UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
|
Q
UARTERLY
REPORT
PURSUANT
TO
S
ECTION
13
OR
15(
D
)
OF
THE
S
ECURITIES
E
XCHANGE
A
CT
OF
1934
|
For the quarterly period ended June 30, 2014
OR
¨
|
T
RANSITION
REPORT
PURSUANT
TO
S
ECTION
13
OR
15(
D
)
OF
THE
S
ECURITIES
E
XCHANGE
A
CT
OF
1934
|
For the transition period
from
to
Commission File Number: 001-36131
Endurance
International Group Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
|
|
|
Delaware
|
|
46-3044956
|
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
10 Corporate Drive, Suite 300
Burlington, Massachusetts
|
|
01803
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
(781) 852-3200
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer
|
|
¨
|
|
Accelerated filer
|
|
¨
|
|
|
|
|
Non-accelerated filer
|
|
x
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
|
|
¨
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
¨
No
x
As of July 31, 2014, there were 129,201,413 shares of the issuers common stock, $0.0001 par value per share, outstanding.
TABLE OF CONTENTS
2
Endurance International Group Holdings, Inc.
Consolidated Balance Sheets
(unaudited)
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
June 30,
2014
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
66,815
|
|
|
$
|
23,947
|
|
Restricted cash
|
|
|
1,983
|
|
|
|
1,799
|
|
Accounts receivable
|
|
|
7,160
|
|
|
|
10,052
|
|
Deferred tax assetshort term
|
|
|
12,981
|
|
|
|
14,905
|
|
Prepaid expenses and other current assets
|
|
|
29,862
|
|
|
|
52,357
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
118,801
|
|
|
|
103,060
|
|
Property and equipmentnet
|
|
|
49,715
|
|
|
|
62,079
|
|
Goodwill
|
|
|
984,207
|
|
|
|
1,079,750
|
|
Other intangible assetsnet
|
|
|
406,140
|
|
|
|
397,279
|
|
Deferred financing costs
|
|
|
430
|
|
|
|
404
|
|
Investments
|
|
|
6,535
|
|
|
|
21,645
|
|
Other assets
|
|
|
15,110
|
|
|
|
10,301
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,580,938
|
|
|
$
|
1,674,518
|
|
|
|
|
|
|
|
|
|
|
Liabilities, redeemable non-controlling interest and stockholders equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,950
|
|
|
$
|
10,495
|
|
Accrued expenses
|
|
|
35,433
|
|
|
|
37,993
|
|
Deferred revenue
|
|
|
194,196
|
|
|
|
239,546
|
|
Current portion of notes payable
|
|
|
10,500
|
|
|
|
43,500
|
|
Current portion of capital lease obligations
|
|
|
|
|
|
|
3,700
|
|
Deferred considerationshort term
|
|
|
24,437
|
|
|
|
13,815
|
|
Other current liabilities
|
|
|
6,796
|
|
|
|
9,971
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
279,312
|
|
|
|
359,020
|
|
Long-term deferred revenue
|
|
|
55,298
|
|
|
|
65,629
|
|
Notes payablelong term
|
|
|
1,036,875
|
|
|
|
1,031,625
|
|
Capital lease obligations
|
|
|
|
|
|
|
6,223
|
|
Deferred tax liabilitylong term
|
|
|
26,171
|
|
|
|
33,307
|
|
Deferred consideration
|
|
|
4,207
|
|
|
|
3,845
|
|
Other liabilities
|
|
|
3,041
|
|
|
|
2,980
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,404,904
|
|
|
$
|
1,502,629
|
|
|
|
|
|
|
|
|
|
|
Redeemable non-controlling interest
|
|
|
20,772
|
|
|
|
21,893
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred Stockpar value $0.0001; 5,000,000 shares authorized; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common Stockpar value $0.0001; 500,000,000 shares authorized; 124,788,853 and 127,402,909 shares issued at December 31, 2013
and June 30, 2014, respectively; 124,766,544 and 127,365,030 outstanding at December 31, 2013 and June 30, 2014, respectively
|
|
|
13
|
|
|
|
14
|
|
Additional paid-in capital
|
|
|
754,061
|
|
|
|
781,479
|
|
Accumulated other comprehensive loss
|
|
|
(55
|
)
|
|
|
(7
|
)
|
Accumulated deficit
|
|
|
(598,757
|
)
|
|
|
(631,490
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
155,262
|
|
|
|
149,996
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable non-controlling interest and stockholders equity
|
|
$
|
1,580,938
|
|
|
$
|
1,674,518
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
Endurance International Group Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Revenue
|
|
$
|
128,222
|
|
|
$
|
151,992
|
|
|
$
|
250,963
|
|
|
$
|
297,742
|
|
Cost of revenue
|
|
|
87,972
|
|
|
|
92,611
|
|
|
|
175,180
|
|
|
|
181,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
40,250
|
|
|
|
59,381
|
|
|
|
75,783
|
|
|
|
115,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
29,768
|
|
|
|
38,225
|
|
|
|
58,299
|
|
|
|
79,849
|
|
Engineering and development
|
|
|
6,095
|
|
|
|
5,365
|
|
|
|
12,235
|
|
|
|
10,318
|
|
General and administrative
|
|
|
15,267
|
|
|
|
16,876
|
|
|
|
28,363
|
|
|
|
32,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
51,130
|
|
|
|
60,466
|
|
|
|
98,897
|
|
|
|
122,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(10,880
|
)
|
|
|
(1,085
|
)
|
|
|
(23,114
|
)
|
|
|
(6,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18
|
|
|
|
89
|
|
|
|
30
|
|
|
|
172
|
|
Interest expense
|
|
|
(21,835
|
)
|
|
|
(14,177
|
)
|
|
|
(43,539
|
)
|
|
|
(27,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expensenet
|
|
|
(21,817
|
)
|
|
|
(14,088
|
)
|
|
|
(43,509
|
)
|
|
|
(27,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity earnings of unconsolidated entities
|
|
|
(32,697
|
)
|
|
|
(15,173
|
)
|
|
|
(66,623
|
)
|
|
|
(34,224
|
)
|
Income tax expense (benefit)
|
|
|
10,390
|
|
|
|
1,048
|
|
|
|
(1,671
|
)
|
|
|
4,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity earnings of unconsolidated entities
|
|
|
(43,087
|
)
|
|
|
(16,221
|
)
|
|
|
(64,952
|
)
|
|
|
(38,711
|
)
|
Equity income of unconsolidated entities, net of tax
|
|
|
(129
|
)
|
|
|
(89
|
)
|
|
|
(266
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(42,958
|
)
|
|
$
|
(16,132
|
)
|
|
$
|
(64,686
|
)
|
|
$
|
(38,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling interest
|
|
|
|
|
|
|
(2,684
|
)
|
|
|
|
|
|
|
(5,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
|
$
|
(42,958
|
)
|
|
$
|
(13,448
|
)
|
|
$
|
(64,686
|
)
|
|
$
|
(32,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(42,958
|
)
|
|
$
|
(13,422
|
)
|
|
$
|
(64,686
|
)
|
|
$
|
(32,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Endurance International Group Holdings, Inc.basic and diluted
|
|
$
|
(0.44
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares used in computing net loss per share attributable to Endurance International Group Holdings,
Inc.basic and diluted
|
|
|
97,933,795
|
|
|
|
127,225,196
|
|
|
|
97,550,649
|
|
|
|
126,844,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
Endurance International Group Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2014
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(64,686
|
)
|
|
$
|
(38,601
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment
|
|
|
8,267
|
|
|
|
14,548
|
|
Amortization of other intangible assets
|
|
|
52,314
|
|
|
|
49,541
|
|
Amortization of deferred financing costs
|
|
|
106
|
|
|
|
38
|
|
Amortization of net present value of deferred consideration
|
|
|
1,168
|
|
|
|
5
|
|
Stock-based compensation
|
|
|
739
|
|
|
|
7,173
|
|
Deferred tax expense (benefit)
|
|
|
(2,750
|
)
|
|
|
1,940
|
|
Loss on sale of property and equipment
|
|
|
332
|
|
|
|
74
|
|
Income of unconsolidated entities
|
|
|
(266
|
)
|
|
|
(110
|
)
|
Gain from change in deferred consideration
|
|
|
|
|
|
|
22
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,902
|
)
|
|
|
(491
|
)
|
Prepaid expenses and other current assets
|
|
|
(7,037
|
)
|
|
|
(17,463
|
)
|
Accounts payable and accrued expenses
|
|
|
2,087
|
|
|
|
(204
|
)
|
Deferred revenue
|
|
|
33,651
|
|
|
|
49,917
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
22,023
|
|
|
|
66,389
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Business acquired in purchase transaction, net of cash acquired
|
|
|
(2,434
|
)
|
|
|
(25,158
|
)
|
Proceeds from sale of assets
|
|
|
23
|
|
|
|
|
|
Cash paid for minority investment
|
|
|
(8,760
|
)
|
|
|
(15,000
|
)
|
Purchases of property and equipment
|
|
|
(17,947
|
)
|
|
|
(12,901
|
)
|
Proceeds from sale of property and equipment
|
|
|
13
|
|
|
|
84
|
|
Purchases of intangible assets
|
|
|
|
|
|
|
(100
|
)
|
Net (deposits) and withdrawals of principal balances in restricted cash accounts
|
|
|
293
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(28,812
|
)
|
|
|
(52,891
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from borrowing of revolver
|
|
|
34,000
|
|
|
|
55,000
|
|
Repayment of term loan
|
|
|
(4,000
|
)
|
|
|
(5,250
|
)
|
Repayment of revolver
|
|
|
(26,000
|
)
|
|
|
(22,000
|
)
|
Payment of financing costs
|
|
|
|
|
|
|
(12
|
)
|
Payment of deferred consideration
|
|
|
(3,336
|
)
|
|
|
(81,503
|
)
|
Principal payments on capital lease obligations
|
|
|
|
|
|
|
(1,782
|
)
|
Issuance costs of common stock
|
|
|
|
|
|
|
(731
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
664
|
|
|
|
(56,278
|
)
|
|
|
|
|
|
|
|
|
|
Net effect of exchange rate on cash and cash equivalents
|
|
|
(136
|
)
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(6,261
|
)
|
|
|
(42,868
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
23,245
|
|
|
|
66,815
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
16,984
|
|
|
$
|
23,947
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
47,272
|
|
|
$
|
28,269
|
|
Income taxes paid
|
|
$
|
1,090
|
|
|
$
|
951
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Shares issued in connection with the acquisition of Directi
|
|
$
|
|
|
|
$
|
27,235
|
|
Assets acquired under capital lease
|
|
$
|
|
|
|
$
|
11,704
|
|
See accompanying notes to consolidated financial statements.
5
Endurance International Group Holdings, Inc.
Notes to Consolidated Financial Statements
(unaudited)
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 by investment funds and entities affiliated with
Warburg Pincus and Goldman Sachs on December 22, 2011, of a controlling interest in EIG Investors, EIG and EIGs subsidiary companies. On November 7, 2012, Holdings reorganized as a Delaware limited partnership and on June 25,
2013, Holdings converted into a Delaware C-corporation and changed its name to Endurance International Group Holdings, Inc. The Company closed its initial public offering (IPO) of its common stock on October 25, 2013.
2. Summary of Significant Accounting Policies
Basis of Preparation
The
accompanying consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared using accounting 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.
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.
Unaudited Interim
Financial Information
The accompanying interim consolidated balance sheet as of June 30, 2014, and the related statements of
operations for the three and six months ended June 30, 2013 and 2014, cash flows for the six months ended June 30, 2013 and 2014, and the notes to consolidated financial statements are unaudited. These unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments
that are necessary for a fair presentation of the Companys financial position at June 30, 2014, and results of operations for the three and six months ended June 30, 2013 and 2014 and cash flows for the six months ended June 30,
2013 and 2014. The consolidated results in the consolidated statements of operations and comprehensive loss are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2014.
6
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.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include deferred expenses for domain name registry fees that are paid in full at the time a domain is
registered by one of the Companys registrars on behalf of a subscriber. The registry fees are recognized on a straight-line basis over the term of the domain registration period. As of December 31, 2013 and June 30, 2014, the balance
of deferred expenses for domain name registry fees was $22.8 million and $38.0 million, respectively.
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. Assets recorded under capital
lease are depreciated over the lease term. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:
|
|
|
Software
|
|
Two to three years
|
Computers and office equipment
|
|
Three years
|
Furniture and fixtures
|
|
Five years
|
Leasehold improvements
|
|
Shorter of useful life or remaining term of the lease
|
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 six months ended
June 30, 2013 and there was $1.3 million and $2.4 million of internal-use software development costs capitalized for the three and six months ended June 30, 2014, respectively.
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. As of December 31,
2013 and June 30, 2014, the fair value of the Companys reporting unit exceeded the carrying value of the reporting units net assets, and therefore no impairment existed as of those dates.
7
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 $984.2 million and $1,079.8 million as of December 31,
2013 and June 30, 2014, 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 and developed technology. The Company also has 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. The Companys intangible assets are recorded at fair value at the time of their acquisition. The Company amortizes intangible assets 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
three and six months ended June 30, 2013 and 2014.
Revenue Recognition
The Company generates revenue primarily 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 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 service arrangements that may
include hosting plans, domain name registrations, and other cloud-based products and services.
8
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 its 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 the business necessitates a more
timely analysis.
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 to be 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 three and six months ended June 30, 2013 and 2014.
The Company
records interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the three and six months ended June 30, 2013 and 2014, the Company did not recognize any interest or 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.
9
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 and comprehensive loss. 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.
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 three and six months ended June 30, 2013 and 2014, non-vested shares, stock options,
restricted stock awards and restricted stock units amounting to 6,774,763 and 9,588,364, respectively, were excluded from the denominator in the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except per share amount and per share data)
|
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
|
$
|
(42,958
|
)
|
|
$
|
(13,448
|
)
|
|
$
|
(64,686
|
)
|
|
$
|
(32,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Endurance International Group Holdings, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.44
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares used in computing net loss per share attributable to Endurance International Group Holdings,
Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
97,933,795
|
|
|
|
127,225,196
|
|
|
|
97,550,649
|
|
|
|
126,844,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In April 2014, the FASB issued ASU No. 2014-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an
Entity,
or ASU 2014-08. Under ASU 2014-08, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organizations operations and
financial results. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued
operations. ASU 2014-08 is effective for fiscal and interim periods beginning on or after December 15, 2014. The Company believes the adoption of ASU 2014-08 will not have an impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, or ASU 2014-09, which supersedes
nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which the
entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgments and estimates may be required within the revenue recognition process than are required
under existing U.S. GAAP. This standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of
the standard in each reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional
footnote disclosures). The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard in 2017.
In June 2014, the FASB issued ASU No. 2014-12,
Accounting for Share-Based Payments When the Terms of an Award Provide That a
Performance Target Could Be Achieved after the Requisite Service Period,
or ASU 2014-12. This new guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a
performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015 with early adoption
permitted. The Company is evaluating the potential impact of ASU 2014-12 on its existing stock-based compensation plans.
10
Reclassifications
In 2013, the Company reclassified deferred consideration in the consolidated statements of cash flows from net cash used in investing
activities to net cash provided by financing activities.
