Notes to Consolidated Financial Statements
(unaudited)
1. The Company and Summary of Significant Accounting Policies
Description of Company
Web.com Group, Inc. ("Web.com" or the "Company") provides a full range of Internet services to small businesses to help them compete and succeed online. Web.com meets the needs of small businesses anywhere along their lifecycle with affordable, subscription-based solutions including domains and related security products, hosting, website design and management, search engine optimization, online marketing campaigns, local sales leads, social media, mobile products and eCommerce solutions sold through three sales channel groupings. Those sales channel groupings are referred to herein as retail, premium services and Web.com for enterprise. Each of these sales channel groupings generally corresponds to size and needs of the Company's customer base, with the retail channel grouping generally servicing smaller businesses or individual customers, premium services channel grouping generally servicing larger businesses with marketing budgets and Web.com for enterprise sales channel generally servicing multi-location or franchisor/franchisee customers. For more information about the Company, please visit
http://www.web.com.
The information obtained on or accessible through the Company's website is not incorporated into this Quarterly Report on Form 10-Q and you may not consider it a part of this Quarterly Report on Form 10-Q.
The Company has reviewed the criteria of Accounting Standards Codification ("ASC") 280-10, Segment Reporting, and has determined that the Company is comprised of only
one
segment, web services and products.
On January 31, 2017, the Company acquired
100%
of the equity interests of Dattatec.com SRL ("DonWeb.com or DonWeb"), a hosting and domain registration company catering to the Spanish-speaking market, located in Rosario, Argentina. On November 1, 2017, the Company acquired certain assets and liabilities of Acquisio, Inc., a provider of online advertising management. See Note 3,
Business Combinations
, for additional information surrounding the acquisitions.
On June 20, 2018, the Company executed a Merger Agreement with Parker Private Holdings II, LLC subject to certain closing conditions for
$25
per share of each common stock issued and outstanding immediately prior to the effective time of the agreement. The agreement provides for a go-shop period of
forty-five
days and remains in effect until August 5, 2018. A transaction is expected to be consummated in the fourth quarter of 2018.
Basis of Presentation
The accompanying consolidated balance sheet as of
June 30, 2018
, the consolidated statements of comprehensive income for the three and
six months ended June 30, 2018
and
2017
, the consolidated statements of cash flows for the
six months ended June 30, 2018
and
2017
, and the related notes to the consolidated financial statements are unaudited.
The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the year ended
December 31, 2017
, except that certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or excluded as permitted.
In the opinion of management, the unaudited consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of
June 30, 2018
, the Company’s results of operations and cash flows for the
six months ended June 30, 2018
and
2017
. The results of operations for the
six months ended June 30, 2018
, are not necessarily indicative of the results to be expected for the year ending
December 31, 2018
. The Company's results of operations and cash flows include Donweb.com and Acquisio from the acquisition dates through the respective period end dates.
Pursuant to the rules and regulations of the SEC, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been omitted from these interim financial statements. These financial statements should be read in conjunction with the audited financial statements and the notes included in the Company's most recent annual report on Form 10-K filed with the SEC on February 23, 2018, and any subsequently filed current reports on Form 8-K.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and bank demand deposit accounts. For purposes of presentation in the
Consolidated Balance Sheets, the Company considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents. Short term restricted cash of
$0.2 million
and
$0.3 million
as of
June 30, 2018
and
December 31, 2017
, respectively is included in other current assets. Long term restricted cash of
$4.7 million
and
$4.6 million
as of
June 30, 2018
and
December 31, 2017
, is included in other long-term assets. The restricted cash is primarily to collateralize letters of credit in support of leases.
Cost of Revenue and Operating Expenses
Cost of Revenue
Cost of revenue consists of expenses related to compensation of our web page development staff, domain name registration costs, directory listing fees, eCommerce store design, online marketing costs for services provided, billing costs, hosting expenses, and allocated occupancy overhead costs. The Company allocates occupancy overhead costs such as rent and utilities to all departments based on headcount. Accordingly, general overhead expenses are reflected in each cost of revenue and operating expense category.
Sales and Marketing Expense
The Company's direct marketing expenses include the costs associated with the online marketing channels used to promote our services and acquire customers. These channels include search marketing, affiliate marketing and partnerships. Sales and marketing costs consist primarily of compensation and related expenses for our sales and marketing staff as well as our customer support staff and allocated occupancy overhead costs. Costs to acquire contracts where the average customer life is greater than one year are deferred and recognized over the average customer life. Sales and marketing expenses also include marketing programs, such as advertising, corporate sponsorships and other corporate events and communications.
Technology and development
Technology and development represents costs associated with creation, development and distribution of our products and websites. Technology and development expenses primarily consist of headcount-related costs associated with the design, development, deployment, testing, operation and enhancement of our products. Also included are costs associated with the data centers and all systems infrastructure costs supporting those products as well as all administrative platforms and allocated occupancy overhead costs.
General and Administrative Expense
General and administrative expenses consist of compensation and related expenses for executive, finance, and administration, as well as professional fees, corporate development costs, other corporate expenses, and allocated occupancy overhead costs.
Depreciation and Amortization Expense
Depreciation and amortization expenses relate primarily to the Company's intangible assets recorded due to the acquisitions it has completed, as well as depreciation expense from computer and other equipment, internally developed software, furniture and fixtures, and building and improvement expenditures.
Foreign Currency Translation
The functional currency of the Company’s Argentinian DonWeb operations and its United Kingdom-based operations is the Argentina Peso and British Pound, respectively. The Company translates the financial statements of these subsidiaries to U.S. dollars using month-end rates of exchange for assets and liabilities, historical rates of exchange for equity and average rates of exchange for revenues, costs, and expenses. Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity.
In addition, the Company’s foreign operations include a customer service center, technology center and outbound sales center in Canada and a technology center in Buenos Aires, Argentina. The Company records foreign currency transaction gains and losses, and remeasurement of local currencies of these foreign subsidiaries where the functional currency is different from the local foreign currency in the consolidated statements of comprehensive income.
