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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2014

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 001-35048

 

DEMAND MEDIA, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-4731239

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1655 26th Street

Santa Monica, CA

 

90404

(Address of principal executive offices)

 

(Zip Code)

(310) 394-6400

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

As of August 5, 2014, there were 18,412,984 shares of the registrant’s common stock, $0.0001 par value, outstanding.

 

 

 

 

 

 


DEMAND MEDIA, INC.

INDEX TO FORM 10-Q

 

 

 

 

  

Page

Part I

 

Financial Information

  

1

 

 

Item 1.      

  

Condensed Consolidated 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 Stockholders’ Equity

  

4

 

 

 

  

Condensed Consolidated Statements of Cash Flows

  

5

 

 

 

  

Notes to the Condensed Consolidated Financial Statements

  

6

 

 

Item 2.

  

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

  

24

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

40

 

 

Item 4.

  

Controls and Procedures

  

41

 

Part II  

 

Other Information

  

42

 

 

Item 1.

  

Legal Proceedings

  

42

 

 

Item 1A.

  

Risk Factors

  

42

 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

62

 

 

Item 3.

  

Defaults Upon Senior Securities

  

62

 

 

Item 4.

  

Mine Safety Disclosures

  

62

 

 

Item 5.

  

Other Information

  

62

 

 

Item 6.

  

Exhibits

  

63

 

 

 

  

Signatures

  

64

 

 

 

i


Part I.       FINANCIAL INFORMATION

 

Item 1.      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Demand Media, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

(Unaudited)

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

131,588

 

 

$

153,511

 

Accounts receivable, net

 

27,608

 

 

 

33,301

 

Prepaid expenses and other current assets

 

8,022

 

 

 

7,826

 

Deferred registration costs

 

73,708

 

 

 

66,273

 

Assets held-for-sale

 

18,038

 

 

 

-

 

Total current assets

 

258,964

 

 

 

260,911

 

Deferred registration costs, less current portion

 

14,037

 

 

 

12,514

 

Property and equipment, net

 

37,132

 

 

 

42,193

 

Intangible assets, net

 

76,707

 

 

 

88,766

 

Goodwill

 

334,882

 

 

 

347,382

 

Other assets

 

26,995

 

 

 

25,322

 

Total assets

$

748,717

 

 

$

777,088

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

9,825

 

 

$

12,814

 

Accrued expenses and other current liabilities

 

38,607

 

 

 

34,679

 

Deferred tax liabilities

 

22,431

 

 

 

22,415

 

Current portion of long-term debt

 

-

 

 

 

15,000

 

Deferred revenue

 

94,572

 

 

 

84,955

 

Liabilities related to assets held-for-sale

 

616

 

 

 

-

 

Total current liabilities

 

166,051

 

 

 

169,863

 

Deferred revenue, less current portion

 

18,747

 

 

 

16,929

 

Other liabilities

 

10,105

 

 

 

13,041

 

Long-term debt

 

73,750

 

 

 

81,250

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common Stock, $0.0001 par value. Authorized 100,000 shares; 19,173 issued and 18,371 shares outstanding at June 30, 2014 and 18,944 issued and 18,142 shares outstanding at December 31, 2013

 

11

 

 

 

11

 

Additional paid-in capital

 

620,988

 

 

 

611,028

 

Accumulated other comprehensive income (loss)

 

(110

)

 

 

502

 

Treasury stock at cost, 802 at June 30, 2014 and December 31, 2013, respectively

 

(30,767

)

 

 

(30,767

)

Accumulated deficit

 

(110,058

)

 

 

(84,769

)

Total stockholders’ equity

 

480,064

 

 

 

496,005

 

Total liabilities and stockholders’ equity

$

748,717

 

 

$

777,088

 

 

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

 

 

 

1


Demand Media, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Service revenue

$

83,086

 

 

$

101,066

 

 

$

166,046

 

 

$

201,686

 

Product revenue

 

6,680

 

 

 

 

 

 

13,472

 

 

 

 

Total revenue

 

89,766

 

 

 

101,066

 

 

 

179,518

 

 

 

201,686

 

Service costs (exclusive of amortization of intangible assets shown separately below)

 

51,269

 

 

 

48,575

 

 

 

100,406

 

 

 

96,752

 

Product costs

 

5,046

 

 

 

 

 

 

10,001

 

 

 

 

Sales and marketing

 

6,797

 

 

 

12,243

 

 

 

15,728

 

 

 

26,326

 

Product development

 

10,056

 

 

 

10,742

 

 

 

21,328

 

 

 

21,902

 

General and administrative

 

18,733

 

 

 

17,622

 

 

 

36,448

 

 

 

33,997

 

Amortization of intangible assets

 

9,785

 

 

 

10,551

 

 

 

21,414

 

 

 

20,110

 

Interest (income) expense, net

 

929

 

 

 

159

 

 

 

1,694

 

 

 

305

 

Other (income) expense, net

 

65

 

 

 

45

 

 

 

(1,239

)

 

 

123

 

Gain on other assets, net

 

(887

)

 

 

(1,229

)

 

 

(5,747

)

 

 

(1,229

)

Income (loss) before income taxes

 

(12,027

)

 

 

2,358

 

 

 

(20,515

)

 

 

3,400

 

Income tax expense

 

(2,306

)

 

 

(1,240

)

 

 

(4,774

)

 

 

(1,613

)

Net income (loss)

$

(14,333

)

 

$

1,118

 

 

$

(25,289

)

 

$

1,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic

$

(0.78

)

 

$

0.06

 

 

$

(1.39

)

 

$

0.10

 

Net income (loss) per share - diluted

$

(0.78

)

 

$

0.06

 

 

$

(1.39

)

 

$

0.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares - basic

 

18,286

 

 

 

17,474

 

 

 

18,229

 

 

 

17,400

 

Weighted average number of shares - diluted

 

18,286

 

 

 

17,691

 

 

 

18,229

 

 

 

17,629

 

 

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

 

 

 

2


Demand Media, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income (loss)

$

(14,333

)

 

$

1,118

 

 

$

(25,289

)

 

$

1,787

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(28

)

 

 

(25

)

 

 

(50

)

 

 

(56

)

Realized gain on marketable securities available-for-sale, net of tax expense of $344

 

 

 

 

 

 

 

(562

)

 

 

 

Other comprehensive income (loss), net of tax:

 

(28

)

 

 

(25

)

 

 

(612

)

 

 

(56

)

Comprehensive income (loss)

$

(14,361

)

 

$

1,093

 

 

$

(25,901

)

 

$

1,731

 

 

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

 

 

 

3


Demand Media, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

Common stock

 

 

Additional

paid-in

capital

 

 

Treasury

 

 

Accumulated

other

comprehensive

income

 

 

Accumulated

 

 

Total

stockholders’

 

 

Shares

 

 

Amount

 

 

amount

 

 

stock

 

 

(loss)

 

 

deficit

 

 

equity

 

Balance at December 31, 2013

 

18,142

 

 

$

11

 

 

$

611,028

 

 

$

(30,767

)

 

$

502

 

 

$

(84,769

)

 

$

496,005

 

Issuance of stock under employee stock awards and other, net

 

229

 

 

 

 

 

 

246

 

 

 

 

 

 

 

 

 

 

 

 

246

 

Stock-based compensation expense

 

 

 

 

 

 

 

9,714

 

 

 

 

 

 

 

 

 

 

 

 

9,714

 