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 and developed technology. 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. 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.
On January 23, 2014, the Company acquired the
web presence business of Directi (Directi) from Directi Web Technologies Holdings, Inc. (Directi Holdings). Directi provides web presence solutions to SMBs in various countries, including India, the United States, Turkey,
China, Russia and Indonesia. The acquisition provides the Company with an established international presence focused on growing emerging markets as well as the ability to expand its geographic footprint by taking its existing portfolio of brands to
international markets.
The final purchase price of $109.8 million consisted of cash payments of $82.6 million in aggregate and the
issuance of 2,269,579 shares of the Companys common stock to Directi Holdings equivalent to $27.2 million or $12.00 per share. 2,123,039 shares of the Companys common stock were issued at closing and 146,540 shares of the Companys
common stock were issued in May 2014. Cash payments included a $5.0 million advance paid in August 2013, $20.5 million paid at the closing and the remaining $57.1 million of deferred consideration was paid during the three months ended June 30,
2014.
The purchase price of $109.8 million has been allocated on a preliminary basis to goodwill of $92.1 million, long-lived intangible
assets consisting of subscriber relationships, developed technology, trade-names and leasehold interests of $7.7 million, $6.4 million, $7.4 million and $0.3 million, respectively, property and equipment of $2.7 million, other assets of $4.7 million
and working capital of $0.2 million, offset by deferred revenue of $3.0 million, other payables of $5.4 million and deferred tax liabilities of $3.3 million. The majority of the purchase price was allocated to goodwill, which is not deductible for
tax purposes. The goodwill reflects the value of an established international business and infrastructure that enables the Company to increase its market penetration in emerging markets. The intangible assets are being amortized in accordance with
their estimated projected cash flows. Subscriber relationships, developed technology, trade names and leasehold interests are being amortized over 17 years, 7 years, 5 years and 4 years, respectively.
For the three and six months ended June 30, 2014, $6.6 million and $9.1 million, respectively, of revenue from the Companys 2014
acquisition of Directi was included in the Companys consolidated statement of operations and comprehensive loss.
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.
In addition, in connection with the acquisition of Directi, the Company was initially obligated to make additional
aggregate payments of up to a maximum of approximately $62.0 million, which expires in May 2015, subject to specified terms, conditions and operational contingencies. The Company has paid $7.6 million of this amount and recorded an estimated
acquisition liability of $13.4 million in connection with the purchase of a domain name business by a subsidiary of the Company from a company associated with the founders of Directi Holdings pursuant to an agreement entered into on April 30,
2014. The estimated aggregate purchase price of $21.0 million was allocated on a preliminary basis to long-lived intangible assets of $15.6 million and goodwill of $5.4 million, all of which is deductible for tax purposes. The intangible
11
assets are being amortized in accordance with their estimated projected cash flows, using the accelerated method. The goodwill reflects the value of an established domain portfolio business that
enables the Company to monetize that domain portfolio.
4. Property and Equipment and Capital Lease Obligations
Components of property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
June 30, 2014
|
|
Software
|
|
$
|
4,503
|
|
|
$
|
18,805
|
|
Computers and office equipment
|
|
|
59,201
|
|
|
|
69,635
|
|
Furniture and fixtures
|
|
|
3,715
|
|
|
|
4,219
|
|
Leasehold improvements
|
|
|
6,033
|
|
|
|
6,919
|
|
Construction in process
|
|
|
1,392
|
|
|
|
1,977
|
|
|
|
|
|
|
|
|
|
|
Property and equipmentat cost
|
|
|
74,844
|
|
|
|
101,555
|
|
Less accumulated depreciation
|
|
|
(25,129
|
)
|
|
|
(39,476
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipmentnet
|
|
$
|
49,715
|
|
|
$
|
62,079
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense related to property and equipment for the three months ended June 30, 2013 and 2014
was $4.3 million and $7.5 million, respectively. Depreciation expense related to property and equipment for the six months ended June 30, 2013 and 2014 was $8.3 million and $14.5 million, respectively.
During the six months ended June 30, 2014, the Company entered into an agreement to lease software licenses for use on certain data
center server equipment for a term of thirty-six months.
As of December 31, 2013 and June 30, 2014, the Companys software
shown in the above table included the software assets under a capital lease as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
June 30, 2014
|
|
Software
|
|
$
|
|
|
|
$
|
11,704
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(1,951
|
)
|
|
|
|
|
|
|
|
|
|
Assets under capital leasenet
|
|
$
|
|
|
|
$
|
9,753
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2014, the expected future minimum lease payments under the capital lease discussed above were
approximately as follows (dollars in thousands):
|
|
|
|
|
|
|
Amount
|
|
Remainder of 2014
|
|
$
|
2,056
|
|
2015
|
|
|
4,112
|
|
2016
|
|
|
4,420
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
10,588
|
|
Less amount representing interest
|
|
|
(665
|
)
|
|
|
|
|
|
Present value of minimum lease payments (capital lease obligation)
|
|
|
9,923
|
|
Current portion
|
|
|
3,700
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
6,223
|
|
|
|
|
|
|
5. 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.
|
12
|
|
|
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, 2013 and June 30, 2014, the Companys financial assets or liabilities
required to be measured on a recurring basis are accrued earn-out consideration payable in connection with the 2012 acquisition of certain assets of Mojoness, Inc. or Mojo and the 2014 acquisition of a domain name business. The Company has
classified its liabilities for contingent earn-out consideration related to these acquisitions within Level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which included probability weighted
cash flows. During the six months ended June 30, 2014, the Company paid $0.2 million related to the earn-out provisions for Mojo and recorded $13.4 million related to the April 2014 acquisition. The earn-out consideration in the table below is
included in total deferred consideration in the Companys consolidated balance sheets.
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, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent earn-out consideration
|
|
$
|
1,655
|
|
|
|
|
|
|
|
|
|
|
$
|
1,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
1,655
|
|
|
|
|
|
|
|
|
|
|
$
|
1,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent earn-out consideration
|
|
$
|
14,851
|
|
|
|
|
|
|
|
|
|
|
$
|
14,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
14,851
|
|
|
|
|
|
|
|
|
|
|
$
|
14,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Goodwill and Other Intangible Assets
The following table summarizes the changes in the Companys goodwill balances from December 31, 2013 to June 30, 2014 (in
thousands):
|
|
|
|
|
Goodwill balance at December 31, 2013
|
|
$
|
984,207
|
|
Goodwill related to 2013 acquisitions
|
|
|
(2,261
|
)
|
Goodwill related to 2014 acquisitions
|
|
|
97,522
|
|
Foreign translation impact
|
|
|
282
|
|
|
|
|
|
|
Goodwill balance at June 30, 2014
|
|
$
|
1,079,750
|
|
|
|
|
|
|
During the six months ended June 30, 2014, the Company completed the purchase accounting related to a
2013 acquisition and allocated an additional $2.3 million to long-lived intangible assets which had been included in goodwill on a preliminary basis. The Company has not recorded any impairment charges related to goodwill during the six months ended
June 30, 2013 and 2014.
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. The Company concluded there were no triggering
events as of June 30, 2014.
13
At June 30, 2014, other intangible assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Weighted
Average
Useful Life
|
|
Developed technology
|
|
$
|
190,370
|
|
|
$
|
46,483
|
|
|
$
|
143,887
|
|
|
|
9 years
|
|
Subscriber relationships
|
|
|
356,687
|
|
|
|
171,317
|
|
|
|
185,370
|
|
|
|
13 years
|
|
Trade-names
|
|
|
76,655
|
|
|
|
26,092
|
|
|
|
50,563
|
|
|
|
12 years
|
|
Intellectual property
|
|
|
18,420
|
|
|
|
1,184
|
|
|
|
17,236
|
|
|
|
13 years
|
|
Leasehold interests
|
|
|
314
|
|
|
|
91
|
|
|
|
223
|
|
|
|
1 year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total June 30, 2014
|
|
$
|
642,446
|
|
|
$
|
245,167
|
|
|
$
|
397,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
The Companys amortization expense is included in cost of revenue in the aggregate amounts of $26.2 million and $25.4 million for the
three months ended June 30, 2013 and 2014, respectively, and $52.3 million and $49.5 million for the six months ended June 30, 2013 and 2014, respectively.
7. Investments
As of December 31,
2013 and June 30, 2014, the Companys carrying value of investments in privately-held companies, was $6.5 million and $21.6 million, respectively.
In 2012, 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, reducing its interest to 40%.
During the three months
ended June 30, 2014, the Company made a strategic investment of $15.0 million in Automattic, Inc. (Automattic), an entity that provides content management systems associated with WordPress. The investment represents less than 5% of
the outstanding shares of Automattic and better aligns the Company with an important partner.
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 income of unconsolidated entities, net of tax. The Company recognized net income of $0.1 million and $0.1 million for the three months ended June 30, 2013 and 2014, respectively, and $0.3 million and $0.1 million for the six
months ended June 30, 2013 and 2014, respectively, related to its investments.
From time to time, the Company may make new and
follow-on investments and may receive distributions from investee companies. As of June 30, 2014, the Company was not obligated to fund any follow-on investments in these investee companies.
As of December 31, 2013 and June 30, 2014, 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.
14
8. Notes Payable
At December 31, 2013 and June 30, 2014 notes payable consisted of a first lien term loan facility with a principal amount outstanding
of $1,047.4 million and $1,042.1 million, respectively, which bore interest at a LIBOR-based rate of 5.00%. The current portion of the first lien loan as of December 31, 2013 and June 30, 2014 was $10.5 million in both periods. At
June 30, 2014, notes payable also included a total of $33.0 million in bank revolver loans, consisting of a loan of $30.0 million which bore interest at a LIBOR-based rate of 7.75% and a loan of $3.0 million which bore interest at an alternate
base rate of 8.50%. The amounts outstanding under the revolving credit facility as of December 31, 2013 and June 30, 2014 of $0.0 million and $33.0 million were classified as current notes payable on the consolidated balance sheets.
January 2013November 24, 2013
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 (November 2012 First Lien), a revolver in aggregate principal amount not to exceed $85.0 million (Revolver) and a new second lien credit agreement
(November 2012 Second Lien) for an original principal amount of $315.0 million. In August 2013, the Company amended its November 2012 First Lien for an additional $90.0 million of incremental first lien term loan before refinancing its
debt in November 2013, as described below.
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 LIBOR-based loan was 5.00% plus the greater of the LIBOR rate, or 1.25%. The interest rate for a reference rate loan was 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%. 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 rate for an Alternate Base Rate (ABR) Revolver loan was 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 was 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 Revolver payable in arrears on the
last day of each fiscal quarter.
During the six months ended June 30, 2013, the Company made aggregate mandatory repayments on the
November 2012 First Lien of $4.0 million. For the three and six months ended June 30, 2013, amortization of deferred financing costs of $0.1 million and $0.1 million, respectively, was included in interest expense in the consolidated statements
of operations and comprehensive loss.
Debt RefinancingNovember 25, 2013
In November 2013, following its IPO, the Company repaid in full its November 2012 Second Lien of $315.0 million and increased the first lien
term loan facility (November 2013 First Lien) by $166.2 million to $1,050.0 million, thereby reducing its overall indebtedness by $148.8 million. The Company also increased the Revolver by $40.0 million to $125.0 million. The mandatory
repayment of principal on the November 2013 First Lien was increased to approximately $2.6 million at the end of each quarter. During the six months ended June 30, 2014, the Company made aggregate mandatory repayments on the November 2013 First
Lien of $5.3 million. In the three months ended June 30, 2014, the Company had drawn down $55.0 million on its Revolver, and subsequently repaid $22.0 million of the amount drawn down, resulting in the $33.0 million Revolver balance outstanding
at June 30, 2014. There was no change to the maturity dates of the term loan facility and Revolver, which mature on November 9, 2019 and December 22, 2016, respectively.
Effective November 25, 2013, the interest rate for a LIBOR based interest loan was reduced to 4.00% plus the greater of the LIBOR rate or
1.00%. The interest rate for a reference rate loan was reduced to 3.00% per annum plus the greater of the prime rate, the federal funds effective rate plus 0.50%, an Adjusted LIBOR rate or 2.00%. There was no change to the interest rates for a
Revolver loan. Interest is payable on maturity of the elected interest period for a LIBOR-based interest loan, which can be one, two, three or six months. Interest is payable at the end of each fiscal quarter for a reference rate loan term loan or
an ABR Revolver loan.
Interest
The Company recorded $21.8 million and $14.2 million in interest expense for the three months ended June 30, 2013 and 2014, respectively,
and $43.5 million and $27.8 million for the six months ended June 30, 2013 and 2014, respectively.
15
The following table provides a summary of interest rates and interest expense for the three and
six months ended June 30, 2013 and 2014 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
2013
|
|
|
Three Months Ended
June 30,
2014
|
|
|
Six Months Ended
June 30,
2013
|
|
|
Six Months Ended
June 30,
2014
|
|
Interest rateLIBOR
|
|
|
6.25%-10.25
|
%
|
|
|
5.00%-7.75
|
%
|
|
|
6.25%-10.25
|
%
|
|
|
5.00%-7.75
|
%
|
Interest ratereference
|
|
|
7.75%-10.25
|
%
|
|
|
5.00%-8.50
|
%
|
|
|
7.75%-10.25
|
%
|
|
|
5.00%-8.50
|
%
|
Non-refundable feeunused facility
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
Interest expense and service fees
|
|
$
|
21,153
|
|
|
$
|
13,956
|
|
|
$
|
42,187
|
|
|
$
|
27,307
|
|
Amortization of deferred financing fees
|
|
$
|
53
|
|
|
$
|
19
|
|
|
$
|
106
|
|
|
$
|
38
|
|
Amortization of net present value of deferred consideration
|
|
$
|
589
|
|
|
$
|
|
|
|
$
|
1,168
|
|
|
$
|
5
|
|
Accretion of present value of deferred bonus payments
|
|
$
|
40
|
|
|
$
|
|
|
|
$
|
78
|
|
|
$
|
1
|
|
Interest expense for capital lease obligations
|
|
$
|
|
|
|
$
|
131
|
|
|
$
|
|
|
|
$
|
274
|
|
Interest expense for deferred consideration promissory note
|
|
$
|
|
|
|
$
|
70
|
|
|
$
|
|
|
|
$
|
140
|
|
Other interest expense
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
21,835
|
|
|
$
|
14,177
|
|
|
$
|
43,539
|
|
|
$
|
27,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The November 2013 Financing Amendment contains 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 contains certain negative covenants and defines 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, 2013 and June 30, 2014.
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 and June 30, 2014.
Common Stock
The Company has 500,000,000 shares of authorized common stock, par value $0.0001.
Voting Rights
All holders of
common stock are entitled to one vote per share.