New Accounting Standards
Recently Adopted Accounting Standards
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The Company adopted the standard and did so without material impact.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments, addressing eight specific cash flow issues in an effort to reduce diversity in practice. The amended
guidance is effective for fiscal years beginning after December 31, 2017, and for interim periods within those years. The
Company early adopted this standard in fiscal 2017 with no impact.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory, which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted the standard in fiscal 2017 and did so without material impact.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires a
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. The amended guidance is effective for fiscal years beginning after
December 31, 2017, and for interim periods within those years. The Company elected to early adopt this standard in fiscal 2017 and has restated the statement of cash flows for the earliest period presented to conform with the retrospective application of the standard. There was no impact on the net change in cash, cash equivalents, and restricted cash in the statement of cash flows for the earliest period presented.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.
The new guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is
effective for the Company beginning after January 1, 2018, including interim periods within those periods. The Company
adopted this standard in fiscal 2017 and did so without material impact.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The Company adopted the standard and did so without material impact.
In February 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
that allows entities to reclassify from
accumulated other comprehensive income to retained earnings stranded tax effects resulting from the Act. The Company adopted this standard without material impact.
In May 2014, the FASB and International Accounting Standards Board ("IASB") issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606), a converged standard on revenue recognition which supersedes previous revenue recognition guidance. Some of the main areas of transition to the new standard include, among others, transfer of control (revenue is recognized when a customer obtains control of a good or service), allocation of transaction price is based on relative standalone selling price (entities that sell multiple goods or services in a single arrangement must allocate the consideration to each of those goods or services), contract costs (entities sometimes incur costs, such as sales commissions or mobilization activities, to obtain or fulfill a contract), and disclosures (extensive disclosures are required to provide greater insight into both revenue that has been recognized, and revenue that is expected to be recognized in the future from existing contracts). In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date, which defers the effective date of the new standard by one year, resulting in the new standard being effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 with early adoption as of the original effective date permitted. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and in April 2016, the FASB issued ASU 2016-10, Revenue from
Contracts with Customers: Identifying Performance Obligations and Licensing. Further in May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. These standards clarify the guidance in ASU 2014-09 and have the same effective date as the original standard. The Company adopted the standard on January 1, 2018 using a modified retrospective approach with the cumulative effect of initially applying the standard recognized at the date of initial application inclusive of certain additional disclosures, as permitted under Topic 606. Refer to Note 2,
Revenues
, for further information on the impact of adoption.
Accounting Standards Issued Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize on the balance sheet a right-of-use asset, representing their right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. ASU 2016-02 is effective for the Company beginning January 1, 2019 and the Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance requires only a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. For public companies, the amended guidance is effective for the Company beginning after January 1, 2020. The adoption of this standard is not expected to have a material impact on its consolidated financial statements or disclosures.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480) And Derivatves And Hedging (Topic 815): Accounting For Certain Financial Instruments With Down Round Features, Replacement of the Indefinite Deferral For Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception. The new guidance changes the classification of certain equity-linked financial instruments (or embedded features) with down round features. The amendments also clarify existing disclosure requirements for equity-classified instruments. For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260, Earnings Per Share, to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features would be subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480, Distinguishing Liabilities from Equity, that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. Part I of the new guidance affects any entity that issues financial instruments that include down round features. The amendments in Part I of this Update that relate to the recognition, measurement, and earnings per share of certain freestanding equity-classified financial instruments that include down round features affect entities that present earnings per share in accordance with the guidance in Topic 260, Earnings Per Share.
Part I is effective for the Company beginning January 1, 2019 and Part II did not require transition guidance as the amendment did not have an accounting effect. The adoption of this standard is not expected to have a material impact on its consolidated financial statements or disclosures.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI")
provisions of the Tax Cuts and Jobs Act (the "Act"). The GILTI provisions impose a tax on foreign income in excess of a
deemed return on tangible assets of foreign corporations. The Act indicates that either accounting for deferred taxes related to
GILTI inclusions or to treat any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting
policy election. The Company is in the process of evaluating the impact of the GILTI provisions.
2. Revenues
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
The Company recorded a net increase to opening retained earnings of
$3.3 million
as of January 1, 2018 due to the cumulative impact of adopting Topic 606 related to capitalizing the commission costs of acquiring contracts. When the amortization period is greater than
one
year, commission costs are deferred and amortized on a straight-line basis over the average life of the customer, which includes renewal periods.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The Company currently derives a substantial majority of its revenue from fees associated with our subscription services, which generally include web services, online marketing, eCommerce, and domain name registration offerings. Customers are billed for the subscription on a monthly, quarterly, semi-annual, annual or multi-year basis, at the customer's option. For all of the Company’s customers, regardless of the method the Company uses to bill them, subscription revenue is recorded as deferred revenue in the accompanying consolidated balance sheets. As services are performed, the Company recognizes subscription revenue on a daily basis over the applicable service period. When the Company provides a free trial period, the Company does not begin to recognize subscription revenue until the trial period has ended and the customer has been billed for the services.
The Company offers certain integrated online marketing services where the fee charged to the customer includes a media budget (”Pay-Per-Click” or “PPC”). Generally, revenue for PPC services are recognized ratably over the period of service. For these customers, revenue is recognized each time an ad is displayed. For ads placed, the Company evaluates whether it is the principal or agent. Generally, advertising revenues for ads placed are reported on a gross basis, that is, the amounts billed to customers are recorded as revenues, and amounts paid are recorded as costs of revenues. The Company is the principal because it controls the advertising inventory before it is transferred to our customers. The Company's control is evidenced by its ability to monetize the advertising inventory, being primarily responsible to our customers, having discretion in establishing pricing, or a combination of these.
Professional services revenues are generated from custom website design, eCommerce store design and support services. Our custom website design and eCommerce store design work is typically billed on a fixed-price basis and over very short periods. Generally, revenue for design services is recognized over time based on the proportion of the design services completed. Revenue for support services is billed on a time basis and recognized over the time as the services are performed. The Company offers products whereby control of the product passes to the customer when delivered and revenue is recognized at the time of delivery. These products represent approximately
five
percent of total revenue.
Arrangements with Multiple Performance Obligations
The Company's contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates the contract's transaction price to each distinct performance obligation based upon its best estimate of the standalone selling price of each distinct performance obligation in the contract. The Company generally determines standalone selling prices based on the prices charged to customers when products are purchased separately, as well as on our overall pricing objectives.