Realized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

(562

)

 

 

 

 

 

(562

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(50

)

 

 

 

 

 

(50

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,289

)

 

 

(25,289

)

Balance at June 30, 2014

 

18,371

 

 

$

11

 

 

$

620,988

 

 

$

(30,767

)

 

$

(110

)

 

$

(110,058

)

 

$

480,064

 

 

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

 

 

 

4


Demand Media, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Six months ended June 30,

 

 

2014

 

 

2013

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

$

(25,289

)

 

$

1,787

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

31,922

 

 

 

30,339

 

Deferred income taxes

 

4,601

 

 

 

1,419

 

Stock-based compensation

 

10,631

 

 

 

14,143

 

Gain on other assets, net

 

(5,747

)

 

 

(1,229

)

Other

 

(1,447

)

 

 

(490

)

Change in operating assets and liabilities, net of effect of acquisition:

 

 

 

 

 

 

 

Accounts receivable, net

 

4,891

 

 

 

7,422

 

Prepaid expenses and other current assets

 

(793

)

 

 

(895

)

Deferred registration costs

 

(8,957

)

 

 

(6,966

)

Deposits with registries

 

294

 

 

 

(647

)

Other long-term assets

 

(674

)

 

 

447

 

Accounts payable

 

(2,887

)

 

 

1,599

 

Accrued expenses and other liabilities

 

(127

)

 

 

(7,103

)

Deferred revenue

 

11,724

 

 

 

7,788

 

Net cash provided by operating activities

 

18,142

 

 

 

47,614

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(5,910

)

 

 

(14,803

)

Purchases of intangible assets

 

(4,314

)

 

 

(10,028

)

Payments for gTLD applications

 

(11,460

)

 

 

 

Proceeds from gTLD withdrawals, net

 

6,105

 

 

 

1,384

 

Cash paid for acquisitions, net of cash acquired

 

 

 

 

(73,229

)

Other

 

1,291

 

 

 

511

 

Net cash used in investing activities

 

(14,288

)

 

 

(96,165

)

Cash flows from financing activities

 

 

 

 

 

 

 

Long-term debt (repayments) borrowings

 

(22,500

)

 

 

20,000

 

Proceeds from exercises of stock options and contributions to ESPP

 

252

 

 

 

3,349

 

Repurchases of common stock

 

 

 

 

(4,835

)

Net taxes paid on RSUs and options exercised

 

(1,646

)

 

 

(2,699

)

Cash paid for acquisition holdback

 

(1,542

)

 

 

 

Other

 

(296

)

 

 

(265

)

Net cash (used in) provided by financing activities

 

(25,732

)

 

 

15,550

 

Effect of foreign currency on cash and cash equivalents

 

(45

)

 

 

(56

)

Change in cash and cash equivalents

 

(21,923

)

 

 

(33,057

)

Cash and cash equivalents, beginning of period

 

153,511

 

 

 

102,933

 

Cash and cash equivalents, end of period

$

131,588

 

 

$

69,876

 

 

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

 

 

 

5


Demand Media, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Company Background and Overview

Demand Media, Inc. (“Demand Media”), together with its consolidated subsidiaries (the “Company”) is a Delaware corporation headquartered in Santa Monica, California. We are a diversified digital content & media and domain name services company. Our business is focused on an Internet-based model for the professional creation of content, and our business is comprised of two service offerings, Content & Media and Registrar.

On August 1, 2014, we completed the separation of Rightside Group, Ltd. (“Rightside”) from Demand Media, Inc., resulting in two independent, publicly traded companies: a pure-play Internet-based content and media company and a pure-play domain name services company (hereinafter referred to as the “Separation”). Following the Separation, Rightside operates the domain name services business, while we continue to own and operate our content and media business. The Separation was structured as a pro rata tax-free dividend involving the distribution of all outstanding shares of Rightside common stock to holders of Demand Media common stock as of the record date (the “Distribution”). Immediately following the Distribution, we enacted a 1-for-5 reverse stock split with respect to all of our outstanding shares of common stock, which is reflected retrospectively throughout the condensed consolidated financial statements.

Content & Media

Our Content & Media service offering includes an online content creation studio with a community of freelance creative professionals, a portfolio of leading owned and operated websites, and a digital artist marketplace and e-commerce platform. Content & Media services are delivered through our Content & Media platform, which includes our content creation studio, social media applications and a system of monetization tools designed to match content with advertisements in a manner that is optimized for revenue yield and end-user experience. We also leverage our content creation studio for third-party brands, publishers and advertisers as part of our content solutions service offering. As a complement to our traditional content offerings, we have recently integrated certain e-commerce and paid content offerings. In June 2013, we acquired Society6, LLC (“Society6”), a digital artist marketplace and e-commerce platform that enables a large community of talented artists to sell their original designs on art prints, phone cases, t-shirts and other products. We also offer certain on-demand services for purchase on an a la carte or subscription basis, such as eHow Now, a platform where customers chat directly with experts to receive advice and guidance.

Registrar

Our domain name services include services provided by our wholesale and retail domain name registrars, domain name registry and related services. To date, nearly all of the revenue generated from this service offering has been generated by our Registrar service offering, which provides domain name registration and various related services to customers through our wholly owned subsidiaries, eNom and Name.com, and we refer to this service offering as our Registrar service offering for historical periods. We own and operate the world’s largest wholesale Internet domain name registrar and the world’s second largest registrar overall, based on the number of names under management. We are also positioned to become a leading domain name registry through our participation in a new program (the “New gTLD Program”) designed to expand the total number of domain name suffixes, or gTLDs, approved by the Internet Corporation for Assigned Names and Numbers (“ICANN”), a global non-profit corporation that manages the Internet's domain name registration system. Under the New gTLD Program, to date, we have entered into 32 registry operator agreements with ICANN, with 13 of its extensions currently in general availability phase. We also began providing registry back-end services to Donuts, a third-party domain name registry, in the fourth quarter of 2013. The combination of our existing registrar business and our new registry business will make us one of the largest providers of end-to-end domain name services in the world. 

 

2. 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 June 30, 2014, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss) for the three and six month periods ended June 30, 2014 and 2013, the condensed consolidated statements of cash flows for the six month periods ended June 30, 2014 and 2013 and the condensed consolidated statement of stockholders’ equity for the six month period ended June 30, 2014 are unaudited.

6


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 June 30, 2014 and our results of operations for the three and six month periods ended June 30, 2014 and 2013 and our cash flows for the six month periods ended June 30, 2014 and 2013. The results for the six month period ended June 30, 2014 are not necessarily indicative of the results expected for the full year. The consolidated balance sheet as of December 31, 2013 has been derived from our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.

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, 2013 filed with the SEC.

In 2014, we began separately reporting product sales and cost of products. As a result of the June 2013 Society6 acquisition, these amounts are now more significant to us and, accordingly, are shown as separate captions under revenue and operating expenses, respectively, on the consolidated statement of operations. Amounts in 2013 have been reclassified to conform to the 2014 presentation.

We reclassified our Statement of Operations to reflect a single-step presentation and removed the subtotals and captions "Total operating expenses" and "Income (loss) from Operations." This reclassification was applied to all periods presented on a consistent basis.

Our common stock share information and related per share amounts included in have been adjusted retroactively for all periods presented to reflect the one-for-five reverse stock split of our common stock that was effected on August 1, 2014.

