| Basis of Presentation and Summary of Significant Accounting Policies | 9 Months Ended |
| Sep. 30, 2013 |
| Accounting Policies [Abstract] | ' |
| Basis of Presentation and Summary of Significant Accounting Policies | ' |
| Basis of Presentation and Summary of Significant Accounting Policies |
|
| A summary of the significant accounting policies consistently applied in the preparation of the accompanying condensed consolidated financial statements follows. |
|
| Basis of Presentation |
|
| The accompanying interim condensed consolidated balance sheet as of September 30, 2013, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss) for the three and nine month periods ended September 30, 2013 and 2012, the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2013 and 2012 and the condensed consolidated statement of stockholders’ equity for the nine month period ended September 30, 2013 are unaudited. |
|
| In the opinion of management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our statement of financial position as of September 30, 2013 and our results of operations for the three and nine month periods ended September 30, 2013 and 2012 and our cash flows for the nine month periods ended September 30, 2013 and 2012. The results for the nine month period ended September 30, 2013 are not necessarily indicative of the results expected for the full year. The consolidated balance sheet as of December 31, 2012 has been derived from our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012. |
|
| The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), for interim financial information and with the instructions to the SEC Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC. |
|
| Principles of Consolidation |
|
| The condensed consolidated financial statements include the accounts of Demand Media, Inc. and our wholly owned subsidiaries. Acquisitions are included from the date of the acquisition. Our purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates. All significant intercompany transactions and balances have been eliminated in consolidation. |
|
| Investments in affiliates such as NameJet LLC, ("NameJet") over which we have the ability to exert significant influence, but do not control and are not the primary beneficiary of are accounted for using the equity method of accounting. Investments in affiliates which we have no ability to exert significant influence are accounted for using the cost method of accounting. Our proportional share of affiliate earnings or losses accounted for under the equity method of accounting, which are not material for all periods presented, are included in other income (expense) in our condensed consolidated statements of operations. Affiliated companies are not material, individually or in the aggregate, to our financial position, results of operations or cash flows for all periods presented. |
|
| 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, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue, allowance for doubtful accounts, investments in equity interests, fair value of issued and acquired stock warrants, the assigned value of acquired assets and assumed liabilities in business combinations, useful lives and impairment of property and equipment, intangible assets, goodwill and other assets, the fair value of equity-based compensation awards, and deferred income tax assets and liabilities. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of our assets and liabilities. |
|
| Revenue Recognition |
|
| We recognize revenue when four basic criteria are met: persuasive evidence of a sales arrangement exists; performance of services has occurred; the sales price is fixed or determinable; and collectability is reasonably assured. We consider persuasive evidence of a sales arrangement to be the receipt of a signed contract or insertion order. Collectability is assessed based on a number of factors, including transaction history with the customer and the credit worthiness of the customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. We record cash received in advance of revenue recognition as deferred revenue. |
|
| For arrangements with multiple deliverables, we allocate revenue to each deliverable if the delivered item(s) has value to the customer on a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in our control. The fair value of the selling price for a deliverable is determined using a hierarchy of (1) Company specific objective and reliable evidence, then (2) third-party evidence, then (3) best estimate of selling price. We allocate any arrangement fee to each of the elements based on their relative selling prices. |
|
| Our revenue is principally derived from the following services: |
|
| Content & Media |
|
| Advertising Revenue. Advertising revenue is generated by performance-based Internet advertising, such as cost-per-click ("CPC") advertising, in which an advertiser pays only when a user clicks on our advertisement that is displayed on our owned and operated websites and customer websites; fees generated by users viewing third-party website banners and text-link advertisements; fees generated by enabling customer leads or registrations for partners; and fees from referring users to, or from users making purchases on, sponsors’ websites. In determining whether an arrangement exists, we ensure that a binding arrangement is in place, such as a standard insertion order or a fully executed customer-specific agreement. Obligations pursuant to our advertising revenue arrangements typically include a minimum number of impressions or the satisfaction of the other performance criteria. Revenue from performance-based arrangements, including referral revenue, is recognized as the related performance criteria are met. We assess whether performance criteria have been met and whether the fees are fixed or determinable based on a reconciliation of the performance criteria and an analysis of the payment terms associated with the transaction. The reconciliation of the performance criteria generally includes a comparison of third-party performance data to the contractual performance obligation and to internal or customer performance data in circumstances where that data is available. |