Deferred Revenues
For all of the Company’s customers, regardless of the method the Company uses to bill them, subscription revenue is recorded as deferred revenue in the accompanying consolidated balance sheets. The change in the deferred revenue balance for the
six months ended June 30, 2018
is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by
$153.5 million
of revenues recognized that were included in the deferred revenue balance at the beginning of the period. Approximately
$241.2
million of the deferred revenue balance is expected to amortize into revenue over the next twelve months and the remaining amount included in long-term deferred revenue is expected to substantially amortize into revenue over the next five year period. Payment terms vary by the type of customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer.
Deferred Costs to Acquire and Fulfill Contracts
Sales commissions earned by the Company's sales force are considered incremental and recoverable costs of acquiring a contract with a customer. Sales commissions for initial contracts where the average customer life is greater than
one
year are deferred and then amortized on a straight-line basis over the period of benefit with the period of benefit ranging from
thirteen
months up to
72
months. The Company determined the period of benefit by taking into consideration the average life of our customer contracts including renewals, its technology and other factors. Sales commissions for renewal contracts are deferred as contract assets and classified as either other current or non-current assets and then amortized on a straight-line basis over the remaining benefit period. Costs to acquire contracts included in deferred expenses amounted to approximately
$4.7 million
at
June 30, 2018
and the related amortization thereof is primarily included in sales and marketing expense in the accompanying Consolidated Statements of Comprehensive Income.
Deferred costs to fulfill contracts generally consist of domain registration costs which have been paid to a domain registry. These costs are deferred and amortized over the life of the domain which generally ranges from
one
to
five
years. Costs to fulfill contracts included in deferred expenses amounted to approximately
$109.9 million
at
June 30, 2018
. Amortization expense is primarily included in cost of revenue, excluding depreciation and amortization.
Total amortization expense was approximately
$24.7 million
and
$49.0 million
during the
three and six
months ended
June 30, 2018
, respectively.
No
impairment losses were recognized in the three and
six months ended June 30, 2018
.
Practical Expedients and Exemptions
The Company expenses sales commissions for those commission plans where the amortization period would have been
one
year or less. These costs are recorded within sales and marketing expenses. The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of
one
year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. Sales and usage-based taxes are excluded from revenues and no amounts have been adjusted for significant financing components if payments are received and the performance obligation is transferred within the year.
The following table disaggregates revenue by major sales channel groupings (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Retail
|
$
|
121,810
|
|
|
$
|
124,469
|
|
|
$
|
242,875
|
|
|
$
|
248,738
|
|
Premium Services
|
45,007
|
|
|
43,486
|
|
|
89,564
|
|
|
86,109
|
|
Web.com For Enterprises
|
19,873
|
|
|
18,776
|
|
|
40,992
|
|
|
37,003
|
|
Total Revenues
|
$
|
186,690
|
|
|
$
|
186,731
|
|
|
$
|
373,431
|
|
|
$
|
371,850
|
|
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company's Consolidated Statement of Comprehensive Income was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2018
|
|
Six months ended June 30, 2018
|
|
As Reported
|
|
Amounts Without the Adoption of ASC 606
|
|
Effect of Change
|
|
As Reported
|
|
Amounts Without the Adoption of ASC 606
|
|
Effect of Change
|
Sales and marketing
|
47,643
|
|
|
47,671
|
|
|
(28
|
)
|
|
99,223
|
|
|
99,442
|
|
|
(219
|
)
|
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company's Consolidated Balance Sheet was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
As Reported
|
|
Amounts Without The Adoption of ASC 606
|
|
Effect of Change
|
Assets
|
|
|
|
|
|
Deferred expenses, current
|
$
|
65,716
|
|
|
$
|
64,236
|
|
|
$
|
1,480
|
|
Deferred expenses, noncurrent
|
48,954
|
|
|
45,927
|
|
|
3,027
|
|
Liabilities
|
|
|
|
|
|
Deferred tax liabilities
|
55,918
|
|
|
54,861
|
|
|
1,057
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
$
|
(180,913
|
)
|
|
$
|
(184,363
|
)
|
|
$
|
3,450
|
|
The opening and closing balances of the Company's accounts receivable, contract assets and deferred revenue are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
Deferred Expenses (Including Contract Assets)
|
|
Deferred Revenue
|
Opening Balance as of December 31, 2017
|
$
|
25,424
|
|
|
109,583
|
|
|
$
|
419,460
|
|
(Decrease) Increase, net
|
(324
|
)
|
|
5,087
|
|
|
7,891
|
|
Ending balance as of June 30, 2018
|
$
|
25,100
|
|
|
114,670
|
|
|
$
|
427,351
|
|
3. Business Combinations
Acquisition of Acquisio, Inc.
On November 1, 2017, the Company acquired certain assets and liabilities of Acquisio, Inc., a provider of online advertising management. The Company paid approximately
$8.7 million
from acquisition at closing and an additional
$0.6 million
through
June 30, 2018
. Transaction costs associated with the acquisition were not significant.
The Company accounted for the acquisition using the acquisition method as required by ASC 805,
Business Combinations
. As such, fair values have been assigned to the assets acquired and liabilities assumed and the excess of the total purchase price over the fair value of the net assets acquired is recorded as goodwill. The Company, with the assistance of independent valuation professionals, has also performed valuations of the fair value of certain intangible assets. The goodwill recorded from this acquisition represents business benefits the Company anticipates realizing from acquiring the entity, and the amount is expected to be deductible for income tax purposes.
The following table summarizes the Company's purchase price allocation based on the fair values of the assets acquired and the liabilities assumed (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Adjustments to Opening Balance Sheet
|
June 30, 2018
|
Tangible current assets
|
$
|
130
|
|
$
|
—
|
|
$
|
130
|
|
Property plant and equipment
|
376
|
|
—
|
|
376
|
|
Domain/Trade names
|
401
|
|
—
|
|
401
|
|
Developed Technology
|
2,698
|
|
—
|
|
2,698
|
|
Customer relationships
|
1,908
|
|
—
|
|
1,908
|
|
Other intangible assets
|
—
|
|
635
|
|
635
|
|
Goodwill
|
4,264
|
|
—
|
|
4,264
|
|
Current liabilities
|
(274
|
)
|
—
|
|
(274
|
)
|
Deferred revenue
|
(93
|
)
|
—
|
|
(93
|
)
|
Other long term liabilities
|
(129
|
)
|
(635
|
)
|
(764
|
)
|
Purchase price consideration
|
$
|
9,281
|
|
$
|
—
|
|
$
|
9,281
|
|
The customer relationships and developed technology are amortized over
four
years and
ten
years, respectively. The domain and trade names are indefinite-lived intangible assets and are not amortized.
