Notes to Consolidated Financial Statements
1. Nature of Business
Formation and Nature of
Business
Endurance International Group Holdings, Inc., (Holdings) is a Delaware corporation which together with its
wholly owned subsidiary company, EIG Investors Corp. (EIG Investors), its primary operating subsidiary company, The Endurance International Group, Inc. (EIG), and other subsidiary companies of EIG, collectively form the
Company. The Company is a leading provider of cloud-based platform solutions designed to help small- and medium-sized businesses succeed online.
EIG and EIG Investors were incorporated in April 1997 and May 2007, respectively, and Holdings was originally formed as a limited liability
company in October 2011 in connection with the acquisition on December 22, 2011, of a controlling interest in EIG Investors, EIG and its subsidiary companies by investment funds and entities affiliated with Warburg Pincus and Goldman Sachs (the
Sponsor Acquisition). On November 7, 2012, Holdings reorganized as a Delaware limited partnership and on June 25, 2013, converted into a Delaware C-corporation and changed its name to Endurance International Group Holdings,
Inc.
Stock Split and Restated Certificate of Incorporation
On October 23, 2013, immediately after giving effect to a 105,187.363-for-one stock split, the Company had 105,187,363 shares of common
stock issued and outstanding. After giving effect to the Companys restated certificate of incorporation filed on October 23, 2013, the Companys authorized capital stock consists of 500,000,000 shares of common stock, par value
$0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share.
Corporate Reorganization
Pursuant to the terms of a corporate reorganization, that was completed following the stock split and prior to the completion of the
Companys initial public offering, as described below, the former direct owner of Holdings, a limited partnership, was dissolved and in liquidation distributed the shares of the Companys common stock to its limited partners. The
distribution of common stock to the limited partners was determined by the value each partner would have received under the distribution provisions of the limited partnership agreement, valued by reference to the initial public offering price.
All share data in the consolidated financial statements retroactively reflects the shares of the Companys common stock after giving
effect to the 105,187.363-for-one stock split and the filing of the restated certificate of incorporation.
Initial Public Offering
On October 30, 2013, the Company closed an initial public offering of its common stock, which resulted in the sale of 21,051,000 shares of
its common stock at a public offering price of $12.00 per share, before underwriting discounts. The offering resulted in gross proceeds of $252.6 million and net proceeds to the Company of $232.1 million after deducting underwriting discounts,
commissions and estimated offering expenses payable by the Company. Offering expenses include both capitalized and non-capitalized expenses.
2.
Summary of Significant Accounting Policies
Basis of Preparation
The accompanying consolidated financial statements, which include the accounts of the Company and its subsidiaries and reflect the Sponsor
Acquisition, as described in Note 3, have been prepared using accounting
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principles generally accepted in the United States of America (U.S. GAAP). All intercompany transactions have been eliminated on consolidation. The Company has reviewed the criteria
of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 280-10,
Segment Reporting,
and determined that the Company is comprised of only one segment for reporting purposes.
The Sponsor Acquisition was accounted for as a purchase in accordance with the FASB ASC 805,
Business Combinations
(ASC
805), and the purchase price was recorded in the Companys consolidated financial statements. The acquired companys financial statements reflect the new accounting basis recorded by the acquiring company. Accordingly, the
Companys purchase accounting adjustments have been reflected in the Companys financial statements for the period commencing December 22, 2011 and reflect the estimated fair value of the Companys assets and liabilities as of
December 22, 2011, the date of the Sponsor Acquisition.
As a result of the Sponsor Acquisition, the period from January 1, 2011
to December 21, 2011, for which the Companys results of operations and cash flows are presented, are reported as the Predecessor period. The period from December 22, 2011 through December 31, 2011 and the years ended
December 31, 2012 and 2013, for which the Companys results of operations and cash flows are presented, are reported as the Successor period.
Holdings had no ownership interest in the Company prior to December 22, 2011. Therefore, for comparative reporting purposes, the Company
reports its financial results, as presented in the Predecessor period, at the EIG Investors company level, which was the primary holding company until the Sponsor Acquisition. Because there was no activity in the Company prior to the Sponsor
Acquisition, nor was there any change in the number of shares issued or the par value of the shares of EIG Investors, it was determined that the Company is essentially the same as EIG Investors. Therefore, the retroactive presentation of the
conversion includes equity activity of EIG Investors for the successor period and the conversion has not been applied to the predecessor period.
The June 25, 2013 conversion of the Company into a Delaware C-corporation, as discussed in Note 1, has been applied to the Companys
financial statements retroactively to December 22, 2011, as if the conversion was effective December 22, 2011.
Use of Estimates
U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates, judgments and assumptions used in
preparing the accompanying consolidated financial statements are based on the relevant facts and circumstances as of the date of the consolidated financial statements. Although the Company regularly assesses these estimates, judgments and
assumptions used in preparing the consolidated financial statements, actual results could differ from those estimates. Changes in estimates are recorded in the period in which they become known. The more significant estimates reflected in these
consolidated financial statements include estimates of fair value of assets acquired and liabilities assumed under purchase accounting related to the Companys acquisitions and when evaluating goodwill and long-lived assets for potential
impairment, the estimated useful lives of intangible and depreciable assets, stock-based compensation, certain accruals, reserves and deferred taxes.
Cash Equivalents
Cash and cash
equivalents include all highly liquid investments with remaining maturities of three months or less at the date of purchase.
Restricted Cash
Restricted cash is composed of certificates of deposits and cash held by merchant banks and payment processors, which provide
collateral against any charge-backs, fees, or other items that may be charged back to the Company by credit card companies and other merchants.
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Accounts Receivable
Accounts receivable is primarily composed of cash due from credit card companies for unsettled transactions charged to subscribers credit
cards. As these amounts reflect authenticated transactions that are fully collectible, the Company does not maintain an allowance for doubtful accounts. The Company also accrues for earned referral fees and commissions, which are governed by
reseller or affiliate agreements, when the amount is reasonably estimable.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include cash equivalents, accounts receivable, accounts payable and
certain accrued expenses, approximate their fair values due to their short maturities. The fair value of the Companys notes payable are based on the borrowing rates currently available to the Company for debt with similar terms and average
maturities and approximate their carrying value.
Concentrations of Credit and Other Risks
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. Cash and cash equivalents are maintained at accredited financial institutions, and PayPal balances are at times without and in excess of federally insured limits. The Company has never experienced any losses related to these
balances and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
For the Predecessor and Successor periods in 2011 and the years ended December 31, 2012 and 2013, no subscriber represented 10% or more
of the Companys total revenue.
Property and Equipment
Property and equipment is recorded at cost or fair value if acquired in an acquisition. The Company also capitalizes the direct costs of
constructing additional computer equipment for internal use, as well as upgrades to existing computer equipment which extend the useful life, capacity or operating efficiency of the equipment. Capitalized costs include the cost of materials,
shipping and taxes. Materials used for repairs and maintenance of computer equipment are expensed and recorded as a cost of revenue. Materials on hand and construction-in-process are recorded as property and equipment. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets as follows:
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Software
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Two years
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Computers and office equipment
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Three years
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Furniture and fixtures
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Five years
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Leasehold improvements
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Shorter of useful life or remaining term of the lease
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Software Development Costs
The Company accounts for software development costs for internal use software under the provisions of ASC 350-40,
Internal-Use
Software
(ASC 350). Accordingly, certain costs to develop internal-use computer software are capitalized, provided these costs are expected to be recoverable. There were no such costs capitalized during the year ended
December 31, 2012. There was $1.2 million of software development costs capitalized for the year ended December 31, 2013.
Investments
In 2012, the Company made two minority investments in privately-held companies. The Companys voting interest in each of
these companies was between 25% and 50%. The Company accounts for these investments under the equity method of accounting. Under this method, the investment balance, originally recorded at cost, is
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adjusted to recognize the Companys share of net earnings or losses of the investee company as they occur, limited to the extent of the Companys investment in, advances to and
commitments for the investee. The Companys share of net earnings or losses of the investee are reflected in equity losses of unconsolidated entities, net of tax, in the Companys accompanying consolidated statements of operations.
The Company assesses the need to record impairment losses on its investments and records such losses when the impairment of an investment is
determined to be other than temporary in nature. On October 31, 2013 the Company reduced its 50% voting interest in one of the minority investments to 40% and recorded a $2.6 million impairment charge (see Note 7).
Goodwill
Goodwill relates to
amounts that arose in connection with the Companys various business combinations and represents the difference between the purchase price and the fair value of the identifiable intangible and tangible net assets when accounted for using the
acquisition method of accounting. Goodwill is not amortized, but is subject to periodic review for impairment. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and
market conditions, including a decline in value, a significant adverse change in certain agreements that would materially affect reported operating results, business climate or operational performance of the business and an adverse action or
assessment by a regulator.
In accordance with ASC 350,
IntangiblesGoodwill and Other
, (ASC 350), the Company is
required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. The Company has determined its entire business represents one reporting unit. Historically, the Company has
performed its annual impairment analysis during the fourth quarter of each year. The provisions of ASC 350 require that a two-step impairment test be performed for goodwill. In the first step, the Company compares the fair value of its reporting
unit to which goodwill has been allocated to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is considered not impaired and the Company is not
required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the
implied fair value of the reporting units goodwill. If the carrying value of a reporting units goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.
Due to the timing of the Sponsor Acquisition on December 22, 2011, and the absence of indicators or impairment through the year ended
December 31, 2011, the Company recorded no impairment of goodwill for the 2011 successor period ended December 31, 2011. As of December 31, 2012 and 2013, the fair value of the Companys reporting unit exceeded the carrying value
of the reporting units net assets by more than 600% and, therefore no impairment existed as of those dates.
Determining the fair
value of a reporting unit, if applicable, requires the Company to make judgments and involves the use of significant estimates and assumptions. These estimates and assumptions relate to, among other things, revenue growth rates and operating margins
used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. The Company bases its fair value estimates on assumptions it believes to be
reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
The Company had
goodwill of $936.7 million and $984.2 million as of December 31, 2012 and 2013, respectively, and no impairment charges have been recorded.
Long-Lived Assets
The
Companys long-lived assets consist primarily of intangible assets, including acquired subscriber relationships, trade names, intellectual property, developed technology, in-process research and development
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(IPR&D). We also have long-lived tangible assets, primarily consisting of property and equipment. The majority of the Companys intangibles are recorded in connection with
its various business combinations, including the Sponsor Acquisition. The Companys intangibles are recorded at fair value at the time of their acquisition. The Company amortizes intangibles over their estimated useful lives.
Determination of the estimated useful lives of the individual categories of intangible assets is based on the nature of the applicable
intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives is recognized in accordance with their estimated projected cash flows.
The Company evaluates long-lived intangible and tangible assets whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If indicators of impairment are present and undiscounted future cash flows are less than the carrying amount, the fair value of the assets is determined and compared to the carrying value. If the fair value is
less than the carrying value, then the carrying value of the asset is reduced to the estimated fair value and an impairment loss is charged to expense in the period the impairment is identified. No such impairment losses have been identified in the
Predecessor and Successor periods in 2011 and for the years ended December 31, 2012 and 2013.
Acquired In-Process Research and Development
(IPR&D)
Acquired IPR&D represents the fair value assigned to research and development assets that the Company acquires
that have not been completed at the date of acquisition. The acquired IPR&D is capitalized as an intangible asset and reviewed on a quarterly basis to determine future use. Any impairment loss of the acquired IPR&D is charged to expense in
the period the impairment is identified. Upon commercialization, the acquired fair value of the IPR&D will be amortized over its estimated useful life. No such impairment losses have been identified in the Predecessor and Successor periods in
2011 and the years ended December 31, 2012 and 2013. During 2013 the Company completed its development process of in-process research and development it had acquired as of December 31, 2012 and the capitalized amount was reclassified to
developed technology as of December 31, 2013 and is being amortized over the estimated useful life.
