Rightside Group, Ltd.
RIGHTSIDE GROUP, LTD. (Form: 10-Q, Received: 05/09/2017 16:16:08)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to              

Commission File: Number 001‑36262

 

RIGHTSIDE GROUP, LTD.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

32‑0415537

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

5808 Lake Washington Blvd. NE, Suite 300

Kirkland, WA 98033

(Address of principal executive offices)

Registrant’s telephone number, including area code: (425) 298-2500

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

As of May 3, 2017, the registrant had 19,424,529 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


 

RIGHTSIDE GROUP, LTD.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

 

PAGE

PART I. FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations

2

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Notes to Condensed Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.

Controls and Procedures

30

PART II. OTHER INFORMATION

31

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

Item 6.

Exhibits

62

SIGNATURES

63

EXHIBIT INDEX

64

 

 

 

 


 

PART I.  FINANCI AL INFORMATION

Item 1.  Financial Statements (Unaudited)

Rightside Group, Ltd.

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

 

2017

 

 

2016

 

 

Assets

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

69,949

 

 

$

31,922

 

 

Accounts receivable, net

 

 

6,094

 

 

 

3,498

 

 

Available-for-sale investments, at fair value (amortized cost of $13,026)

 

 

13,024

 

 

 

 

 

Prepaid expenses and other current assets

 

 

2,967

 

 

 

2,590

 

 

Deferred registration costs

 

 

8,504

 

 

 

9,063

 

 

Assets of discontinued operations

 

 

 

 

 

129,053

 

 

Total current assets

 

 

100,538

 

 

 

176,126

 

 

Deferred registration costs, less current portion

 

 

1,640

 

 

 

1,594

 

 

Property and equipment, net

 

 

5,392

 

 

 

5,746

 

 

Intangible assets, net

 

 

45,129

 

 

 

46,961

 

 

Goodwill

 

 

70,921

 

 

 

70,921

 

 

gTLD deposits

 

 

1,517

 

 

 

2,169

 

 

Other assets

 

 

510

 

 

 

671

 

 

Total assets

 

$

225,647

 

 

$

304,188

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

771

 

 

$

1,080

 

 

Accrued expenses and other current liabilities

 

 

7,417

 

 

 

8,887

 

 

Debt

 

 

 

 

 

12,800

 

 

Capital lease obligation

 

 

 

 

 

983

 

 

Deferred revenue

 

 

20,111

 

 

 

19,475

 

 

Liabilities of discontinued operations

 

 

 

 

 

133,588

 

 

Total current liabilities

 

 

28,299

 

 

 

176,813

 

 

Deferred revenue, less current portion

 

 

4,917

 

 

 

4,429

 

 

Deferred tax liabilities, net

 

 

8,179

 

 

 

8,102

 

 

Other liabilities

 

 

372

 

 

 

261

 

 

Total liabilities

 

 

41,767

 

 

 

189,605

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value per share; 20,000 shares authorized

   Shares issued and outstanding: 0 and 0

 

 

 

 

 

 

 

Common stock, $0.0001 par value per share; 100,000 shares authorized

   Shares issued and outstanding: 19,503 and 19,539

 

 

2

 

 

 

2

 

 

Additional paid-in capital

 

 

151,969

 

 

 

152,421

 

 

Accumulated other comprehensive loss

 

 

(2

)

 

 

 

 

Retained earnings (accumulated deficit)

 

 

31,911

 

 

 

(37,840

)

 

Total stockholders’ equity

 

 

183,880

 

 

 

114,583

 

 

Total liabilities and stockholders’ equity

 

$

225,647

 

 

$

304,188

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

-1-


 

Rightside Group, Ltd.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2017

 

 

2016

 

 

Revenue

 

$

14,426

 

 

$

16,606

 

 

Cost of revenue (excluding depreciation and amortization)

 

 

8,480

 

 

 

10,539

 

 

Sales and marketing

 

 

1,897

 

 

 

2,111

 

 

Technology and development

 

 

2,372

 

 

 

3,137

 

 

General and administrative

 

 

4,572

 

 

 

4,652

 

 

Depreciation and amortization

 

 

2,537

 

 

 

3,178

 

 

(Gain) loss on other assets, net

 

 

(120

)

 

 

1

 

 

Interest expense

 

 