16
The following tables present the changes in total stockholders equity (in thousands):
|
|
|
|
|
|
|
Total
Stockholders
Equity
|
|
Balance, December 31, 2013
|
|
$
|
155,262
|
|
Issuance of common stock for Directi acquisition
|
|
|
27,235
|
|
Stock-based compensation
|
|
|
7,173
|
|
Non-controlling interest accretion
|
|
|
(1,121
|
)
|
Foreign currency translation adjustment
|
|
|
48
|
|
Net loss
|
|
|
(38,601
|
)
|
|
|
|
|
|
Balance, June 30, 2014
|
|
$
|
149,996
|
|
|
|
|
|
|
10. Stock-Based Compensation
2012 Restricted Stock Awards
The
following tables present a summary of the 2012 restricted stock awards activity for the six months ended June 30, 2014 for restricted stock awards that were granted prior to the Companys IPO (dollars in thousands):
|
|
|
|
|
|
|
2012 Restricted Stock Awards
|
|
Non-vested at December 31, 2013
|
|
|
1,456,666
|
|
Forfeitures
|
|
|
(15,487
|
)
|
Vested
|
|
|
(325,226
|
)
|
|
|
|
|
|
Non-vested at June 30, 2014
|
|
|
1,115,953
|
|
|
|
|
|
|
The following table provides a summary of the activity of the restricted stock units that were granted in
connection with the IPO and the non-vested balance as of June 30, 2014 (dollars in thousands except grant date fair value price):
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested at December 31, 2013
|
|
|
288,014
|
|
|
$
|
12.00
|
|
Vested and unissued
|
|
|
(66,452
|
)
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2014
|
|
|
221,562
|
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
2013 Stock Incentive Plan
The 2013 Stock Incentive Plan (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.
For stock options issued under the 2013 Plan, the fair value of each option is estimated on the date of grant, and an estimated forfeiture
rate 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 weighted-average assumptions used to compute stock-based compensation expense for awards
granted under the 2013 Stock Incentive Plan during the six months ended June 30, 2014 are as follows:
|
|
|
|
|
|
|
2014
|
|
Risk-free interest rate
|
|
|
2.2
|
%
|
Expected volatility
|
|
|
58.4
|
%
|
Expected life (in years)
|
|
|
6.25
|
|
Expected dividend yield
|
|
|
|
|
17
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 a 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 under the 2013 Plan generally vest annually over a four-year period.
The following table provides a summary of the Companys stock options as of June 30, 2014 and the stock option activity for all
stock options granted under the 2013 Plan during the six months ended June 30, 2014 (dollars in thousands except exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual Term
(In Years)
|
|
|
Aggregate
Intrinsic
Value(3)
|
|
Outstanding at December 31, 2013
|
|
|
5,619,671
|
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
12,006
|
|
|
$
|
12.52
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(267,740
|
)
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
5,363,937
|
|
|
$
|
12.00
|
|
|
|
9.3
|
|
|
$
|
17,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2014
|
|
|
469,144
|
|
|
$
|
12.00
|
|
|
|
9.3
|
|
|
$
|
1,543
|
|
Expected to vest at June 30, 2014(1)
|
|
|
4,804,240
|
|
|
$
|
12.00
|
|
|
|
9.3
|
|
|
$
|
15,800
|
|
Exercisable and expected to vest at June 30, 2014(2)
|
|
|
5,273,384
|
|
|
$
|
12.00
|
|
|
|
9.3
|
|
|
$
|
17,343
|
|
(1)
|
This represents the number of unvested options outstanding as of June 30, 2014, which has been reduced using an estimated forfeiture rate and are expected to vest in the future.
|
(2)
|
This represents the number of vested options as of June 30, 2014 plus the number of unvested options outstanding as of June 30, 2014, which has been reduced using an estimated forfeiture rate and are expected
to vest in the future.
|
(3)
|
The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Companys common stock on June 30, 2014 of $15.29 per share, or the date of exercise as
appropriate, and the exercise price of the underlying options.
|
The following table provides a summary of the Companys
restricted stock award activity for the 2013 Plan during the six months ended June 30, 2014 (dollars in thousands except weighted-average grant date fair value price):
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Awards
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested at December 31, 2013
|
|
|
714,928
|
|
|
$
|
12.00
|
|
Granted
|
|
|
85,900
|
|
|
$
|
12.28
|
|
Vested
|
|
|
(3,682
|
)
|
|
$
|
12.00
|
|
Canceled
|
|
|
(75,603
|
)
|
|
$
|
12.02
|
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2014
|
|
|
721,543
|
|
|
$
|
12.03
|
|
|
|
|
|
|
|
|
|
|
18
The following table provides a summary of the Companys restricted stock unit activity for
the 2013 Plan during the six months ended June 30, 2014 (dollars in thousands except weighted-average grant date fair value price):
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested at December 31, 2013
|
|
|
461,556
|
|
|
$
|
12.00
|
|
Vested and unissued
|
|
|
(60,197
|
)
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2014
|
|
|
401,359
|
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
All Plans
The following table presents total stock-based compensation expense recorded in the consolidated statement of operations and comprehensive loss
for all 2012 restricted stock awards and units issued prior to the Companys IPO in October 2013 and all awards granted under the 2013 Plan in connection with or subsequent to the IPO (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Cost of revenue
|
|
$
|
2
|
|
|
$
|
114
|
|
|
$
|
11
|
|
|
$
|
246
|
|
Sales and marketing
|
|
|
5
|
|
|
|
385
|
|
|
|
45
|
|
|
|
753
|
|
Engineering and development
|
|
|
3
|
|
|
|
180
|
|
|
|
29
|
|
|
|
373
|
|
General and administrative
|
|
|
176
|
|
|
|
2,950
|
|
|
|
654
|
|
|
|
5,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
$
|
186
|
|
|
$
|
3,629
|
|
|
$
|
739
|
|
|
$
|
7,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a summary of the unrecognized compensation expense for the Companys 2012
restricted stock awards and units and the 2013 Plan awards by plan and type of award as of June 30, 2014 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Unrecognized Compensation
Expense at June 30, 2014
|
|
|
Weighted
Average
Period To Be
Recognized
|
|
2012 Restricted Stock Awards
|
|
$
|
978
|
|
|
|
1.8 years
|
|
2012 Restricted Stock Unit Awards
|
|
$
|
2,620
|
|
|
|
1.7 years
|
|
2013 Plan Stock Option Awards
|
|
$
|
30,224
|
|
|
|
3.3 years
|
|
2013 Plan Restricted Stock Awards
|
|
$
|
7,323
|
|
|
|
3.3 years
|
|
2013 Plan Restricted Stock Unit Awards
|
|
$
|
4,793
|
|
|
|
3.3 years
|
|
11. Redeemable Non-controlling Interest
In connection with a 2013 equity investment in a privately held company based in the United Kingdom, where the Company acquired a controlling
interest, the agreement provided for a put option for the then non-controlling interest (NCI) shareholders to put the remaining equity interest to the Company within pre-specified put periods. As the NCI is subject to a put option that
is outside the control of the Company, it is deemed a 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 guidance of the Securities and Exchange Commission (SEC) under ASC 480-10-S99,
Accounting for Redeemable Equity Securities.
The difference between the $20.8 million 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. The estimated value of the redeemable non-controlling interest as of June 30, 2014 was $21.9 million. 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 and comprehensive loss.
19
12. Income Taxes
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, 2013 and June 30, 2014 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.
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:
|
|
|
Net Operating Losses (NOLs) incurred from the Companys inception to June 30, 2014;
|
|
|
|
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 June 30, 2014, 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 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 as of December 31, 2013. The provision for income taxes results from a combination of the activities of the Companys domestic and foreign subsidiaries.
For the three months ended June 30, 2013 and 2014, the Company has recognized tax expense of $10.4 million and $1.0 million,
respectively, and for the six months ended June 30, 2013 and 2014, the Company has recognized a tax benefit of $1.7 million and tax expense of $4.5 million, respectively, in the consolidated statements of operations and comprehensive loss. The
income tax expense for the three months ended June 30, 2014 is primarily comprised of U.S. deferred tax expense of $1.7 million related to the differences in the accounting treatment of goodwill under U.S. GAAP and the tax accounting for
goodwill, a foreign deferred tax benefit of $0.8 million related to the reductions of deferred liabilities created in purchase accounting and a provision for foreign taxes of $0.3 million. The income tax expense for the six months ended
June 30, 2014 is primarily attributable to a provision for foreign taxes of $2.1 million and U.S. alternative minimum taxes of $0.4 million. The remaining balance of $2.0 million for the six months ended June 30, 2014 is primarily
attributable to an increase in U.S. deferred tax liabilities due to the differences in the accounting treatment of goodwill under U.S. GAAP and the tax accounting treatment for goodwill of $4.5 million offset by a foreign deferred benefit of $2.5
million related to the reductions of deferred liabilities created in purchase accounting.
The provision (benefit) for income taxes shown
on the consolidated statements of operations and comprehensive loss 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.
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.
20
Utilization of the NOL carry-forwards can be subject to an annual limitation due to the ownership
percentage change limitations under Section 382 of the Internal Revenue Code (Section 382 limitation). 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. In connection with a change in control in 2011 the Company was subject to Section 382 annual limitations of $77.1 million against the balance of NOL carry-forwards generated prior to the change in
control in 2011. Through December 31, 2013 the Company accumulated the unused amount of Section 382 limitations in excess of the amount of NOL carry-forwards that were originally subject to limitation. Therefore these unused NOL
carry-forwards are available for future use to offset taxable income. The Company has completed an analysis of changes in its ownership from 2011, through its IPO, to December 31, 2013. The conclusion is that there was not a Section 382
ownership change during this period and therefore any NOLs generated through December 31, 2013, are not subject to any new Section 382 annual limitations on NOL carry-forwards. As a result, all unused NOL carry-forwards at
December 31, 2013 are available for future use to offset taxable income.
13. Severance and Other Exit Costs
In connection with acquisitions, the Company may evaluate its data center, sales and marketing, customer support and engineering operations and
the general and administrative function in an effort to eliminate redundant costs. As a result, the Company may incur charges for employee severance, exiting facilities and restructuring data center commitments and other related costs. During the
three months ended June 30, 2014, the Company implemented plans to further integrate and consolidate its customer support and engineering operations, resulting in severance and facility exit costs. The severance charges are associated with
eliminating 90 positions across primarily customer support, engineering operations and sales and marketing. Total severance for these plans will be approximately $1.5 million, of which, $1.2 million was incurred in the three months ended June 30,
2014, with the balance to be incurred in the second half of fiscal year 2014. The Company expects the employee-related charges to be completed during the year ended December 31, 2014. The Company has accrued a severance liability of $1.0 million as
of June 30, 2014 related to these severance costs.
The Company expects to incur facility costs associated with closing offices in Redwood
City, California and Englewood, Colorado. The Company will have remaining lease obligations of approximately $3.0 million for vacated facilities, and will take a charge for these future lease payments, less expected sublease income, during the third
quarter of fiscal year 2014. The Company is still evaluating the amount of potential sublease income that will partially offset this charge. The Company has cash payment obligations for these leases, net of sublease income, through March 31, 2018.
The following table provides a summary of the activity for the three and six months ended June 30, 2014 related to the Companys
severance accrual (in thousands):
|
|
|
|
|
|
|
Employee Severance
|
|
Balance at December 31, 2013
|
|
$
|
|
|
Severance charges
|
|
|
1,247
|
|
Cash paid
|
|
|
(216
|
)
|
|
|
|
|
|
Balance at June 30, 2014
|
|
$
|
1,031
|
|
|
|
|
|
|
The following table presents severance charges recorded in the consolidated statement of operations and
comprehensive loss for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2014
|
|
|
June 30, 2014
|
|
Cost of revenue
|
|
$
|
290
|
|
|
$
|
290
|
|
Sales and marketing
|
|
|
115
|
|
|
|
115
|
|
Engineering and development
|
|
|
823
|
|
|
|
823
|
|
General and administrative
|
|
|
19
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Total severance charges
|
|
$
|
1,247
|
|
|
$
|
1,247
|
|
|
|
|
|
|
|
|
|
|
14. Commitments and Contingencies
On February 28, 2014, the Company entered into a Master Service Agreement (the Agreement) with Ace Data Centers, Inc. Under
the terms of the Agreement, which is retroactively effective as of January 1, 2014 (the Effective Date), the Company will license space at a data center facility in Provo, Utah. The Agreement provides for a term of ten years from
the Effective Date and has a total estimated financial obligation of $102.0 million over the ten year term, exclusive of certain fees and charges, including without limitation, non-recurring charges, late fees or other penalties, fees for additional
bandwidth purchased by the Company and additional services not contemplated in the Agreement.
21
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.
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 three and six months ended June 30, 2013 and 2014.
The Company has certain contracts with entities for outsourced services that are related parties. 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 three months ended June 30, 2013 and 2014, $1.0 million and $1.4 million, respectively, was recorded as
expense in cost of revenue, $0.1 million and $0.3 million, respectively, was recorded in engineering and development expense, $0.1 million and $0.1 million, respectively, was recorded in sales and marketing expense, and $0.6 million and $0.0
million, respectively, was recorded in general and administrative expense, relating to services provided to the Company under these agreements. For the six months ended June 30, 2013 and 2014, $2.4 million and $2.4 million, respectively, was
recorded as expense in cost of revenue, $0.4 million and $0.5 million, respectively, was recorded in engineering and development expense, $0.1 million and $0.2 million, respectively, was recorded in sales and marketing expense, and $1.0 million and
$0.1 million, respectively, was recorded in general and administrative expense, relating to services provided to the Company under these agreements.
The Company also has an agreement with an entity that provides a 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 both of whom are beneficial owners, directly and indirectly, of equity in the Company. For the
three months ended June 30, 2013 and 2014, $0.9 million and $1.4 million, respectively, were recorded as expense in cost of revenue related to this agreement. For the six months ended June 30, 2013 and 2014, $1.6 million and $2.0 million,
respectively, were recorded as expense in cost of revenue related to this agreement.
16. Subsequent Events
With respect to the unaudited consolidated financial statements as of and for the three and six months ended June 30, 2014, the Company
performed an evaluation of subsequent events through the date of this filing.
On July 7, 2014, the Company paid $4.2 million to
increase its investment in a privately-held company based in the United Kingdom, of which the Company has a controlling interest. Also on July 7, 2014, the Company entered into an amendment to the put option made by the NCI shareholders (see
Note 11), which proportionately reduced the value expected to be paid upon exercise.
22
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations together with
our consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that
are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, anticipate, believe, can, continue; could, estimate,
expect, intend, may, plan, project, seek, should, strategy, target, will, would and similar expressions or variations
intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties
and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those identified below and those discussed in the section titled Risk Factors included under Part II, Item 1A below, among others. Furthermore, such forward-looking statements speak only as of the
date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
We are a leading provider of
cloud-based platform solutions designed to help small and medium-sized businesses, or SMBs, succeed online. Leveraging our proprietary technology platform, we serve over 3.7 million subscribers globally with a comprehensive and integrated suite
of over 150 products and services that help SMBs get online, get found and grow their businesses. The products and services available on our platform include domains, website builders, web hosting, email, security, backup, search engine
optimization, or SEO, and search engine marketing, or SEM, social media services, website analytics, and productivity and e-commerce solutions.