Acquisition of DonWeb
On January 31, 2017, the Company acquired
100%
of the outstanding shares of DonWeb, a hosting and domain registration company catering to the Spanish-speaking market, located in Rosario, Argentina. The Company paid approximately
$8.6 million
at closing. The Company may pay the seller additional consideration of up to
$2.0 million
on January 31, 2021, present valued to
$1.7 million
as of the acquisition date subject to certain indemnification provisions, for total consideration of
$10.3 million
In addition, the agreement includes a
four
-year earnout provision that entitles the seller up to
$3.0 million
of
consideration contingent upon the post-acquisition business performance and employment. Earnout amounts are recorded as compensation expense. Transaction costs associated with the acquisition were not significant.
The Company accounted for the acquisition using the acquisition method as required by ASC 805,
Business Combinations
. As such, fair values have been assigned to the assets acquired and liabilities assumed and the excess of the total purchase price over the fair value of the net assets acquired is recorded as goodwill. The Company, with the assistance of independent valuation professionals, has also performed valuations of the fair value of certain intangible assets. The goodwill recorded from this acquisition represents business benefits the Company anticipates realizing from acquiring an entity in the Spanish-speaking market, and is not deductible for income tax purposes. In connection with the acquisition, the Company recorded approximately
$4.0 million
of liabilities arising from pre-acquisition matters that are more likely than not to be sustained upon examination, inclusive of interest and penalties for which the Company is indemnified. The following table summarizes the Company's purchase price allocation based on the fair values of the assets acquired and the liabilities assumed (in thousands):
|
|
|
|
|
|
As of June 30, 2018
|
Tangible current assets
|
$
|
1,071
|
|
Property plant and equipment
|
2,344
|
|
Domain/Trade names
|
990
|
|
Non-competes
|
236
|
|
Customer relationships
|
1,720
|
|
Other non current assets
|
2,811
|
|
Goodwill
|
10,568
|
|
Current liabilities
|
(1,738
|
)
|
Deferred revenue
|
(1,584
|
)
|
Other long term liabilities
|
(6,070
|
)
|
Purchase price consideration
|
$
|
10,348
|
|
The non-competes and customer relationships are amortized over
four
years and
three
years, respectively. The domain and trade names are indefinite-lived intangible assets and are not amortized.
4. Net Income Per Common Share
Basic net income per common share is calculated using net income and the weighted-average number of shares outstanding during the reporting period. Diluted net income per common share includes the effect from the potential issuance of common stock, such as common stock issued pursuant to the exercise of stock options or vesting of restricted shares.
The Company issues equity awards with performance, service and market conditions. These awards are included in basic shares outstanding once all criteria have been met and the shares have vested. Prior to the end of the vesting period, the number of contingently issuable shares included in diluted EPS is based on the number of shares, if any, that would be issuable under the terms of the arrangement if the end of the reporting period were the end of the contingency period, using the treasury stock method and assuming the result would be dilutive. See Note 12,
Stock-Based Compensation and Stockholders' Equity
, for additional information on this award.
During each of the
three months ended June 30, 2018
and
2017
,
2.9 million
share-based awards, have been excluded from the calculation of diluted common shares because including those securities would have been anti-dilutive. During the
six months ended June 30, 2018
and
2017
,
2.9 million
and
2.8 million
share-based awards, respectively, have been excluded from the calculation of diluted common shares because including those securities would have been anti-dilutive.
The Company's potentially dilutive shares also include incremental shares issuable upon the conversion of the Company's Senior Convertible Notes due August 15, 2018 ("2018 Notes"). See Note 7,
Long-term Debt
, for additional information regarding the 2018 Notes. Upon conversion or maturity of the 2018 Notes, the Company may settle the notes with either cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. The Company has adopted a current policy to settle the principal amount in cash and any excess conversion value in shares of its common stock. Because the principal amount of the 2018 Notes will be settled in cash upon conversion, only the conversion spread relating to the 2018 Notes is included in the calculation of diluted net income per common share. When the market price of the Company's stock
exceeds the conversion price, as applicable, it will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued upon conversion using the treasury stock method. There were no incremental common shares from the 2018 Notes that were included in the calculation of diluted shares because the Company's average price of its common stock did not exceed the conversion price during the
three and six
months ended
June 30, 2018
and
2017
.
The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
|
|
$
|
6,212
|
|
|
$
|
8,046
|
|
|
$
|
10,790
|
|
|
$
|
14,562
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
48,007
|
|
|
49,488
|
|
|
47,783
|
|
|
49,283
|
|
Dilutive effect of stock options
|
|
|
933
|
|
|
1,352
|
|
|
986
|
|
|
1,322
|
|
Dilutive effect of restricted shares
|
|
|
296
|
|
|
346
|
|
|
490
|
|
|
456
|
|
Dilutive effect of performance shares
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
6
|
|
Diluted weighted average common shares outstanding
|
|
|
49,236
|
|
|
51,186
|
|
|
49,275
|
|
|
51,067
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic common share
|
|
|
$
|
0.13
|
|
|
$
|
0.16
|
|
|
0.23
|
|
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
|
$
|
0.13
|
|
|
$
|
0.16
|
|
|
$
|
0.22
|
|
|
$
|
0.29
|
|
5. Goodwill and Intangible Assets
In accordance with ASC 350, the Company reviews goodwill and other indefinite-lived intangible asset balances for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill or indefinite-lived intangible assets below its carrying amount. As of
December 31, 2017
, the Company completed its annual impairment test of goodwill and other indefinite-lived intangible assets and determined that there was no impairment. There were no indicators of impairment during the
six months ended June 30, 2018
.