Principles of Consolidation

The consolidated financial statements include the accounts of Demand Media and its wholly owned subsidiaries. Acquisitions are included in our consolidated financial statements 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.

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.

Investments in Equity

Investments in affiliates over which we have the ability to exert significant influence, but do not control and are not the primary beneficiary of, including NameJet, LLC (“NameJet”), 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 shares 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 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 any period presented.

We account for investments in companies that we do not control or account for under the equity method either at fair value or under the cost method, as applicable. Investments in equity securities are carried at fair value if the fair value of the security is readily determinable. Equity investments carried at fair value are classified as available-for-sale securities. Realized gains and losses for available-for-sale securities are included in other (income) expense, net in our consolidated statements of operations. Unrealized gains and losses, net of taxes, on available-for-sale securities are included in our consolidated financial statements as a component of other comprehensive income and accumulated other comprehensive income (loss) (“AOCI”), until realized.

7


Investments in equity securities that we do not control or account for under the equity method and do not have readily determinable fair values are accounted for under the cost method. Cost method investments are originally recorded at cost. In determining whether other-than-temporary impairment exists for equity securities, management considers: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. We have determined that there has been no impairment of our equity marketable securities to date.

The cost of marketable securities sold is based upon the specific identification method and any realized gains or losses on the sale of investments are reflected as a component of interest income or expense. For the year ended December 31, 2013, unrealized gain on marketable securities was $0.9 million. During the first quarter, 2014, we sold all of our marketable securities, resulting in a reclassification of $0.9 million of unrealized gain on marketable securities from other accumulated other comprehensive income to other (income) expense, net. The sale of our marketable securities resulted in total realized gains of $1.4 million related the sale of our marketable securities, which are included in other (income) expense, net.

In addition, we classify marketable securities as current or non-current based upon whether such assets are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.

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. Collectability is assessed based on a number of factors, including transaction history and the credit worthiness of a 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:

Service Revenue

Content & Media

Advertising Revenue. Advertising revenue is generated by performance-based Internet advertising, such as cost-per-click 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.

Where we enter into revenue-sharing arrangements with our customers, such as those relating to advertising on our customers’ domains, and when we are considered the primary obligor, we report the underlying revenue on a gross basis in our consolidated statements of operations, and record these revenue-sharing payments to our customers as revenue-sharing expenses, which are included in service costs.

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 30 days of the period end. For the three and six months ended June 30, 2014 and 2013, the difference between the amounts recognized based on preliminary information and cash collected was not material.

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Subscription Services and Social Media Services. Subscription services revenue is generated through the sale of membership fees paid to access content available on certain of our 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 arrangements 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 occur, such as significant customer attrition relative to expected historical or projected future results. 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.

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. We recognize revenue from registration fees charged to third parties in connection with new, renewed and transferred domain name registrations on a straight-line basis over the registration term, which ranges from one to ten years. We include payments received in advance of the domain name registration term in deferred revenue in our consolidated balance sheets. The registration term and related revenue recognition commences once we confirm that the requested domain name has been recorded in the appropriate registry under accepted contractual performance standards. We defer the associated direct and incremental costs, which principally consist of registry and ICANN fees, and expense them as service costs on a straight-line basis over the registration term.

Our businesses including 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 to those parties. As a result, we report revenue in the amount of the fees we receive directly from our reseller and retail registrant customers. Our reseller customers maintain the primary obligor relationship with their retail customers, establish pricing and retain credit risk to those customers. Accordingly, we do not recognize any revenue related to transactions between our reseller customers and their ultimate retail customers. A portion of our resellers have contracted with us to provide billing and credit card processing services to the resellers’ retail customer base in addition to registration services. Under these circumstances, the cash collected from these resellers’ retail customer base exceeds the fixed amount per transaction that we charge for domain name registration services. Accordingly, 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. We report revenue from these resellers on a net basis because the reseller determines the price to charge its retail customers and maintains the primary customer relationship.

Value Added Services. We recognize revenue from online registrar value-added services, which include, but are not limited to, security certificates, domain name identification protection, charges associated with alternative payment methodologies, web hosting services and email services on a straight-line basis over the period in which services are provided. We include payments received in advance of services being provided in deferred revenue.

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Auction Service Revenue. Domain name auction service revenue represents proceeds received from selling domain names from our portfolio, as well as proceeds received from selling domain names that are not renewed by customers of our registrar platform. Domain name sales are primarily conducted through our direct sales efforts as well as through our NameJet joint venture. Domain name sales revenue is recognized when title to the name is transferred to the buyer and the related registration fees are recognized on a straight-line basis over the registration term. If we sell a domain name, any unamortized cost basis is recorded as a service cost. For domain name sales generated through NameJet, we recognize revenue net of auction service fee payments to NameJet.

Product Revenue

Content & Media

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. Sales tax is not included in revenue, as we are a pass-through conduit for collecting and remitting sales taxes.

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, such as traffic acquisition costs, Internet connection and co-location charges 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 service offering, personnel costs relating to in-house editorial, customer service, and information technology.

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 undeveloped websites and media content owned by us is included in amortization of intangible assets.

Product Costs

Product costs consist of outsourced product manufacturing costs; shipping and handling; artist royalties and personnel costs.

Shipping and Handling

Shipping and handling charged to customers are recorded in revenue. Associated costs are recorded in product costs.

Deferred Revenue and Deferred Registration Costs

Deferred revenue consists primarily 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 online value-added service period.

Deferred registration costs represent the 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 are included in service costs.

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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 ten 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 difference between the sales price, if any, and the net remaining value (gross amount of property and equipment less accumulated depreciation expense) of the related equipment at the date of disposal.

Intangible Assets—Undeveloped Websites

We capitalize costs incurred to acquire and to initially register our owned and operated undeveloped websites (i.e., Uniform Resource Locators). We amortize these costs over the expected useful life of the underlying undeveloped websites on a straight-line basis. The expected useful lives of the website names range 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 domain names 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 12 months. We record renewal registration fees of website name intangible assets in deferred registration costs and amortize the costs over the renewal registration period, which is included in service costs.

Intangible Assets—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 incurred for the ongoing maintenance of our websites in which our content is published.

Capitalized media content is amortized on a straight-line basis over its useful life, which is typically five years, representing our estimate of the pattern that the underlying economic benefits are expected to be realized and based on its 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 with 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 accompanying condensed consolidated statements of cash flows.

Intangible Assets—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, and content publisher 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.

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, a 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

11


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 June 30, 2014, we have identified no such impairment loss. Assets to be disposed of would be separately presented on the 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 their search engine algorithms, some of which have led us to experience fluctuations in the total number of Google search referrals to our owned and operated and network of customer websites. In 2011 and 2013, the overall impact of these changes on our owned and operated websites was negative primarily due to a decline in traffic to eHow.com, our largest website. Beginning in response to changes in search engine algorithms since 2011, we have performed evaluations of our existing content library to identify potential improvements in our content creation and distribution platform. As a result of these evaluations, we elected to remove certain content assets from service, resulting in $2.4 million, $2.1 million and $5.9 million of related accelerated amortization expense in 2013, 2012 and 2011, respectively. Any further discretionary actions may result in additional accelerated amortization in the periods the actions occur.

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, 2013, we determined that we have three reporting units. We perform an assessment as to whether a reporting unit’s fair value is less than our carrying value of its assets. If the fair value of the reporting unit exceeds the carrying value, goodwill is not considered to be impaired and no additional steps are necessary. If, however, the fair value of a reporting unit is less than its carrying value, then a second step is performed to determine the amount of the impairment loss. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of the 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.