124

 

 

 

1,235

 

 

Other income, net

 

 

(51

)

 

 

(50

)

 

Loss from continuing operations before income tax

 

 

(5,385

)

 

 

(8,197

)

 

Income tax expense (benefit)

 

 

247

 

 

 

(1,945

)

 

Loss from continuing operations

 

 

(5,632

)

 

 

(6,252

)

 

Income from discontinued operations, net of income

   tax of $39 and $1,577

 

 

75,383

 

 

 

1,145

 

 

Net income (loss)

 

$

69,751

 

 

$

(5,107

)

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.29

)

 

$

(0.33

)

 

Discontinued operations

 

 

3.85

 

 

 

0.06

 

 

Basic income (loss) per share

 

$

3.56

 

 

$

(0.27

)

 

Diluted income (loss) per share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.29

)

 

$

(0.33

)

 

Discontinued operations

 

 

3.85

 

 

 

0.06

 

 

Diluted income (loss) per share

 

$

3.56

 

 

$

(0.27

)

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

19,583

 

 

 

19,146

 

 

Diluted

 

 

19,583

 

 

 

19,146

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

-2-


 

Rightside Group, Ltd.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2017

 

 

2016

 

 

Net income (loss)

 

$

69,751

 

 

$

(5,107

)

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

 

(2

)

 

 

 

 

Tax effect

 

 

 

 

 

 

 

Other comprehensive loss, net of tax

 

 

(2

)

 

 

 

 

Comprehensive income (loss)

 

$

69,749

 

 

$

(5,107

)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

-3-


 

Rightside Group, Ltd.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2017

 

 

2016

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

69,751

 

 

$

(5,107

)

 

Less: Income from discontinued operations, net of income tax

 

 

75,383

 

 

 

1,145

 

 

Loss from continuing operations

 

 

(5,632

)

 

 

(6,252

)

 

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,537

 

 

 

3,178

 

 

Amortization of discount and issuance costs on debt

 

 

50

 

 

 

452

 

 

Deferred income taxes

 

 

77

 

 

 

(1,961

)

 

Stock-based compensation expense

 

 

1,462

 

 

 

1,234

 

 

(Gain) loss on gTLD application withdrawals, net

 

 

(120

)

 

 

1

 

 

Gain on sale and disposal of assets, net

 

 

(4

)

 

 

(14

)

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,230

)

 

 

(1,016

)

 

Prepaid expenses and other current assets

 

 

(378

)

 

 

768

 

 

Deferred registration costs

 

 

512

 

 

 

81

 

 

Other long-term assets

 

 

(99

)

 

 

76

 

 

Accounts payable

 

 

(309

)

 

 

657

 

 

Accrued expenses and other liabilities

 

 

(596

)

 

 

(51

)

 

Deferred revenue

 

 

1,124

 

 

 

1,228

 

 

Net cash used in operating activities from continuing operations

 

 

(3,606

)

 

 

(1,619

)

 

Net cash (used in) provided by operating activities from discontinued operations

 

 

(2,300

)

 

 

2,124

 

 

Net cash (used in) provided by operating activities

 

 

(5,906

)

 

 

505

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(429

)

 

 

(479

)

 

Purchases of intangible assets

 

 

(6

)

 

 

(207

)

 

Purchases of fixed maturities

 

 

(13,027

)

 

 

 

 

Payments, deposits and returns of deposits for gTLD applications

 

 

259

 

 

 

3,021

 

 

Proceeds from gTLD withdrawals

 

 

125

 

 

 

125

 

 

Proceeds from sale of assets

 

 

31

 

 

 

116

 

 

Net cash (used in) provided by investing activities from continuing operations

 

 

(13,047

)

 

 

2,576

 

 

Net cash provided by (used in) investing activities from discontinued operations

 

 

72,677

 

 

 

(243

)

 

Net cash provided by investing activities

 

 

59,630

 

 

 

2,333

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

Principal payments on capital lease obligations

 

 

(983

)

 

 

(250

)

 

Principal payments on debt

 

 

(12,800

)

 

 

(375

)

 

Shares repurchased

 

 

(1,620

)

 

 

 

 

Proceeds from stock option exercises

 

 

31

 

 

 

3

 

 

Payments of tax withholdings on restricted stock awards

 

 

(325

)