Deferred Financing Costs
Deferred financing costs comprise fees and costs incurred by the Company in connection with obtaining notes payable. Deferred financing costs
are amortized over the term of the related debt agreement.
Revenue Recognition
The Company generates revenue from selling subscriptions for cloud-based products and services. The subscriptions are similar across all of the
Companys brands and are provided under contracts pursuant to which the Company has ongoing obligations to support the subscriber. These contracts are generally for service periods of up to 36 months and typically require payment in advance.
The Company recognizes the associated revenue ratably over the service period
,
whether the associated revenue is derived from a direct subscriber or through a reseller. Deferred revenue represents the liability to subscribers for advance
billings for services not yet provided and the fair value of the assumed liability outstanding for subscriber relationships purchased in an acquisition.
The Company sells domain name registrations that provide a subscriber with the exclusive use of a domain name. These domains are obtained
either by one of the Companys registrars on the subscribers behalf, or by the Company from third-party registrars on the subscribers behalf. Domain registration fees are non-refundable.
Revenue from the sale of a domain name registration by a registrar within the Company is recognized ratably over the subscribers service
period as the Company has the obligation to provide support over the domain term. Revenue from the sale of a domain name registration purchased by the Company from a third-party
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registrar is recognized when the subscriber is billed on a gross basis as there are no remaining Company obligations once the sale to the subscriber occurs, and the Company has full discretion on
the sales price and bears all credit risk.
Revenue from the sale of non-term based applications and services, such as online security
products and professional technical services, referral fees and commissions, is recognized when the product is purchased, the service is provided or the referral fee or commission is earned, respectively.
A substantial amount of the Companys revenue is generated from transactions that are multiple-element services arrangements that may
include hosting plans, domain name registrations, and cloud-based products and services.
The Company follows the provisions of the FASB,
Accounting Standards Update (ASU) No. 2009-13, (ASU 2009-13),
Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangementsa consensus of the FASB Emerging Issues Task Force
and allocates
revenue to each deliverable in a multiple- element service arrangement based on its respective relative selling price.
Under ASU 2009-13,
to treat deliverables in a multiple-element service arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, the Company accounts for each
deliverable separately. Hosting services, domain name registrations, cloud-based products and services have standalone value and are often sold separately.
When multiple deliverables included in a multiple-element service arrangement are separated into different units of accounting, the total
transaction amount is allocated to the identified separate units based on a relative selling price hierarchy. The Company determines the relative selling price for a deliverable based on vendor specific objective evidence, (VSOE), of
fair value, if available, or best estimate of selling price, (BESP), if VSOE is not available. The Company has determined that third-party evidence of selling price, (TPE), is not a practical alternative due to differences in
its multi-brand offerings compared to competitors and the lack of availability of relevant third-party pricing information. The Company has not established VSOE for our offerings due to lack of pricing consistency, the introduction of new products,
services and other factors. Accordingly, the Company generally allocates revenue to the deliverables in the arrangement based on the BESP. The Company determines BESP by considering its relative selling prices, competitive prices in the marketplace
and management judgment; these selling prices, however, may vary depending upon the particular facts and circumstances related to each deliverable. The Company analyzes the selling prices used in its allocation of transaction amount, at a minimum,
on a quarterly basis. Selling prices are analyzed on a more frequent basis if a significant change in our business necessitates a more timely analysis.
Direct Costs of Revenue
The
Companys direct costs of revenue include only those costs directly incurred in connection with the provision of its cloud-based products and services. The direct costs of registering domain names with registries are spread over the terms of
the arrangement and the cost of reselling domains of other third-party registrars are expensed as incurred. Cost of revenue includes depreciation on data center equipment and support infrastructure and amortization expense related to the
amortization of long-lived intangible assets.
Engineering and Development Costs
Engineering and development costs incurred in the development and maintenance of the Companys technology infrastructure are expensed as
incurred.
Sales and Marketing Costs
The Company engages in sales and marketing through various online marketing channels, which include affiliate and search marketing as well as
online partnerships. The Company expenses sales and marketing costs
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as incurred. For the Predecessor and Successor periods in 2011 and the years ended December 31, 2012 and 2013, the Companys sales and marketing costs were $54.9 million, $1.5 million,
$83.1 million and $117.7 million, respectively.
Foreign Currency
The Company has sales in a number of foreign currencies. In 2013, the Company commenced operations in foreign locations which report in the
local currency. The assets and liabilities of the Companys foreign locations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average monthly exchange rates.
The resulting translation adjustments are recorded as a separate component of stockholders equity and have not been material. Foreign currency transaction gains and losses relate to the settlement of assets or liabilities in another currency.
Foreign currency transaction gains (losses) were not material during the Predecessor and Successor periods in 2011, and the year ended
December 31, 2012. Foreign currency transaction losses were $1.2 million during the year ended December 31, 2013. These amounts are recorded in general and administrative expense.
Income Taxes
Income taxes are
accounted for in accordance with ASC 740,
Accounting for Income Taxes
, (ASC 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold that a tax position is required to meet
before being recognized in the financial statements. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount
that is more likely than not to be realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. There were no unrecognized tax benefits in the Predecessor and Successor Periods in 2011, and the
years ended December 31, 2012 and 2013.
The Company records interest related to unrecognized tax benefits in interest expense and
penalties in operating expenses. During the Predecessor and Successor periods in 2011, and the years ended December 31, 2012 and 2013, the Company did not recognize any interest and penalties related to unrecognized tax benefits.
Stock-Based Compensation
The
Company follows the provisions of ASC 718,
CompensationStock Compensation
(ASC 718), which requires employee stock-based payments to be accounted for under the fair value method. Under this method, the Company is required to
record compensation cost based on the estimated fair value for stock-based awards granted over the requisite service periods for the individual awards, which generally equals the vesting periods. The Company uses the straight-line amortization
method for recognizing stock-based compensation expense.
The Company estimates the fair value of employee stock options on the date of
grant using the Black-Scholes option-pricing model, which requires the use of highly subjective estimates and assumptions. For restricted stock awards granted, the Company estimates the fair value of each restricted stock award based on the closing
trading price of its common stock on the date of grant.
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Net Loss per Share
The Company considered ASC 260-10,
Earnings per Share
, (ASC 260-10) which requires the presentation of both basic and diluted earnings
per share in the Consolidated Statements of Operations. The Companys basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period and, if there are dilutive
securities, diluted income per share is computed by including common stock equivalents which includes shares issuable upon the exercise of stock options, net of shares assumed to have been purchased with the proceeds, using the treasury stock
method. All share data retroactively reflect the shares of the Companys common stock after giving effect to the 105,187.363-for-one stock split and the filing of the restated certificate of incorporation.
The Companys potentially dilutive shares of common stock would be excluded from the diluted weighted-average number of shares of common
stock outstanding as their inclusion in the computation would be anti-dilutive due to net losses. For the years ended December 31, 2011, 2012 and 2013, non-vested shares, stock options, restricted stock awards and restricted stock units
amounting to zero, 8,108,177 and 8,822,924, respectively, were excluded from the denominator in the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.
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Period from
December 22
through
December 31,
2011
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Year Ended
December 31,
2012
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Year Ended
December 31,
2013
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(in thousands, except share
amount and per share data)
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Computation of basic and diluted net loss per share:
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Net loss attributable to Endurance International Group Holdings, Inc.
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$
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(4,381
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)
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$
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(139,298
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)
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$
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(159,187
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)
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Net loss per share attributable to Endurance International Group Holdings, Inc.:
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Basic and diluted
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$
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(0.05
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)
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$
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(1.44
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)
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$
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(1.55
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)
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Weighted average number of shares of common stock used to compute net loss per share attributable to Endurance International Group
Holdings, Inc.:
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Basic and diluted
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96,370,134
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96,562,674
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|
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102,698,773
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Guarantees
The Company has the following guarantees and indemnifications:
In connection with its acquisitions of companies and assets from third parties, the Company may provide indemnification or guarantees to the
sellers in the event of damages for breaches or other claims covered by such agreements.
In connection with various vendor contracts,
including those by which a product or service of a third party is offered to subscribers of the Company, standard guaranty of subsidiary obligations and indemnification obligations exist.
Pursuant to the purchase agreement for the acquisition of Homestead, the Company assumed a reseller agreement between the former owner of
Homestead and a reseller. In accordance with the reseller agreement, the Company has indemnified its reseller for certain losses related to a patent litigation matter. The former owner of Homestead is defending this action, paying for the legal
expenses incurred, and indemnifying the Company, subject to a deductible and a limit. Any settlements or indemnity claims also remain subject to the terms of indemnification provided in the purchase agreement. The litigation is in the early stages
and the outcome is unknown and the Company therefore cannot reasonably estimate potential losses at this time.
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As permitted under Delaware and other applicable law, the Companys charter and by-laws and
those of its subsidiary companies provide that the Company shall indemnify its officers and directors for certain liabilities, including those incurred by reason of the fact that the officer or director is, was, or has agreed to serve as an officer
or director of the Company. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited.
The Company leases office space and equipment under various operating leases. The Company has standard indemnification arrangements under
these leases that require the Company to indemnify the lessor against losses, liabilities and claims incurred in connection with the premises or equipment covered by the Companys lease agreements, the Companys use of the premises,
property damage or personal injury and breach of the agreement.
Through December 31, 2013, the Company had not experienced any
losses related to these indemnification obligations and no claims with respect thereto were outstanding other than the Homestead claim as described above. The Company does not expect significant claims related to these indemnification obligations
and consequently concluded that the fair value of these obligations is negligible and no related liabilities were established.
Recent Accounting
Pronouncements
In February 2013, the FASB issued ASU No. 2013-02,
Comprehensive Income (Topic 220): Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income
(ASU 2013-02) to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires an entity to report the effect of
reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For accumulated other
comprehensive income reclassification items that are not required under U.S. GAAP to be reclassified in their entirety into net income in the same reporting period, entities must provide a cross reference to other required U.S. GAAP disclosures that
provide additional detail about those amounts. ASU 2013-02 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of ASU 2013-02 did not have any impact on the Companys
consolidated financial statements.
In March 2013, the FASB issued ASU No. 2013-05,
Parents Accounting for the Cumulative
Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity
(ASU 2013-05). ASU 2013-05 addresses the accounting for the cumulative
translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign
entity. ASU 2013-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and should be applied prospectively. The Company believes the adoption of ASU 2013-05 will not have any impact on its
consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11,
Presentation of an Unrecognized Tax Benefit
When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists
(ASU 2013-11) to clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the
financial statements as a reduction to a deferred tax asset for a net operating loss (NOL) carry-forward, a similar tax loss, or a tax credit carry-forward, with some allowed exceptions. ASU 2013-11 does not impose any new recurring
disclosure requirements because it does not affect the recognition or measurement of uncertain tax positions. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company
believes the adoption of ASU 2013-11 will not have an impact on its consolidated financial statements.
Reclassifications
In 2013, the Company has reclassified deferred consideration in the consolidated statements of cash flows from net cash used in investing
activities to net cash provided by financing activities. Prior years have also been reclassified to conform to current year presentation.
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3. Acquisitions
The Company accounts for the acquisitions of businesses using the purchase method of accounting. The Company allocates the purchase price to
the tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values. Purchased identifiable intangible assets include subscriber relationships, trade names, developed technology and IPR&D. The
methodologies used to determine the fair value assigned to subscriber relationships is typically based on the excess earnings method that considers the return received from the intangible asset and includes certain expenses and also considers an
attrition rate based on the Companys internal subscriber analysis and an estimate of the average life of the subscribers. The fair value assigned to trade names is typically based on the income approach using a relief from royalty methodology
that assumes that the fair value of a trade name can be measured by estimating the cost of licensing and paying a royalty fee for the trade name that the owner of the trade name avoids. The fair value assigned to developed technology typically uses
the cost approach. The fair value assigned to IPR&D is based on the cost approach. If applicable, the Company estimates the fair value of contingent consideration payments in determining the purchase price. The contingent consideration is then
adjusted to fair value in subsequent periods as an increase or decrease in current earnings in general and administrative expense in the consolidated statements of operations.