Our most recent annual impairment analysis was performed in the fourth quarter of the year ended December 31, 2013 and indicated that the fair value of each of our three reporting units exceeded the respective reporting unit’s carrying value at that time. We recently experienced a significant volatility in our stock price, however, and as of June 30, 2014, our market capitalization was less than our book value. Should this condition continue to exist for an extended period of time, we will consider this and other factors, including our anticipated future cash flows, to determine whether goodwill is impaired. If we are required to record a significant impairment charge against certain intangible assets reflected on our balance sheet during the period in which an impairment is determined to exist, we could report a greater loss in one or more future periods. Based on a review of events and changes in circumstances at the reporting unit level through June 30, 2014, we have not identified any indications that the carrying value of our goodwill is impaired. We will continue to perform our annual goodwill impairment test in the fourth quarter of the year ending December 31, 2014, consistent with our existing accounting policy.

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

12


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.

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based payment awards made to employees, non-employees and directors based on the grant date fair values of the awards. For stock option awards to employees with service and/or performance based vesting conditions the fair value is estimated using the Black-Scholes-Merton option pricing model. The value of an award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. We elected to treat stock-based payment awards, other than performance awards, with graded vesting schedules and time-based service conditions as a single award and recognize stock-based compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. Stock-based compensation expenses are classified in the consolidated statement of operations based on the department to which the related employee reports. Our stock-based awards are comprised principally of stock options, restricted stock units and restricted stock awards.

We account for stock-based payment awards and stock options issued to non-employees in accordance with the guidance for equity-based payments to non-employees. Stock option awards to non-employees are accounted for at fair value using the Black-Scholes-Merton option pricing model. We believe that the fair value of stock-based payment awards and stock options is more reliably measured than the fair value of the services received. The fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

The Black-Scholes-Merton option pricing model requires management to make assumptions and to apply judgment in determining the fair value of our awards. The most significant assumptions and judgments include the expected volatility, expected term of the award and estimated forfeiture rates.

We estimated the expected volatility of our awards from the historical volatility of selected public companies within the Internet and media industry with comparable characteristics to Demand Media, including similarity in size, lines of business, market capitalization, revenue and financial leverage. From our inception through December 31, 2008, the weighted average expected life of options was calculated using the simplified method as prescribed under guidance by the SEC. This decision was based on the lack of relevant historical data due to our limited experience and the lack of an active market for our common stock. Effective January 1, 2009, we calculated the weighted average expected life of our options based upon our historical experience of option exercises combined with estimates of the post-vesting holding period. The-risk free interest rate is based on the implied yield currently available on U.S. Treasury notes with terms approximately equal to the expected life of the option. The expected dividend rate is zero as we currently have no history or expectation of paying cash dividends on our common stock. The forfeiture rate is established based on applicable historical forfeiture patterns adjusted for any expected changes in future periods.

Under the Demand Media Employee Stock Purchase Plan (“ESPP”), during any offering period, eligible officers and employees can purchase a limited amount of Demand Media’s common stock at a discount to the market price in accordance with the terms of the plan. Demand Media uses the Black-Scholes-Merton option pricing model to determine the fair value of the ESPP awards granted which is recognized straight-line over the total offering period. The most recent offering period ended in November 2013.

Stock Repurchases

Under our 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 recognize 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

13


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 income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Net loss attributable to common stockholders is increased for cumulative preferred stock dividends earned during the period. Diluted loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average common shares outstanding plus potentially dilutive common shares. We reported a net loss for the three and six months ended June 30, 2014, and as a result, all potentially dilutive common shares comprising of stock options and restricted stock units (“RSUs”), stock from the ESPP are considered antidilutive for this period.

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

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, accrued liabilities and customer deposits approximate fair value because of their short maturities. For our term loans and revolving loan facility, the carrying amount approximate fair value since they bear interest at variable 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 six months ended June 30, 2014 and the year ended December 31, 2013, no impairments were recorded on those assets required to be measured at fair value on a nonrecurring basis. (Refer to Note 15 for additional information).

Assets Held-For-Sale

We report a business as held-for-sale when management has approved or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is probable and anticipated to occur during the ensuing year and certain other specified criteria are met. A business classified as held-for-sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Depreciation is not recorded on long-lived assets of a business classified as held-for-sale. Assets and liabilities related to a business classified as held-for-sale are segregated in the unaudited condensed consolidated balance sheet and major classes are separately disclosed in the notes to the unaudited condensed consolidated financial Statements commencing in the period in which the business is classified as held-for-sale.

Discontinued Operations

 

We report the results of operations of a business as discontinued operations if the disposal of a component represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The results of discontinued operations are reported in discontinued operations in the condensed unaudited consolidated statements of operations for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation, and include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell.

 

In April 2014, the Financial Accounting Standards Board issued a revised standard on reporting discontinued operations and disclosures of disposals of components of an entity, which changed the criteria for reporting a discontinued operation. We elected to early adopt the standard in the second quarter of 2014 (refer to note 7 for additional information).

 

New Accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the

14


consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and changes in judgments. The Accounting Standard Update (“ASU”) allows for both retrospective and prospective methods of adoption and is effective for periods beginning after December 15, 2016. We are currently evaluating the impact that the adoption of this ASU will have on our consolidated financial statements.

 

3. Property and Equipment

Property and equipment consisted of the following (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Computers and other related equipment

$

43,471

 

 

$

43,010

 

Purchased and internally developed software

 

68,070

 

 

 

65,632

 

Furniture and fixtures

 

3,920

 

 

 

3,868

 

Leasehold improvements

 

8,849

 

 

 

9,075

 

 

 

124,310

 

 

 

121,585

 

Less accumulated depreciation

 

(87,178

)

 

 

(79,392

)

Property and equipment, net

$

37,132

 

 

$

42,193

 

 

Depreciation and software amortization expense, which includes acceleration of depreciation, as a result of the Company shortening its estimated useful lives for certain assets, of approximately $0.1 million for the three months ended June 30, 2014, and 2013, and $1.0 million and $0.6 million for the six months ended June 30, 2014, and 2013, respectively, is shown by classification below (in thousands):

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Service costs

$

2,878

 

 

$

3,466

 

 

$

6,491

 

 

$

7,448

 

Sales and marketing

 

58

 

 

 

99

 

 

 

114

 

 

 

206

 

Product development

 

171

 

 

 

225

 

 

 

349

 

 

 

461

 

General and administrative

 

1,625

 

 

 

1,094

 

 

 

3,554

 

 

 

2,114

 

Total depreciation

$

4,732

 

 

$

4,884

 

 

$

10,508

 

 

$

10,229

 

 

4. Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

June 30, 2014

 

 

Gross carrying amount

 

 

Accumulated amortization

 

 

Net

 

Owned website names

$

30,598

 

 

$

(15,273

)

 

$

15,325

 

Customer relationships

 

29,583

 

 

 

(25,528

)

 

 

4,055

 

Artist relationships

 

9,867

 

 

 

(3,152

)

 

 

6,715

 

Media content

 

142,364

 

 

 

(104,938

)

 

 

37,426

 

Technology

 

33,397

 

 

 

(29,206

)

 

 

4,191

 

Non-compete agreements

 

460

 

 

 

(166

)

 

 

294

 

Trade names

 

15,563

 

 

 

(7,128

)

 

 