The following table summarizes changes in the Company’s goodwill balances as required by ASC 350-20 for the
six months ended June 30, 2018
and the year ended
December 31, 2017
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Goodwill balance at beginning of period
|
$
|
987,956
|
|
|
$
|
974,045
|
|
Accumulated impaired goodwill at beginning of period
|
(102,294
|
)
|
|
(102,294
|
)
|
Goodwill balance at beginning of period, net
|
$
|
885,662
|
|
|
871,751
|
|
Goodwill acquired during the period- DonWeb-
Note 3, Business Combinations
|
—
|
|
|
10,568
|
|
Goodwill acquired during the period- Acquisio -
Note 3, Business Combinations
|
—
|
|
|
4,264
|
|
Foreign currency translation adjustments
|
(3,368
|
)
|
|
(921
|
)
|
Goodwill balance at end of period, net *
|
$
|
882,294
|
|
|
$
|
885,662
|
|
* Gross goodwill balances were
$984.6 million
as of
June 30, 2018
and
$988.0 million
as of
December 31, 2017
. These include accumulated impairment losses of
$102.3 million
.
The Company’s intangible assets are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Weighted-average Remaining Amortization Period in Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
Domain/Trade names
|
$
|
160,899
|
|
|
$
|
—
|
|
|
$
|
160,899
|
|
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
Customer relationships
|
326,622
|
|
|
(198,749
|
)
|
|
127,873
|
|
|
5.1
|
Developed technology
|
283,276
|
|
|
(225,443
|
)
|
|
57,833
|
|
|
3.8
|
Other
|
8,563
|
|
|
(8,452
|
)
|
|
111
|
|
|
2.0
|
Total *
|
$
|
779,360
|
|
|
$
|
(432,644
|
)
|
|
$
|
346,716
|
|
|
|
* Cumulative foreign currency translation adjustments, reflecting the movement in currencies, decreased total intangible assets by approximately
$0.7 million
as of
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Weighted-average Remaining Amortization Period in Years
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
Domain/Trade names
|
$
|
161,251
|
|
|
$
|
—
|
|
|
$
|
161,251
|
|
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
Customer relationships
|
327,176
|
|
|
(185,353
|
)
|
|
141,823
|
|
|
5.6
|
Developed technology
|
283,319
|
|
|
(215,545
|
)
|
|
67,774
|
|
|
4.2
|
Other
|
8,673
|
|
|
(7,950
|
)
|
|
723
|
|
|
1.0
|
Total *
|
$
|
780,419
|
|
|
$
|
(408,848
|
)
|
|
$
|
371,571
|
|
|
|
*Cumulative foreign currency translation adjustments, reflecting the movement in currencies, decreased total intangible assets by approximately $0.2 million as of December 31, 2017.
.
The weighted-average amortization period for the amortizable intangible assets remaining as of
June 30, 2018
is approximately
4.7
years. Total amortization expense was
$11.9 million
and
$12.1 million
for the
three months ended June 30, 2018
and
2017
, respectively. Total amortization expense was
$24.2 million
and
$25.0 million
for the
six months ended June 30, 2018
and
2017
, respectively.
As of
June 30, 2018
, the amortization expense for the remainder of the year ended
December 31, 2018
, and the next five years and thereafter is as follows (in thousands):
|
|
|
|
|
2018 (remainder of year)
|
$
|
21,683
|
|
2019
|
41,659
|
|
2020
|
39,158
|
|
2021
|
38,264
|
|
2022
|
26,667
|
|
2023
|
17,067
|
|
Thereafter
|
1,319
|
|
Total
|
$
|
185,817
|
|
6. Related Party Transactions
Effective February 6, 2015, the Company elected Mr. John A. Giuliani to serve on its Board of Directors. Mr. Giuliani serves as President, Chief Executive Officer and Director of Conversant, a subsidiary of Alliance Data Systems Corporation, a personalized digital marketing platform. The Company incurred
no
significant expense related to services provided by Conversant during the three months and
six months ended June 30, 2018
. The Company incurred
$0.2 million
and
$0.4 million
of expense related to services provided by Conversant during the three months and
six months ended June 30, 2017
, respectively.
7. Long-Term Debt
1%
Senior Convertible Notes due August 15, 2018
In August 2013, the Company issued
$258.8 million
aggregate principal amount of
1.00%
Senior Convertible Notes due
August 15, 2018
(the "2018 Notes"). The 2018 Notes bear interest at a rate of
1.00%
per year, payable semiannually in arrears, on February 15 and August 15 of each year, beginning on February 15, 2014. The conversion price for the 2018 Notes is equivalent to an initial effective conversion price of approximately
$35.00
per share of common stock. Proceeds, net of original issuance discounts and debt issuance costs, of
$252.3 million
were received from the 2018 Notes. The net proceeds were used to pay down
$208.0 million
of the First Lien Term Loan and
$43.0 million
of the Revolving Credit Facility.
On or after
August 20, 2016
, the Company may redeem for cash any or all of the 2018 Notes, at its option, if the last reported sale price of its common stock exceeds
130%
of the applicable conversion price on each applicable trading day, as defined by the indenture. The redemption price will equal
100%
of the principal amount of the 2018 Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date. Holders of the 2018 Notes may also convert their notes at any time prior to
May 15, 2018
if the sale price of the Company's common stock exceeds
130%
of the applicable conversion price on each applicable trading day as defined by the indenture.
In addition, Holders may also convert their 2018 Notes any time prior to
May 15, 2018
, (i) if during the
five
business days after any
five
consecutive trading day period in which the trading price of the 2018 Notes was less than
98%
of the product of the last reported sale price of the Company's common stock and the conversion rate, (ii) if the Company calls the 2018 Notes for redemption; or (iii) upon the occurrence of specified corporate events. As of May 15, 2018, none of the Holders converted their 2018 Notes.
The 2018 Notes are senior unsecured obligations and will be effectively junior to any of the Company's existing and future secured indebtedness.
The Company determined that the embedded conversion option in the 2018 Notes is not required to be separately accounted for as a derivative under ASC 815,
Derivatives and Hedging
. The 2018 Notes are within the scope of ASC 470, Topic 20,
Debt with Conversion and Other Options,
which requires the Company to separate a liability component and an equity component from the proceeds received. The carrying amount of the liability component at the time of the transaction of
$204.4 million
was calculated by measuring the fair value of a similar debt instrument that does not have an associated equity component. The fair value of the liability component was subtracted from the initial proceeds and the remaining amount of
$47.8 million
was recorded as the equity component. The excess of the principal amount of the liability component over its carrying amount will be amortized to interest expense over the expected life of
5 years
using the effective interest method.