Acquisitions2011
During the
Predecessor period in 2011, the Company made a payment of $5.4 million related to contingent consideration and transaction costs and recorded a $0.4 million adjustment to fair value in the Companys consolidated statements of operations for
acquisitions made prior to 2010.
Business CombinationsDotster, Inc.
On July 22, 2011, EIG acquired Dotster, Inc. (Dotster), a privately-held leading provider of shared web hosting and domain
name management. Under the terms of the stock purchase agreement, the Company acquired all of the outstanding common stock of Dotster for an aggregate purchase price of $62.9 million in cash, including $5.3 million subject to escrow of which the
Company received back an aggregate amount of $2.5 million. The remaining cash balance in escrow of $2.8 million was paid to the seller during 2013. Transaction costs of $0.3 million were recorded as a general and administrative expense in the
related consolidated statements of operations for the Predecessor period.
In connection with the acquisition of Dotster, EIG Investors
issued 38,000 shares of series D preferred stock to investors in exchange for $38.0 million cash (see Note 9), and funded the remainder from existing cash resources and use of its revolving loan facility.
The Company accounted for the acquisition as a business combination using the purchase method of accounting. The Company allocated the
purchase price to the tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values. The excess of the purchase price over the aggregate fair value of identifiable assets and assumed liabilities was
recorded as goodwill. The acquisition has carryover tax deductible goodwill.
Sponsor Acquisition
On December 22, 2011, the Company was acquired by Holdings by acquiring all of the outstanding preferred and common stock of EIG Investors
and its subsidiary companies. In connection with the Sponsor Acquisition, Holdings issued 100% of its membership interests (which converted into 1,000 shares of the Companys common stock as a result of the reorganization of Holdings into a
Delaware partnership and subsequent conversion into a Delaware C-corporation, (see Note 1)) to WP Expedition Midco LLC (converted to WP Expedition Midco L.P.) (Midco) a wholly owned subsidiary of WP Expedition Topco LLC (converted to WP
Expedition Topco L.P.) (Topco) and 150,000 shares of its series E preferred stock to an entity owned by Accel-KKR, the prior private equity sponsor, as a component of the purchase price of the Sponsor Acquisition. In
94
addition, EIG Investors entered into a $350.0 million term loan facility (the December 2011 Term Loan), the proceeds of which were used to repay existing indebtedness (see Note 8).
The aggregate purchase price of $683.1 million, excluding $305.0 million of assumed indebtedness, consisted of $472.2 million in cash,
issuance of 150,000 shares of series E preferred stock for $150.0 million, and a deemed capital contribution of $55.1 million from the ultimate parent company, Holdings, related to equity issued in Topco in lieu of cash proceeds to roll-over
stockholders. In addition, the purchase consideration included deferred consideration of $5.7 million which was paid during 2012. Direct transaction expenses of $3.6 million were recorded as general and administrative expense in the related
Successor period.
The Company accounted for the Sponsor Acquisition as a purchase using the purchase method of accounting for business
combinations in accordance with ASC 805. The purchase price was pushed down to the Companys consolidated financial statements in accordance with SEC Staff Accounting Bulletin Topic 5J (New Basis of Accounting Required in Certain
Circumstances) as the majority stockholders of the ultimate parent company acquired approximately 89% of the class A units of the voting securities of Topco. When using the push-down basis of accounting, the acquired companys separate
financial statements reflect the new accounting basis recorded by the acquiring company. The Companys consolidated financial statements reflect the equity at the Holdings level and accordingly do not reflect any non-controlling interest held
by stockholders in Topco. The Company allocated the purchase price to the tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values. The excess of the purchase price over the aggregate fair value of
identifiable assets and assumed liabilities was recorded as goodwill.
The goodwill recorded as part of the Sponsor Acquisition is not
deductible for U.S. federal income tax purposes.
The acquired intangible assets, all of which are being utilized, are composed of $167.0
million in developed technology, $177.1 million in subscriber relationships and $44.3 million in trade names. Developed technology has an estimated useful life of ten years. Subscriber relationships and trade names have estimated useful lives of ten
years and 15 years, respectively.
Acquisitions2012
Business CombinationHostGator.com LLC
On July 13, 2012, the Company acquired all of the membership units of HostGator, a privately-held leading provider of shared, VPS and
dedicated web hosting services to small and medium sized businesses. The aggregate purchase price was $299.8 million, of which $227.3 million was paid in cash at the closing. Transaction expenses of $2.4 million were recorded as general and
administrative expense. Under the terms of the purchase agreement (the HostGator Agreement), the purchase consideration was subject to a working capital adjustment, which resulted in an additional $0.8 million that was paid by the
Company in January 2013. The Company has filed a 338(h)(10) election which allows for goodwill and intangible assets recorded as part of the acquisition to be deductible for U.S. federal income tax purposes. Under the terms of the HostGator
agreement, the Company agreed to compensate the seller for incremental taxes arising from the filing of the election and recorded $0.8 million as due and payable by the Company at December 31, 2012, which resulted in a corresponding increase to
the purchase price. This amount was paid in April 2013.
The Company was also obligated to pay additional purchase consideration of $73.6
million in two installments of $49.4 million and $24.2 million, due 12 and 18 months from the acquisition date, respectively. Of this additional purchase consideration, the net present value of future cash consideration payments consisting of $47.9
million and $23.0 million, were included in the aggregate purchase price while the remaining $2.7 million was accreted at the rate of $1.2 million and $1.6 million, in each of the years ended December 31, 2012 and 2013, respectively, in
interest expense. During 2013, the Company paid $49.4 million of deferred consideration resulting in a deferred amount payable of $24.2 million at December 31, 2013. This was fully paid in January
95
2014. Under the terms of the HostGator Agreement, the Company was also obligated to pay amounts deemed to be future compensation for certain employees in the amounts of $2.9 million and $2.0
million, also due 12 and 18 months from the acquisition date, respectively. These future compensation amounts were accrued to compensation expense over the service term and the unpaid amounts were recorded as other liability in the Companys
consolidated balance sheet as of December 31, 2012 and 2013. As of December 31, 2013, the Company has paid $2.9 million as compensation expense for certain employees.
The Company accounted for the HostGator acquisition as a business combination using the purchase method of accounting. The Company allocated
the preliminary purchase price to the tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values. Developed technology has an estimated useful life of ten years and subscriber relationships and trade
names have estimated useful lives of 20 years and ten years, respectively. The excess of the purchase price over the fair value of the identifiable assets and assumed liabilities was recorded as goodwill.
The following table summarizes the preliminary purchase price allocation on the acquisition date and the estimated fair values of goodwill,
intangible assets and tangible assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Cash
|
|
$
|
593
|
|
Accounts receivable
|
|
|
512
|
|
Prepaid expenses and other current assets
|
|
|
2,762
|
|
Property and equipment
|
|
|
315
|
|
Intangible assets
|
|
|
116,060
|
|
Investment
|
|
|
10,000
|
|
Deferred tax asset
|
|
|
2,067
|
|
Goodwill
|
|
|
189,296
|
|
|
|
|
|
|
Total assets acquired
|
|
|
321,605
|
|
|
|
|
|
|
Accounts payable
|
|
|
147
|
|
Accrued expenses
|
|
|
5,102
|
|
Deferred revenue
|
|
|
16,558
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
21,807
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
299,798
|
|
|
|
|
|
|
The acquired intangible assets, all of which are being utilized, are comprised of $1.6 million in developed
technology, $16.9 million in trade names and $97.6 million in subscriber relationships.
Homestead Technologies, Inc.
On September 17, 2012, the Company acquired the assets and assumed certain liabilities in connection with the acquisition of Homestead
Technologies, Inc. (Homestead). Homestead offers website and online store design software which enables individual and business subscribers to build their websites and online stores. The aggregate purchase price was $61.5 million in
cash, consisting of $60.4 million paid at the closing and a working capital adjustment of $1.1 million paid in December 2012. Transaction expenses of $1.5 million were recorded as a general and administrative expense.
The Company accounted for the acquisition as a business combination using the purchase method of accounting. The Company allocated the
purchase price to the tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values. Developed technology has an estimated useful life of five years and subscriber relationships and trade names both have
estimated useful lives of ten years. IPR&D has been recorded at fair value and is recognized as an indefinite-lived intangible asset until completion or
96
abandonment of the associated research and development efforts. The excess of the purchase price over the fair value of the identifiable assets and assumed liabilities was recorded as goodwill.
The following table summarizes the Homestead purchase price allocation on the acquisition date and the estimated fair values of goodwill,
intangible assets and tangible assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Accounts receivable
|
|
$
|
1,575
|
|
Prepaid expenses and other assets
|
|
|
399
|
|
Property and equipment
|
|
|
1,287
|
|
Intangible assets
|
|
|
58,240
|
|
Goodwill
|
|
|
22,063
|
|
|
|
|
|
|
Total assets acquired
|
|
|
83,564
|
|
|
|
|
|
|
Accounts payable
|
|
|
2,178
|
|
Reserves for refunds and chargebacks
|
|
|
30
|
|
Deferred tax liability
|
|
|
17,558
|
|
Deferred revenue
|
|
|
2,337
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
22,103
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
61,461
|
|
|
|
|
|
|
The acquired intangible assets, all of which are being utilized, are composed of $7.7 million in developed
technology, $7.6 million in trade names, $41.6 million in subscriber relationships and $1.3 million for IPR&D. Goodwill related to the acquisition is not tax deductible.
Other Acquisitions2012
During the year ended December 31, 2012, the Company made three smaller acquisitions. The aggregate purchase price of $13.5 million was
allocated primarily to long-lived intangible assets of $7.8 million, goodwill of $6.5 million, deferred tax asset of $0.5 million, offset by deferred revenue of $1.3 million.
For the period ended December 31, 2012, $75.6 million of revenue from the Companys 2012 acquisitions was included in the
Companys consolidated statements of operations for the year ended December 31, 2012.
The Company has omitted earnings
information related to its acquisitions as it does not separately track earnings from each of its acquisitions that would provide meaningful disclosure. The Company considers it to be impracticable to compile such information on an
acquisition-by-acquisition basis since activities of integration and use of shared costs and services across the Companys business are not allocated to each acquisition and are not managed to provide separate identifiable earnings from the
dates of acquisition.
Under the terms of the asset acquisition purchase agreements, installment payments are payable upon the resolution
of certain contingencies. An aggregate amount of $1.8 million of deferred and earn-out payments were paid during 2013. The balance of earn-out payments as of December 31, 2013 was $1.7 million after recording a net increase in deferred and
earn-out payments of $0.1 million. Goodwill in the amount of $0.1 million recorded as part of one of the other acquisitions is deductible for U.S. federal income tax purposes.
Acquisitions2013
During the
year ended December 31, 2013, the Company made three other small acquisitions. Under the terms of the purchase agreements, the Company acquired all of the outstanding shares of each entity for an aggregate purchase price of $5.4 million in cash
plus deferred consideration payable of $5.5 million. The
97
Company had estimated the fair value of the contingent deferred consideration of one acquisition to be $2.7 million and had recorded the liability in the Companys consolidated balance sheet
as of September 30, 2013. The Companys initial public offering in October 2013 resulted in the Company determining that the contingent consideration was payable in an amount of $2.0 million and made this full and final payment during the
three months ended December 31, 2013. The balance of the estimated earn-out payment of $0.7 million was written-down and recorded as an increase in current earnings in general and administrative expense in the consolidated statements of
operations. The deferred consideration of $2.8 million for the other acquisition is payable after four years and is recorded as a long term liability at December 31, 2013. The purchase price of these acquisitions was preliminarily allocated to
long-lived intangible assets of $2.0 million and goodwill of $8.9 million.