We deliver these products and services to our subscribers through an integrated technology platform that enables the delivery of cloud-based
products and services in an easy to use, intuitive and cost-effective manner. Over our 17 year history, we have honed and refined our platform to amass significant insights into the needs and aspirations of our subscribers. This allows us to engage
our subscribers in timely and compelling ways, driving significant business value for them. We believe that our platform delivers these solutions quickly, reliably and safely and that these strengths and capabilities help us attract and retain
subscribers who view their web presence as mission critical. These subscribers then demand products which we seek to upsell to them over a sustained period of time.
Our Multi-Channel, Multi-Brand Approach.
The SMB market is broad and diverse in terms of geography, industry, size and degree of
technology sophistication. As a consequence, we leverage our proprietary data to implement a multi-brand, multi-channel approach that allows us to precisely target the SMB universe, identify the best ways to reach different categories of subscribers
and tailor our brands and product offerings specifically toward those audiences. Our approach is designed to reach and efficiently on-board subscribers at scale while minimizing subscriber acquisition costs.
Our Multi-Product, Multi-Engagement Approach.
Once we get our subscribers online, we offer them a comprehensive and integrated
suite of over 150 products and services that helps them get found and grow their businesses. We use our technology and proprietary data and analytics to identify subscriber needs and opportunities based on type of business, length of time in
business, geography, products and services previously purchased from us and various other factors. This allows us to proactively engage with our subscribers in a timely manner through a variety of customer engagement channels. Using this
multi-product, multi-engagement approach, we have been able to steadily increase our average revenue per subscriber, or ARPS, by selling additional products and services to our subscribers throughout their subscription period.
23
Our approach to addressing the needs of SMBs and meeting the challenges of serving the SMB market
has enabled us to grow rapidly, to create long-term subscriber relationships and to build an attractive business model that generates substantial cash flow.
Second Quarter Results
Our revenue for
the three months ended June 30, 2013 and 2014 was $128.2 million and $152.0 million, respectively, representing year-over-year growth of 19% while our net losses were $43.0 million and $13.4 million, respectively, and our Adjusted EBITDA was
$53.7 million and $56.5 million, respectively, representing year-over-year growth of approximately 5%. During the same three month periods, our unlevered free cash flow, or UFCF, was $40.8 million and $43.6 million, respectively, representing
year-over-year growth of 7%, while our free cash flow, or FCF, was $19.7 million and $29.5 million, respectively, representing year-over-year growth of 50%.
Our revenue for the six months ended June 30, 2013 and 2014 was $251.0 million and $297.7 million, respectively, representing
year-over-year growth of 19% while our net losses were $64.7 million and $32.7 million, respectively, and our Adjusted EBITDA was $111.8 million and $115.6 million, respectively, representing year-over-year growth of approximately 3%. During the
same six month periods, our UFCF was $85.9 million and $92.6 million, respectively, representing year-over-year growth of 8%, while our FCF was $43.8 million and $65.0 million, respectively, representing year-over-year growth of 48%.
Our revenue growth during the three and six months ended June 30, 2014 resulted from increases in our two key growth drivers, total
subscribers and ARPS. We added approximately 93,000 net paying subscribers during the quarter bringing the total number of subscribers on our platform to over 3.7 million. During the quarter, ARPS grew $1.32 from $13.01 at the end of the second
quarter of 2013 to $14.33. Excluding the impact of Directi (which we acquired in January 2014), our ARPS grew to $13.35 or $0.34 greater than for the second quarter of 2013. During the six months ended June 30, 2014, we added approximately
194,000 net paying subscribers, excluding the 51,000 added to our base from the acquisition of Directi in the first quarter of 2014. During the six months ended June 30, 2014, ARPS grew $1.30 from $12.96 at the end of the second quarter of 2013
to $14.26. Excluding the impact of Directi, our ARPS grew to $13.41 or $0.45 greater than at the end of the second quarter of 2013. We believe that the growth in both total subscribers and ARPS on a year-over-year basis was driven by increased
investments in our direct and product marketing programs as well as favorable trends in our free to pay conversions that attracted new subscribers, combined with an increase in product adoption rates and higher cart values. We typically add fewer
net paying subscribers in the second quarter over the first quarter due to seasonality and believe that we will continue to grow our total subscriber base as we invest behind our marketing programs.
Growth in Adjusted EBITDA on a year-over-year basis was primarily a result of our revenue growth offset by the additional costs we incurred
related to becoming a public company, as well as by our increased investments in marketing as compared to the first half of 2013. In 2013, our marketing expenditures were lower due to our focus on integrating our 2012 acquisitions of Homestead and
HostGator into our technology platform. Typically, when we are integrating technology platforms, we curtail marketing spend and subscriber additions. Following the completion of the technology integration at the end of 2013, we began re-investing in
marketing and finding new channels that we believe will provide revenue-generating opportunities. We have explored new ways to on-board subscribers such as through lead-in products like back-up and storage. We have increased marketing that targets
sales of products such as these while also increasing our direct marketing effort for our core web presence solutions. We believe these additional marketing investments will enable our continued growth in subscribers and ARPS and we plan to continue
to increase our overall marketing spend provided we can manage our subscriber acquisition costs and return on our marketing investments at favorable levels. While these investments are generally neutral on a cash flow basis in the first year, we
expect based on our experience that they will become cash flow generative over the lifetime of the product renewal cycle.
Year-over year
growth in UFCF was favorably impacted by the reduction in capital expenditures following the completion of the integration of Homestead and HostGator into our technology platform.
During the three and six months ended June 30, 2014, FCF grew 50% and 48%, respectively, over the three and six months ended
June 30, 2013, as we benefited from economies of scale and reduced financing costs as a result of our November 2013 bank debt refinancing.
Adjusted EBITDA, UFCF and FCF were lower in the second quarter of 2014 over the first quarter of 2014 primarily from higher sales due to
typical seasonality in the first quarter. In addition higher capital expenditures of $0.5 million and a negative change in operating assets and liabilities contributed to the lower UFCF and FCF in the second quarter. We believe our Adjusted EBITDA,
UFCF and FCF may increase or decrease between quarters for these reasons but will continue to increase on a year over year basis as we continue to grow our revenue and realize efficiencies in the business.
24
As we acquire other businesses, we regularly combine data center, sales and marketing, customer
support and engineering operations and the general and administrative function to better leverage our cost structure by eliminating redundant costs. In order to remove these costs, we may incur charges for employee severance, exiting facilities and
restructuring data center commitments and other related costs. During the second quarter, we began the process to close office locations in California and Colorado. These office closings resulted in the elimination of 90 positions, for which we will
take severance charges of $1.5 million, of which $1.2 million was incurred during the second quarter of 2014, with the balance to be incurred during the second half of 2014. We will have approximately $3.0 million in remaining lease obligations for
these closed facilities and will take a charge for remaining lease payments, net of expected sublease income, in the third quarter of 2014. We are still evaluating the amount of potential sublease income that will partially offset this charge.
Finally, we have been focusing efforts on creating more technology-focused efficiencies that we believe will support the business overall and
benefit us over the long-term. The acquisition of Directi has allowed us to assess our current footprint and has resulted in a decision to reconfigure and consolidate our data center operations and customer support organization during 2014. We
currently estimate that these additional plans will result in approximately $1.0 million of severance charges during the second half of 2014.
ARPS, Adjusted EBITDA, UFCF and FCF are non-GAAP financial measures. For more information regarding ARPS, Adjusted EBITDA, UFCF and FCF and a
reconciliation of these measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, see Non-GAAP Financial Measures and Key Metrics below.
Growth Strategy
We believe total
subscribers and ARPS will continue to be the key drivers of our revenue growth in the future, and we intend to drive growth in both of these metrics by leveraging the strengths of our approach to serving the SMB market.
Increasing Total Subscribers
We
plan to increase total subscribers by continuing to invest in our multi-channel, multi-brand approach. We expect to continue to develop and refine our multiple subscriber acquisition channels, including our word of mouth referrals, our referral and
reseller network, our partnership with Google and other strategic partners and to expand our geographic footprint and our internationally-sourced revenues, particularly in emerging markets, as more and more SMBs in these markets come online due to
wider availability of internet infrastructure and mobile connectivity. The Directi acquisition has allowed us to expand our reach in these markets. Bluehost China went live in the first quarter, and in the second quarter we released localized
versions of our Bluehost and HostGator sites in several countries, including Brazil, India, Turkey and Russia. We expect to develop and launch these brands and additional brands from our portfolio in more international markets over the next several
quarters. We are planning to add to our portfolio of brands, both organically and through acquisitions, to target specific segments of the SMB market.
Increasing Average Revenue per Subscriber
We plan to increase ARPS through our multi-product, multi-engagement approach by offering our subscribers additional products and services,
particularly higher value items such as advanced hosting services, mobile and productivity solutions and professional services. As part of these efforts, we expect to continue to enhance our technology platform and services delivery architecture by
continuing to invest in new data center space and capacity, new gear and the development of intellectual property. We also plan to build out our cloud-based applications and services to help us upsell to more price conscious subscribers in emerging
markets as well as to increase our penetration in mature markets.
Non-GAAP Financial Measures and Key Metrics
In addition to our financial information presented in accordance with GAAP, we use certain non-GAAP financial measures described
below to evaluate the operating and financial performance of our business, identify trends affecting our business, develop projections and make strategic business decisions. Generally, a non-GAAP financial measure is a numerical measure of a
companys operating performance, financial position or cash flow that includes or excludes amounts that are included or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. We monitor the non-GAAP
financial measures described below, and we believe they are helpful to investors, because we believe they reflect the operating performance of our business and help management and investors gauge our ability to generate cash flow, excluding some
recurring and non-recurring expenses that are included in the most directly comparable measures calculated and presented in accordance with GAAP.
25
Our non-GAAP financial measures may not provide information that is directly comparable to that
provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to adjustments for integration and restructuring expenses. In addition, there are limitations
in using non-GAAP financial measures because they are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact on our reported financial
results. Furthermore, interest expense, which is excluded from some of our non-GAAP measures, has been and will continue to be for the foreseeable future a significant recurring expense in our business. The presentation of non-GAAP financial
information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. We urge you to review the reconciliations of our non-GAAP financial measures to the comparable
GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.
Key Metrics
We use a number of metrics, including the following key metrics, to evaluate the operating and financial performance of our business, identify
trends affecting our business, develop projections and make strategic business decisions:
|
|
|
average revenue per subscriber;
|
|
|
|
monthly recurring revenue retention rate;
|
|
|
|
unlevered free cash flow; and
|
The following table, which includes Directi for the three and six months
ended June 30, 2014, summarizes these non-GAAP financial measures and key metrics for the periods presented (all data in thousands, except average revenue per subscriber and monthly recurring revenue retention rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Financial and other metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subscribers
|
|
|
3,370
|
|
|
|
3,747
|
|
|
|
3,370
|
|
|
|
3,747
|
|
Average revenue per subscriber
|
|
$
|
13.01
|
|
|
$
|
14.33
|
|
|
$
|
12.96
|
|
|
$
|
14.26
|
|
Monthly recurring revenue retention rate
|
|
|
99
|
%
|
|
|
99
|
%
|
|
|
99
|
%
|
|
|
99
|
%
|
Adjusted Net Income
|
|
$
|
15,442
|
|
|
$
|
31,444
|
|
|
$
|
58,110
|
|
|
$
|
64,354
|
|
Adjusted EBITDA
|
|
$
|
53,701
|
|
|
$
|
56,496
|
|
|
$
|
111,827
|
|
|
$
|
115,623
|
|
Unlevered free cash flow
|
|
$
|
40,808
|
|
|
$
|
43,574
|
|
|
$
|
85,949
|
|
|
$
|
92,572
|
|
Free cash flow
|
|
$
|
19,673
|
|
|
$
|
29,505
|
|
|
$
|
43,792
|
|
|
$
|
64,976
|
|
Total Subscribers
We define total subscribers as those that, as of the end of a period, are subscribing directly to our web presence solutions on a paid basis.
Historically, in calculating total subscribers, we included the number of end-of-period subscribers we added through business acquisitions as if those subscribers had subscribed with us since the beginning of the period presented. Since the first
quarter of 2014, we have included subscribers we added through business acquisitions from the date of the relevant acquisition. We do not include in total subscribers accounts that access our solutions via resellers or purchase only domain names
from us. Subscribers of more than one brand are counted as separate subscribers. We believe total subscribers is an indicator of the scale of our platform and our ability to expand our subscriber base and is a critical factor in our ability to
monetize the opportunity we have identified in serving the SMB market.
26
During the three and six months ended June 30, 2014, we added approximately 93,000 and
194,000 net paying subscribers, respectively, excluding the subscribers added to our base from the acquisition of Directi in the first quarter of 2014. The increase in subscriptions is primarily a result of growth in the market for our products and
services, referrals, channel development, investing in our sales and our support organizations and training them to better utilize our data and analytical capabilities. In addition, upon closing the acquisition of Directi, we acquired a base of over
51,000 subscribers, bringing our total subscribers on platform to over 3.7 million as of June 30, 2014 versus 3.4 million as of June 30, 2013. The Directi subscriber base includes a significant number of resellers, which reduces
the total amount of Directis contribution to total subscribers because we count only the resellers, and not their end customers, as subscribers.
Average Revenue per Subscriber
Average revenue per subscriber, or ARPS, is a non-GAAP financial measure that we calculate as the amount of revenue we recognize in a period
divided by the average of the number of total subscribers at the beginning of the period and at the end of the period. In calculating ARPS, we exclude the impact of any fair value adjustments to deferred revenue resulting from acquisitions.
Historically, we adjusted the amount of revenue to include the revenue generated from subscribers we added through business acquisitions as if those acquired subscribers had been our subscribers since the beginning of the period presented. Since the
first quarter of 2014, we have adjusted the amount of revenue to include the revenue generated from subscribers we add through business acquisitions from the date of the relevant acquisition. We believe including revenue from acquired subscribers in
this manner provides a useful comparison of the revenue generated per subscriber from period to period. We believe ARPS is an indicator of our ability to optimize our mix of products and services and pricing, and sell products and services to new
and existing subscribers.
For the three months ended June 30, 2013 and 2014, ARPS increased from $13.01 to $14.33, respectively, and
for the six months ended June 30, 2013 and 2014, ARPS increased from $12.96 to $14.26, respectively. For the three months ended June 30, 2013 and 2014, excluding the impact of Directi, ARPS increased from $13.01 to $13.35, respectively,
and for the six months ended June 30, 2013 and 2014, excluding the impact of Directi, ARPS increased from $12.96 to $13.41, respectively. These increases in ARPS was a result of increasing demand for our solutions as we made progress with
product adoption rates from both new and existing subscribers. We expect ARPS to increase as we increase sales to existing and new subscribers by offering additional products and services and improving our distribution by expanding our points of
subscriber engagement, optimizing our communications across our various subscriber touchpoints and by facilitating easier access to our solutions.