Upon conversion or maturity of the 2018 Notes, the Company may settle the notes with either cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. The Company has adopted a current policy to settle the
$258.8 million
of principal amount in cash and any excess conversion value in shares of its common stock. Because the principal amount of the 2018 Notes will be settled in cash upon conversion, only the conversion spread relating to the 2018 Notes may be included in the Company's calculation of diluted net income per common share. When the market price of the Company's stock exceeds the conversion price, it will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued upon conversion using the treasury stock method. As such, the 2018 Notes have no impact on diluted net income per common share until the price of the Company's common stock exceeds the conversion price (approximately
$35.00
per common share) of the 2018 Notes.
As of
June 30, 2018
and
December 31, 2017
, the carrying value of the debt and equity component was
$257.2 million
and
$47.8 million
and
$251.0 million
and
$47.8 million
, respectively. The unamortized debt discount of
$1.5 million
as of
June 30,
2018
will be amortized over the remaining life of
two months
using the effective interest method. The Company has included the carrying value of the debt component of the 2018 Notes as long-term debt based upon its intent and ability to refinance these obligations.
Credit Agreement
On February 11, 2016, the Company entered into an amendment (the "Amendment") to that certain Credit Agreement, dated as of September 9, 2014 (the "Existing Credit Agreement" and as amended by the Amendment, the "Amended Credit Agreement"), by and among the Company, the several lenders from time to time parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent. On March 9, 2016, the amended Credit Agreement became effective following the completion of the acquisition of Yodle Inc. On May 18, 2017, the Company entered into a second amendment to the Credit Agreement. On April 30, 2018, the Company entered into a third amendment to the Credit Agreement ("Third Amendment").
The Third Amendment to the Credit Agreement provided (i)
$400.0 million
of
five
-year secured term loans, replacing and refinancing the
$389.7 million
of secured term loans outstanding under the Amended Credit Agreement and (ii) increased the revolving credit commitment under the Amended Credit Agreement to
$400.0 million
from
$260.0 million
, with a
five
-year maturity date from the date of the Third Amendment. The Company intends to use the proceeds from future borrowings under the revolving credit facility to pay the 2018 Notes upon maturity.
The Term Loan and loans under the Revolving Credit Facility bear interest at a rate equal to either, at the Company’s option, the LIBOR rate plus an applicable margin initially equal to
1.75%
per annum, or the prime lending rate plus an applicable margin equal to
0.75%
per annum. The applicable margins for the Term Loan and loans under the Revolving Credit Facility are subject to reduction or increase based upon the Company’s consolidated first lien net leverage ratio as of the end of each fiscal quarter. The Company must also pay (i) a commitment fee initially equal to
0.30%
per annum on the actual daily amount by which the revolving credit commitment exceeds then-outstanding usage under the Revolving Credit Facility, also subject to reduction or increase based upon the Company’s consolidated first lien net leverage ratio, (ii) a letter of credit fee equal to the applicable margin that applies to LIBOR loans under the Revolving Credit Facility and (iii) a fronting fee of
0.125%
per annum, calculated on the daily amount available to be drawn under each letter of credit issued under the Revolving Credit Facility.
The Company is permitted to make voluntary prepayments with respect to the Revolving Credit Facility and the Term Loan at any time without payment of a premium. The Company is required to make mandatory prepayments of the Term Loan with (i) net cash proceeds from certain asset sales (subject to reinvestment rights) and (ii) net cash proceeds from certain issuances of debt. The Company is also required to maintain certain financial ratios under the Credit Agreement and there are customary covenants that limit the incurrence of debt, the payment of dividends, the disposition of assets, and making of certain payments. Substantially all of the Company's and certain of its domestic subsidiaries' tangible and intangible assets are pledged as collateral under the Credit Agreement.
The aforementioned amendments were principally accounted for as modifications of the Credit Agreement and as a result,
$3.0 million
and
$1.9 million
of additional loan origination discounts and bank lender fees were capitalized during the quarters ended June 30, 2018 and June 30, 2017, respectively. A partial loss on extinguishment of debt resulted from a certain bank that chose to substantially reduce their syndication of the Term Loan. As a result, the Company recorded a
$0.4 million
loss for the portion of the debt that was extinguished. An additional loss on debt extinguishment of
$0.1 million
resulted from the Company's prepayment of
$10.0 million
on the Term Loan.
The Company has
$398.2 million
of available borrowings under the Revolving Credit Facility as of
June 30, 2018
.
Outstanding long-term debt and the interest rates in effect at
June 30, 2018
and
December 31, 2017
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Revolving Credit Facility maturing 2023, based on LIBOR plus 1.75%
|
$
|
—
|
|
|
$
|
10,000
|
|
Term Loan due 2023, 3.84% based on LIBOR plus 1.75%, less unamortized discount of $4,175 at June 30, 2018, effective rate of 3.99%
|
385,825
|
|
|
385,934
|
|
Senior Convertible Notes, maturing 2018, 1.00%, less unamortized discount of $1,528 at June 30, 2018, effective rate of 5.88%
|
257,222
|
|
|
251,036
|
|
Total Outstanding Debt
|
643,047
|
|
|
646,970
|
|
Less: Current Portion of Long-Term Debt
|
(4,946
|
)
|
|
(16,612
|
)
|
|
|
|
|
|
|
|
|
|
Long-Term Portion
|
$
|
638,101
|
|
|
$
|
630,358
|
|
Debt discount and issuance costs
The Company recorded
$3.6 million
and
$3.4 million
of expense from amortizing debt issuance and discount costs during the
three months ended June 30, 2018
and
2017
, respectively. During the
six months ended June 30, 2018
and
2017
,
$7.2 million
and
$6.8 million
of amortization expense was recorded, respectively.