8,435

 

Content publisher relationships

 

2,092

 

 

 

(1,826

)

 

 

266

 

 

$

263,924

 

 

$

(187,217

)

 

$

76,707

 

 

 

15


 

December 31, 2013

 

 

Gross carrying amount

 

 

Accumulated amortization

 

 

Net

 

Owned website names

$

22,370

 

 

$

(14,684

)

 

$

7,686

 

Customer relationships

 

32,462

 

 

 

(26,026

)

 

 

6,436

 

Artist relationships

 

9,867

 

 

 

(1,507

)

 

 

8,360

 

Media content

 

143,756

 

 

 

(95,687

)

 

 

48,069

 

Technology

 

37,832

 

 

 

(30,165

)

 

 

7,667

 

Non-compete agreements

 

1,159

 

 

 

(294

)

 

 

865

 

Trade names

 

15,742

 

 

 

(6,444

)

 

 

9,298

 

Content publisher relationships

 

2,092

 

 

 

(1,707

)

 

 

385

 

 

$

265,280

 

 

$

(176,514

)

 

$

88,766

 

 

 

Service costs included an accelerated amortization charge of $0.1 million for the three months ended June 30, 2014 and 2013, and $1.6 million and $0.1 million, for the six months ended June 30, 2014 and 2013, respectively, as a result of the removing of certain assets from service.

Identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives commencing the date that the asset is available for its intended use.

Amortization expense by classification is shown below (in thousands):

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Service costs

$

7,237

 

 

$

8,381

 

 

$

14,793

 

 

$

15,820

 

Sales and marketing

 

1,158

 

 

 

898

 

 

 

3,588

 

 

 

1,743

 

Product development

 

1,013

 

 

 

1,073

 

 

 

2,204

 

 

 

2,144

 

General and administrative

 

377

 

 

 

199

 

 

 

829

 

 

 

403

 

Total amortization

$

9,785

 

 

$

10,551

 

 

$

21,414

 

 

$

20,110

 

 

 

 

5. Other Assets

Other long term assets consisted of the following (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

gTLD deposits

$

23,343

 

 

$

21,252

 

Other

 

3,652

 

 

 

4,070

 

Other assets

$

26,995

 

 

$

25,322

 

 

For the three and six month periods ended June 30, 2014, the net gain related to the withdrawals of our interest in certain gTLD applications was $0.9 million and $5.7 million, respectively. For the three and six month periods ended June 30, 2013, the net gain related to the withdrawals of our interest in certain gTLD applications was $1.2 million. We recorded these gains in gain on other assets, net on the condensed consolidated statements of operations.

Other assets at June 30, 2014 and December 31, 2013 include $1.2 million and $0.9 million, respectively, of restricted cash comprising a collateralized letter of credit connected with our applications under the New gTLD Program. The restrictions require the cash to be maintained in a bank account for a minimum of five years from the delegation of the gTLDs.

 

16


6. Other Balance Sheets Items

Accrued expenses and other liabilities consisted of the following (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Accrued payroll and related items

$

7,086

 

 

$

9,301

 

Domain owners' royalties payable

 

962

 

 

 

1,193

 

Commission payable

 

2,555

 

 

 

2,808

 

Customer deposits

 

8,000

 

 

 

7,666

 

Other

 

20,004

 

 

 

13,711

 

Accrued expenses and other liabilities

$

38,607

 

 

$

34,679

 

 

7. Assets Held-For-Sale

 

The major classes of assets and liabilities held-for-sale included in our unaudited condensed consolidated balance sheet at June 30, 2014 were as follows:

 

   Accounts receivable, net

 

$

321

 

   Prepaid expenses and other current assets

 

 

45

 

   Property and equipment, net

 

 

534

 

   Intangible assets, net

 

 

4,638

 

   Goodwill

 

 

12,500

 

Total assets held-for-sale

 

$

18,038

 

 

 

 

 

 

   Accrued expenses and other liabilities

 

$

311

 

   Deferred revenue, current

 

 

288

 

   Other liabilities

 

 

17

 

Total liabilities related to assets held-for-sale

 

$

616

 

During the second quarter 2014, we reclassified assets and liabilities related to the sale of CreativeBug and CoveritLive to assets held-for-sale and liabilities related to assets held-for-sale. These balances relate to dispositions of entities that for which we entered into sales agreements during July 2014. We received cash of $10 million for the CreativeBug disposal, inclusive of $1.0 million held in escrow for one year from the closing date as a holdback amount to cover indemnity claims. We  received $4.5 million of cash and a $5.6 million promissory note for the sale of CoveritLive.

17


In April 2014, the Financial Accounting Standards Board issued a revised standard on reporting discontinued operations and disclosures of disposals of components of an entity, which changed the criteria for reporting a discontinued operation. Specifically, the guidance changed the current definition of “discontinued operations” so that only disposals of components that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results qualify for discontinued operations reporting. The revised standard applies prospectively to new disposals and new classifications as held for sale of components of an entity occurring after the date of adoption. We elected to early adopt the standard in the second quarter of 2014. Accordingly, under the guidelines of the revised standard, the operations of our businesses classified as held-for-sale in the second quarter 2014 were not reported as discontinued operations as a result of a disposal transactions, as we concluded that they did not meet the new definition of a discontinued operation under the new guidance as they were not individually significant components of our operations. Under our prior accounting policy for discontinued operations, the impact of these disposition transactions would have been to reclassify the following activity in our Statement of Operations from continuing operations to discontinued operations:

 

 

 

June 30, 2014

 

 

 

Three months ended

 

 

Six months ended

 

Service revenue

 

$

815

 

 

$

1,581

 

Service costs (exclusive of amortization of intangible assets shown separately below)

 

 

478

 

 

 

862

 

Sales and marketing

 

 

288

 

 

 

499

 

Product development

 

 

601

 

 

 

1,352

 

General and administrative

 

 

416

 

 

 

824

 

Amortization of intangible assets

 

 

330

 

 

 

828

 

Income (loss) before income taxes

 

 

(1,298

)

 

 

(2,784

)

Income tax benefit

 

 

17

 

 

 

34

 

Net income (loss)

 

$

(1,281

)

 

$

(2,750

)

 

8. Debt

We entered into a credit agreement, dated August 29, 2013, with Silicon Valley Bank, as administrative agent, and the lenders and other agents party thereto (the “Credit Agreement”). The Credit Agreement provides for a $100.0 million senior secured term loan facility (the “Term  Loan Facility”) and a $125.0 million senior secured revolving loan facility (the “Revolving Loan Facility”), each maturing on August 29, 2018. The Credit Agreement replaced our pre-existing revolving credit facility that we entered into in August 2011.

The Term Loan Facility provides for $100.0 million term loan that was fully drawn as of December 31, 2013 (“Term Loans”). The Revolving Loan Facility provides for borrowings up to $125.0 million, with the right (subject to certain conditions and at the discretion of the lenders) to increase the Revolving Loan Facility by up to $25.0 million in the aggregate. The Revolving Loan Facility also includes sublimits of up to (i) $25.0 million to be available for the issuance of letters of credit and (ii) $10.0 million to be available for swingline loans. Term Loans must be repaid in installments of $3.75 million that commenced on December 31, 2013, and continue quarterly thereafter, and repaid Term Loans cannot be re-borrowed. During the three months ended June 30, 2014, we made an advance payment of $15 million on the Term Loans covering the next four quarterly repayments. At June 30, 2014, $73.8 million was outstanding under the Term Loan Facility. The weighted average variable interest rate of the Term Loans at June 30, 2014 was 2.34%.