The following table reflects the reconciliation of ARPS to revenue calculated in accordance with GAAP (all data in thousands, except ARPS
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Revenue
|
|
$
|
128,222
|
|
|
$
|
151,992
|
|
|
$
|
250,963
|
|
|
$
|
297,742
|
|
Purchase accounting adjustment
|
|
|
2,198
|
|
|
|
7,046
|
|
|
|
5,475
|
|
|
|
14,067
|
|
Pre-acquisition revenue from acquired properties
|
|
|
|
|
|
|
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted revenue
|
|
$
|
130,420
|
|
|
$
|
159,038
|
|
|
$
|
256,950
|
|
|
$
|
311,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subscribers
|
|
|
3,370
|
|
|
|
3,747
|
|
|
|
3,370
|
|
|
|
3,747
|
|
ARPS
|
|
$
|
13.01
|
|
|
$
|
14.33
|
|
|
$
|
12.96
|
|
|
$
|
14.26
|
|
Adjusted revenue attributable to Directi
|
|
|
|
|
|
|
12,850
|
|
|
|
|
|
|
|
22,310
|
|
Adjusted revenue excluding Directi
|
|
$
|
130,420
|
|
|
$
|
146,188
|
|
|
$
|
256,950
|
|
|
$
|
289,499
|
|
Total subscribers excluding Directi
|
|
|
3,370
|
|
|
|
3,695
|
|
|
|
3,370
|
|
|
|
3,695
|
|
ARPS excluding Directi
|
|
$
|
13.01
|
|
|
$
|
13.35
|
|
|
$
|
12.96
|
|
|
$
|
13.41
|
|
Monthly Recurring Revenue Retention Rate
We believe that our ability to retain revenue from our subscribers is an indicator of the long-term value of our subscriber relationships and
the stability of our revenue base. To assess our performance in this area, we measure our monthly recurring revenue, or MRR, retention rate. We calculate MRR retention rate at the end of a period by taking the retained recurring value of
subscription revenue of all active subscribers at the end of the prior period and dividing it into the retained recurring value of subscription revenue for those same subscribers at the end of the period presented. We believe MRR retention rate is
an indicator of our ability to retain existing subscribers, sell products and services and maintain subscriber satisfaction.
27
Our MRR retention rate was 99% for all periods presented.
Adjusted Net Income
Adjusted Net
Income is a non-GAAP financial measure that we calculate as net income (loss) plus (i) changes in deferred revenue inclusive of purchase accounting adjustments related to acquisitions, amortization, stock-based compensation expense, loss of
unconsolidated entities, net loss on sale of property and equipment, expenses related to integration of acquisitions and restructurings, any dividend-related payments accounted for as compensation expense, transaction expenses and charges including
costs associated with certain litigation matters, and preparation for our IPO, less (ii) earnings of unconsolidated entities and net gain on sale of property and equipment and (iii) the estimated tax effects of the foregoing adjustments.
Due to our history of acquisitions and financings, we have incurred accounting charges and expenses that obscure the operating performance of our business. We believe that adjusting for these items and the use of Adjusted Net Income is useful to
investors in evaluating the performance of our company.
Our adjusted net income increased from $15.4 million for the three months ended
June 30, 2013 to $31.4 million for the three months ended June 30, 2014 and increased from $58.1 million for the six months ended June 30, 2013 to $64.4 million for the six months ended June 30, 2014. The increase in our Adjusted
Net Income was in part due to lower interest expense of $7.7 million and $15.9 million in the three and six months ended June 30, 2014, respectively, as a result of a lower effective interest rate on our term loan debt, following our
refinancing in November 2013. The increase in our Adjusted Net Income in the three months ended June 30, 2014 was also due to a lower income tax charge of $8.7 million compared with the three months ended June 30, 2013. In the second
quarter of 2013 we recorded a valuation allowance against substantially all of our deferred tax assets. Year over year for the six month periods we had higher income taxes of $7.1 million which in part offsets the overall increase in our Adjusted
Net Income. This increase in our Adjusted Net Income was also partially offset by a higher depreciation charge of $3.2 million and $6.3 million in the three and six months ended June 30, 2014, respectively, as a result of expanding our business
and data center infrastructure as we migrated customers from our 2012 acquisitions of HostGator and Homestead onto our platform.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we calculate as Adjusted Net Income plus interest expense, depreciation, and
income tax expense (benefit). We manage our business based on the cash collected from our subscribers and the cash required to acquire and service those subscribers. We believe highlighting cash collected and cash spent in a given period provides
insight to an investor to gauge the overall health of our business. Under GAAP, although subscription fees are paid in advance, we recognize the associated revenue over the subscription term, which does not fully reflect short-term trends in our
operating results.
After adjusting both periods for the impact of the changes in deferred tax, depreciation and interest expense, as
described above under Adjusted Net Income, Adjusted EBITDA increased by $2.8 million from $53.7 million for the three months ended June 30, 2013 to $56.5 million for the three months ended June 30, 2014 and increased by $3.8 million from
$111.8 million for the six months ended June 30, 2013 to $115.6 million for the six months ended June 30, 2014. These increases in Adjusted EBITDA were primarily a result of our revenue growth, increases in the number of subscribers on our
platform, an increase in ARPS and achieving greater scale benefits. This growth was impacted by our increased investments in marketing and by the additional costs we incurred related to becoming a public company. While growth in new subscriber
revenue is typically offset by marketing expense in the first year of subscription, these investments in marketing are generally neutral on a cash flow basis in the first year. In our experience, these investments become cash flow generative over
the lifetime of the product renewal cycle. We expect that these investments in 2014 will be contributing to cash flow starting in 2015 as subscribers remain on platform, renew their subscription and buy additional products with minimal further
marketing investment.
Unlevered Free Cash Flow
Unlevered free cash flow, or UFCF, is a non-GAAP financial measure that we calculate as Adjusted EBITDA plus change in operating assets and
liabilities (other than deferred revenue) net of acquisitions, less capital expenditures and income taxes excluding deferred tax. We believe the most useful indicator of our operating performance is the cash generating potential of our company prior
to any accounting charges related to our acquisitions. We also invest in marketing, our largest operating expense, which may increase or decrease in a given period, depending on the cost of attracting new
28
subscribers to our solutions. We also believe that because our business has meaningful data center and related infrastructure requirements, the level of capital expenditures required to run our
business is an important factor for investors. We believe UFCF is a useful measure that captures the effects of these issues.
UFCF
increased from $40.8 million in the three months ended June 30, 2013 to $43.6 million in the three months ended June 30, 2014 and increased from $85.9 million for the six months ended June 30, 2013 to $92.6 million for the six months
ended June 30, 2014. Year-over year growth in UFCF was favorably impacted by the reduction in capital expenditures, following the completion of integration of Homestead and HostGator into our technology platform.
Free Cash Flow
Free cash flow, or
FCF, is a non-GAAP financial measure that we calculate as unlevered free cash flow less interest expense. We believe that this presentation of free cash flow provides investors with an additional indicator of our ability to generate positive cash
flows after meeting our obligations with regard to payment of interest on our outstanding indebtedness.
FCF increased from $19.7 million
for the three months ended June 30, 2013 to $29.5 million for the three months ended June 30, 2014. FCF increased from $43.8 million for the six months ended June 30, 2013 to $65.0 million for the six months ended June 30, 2014.
The increases in FCF were primarily due to realizing economies of scale in the business and reduced financing costs following our initial public offering or IPO. This included reducing our overall term loan bank debt and a reduction in our effective
interest rate as a result of our debt refinancing which occurred in November 2013. We expect our FCF to continue to benefit in future periods from the reduction in our term loan interest expense, based on the current loan balance and interest rates.
29
The following table reflects the reconciliation of Adjusted Net Income, Adjusted EBITDA, UFCF and
FCF to net loss calculated in accordance with GAAP (all data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Net loss
|
|
$
|
(42,958
|
)
|
|
$
|
(16,132
|
)
|
|
$
|
(64,686
|
)
|
|
$
|
(38,601
|
)
|
Stock-based compensation
|
|
|
186
|
|
|
|
3,629
|
|
|
|
739
|
|
|
|
7,173
|
|
(Gain) loss on sale of property and equipment
|
|
|
345
|
|
|
|
68
|
|
|
|
332
|
|
|
|
74
|
|
(Gain) loss of unconsolidated entities
|
|
|
(129
|
)
|
|
|
(89
|
)
|
|
|
(266
|
)
|
|
|
(110
|
)
|
Amortization of intangible assets
|
|
|
26,244
|
|
|
|
25,462
|
|
|
|
52,314
|
|
|
|
49,541
|
|
Amortization of deferred financing costs
|
|
|
53
|
|
|
|
19
|
|
|
|
106
|
|
|
|
38
|
|
Changes in deferred revenue (inclusive of impact of purchase accounting)
|
|
|
13,926
|
|
|
|
12,188
|
|
|
|
33,651
|
|
|
|
37,580
|
|
Transaction expenses and charges
|
|
|
4,517
|
|
|
|
757
|
|
|
|
8,358
|
|
|
|
2,120
|
|
Integration and restructuring expenses
|
|
|
15,021
|
|
|
|
7,975
|
|
|
|
31,280
|
|
|
|
11,171
|
|
Tax-affected impact of adjustments
|
|
|
(1,763
|
)
|
|
|
(2,433
|
)
|
|
|
(3,718
|
)
|
|
|
(4,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
|
|
$
|
15,442
|
|
|
$
|
31,444
|
|
|
$
|
58,110
|
|
|
$
|
64,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,342
|
|
|
|
7,502
|
|
|
|
8,267
|
|
|
|
14,548
|
|
Income tax expense (benefit)
|
|
|
12,153
|
|
|
|
3,481
|
|
|
|
2,047
|
|
|
|
9,119
|
|
Interest expense, net (net of impact of amortization of deferred financing costs)
|
|
|
21,764
|
|
|
|
14,069
|
|
|
|
43,403
|
|
|
|
27,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
53,701
|
|
|
$
|
56,496
|
|
|
$
|
111,827
|
|
|
$
|
115,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in operating assets and liabilities, net of acquisitions
|
|
|
(5,839
|
)
|
|
|
(5,242
|
)
|
|
|
(6,852
|
)
|
|
|
(5,821
|
)
|
Capital expenditures (1)
|
|
|
(6,442
|
)
|
|
|
(7,595
|
)
|
|
|
(17,947
|
)
|
|
|
(14,683
|
)
|
Income tax (excluding deferred tax)
|
|
|
(612
|
)
|
|
|
(85
|
)
|
|
|
(1,079
|
)
|
|
|
(2,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unlevered free cash flow
|
|
$
|
40,808
|
|
|
$
|
43,574
|
|
|
$
|
85,949
|
|
|
$
|
92,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash interest paid (net of change in accrued loan interest)
|
|
|
(21,135
|
)
|
|
|
(14,069
|
)
|
|
|
(42,157
|
)
|
|
|
(27,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
19,673
|
|
|
$
|
29,505
|
|
|
$
|
43,792
|
|
|
$
|
64,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Capital expenditures during the three and six months ended June 30, 2014 includes $0.9 million and $1.8 million, respectively, of payments under a three year capital lease for software of $11.7 million beginning in
January 2014. The remaining balance on the capital lease is $9.9 million as of June 30, 2014.
|
The following table
provides a reconciliation of changes in deferred revenue (inclusive of impact of purchase accounting), included in Adjusted EBITDA to changes in deferred revenue in our consolidated statements of cash flows (all data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Changes in deferred revenue (inclusive of impact of purchase accounting)
|
|
$
|
13,926
|
|
|
$
|
12,188
|
|
|
$
|
33,651
|
|
|
$
|
37,580
|
|
Application of purchase accounting for the Directi acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of reduced fair value of deferred domain registration costs
|
|
|
|
|
|
|
6,335
|
|
|
|
|
|
|
|
12,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in deferred revenue in consolidated statements of cash flows
|
|
$
|
13,926
|
|
|
$
|
18,523
|
|
|
$
|
33,651
|
|
|
$
|
49,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
The following table provides a reconciliation of change in operating assets and liabilities, net
of acquisitions, included in UFCF to the changes in operating assets and liabilities in our consolidated statements of cash flows (all data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Change in operating assets and liabilities, net of acquisitions
|
|
$
|
(5,839
|
)
|
|
$
|
(5,242
|
)
|
|
$
|
(6,852
|
)
|
|
$
|
(5,821
|
)
|
Application of purchase accounting for the Directi acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of reduced fair value of deferred domain registration costs
|
|
|
|
|
|
|
(6,335
|
)
|
|
|
|
|
|
|
(12,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in operating assets and liabilities, excluding deferred revenue, in consolidated statements of cash flows
|
|
$
|
(5,839
|
)
|
|
$
|
(11,577
|
)
|
|
$
|
(6,852
|
)
|
|
$
|
(18,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of income tax expense (benefit) included in FCF to the income
tax expense (benefit) in our consolidated statements of operations and comprehensive loss and to the income taxes paid amount in our consolidated statements of cash flows (all data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Income tax expense (benefit)
|
|
$
|
12,153
|
|
|
$
|
3,481
|
|
|
$
|
2,047
|
|
|
$
|
9,119
|
|
Tax-affected impact of adjustments
|
|
|
(1,763
|
)
|
|
|
(2,433
|
)
|
|
|
(3,718
|
)
|
|
|
(4,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) in consolidated statement of operations and comprehensive loss
|
|
$
|
10,390
|
|
|
$
|
1,048
|
|
|
$
|
(1,671
|
)
|
|
$
|
4,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: change in deferred tax benefit (expense)
|
|
|
(9,778
|
)
|
|
|
(963
|
)
|
|
|
2,750
|
|
|
|
(1,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (excluding deferred tax)
|
|
$
|
612
|
|
|
$
|
85
|
|
|
$
|
1,079
|
|
|
$
|
2,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accrued income taxes
|
|
|
225
|
|
|
|
619
|
|
|
|
11
|
|
|
|
(1,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid in consolidated statements of cash flows
|
|
$
|
837
|
|
|
$
|
704
|
|
|
$
|
1,090
|
|
|
$
|
951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of net interest expense included in FCF to net interest in our
consolidated statement of operations and comprehensive loss and to interest paid in our consolidated statement of cash flows (all data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Interest expense, net (net of impact of deferred financing costs)
|
|
$
|
21,764
|
|
|
$
|
14,069
|
|
|
$
|
43,403
|
|
|
$
|
27,602
|
|
Amortization of deferred financing costs
|
|
|
53
|
|
|
|
19
|
|
|
|
106
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense in consolidated statements of operations and comprehensive loss
|
|
$
|
21,817
|
|
|
$
|
14,088
|
|
|
$
|
43,509
|
|
|
$
|
27,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs
|
|
|
(53
|
)
|
|
|
(19
|
)
|
|
|
(106
|
)
|
|
|
(38
|
)
|
Amortization of net present value of deferred consideration
|
|
|
(589
|
)
|
|
|
|
|
|
|
(1,168
|
)
|
|
|
(5
|
)
|
Decrease in accrued interest
|
|
|
4,108
|
|
|
|
16
|
|
|
|
5,007
|
|
|
|
500
|
|
Interest income
|
|
|
18
|
|
|
|
89
|
|
|
|
30
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid in consolidated statements of cash flows
|
|
$
|
25,301
|
|
|
$
|
14,174
|
|
|
$
|
47,272
|
|
|
$
|
28,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
The following table provides the three major categories of the statement of our cash flows,
calculated in accordance with GAAP (all data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Cash flows provided by operating activities
|
|
$
|
6,537
|
|
|
$
|
28,402
|
|
|
$
|
22,023
|
|
|
$
|
66,389
|
|
Cash flows used in investing activities
|
|
$
|
(15,135
|
)
|
|
$
|
(28,311
|
)
|
|
$
|
(28,812
|
)
|
|
$
|
(52,891
|
)
|
Cash flows provided by (used in) financing activities
|
|
$
|
7,809
|
|
|
$
|
(27,662
|
)
|
|
$
|
664
|
|
|
$
|
(56,278
|
)
|
The following table reflects the reconciliation of cash flows from operating activities (operating cash
flow) to free cash flow (all data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Operating cash flow
|
|
$
|
6,537
|
|
|
$
|
28,402
|
|
|
$
|
22,023
|
|
|
$
|
66,389
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures and capital lease obligations
|
|
|
(6,442
|
)
|
|
|
(7,595
|
)
|
|
|
(17,947
|
)
|
|
|
(14,683
|
)
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs excluded in free cash flow net of costs also excluded in operating cash flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction expenses and charges
|
|
|
4,557
|
|
|
|
723
|
|
|
|
8,436
|
|
|
|
2,099
|
|
Integration and restructuring expenses
|
|
|
15,021
|
|
|
|
7,975
|
|
|
|
31,280
|
|
|
|
11,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
19,673
|
|
|
$
|
29,505
|
|
|
$
|
43,792
|
|
|
$
|
64,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Operating Results
Revenue
We generate revenue
primarily from selling subscriptions for our cloud-based products and services. The subscriptions we offer are similar across all of our brands and are provided under contracts pursuant to which we have ongoing obligations to support the subscriber.