During the second quarter of 2013, the Company made an initial
investment of $8.8 million to acquire a 17.5% interest in a privately-held company based in the United Kingdom. The agreement provided for the acquisition of additional equity interests from the shareholders of the non-controlling interest
(NCI). In particular, it provided for a call option allowing the Company to acquire an additional equity interest during pre-specified call periods and a put option (only if the call option is exercised), for the then non-controlling
interest (NCI) shareholders to put the remaining equity interest to the Company within pre-specified put periods, provided that the call option had been exercised during the appropriate call periods. In the fourth quarter of 2013, the
Company exercised the call option in full for an additional $22.2 million in cash to acquire a controlling interest in the privately held Company.
Under the put option, the NCI shareholders can put their shares to the Company at a price calculated at the time of the exercise of the put
option, subject to a minimum of $24.0 million. As the NCI is subject to a put option that is outside the control of the Company, it is deemed redeemable non-controlling interest and not recorded in permanent equity, and is being presented as
mezzanine redeemable non-controlling interest on the consolidated balance sheet, and is subject to the SEC guidance under ASC 480-10-S99,
Accounting for Redeemable Equity Securities.
Upon the exercise of the call option, the Company estimated the fair value of the assets and liabilities in accordance with the guidance for
business combinations, and estimated that the value of the redeemable non-controlling interest on December 11, 2013 was $20.6 million. The difference between the initial fair value of the redeemable non-controlling interest and the value
expected to be paid upon exercise of the put option is being accreted over the period commencing December 11, 2013, and up to the end of the first put option period, which commences on the eighteen month anniversary of the acquisition date.
Adjustments to the carrying amount of the redeemable non-controlling interest are charged to additional paid-in capital.
Non-controlling
interest arising from the application of the consolidation rules is classified within the total stockholders equity with any adjustments charged to net loss attributable to non-controlling interest in a consolidated subsidiary in the
consolidated statement of operations.
The estimated purchase price of $31.0 million and minority interest of $20.6 million was allocated
on a preliminary basis primarily to goodwill of $37.7 million, long-lived intangible assets of $28.5 million and property and equipment of $0.3 million, which were offset by $9.3 million of deferred revenue, other liabilities of $2.6 million,
deferred tax liabilities of $1.9 million and negative net working capital of $1.1 million. Goodwill allocated to the acquisition is not tax deductible.
For the period ended December 31, 2013, $7.8 million of revenue from the Companys 2013 acquisitions was included in the
Companys consolidated statements of operations for the year ended December 31, 2013.
The Company has omitted earnings
information related to its acquisitions as it does not separately track earnings from each of its acquisitions that would provide meaningful disclosure. The Company considers it to be impracticable to compile such information on an
acquisition-by-acquisition basis since activities of integration and use of shared costs and services across the Companys business are not allocated to each acquisition and are not managed to provide separate identifiable earnings from the
dates of acquisition.
98
Pro forma Disclosure
The following table includes selected unaudited pro forma financial information from the HostGator and Homestead business combinations in 2012,
as if the acquisition of these entities had occurred on January 1, 2012. The Company has omitted pro forma disclosures related to its other less significant acquisitions completed during 2012 and 2013 as the pro forma effect of including the
results of these acquisitions since the beginning of 2012 and 2013 would not be materially different than the actual results reported.
The pro forma results include amounts derived from the historical financial results of the acquired businesses for the period presented and
are not necessarily indicative of the results that would have occurred had the acquisitions been consummated on January 1, 2012. There was no pro forma impact on the results of operations for 2013, as the HostGator and Homestead acquisitions
closed prior to January 1, 2013.
|
|
|
|
|
|
|
Pro forma
For the Year
Ended
December 31,
2012
|
|
Revenues
|
|
$
|
415,209
|
|
Net loss attributable to common stockholders
|
|
$
|
(125,021
|
)
|
Net loss per share attributable to common stockholders basic and diluted
|
|
$
|
(1.29
|
)
|
4. Fair Value Measurements
The following valuation hierarchy is used for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the
inputs into three broad levels as follows:
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
|
Level 2 inputs are quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for
substantially the full term of the financial instrument.
|
|
|
|
Level 3 inputs are unobservable inputs based on the Companys own assumptions used to measure assets and liabilities at fair value.
|
A financial asset or liabilitys classification within the hierarchy is determined based on the lowest level input that is significant to
the fair value measurement.
As of December 31, 2012, the Companys only financial asset or liability required to be measured on
a recurring basis is the accrued earn-out consideration payable in connection with the 2012 acquisition of Mojoness Inc. (Mojo), through which the Company acquired technology that creates new opportunities for the Company to engage with
its subscribers through an application store.
As of December 31, 2013, the Companys only financial assets or liabilities
required to be measured on a recurring basis is the accrued earn-out consideration payable in connection with the acquisitions of Mojo. The Company has classified its liabilities for contingent earn-out consideration related to the acquisitions of
Mojo within Level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which included probability weighted cash flows. The Company recorded a $0.3 million change in fair value of the earn-out
consideration related to Mojo as of December 31, 2013 in the Companys general and administrative expense in the consolidated statement of operations and comprehensive income. The earn-out consideration in the table below is included in
total deferred consideration in the Companys consolidated balance sheets.
99
Basis of Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Quoted Prices
in Active Markets
for Identical Items
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent earn-out consideration
|
|
$
|
1,383
|
|
|
|
|
|
|
|
|
|
|
$
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
1,383
|
|
|
|
|
|
|
|
|
|
|
$
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent earn-out consideration
|
|
$
|
1,655
|
|
|
|
|
|
|
|
|
|
|
$
|
1,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
1,655
|
|
|
|
|
|
|
|
|
|
|
$
|
1,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Property and Equipment
Components of property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
Software
|
|
$
|
937
|
|
|
$
|
4,503
|
|
Computers and office equipment
|
|
|
33,314
|
|
|
|
59,201
|
|
Furniture and fixtures
|
|
|
1,570
|
|
|
|
3,715
|
|
Leasehold improvements
|
|
|
4,692
|
|
|
|
6,033
|
|
Construction in process
|
|
|
748
|
|
|
|
1,392
|
|
|
|
|
|
|
|
|
|
|
Property and equipmentat cost
|
|
|
41,261
|
|
|
|
74,884
|
|
Less accumulated depreciation
|
|
|
(6,657
|
)
|
|
|
(25,129
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipmentnet
|
|
$
|
34,604
|
|
|
$
|
49,715
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense related to property and equipment for the Predecessor and Successor periods in 2011, and
the years ended December 31, 2012 and 2013, was $3.5 million, $0.1 million, $6.9 million and $18.6 million, respectively.
6. Goodwill and Other
Intangible Assets
The following table summarizes the changes in the Companys goodwill balances as of December 31, 2012 and
2013 (in thousands):
|
|
|
|
|
Goodwill balance at January 1, 2012
|
|
$
|
713,896
|
|
Goodwill related to 2012 acquisitions
|
|
|
217,817
|
|
Purchase price adjustments for acquisition of the Company
|
|
|
5,033
|
|
|
|
|
|
|
Goodwill balance at December 31, 2012
|
|
$
|
936,746
|
|
Goodwill related to 2012 acquisition
|
|
|
844
|
|
Goodwill related to 2013 acquisition
|
|
|
46,617
|
|
|
|
|
|
|
Goodwill balance at December 31, 2013
|
|
$
|
984,207
|
|
|
|
|
|
|
100
The Company has not recorded any impairment charges related to goodwill. During 2012, the Company
identified certain intangibles and other items recorded with the Sponsor Acquisition with different book and tax basis. Accordingly, the Company recorded net deferred tax liabilities with a corresponding increase to goodwill.
In accordance with ASC 350, the Company reviews goodwill and other indefinite-lived intangible assets for indicators of impairment on an
annual basis and between tests if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying amount. In the three months ended December 31, 2013, the Company completed its annual
impairment test of goodwill and other indefinite-lived intangible assets and determined that there were no indicators of impairment.
At
December 31, 2012, other intangible assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Weighted
Average
Useful Life
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$
|
176,360
|
|
|
$
|
17,490
|
|
|
$
|
158,870
|
|
|
|
10 years
|
|
Subscriber relationships
|
|
|
321,469
|
|
|
|
62,852
|
|
|
|
258,617
|
|
|
|
13 years
|
|
Trade-names
|
|
|
68,990
|
|
|
|
9,407
|
|
|
|
59,583
|
|
|
|
13 years
|
|
Intellectual property
|
|
|
2,280
|
|
|
|
|
|
|
|
2,280
|
|
|
|
5 years
|
|
IPR&D
|
|
|
1,340
|
|
|
|
|
|
|
|
1,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total December 31, 2012
|
|
$
|
570,439
|
|
|
$
|
89,749
|
|
|
$
|
480,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013, other intangible assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Weighted
Average
Useful Life
|
|
Other Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$
|
183,201
|
|
|
$
|
36,195
|
|
|
$
|
147,006
|
|
|
|
10 years
|
|
Subscriber relationships
|
|
|
346,506
|
|
|
|
138,297
|
|
|
|
208,209
|
|
|
|
13 years
|
|
Trade-names
|
|
|
69,202
|
|
|
|
20,633
|
|
|
|
48,569
|
|
|
|
13 years
|
|
Intellectual property
|
|
|
2,820
|
|
|
|
464
|
|
|
|
2,356
|
|
|
|
8 years
|
|
IPR&D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total December 31, 2013
|
|
$
|
601,729
|
|
|
$
|
195,589
|
|
|
$
|
406,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated useful lives of the individual categories of other intangible assets are based on the nature of
the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives is recognized over the period of time the assets are expected to contribute to future
cash flows. The Company amortizes finite-lived intangible assets over the period in which the economic benefits are expected to be realized based upon their estimated projected cash flows. During the year ended December 31, 2013 the Company
completed its development process of in-process research and development it had acquired as of December 31, 2012 and the capitalized amount was reclassified to developed technology as of December 31, 2013 and is being amortized over the
estimated useful life.
The Companys amortization expense is included in cost of revenue in the aggregate amounts of $50.4 million,
$1.7 million, $88.1 million and $105.8 million, for the Predecessor and Successor periods in 2011 and the years ended December 31, 2012 and 2013, respectively.
101
At December 31, 2013, the expected future amortization of the other intangible assets, was
approximately as follows (dollars in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
2014
|
|
$
|
92,000
|
|
2015
|
|
|
71,000
|
|
2016
|
|
|
57,000
|
|
2017
|
|
|
46,000
|
|
2018
|
|
|
37,000
|
|
Thereafter
|
|
|
103,000
|
|
|
|
|
|
|
Total
|
|
$
|
406,000
|
|
|
|
|
|
|
7. Investments
In connection with the acquisition of HostGator, the Company assumed a 50% interest in another privately-held company, with a fair value of
$10.0 million. On October 31, 2013, the Company sold 10% of its ownership interest in this privately-held Company and recorded a $1.5 million note receivable from the buyer and decreased its investment by $1.5 million. The Company evaluated its
remaining 40% ownership interest in this privately-held company and recognized a $2.6 million impairment on the remaining investment, which is recorded in equity loss of unconsolidated entities, net of tax, in the Companys consolidated
statement of operations and comprehensive loss.
On June 6, 2013, the Company made an initial investment of $8.8 million to acquire a
17.5% interest in a company based in the United Kingdom, which provides online desktop backup services. The agreement also provided for the acquisition of additional equity interests which the Company exercised on December 11, 2013, (for more
detail see Note 3 to the consolidated financial statements).
Investments in which the Companys interest is less than 20% and which
are not classified as available-for-sale securities are carried at the lower of cost or net realizable value unless it is determined that the Company exercises significant influence over the investee company, in which case the equity method of
accounting is used. For those investments in which the Companys voting interest is between 20% and 50%, the equity method of accounting is used. Under this method, the investment balance, originally recorded at cost, is adjusted to recognize
the Companys share of net earnings or losses of the investee company, as they occur, limited to the extent of the Companys investment in, advances to and commitments for the investee. These adjustments are reflected in equity loss
(income) of unconsolidated entities, net of tax. The Company recognized net income of $0.5 million for the year ended December 31, 2013 related to its investments.