 

 

(332

)

 

Net cash used in financing activities from continuing operations

 

 

(15,697

)

 

 

(954

)

 

Change in cash and cash equivalents

 

 

38,027

 

 

 

1,884

 

 

Cash and cash equivalents, beginning of period

 

 

31,922

 

 

 

45,095

 

 

Cash and cash equivalents, end of period

 

$

69,949

 

 

$

46,979

 

 

Supplemental disclosure of cash flows

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

168

 

 

$

744

 

 

Cash paid for income taxes

 

 

26

 

 

 

41

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

 

-4-


 

Rightside Group, Ltd.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.  Company Background and Basis of Presentation

Description of Business

Rightside Group, Ltd. (together with its subsidiaries, “Rightside,” the “Company,” “our,” “we,” or “us”) provides domain name registration and related value‑added service subscriptions to third parties. We are also an accredited registry for new generic Top Level Domains (“gTLDs”) made available by the expansion (the “New gTLD Program”) of new gTLDs by the Internet Corporation for Assigned Names and Numbers (“ICANN”).

eNom Divestiture

On January 20, 2017, we completed the sale of eNom, Incorporated (“eNom”), our wholly-owned registrar, through a Stock Purchase Agreement with Tucows Inc. (“Tucows”) in exchange for $83.5 million, less a net working capital adjustment of $5.8 million, resulting in net cash at closing of $77.7 million.

Basis of Presentation

Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation. We will refer to our condensed consolidated financial statements as “financial statements,” “balance sheets,” “statements of operations,” “statements of comprehensive income (loss),” “statements of stockholders’ equity,” and “statements of cash flows” herein.

Interim Financial Statements

We have prepared the unaudited condensed consolidated interim financial statements on the same basis as the audited financial statements and have included all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair statement of our financial statements. The results for the three months ended March 31, 2017 are not necessarily indicative of the results expected for the full year.

The unaudited condensed consolidated interim financial statements have been prepared in accordance with GAAP. They do not include all of the information and footnotes required by GAAP for complete financial statements. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Therefore, these condensed consolidated financial statements should be read in conjunction with our audited financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission (“SEC”) on March 15, 2017.

Reclassifications

Certain amounts previously presented for prior periods have been reclassified to conform to current presentation. These reclassifications did not affect assets, liabilities, net income, cash flows or equity for the periods presented.

Revisions

We determined that the change in unpaid purchases of assets was misclassified in the statements of cash flows for the three months ended March 31, 2016. For the three months ended March 31, 2016, this classification error resulted in an overstatement of cash outflows from operations of $0.4 million and an overstatement of cash inflows from investing activities of $0.4 million.

 

 

-5-


 

2.  Summary of Significant Accounting Policies and Accounting Pronouncements

Refer to our audited financial statements included in our Form 10-K as filed with the SEC on March 15, 2017, for a complete discussion of all significant accounting policies.

Adoption of New Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of share-based payment accounting, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows . We adopted this standard on January 1, 2017 and now withhold shares up to the employees’ maximum statutory tax rate in the employees’ applicable jurisdictions. We also now recognize the income tax effects of share-based compensation in the statements of operations.

Accounting Pronouncements Not Yet Adopted

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the test for goodwill impairment by eliminating Step 2. The new standard is effective for interim and annual reporting periods beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. This standard will be applied on a prospective basis. We expect the adoption of ASU 2017-04 will reduce the complexity surrounding the evaluation of goodwill for impairment. The impact of this standard will depend on the outcomes of future goodwill impairment tests.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new standard provides specific guidance on eight cash flow classification issues, thereby reducing the diversity in practice on these issues. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. ASU 2016-15 will be applied using the retrospective transition method. We have not determined the impact of the adoption on our financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The new standard replaces the current incurred loss impairment methodology with one that reflects expected credit losses and utilizes a broader range of information to make credit loss estimates. The new standard is effective for interim and annual reporting periods beginning after December 15, 2019 with early adoption permitted. We have not determined the impact of the adoption on our financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which increases transparency and comparability for lease transactions. The new standard brings substantially all leases on the balance sheets for operating lease arrangements with lease terms greater than 12 months for lessees. This standard will require a modified retrospective application, which includes a number of optional practical expedients related to the identification and classification of leases commenced before the effective date. The new standard is effective for interim and annual reporting periods beginning after December 15, 2018 with early adoption permitted. We do not intend to adopt the standard early and are currently assessing the impact of ASU 2016-02 on our financial statements.