These contracts are generally for service periods of up to 36 months and typically require payment in advance at the time of initiating the subscription for the entire subscription period. Typically, we also have arrangements in place to auto renew
a subscription at the end of the subscription period. Due to factors such as introductory pricing, our renewal fees may be higher than our initial subscription. We sell more subscriptions with twelve month terms than with any other term length. We
also earn revenue from the sale of domain name registrations and non-term based products and services, such as online security products and professional technical services as well as through referral fees and commissions. We expect our revenue to
increase in future periods as we expand our subscriber base and increase our average revenue per subscriber by selling additional products and services throughout their subscription period.
Cost of Revenue
Cost of revenue
includes costs of operating our subscriber support organization, fees we pay to register domain names for our subscribers, costs of leasing and operating data center infrastructure, including personnel costs for our network operations, fees we pay
to third-party product and service providers, and merchant fees we pay as part of our billing processes. We also allocate to cost of revenue the depreciation and amortization related to these activities and the intangible assets we have acquired, as
well as a portion of our overhead costs attributable to our employees engaged in subscriber support activities. In addition, cost of revenue includes stock-based compensation expense for employees engaged in support and network operations. We expect
cost of revenue to increase in absolute dollars in future periods as we expand our subscriber base, increase our levels of subscriber support, expand our domain name business and add data center capacity. Cost of revenue may increase or decrease as
a percentage of revenue in a given period, depending on our ability to manage our infrastructure costs, in particular with respect to data centers and support, the amount of third-party product and services that we sell and as a result of our
amortization expense.
32
Gross Profit
Gross profit is the difference between revenue and cost of revenue. Gross profit has fluctuated from period to period in large part as a result
of revenue and cost of revenue adjustments from purchase accounting impacts related to acquisitions, as well as revenue and cost of revenue impacts from growth in our business. With respect to revenue, the application of purchase accounting requires
us to record purchase accounting adjustments for acquired deferred revenue, which reduces the revenue recorded from acquisitions. With respect to cost of revenue, the application of purchase accounting requires us to defer domain registration costs,
which reduces cost of revenue, and record long-lived assets at fair value, which increases cost of revenue through an increase in amortization expense over the estimated useful life of the long-lived assets. In addition, our revenue and our cost of
revenue have increased in recent years as our subscriber base has expanded. For a new subscriber that we bring on to our platform, we typically recognize revenue over the term of the subscription, even though we collect the subscription fee at the
initial billing. As a result, our gross profit may be affected by the prices we charge for our subscriptions, as well as by the number of new subscribers and the terms of their subscriptions. We expect our gross profit to increase in absolute
dollars in future periods while our gross profit margin may increase or decrease.
Operating Expense
We classify our operating expense into three categories: sales and marketing, engineering and development, and general and administrative.
Sales and Marketing.
Sales and marketing expense primarily consists of costs associated with payments to our network of
partners, SEM and SEO, general awareness and brand building activities, as well as the cost of employees engaged in sales and marketing activities. Sales and marketing expense also includes costs associated with sales of products. In the last fiscal
quarter of 2013 we broadened our investment in marketing expense to include new channels for acquiring subscribers through lead in products like storage and backup. In the three and six months ended June 30, 2014, we increased our investment in
marketing, including ramping up our investment in product marketing.
Sales and marketing expense includes stock-based compensation
expense for employees engaged in sales and marketing activities. We expect sales and marketing expense to increase in absolute dollars in future periods as we continue to expand our business and increase our sales efforts. We also expect sales and
marketing expense to be our largest category of operating expense for the foreseeable future as we continue with our plans to develop and grow additional subscriber acquisition channels. Sales and marketing expense as a percentage of revenue may
increase or decrease in a given period, depending on the cost of attracting new subscribers to our solutions (our subscriber acquisition costs), changes in how we invest in different subscriber acquisition channels, changes in how we approach search
engine marketing and search engine optimization and the extent of general awareness and brand building activities we may undertake as well as the efficiency of our sales and support people and our ability to monetize our subscribers and drive
favorable returns on invested marketing dollars.
Engineering and Development.
Engineering and development expense
includes the cost of employees engaged in enhancing our systems, developing and expanding product and service offerings, and integrating technology capabilities from our acquisitions. Engineering and development expense includes stock-based
compensation expense for employees engaged in engineering and development activities. We expect our engineering and development expense as a percentage of our revenue to remain in line with current performance.
General and Administrative.
General and administrative expense includes the cost of employees engaged in corporate
functions, such as finance, human resources, legal affairs and general management. General and administrative expense also includes all facility and related overhead costs not allocated to cost of revenue, as well as insurance premiums and
professional service fees. We incurred additional expenses in preparing for our IPO and will continue to incur additional expenses associated with being a publicly traded company and due to our expansion into international territories, including
increased legal, corporate insurance, tax and accounting expenses, and the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act and other regulations. General and administrative expense includes
stock-based compensation expense for employees engaged in general and administrative activities. We expect that general and administrative expense will continue to increase in absolute dollars but decrease marginally as a percentage of revenue.
Net Interest Income (Expense)
Interest expense consists primarily of costs related to, and interest paid on, our indebtedness. We include the cash cost of interest payments
and loan financing fees, the amortization of deferred financing costs and the amortization of the net present value adjustment which we may apply to some deferred consideration payments related to our acquisitions in our
33
calculation of interest expense. Interest income consists primarily of interest income earned on our cash and cash equivalents balances. We expect net interest expense on our first lien term loan
to be lower in future periods as compared to 2013 following a refinancing of our bank debt in November 2013.
Income Tax Expense (Benefit)
We estimate our income taxes in accordance with the asset and liability method, under which deferred tax assets and liabilities
are recognized based on temporary differences between the assets and liabilities in our consolidated financial statements and the financial statements that are prepared in accordance with tax regulations for the purpose of filing our income tax
returns, using statutory tax rates. This methodology requires us to record a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not
be realized. During the year ended December 31, 2013, we recorded a reversal of our existing deferred tax liability, which created a deferred tax benefit. We established a valuation allowance on substantially all of our deferred tax assets
during the year ended December 31, 2013.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of our consolidated financial statements
requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenue and expense during the reported periods. We base our estimates, judgments and assumptions on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from the estimates, judgments and assumptions made by our management. To the extent that there
are differences between our estimates, judgments and assumptions and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows may be affected.
We believe that our critical accounting policies and estimates are the assumptions and estimates associated with the following:
|
|
|
stock-based compensation arrangements.
|
There have been no material changes to our critical
accounting policies since December 31, 2013. For further information on our critical accounting policies and estimates, see Note 2 to the consolidated financial statements appearing in Part I. Item 1. in this Quarterly Report on Form 10-Q
and our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on February 28, 2014.
34
Results of Operations
The following tables set forth our results of operations for the periods presented (all data in thousands). The period-to-period comparison of
financial results is not necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
128,222
|
|
|
$
|
151,992
|
|
|
$
|
250,963
|
|
|
$
|
297,742
|
|
Cost of revenue
|
|
|
87,972
|
|
|
|
92,611
|
|
|
|
175,180
|
|
|
|
181,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
40,250
|
|
|
|
59,381
|
|
|
|
75,783
|
|
|
|
115,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
29,768
|
|
|
|
38,225
|
|
|
|
58,299
|
|
|
|
79,849
|
|
Engineering and development
|
|
|
6,095
|
|
|
|
5,365
|
|
|
|
12,235
|
|
|
|
10,318
|
|
General and administrative
|
|
|
15,267
|
|
|
|
16,876
|
|
|
|
28,363
|
|
|
|
32,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
51,130
|
|
|
|
60,466
|
|
|
|
98,897
|
|
|
|
122,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(10,880
|
)
|
|
|
(1,085
|
)
|
|
|
(23,114
|
)
|
|
|
(6,584
|
)
|
Total other expense, net
|
|
|
(21,817
|
)
|
|
|
(14,088
|
)
|
|
|
(43,509
|
)
|
|
|
(27,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity earnings of unconsolidated entities
|
|
|
(32,697
|
)
|
|
|
(15,173
|
)
|
|
|
(66,623
|
)
|
|
|
(34,224
|
)
|
Income tax expense (benefit)
|
|
|
10,390
|
|
|
|
1,048
|
|
|
|
(1,671
|
)
|
|
|
4,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity earnings of unconsolidated entities
|
|
|
(43,087
|
)
|
|
|
(16,221
|
)
|
|
|
(64,952
|
)
|
|
|
(38,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income of unconsolidated entities, net of tax
|
|
|
(129
|
)
|
|
|
(89
|
)
|
|
|
(266
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(42,958
|
)
|
|
$
|
(16,132
|
)
|
|
$
|
(64,686
|
)
|
|
$
|
(38,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling interest
|
|
|
|
|
|
|
(2,684
|
)
|
|
|
|
|
|
|
(5,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Endurance International Group Holdings, Inc.
|
|
$
|
(42,958
|
)
|
|
$
|
(13,448
|
)
|
|
$
|
(64,686
|
)
|
|
$
|
(32,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Three Months Ended June 30, 2013 and 2014
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
|
|
|
Change
|
|
|
|
2013
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
Revenue
|
|
$
|
128,222
|
|
|
$
|
151,992
|
|
|
$
|
23,770
|
|
|
|
19
|
%
|
Revenue increased by $23.8 million, or 19%, from $128.2 million for the three months ended June 30, 2013
to $152.0 million for the three months ended June 30, 2014. Of this increase, $6.6 million was related to revenues from our acquisition of Directi and $17.2 million was primarily due to an increase in subscribers on our platform as we
expanded lead-in products such as back-up and storage and focused our marketing on attracting new subscribers, an increase in demand for our solutions from both new and existing subscribers and increases in prices paid by our subscribers at renewals
or after expiration of promotional periods. Consistent with our plans, as we completed the integration of the 2012 acquisitions of HostGator and Homestead onto our integrated technology platform, we were able to increase our marketing spend and
drive additional subscriber signups and also enhance the promotion of our products and services through improved business insight and analytics offered through the integrated technology platform.
35
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
Change
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
%
|
|
Cost of revenue
|
|
$
|
87,972
|
|
|
|
69
|
%
|
|
$
|
92,611
|
|
|
|
61
|
%
|
|
$
|
4,639
|
|
|
|
5
|
%
|
Cost of revenue increased by $4.6 million, or 5%, from $88.0 million for the three months ended June 30,
2013 to $92.6 million for the three months ended June 30, 2014. Of this increase, $6.0 million, which included an amortization charge of $1.7 million, was attributable to our acquisition of Directi on January 23, 2014, $2.8 million was due
to an increase in depreciation expense as a result of expanding our data center infrastructure during 2012 and 2013, $1.4 million was related to an increase in domain registration costs and $2.2 million was attributable to costs of third party
products and services related to our sales. Stock-based compensation expense increased by approximately $0.1 million from $2,000 for the three months ended June 30, 2013 to $0.1 million for the three months ended June 30, 2014. These
increases were partially offset by a decrease in data center expenses of $2.6 million, a decrease in support costs of $2.8 million resulting from the migration of HostGator and Homestead subscribers onto our platform and a $2.5 million decrease in
amortization expense.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
Change
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
%
|
|
Gross profit
|
|
$
|
40,250
|
|
|
|
31
|
%
|
|
$
|
59,381
|
|
|
|
39
|
%
|
|
$
|
19,131
|
|
|
|
48
|
%
|
Gross profit increased by $19.1 million, from $40.3 million for the three months ended June 30, 2013 to
$59.4 million for the three months ended June 30, 2014. Our gross profit as a percentage of revenue increased by 8 percentage points from 31% for the three months ended June 30, 2013 to 39% for the three months ended June 30, 2014.
Approximately 50% of this increase, quarter over quarter, was attributable to the net contribution from an increase in our subscriber base, our monetization of those subscribers and our acquisition of Directi. The remaining increase in our gross
profit as a percentage of revenue, quarter over quarter, was attributable to the net purchase accounting impact of amortization related to our acquisitions since 2012, including Directi. A reduction in the amortization expense from our earlier
acquisitions was offset by additional amortization expense from our acquisitions since June 30, 2013.
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
Change
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
%
|
|
Sales and marketing
|
|
$
|
29,768
|
|
|
|
23
|
%
|
|
$
|
38,225
|
|
|
|
25
|
%
|
|
$
|
8,457
|
|
|
|
28
|
%
|
Engineering and development
|
|
|
6,095
|
|
|
|
5
|
%
|
|
|
5,365
|
|
|
|
4
|
%
|
|
|
(730
|
)
|
|
|
(12
|
)%
|
General and administrative
|
|
|
15,267
|
|
|
|
12
|
%
|
|
|
16,876
|
|
|
|
11
|
%
|
|
|
1,609
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51,130
|
|
|
|
40
|
%
|
|
$
|
60,466
|
|
|
|
40
|
%
|
|
$
|
9,336
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing.
Sales and marketing expense increased by $8.5 million, or 28%, from
$29.7 million for the three months ended June 30, 2013 to $38.2 million for the three months ended June 30, 2014. In addition to investing in marketing expense for the acquisition of new subscribers, we have increased our investing in
product marketing. The increase is primarily attributable to increases of $8.6 million in marketing spend, $0.4 million in stock-based compensation expense, which increased from $5,000 for the three months ended June 30, 2013 to $0.4 million
for the three months ended June 30, 2014, and $0.2 million in depreciation expense. These increases were partially offset by a net decrease in payroll and commissions of $0.7 million as we changed our commission structure.
36
Engineering and Development.
