical terms of the hedging instrument, and of the entire hedged forecasted transaction, are the same, in accordance with ASC Topic 815, the Company has been able to conclude that changes in fair value and cash flows attributable to the risk being hedged are expected to completely offset at inception and on an ongoing basis. The Company designated the interest rate swap as a cash flow hedge of expected future interest payments at the inception of the contract. Accordingly, for the foreign exchange, unrealized gains or losses on the effective portion of these contracts were included within other comprehensive income and reclassified to earnings when the hedged transaction is settled. Cash flows from hedging activities were classified under the same category as the cash flows from the hedged items in the consolidated statements of cash flows. The fair value of the contracts, as of  June 30, 2023 and December 31, 2022, is recorded as derivative instrument assets or liabilities. For certain contracts where the hedged transactions are no longer probable to occur, the loss on the associated forward contract is recognized in earnings.

During the third quarter of fiscal year 2022, the Company elected to discontinue its application of hedge accounting to its interest rate swaps prospectively. Until the interest rate swaps matured in June 2023, the derivatives continued to be carried at fair value in the accompanying Consolidated Balance Sheets with changes in their fair value from the date of discontinuance recognized in current period earnings in Interest expense, net in the Consolidated Statements of Operations and Comprehensive Income. Unrealized gains and losses in Accumulated other comprehensive income as of the date of discontinuance were realized in net income over the remaining term of the underlying forecasted interest payments into interest expense over the original term of the hedged debt. Prior to the discontinuance, for the interest rate swap contracts, unrealized gains or losses on the effective portion of these contracts had been included in other comprehensive income and reclassified to earnings when the hedged transaction is settled.

As of June 30, 2023, the notional amount of forward contracts that the Company held to sell U.S. dollars in exchange for Canadian dollars was $32.5 million, of which $32.5 million met the requirements of ASC Topic 815 and were designated as hedges.

As of December 31, 2022, the notional amount of forward contracts that the Company held to sell U.S. dollars in exchange for Canadian dollars was $49.7 million, of which $49.7 million met the requirements of ASC Topic 815 and were designated as hedges.

As of June 30, 2023, the notional amount of interest swaps contracts that the Company held to pay-fixed, receive-variable interest rate swap was nil.

As of December 31, 2022, the notional amount of interest swaps contracts that the Company held to pay-fixed, receive-variable interest rate swap was $70 million, of which $70 million met the requirements of ASC Topic 815 and were designated as hedges. 

As of June 30, 2023, we had the following outstanding forward contracts to trade U.S. dollars in exchange for Canadian dollars:

Maturity date (Dollar amounts in thousands of U.S. dollars)	Notional amount of U.S. dollars		Weighted average exchange rate of U.S. dollars		Fair value Asset
July - September 2023	$	18,041		1.3608	$	513
October - December 2023		14,430		1.3721		547
	$	32,471		1.3658	$	1,060

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

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

Fair value of derivative instruments in the consolidated balance sheets 

Derivatives (Dollar amounts in thousands of U.S. dollars)	Balance Sheet Location	As of June 30, 2023 Fair Value Asset		As of December 31, 2022 Fair Value Asset (Liability)
Foreign Currency forward contracts designated as cash flow hedges (net)	Derivative instruments	$	1,060	$	(84	)
Interest rate swap contract discontinued as a cash flow hedge (net)	Derivative instruments		-		1,598
Total foreign currency and interest swap forward contracts (net)	Derivative instruments	$	1,060	$	1,514

Movement in accumulated other comprehensive income (AOCI) balance for the three months ended June 30, 2023 (Dollar amounts in thousands of U.S. dollars)

	Gains and losses on cash flow hedges			Tax impact			Total AOCI
Opening AOCI Balance - March 31, 2023	$	812		$	(196	)	$	616
Other comprehensive income (loss) before reclassifications		762			(184	)		578
Amount reclassified from AOCI		32			(7	)		25
Amortization of discontinued cash flow hedge		(547	)		132			(415	)
Other comprehensive income (loss) for the three months ended June 30, 2023		247			(59	)		188
Ending AOCI Balance - June 30, 2023		1,059			(255	)		804

Movement in accumulated other comprehensive income (AOCI) balance for the six months ended June 30, 2023 (Dollar amounts in thousands of U.S. dollars)

	Gains and losses on cash flow hedges			Tax impact			Total AOCI
Opening AOCI balance - December 31, 2022	$	1,032		$	(248	)	$	784
Other comprehensive income (loss) before reclassifications		852			(206	)		646
Amount reclassified from AOCI		292			(71	)		221
Amortization of discontinued cash flow hedge		(1,117	)		270			(847	)
Other comprehensive income (loss) for the six months ended June 30, 2023		27			(7	)		20
Ending AOCI Balance - June 30, 2023	$	1,059		$	(255	)	$	804

Effects of derivative instruments on income and other comprehensive income (OCI) for the three months ended June 30, 2023 and 2022 are as follows (Dollar amounts in thousands of U.S. dollars) 

Derivatives in Cash Flow Hedging Relationship	Amount of Gain or (Loss) Recognized in OCI, net of tax, on Derivative			Location of Gain or (Loss) Reclassified from AOCI into Income	Amount of Gain or (Loss) Reclassified from AOCI into Income
				Operating expenses	$	(25	)
Foreign currency forward contracts for the three months ended June 30, 2023	$	578		Cost of revenues	$	(8	)
Interest rate swap contract for the three months ended June 30, 2023	$	-		Interest expense, net	$	-
				Operating expenses	$	10
Foreign currency forward contracts for the three months ended June 30, 2022	$	(187	)	Cost of revenues	$	2
Interest rate swap contract for the three months ended June 30, 2022	$	382		Interest expense, net	$	86

Effects of derivative instruments on income and other comprehensive income (OCI) for the six months ended June 30, 2023 and 2022 are as follows (Dollar amounts in thousands of U.S. dollars) 

Derivatives in Cash Flow Hedging Relationship	Amount of Gain or (Loss) Recognized in OCI, net of tax, on Derivative			Location of Gain or (Loss) Reclassified from AOCI into Income	Amount of Gain or (Loss) Reclassified from AOCI into Income
				Operating expenses	$	(235	)
Foreign currency forward contracts for the six months ended June 30, 2023	$	646		Cost of revenues	$	(57	)
Interest rate swap contract for the six months ended June 30, 2023	$	-		Interest expense, net	$	-
				Operating expenses	$	(49	)
Foreign currency forward contracts for the six months ended June 30, 2022	$	(275	)	Cost of revenues	$	(10	)
Interest rate swap contract for the six months ended June 30, 2022	$	1,438		Interest expense, net	$	69