The Credit Agreement permits the Proposed Business Separation to occur subject to certain conditions, including pro forma compliance with the affirmative and negative covenants, including the financial covenants, set forth in the Credit Agreement, and maintenance of a minimum level of liquidity and a minimum trailing 12 month adjusted earnings before taxes, interest, depreciation and amortization expense (“Adjusted EBITDA”) after giving effect to the Proposed Business Separation.

Our obligations under the Credit Agreement are guaranteed by our material direct and indirect domestic subsidiaries, subject to certain exceptions. Our obligations under the Credit Agreement and the guarantees are secured by a lien on substantially all of our tangible and intangible property and substantially all of the tangible and intangible property of our domestic subsidiaries that are guarantors, and by a pledge of all of the equity interests of our material direct and indirect domestic subsidiaries and 66% of each class of capital stock of any material first-tier foreign subsidiaries, subject to limited exceptions.

The Credit Agreement contains customary events of default and affirmative and negative covenants, including certain financial maintenance covenants requiring compliance with a maximum consolidated leverage ratio and a minimum fixed charge coverage ratio, as well as other restrictions typical for a financing of this type that, among other things, restrict our ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase our capital stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of our business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate. Non-compliance with one or more of the covenants and

18


restrictions could result in the full or partial principal balance outstanding under the Credit Agreement becoming immediately due and payable and termination of the commitments available under the Revolving Loan Facility. As of June 30, 2014, we were in compliance with the covenants under the Credit Agreement.

Under the Credit Agreement, loans bear interest, at our option, at an annual rate based on LIBOR or a base rate. Loans based on LIBOR bear interest at a rate between LIBOR plus 2.00% and LIBOR plus 3.00%, depending on our consolidated leverage ratio. Loans based on the base rate bear interest at the base rate plus an applicable margin of 1.00% or 2.00%, depending on our consolidated leverage ratio. We are required to pay a commitment fee between 0.20% and 0.40% per annum, depending on our consolidated leverage ratio, on the undrawn portion available under the Revolving Loan Facility and the Term Loan Facility.

As of June 30, 2014, no principal balance was outstanding and approximately $113.8 million was available for borrowing under the Revolving Loan Facility, after deducting the face amount of outstanding standby letters of credit of approximately $11.2 million, and we were in compliance with all covenants.

In connection with entering into the Credit Agreement, we incurred debt issuance costs of $1.9 million. Debt issuance costs are capitalized and amortized into interest expense over the term of the underlying debt. During the three months and six months ended June 30, 2014 we amortized $0.2 million and $0.3 million, respectively, of deferred debt issuance costs.

 

9. Commitments and Contingencies

Leases

We conduct our operations utilizing leased office facilities in various locations and lease certain equipment under non-cancelable operating and capital leases. Our leases expire between April 2016 and December 2019. During the first quarter of 2014 we amended our lease for the headquarters of our domain name business in Kirkland, Washington which is expanded our leased space from 34,000 square feet to 41,000 square feet, under a lease that expires in April 2019.

Letters of Credit

We issue letters of credit under our Revolving Loan Facility, and as of June 30, 2014, the total letters of credit outstanding under this facility was $11.2 million.

Litigation

From time to time we are a party to various legal matters incidental to the conduct of our business. Certain of our outstanding legal matters include speculative claims for indeterminate amounts of damages. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. Based on our current knowledge, we do not believe that there is a reasonable possibility that the final outcome of the pending or threatened legal proceedings to which we are a party, either individually or in the aggregate, will have a material adverse effect on our future financial results. However, the outcome of such legal matters is subject to significant uncertainties.

Taxes

From time to time, various federal, state and other jurisdictional tax authorities undertake review of us and our filings. In evaluating the exposure associated with various tax filing positions, we accrue charges for possible exposures. The Company’s 2012 federal income tax return is currently under IRS audit. We believe any adjustments that may ultimately be required as a result of any of these reviews will not be material to our consolidated financial statements.

Domain Name Agreement

On April 1, 2011, we entered into an agreement with a customer to provide domain name registration services and manage certain domain names owned and operated by the customer (the "Domain Agreement"). In December 2013, we amended the Domain Agreement (as amended, the "Amended Domain Agreement"). The term of the Amended Domain Agreement expires on December 31, 2014, but will automatically renew for an additional one-year period unless terminated by either party. Pursuant to the Amended Domain Agreement, we are committed to purchase approximately $0.2 million of expired domain names every calendar quarter over the remaining term of the agreement.

19


Indemnification

In the normal course of business, we have provided certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include intellectual property indemnities to our customers, indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware and indemnification related to our lease agreements. In addition, our advertiser and distribution partner agreements contain certain indemnification provisions which are generally consistent with those prevalent in our industry. We have not incurred significant obligations under indemnification provisions historically and do not expect to incur significant obligations in the future. Accordingly, we have not recorded any liability for these indemnities, commitments and guarantees in the accompanying condensed consolidated balance sheets.

 

10. Income Taxes

Our effective tax rate differs from the statutory rate primarily as a result of state taxes, foreign taxes, nondeductible stock option expenses and changes in our valuation allowance.

During the six months ended June 30, 2014, we recorded an income tax expense of $4.8 million compared to an income tax expense of $1.6 million during the same period in 2013, representing an increase of $3.2 million. The increase was primarily due to acquisitions occurring in 2013.

We reduce our deferred tax assets resulting from future tax benefits by a valuation allowance if, based on the weight of the available evidence it is more likely than not that some portion or all of these deferred taxes will not be realized. The timing of the reversal of deferred tax liabilities associated with tax deductible goodwill is not certain and thus not available to assure the realization of deferred tax assets. Due to the limitation associated with deferred tax liabilities from tax deductible goodwill, we have deferred tax assets in excess of deferred tax liabilities before application of a valuation allowance for the periods presented. As we have insufficient history of generating book income, the ultimate future realization of these excess deferred tax assets is not more likely than not and thus subject to a valuation allowance. Accordingly, we have established a valuation allowance against our deferred tax assets.

We are subject to the accounting guidance for uncertain income tax positions. We believe that our income tax positions and deductions will be sustained on audit and do not anticipate any adjustments will result in a material adverse effect on our financial condition, results of operations, or cash flow. We acquired a $0.1 million uncertain tax position as a result of a business acquisition during 2011.

Our policy for recording interest and penalties associated with audits and uncertain tax positions is to record such items as a component of income tax expense, and amounts recognized to date are insignificant. No uncertain income tax positions were recorded during the six months ended June 30, 2014 or 2013 other than the acquired uncertain tax position, and we do not expect our uncertain tax position to change materially during the next 12 months. We file a U.S. federal and many state tax returns as well as tax returns in multiple foreign jurisdictions. All tax years since our incorporation remain subject to examination by the IRS and various state authorities.

 

11. Employee Benefit Plan

We have a defined contribution plan under Section 401(k) of the Code (the “401(k) Plan”) covering all full-time employees who meet certain eligibility requirements. Eligible employees may defer up to 90% of their pre-tax eligible compensation, up to the annual maximum allowed by the IRS. Effective January 1, 2013, we began matching a portion of the employee contributions under the 401(k) Plan up to a defined maximum. During the six months ended June 30, 2014, we incurred approximately $1.1 million in employer contributions under the 401(k) Plan, and expect to incur a similar amount for the remainder of the current fiscal year.