-6-


 

In May 2014, the FASB issued ASU 2014 ‑09, Revenue from Contracts with Customers (Topic 606 ). ASU 2014-09 provides new criteria for recognizing revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services. It also requires expanded disclosures 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. Quantitative and qualitative information will be provided about the significant judgments and changes in those judgments that management made to determine the revenue that is recorded. ASU 2014-09 was set to be effective for interim and annual periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, “Deferral of the Effective Date,” which changed the effective date to interim and annual periods beginning after December 15, 2017, with early adoption permitted as of the original effective date. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net) , which clarifies the implementation guidance on determining the proper unit of account and applying the control principle. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing , which clarifies the implementation guidance on identifying when a performance obligation has been satisfied and determining how to recognize revenue when an entity grants a license to use or access its intellectual property. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvemen ts and Practical Expedients,” which aims to reduce the risk of diversity in practice for certain aspects of Topic 606, including collectibility, noncash consideration, presentation of sales tax, and transition. The new standard may be applied retrospective ly to each prior period presented (full retrospective method) or retrospectively with a cumulative-effect adjustment recognized at the date of adoption (modified retrospective method). We do not intend to adopt the standard early and are currently assessin g the provisions of the new standard. We have not yet determined the transition method or quantitative impact of the adoption on our financial statements. We are in the process of reviewing our historical revenue and contract cost arrangements in order to assess all potential impacts of the standard. As part of this review, we are identifying distinct performance obligations, determining whether a significant financing component exists in certain arrangements with upfront payments, determining when performa nce obligations transfer to customers and selecting the appropriate method for measuring progress toward complete satisfaction. In addition, we are determining methodologies for estimating variable consideration related to our collaboration agreement for p roviding back-end registry services, presentation of incremental costs to obtain a contract, and principle versus agent considerations.

 

 

3.  Business Divestiture

Discontinued Operations

On January 20, 2017, Rightside completed the divestiture (the “eNom Divestiture”) of eNom, our wholly-owned registrar, to Tucows, in exchange for $83.5 million, less a net working capital adjustment of $5.8 million, resulting in net cash at closing of $77.7 million. Under the Stock Purchase Agreement, we will indemnify Tucows against losses arising from, among other things, breaches of representations and warranties, breaches of covenants, any pre-closing taxes, any unpaid debt or transaction expenses and certain other specified matters. In addition, we are required to maintain certain unrestricted cash and cash equivalents balances. Upon completion of the eNom Divestiture, we recognized a gain of $75.6 million on the statements of operations within income from discontinued operations, net of income tax. The eNom Divestiture resulted in a loss for tax purposes since Rightside’s tax basis in its eNom stock exceeded the proceeds from the sale.

In connection with the eNom Divestiture, we and Tucows entered into a transition services agreement under which each party will compensate the other for the provision of various services to the other party, including information technology, accounting and finance, human resources and facilities services. The obligations under this transition services agreement began on January 20, 2017 and ends on various dates through June 30, 2019.

The eNom Divestiture met the criteria of a “discontinued operation” as defined by ASC 205-20. eNom’s assets and liabilities are classified as discontinued operations in our balance sheet for all periods presented and eNom’s results of operations and gain on sale, net of income taxes, of $75.4 million are included in income from discontinued operations in our statements of operations for all periods presented.

-7-


 

The major classes of assets and liabilities included as discontinued operations related to eNom are as follows (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

 

2017

 

 

2016

 

 

Assets

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

 

 

$

6,422

 

 

Prepaid expenses and other current assets

 

 

 

 

 

3,332

 

 

Deferred registration costs

 

 

 

 

 

65,982

 

 

Deferred registration costs, less current portion

 

 

 

 

 

14,441

 

 

Property and equipment, net

 

 

 

 

 

4,718

 

 

Intangible assets, net

 

 

 

 

 

1,955

 

 

Goodwill

 

 

 

 

 

32,121

 

 

Other assets

 

 

 

 

 

82

 

 

Total assets of discontinued operations

 

$

 

 

$

129,053

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

 

$

5,494

 