|
| When we enter into advertising revenue sharing arrangements where we act as the primary obligor, we recognize the underlying revenue on a gross basis. In determining whether to report revenue gross for the amount of fees received from the advertising networks, we assess whether we maintain the principal relationship with the advertising network, whether we bear the credit risk and whether we have latitude in establishing prices. In circumstances where the customer acts as the primary obligor, we recognize the underlying revenue on a net basis. |
|
| In certain cases, we record revenue based on available and preliminary information from third parties. Amounts collected on the related receivables may vary from reported information based upon third party refinement of estimated and reported amounts owing that occurs typically within 45 days of the period end. |
|
| Subscription Services and Social Media Services. Subscription services revenue is generated through the sale of membership fees paid to access content available on certain owned and operated websites. The majority of the memberships range from 6 to 12 month terms. Subscription services revenue is recognized on a straight-line basis over the membership term. |
|
| We configure, host, and maintain our platform social media services under private-labeled versions of software for commercial customers. We earn revenue from our social media services through initial set-up fees, recurring management support fees, overage fees in excess of standard usage terms, and outside consulting fees. Due to the fact that social media services customers have no contractual right to take possession of our private-labeled software, we account for our social media services revenue as service arrangements, whereby social media services revenue is recognized when persuasive evidence of an arrangement exists, delivery of the service has occurred and no significant obligations remain, the selling price is fixed or determinable, and collectability is reasonably assured. |
|
| Social media service arrangements may contain multiple deliverables, including, but not limited to, single arrangements containing set-up fees, monthly support fees and overage billings, consulting services and advertising services. To the extent that consulting services have value on a standalone basis, we allocate revenue to each element in the multiple deliverable arrangement based upon their relative fair values. Fair value is determined based upon the best estimate of the selling price. To date, substantially all consulting services entered into concurrently with the original social media service arrangements are not treated as separate deliverables as such services do not have value to the customer on a standalone basis. In such cases, the arrangement is treated as a single unit of accounting with the arrangement fee recognized over the term of the arrangement on a straight-line basis. Set-up fees are recognized as revenue on a straight-line basis over the greater of the contractual or estimated customer life once monthly recurring services have commenced. We determine the estimated customer life based on analysis of historical attrition rates, average contractual term and renewal expectations. We review the estimated customer life at least quarterly and when events or changes in circumstances, such as significant customer attrition relative to expected historical or projected future results, occur. Overage billings are recognized when delivered and at contractual rates in excess of standard usage terms. |
|
| Outside consulting services performed for customers that have value on a stand-alone basis are recognized as services are performed. |
|
| We recognize revenue from product sales upon delivery, net of estimated returns based on historical experience. Payments received in advance of delivery are included in deferred revenue in the accompanying condensed consolidated balance sheets. Revenue is recorded at the gross amount due to the following factors: we are the primary obligor in a transaction, we have inventory and credit risk, and we have latitude in establishing prices and selecting suppliers. Product sales and shipping revenue is recognized net of promotional discounts, rebates, and return allowances. We periodically provide incentive offers to customers to encourage purchases. Such offers may include current discount offers, such as percentage discounts off current purchases, free shipping and other similar offers. |
|
| Content and Other Revenue. Content and other revenue is generated through the sale or license of media content or undeveloped websites. Revenue from the sale or perpetual license of content and undeveloped websites is recognized when the content and the sale of undeveloped websites have been delivered and the contractual performance obligations have been fulfilled. Revenue from the license of content is recognized over the period of the license as content is delivered or when other related performance criteria are fulfilled. |
|
| Registrar |
|