 

12. Stock-based Compensation Plans and Awards

Stock-based Compensation Expense

Stock-based compensation expense related to all employee and non-employee stock-based awards recognized in the condensed consolidated statements of operations was as follows (in thousands):

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Service costs

$

521

 

 

$

726

 

 

$

923

 

 

$

1,337

 

Sales and marketing

 

355

 

 

 

1,406

 

 

 

1,180

 

 

 

3,329

 

20


 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Product development

 

1,183

 

 

 

1,270

 

 

 

2,142

 

 

 

2,435

 

General and administrative

 

3,305

 

 

 

3,478

 

 

 

6,386

 

 

 

7,042

 

Total stock-based compensation included in net income (loss)

$

5,364

 

 

$

6,880

 

 

$

10,631

 

 

 

14,143

 

 

During the six months ended June 30, 2014, we granted 0.4 million restricted stock units as part of our annual employee compensation process. In addition, 0.2 million options were forfeited as a result of the departure of a Company executive.

 

13. Stockholders’ Equity

Reverse Stock Split

On August 1, 2014, we completed the separation of Rightside Group, Ltd. (“Rightside”) from Demand Media, Inc., resulting in two independent, publicly traded companies: a pure-play Internet-based content and media company and a pure-play domain name services company (hereinafter referred to as the “Separation”). The Separation was structured as a pro rata tax-free dividend involving the distribution of all outstanding shares of Rightside common stock to holders of Demand Media common stock as of the record date (the “Distribution”). Immediately following the Distribution, we enacted a 1-for-5 reverse stock split with respect to all of our outstanding shares of common stock, which is reflected retrospectively throughout the condensed consolidated financial statements.

Stock Repurchases

Under our February 8, 2012 stock repurchase plan, as amended, we are authorized to repurchase up to $50.0 million of our common stock from time to time. Since April 2013, we have not repurchased any shares of common stock. Approximately $19.2 million remains available under the repurchase plan at June 30, 2014. The timing and actual number of shares repurchased will depend on various factors including price, corporate and regulatory requirements, debt covenant requirements, alternative investment opportunities and other market conditions.

Shares repurchased by us are accounted for when the transaction is settled. As of June 30, 2014, there were no unsettled share repurchases. Shares repurchased and retired are deducted from common stock for par value and from additional paid in capital for the excess over par value. Direct costs incurred to acquire the shares are included in the total cost of the shares.

Other

Each share of common stock has the right to one vote per share. Each restricted stock purchase right has the right to one vote per share and the right to receive dividends or other distributions paid or made with respect to common shares, subject to restrictions for continued employment service.

 

14. Business Segments

We operate in one operating segment. Our chief operating decision maker (the “CODM”) manages our operations on a consolidated basis for purposes of evaluating financial performance and allocating resources. The CODM reviews separate revenue information for our Content & Media and Registrar service offerings. All other financial information is reviewed by the CODM on a consolidated basis. All of our principal operations and decision-making functions are located in the United States. Revenue generated outside of the United States is not material for any of the periods presented.

Revenue derived from our Content & Media and Registrar service offering is as follows (in thousands):

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Content & Media revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned & operated

$

38,833

 

 

$

51,709

 

 

$

79,585

 

 

$

101,412

 

Network

 

9,699

 

 

 

12,790

 

 

 

19,570

 

 

 

28,378

 

Total Content & Media revenue

 

48,532

 

 

 

64,499

 

 

 

99,155

 

 

 

129,790

 

Registrar revenue

 

41,234

 

 

 

36,567

 

 

 

80,363

 

 

 

71,896

 

Total revenue

$

89,766

 

 

$

101,066

 

 

$

179,518

 

 

$

201,686

 

 

21


15. Fair Value

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 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.

Financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):

 

 

Balance at June 30, 2014

 

 

Level 1

 

 

Level 2

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

$

1,334

 

 

$

 

 

$

1,334

 

 

$

1,334

 

 

$

 

 

$

1,334

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Debt

$

 

 

$

73,750

 

 

$

73,750

 

 

$

 

 

$

73,750

 

 

$

73,750

 

 

(1)

Comprises money market funds which are included in Cash and cash equivalents in the accompanying condensed consolidated balance sheet.

22


 

 

Balance at December 31, 2013

 

 

Level 1

 

 

Level 2

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

$

4,034

 

 

$

 

 

$

4,034

 

Marketable securities

 

902

 

 

 

 

 

 

902

 

 

$

4,936

 

 

$

 

 

$

4,936

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Debt

$

 

 

$

96,250

 

 

$

96,250

 

 

$

 

 

$

96,250

 

 

$

96,250

 

 

(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).

 

16. Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share of common stock (in thousands, except per share data):

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income (loss)

$

(14,333

)

 

$

1,118

 

 

$

(25,289

)

 

$

1,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

18,286

 

 

 

17,496

 

 

 

18,231

 

 

 

17,432

 

Weighted average unissued shares

 

 

 

 

6

 

 

 

 

 

 

3

 

Weighted average unvested restricted stock awards

 

 

 

 

(28

)

 

 

(2

)

 

 

(35

)

Weighted average common shares outstanding—basic

 

18,286

 

 

 

17,474

 

 

 

18,229

 

 

 

17,400

 

Dilutive effect of stock options, warrants and ESPP

 

 

 

 

217

 

 

 

 

 

 

229

 

Weighted average common shares outstanding—diluted

 

18,286

 

 

 

17,691

 

 

 

18,229

 

 

 

17,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share—basic

$

(0.78

)

 

$

0.06

 

 

$

(1.39

)

 

$

0.10

 

Net income (loss) per share—diluted

$

(0.78

)

 

$

0.06

 

 

$

(1.39

)

 

$

0.10

 

 

For the three and six months ended June 30, 2014 we excluded 0.1 million shares, from the calculation of diluted weighted average shares outstanding, as their inclusion would have been antidilutive. There were no antidilutive shares for the other periods presented.

 

17. Subsequent Events

During July 2014, we entered into separate asset purchase agreements for CreativeBug and CoveritLive. We received cash of $10 million for the CreativeBug disposal, including a $1.0 million held in escrow for one year from the closing date as a holdback amount to cover indemnity claims. We received $4.5 million of cash and a $5.6 million promissory note for the sale of CoveritLive (refer to Note 7 for additional information).

On August 1, 2014, we completed the separation of Rightside Group, Ltd. (“Rightside”) from Demand Media, Inc., resulting in two independent, publicly traded companies: a pure-play Internet-based content and media company and a pure-play domain name services company (hereinafter referred to as the “Separation”). Following the Separation, Rightside operates the domain name services business, while we continue to own and operate our content and media business. The Separation was structured as a pro rata tax-free dividend involving the distribution of all outstanding shares of Rightside common stock to holders of Demand Media common stock as of the record date (the “Distribution”). Immediately following the Distribution, we enacted a 1-for-5 reverse stock split with respect to all of our outstanding shares of common stock, which is reflected retrospectively throughout the condensed consolidated financial statements.

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On August 8, 2014, we completed the acquisition of Saatchi Online, Inc. (“Saatchi Online”), an online art gallery, for a total purchase price consideration of $17.0 million was comprised of $5.7 million of cash and 1,049,964 shares of Demand Media.