Engineering and development expense decreased by
$0.7 million, or 12%, from $6.1 million for the three months ended June 30, 2013 to $5.4 million for the three months ended June 30, 2014. Of this decrease, $0.9 million was due to capitalizing certain software development costs in
connection with our investment in improvements to our infrastructure and technology platform and $0.6 million was due to a reduction in integration and restructuring costs as we completed our integration of 2012 acquisitions at the end of the last
fiscal year. These cost reductions were partially offset by a $0.6 million increase as we expanded our international footprint following the acquisition of Directi and by a $0.2 million increase in stock-based compensation expense from $3,000 for
the three months ended June 30, 2013 to $0.2 million for the three months ended June 30, 2014.
General and
Administrative.
General and administrative expense increased by $1.6 million, or 11%, from $15.3 million for the three months ended June 30, 2013 to $16.9 million for the three months ended June 30, 2014. Of this increase,
$2.8 million was attributable to increased stock-based compensation expense, which increased from $0.2 million for the three months ended June 30, 2013 to $3.0 million for the three months ended June 30, 2014. The increase in our
stock-based compensation is primarily a result of stock awards granted under our 2013 Stock Incentive Plan during the fourth quarter of 2013. In addition, $1.7 million was attributable to increased spending to support the growth of our business.
These increases were offset by a $2.7 million decrease in transaction expenses and a $0.2 million decrease in depreciation expense. We incurred higher transaction costs in the three months ended June 30, 2013 which primarily consisted of
deferred bonus payments in connection with the acquisition of HostGator and legal and professional costs incurred related to our acquisition of Directi.
Net Interest Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Change
|
|
|
|
2013
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
Net interest income (expense)
|
|
$
|
(21,817
|
)
|
|
$
|
(14,088
|
)
|
|
$
|
7,729
|
|
|
|
35
|
%
|
Net interest expense decreased by $7.7 million, or 35%, from $21.8 million for the three months ended
June 30, 2013 to $14.1 million for the three months ended June 30, 2014. Of this decrease, $7.2 million is due to lower interest expense resulting from our debt refinancing activities in November 2013, which lowered our aggregate notes
payable and our effective interest rates. The decrease is also due to a $0.6 million reduction in the accretion of present value for the deferred consideration and deferred bonus payments related to the HostGator acquisition, paid in January 2014.
These decreases were partially offset by an increase of $0.1 million related to capitalized lease obligations which were entered into during the three months ended March 31, 2014.
Income Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Change
|
|
|
|
2013
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
Income tax expense
|
|
$
|
10,390
|
|
|
$
|
1,048
|
|
|
$
|
9,342
|
|
|
|
90
|
%
|
Income tax expense for the three months ended June 30, 2013 decreased by $9.3 million, or 90%, from
$10.4 million for the three months ended June 30, 2013 to $1.1 million for the three months ended June 30, 2014. The decrease of $9.3 million is primarily attributable to the tax expense incurred in 2013 with the establishment of a
valuation allowance against substantially all of our deferred tax assets. In both periods, we had nondeductible expenses primarily related to stock-based compensation, transaction costs and interest.
37
Comparison of Six Months Ended June 30, 2013 and 2014
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended June 30,
|
|
|
Change
|
|
|
|
2013
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
Revenue
|
|
$
|
250,963
|
|
|
$
|
297,742
|
|
|
$
|
46,779
|
|
|
|
19
|
%
|
Revenue increased by $46.7 million, or 19%, from $251.0 million for the six months ended June 30, 2013 to
$297.7 million for the six months ended June 30, 2014. Of this increase, $9.1 million was related to revenues from our acquisition of Directi and $37.6 million was primarily due to an increase in subscribers on our platform as we expanded
lead-in products such as back-up and storage and focused our marketing on attracting new subscribers, an increase in demand for our solutions from both new and existing subscribers and increases in prices paid by our subscribers at renewals or after
expiration of promotional periods. Consistent with our plans, as we completed the integration of the 2012 acquisitions of HostGator and Homestead onto our integrated technology platform, we were able to increase our marketing spend and drive
additional subscriber signups and also enhance the promotion of our products and services through improved business insight and analytics offered through the integrated technology platform.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
Change
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
%
|
|
Cost of revenue
|
|
$
|
175,180
|
|
|
|
70
|
%
|
|
$
|
181,802
|
|
|
|
61
|
%
|
|
$
|
6,622
|
|
|
|
4
|
%
|
Cost of revenue increased by $6.6 million, or 4%, from $175.2 million for the six months ended June 30,
2013 to $181.8 million for the six months ended June 30, 2014. Of this increase, $9.2 million, which included an amortization charge of $2.7 million, was attributable to our acquisition of Directi on January 23, 2014, $5.7 million was due
to an increase in depreciation expense as a result of expanding our data center infrastructure during 2012 and 2013, $3.2 million was related to an increase in domain registration costs and $3.8 million was attributable to costs of third party
products and services related to our sales. Stock-based compensation expense increased by approximately $0.2 million from $11,000 for the six months ended June 30, 2013 to $0.2 million for the six months ended June 30, 2014. These
increases were partially offset by a decrease in data center expenses of $7.2 million, support of $2.8 million resulting from the migration of HostGator and Homestead subscribers onto our platform and a $5.5 million decrease in amortization
expense.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
Change
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
%
|
|
Gross profit
|
|
$
|
75,783
|
|
|
|
30
|
%
|
|
$
|
115,940
|
|
|
|
39
|
%
|
|
$
|
40,157
|
|
|
|
53
|
%
|
Gross profit increased by $40.2 million, from $75.8 million for the six months ended June 30, 2013 to
$116.0 million for the six months ended June 30, 2014. Our gross profit as a percentage of revenue increased by 9 percentage points from 30% for the six months ended June 30, 2013 to 39% for the six months ended June 30, 2014.
Approximately 50% of this increase, period over period, was attributable to the net contribution from an increase in our subscriber base, our monetization of those subscribers and our acquisition of Directi. The remaining increase in our gross
profit as a percentage of revenue, period over period, was attributable to the net purchase accounting impact of amortization related to our acquisitions since 2012, including Directi. A reduction in the amortization expense from our earlier
acquisitions was offset by additional amortization expense from our acquisitions since June 30, 2013.
38
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
Change
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
%
|
|
Sales and marketing
|
|
$
|
58,299
|
|
|
|
23
|
%
|
|
$
|
79,849
|
|
|
|
27
|
%
|
|
$
|
21,550
|
|
|
|
37
|
%
|
Engineering and development
|
|
|
12,235
|
|
|
|
5
|
%
|
|
|
10,318
|
|
|
|
3
|
%
|
|
|
(1,917
|
)
|
|
|
(16
|
)%
|
General and administrative
|
|
|
28,363
|
|
|
|
11
|
%
|
|
|
32,357
|
|
|
|
11
|
%
|
|
|
3,994
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
98,897
|
|
|
|
39
|
%
|
|
$
|
122,524
|
|
|
|
41
|
%
|
|
$
|
23,627
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing.
Sales and marketing expense increased by $21.5 million, or 37%, from
$58.3 million for the six months ended June 30, 2013 to $79.8 million for the six months ended June 30, 2014. In addition to investing in marketing expense for the acquisition of new subscribers, we have increased our investing in product
marketing. The increase is primarily attributable to increases of $18.9 million in marketing spend, $0.7 million in stock-based compensation expense, which increased from $0.1 million for the six months ended June 30, 2013 to $0.8 million for
the six months ended June 30, 2014, and $0.4 million in depreciation expense. In addition, net payroll and commission expense increased by $1.5 million for the six months ended June 30, 2014 as we changed our commission structure.
Engineering and Development.
Engineering and development expense decreased by $1.9 million, or 16%, from $12.2 million for
the six months ended June 30, 2013 to $10.3 million for the six months ended June 30, 2014. Of this decrease, $1.9 million was due to a reduction in integration and restructuring costs as we completed our integration of 2012 acquisitions
at the end of the last fiscal year, and $1.5 million was due to capitalizing certain software development costs in connection with our investment in improvements to our infrastructure and technology platform. This was partially offset by a $1.2
million increase as we expanded our international footprint following the acquisition of Directi and a $0.3 million increase in stock-based compensation expense from $0.1 million for the six months ended June 30, 2013 to $0.4 million for the
six months ended June 30, 2014.
General and Administrative.
General and administrative expense increased by $4.0
million, or 14%, from $28.4 million for the six months ended June 30, 2013 to $32.4 million for the six months ended June 30, 2014. Of this increase, $5.2 million was attributable to increased stock-based compensation expense, which
increased from $0.6 million for the six months ended June 30, 2013 to $5.8 million for the six months ended June 30, 2014. The increase in our stock-based compensation is primarily a result of stock awards granted under our 2013 Stock
Incentive Plan during the fourth quarter of 2013. In addition, $3.6 million was attributable to increased spending to support the growth of our business. These increases were offset by a $4.6 million decrease in transaction expenses and a $0.2
million decrease in depreciation expense. We incurred higher transaction costs in the six months ended June 30, 2013 which primarily consisted of deferred bonus payments in connection with the acquisition of HostGator and legal and professional
costs incurred related to our international acquisitions.
Net Interest Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
Change
|
|
|
|
2013
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
Net interest income (expense)
|
|
$
|
(43,509
|
)
|
|
$
|
(27,640
|
)
|
|
$
|
15,869
|
|
|
|
36
|
%
|
Net interest expense decreased by $15.9 million, or 36%, from $43.5 million for the six months ended
June 30, 2013 to $27.6 million for the six months ended June 30, 2014. Of this decrease, $14.9 million is due to lower interest expense resulting from our debt refinancing activities in November 2013, which lowered our aggregate notes
payable and our effective interest rates. The decrease is also due to a $1.2 million reduction in the accretion of present value for the deferred consideration and deferred bonus payments related to the HostGator acquisition, paid in January 2014.
These decreases were partially offset by an increase of $0.2 million related to capitalized lease obligations which were entered into during the six months ended June 30, 2014.
39
Income Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
Change
|
|
|
|
2013
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
Income tax expense (benefit)
|
|
$
|
(1,671
|
)
|
|
$
|
4,487
|
|
|
$
|
6,158
|
|
|
|
369
|
%
|
The benefit for income taxes for the six months ended June 30, 2013 decreased by $6.2 million, or
369%, from a $1.7 million benefit for the six months ended June 30, 2013 to a $4.5 million expense for the six months ended June 30, 2014. The decrease includes a net increase in our state and foreign income tax expense of $1.5 million and
a net increase in our deferred tax expense of $4.7 million. The decrease in our deferred tax benefit from June 30, 2013 to June 30, 2014 was primarily attributable to the establishment of a valuation allowance during the second quarter of
2013. In both periods, we had nondeductible expenses primarily related to stock-based compensation, transaction costs and interest.
Liquidity and
Capital Resources
Sources of Liquidity
We have funded our operations since inception primarily with cash flow generated by operations and borrowings under credit facilities. In
October 2013, we also raised funds from our IPO and received net proceeds of $232.1 million, after deducting underwriting discounts and commissions and offeringrelated expenses payable by us. On November 25, 2013, we completed a debt
refinancing and used a portion of the net proceeds from our IPO to reduce our overall indebtedness by $148.8 million to $1,050.0 million, consisting of first lien debt which matures November 9, 2019. We also increased our revolving credit
facility, which matures on December 22, 2016, to $125.0 million. As part of the refinancing, we paid off our second lien term loan and added an incremental first lien term loan, resulting in a lower interest rate which we expect will provide
annualized savings of approximately $35.0 million, based on the first lien term loan balance as of June 30, 2014.
Under our first
lien term loan facility, we are required to make quarterly principal payments of $2.6 million. We currently pay 5.00% interest on our first lien term loan and between 7.75% and 8.50% on our revolving credit facility borrowings, which we use to fund
our acquisition and investing activities.
Historically, we have used debt primarily to finance our acquisition related activities. Our
current debt originated as a term loan in the amount of $350.0 million in connection with our acquisition by investment funds and entities affiliated with Warburg Pincus and Goldman Sachs on December 22, 2011. Between the end of 2011 and our
IPO, we raised additional debt through a series of refinancings, primarily in 2012, for funding the redemption of certain redeemable preferred stock for $156.0 million, a dividend distribution of $300.0 million and the acquisitions of HostGator
and Homestead, which had an aggregate purchase price of approximately $360.0 million.
As of June 30, 2014, we had cash and cash
equivalents totaling $23.9 million and negative working capital of $256.0 million. In addition, we had approximately $1,042.1 million of indebtedness outstanding under our first lien term loan facility and $33.0 million drawn against our $125.0
million revolving credit facility.
Cash and Cash Equivalents
As of June 30, 2014, our cash and cash equivalents were primarily held for working capital purposes and for required principal and
interest payments under our indebtedness. A majority of our cash and cash equivalents was held in operating accounts. Our cash and cash equivalents decreased by $42.9 million from $66.8 million at December 31, 2013 to $23.9 million at
June 30, 2014. We used excess cash on hand at December 31, 2013, along with cash flows from operations and a net draw against our revolving credit facility of $33.0 million to fund our acquisition and investment activity described under
financing and investing activities below. Our future capital requirements will depend on many factors including, but not limited to, our growth rate, the continued expansion of sales and marketing activities, the introduction of new and enhanced
products and services, market acceptance of our solutions, acquisitions and our gross profits and operating expenses. We believe that our current cash and cash equivalents and operating cash flows will be sufficient to meet our anticipated working
capital and capital expenditure requirements as well as our required principal and interest payments under our indebtedness, for at least the next 12 months.
40
The following table shows our cash flows from operating activities, investing activities and
financing activities for the stated periods (all data in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2013
|
|
|
2014
|
|
Purchases of property and equipment
|
|
$
|
(17,947
|
)
|
|
$
|
(12,901
|
)
|
Principal payments on capital lease obligations
|
|
|
|
|
|
|
(1,782
|
)
|
Depreciation
|
|
|
8,267
|
|
|
|
14,548
|
|
Amortization
|
|
|
53,588
|
|
|
|
49,584
|
|
Cash flows provided by operating activities
|
|
|
22,023
|
|
|
|
66,389
|
|
Cash flows used in investing activities
|
|
|
(28,812
|
)
|
|
|
(52,891
|
)
|
Cash flows provided by (used in) financing activities
|
|
|
664
|
|
|
|
(56,278
|
)
|
Capital Expenditures
Our capital expenditures on purchase of property and equipment for the six months ended June 30, 2013 and 2014 were $17.9 million and
$12.9 million, respectively. The higher expenditure in the six months ended June 30, 2013 included a significant and extraordinary investment in data center infrastructure to support the migration of subscribers from the 2012 HostGator
acquisition to our systems. In addition, our capital expenditures during the six months ended June 30, 2014, includes $1.8 million of principal payments under a three year capital lease for software of $11.7 million beginning in January 2014.
The remaining balance payable on the capital lease is $9.9 million. We did not have any capital lease obligations in the six months ended June 30, 2013. We expect to maintain our total capital expenditures in line with revenue growth as we
expand our business.
Depreciation
Our depreciation expense for the six months ended June 30, 2013 and 2014 increased from $8.3 million to $14.5 million. This increase
was primarily due to expansion in our business by on-boarding acquisitions as well as investments in data center infrastructure as described above and leasehold improvements. The leasehold improvements were associated with new operating leases as we
expanded and revamped our presence in Arizona, Utah, Texas, and Massachusetts.