| Domain Name Registration Service Fees. Registration fees charged to third parties in connection with new, renewed, and transferred domain name registrations are recognized on a straight-line basis over the registration term, which customarily ranges from one to two years but can extend to ten years. Payments received in advance of the domain name registration term are included in deferred revenue in the accompanying condensed consolidated balance sheets. The registration term and related revenue recognition commence once we confirm that the requested domain name has been recorded in the appropriate registry under contractual performance standards. Associated direct and incremental costs, which principally consist of registry and Internet Corporation for Assigned Names and Numbers (“ICANN”) fees, are also deferred and amortized to service costs on a straight-line basis over the registration term. |
|
| Our wholly owned subsidiaries, eNom and Name.com, are ICANN accredited registrars. Thus, we are the primary obligor with our reseller and retail registrant customers and are responsible for the fulfillment of our registrar services. As a result, we report revenue derived from the fees we receive from resellers and retail registrant customers for registrations on a gross basis in the accompanying condensed consolidated statements of operations. A minority of our resellers have contracted with us to provide billing and credit card processing services to the resellers’ retail customer base in addition to domain name registration services. Under these circumstances, the cash collected from these resellers’ retail customer base is in excess of the fixed amount per transaction that we charge for domain name registration services. As such, these amounts, which are collected for the benefit of the reseller, are not recognized as revenue and are recorded as a liability until remitted to the reseller on a periodic basis. |
|
| Value Added Services. Revenue from online value added services, which includes, but is not limited to, web hosting services, email services, domain name identification protection, charges associated with alternative payment methods, and security certificates, is recognized on a straight-line basis over the period in which services are provided. Payments received in advance of services being provided are included in deferred revenue. |
|
| Auction Service Revenue. Domain name auction service revenue represents fees received from selling third-party owned domains via an online bidding process primarily through NameJet. For names sold through the auction process that are registered on our registrar platform, we have determined that auction revenue and related registration revenue represent separate units of accounting given the domain name has value to the customers on a standalone basis at the time of sale. As a result, we recognize the related registration fees on a straight-line basis over the registration term. We recognize the bidding portion of auction revenue upon sale, net of payments to third parties since we are acting as an agent only. |
|
| Service Costs |
|
| Service costs consist primarily of fees paid to registries and ICANN associated with domain registrations, advertising revenue recognized by us and shared with our customers or partners as a result of our revenue-sharing arrangements, Internet connection and co-location charges, outsourced product manufacturing costs, shipping and handling, artist royalties and other platform operating expenses associated with our owned and operated and customer websites, including depreciation of the systems and hardware used to build and operate our Content & Media platform and Registrar, personnel costs relating to in-house editorial, customer service, information technology and certain content production costs. |
|
| Registry fee expenses consist of payments to entities accredited by ICANN as the designated registry related to each top level domain (“TLD”). These payments are generally fixed dollar amounts per domain name registration period and are recognized on a straight-line basis over the registration term. The costs of renewal registration fee expenses for owned and operated undeveloped websites are also included in service costs. Amortization of the cost of website names and media content owned by us is included in amortization of intangible assets. |
|
| Shipping and Handling |
|
| Shipping and handling charged to customers are recorded in revenue. Associated costs are recorded in service costs. |
|
| Deferred Revenue and Deferred Registration Costs |
|
| Deferred revenue consists substantially of amounts received from customers in advance of our performance for domain name registration services, subscription services for premium media content, social media services and online value added services. Deferred revenue is recognized as revenue on a systematic basis that is proportionate to the unexpired term of the related domain name registration, media subscription as services are rendered, over customer useful life, or over the period of online value added service. |
|
| Deferred registration costs represent incremental direct cost paid in advance to registries, ICANN, and other third parties for domain name registrations and are recorded as a deferred cost on the balance sheets. Deferred registration costs are amortized to expense on a straight-line basis concurrently with the recognition of the related domain name registration revenue and the expense is included in service costs. |
|
| Long-lived Assets |
|