 

Accrued expenses and other current liabilities

 

 

 

 

 

12,988

 

 

Deferred revenue

 

 

 

 

 

77,082

 

 

Deferred revenue, less current portion

 

 

 

 

 

18,457

 

 

Deferred tax liabilities, net

 

 

 

 

 

19,099

 

 

Other liabilities

 

 

 

 

 

468

 

 

Total liabilities of discontinued operations

 

$

 

 

 

133,588

 

 

 

The major classes of line items constituting the income from discontinued operations in the statements of operations are as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2017

 

 

2016

 

 

Revenue

 

$

7,798

 

 

$

38,975

 

 

Cost of revenue (excluding depreciation and amortization)

 

 

6,909

 

 

 

31,838

 

 

Sales and marketing

 

 

196

 

 

 

527

 

 

Technology and development

 

 

655

 

 

 

2,747

 

 

General and administrative

 

 

82

 

 

 

273

 

 

Depreciation and amortization

 

 

174

 

 

 

868

 

 

(Loss) income from discontinued operations before income tax

 

 

(218

)

 

 

2,722

 

 

Income tax expense

 

 

39

 

 

 

1,577

 

 

(Loss) income from discontinued operations, net of income tax

 

$

(257

)

 

$

1,145

 

 

Gain on sale

 

 

75,640

 

 

 

 

 

Income from discontinued operations

 

$

75,383

 

 

$

1,145

 

 

 

Loss from continuing operations includes $0.1 million and $0.5 million of revenue for the three months ended March 31, 2017 and 2016, respectively, which was previously eliminated in the consolidated financial statements. These amounts relate to transactions between eNom and our Registry services business that were eliminated upon consolidation prior to the eNom Divestiture.

 

 

-8-


 

4.  Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

carrying

 

 

Accumulated

 

 

 

 

 

 

carrying

 

 

Accumulated

 

 

 

 

 

 

 

 

amount

 

 

amortization

 

 

Net

 

 

amount

 

 

amortization

 

 

Net

 

 

Owned website names

 

$

13,625

 

 

$

(11,216

)

 

$

2,409

 

 

$

13,935

 

 

$

(11,198

)

 

$

2,737

 

 

Customer relationships

 

 

8,224

 

 

 

(8,224

)

 

 

 

 

 

8,090

 

 

 

(8,037

)

 

 

53

 

 

Technology

 

 

416

 

 

 

(416

)

 

 

 

 

 

416

 

 

 

(416

)

 

 

 

 

Non-compete agreements

 

 

207

 

 

 

(174

)

 

 

33

 

 

 

207

 

 

 

(164

)

 

 

43

 

 

Trade names

 

 

1,276

 

 

 

(584

)

 

 

692

 

 

 

1,276

 

 

 

(548

)

 

 

728

 

 

gTLDs

 

 

54,348

 

 

 

(12,353

)

 

 

41,995

 

 

 

54,348

 

 

 

(10,948

)

 

 

43,400

 

 

Total

 

$

78,096

 

 

$

(32,967

)

 

$

45,129

 

 

$

78,272

 

 

$

(31,311

)

 

$

46,961

 

 

 

Amortization expense of intangible assets was $1.8 million and $2.2 million for the three months ended March 31, 2017 and 2016, respectively.

 

Estimated future amortization expense related to intangible assets held as of March 31, 2017 (in thousands):

 

Years Ending December 31,

 

Amount

 

 

2017 (April 1, 2017 to December 31, 2017)

 

$

5,081

 

 

2018

 

 

6,490

 

 

2019

 

 

6,190

 

 

2020

 

 

5,970

 

 

2021

 

 

5,855

 

 

Thereafter

 

 

15,543

 

 

Total

 

$

45,129

 

 

 

 

5.  gTLD Deposits

As of March 31, 2017 and December 31, 2016, our gTLD deposits were $1.5 million and $2.2 million, respectively. During the three months ended March 31, 2017, we received $0.3 million related to the settlement of certain gTLD applications under the New gTLD Program. Payments, deposits and returns of deposits for gTLD applications represent amounts paid directly to ICANN or third parties in the pursuit of gTLD operator rights, the majority of which was paid to Donuts Inc. These deposits would be applied to the purchase of the gTLD if we are awarded the gTLD operator rights or these deposits may be returned to us if we withdraw our interest in the gTLD application. Gains on the sale of our interest in gTLDs applications are recognized when realized, while losses are recognized when deemed probable.