As of December 31, 2012 and December 31, 2013, the Companys carrying value of investments in privately-held companies, which
does not include the Companys controlling interest was $10.2 million and $6.5 million, respectively.
From time to time, the Company
may make new and follow-on investments and may receive distributions from investee companies. As of December 31, 2013, the Company was not obligated to fund any follow-on investments in these investee companies.
As of December 31, 2012 and December 31, 2013, the Company did not have an equity method investment in which the Companys
proportionate share exceeded 10% of the Companys consolidated assets or income from continuing operations.
8. Notes Payable
During 2012 and 2013, in connection with a number of transactions, EIG Investors entered into a series of amendments to its December 2011 Term
Loan as described below. At December 31, 2012, notes payable
102
consisted of first and second lien term loan facilities with an aggregate principal amount outstanding of $1,115.0, million which bore interest at LIBOR-based rates of 6.25% and 10.25%,
respectively, and a bank revolver loan of $15.0 million, which bore interest at a LIBOR-based rate of 7.75%. At December 31, 2013, notes payable consisted of a first lien term loan facility with a principal amount outstanding of $1,047.4
million, which bore interest at a LIBOR-based rate of 5.00%.
December 22, 2011
On December 22, 2011, the Company entered into the December 2011 Term Loan for an initial total commitment of $385.0 million, consisting
of a term loan in the original principal amount of $350.0 million and a revolving credit commitment (Revolver) in an aggregate principal not to exceed $35.0 million. At that date the Company had an outstanding term loan of $305.0 million
which was repaid in full.
The loans automatically bore interest at the banks reference rate unless the Company provided notice to
opt for LIBOR rate loans. The interest rate for a reference rate loan was 5.25% per annum plus the greater of the Prime Rate, the Federal Funds Effective Rate plus half of one percent, an Adjusted LIBOR rate or 2.5%. The interest rate for a
LIBOR loan was 6.25% plus the greater of the LIBOR rate or 1.5%.
The closing fees plus certain other finance costs related to the
issuance of the term loan (deferred financing fees) totaling $21.4 million were deferred and were amortized over the 6 year term of the term loan. Amortization of $0.1 million was included in interest expense in the consolidated
statements of operations for the successor period.
January 2012 to November 8, 2012
On April 20, 2012, the Company entered into a new six-year term loan (the April 2012 Term Loan) for $535.0 million and an
increase in the revolving credit commitment (Revolver) by $20.0 million to $55.0 million. The previously outstanding term loan balance of $349.1 million was repaid in full. The Company concluded that the April 2012 Term Loan was a debt
modification in accordance with ASC 470-50,
DebtModifications and Extinguishments
(ASC 470-50)
,
and as such all third-party costs incurred to modify the debt of $0.6 million were expensed. Additional financing related
costs of $9.2 million were incurred and were recorded as deferred financing costs with an amortization period of six years.
On
July 13, 2012, the Company entered into an amended and restated financing agreement (the July Financing Amendment) for an additional $135.0 million of term loans, a second lien credit agreement (the Second Lien
Agreement) for $140.0 million and an increase in the Revolver by $20.0 million to $75.0 million. The Company concluded that the July Financing Amendment was a debt modification in accordance with ASC 470-50, and as such all third-party costs
incurred to modify the debt of $0.7 million were expensed. Additional financing costs of $12.8 million were incurred and were recorded as deferred financing costs with an amortization period of six years.
The loans automatically bore interest at the banks reference rate unless the Company provided notice to opt for LIBOR-based interest
rate loans. The interest rate for a reference rate loan was 5.25% per annum plus the greater of the prime rate, the federal funds effective rate plus 0.5%, an adjusted LIBOR rate or 2.50%. The interest rate for a LIBOR-based loan was 6.25% plus
the greater of the LIBOR rate or 1.50%. The interest on reference rate loans were paid at the end of each quarter and the interest on LIBOR based loans on the maturity date of each LIBOR-based loan. A non-refundable fee, equal to 0.50% of the daily
unused principal amount of the Revolver, was payable in arrears on the last day of each fiscal quarter. The interest rate under the Second Lien Agreement for a LIBOR-based loan was 9.50% plus the greater of the LIBOR rate or 1.50%.
Debt RefinancingNovember 9, 2012
On November 9, 2012, the Company entered into the November Financing Amendment (November 2012 Financing Amendment) for a new
First Lien term loan in the original principal amount of $800.0 million
103
(November 2012 First Lien), a revolver in aggregate principal amount not to exceed $85.0 million (November 2012 Revolver) and a new Second Lien credit agreement
(November 2012 Second Lien), for an original principal amount of $315.0 million.
The Company concluded that the November 2012
Financing Amendment was a debt extinguishment in accordance with ASC 470-50, which requires the term loans be recorded at fair value. The November 2012 Financing Amendment modified the July Financing Amendment. At the time of the November 2012
Financing Amendment, the April 2012 Term Loan, as modified by the July Financing Amendment, and the Second Lien facility had balances of $668.3 million and $140.0 million, respectively. The term loans have been recorded at face value which equaled
fair value, and as such all expenses paid to and on behalf of the lender were expensed. Third-party financing related costs of $1.5 million were incurred and recorded as deferred financing costs with an amortization period based on the remaining
terms of the loans.
Under the November 2012 First Lien and November 2012 Second Lien, the term loans would have mature on
November 9, 2019 and May 9, 2020, respectively, and the November 2012 Revolver matures on December 22, 2016. Commencing on March 28, 2013, the November 2012 First Lien had a mandatory repayment of $2.0 million at the end of each
quarter.
The loans automatically bore interest at the banks reference rate unless the Company gave notice to opt for LIBOR-based
interest rate loans. For the November 2012 First Lien, the interest rate for a reference rate loan was reduced to 4.00% per annum plus the greater of the prime rate, the federal funds effective rate plus 0.50%, an Adjusted LIBOR rate or 2.25%.
The interest rate for a LIBOR based loan was 5.00% plus the greater of the LIBOR rate or 1.25%. For the November 2012 Second Lien, the interest rate for a LIBOR-based loan was 9.00% plus the greater of the LIBOR rate or 1.25%. The interest on
reference rate loans was payable at the end of a quarter and the interest on the LIBOR-based interest rate loans on the maturity date of each LIBOR loan. The interest rate for an Alternate Base Rate (ABR) Revolver loan is 5.25% per
annum plus the greater of the prime rate, the federal funds effective rate plus 0.50%, an adjusted LIBOR rate or 2.25%. The interest rate for a LIBOR based Revolver loan is 6.25% per annum plus the greater of the LIBOR rate or 1.50%. The
November 2012 First Lien also had a non-refundable fee, equal to 0.50% of the daily unused principal amount of the November 2012 Revolver payable in arrears on the last day of each fiscal quarter, commencing on December 31, 2012.
During the year ended December 31, 2012, the Company made mandatory repayments on term loan facilities in an aggregate amount of $2.7
million. For the year ended December 31, 2012, amortization of deferred financing costs of $4.6 million, respectively, was included in interest expense in the consolidated statements of operations.
Debt RefinancingAugust 9, 2013
On August 9, 2013, the Company entered into the Incremental Amendment to the Second Amended and Restated Credit Agreement (the
August 2013 First Lien) and borrowed an additional $90.0 million of incremental term loans. In connection with the August 2013 First Lien, the Company repaid the $37.0 million then outstanding under the November 2012 Revolver. The
Company concluded that the August 2013 First Lien was a debt modification in accordance with ASC 470-50, and as such all third-party costs incurred to modify the debt were expensed.
The August 2013 First Lien modified the November 2012 First Lien. At the time of the August 2013 First Lien, the November 2012 First Lien had
a balance of $796.0 million. Additional financing costs of $1.3 million were incurred, which were recorded as deferred financing costs with an amortization period based on the remaining term of the loan.
Amortization of $0.3 million was included in interest expense for the year ended December 31, 2013, related to deferred financing costs
from the November 2012 Financing Amendment and the August 2013 First Lien.
104
In connection with the August 2013 First Lien, the interest rates for the term loan and the
November 2012 Revolver remained the same as under the November 2012 First Lien.
Debt RefinancingNovember 25, 2013
In November 2013, following its initial public offering, the Company repaid in full its November 2012 Second Lien of $315.0 million and
increased the First Lien term loan facility by $166.2 million to $1,050.0 million, thereby reducing its overall indebtedness by $148.8 million. The Company also increased the November 2012 Revolver by $40.0 million to $125.0 million, all of which
was available for borrowing.
The Company concluded that the November 2013 Financing Agreement was a debt extinguishment in accordance
with ASC 470-50, which requires the term loans be recorded at fair value. The November 2013 Financing Agreement modified the August 2013 First Lien. At the time of the November 2013 Financing Agreement, the August 2013 First Lien, and the Second
Lien facility had balances of $883.8 million and $315.0 million, respectively. The term loan has been recorded at face value which equaled fair value, and as such, all expenses paid to and on behalf of the lender were expensed. Third-party financing
related costs of $0.4 million were incurred and recorded as deferred financing costs with an amortization period based on the remaining term of the loan.
Effective November 25, 2013, the interest rate for a LIBOR based interest loan has been reduced to 4.00% plus the greater of the LIBOR
rate or 1.00% from 5.00% plus the greater of the LIBOR rate or 1.25%. Interest is payable at the end of each quarter from the date of the refinancing, except for interest accrued on the mandatory repayment, which is due at the end of each calendar
quarter.
Commencing on December 31, 2013, the new first lien facility has a mandatory repayment of approximately $2.6 million at the
end of each quarter. There was no change to the maturity dates of the First Lien facility and Revolver, which mature on November 9, 2019 and December 22, 2016, respectively.
At December 31, 2012 and 2013, notes payable consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2013
|
|
LIBOR First Lien term loan
|
|
$
|
800,000
|
|
|
$
|
1,047,375
|
|
LIBOR Second Lien term loan
|
|
|
315,000
|
|
|
|
|
|
LIBOR Revolver loan
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,130,000
|
|
|
$
|
1,047,375
|
|
|
|
|
|
|
|
|
|
|
The maturity of the notes payable at December 31, 2013 is as follows (dollars in thousands):
|
|
|
|
|
|
|
Amount
|
|
2014
|
|
$
|
10,500
|
|
2015
|
|
|
10,500
|
|
2016
|
|
|
10,500
|
|
2017
|
|
|
10,500
|
|
2018
|
|
|
10,500
|
|
2019
|
|
|
994,875
|
|
|
|
|
|
|
Total
|
|
$
|
1,047,375
|
|
|
|
|
|
|
Interest
The Company recorded $24.4 million, $0.8 million, $53.0 million and $85.7 million in interest expense and service fees for the Predecessor and
Successor periods in 2011 and the years ended December 31, 2012 and 2013,
105
respectively. For the years ended December 31, 2012 and 2013, interest expense included $1.2 million and $1.7 million, respectively, related to the accretion of present value for the
deferred consideration and deferred bonus payments related to the HostGator acquisition.
As of December 31, 2012, the interest rates
on the LIBOR-based First Lien, Second Lien and Revolver loans were 6.25%, 10.25% and 7.75%, respectively. As of December 31, 2013, the interest rate on the LIBOR-based First Lien loan was 5.00%.