| We evaluate the recoverability of our long-lived assets with finite useful lives for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Such trigger events or changes in circumstances may include: a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, significant adverse change in legal factors or in the business climate, including those resulting from technology advancements in the industry, the impact of competition or other factors that could affect the value of a long-lived asset, a significant adverse deterioration in the amount of revenue or cash flows we expect to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. We perform impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of the asset group, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Fair value is determined based upon estimated discounted future cash flows. Through September 30, 2013, we have identified no such impairment loss. Assets to be disposed of would be separately presented on the condensed consolidated balance sheets and reported at the lower of their carrying amount or fair value less costs to sell, and would no longer be depreciated or amortized. |
|
| Google, the largest provider of search engine referrals to the majority of our websites, regularly deploys changes to its search engine algorithms. Since 2011, we have experienced fluctuations in the total number of Google search referrals to our owned and operated websites, including eHow and Livestrong.com, and our network of customer websites. During 2013, we experienced several negative changes in Google referrals that, in the aggregate, are larger in magnitude than those that we have previously experienced. These changes have resulted in substantial declines to traffic to our owned and operated websites. Other search engines may deploy similar changes. These changes, as well as any potential future changes, may result in material fluctuations in our financial performance. |
|
| We regularly evaluate and strive to continuously improve our websites, content library and content creation and distribution platform in an effort to improve user experience and engagement. Such improvements include redesigning our websites, refining our content library through select removals and additions, establishing more stringent criteria for the admission of content creators, adding processes to ensure that each additional unit of content published is unique in relation to existing content units, creating new content formats designed to further diversify our content offering, and integrating commerce products and services with our content experience. |
|
| There can be no assurance that these changes or any future changes that may be implemented by us, by search engines to their algorithms and search methodologies, or by consumers in their web usage habits will not adversely impact the carrying value, estimated useful life or intended use of our long-lived assets. We will continue to monitor these changes as well as any future changes and emerging trends in search engine algorithms and methodologies, including the resulting impact that these changes may have on future operating results, the economic performance of our long-lived assets and in our assessment as to whether significant changes in circumstances might provide an indication of potential impairment of the carrying value of our long-lived assets, including our media content and goodwill arising from acquisitions. |
|
| Property and equipment |
|
| Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Computer equipment is amortized over two to five years, software is amortized over two to three years, and furniture and fixtures are amortized over seven to ten years. Leasehold improvements are amortized straight-line over the shorter of the remaining lease term or the estimated useful lives of the improvements ranging from one to seven years. Upon the sale or retirement of property or equipment, the cost and related accumulated depreciation or amortization is removed from our financial statements with the resulting gain or loss reflected in our results of operations. Repairs and maintenance costs are expensed as incurred. In the event that property and equipment is no longer in use, we will record a loss on disposal of the property and equipment, which is computed as the net remaining value (gross amount of property and equipment less accumulated depreciation expense) of the related equipment at the date of disposal. |
|
| Intangibles—Undeveloped Websites |
|
| We capitalize costs incurred to acquire and to initially register our owned and operated undeveloped websites. We amortize these costs over the expected useful life of the underlying undeveloped websites on a straight-line basis. The expected useful life of an undeveloped website ranges from 12 months to 84 months. We determine the appropriate useful life by performing an analysis of expected cash flows based on historical experience with undeveloped websites of similar quality and value. |
|
| In order to maintain the rights to each undeveloped website acquired, we pay periodic renewal registration fees, which generally cover a minimum period of twelve months. We record renewal registration fees of website name intangible assets in deferred registration costs and recognize the costs over the renewal registration period, which is included in service costs. |
|
| Intangibles—Media Content |
|
| We capitalize the direct costs incurred to acquire our media content that is determined to embody a probable future economic benefit. Costs are recognized as finite lived intangible assets based on their acquisition cost to us. Direct content costs primarily represent amounts paid to unrelated third parties for completed content units, and to a lesser extent, specifically identifiable internal direct labor costs incurred to enhance the value of specific content units acquired prior to their publication. Internal costs not directly attributable to the enhancement of an individual content unit acquired are expensed as incurred. All costs incurred to deploy and publish content are expensed as incurred, including the costs for the ongoing maintenance of our websites in which our content is deployed. |
|