 

 

 

 

 

24


Item 2.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used herein, “Demand Media,” the “Company,” “our,” “we,” or “us” and similar terms include Demand Media, Inc. and its subsidiaries, unless the context indicates otherwise. “Demand Media” and other trademarks of ours appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our 2013 Annual Report on Form 10-K.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “plan” and similar expressions are intended to identify forward-looking statements. You should not rely upon forward-looking statements as guarantees of future performance. We have based these forward-looking statements largely on our estimates of our financial results and our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section entitled “Risk Factors” in Part II.Item 1A of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q, except as required by law.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the Securities and Exchange Commission (the “SEC”) with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

Recent Developments

Acquisition of Saatchi Online, Inc.

On August 8, 2014, we completed the acquisition of Saatchi Online, Inc., an online art gallery, for total consideration of approximately $17 million, comprised of $5.7 million in cash and 1,049,964 shares of Demand Media common stock.

Appointment of Chief Executive Officer

Effective August 12, 2014, we also appointed Sean Moriarty as our new Chief Executive Officer, and as a member of our board of directors. Shawn Colo, our interim President and Chief Executive Officer, resigned as interim Chief Executive Officer but will remain as as President of the Company, effective August 12, 2014, and will also join our board of directors.

Rightside Spin-Off Transaction

On August 1, 2014, we completed the separation of Rightside Group, Ltd. (“Rightside”) from Demand Media, Inc., resulting in two independent, publicly traded companies: a pure-play Internet-based content and media company and a pure-play domain name services company (hereinafter referred to as the “Separation”). Following the Separation, Rightside operates the domain name services business, while we continue to own and operate our content and media business. The Separation was structured as a pro rata tax-free dividend involving the distribution of all outstanding shares of Rightside common stock to holders of Demand Media common stock as of the record date (the “Distribution”). Immediately following the Distribution, we enacted a 1-for-5 reverse stock split of our outstanding and treasury shares of common stock.

25


Creativebug and CoveritLive Divestitures

In July 2014, we completed the sales of CreativeBug, an online video arts and crafts business, and CoveritLive, a real-time engagement solutions business.

Because the Separation and the CreativeBug and CoveritLive divestitures were consummated after June 30, 2014, the financial condition, results of operations and cash flows for the periods presented in this report include results relating to these businesses.

Overview

We are a diversified digital content & media company. We have developed a leading Internet-based model for the professional creation and distribution of high-quality content, and we have expanded to include commerce-based products and services. Prior to the Separation, we were also a leader in the domain name industry, with a complete suite of products and services that our customers utilize as the foundation to build their online presence, including operating wholesale and retail domain name registrars, serving as a domain name registry and providing related services.

For the quarter ended June 30, 2014, our business was comprised of two service offerings: Content & Media and Domain Name Services. Our content & media service offering includes an online content creation studio with a community of freelance creative professionals, a portfolio of leading owned and operated websites, and a digital artist marketplace and e-commerce platform. We deploy our proprietary content and media platform to our owned and operated websites, such as eHow.com, Livestrong.com and Cracked.com, and to websites operated by our customers. We also leverage our content creation studio for third-party brands, publishers and advertisers as part of our content solutions service offering. As a complement to our traditional content offerings, we have recently integrated certain e-commerce and paid content offerings. In June 2013, we acquired Society6, LLC (“Society6”), a digital artist marketplace and e-commerce platform that enables a large community of talented artists to sell their original designs on art prints, phone cases, t-shirts and other products. In August 2014, we acquired Saatchi Online (“Saatchi Online”), an online art gallery. We also offer certain on-demand services for purchase on an a la carte or subscription basis, such as eHow Now, a platform where customers chat directly with experts to receive advice and guidance. Our Content & Media service offering also included a portfolio of websites primarily containing advertising listings, which we refer to as undeveloped websites.

Our Domain Name Services offering, which is now operated by Rightside, includes services provided by our wholesale and retail domain name registrars, domain name registry and related services. To date, nearly all of the revenue generated from this service offering has been generated by the registrar service offering, which provides domain name registration and various related services to customers, and we refer to this service offering as our Registrar service offering for historical periods. Rightside owns and operates the world’s largest wholesale Internet domain name registrar and the world’s second largest registrar overall, based on the number of names under management. Rightside is also positioned to become a leading domain name registry through its participation in a new program (the “New gTLD Program”) designed to expand the total number of domain name suffixes, or gTLDs, approved by the Internet Corporation for Assigned Names and Numbers (“ICANN”), a global non-profit corporation that manages the Internet's domain name registration system. Under the New gTLD Program, to date, Rightside has entered into 32 registry operator agreements with ICANN , with 13 of its extensions currently in general availability phase.. Rightside also began providing registry back-end services to Donuts, a third-party domain name registry, in the fourth quarter of 2013.

Our principal operations and decision-making functions are located in the United States. Our financial results are reported as one operating segment, with two distinct service offerings. Our operating results are regularly reviewed by our chief operating decision maker on a consolidated basis, principally to make decisions about how we allocate our resources and to measure our consolidated operating performance. We currently generate the vast majority of our Content & Media revenue through the sale of advertising and sales of products. To a lesser extent, we also generate, or have generated, Content & Media revenue through subscriptions to our social media applications, the sale or licensing of media content, sales of on-demand services and sales of undeveloped websites. Substantially all of our Registrar revenue is derived from domain name registration and related value-added service subscriptions. Our chief operating decision maker regularly reviews revenue for each of our Content & Media and Registrar service offerings in order to gain more depth and understanding of the key business metrics driving our business. Accordingly, we report Content & Media and Registrar revenue separately.

For the six months ended June 30, 2014 and 2013, we reported revenue of $179.5 million and $201.7 million, respectively. For the six months ended June 30, 2014 and 2013, our Content & Media service offering accounted for 55% and 64% of our total revenue, respectively, and our Registrar service offering accounted for 45% and 36% of our total revenue, respectively.

Key Business Metrics

We regularly review a number of business metrics, including the following key metrics, to evaluate our business, measure the performance of our business model, identify trends impacting our business, determine resource allocations, formulate financial

26


projections and make strategic business decisions. Measures which we believe are the primary indicators of our performance are as follows:

Content & Media Metrics

·

page views: We define page views as the total number of web pages viewed across (1) our owned and operated websites and/or (2) our network of customer websites, to the extent that the viewed web pages of our customers host our monetization, social media and/or content services. Page views are primarily tracked through internal systems, such as our Omniture web analytics tool, contain estimates for our customer websites using our social media tools and may use data compiled from certain customer websites. We periodically review and refine our methodology for monitoring, gathering, and counting page views in an ongoing effort to improve the accuracy of our measure.

·

RPM: We define RPM as Content & Media revenue per one thousand page views.

Registrar Metrics

domain: We define a domain as an individual domain name registered by a third-party customer on our platform for which we have begun to recognize revenue. This metric does not include any of our owned and operated websites.

average revenue per domain: We calculate average revenue per domain by dividing Registrar revenue for a period by the average number of domains registered in that period. The average number of domains is the simple average of the number of domains at the beginning and end of the period. Average revenue per domain for partial year periods is annualized.

The following table sets forth additional performance highlights of key business metrics for the periods presented:

 

 

Three months ended June 30,

 

 

% Change

 

 

Six months ended June 30,

 

 

% Change

 

 

2014

 

 

2013

 

 

2014 to 2013

 

 

2014

 

 

2013

 

 

2014 to 2013

 

Content & Media Metrics(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned & operated