Amortization
Our amortization expense, which includes amortization of other intangible assets, amortization of deferred financing costs and amortization of
net present value of deferred consideration, decreased by $4.0 million from $53.6 million for the six months ended June 30, 2013 to $49.6 million for the six months ended June 30, 2014. Of this decrease in amortization expense, $2.8
million was primarily due to lower expenses associated with customer relationships and trademarks related to acquisitions that occurred prior to June 30, 2013, partially offset by the increase of amortization expense related to intangible
assets of businesses that have been acquired since December 1, 2013. The remaining $1.2 million was attributable to lower amortization expense of net present value of deferred consideration as a result of our acquisition of HostGator in July
2012, which had deferred consideration payments payable twelve and eighteen months after the date of the acquisition. The final payment was made in January 2014.
Operating Activities
Cash
provided by operating activities consists primarily of net loss adjusted for certain non-cash items including depreciation, amortization, stock-based compensation expense and changes in deferred taxes, and the effect of changes in working capital,
in particular in deferred revenue. As we add subscribers to our platform, we typically collect subscription fees at the time of initial billing and recognize revenue over the terms of the subscriptions. Accordingly, we generate operating cash flows
as we collect cash from our subscribers in advance of delivering the related products and services, and we maintain a significant deferred revenue balance. As we add subscribers and sell additional products and services, our deferred revenue balance
increases. Our operating cash flows are net of transaction expenses and charges, including IPO expenses.
Net cash provided by operating
activities was $66.4 million in the six months ended June 30, 2014 compared with $22.0 million in the six months ended June 30, 2013. The increase in the six months ended June 30, 2014 consisted of a net loss of $38.6 million, offset
by non-cash charges of $73.2 million, and a net change of $31.8 million in our operating assets and liabilities. The net change in our operating assets and liabilities included an increase in deferred revenue of $49.9 million which was $16.3 million
greater than in the same period in 2013. In addition, we used $19.0 million less cash to fund our interest payments.
41
Net cash provided by operating activities was $22.0 million in the six months ended June 30,
2013 which consisted of a net loss of $64.7 million, offset by non-cash charges of $59.9 million and a net change of $26.8 million in our operating assets and liabilities. The net change in our operating assets and liabilities included an increase
in deferred revenue of $33.7 million.
Investing Activities
Cash flows used in investing activities consists primarily of purchase of property and equipment, acquisition consideration payments, and
changes in restricted cash balances.
During the six months ended June 30, 2014 we used $25.2 million in cash, net of cash acquired,
for the purchase consideration for our acquisition of Directi and our purchase of a domain name business and $15.0 million was used to acquire a minority interest in Automattic, Inc. We also used $12.8 million of cash to purchase property and
equipment, net of proceeds from disposals of $0.1 million. These were partially offset by a net return of $0.2 million of restricted cash held by a payment processor.
The majority of the cash used during the six months ended June 30, 2013 was to purchase $17.9 million of property and equipment, in
particular for the migration of HostGator subscribers as previously described above under Capital Expenditures. We also used $2.4 million, net of cash acquired, for initial consideration for an acquisition in Brazil and $8.8 million to acquire a
minority interest in a company based in the United Kingdom. These were partially offset by a $0.3 million return of restricted cash held by a payment processor.
Financing Activities
Cash flow
from financing activities consists primarily of the net change in our overall indebtedness, payment of associated financing costs, payment of deferred consideration for our acquisitions and the issuance or repurchase of equity.
During the six months ended June 30, 2014, cash flows used in financing activities was $56.3 million, which includes $81.5 million of
deferred consideration paid during the period, the majority of which was for our Directi and HostGator acquisitions, offset by net borrowings against our revolving credit facility of $33.0 million, principal payments of $5.3 million under our first
lien term loan facility, $1.8 million of principal payments related to capital lease obligations and $0.7 million of payments related to issuance costs from our IPO which were unpaid as of December 31, 2013. During the six months ended
June 30, 2014, we borrowed $55.0 million against our revolving credit facility and subsequently repaid $22.0 million of the amount borrowed. During the six months ended June 30, 2014, we entered into a three year capital lease agreement
for $11.7 million for software licenses which require principal payments of approximately $0.9 million each quarter in 2014.
During the
six months ended June 30, 2013, cash flow provided by financing activities net of repayments was $0.7 million. We drew $34.0 million from our revolving credit facility and subsequently repaid $26.0 million under that facility, as well as $4.0
million under our first lien term loan facility. In addition, we paid $3.3 million of deferred consideration obligations outstanding at December 31, 2012.
We believe that our existing cash and cash equivalents, our cash flows from operations and use of our revolving credit facility will be
sufficient to meet the maximum payment obligations related to our acquisitions, credit facility obligations and minority investments.
Net Operating
Loss Carry-Forwards
As of December 31, 2013, we had net operating loss, or 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, we had NOL carry-forwards in
foreign jurisdictions available to offset future foreign taxable income by approximately $33.7 million, including approximately $2.1 million in NOL carry-forwards that expire in 2021 and approximately $31.6 million of NOL carry-forwards in the
United Kingdom that do not expire.
42
Utilization of the NOL carry-forwards can be subject to an annual limitation due to the ownership
percentage change limitations under Section 382 of the Internal Revenue Code (Section 382 limitation). 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. In connection with a change in control in 2011 we were subject to Section 382 annual limitations of $77.1 million against the balance of NOL carry-forwards generated prior to the change in control in
2011. Through December 31, 2013 we accumulated the unused amount of Section 382 limitations in excess of the amount of NOL carry-forwards that were originally subject to limitation. Therefore these unused NOL carry-forwards are available
for future use to offset taxable income. We completed an analysis of changes in our ownership from 2011, through our IPO, to December 31, 2013 and concluded that there was not a Section 382 ownership change during this period and therefore
any NOLs generated through December 31, 2013 will not be subject to any new Section 382 annual limitations on NOL carry-forwards. As a result, all unused NOL carry-forwards at December 31, 2013 are available for future use to offset
taxable income.
Contractual Obligations and Commitments
As of July 31, 2014, we had outstanding indebtedness of $1,042.1 million under our first lien term loan facility, which has
a quarterly principal repayment of $2.6 million. During the six months ended June 30, 2014, we paid $24.1 million of deferred consideration and $2.0 million of compensation expense in connection with the HostGator acquisition. On
February 28, 2014, we entered into a Master Service Agreement with Ace Data Centers Inc., to license space at a data center facility in Provo, Utah. This agreement provides for a term of ten years and has a total estimated financial obligation
of approximately $102.0 million over the term of the agreement. During the six months ended June 30, 2014 we paid deferred consideration payment obligations of $57.1 million related to our acquisition of Directi. In addition, in connection
with the acquisition of Directi, we entered into agreements that may require us to make additional aggregate payments of up to approximately $62.0 million, subject to specified terms, conditions and operational contingencies of which we have paid
$7.6 million during the three months ended June 30, 2014. There have been no other significant changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K filed with the SEC on February 28, 2014.
Recently Issued Accounting Pronouncements
For information on recent accounting pronouncements, see
Recent Accounting Pronouncements
in the notes to the consolidated financial
statements appearing in Part I., Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We do not have any special purpose entities or off-balance sheet arrangements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosure About Market Risk
We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of our business.
These risks include primarily foreign exchange risk, interest rate and inflation.
Foreign Currency Exchange Risk
A significant majority of our subscription agreements and our expenses are denominated in US dollars. We do, however, have sales in a number of
foreign currencies as well as business operations in Brazil and India and are subject to the impacts of currency fluctuations in those markets. The impact of these currency fluctuations is insignificant relative to the overall financial results of
our company.
Interest Rate Sensitivity
We had cash and cash equivalents of $23.9 million at June 30, 2014, the majority of which was held in operating accounts for working
capital purposes and other general corporate purposes, which include payment of principal and interest under our indebtedness. As of June 30, 2014, we had approximately $1,042.1 million of indebtedness outstanding under our first lien term loan
facility and a revolving credit facility of $125.0 million, of which $92.0 million was available.
The first lien term loan facility bears
interest at a rate per annum equal to an applicable credit spread plus, at our option, (a) adjusted LIBOR or (b) an alternate base rate determined by reference to the greater of (i) the prime rate, (ii) the federal funds
effective rate plus 0.50% and (iii) one-month adjusted LIBOR plus 1.00%. The term loan is subject to a floor of 1.00% per annum with an applicable credit spread for interest based on adjusted LIBOR of 4.00%.
43
Under our credit facility, our revolving credit loans that bear interest at the LIBOR reference
rate are subject to a floor of 1.50% per annum with the applicable credit spread for interest based on adjusted LIBOR of 6.25%.
We
are also required to pay a commitment fee of 0.50% per annum to the lenders based on the average daily unused amount of the revolving commitments.
Based on our aggregate indebtedness on our first lien term loan facility of $1,042.1 million as of June 30, 2014, a 100-basis-point
increase in the adjusted LIBOR rate above the LIBOR floor would result in a $10.5 million increase in our aggregate interest payments over a 12-month period, and a 100-basis-point decrease at the current LIBOR rate would not result in a decrease in
our interest payments.
Inflation Risk
We do not believe that inflation has a material effect on our business, financial condition or results of operations. If our costs were to
become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability to do so could harm our business, financial condition and results of operations.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of June 30, 2014, our management, with the participation of our chief executive officer and chief financial officer, evaluated the
effectiveness of our disclosure controls and procedures. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon
that evaluation of our disclosure controls and procedures as of June 30, 2014, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable
assurance level.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during
the fiscal quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are, from time to time, party to litigation arising in the ordinary course of our business. We
are not presently involved in any legal proceeding that in the opinion of our management, if determined adversely to us, would have a material adverse effect on our business operating results or financial condition.
ITEM 1A. RISK FACTORS
You should carefully review and consider the information regarding certain factors which could materially affect our business, financial
condition or future results set forth under Item 1A. Risk Factors in our Form 10-K for the fiscal year ended December 31, 2013 as filed with the SEC on February 28, 2014. There have been no material changes from the
factors disclosed in our Form 10-K for the year ended December 31, 2013, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
44
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
On May 22, 2014, we issued 146,540 shares of our common stock to Directi Holdings as partial consideration for our acquisition of the web
presence business of Directi. The shares of common stock issued to Directi Holdings were valued at $12.00 per share for purposes of calculating the number of shares to be issued.
No underwriters were involved in this transaction. This issuance was deemed to be exempt from registration under the Securities Act in
reliance upon Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving any public offering. The securities issued in this transaction are deemed restricted securities for purposes of the Securities Act.
ITEM 5. OTHER INFORMATION
Disclosures of Iranian Activities under Section 13(r) of the Exchange Act
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, or ITRA, which added Section 13(r) to the
Exchange Act, we are required to disclose in our annual or quarterly reports, as applicable, whether we or any of our affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities that
are subject to sanctions under U.S. law. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.
Warburg Pincus LLC, or WP LLC, affiliates of which (i) beneficially own more than 10% of our outstanding common stock and/or are members
of our board of directors and (ii) beneficially own more than 10% of the equity interests of, and have the right to designate members of the board of directors of, Santander Asset Management Investment Holdings Limited, or SAMIH, has informed
us that, during the reporting period, Santander Asset Management UK Limited, or Santander UK, an affiliate of SAMIH and WP LLC, engaged in activities subject to disclosure pursuant to Section 219 of ITRA and Section 13(r) of the Exchange
Act. As a result, we are required to provide disclosure as set forth below pursuant to Section 219 of ITRA and Section 13(r) of the Exchange Act. WP LLC has informed us that SAMIH has provided WP LLC with the information below relevant to
Section 219 of ITRA and Section 13(r) of the Exchange Act.
At the time of the events described below, SAMIH and its non-U.S.
affiliates, including Santander UK, may have been deemed to be under common control with us, but this statement is not meant to be an admission that common control existed or exists. We have no control over or involvement in the activities of SAMIH
or its non-U.S. affiliates, including Santander UK, or any of its subsidiaries or predecessor companies, and we were not involved in the preparation of, nor have we independently verified, the information provided by SAMIH to WP LLC. The disclosure
below does not relate to any activities conducted by us and does not involve us or our management. The disclosure relates solely to activities conducted by SAMIH and its non-U.S. affiliates, including Santander UK. We are not representing to the
accuracy or completeness of the disclosure below, and we undertake no obligation to correct or update this information.
We understand
that SAMIHs affiliates intend to disclose in their next annual or quarterly report that an Iranian national, resident in the United Kingdom, who is currently designated by the United States under the Iran Financial Sanctions Regulations and
the NPWMD designation, holds two investment accounts with Santander UK. The accounts have remained frozen throughout 2013 and the first half of 2014. The investment returns are being automatically reinvested, and no disbursements have been made to
the customer. Total revenue for the Banco Santander group in connection with the investment accounts was £23,200, while net profits in the first half of 2014 were negligible relative to the overall profits of Banco Santander, S.A.
ITEM 6. EXHIBITS
See the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, which is incorporated herein by
reference.
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
ENDURANCE INTERNATIONAL GROUP HOLDINGS, INC.
|
|
|
|
|
Date: August 8, 2014
|
|
|
|
By:
|
|
/s/ Tivanka Ellawala
|
|
|
|
|
|
|
Tivanka Ellawala
|
|
|
|
|
|
|
Chief Financial Officer
(Principal Financial
Officer)
|
46
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
Description of Exhibit
|
|
|
|
|
Incorporated by Reference
|
|
|
|
Filed
Herewith
|
|
Furnished
Herewith
|
|
|
|
|
Form
|
|
|
File Number
|
|
|
Date of Filing
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Restated Certificate of Incorporation of the Registrant
|
|
|
S-1/A
|
|
|
|
333-191061
|
|
|
October 23, 2013
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Registrant
|
|
|
S-1/A
|
|
|
|
333-191061
|
|
|
October 23, 2013
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Specimen certificate evidencing shares of common stock of the Registrant
|
|
|
S-1/A
|
|
|
|
333-191061
|
|
|
October 8, 2013
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Form of Second Amended and Restated Registration Rights Agreement by and among the Registrant and the other parties thereto
|
|
|
S-1/A
|
|
|
|
333-191061
|
|
|
October 8, 2013
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
Form of Stockholders Agreement by and among the Registrant and certain holders of the Registrants common stock
|
|
|
S-1/A
|
|
|
|
333-191061
|
|
|
October 8, 2013
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4.3
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10.1#
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Bonus Arrangement for Ronald LaSalvia
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10-Q
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001-36131
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May 9, 2014
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10.2
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31.1
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Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended
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X
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31.2
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Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended
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X
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32.1
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Certification of Principal Executive Officer Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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X
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32.2
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Certification of Principal Financial Officer Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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X
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101.INS
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XBRL Instance Document
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X
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101.SCH
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XBRL Taxonomy Extension Schema Document
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X
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101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
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X
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101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
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X
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101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
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X
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101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
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X
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47
|
In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents in Exhibit 101 to this Quarterly Report on Form 10-Q are furnished and not filed or a part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
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#
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Management contract or any compensatory plan, contract or agreement.
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48
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