| Capitalized media content is amortized on a straight-line basis over five years, representing our estimate of the pattern that the underlying economic benefits are expected to be realized and based on our estimates of the projected cash flows from advertising revenue expected to be generated by the deployment of our content. These estimates are based on our plans and projections, comparison of the economic returns generated by our content of comparable quality and an analysis of historical cash flows generated by that content to date. Amortization of media content is included in amortization of intangible assets in the accompanying condensed consolidated statement of operations, and the acquisition costs are included in purchases of intangible assets within cash flows from investing activities in the condensed consolidated statements of cash flows. |
|
| Intangibles—Acquired in Business Combinations |
|
| We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocate the purchase price of each acquired business to our respective net tangible and intangible assets. Acquired intangible assets include: trade names, non-compete agreements, owned website names, customer relationships, technology, media content, content publisher relationships and artist relationships. We determine the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight line method which approximates the pattern in which the economic benefits are consumed. |
|
| Goodwill |
|
| Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is tested for impairment annually during the fourth quarter of our fiscal year or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or significant underperformance relative to expected historical or projected future results of operations. |
|
| Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. As of December 31, 2012, we determined that we have three reporting units. When testing goodwill for impairment, we first perform a qualitative assessment to determine whether it is necessary to perform step one of a two-step annual goodwill impairment test for each reporting unit. We are required to perform step one only if we conclude that it is more likely than not that a reporting unit's fair value is less than the carrying value of its assets. Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair values of our reporting units with their respective carrying values, including goodwill. If the estimated fair value of the reporting unit exceeds the carrying value, goodwill is considered not to be impaired, and no additional steps are necessary. If, however, the fair value of the reporting unit is less than its carrying value, then the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit, but may require valuations of certain internally generated and unrecognized intangible assets such as our software, technology, patents and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. |
|
| Business acquisitions and supplemental pro forma information |
|
| On December 31, 2012, we completed the acquisition of the net assets of Name.com, a retail registrar company based in Denver, Colorado. In March 2013, we acquired Creativebug, an online destination for arts and crafts instruction based in San Francisco, California. |
|
| On June 20, 2013, we completed the acquisition of Society6, an online marketplace and e-commerce platform. The purchase price consideration of $94.3 million was comprised of cash of $76.1 million and 2,322,880 shares of common stock valued at $18.2 million, based on our stock price on the date of acquisition. $7.9 million in cash and 243,902 shares of common stock were held back by us to secure post-closing indemnification obligations of the sellers and/or post-closing adjustments to the purchase price. Any remaining portion of the holdback amount that is not subject to then-pending claims will be paid on the 24-month anniversary of the closing of the transaction. |
| |
| Supplemental information on an unaudited pro forma basis, as if these acquisitions had been completed as of January 1, 2012, is as follows (in thousands): |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| Revenue | $ | 96,251 | | | $ | 105,257 | | | $ | 308,889 | | | $ | 294,743 | |
|
| Net income (loss) | (10,440 | ) | | 4,073 | | | (5,150 | ) | | 2,837 | |
|
|
| The unaudited pro forma supplemental information is based on estimates and assumptions, which we believe are reasonable and reflect amortization of intangible assets as a result of the acquisitions. The pro forma results are not necessarily indicative of the results that have been realized had the acquisitions been consolidated as of the beginning of the periods presented. |
|
| We account for acquisitions of businesses using the purchase method of accounting where the cost is allocated to the underlying net tangible and intangible assets acquired, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. |
|
| Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses and cash flows, weighted average cost of capital, discount rates, estimates of advertiser and publisher turnover rates and estimates of terminal values. |
|
| The acquisitions are included in our condensed consolidated financial statements as of the date of the acquisition. The allocation of the purchase consideration, which is preliminary and subject to revision based on the finalization of holdback amounts for post-closing obligations and related matters, for business acquisitions made by us during the nine months ended September 30, 2013 is as follows (in thousands): |
| | | | |
| | | | | | | | | | | | | | | |
| Creativebug | | Society6 | | Total | | | | |
| Goodwill | $ | 4,459 | | | $ | 76,676 | | | $ | 81,135 | | | | | |
| | | |
| Media content | 3,390 | | | — | | | 3,390 | | | | | |
| | | |
| Technology | — | | | 2,587 | | | 2,587 | | | | | |
| | | |
| Artist relationships | — | | | 9,867 | | | 9,867 | | | | | |