Total estimated principal payments due for the next five years as of
June 30, 2018
are as follows:
|
|
|
|
|
Year 1
|
$
|
5,000
|
|
Year 2
|
20,000
|
|
Year 3
|
20,000
|
|
Year 4
|
20,000
|
|
Year 5
|
583,750
|
|
Total principal payments
|
$
|
648,750
|
|
8. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Foreign currency translation adjustments
|
$
|
(6,519
|
)
|
|
$
|
(4,503
|
)
|
Total accumulated other comprehensive loss
|
$
|
(6,519
|
)
|
|
$
|
(4,503
|
)
|
9. Fair Value
The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels as follows:
Level 1
-Quoted prices in active markets for identical assets or liabilities.
Level 2
-Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
-Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
The Company has financial assets and liabilities that are not required to be remeasured to fair value on a recurring basis. The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, deferred consideration and accrued expenses approximates fair market value as of
June 30, 2018
and
December 31, 2017
due to the short maturity of these items. As of
June 30, 2018
, the fair value and carrying value of the Company’s 2018 Notes totaled
$257.1 million
and
$257.2 million
, respectively. As of
December 31, 2017
, the fair value and carrying value of the Company's 2018 Notes was $
255.3 million
and
$251.0 million
, respectively. The fair value of the 2018 Notes, including the equity component, was calculated by taking the quoted market price for the instruments multiplied by the principal amount. This is based on a Level 2 fair value hierarchy calculation obtained from quoted market prices for the Company’s long-term debt instruments that may not be actively traded at each respective period end. The Revolving Credit Facility and Term Loan are variable rate debt instruments indexed to 1-Month LIBOR that resets monthly and the fair value approximates the carrying value as of
June 30, 2018
and
December 31, 2017
. See Note 7,
Long-term Debt
, for additional information surrounding the amendment.
10. Income Taxes
The Company accounts for income taxes under the provisions of ASC 740,
Income Taxes
, using the liability method. ASC 740 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse.
The Company recorded income tax expense of
$3.1 million
and
$6.8 million
during the
three months ended June 30, 2018
and
2017
, and
$5.3 million
and
$12.9 million
during the
six months ended June 30, 2018
and
2017
, respectively, based upon the estimated annual effective tax rates for each year. The estimated annual effective tax rate for
2018
and
2017
reflects the impact of net unfavorable permanent book-tax differences, primarily driven by transaction and stock compensation costs and an increase in the projected year-end valuation allowance related to certain state and foreign deferred tax assets.
On December 22, 2017, the Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company has estimated its provision for income taxes in accordance with the Act and guidance available as of the date of this filing. The effective tax rate for the
six months ended June 30, 2018
and 2017 was
33.1%
and
47.1%
, respectively. The decrease in the effective tax rate was primarily due to the adoption of the Act.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities and the transition tax on our historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to tax expense in 2018 when the analysis is complete. The Company recorded a discrete item a benefit of
$0.5 million
for the six months ended June 30, 2018 after further evaluation of its review of the transition tax. The Company has not provided an estimate for foreign derived intangible income, as it is still in the process of obtaining the requisite information.
11. Commitments and Contingencies
Standby Letters of Credit
The Company utilizes letters of credit to back certain payment obligations relating to its facility operating leases. The Company had approximately $
6.7 million
in standby letters of credit as of
June 30, 2018
, $
1.8 million
of which were issued under the Revolving Credit Facility.
Legal Proceedings
On July 13, 2017, the Company was named as a defendant in a lawsuit filed in the United States District Court for the Middle District of Florida. The plaintiff in the case alleges that the Company infringed upon certain copyrights, misappropriated trade secrets, breached contracts, and violated the Florida Deceptive and Unfair Trade Practices Act in connection with the Company’s Ignite products. The plaintiff seeks damages in an unspecified amount, plus the recovery of its costs and attorneys’ fees incurred in the suit. The Company believes that it has meritorious defenses against the asserted claims and is no longer offering the afore mentioned products for sale. A preliminary injunction against the Company was entered and the appeal is pending. The Company has reserved an immaterial amount which it determined to be commensurate with the liability, damage and coverage issues presented by the subject claims at this early stage of the pending lawsuit. It is also not currently possible to reasonably estimate the amount or range of any amounts that the Company may be required to pay as damages in the event that liability is found against the Company in excess of the amount reserved without plaintiff providing more detail on its claims and without expert discovery on the damage and apportionment issues presented by the claims.
From time to time, the Company and its subsidiaries receive inquiries from foreign, federal, state and local regulatory authorities or are named as defendants in various investigations, inquires or legal actions that are incidental to its business and arise out of or are related to claims made in connection with its marketing practices, customer and vendor contracts and employment related disputes. The Company believes that the resolution of these investigations, inquiries or legal actions will not have a material adverse effect on its financial position, marketing practices or results of operations.
Indemnifications
The Company has agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by them in any action or proceeding to which any of them is, or is threatened to be, made a party by reason of their service as a director or officer, including any action by the Company, arising out of their services as the Company’s director or officer or their services provided to any other company or enterprise at the Company’s request.
Other
The Company is responsible for charging end customers certain taxes in numerous jurisdictions. In the ordinary course of its business, there are many transactions and calculations where the ultimate tax determination is uncertain. In the future, the Company may come under audit, which could result in changes to its tax estimates. The Company routinely assesses these matters and although the Company believes its tax estimates are reasonable, the final determination of tax audits could be materially different than the Company’s estimates, which would result in the Company recording an expense in the period in which a final determination is made.
12. Stock-Based Compensation and Stockholders' Equity
The Company records compensation expense for employee and director stock-based compensation plans based upon the fair value of the award in accordance with ASC 718, Compensation-Stock Compensation.
Equity Incentive Plans
The Company has the 2014 Equity Incentive Plan for the issuance of stock-based compensation, including but not limited to, common stock options and restricted shares to employees. In addition, the Company’s plan provides for grants of non-statutory stock options and restricted shares awards (“RSA’s”) to non-employee directors. The Company issues shares out of treasury stock, if available, upon the exercise of stock options, otherwise new shares of common stock are issued. Restricted shares are issued out of common stock when they are granted.
Incentive stock options and non-statutory stock options issued generally vest ratably over
three
to
four
years, are contingent upon continued service and expire
ten
years from the grant date. Restricted share awards generally vest
25
percent each year over a
four
year period.