 

The settlement of our interest in certain gTLD applications resulted in a net gain of $0.1 million for the three months ended March 31, 2017 and the withdrawal of our interest in certain gTLD applications resulted in a net loss of $1,000 for the three months ended March 31, 2016. We recorded these gains and losses in (gain) loss on other assets, net, on the statements of operations.

 

 

-9-


 

6.  Debt

Silicon Valley Bank Credit Facility

On January 20, 2017, we fully repaid the $12.8 million draw on our revolving line of credit with Silicon Valley Bank (“SVB Credit Facility”) and entered into a Limited Consent and Amendment No. 4 to Credit Agreement (“Amendment No. 4”) with Silicon Valley Bank to release eNom as a party to the SVB Credit Facility in connection with the eNom Divestiture. In addition, Amendment No. 4 suspends the availability period for revolving loans, lowers the total commitment from $30.0 million to $15.0 million and amends certain financial covenants.

 

 

7.  Commitments and Contingencies

Letters of Credit

As of March 31, 2017, we have letters of credit totaling $2.8 million under the SVB Credit Facility.

Litigation

From time to time, we are party to various litigation matters incidental to the conduct of our business. There is no pending or threatened legal proceeding to which we are a party that, in our belief, could have a material adverse effect on our future financial results.

 

 

8.  Investments

Our available-for-sale investments by major security type are as follows (in thousands):

 

 

 

Cost or

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

As of March 31, 2017

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

3,495

 

 

$

 

 

$

 

 

$

3,495

 

 

Corporate securities

 

 

3,604

 

 

 

 

 

 

(2

)

 

 

3,602

 

 

Commercial paper

 

 

5,927

 

 

 

 

 

 

 

 

 

5,927

 

 

Total

 

$

13,026

 

 

$

 

 

$

(2

)

 

$

13,024

 

 

 

The following table presents gross unrealized losses and fair values of our available-for-sale investments (in thousands). The table is aggregated by investment category and presents separately those securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more.

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

As of March 31, 2017

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

1,251

 

 

$

 

 

$

 

 

$

 

 

Corporate securities

 

 

2,351

 

 

 

(2

)

 

 

 

 

 

 

 

Total

 

$

3,602

 

 

$

(2

)

 

$

 

 

$

 

 

 

We had no investments as of December 31, 2016.

We invest in securities that are rated investment grade or better. As of March 31, 2017, our investments are all due within one year or less.

-10-


 

We review the individual securities in our portfolio to determine whether a decline in a security’s fair value below the amortized cost basis is other-than-temporary. We determined that as of March 31, 2017, there were no investments in our portfolio that were other-than-temporarily impaired.

 

 

9.  Stockholders’ Equity

Stock repurchase program

In February 2017, we announced that our board of directors authorized a stock repurchase program of up to $50 million of our outstanding common stock, effective immediately. The stock repurchase program will be in place for up to 24 months. Under the stock repurchase program, repurchases may be made from time to time in the open market. The share repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. The repurchase program may be limited, suspended or discontinued at any time without prior notice.

The following table presents the open-market share purchase activity, exclusive of purchase and administrative costs (in thousands, except per share data):

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2017

 

 

2016

 

 

Total number of shares purchased

 

 

174

 

 

 

 

 

Average price paid per share

 

$

9.32

 

 

$

 

 

Total cost

 

$

1,620

 

 

$

 

 

 

 

10.  Fair Value of Financial Instruments

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.

Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. 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. Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

-11-


 

The following tables present the fair value of our financial instruments classified by the valuation hierarchy described above. The financial instruments are separated between those measured at fa ir value on a recurring basis and those not carried at fair value, but for which disclosure of fair value is required (in thousands):

 

 

 

Carrying

 

 

Fair Value Measurement Using

 

 

Total

 

 

As of March 31, 2017

 

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

 

Measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

3,495

 

 

$

 

 

$

3,495

 

 

$

 

 

$

3,495

 

 

Corporate securities

 

 

3,602

 

 

 

 

 

 

3,602

 

 

 

 

 

 

3,602

 

 

Commercial paper

 

 

5,927