| | | |
| Non-compete agreements | 699 | | | 192 | | | 891 | | | | | |
| | | |
| Trade names | 132 | | | 3,419 | | | 3,551 | | | | | |
| | | |
| Customer relationships | 43 | | | — | | | 43 | | | | | |
| | | |
| Other assets and liabilities assumed | (723 | ) | | 1,581 | | | 858 | | | | | |
| | | |
| Total | $ | 8,000 | | | $ | 94,322 | | | $ | 102,322 | | | | | |
| | | |
|
| Other Long-Term Assets |
|
| A framework for the significant expansion of the number of generic Top Level Domains (“gTLDs”) has been approved by ICANN, which began delegating gTLDs in October 2013 (the “New gTLD Program”). We capitalize the costs incurred to pursue the acquisition of gTLD operator rights that are determined to embody a probable economic benefit. Capitalized payments for gTLD applications are included in long-term other assets during the application process. For those gTLDs which have been delegated to us, capitalized payments will be reclassified as finite lived intangible assets following the delegation of operator rights for each gTLD by ICANN, however, there can be no assurance that we will be awarded all gTLDs for which we have applied. Payments for gTLD applications primarily represent amounts paid directly to ICANN and or third parties in the pursuit of gTLD operator rights. We may receive partial cash refunds for certain gTLD applications, and to the extent we elect to sell or withdraw our interest in certain gTLD applications throughout the process, we may also incur gains or losses on amounts invested. Gains on our interest in gTLD applications will be recognized when realized, while losses will be recognized when deemed probable. Other costs incurred by us as part of our gTLD initiative not directly attributable to the acquisition of gTLD operator rights are expensed as incurred. Capitalized costs will be amortized on a straight-line basis over the estimated useful life of the gTLD operator rights acquired commencing the date that each asset is available for its intended use, which is expected to occur following commencement of delegation by ICANN in the first quarter 2014. |
| |
| Stock-Based Compensation |
|
| Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period, on a straight-line basis. We use the Black-Scholes option-pricing model to determine the fair value of stock options that do not include market conditions. Stock-based awards are comprised principally of stock options, restricted stock awards (“RSA”), and restricted stock units (“RSU”). |
|
| Under our 2010 Employee Stock Purchase Plan (the “ESPP”), eligible officers and employees may purchase a limited amount of our common stock at a discount to the market price in accordance with the terms of the plan as described in Note 12 - Share-based Compensation Plans and Awards. We use the Black-Scholes option-pricing model to determine the fair value of the ESPP awards granted which is recognized straight-line over the total offering period. |
| |
| Some equity awards granted by us contain certain performance and/or market conditions. We recognize compensation cost for awards with performance conditions based upon the probability of that performance condition being met, net of an estimate of pre-vesting forfeitures. Awards granted with performance and/or market conditions are amortized using the graded vesting method. |
|
| The effect of a market condition is reflected in the award’s fair value on the grant date. We use a Monte Carlo simulation model or binomial lattice model to determine the grant date fair value of awards with market conditions. Compensation cost for an award that has a market condition is recognized as the requisite service period is fulfilled, even if the market condition is never satisfied. |
|
| Stock-based awards issued to non-employees are accounted for at fair value determined using the Black-Scholes option-pricing model. Management believes that the fair value of the stock options is more reliably measured than the fair value of the services received. The fair value of each non-employee stock-based compensation award is re-measured each period until a commitment date is reached, which is generally the vesting date. |
|
| Stock Repurchases |
|
| Under a stock repurchase plan, shares repurchased by us are accounted for when the transaction is settled. Repurchased shares held for future issuance are classified as treasury stock. Shares formally or constructively retired are deducted from common stock at par value and from additional paid in capital for the excess over par value. If additional paid in capital has been exhausted, the excess over par value is deducted from retained earnings. Direct costs incurred to acquire the shares are included in the total cost of the repurchased shares. |
|
| Income Taxes |
|
| Deferred income taxes are recognized for differences between financial reporting and tax bases of assets and liabilities at the enacted statutory tax rates in effect for the years in which the temporary differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate the realizability of deferred tax assets and recognizes a valuation allowance for our deferred tax assets when it is more likely than not that a future benefit on such deferred tax assets will not be realized. |
|
| We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. We recognize interest and penalties accrued related to unrecognized tax benefits in our income tax (benefit) provision in the accompanying condensed consolidated statements of operations. |
|
| Net Income (Loss) Per Share |
|