The following table provides a summary of interest rates and interest expense for the Predecessor and Successor Periods in 2011, and the years
ended December 31, 2012 and 2013, (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from January 1,
2011 through
December 21,
2011
|
|
|
Period from December 21,
2011 through December 31,
2011
|
|
|
Year Ended
December 31, 2012
|
|
|
Year Ended
December 31,
2013
|
|
Interest rateLIBOR
|
|
|
8.00%-11.25
|
%
|
|
|
7.75
|
%
|
|
|
6.25%-11.00
|
%
|
|
|
5.00%-10.25
|
%
|
Interest ratereference
|
|
|
8.75% to 12.25
|
%
|
|
|
8.50
|
%
|
|
|
7.75% to 11.00
|
%
|
|
|
6.25%-10.25
|
%
|
Non-refundable feeunused facility
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
Interest expense and service fees
|
|
$
|
24,435
|
|
|
$
|
757
|
|
|
$
|
52,995
|
|
|
$
|
85,655
|
|
Amortization of deferred financing fees
|
|
$
|
23,781
|
|
|
$
|
98
|
|
|
$
|
4,466
|
|
|
$
|
260
|
|
Amortization of net present value of deferred consideration
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,093
|
|
|
$
|
1,701
|
|
Loss on extinguishment of term loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
67,611
|
|
|
$
|
10,833
|
|
The November 2013 Financing Amendment contained certain restrictive financial covenants, including a net
leverage ratio, restrictions on the payment of dividends, as well as reporting requirements. Additionally, the November 2013 Financing Amendment contained certain negative covenants and defined certain events of default, including a change of
control and non-payment of principal and interest, among others, which could result in amounts becoming payable prior to their maturity dates. The Company was in compliance with all covenants at December 31, 2012 and 2013.
Substantially all of the Companys assets are pledged as collateral for the outstanding loan commitments with the exception of certain
excluded equity interests and the exception of certain restricted cash balances and bank deposits permitted under the terms of the Financing Agreement.
9. Stockholders Equity
Preferred Stock
The Company has 5,000,000 shares of authorized preferred stock, par value $0.0001. There are no preferred shares issued or
outstanding as of December 31, 2013.
Common Stock
The Company has 500,000,000 shares of authorized common stock, par value $0.0001. On December 22, 2011, in connection with the Sponsor
Acquisition, 105,187,363 shares of common stock were issued for an aggregate amount of $507.4 million, net of issuance costs, consisting of cash of $452.3 million and a deemed capital contribution of $55.1 million.
106
Voting Rights
All holders of common stock are entitled to one vote per share.
Initial Public OfferingOctober 2013
As disclosed in Note 1, the Company completed its initial public offering in October 2013. The following table provides a summary of the
Companys outstanding shares of common stock as of December 31, 2013:
|
|
|
|
|
|
|
Outstanding
Shares
|
|
Common shares issuedprior to initial public offering
|
|
|
103,695,318
|
|
Common shares issued at initial public offering
|
|
|
21,049,004
|
|
Restricted stock awards granted as vested at initial public offering
|
|
|
22,222
|
|
|
|
|
|
|
Shares of common stock outstanding at December 31, 2013
|
|
|
124,766,544
|
|
|
|
|
|
|
Restricted shares are not considered outstanding until they are vested.
Successor period(December 22, 2011April 20, 2012)
Series E Preferred Stock
The
Company had 150,000 authorized shares of series E preferred stock, par value $0.01 (Series E).
Dividends
Holders of the Series E were entitled to receive dividends, when, as and if dividends were declared by the board of the Company and would have
accumulated, whether or not dividends were declared. The Series E were issued on December 22, 2011 and accrued a cumulative dividend at the rate of 12% per annum, based on a 360-day year consisting of twelve 30-day months, compounded on
the last day of each calendar quarter beginning December 31, 2012.
Redemption
The Series E was redeemable in whole or in part by the Company at a price equal to the Liquidation Preference amount of $1,000 per share, plus
accrued dividend amounts at the date of redemption. On April 20, 2012, in connection with the financing from the April 2012 Term Loan, the Company redeemed all of the outstanding shares of Series E for $150.0 million plus accrued dividends of
$6.0 million.
Predecessor Period (January 1, 2011December 21, 2011)
On January 1, 2011, EIG Investors had authorized stock of 275,000 shares of preferred stock (par value $0.01) consisting of 75,000 shares
of series A preferred stock (Series A), 75,000 shares of series B preferred stock (Series B), 75,000 shares of series C preferred stock (Series C), 50,000 undesignated and 2,500 shares of common stock, par value
$0.01. In July 2011, an amendment to the Certificate of Incorporation authorized 75,000 additional shares of series D preferred stock (Series D). In connection with the acquisition of Dotster (see Note 3), 38,000 shares of Series D were
issued to investors in exchange for cash.
December 21, 2011 represented the last day prior to the Sponsor Acquisition.
Dividends
The Series A accrued
dividends at the rate of 25% per annum, compounded on the last day of each calendar quarter. The Series C and Series D accrued dividends at the rate of 25% per annum, compounded on the last day of each calendar year. The Series B was not
entitled to any dividend.
107
Redemption
In October 2011, the Company fully redeemed the Series C and the Series D plus the accrued dividends for a total of $65.8 million. At any time,
the majority holders of the Prior Parent could require the holders of the Series A to exchange their shares for the same number of class A units in the Prior Parent. Accordingly, on December 13, 2011, the outstanding balance of 5,998,500 shares
of Series A was exchanged.
In 2009, the board of the Prior Parent resolved that upon a sale of the Company a discretionary bonus pool
shall be established for certain employees of the Company and that the amount, distribution and participants would be determined by the board at the time of sale. Accordingly, on November 1, 2011, the board approved the allocation of certain
profits interests resulting from the proposed merger and sale of the Company. An amount of $5.0 million was recorded in general and administrative expense in the Predecessor period in 2011.
10. Stock-Based Compensation
The Company
follows the provisions of ASC 718, which requires the measurement and recognition of all stock-based payment awards (stock-based awards) made to employees, non-employee directors and consultants.
The Company recognizes stock-based compensation expense for stock-based awards based on the grant date fair value of the awards on a
straight-line basis over the requisite service period for those stock-based awards subject to time vesting and when it was probable a performance target would be met for those stock-based awards with vesting that is subject to the achievement of
performance targets.
Unless otherwise determined by the Companys board of directors, stock-based awards granted prior to the
initial public offering generally vest over a four-year period or had vesting that was dependent on the achievement of specified performance targets. The fair value of these stock-based awards was determined as of the grant date of each award using
an option-pricing model and assuming no pre-vesting forfeiture of the awards.
Given the absence of an active trading market for the
Companys common stock prior to the completion of its initial public offering, the fair value of the equity interests underlying stock-based awards was determined by the Companys management. In doing so, valuation analyses were prepared
in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid,
Valuation of Privately-Held-Company Equity Securities Issued as Compensation,
and were used by the Companys management to
assist in determining the fair value of the equity interests underlying its stock-based awards. Each equity interest was granted with a threshold amount meaning that the recipient of an equity security only participated to the extent
that the Company appreciated in value from and after the date of grant of the equity interest (with the value of the entity as of the grant date being the threshold amount). The assumptions used in the valuation models were based on
future expectations combined with managements judgment. In the absence of a public trading market, the Companys management exercised significant judgment and considered numerous objective and subjective factors to determine the fair
value of the stock-based awards as of the date of each award. These factors included:
|
|
|
contemporaneous or retrospective valuations for the Company and its securities;
|
|
|
|
the rights, preferences, and privileges of the stock-based awards relative to each other as well as to the existing shareholders;
|
|
|
|
lack of marketability of the Companys equity securities;
|
|
|
|
historical operating and financial performance;
|
|
|
|
the Companys stage of development;
|
|
|
|
current business conditions and projections;
|
|
|
|
hiring of key personnel and the experience of the Companys management team;
|
108
|
|
|
risks inherent to the development of the Companys products and services and delivery of its solutions;
|
|
|
|
trends and developments in the Companys industry;
|
|
|
|
the threshold amount for the stock-based awards and the values at which the stock-based awards would vest;
|
|
|
|
the market performance of comparable publicly traded companies;
|
|
|
|
likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of the Company given prevailing market conditions; and
|
|
|
|
U.S. and global economic and capital market conditions.
|
The Company completed its initial
public offering in October 2013, and determined that the performance targets associated with the performance-based stock awards were met in full and consequently the performance-based stock awards would be fully vested. However, effective prior to
the first day of public trading of the Companys common stock, the Company accelerated the vesting of 2,167,870 shares of common stock issued in respect of the time-based stock awards and modified the vesting of 3,574,637 shares issued in
respect of the performance-based stock awards so that 2,580,271 shares of common stock were fully vested and 994,366 shares of common stock will follow the same vesting schedule as the time-based stock awards that were granted on the same date as
such performance-based stock awards.
The Company recognized stock-based compensation expense of approximately $1.4 million for the shares
of common stock issued in respect of the performance-based stock awards that vested at closing of its initial public offering and $2.4 million for the acceleration of vesting for a portion of the shares of common stock issued in respect of
previously unvested time-based stock awards.
Total stock-based compensation expense recognized for the time-based vesting stock awards
was $2.3 million and $6.5 million for the years ended December 31, 2012 and 2013, respectively. No compensation expense was recognized for the year ended December 31, 2012 for the performance-based stock awards, since in the opinion of
management, it was not then probable that any of the performance targets necessary for the performance-based stock awards to vest would have been met prior to their expiration. Total stock-based compensation expense recognized for the
performance-based stock awards was $1.4 million for the year ended December 31, 2013, since the performance targets necessary for the performance-based stock awards were met prior to their expiration. The Company will recognize a recovery of
expense if the actual forfeiture rate for the time-based stock awards is higher than estimated.
The following tables present a summary of
the stock-based awards activity for the years ended December 31, 2012 and 2013 for time-based vesting stock awards and performance-based vesting stock awards that were granted prior to the Companys initial public offering (dollars in
thousands):
|
|
|
|
|
|
|
Time-Based Vesting
Stock Awards(1)
|
|
Granted
|
|
|
5,086,728
|
|
Forfeitures
|
|
|
(10,762
|
)
|
Vested
|
|
|
(375,879
|
)
|
|
|
|
|
|
Non-Vested at December 31, 2012
|
|
|
4,700,087
|
|
|
|
|
|
|
Granted
|
|
|
166,839
|
|
Forfeitures
|
|
|
(17,837
|
)
|
Vested
|
|
|
(4,120,756
|
)
|
|
|
|
|
|
Non-Vested at December 31, 2013
|
|
|
728,333
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
Performance-Based
Vesting
Stock Awards(1)
|
|
Granted
|
|
|
3,418,853
|
|
Forfeitures
|
|
|
(10,762
|
)
|
Vested
|
|
|
|
|
|
|
|
|
|
Non-Vested at December 31, 2012
|
|
|
3,408,091
|
|
|
|
|
|
|
Granted
|
|
|
166,839
|
|
Forfeitures
|
|
|
(17,916
|
)
|
Vested
|
|
|
(2,828,681
|
)
|
|
|
|
|
|
Non-Vested at December 31, 2013
|
|
|
728,333
|
|
|
|
|
|
|
(1)
|
The aggregate intrinsic value of restricted stock awards is calculated as the fair value of the common stock on December 31, 2013 of $14.18 per share.
|
In connection with the initial public offering the Company granted restricted stock units under the prior equity plan. The following table
provides a summary of the restricted stock units that were granted in connection with the initial public offering under this plan and the non-vested balance as of December 31, 2013(dollars in thousands except exercise price):
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Granted
|
|
|
531,719
|
|
|
$
|
12.00
|
|
Forfeitures
|
|
|
|
|
|
|
|
|
Vested and unissued
|
|
|
(243,705
|
)
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2013
|
|
|
288,014
|
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013, there was $1.0 million of unrecognized compensation expense with respect to the
time-based stock awards that were expected to be recognized over a weighted average period of 2.3 years. As of December 31, 2013, there was unrecognized compensation expense of $0.3 million with respect to the non-vested performance-based stock
awards that were expected to be recognized over a weighted average period of 2.2 years. As of December 31, 2013, there was $3.5 million of unrecognized compensation expense with respect to the restricted stock units that were expected to be
recognized over a weighted average period of 2.2 years.
2013 Stock Incentive Plan
The 2013 Stock Incentive Plan (the 2013 Plan) became effective upon the closing of our initial public offering. The 2013 Plan of
the Company provides for the grant of options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards to employees, officers, directors, consultants and advisors of the Company.