The Board of Directors, or a committee thereof, administers all of the equity incentive plans and establishes the terms of options granted, including the exercise price, the number of shares subject to individual option awards and the vesting period of options, within the limits set forth in the plans. Options have a maximum term of
10
years and vest as determined by the Board of Directors.
The Company has additional equity incentive plans that are established in conjunction with its acquisitions. These plans are considered one-time, inducement awards of incentive stock options, non-statutory stock options and restricted shares. Once the inducement awards are granted, no additional shares, including forfeitures and cancellations, are available for future grant under these plans.
Performance Shares
During the first six months of
2018
and
2017
, the Compensation Committee of the Board of Directors approved the issuance of performance share equity awards. The targeted number of shares under a
100 percent
payout scenario for each of the
2018
and
2017
awards granted are
0.2
million shares, earned over the
three
year vesting periods, with one-third vesting each year. The actual number of shares that may be earned and issued, if any, may range from
0-200%
of the target number of shares granted. The range is based upon (1) the number of shares earned based upon the over achievement or under achievement of the financial measures for the annual performance period and (2) the number of shares earned being adjusted higher or lower depending on the performance of the Company's total shareholder return, compared against the Company's peer group.
Compensation expense related to the performance share stock plan for the
three months ended June 30, 2018
and
2017
was approximately and
$0.4 million
and
$1.2 million
, respectively. Compensation expense for the
six months ended June 30, 2018
and
2017
was
$1.0 million
and
$1.9 million
respectively. The 2017 tranche of the performance share award resulted in a payout of
71%
of the target shares, or approximately
113 thousand
shares during the first quarter of
2018
. During the
six months ended June 30, 2018
, approximately
41 thousand
shares totaling
$0.7 million
were withheld by the Company for minimum income tax withholding requirements.
Stock Options
Compensation expense related to the Company’s stock option plans was
$1.4 million
and
$2.0 million
for the
three months ended June 30,
2018
and
2017
, respectively. Compensation expense for the
six months ended June 30, 2018
and
2017
was
$3.1 million
and
$4.0 million
, respectively. During the
three months ended June 30, 2018
and
2017
,
0.5 million
and
0.3 million
common shares were issued for options exercised, respectively. During the
six months ended June 30, 2018
and
2017
,
0.6 million
and
0.6 million
common shares were issued for options exercised, respectively. During the
six months ended June 30, 2018
and
2017
,
0.9 million
and
1.0 million
options were granted, respectively. The weighted-average grant-date fair value of an option granted during the
six months ended June 30, 2018
and
2017
was
$6.99
and
$8.60
, respectively.
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. Below are the ranges of assumptions used in calculating the fair value of options granted during the following periods:
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
2018
|
2017
|
Risk-free interest rate
|
2.54%
|
-
|
2.81%
|
1.90%
|
-
|
1.98%
|
Dividend yield
|
N/A
|
N/A
|
Expected life (in years)
|
4.99
|
-
|
5.04
|
5.05
|
-
|
5.07
|
Volatility
|
41.47%
|
-
|
42.36%
|
43.54%
|
-
|
44.67%
|
Restricted Stock
Compensation expense related to restricted stock plans for the
three months ended June 30,
2018
and
2017
, was approximately
$3.9 million
and
$3.0 million
, respectively. Compensation expense for the
six months ended June 30,
2018
and
2017
was
$7.4 million
and
$5.8 million
, respectively. During the
six months ended June 30,
2018
and
2017
, approximately
0.2 million
and
0.2 million
shares totaling approximately
$3.2 million
and
$3.1 million
, respectively, were withheld by the Company for minimum income tax withholding requirements. During the
three months ended June 30,
2018
and
2017
,
118 thousand
and
136 thousand
restricted common shares were granted, respectively. During the
six months ended June 30,
2018
and
2017
,
0.7 million
and
0.9 million
restricted common shares were granted, respectively. The weighted-average grant-date fair value of restricted stock granted during the
three months ended June 30,
2018
and
2017
was
$18.15
and
$20.32
, respectively. The weighted-average grant-date fair value of restricted stock granted during the
six months ended June 30,
2018
and
2017
was
$22.18
and
$20.43
, respectively.
Stock Repurchases
On
November 5, 2014
, the Company's Board of Directors authorized a share repurchase program of up to
$100.0 million
of the Company's common stock expiring on
December 31, 2016
. In October 2016, the Company's Board of Directors authorized that the share repurchase program of the Company's outstanding securities be extended through December 31, 2018 and be increased by an additional
$100.0 million
.
The aggregate amount remaining available for repurchase under this program was
$33.8 million
at
June 30, 2018
. Repurchases under the repurchase programs may take place in the open market or in privately negotiated transactions, including structured and derivative transactions such as accelerated share repurchase transactions, and may be made under a Rule 10b5-1 plan. During the three months and the
six months ended June 30, 2018
, the Company did
not
repurchase any common shares.
No
common shares were repurchased during the
three months ended June 30,
2017
. During the
six months ended June 30,
2017
, the Company repurchased approximately
0.1 million
common shares for
$2.1 million
.
13. Restructuring
In March 2018, the Company completed a reorganization of its operations, designed to consolidate operations and rationalize infrastructure. Through this reorganization, the Company eliminated various positions and offered separation agreements to those impacted. During the
six months ended June 30, 2018
, the Company recognized
$2.7 million
of pre-tax restructuring charges. Of this amount,
$2.0 million
was paid during
three months ended June 30, 2018
.
No
additional pre-tax restructuring charges were recognized during the
three months ended June 30, 2018
and the remaining balance of
$0.7 million
is expected to be paid in the third quarter of 2018.
During the
six months ended June 30, 2017
, the Company recorded
$0.3 million
in connection with severance charges. There were
no
amounts recorded during the
three months ended June 30, 2017
.
14. Subsequent Events
Effective July 1, 2018, the functional currency of the Company’s Argentinian DonWeb operations will change to the U.S. dollar (its reporting currency) due to the Company’s determination that Argentina’s economy was highly inflationary at June 30, 2018. As such, non-monetary assets and liabilities will be measured at the historical rate while monetary assets and liabilities will be measured at current rates with foreign exchange gains and losses recorded in the Consolidated Statement of Comprehensive Income. Future fluctuations in foreign exchange rates cannot be reasonably predicted, therefore an estimate of the financial effect of this determination cannot be made.