| Basic income (loss) per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Net income (loss) attributable to common stockholders is increased for cumulative preferred stock dividends earned during the period. Diluted income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average common shares outstanding plus potentially dilutive common shares. Because we reported losses in certain the periods presented, potentially dilutive common shares comprising stock options, RSUs, stock from the ESPP, warrants and convertible preferred stock are antidilutive in those periods. |
|
| RSUs and other restricted awards are considered outstanding common shares and included in the computation of basic earnings per share as of the date that all necessary conditions of vesting are satisfied. RSUs are excluded from the dilutive earnings per share calculation when their impact is antidilutive. |
|
| Fair Value of Financial Instruments |
|
| Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We measure our financial assets and liabilities in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. |
|
| | | | | | | | | | | | | | | |
| • | Level 1—valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow a company to sell its ownership interest back at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities or funds. | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| • | Level 2—valuations for assets and liabilities traded in less active dealer, or broker markets, such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active. Level 2 includes U.S. Treasury, U.S. government and agency debt securities, and certain corporate obligations. Valuations are usually obtained from third-party pricing services for identical or comparable assets or liabilities. | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| • | Level 3—valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. | | | | | | | | | | | | | | |
|
| In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in our assessment of fair value. |
|
| We chose not to elect the fair value option for our financial assets and liabilities that had not been previously carried at fair value. Therefore, material financial assets and liabilities not carried at fair value, such as trade accounts receivable and payables, are reported at their carrying values. |
|
| The carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, receivables from domain name registries, registry deposits, restricted cash, accounts payable, term loan, revolving credit facility, accrued liabilities and customer deposits approximate fair value because of their short maturities. For the term loans and revolving loan facility, the carrying amount approximates fair value since it bears interest at variable rates or fixed rates which approximates fair value. Our investments in marketable securities are recorded at fair value. Certain assets, including equity investments, investments held at cost, goodwill and intangible assets are also subject to measurement at fair value on a nonrecurring basis, if they are deemed to be impaired as the result of an impairment review. For the year ended December 31, 2012 and nine-month period ended September 30, 2013, no impairments were recorded on those assets required to be measured at fair value on a nonrecurring basis. |
|
| Financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands): |
| | | | |
| | | | | | | | | | | | | | | |
| Balance at September 30, 2013 | | | | |
| Level 1 | | Level 2 | | Total | | | | |
| Assets | | | | | | | | | | | | |
| | | |
| Cash equivalents(1) | $ | 5,034 | | | $ | — | | | $ | 5,034 | | | | | |
| | | |
| Total assets at fair value | $ | 5,034 | | | $ | — | | | $ | 5,034 | | | | | |
| | | |
| Liabilities | | | | | | | | | |
| Long term debt | $ | — | | | $ | 50,000 | | | $ | 50,000 | | | | | |
| | | |
| Total liabilities at fair value | $ | — | | | $ | 50,000 | | | $ | 50,000 | | | | | |
| | | |
| ___________________________________ |
| (1)Comprises money market funds which are included in Cash and cash equivalents in the accompanying condensed consolidated balance sheet. |
|
| | | | |
| | | | | | | | | | | | | | | |
| Balance at December 31, 2012 | | | | |
| Level 1 | | Level 2 | | Total | | | | |
| Assets | | | | | | | | | | | | |
| | | |
| Cash equivalents(1) | $ | 29,129 | | | $ | 7,940 | | | $ | 37,069 | | | | | |
| | | |
| Total assets at fair value | $ | 29,129 | | | $ | 7,940 | | | $ | 37,069 | | | | | |
| | | |
| _______________________ |
| (1)Comprises money market funds which are included in Cash and cash equivalents in the accompanying condensed consolidated balance sheet. |
|
| For financial assets that utilize Level 1 and Level 2 inputs, we utilize both direct and indirect observable price quotes, including quoted market prices (Level 1 inputs) or inputs that are derived principally from or corroborated by observable market data (Level 2 inputs). |
|
| Recent Accounting Pronouncements |
|
| Presentation of unrecognized tax |
|
| In July 2013, the Financial Accounting Standards Board (the "FASB") issued guidance regarding the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under certain circumstances, unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. This guidance is effective for fiscal years beginning after December 31, 2013 on either a prospective or retrospective basis. We did not adopt this guidance early and we do not anticipate it to have a material impact on our consolidated financial statements. |
|
| Reclassification of accumulated other comprehensive loss |
|
| In February 2013, the FASB issued an accounting standards update requiring new disclosures about reclassifications from accumulated other comprehensive loss to net income. These disclosures may be presented on the face of the statements or in the notes to the consolidated financial statements. The standards update is effective for fiscal years beginning after December 15, 2012. The adoption of this guidance did not have a material impact on our consolidated financial statements. |