Under the 2013 Plan, the Company may issue up to 18,000,000 shares of the Companys common stock. At December 31, 2013, 11,161,556
shares were available for grant under the Plan.
110
At December 31, 2013, the Company has reserved the following shares of common stock for
future issuance:
|
|
|
|
|
|
|
As of
December 31,
2013
|
|
Common stock options granted and outstanding
|
|
|
5,619,671
|
|
Restricted stock unit awards granted and unissued
|
|
|
481,623
|
|
Shares available for future grant under the 2013 stock incentive plan
|
|
|
11,161,556
|
|
|
|
|
|
|
Total shares of authorized common stock reserved for future issuance
|
|
|
17,262,850
|
|
|
|
|
|
|
Restricted stock awards granted and issued
|
|
|
737,150
|
|
|
|
|
|
|
Total shares authorized to be issued under
2013 Stock Incentive Plan
|
|
|
18,000,000
|
|
|
|
|
|
|
In connection with the initial public offering the Company granted stock option awards, restricted stock-based
awards and restricted stock units under its 2013 Stock Incentive Plan. The following table provides a summary of the Companys non-vested common stock at the date of the initial public offering and new stock-based awards, consisting of
restricted stock units that were granted in connection with the initial public offering as well as stock options, restricted stock awards and restricted stock units that were granted under the 2013 Stock Incentive Plan and the non-vested balance as
of December 31, 2013(dollars in thousands except exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual Term
(In Years)
|
|
|
Aggregate
Intrinsic
Value(2)
|
|
GrantedOctober 25, 2013
|
|
|
5,623,671
|
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Canceled
|
|
|
(4,000
|
)
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
5,619,671
|
|
|
$
|
12.00
|
|
|
|
9.8
|
|
|
$
|
12,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2013
|
|
|
113,714
|
|
|
$
|
12.00
|
|
|
|
9.8
|
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2013(1)
|
|
|
5,504,052
|
|
|
$
|
12.00
|
|
|
|
9.8
|
|
|
$
|
11,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
This represents the number of vested options as of December 31, 2013 plus the number of unvested options outstanding as of December 31, 2013, which has been reduced using an estimated forfeiture rate.
|
(2)
|
The aggregate intrinsic value was calculates based on the positive difference between the estimated fair value of the Companys common stock on December 31, 2013 of $14.18 per share, or the date of exercise as
appropriate, and the exercise price of the underlying options.
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Granted
|
|
|
741,150
|
|
|
$
|
12.00
|
|
Vested
|
|
|
(22,222
|
)
|
|
$
|
12.00
|
|
Canceled
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2013
|
|
|
714,928
|
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The aggregate intrinsic value of restricted stock awards is calculated as the fair value of the common stock on December 31, 2013 of $14.18 per share.
|
111
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Granted
|
|
|
481,623
|
|
|
$
|
12.00
|
|
Vested and unissued
|
|
|
(20,067
|
)
|
|
$
|
12.00
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2013
|
|
|
461,556
|
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
For stock options issued under the Plan, the fair value of each option is estimated on the date of grant, and
an estimated forfeiture rates is used when calculating stock-based compensation expense for the period. Stock options typically vest over four years and the Company recognizes compensation expense on a straight-line basis over the requisite service
period of the award. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option awards and determine the related compensation expense. The assumptions used to compute stock-based compensation expense for
awards granted under the 2013 Stock Incentive Plan are as follows:
|
|
|
|
|
|
|
2013
|
|
Risk-free interest rate
|
|
|
1.9
|
%
|
Expected volatility
|
|
|
60.0
|
%
|
Expected life (in years)
|
|
|
6.25
|
|
Expected dividend yield
|
|
|
|
|
The risk-free interest rate assumption was based on the U.S. Treasury zero-coupon bonds with maturities
similar to those of the expected term of the award being valued. The Company bases its estimate of expected volatility using volatility data from comparable public companies in similar industries and markets because there is currently limited public
history for the Companys common stock, and therefore, a lack of market-based company-specific historical and implied volatility information. The weighted-average expected life for employee options reflects the application of the simplified
method, which represents the average of the contractual term of the options and the weighted-average vesting period for all option tranches. The simplified method has been used since the Company does not have sufficient historical exercise data to
provide reasonable basis upon which to estimate expected term due to a limited history of stock option grants. The assumed dividend yield was based on the Companys expectation of not paying dividends in the foreseeable future. In addition, the
Company has estimated expected forfeitures of stock options based on managements judgment due to the limited historical experience of forfeitures. The forfeiture rate was not material to the calculation of stock-based compensation expense.
Unless otherwise determined by the Companys board of directors, stock-based awards granted at the time of the initial public offering and subsequent to the initial public offering, generally vest annually over a four-year period. The Company
recognized approximately $2.9 million of stock-based compensation expense during the year ended December 31, 2013 for awards granted under the 2013 Stock Incentive Plan.
As of December 31, 2013, there was $36.8 million of unrecognized compensation expense with respect to stock option awards that was
expected to be recognized over a weighted average period of 3.8 years. As of December 31, 2013, there was $8.2 million of unrecognized compensation expense with respect to restricted stock awards that was expected to be recognized over a
weighted average period of 3.8 years. As of December 31, 2013, there was unrecognized compensation expense of $5.5 million with respect to the restricted stock units that was expected to be recognized over a weighted average period of 3.8
years.
112
The following table presents total stock-based compensation expense for the time-based stock
awards, performancebased stock awards and awards issued under the 2013 Stock Incentive Plan included in the Companys consolidated statement of operations and comprehensive loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
Successor
|
|
|
|
Period from
January 1
through
December 11,
2011
|
|
|
|
|
Period from
December 22
through
December 31,
2011
|
|
|
Year Ended
December 31,
2012
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2013
|
|
Cost of revenue
|
|
$
|
|
|
|
|
|
$
|
|
|
|
$
|
26
|
|
|
$
|
126
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
266
|
|
|
|
459
|
|
Engineering and development
|
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
|
|
267
|
|
General and administrative
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
1,883
|
|
|
|
9,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
$
|
1,000
|
|
|
|
|
$
|
|
|
|
$
|
2,308
|
|
|
$
|
10,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Dividend
On November 9, 2012, the Company paid a dividend in the aggregate amount of $300.0 million to shareholders and non-vested shareholders of
the Company. The Company paid a $289.5 million dividend to existing shareholders of the Company and $10.5 million to the non-vested shareholders of the Company. At the time the dividend was paid, a special authorization was made by the board of
directors of the Company to allow the non-vested shareholders to participate since at that date the non-vested shareholders were not entitled to receive a dividend. The non-vested shareholders participation was subject to certain aggregate
payments first being made to the existing shareholders of the Company which had not yet been met. For accounting purposes the dividend paid to the non-vested shareholders is treated as a modification of the original non-vested share award resulting
in the measurement of compensation expense equal to the amount of the dividend. Certain of the non-vested shareholders were required to enter into clawback arrangements whereby if the non-vested shareholders employment with the Company
terminated under certain defined conditions prior to the non-vested shareholders vesting in the non-vested shares, all or a portion of the dividend would be required to be repaid to the Company. Compensation expense related to the dividend
amount subject to clawback arrangements with a future service requirement were being recognized over the future service period. Generally, the amount of the dividend subject to clawback reduced over time as the non-vested shares vest. For the
dividend paid to the non-vested shareholders, $9.8 million was recorded in general and administrative expense in the year ended December 31, 2012 since this dividend amount was not attributable to a future service requirement by the class
non-vested shareholders. The Company recorded the remaining $0.7 million of compensation expense during 2013.
12. Income Taxes
We account for income taxes in accordance with authoritative guidance, which requires the use of the asset and liability method. Under this
method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate
expected to apply in the years in which the differences are expected to be reversed.
The domestic and foreign components of loss before
income taxes for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
2012
|
|
|
December 31,
2013
|
|
United States
|
|
$
|
(216,478
|
)
|
|
$
|
(158,481
|
)
|
Foreign
|
|
|
|
|
|
|
(2,894
|
)
|
|
|
|
|
|
|
|
|
|
Total loss before income taxes
|
|
$
|
(216,478
|
)
|
|
$
|
(161,375
|
)
|
|
|
|
|
|
|
|
|
|
113
The components of the provision (benefit) for income taxes consisted of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
Successor
|
|
|
|
Period from
January 1,
2011 through
December 21,
2011
|
|
|
|
|
Period from
December 22,
2011 through
December 31,
2011
|
|
|
Year Ended
December 31,
2012
|
|
|
Year Ended
December 31,
2013
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
126
|
|
|
|
|
|
10
|
|
|
|
407
|
|
|
|
267
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
126
|
|
|
|
|
|
10
|
|
|
|
407
|
|
|
|
1,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(23,112
|
)
|
|
|
|
|
(2,240
|
)
|
|
|
(64,295
|
)
|
|
|
(50,007
|
)
|
State
|
|
|
(5,482
|
)
|
|
|
|
|
(516
|
)
|
|
|
(13,315
|
)
|
|
|
(8,852
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,590
|
)
|
Change in valuation allowance
|
|
|
28,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision
|
|
|
|
|
|
|
|
|
(2,756
|
)
|
|
|
(77,610
|
)
|
|
|
(4,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense (benefit)
|
|
$
|
126
|
|
|
|
|
$
|
(2,746
|
)
|
|
$
|
(77,203
|
)
|
|
$
|
(3,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had a net deferred tax liability at the end of 2012. During 2013, the Companys net deferred
tax liability was eliminated due mainly to a reduction in a deferred liability related to definite-lived intangibles and for current period losses resulting in an increase to offsetting deferred tax assets. On December 22, 2011, the Company was
acquired by Holdings. The Company recorded its intangible assets at fair value as a result of the acquisition. For U.S. GAAP purposes the definite-lived intangible assets have accelerated amortization, while for tax purposes the intangible assets
maintained their historical basis and lives. As such, a deferred tax liability was established through purchase accounting. The reversal of the 2012 deferred tax liability in 2013 resulted in a deferred tax benefit in 2013. The Company established a
valuation allowance on substantially all of their deferred tax assets during the year ended December 31, 2013. The benefit has been reduced after the establishment of the valuation allowance by the deferred tax expense associated with the tax
amortization of assets that have an indefinite life for U.S. GAAP purposes. The state income tax is primarily driven by states who tax the Company based on a gross margin tax. The Company also has a subsidiary in Brazil that is generating taxable
income and is solely driving the current foreign tax.
The following table presents a reconciliation of the statutory federal rate, and
the Companys effective tax rate, for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
2012
|
|
|
December 31,
2013
|
|
U.S. federal taxes at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
3.6
|
|
|
|
3.2
|
|
Permanent differences
|
|
|
(2.5
|
)
|
|
|
(2.1
|
)
|
Foreign rate differential
|
|
|
|
|
|
|
(0.2
|
)
|
Change in valuation allowanceUS
|
|
|
|
|
|
|
(34.0
|
)
|
Change in valuation allowanceforeign
|
|
|
|
|
|
|
(0.5
|
)
|
Rate change
|
|
|
0.4
|
|
|
|
0.4
|
|
Other
|
|
|
0.2
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35.7
|
%
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
114
The provision (benefit) for income taxes shown on the consolidated statements of operations
differs from amounts that would result from applying the statutory tax rates to income before taxes primarily because of state income taxes and certain permanent expenses that were not deductible, as well as the application of valuation allowances
against U.S. and foreign assets.
The significant components of the Companys deferred income tax assets and liabilities as of
December 31, 2012 and December 31, 2013 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
56,398
|
|
|
$
|
87,784
|
|
Other
|
|
|
330
|
|
|
|
1,598
|
|
Deferred compensation
|
|
|
387
|
|
|
|
556
|
|
Deferred revenue
|
|
|
9,127
|
|
|
|
11,622
|
|
Other reserves
|
|
|
9,971
|
|
|
|
5,848
|
|
Stock-based compensation
|
|
|
|
|
|
|
2,788
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
76,213
|
|
|
|
110,196
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Purchased intangible assets
|
|
|
(85,836
|
)
|
|
|
(56,848
|
)
|
Goodwill
|
|
|
(4,679
|
)
|
|
|
(10,736
|
)
|
Property and equipment
|
|
|
(1,184
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(91,699
|
)
|
|
|
(67,600
|
)
|
Valuation allowance
|
|
|
|
|
|
|
(55,786
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets/(liabilities)
|
|
$
|
(15,486
|
)
|
|
$
|
(13,190
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013, the Company had NOL carry-forwards available to offset future U.S. federal
taxable income of approximately $214.2 million and future state taxable income by approximately $152.8 million. These NOL carry-forwards expire on various dates through 2033. As of December 31, 2013, the Company had NOL carry-forwards in
foreign jurisdictions available to offset future foreign taxable income by approximately $33.7 million. India has loss carry-forwards totaling $2.1 million that expire in 2021. The Company also has loss carry-forwards in the United Kingdom of $31.6
million and these losses do not expire.
Utilization of the NOL carry-forwards may be subject to an annual limitation due to the ownership
percentage change limitations. Ownership changes can limit the amount of net operating loss and other tax attributes that a company can use each year to offset future taxable income and taxes payable. As a result of the Sponsor Acquisition, the
Company analyzed changes in ownership and determined that effective 2012, the Company could only use approximately $77.1 million of NOL carry-forwards per year.
The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires
significant management judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluated all available positive and negative evidence, and weighted the evidence based on its objectivity. Evidence the
Company considered included:
|
|
|
NOLs incurred from the Companys inception to December 31, 2013;
|
|
|
|
Expiration of various federal and state tax attributes;
|
|
|
|
Reversals of existing temporary differences;
|
|
|
|
Composition and cumulative amounts of existing temporary differences; and
|
|
|
|
Forecasted profit before tax.
|
As of December 31, 2013, the Company is in a cumulative pre-tax
book loss position for the past three years. The Company has generated significant NOLs since inception and as such it has no U.S. carryback
115
capacity. The Company has a history of expiring state NOLs. The Company scheduled out the future reversals of existing deferred tax assets and liabilities and concluded that these reversals did
not generate sufficient future taxable income to offset the existing net operating losses. After consideration of the available evidence, both positive and negative, the Company has recorded a valuation allowance of $55.8 million. For the
Predecessor and Successor periods in 2011 and the years ended December 31, 2012 and 2013, the Company has recognized a tax expense (benefit) of $0.1 million, $(2.7) million, $(77.2) million and $(3.6) million, respectively in the consolidated
statements of operations.
The Company files income tax returns in the United States for federal income taxes and in various state
jurisdictions. The Company also files in several foreign jurisdictions. In the normal course of business, the Company is subject to examination by tax authorities throughout the world. Since the Company is in a loss carry-forward position, the
Company is generally subject to U.S. federal and state income tax examinations by tax authorities for all years for which a loss carry-forward is available.
The Company recognizes, in its consolidated financial statements, the effect of a tax position when it is more likely than not, based on the
technical merits, that the position will be sustained upon examination. The Company has no unrecognized tax positions at December 31, 2012 and December 31, 2013, that would affect its effective tax rate. The Company does not expect a
significant change in the liability for unrecognized tax benefits in the next twelve months.
Permanent Reinvestment of Foreign Earnings
We consider the operating earnings of our non-United States subsidiaries to be indefinitely invested outside the United States
under ASC 740-30 based on estimates that future and domestic cash generation will be sufficient to meet future domestic cash needs. The Company only has one cumulatively profitable foreign jurisdiction, Brazil, which has generated approximately $2.5
million of profits outside of the United States. If the Company were to repatriate these cumulative profits, there would be sufficient United States net operating losses to offset the tax impact of the repatriation. Should the Company decide to
repatriate foreign earnings the Company would have to adjust the income tax provision in the period it determined that the earnings will no longer be indefinitely vested outside the United States.
13. Commitments and Contingencies
Operating Leases
The Company has operating lease commitments for certain facilities and equipment that expire on various dates through 2024. The
following table outlines future minimum annual rental payments under these leases at December 31, 2013:
|
|
|
|
|
Year Ending December 31,
|
|
Amount (in thousands)
|
|
2014
|
|
$
|
8,362
|
|
2015
|
|
|
7,901
|
|
2016
|
|
|
6,558
|
|
2017
|
|
|
5,988
|
|
2018
|
|
|
3,904
|
|
Thereafter
|
|
|
15,441
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
48,154
|
|
|
|
|
|
|
Total rent expense incurred under non-cancellable operating leases for the Predecessor and Successor periods
in 2011 and the years ended December 31, 2012 and 2013, were $1.5 million, $43,000, $2.7 million and $8.9 million, respectively.
116
Contingencies
From time to time, the Company is involved in legal proceedings or subject to claims arising in the ordinary course of its business. The
Company is not presently a party to any legal proceedings that in the opinion of management, if determined adversely to the Company, would have a material adverse effect on its business, financial condition, operating results or cash flow.
Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
14. Employee Benefit Plans
The Company
has a defined contribution plan established under Section 401(k) of the Internal Revenue Code (the 401(k) Plan), which covers substantially all employees. Employees are eligible to participate in the 401(k) Plan beginning on the
first day of the month following commencement of their employment. The 401(k) Plan includes a salary deferral arrangement pursuant to which participants may elect to reduce their current compensation by up to the statutorily prescribed limit, equal
to $17,500 in 2013, and have the amount of the reduction contributed to the 401(k) Plan. Beginning January 1, 2013, the Company matches 100% of the each participants annual contribution to the 401(k) plan up to 3% of the
participants salary and then 50% of each participants contribution up to 2% of each participants salary. The match immediately vests 100%. Matching contributions by the Company related to the 2013 plan year were approximately $1.2
million were made to the 401(k) Plan. The Company did not make matching contributions to the 401(k) Plan in the Predecessor and Successor periods in 2011 or the year ended December 31, 2012.
In connection with the Dotster acquisition in 2011, the Company assumed a defined contribution plan established under Section 401(k) of
the Internal Revenue Code (the Dotster 401(k) Plan), in which employees are eligible to participate upon the date of hire. Under the Dotster 401(k) Plan, the Company matches 100% of each participants annual contribution to the
Dotster 401(k) Plan up to 3% of each participants salary and then 50% of each participants annual contribution to the Dotster 401(k) Plan up to 2% of each participants salary. The match immediately vests 100%. Matching
contributions by the Company related to the 2011, 2012 and 2013 plan years in the amounts of $62,000, $0.2 million and $0.4 million, respectively, were made to the Dotster 401(k) Plan.
In connection with the HostGator acquisition in 2012, the Company assumed a defined contribution plan established under Section 401(k) of
the Internal Revenue Code (the HostGator 401(k) Plan), in which employees are eligible to participate on the date of hire. Under the HostGator 401(k) Plan, the Company matches 25% of each participants annual contribution up to 4%
of each participants salary, vesting 100% after three years of service. Matching contributions by the Company related to the 2012 and 2013 plan years in the amounts of $0.1 million for each year, were made to the HostGator 401(k) Plan.
15. Related Party Transactions
The
Company has various agreements in place with related parties. Below are details of related party transactions that occurred during the Predecessor and Successor periods in 2011 and the years ended December 31, 2012 and 2013.
The Company has contracts with entities for outsourced services. The ownership of these entities is held directly or indirectly by family
members of the Companys chief executive officer, who is also a director of the Company. For the Predecessor period in 2011 and the Successor year ended December 31, 2012, $4.8 million and $4.6 million, respectively, was recorded in cost
of revenue $0.6 million and $1.0 million, respectively, was recorded in engineering and development expense, $0.1 million and $0.3 million, respectively, was recorded in sales and marketing expense, and $0.9 million was recorded in general and
administrative expense in the year ended December 31, 2012, relating to services provided to the Company under these agreements. Of these amounts, $0.3 million and $0.2 million was recorded in accrued expenses or accounts payable at
December 31,
117
2011 and 2012, respectively. For the year ended December 31, 2013, $5.2 million was recorded in cost of revenue, $0.9 million was recorded in engineering and development expense, $0.3
million was recorded in sales and marketing expense and $0.9 million was recorded in general and administrative expense relating to services provided under these agreements.
The Company also has an agreement with an entity that provides a multi-layered third-party security application that is sold by the Company.
The entity is collectively majority owned by the Companys chief executive officer, and two investors in the Company, one of whom is a director of the Company, and who are beneficial owners, directly and indirectly, of equity in the Company.
For the Predecessor period in 2011 and the Successor years ended December 31, 2012 and 2013, the Company recorded $1.1 million, $2.2 million and $3.0 million, respectively, in cost of revenue related to this agreement.
16. Subsequent Events
On
January 23, 2014, the Company acquired the web presence business of Directi Web Technologies Holdings, Inc. (Directi). Directi provides web presence solutions to SMBs in various countries, including India, the United States, Turkey,
China, Russia and Indonesia. After giving effect to certain post-closing adjustments, the Company expects the total consideration for this acquisition to be between $100.0 million and $110.0 million. The purchase consideration is expected to consist
of, cash payments of $25.5 million (including $20.5 million paid at the closing and a $5.0 million advance payment paid in August 2013), a promissory note from us to Directi Holdings of $51.0 million and the issuance of 2,123,039 shares of the
Companys common stock to Directi Holdings. The promissory note will mature on April 15, 2014. The principal amount of the promissory note could increase if Directi meets certain performance metrics for the period from July 1, 2013
through March 30, 2014.
In addition, in connection with the acquisition of Directi, the Company may be obligated to make additional
aggregate payments of up to a maximum of approximately $62.0 million, subject to specified terms, conditions and operational contingencies.
With respect to the consolidated financial statements as of and for the year ended December 31, 2013, the Company performed an evaluation
of subsequent events through the date of this filing.
17. Quarterly Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended:
|
|
|
|
March 31,
2012
|
|
|
June 30,
2012
|
|
|
Sept. 30,
2012
|
|
|
Dec. 31,
2012
|
|
|
March 31,
2013
|
|
|
June 30,
2013
|
|
|
Sept. 30,
2013
|
|
|
Dec. 31,
2013
|
|
Revenue
|
|
$
|
41,293
|
|
|
$
|
50,475
|
|
|
$
|
83,353
|
|
|
$
|
117,035
|
|
|
$
|
122,741
|
|
|
$
|
128,222
|
|
|
$
|
132,913
|
|
|
$
|
136,420
|
|
Gross profit
|
|
|
2,792
|
|
|
|
8,409
|
|
|
|
13,861
|
|
|
|
29,915
|
|
|
|
35,533
|
|
|
|
40,250
|
|
|
|
45,748
|
|
|
|
48,862
|
|
Loss from operations
|
|
|
(21,418
|
)
|
|
|
(20,186
|
)
|
|
|
(25,140
|
)
|
|
|
(23,603
|
)
|
|
|
(12,234
|
)
|
|
|
(10,880
|
)
|
|
|
(4,335
|
)
|
|
|
(35,599
|
)
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
|
|
(18,765
|
)
|
|
|
(20,251
|
)
|
|
|
(27,692
|
)
|
|
|
(72,590
|
)
|
|
|
(21,728
|
)
|
|
|
(42,958
|
)
|
|
|
(27,027
|
)
|
|
|
(67,774
|
)
|
Basic and diluted net loss per share attributable to Endurance International Group Holdings, Inc.
|
|
$
|
(0.19
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
In the three months ended December 31, 2013 net loss attributable to Endurance International
Group Holdings, Inc. included $24.9 million of expense attributable to bonus payments in connection with the Companys initial public offering. In addition, the three months ended December 31, 2013 included $9.7 million of stock-based
compensation expense primarily attributable to the acceleration of certain non-vested shares and the granting of stock-based awards at the time of the initial public offering.