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EX-32.2 - EX-32.2 - LEAF GROUP LTD.dmd-ex322_201409307.htm
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EX-31.2 - EX-31.2 - LEAF GROUP LTD.dmd-ex312_201409309.htm
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EXCEL - IDEA: XBRL DOCUMENT - LEAF GROUP LTD.Financial_Report.xls
EX-32.1 - EX-32.1 - LEAF GROUP LTD.dmd-ex321_201409306.htm

 

 

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 September 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 November 6, 2014, there were 19,579,408 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

  

25

 

 

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

  

63

 

 

Item 3.

  

Defaults Upon Senior Securities

  

63

 

 

Item 4.

  

Mine Safety Disclosures

  

63

 

 

Item 5.

  

Other Information

  

63

 

 

Item 6.

  

Exhibits

  

64

 

 

 

  

Signatures

  

66

 

 

 

i


Part I.       FINANCIAL INFORMATION

 

Item 1.      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Demand Media, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

113,231

 

 

$

153,511

 

Accounts receivable, net

 

17,663

 

 

 

33,301

 

Prepaid expenses and other current assets

 

9,673

 

 

 

7,826

 

Deferred registration costs

 

-

 

 

 

66,273

 

Total current assets

 

140,567

 

 

 

260,911

 

Deferred registration costs, less current portion

 

-

 

 

 

12,514

 

Property and equipment, net

 

24,335

 

 

 

42,193

 

Intangible assets, net

 

53,353

 

 

 

88,766

 

Goodwill

 

10,397

 

 

 

347,382

 

Other assets

 

5,953

 

 

 

25,322

 

Total assets

$

234,605

 

 

$

777,088

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

1,776

 

 

$

12,814

 

Accrued expenses and other current liabilities

 

24,969

 

 

 

34,679

 

Deferred tax liabilities

 

-

 

 

 

22,415

 

Current portion of long-term debt

 

3,750

 

 

 

15,000

 

Deferred revenue

 

3,768

 

 

 

84,955

 

Total current liabilities

 

34,263

 

 

 

169,863

 

Deferred revenue, less current portion

 

254

 

 

 

16,929

 

Other liabilities

 

2,386

 

 

 

13,041

 

Long-term debt

 

70,000

 

 

 

81,250

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, $0.0001 par value. Authorized 100,000 shares; 20,370 issued and 19,568 shares outstanding at September 30, 2014 and 18,944 issued and 18,142 shares outstanding at December 31, 2013

 

2

 

 

 

11

 

Additional paid-in capital

 

492,514

 

 

 

611,028

 

Accumulated other comprehensive income (loss)

 

(151

)

 

 

502

 

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

 

(30,767

)

 

 

(30,767

)

Accumulated deficit

 

(333,896

)

 

 

(84,769

)

Total stockholders’ equity

 

127,702

 

 

 

496,005

 

Total liabilities and stockholders’ equity

$

234,605

 

 

$

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 September 30,

 

 

Nine months ended September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service revenue

$

33,712

 

 

$

45,102

 

 

$

108,373

 

 

$

152,536

 

Product revenue

 

7,603

 

 

 

5,643

 

 

 

21,075

 

 

 

5,643

 

Total revenue

 

41,315

 

 

 

50,745

 

 

 

129,448

 

 

 

158,179

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

11,256

 

 

 

12,310

 

 

 

33,198

 

 

 

38,728

 

Product costs

 

5,506

 

 

 

3,713

 

 

 

15,507

 

 

 

3,713

 

Sales and marketing

 

4,699

 

 

 

8,065

 

 

 

15,422

 

 

 

29,156

 

Product development

 

7,050

 

 

 

8,645

 

 

 

21,221

 

 

 

25,170

 

General and administrative

 

12,464

 

 

 

14,232

 

 

 

36,868

 

 

 

40,217

 

Goodwill impairment charge

 

232,270

 

 

 

 

 

 

232,270

 

 

 

 

Amortization of intangible assets

 

7,388

 

 

 

8,736

 

 

 

25,203

 

 

 

24,631

 

Total operating expenses

 

280,633

 

 

 

55,701

 

 

 

379,689

 

 

 

161,615

 

Loss from operations

 

(239,318

)

 

 

(4,956

)

 

 

(250,241

)

 

 

(3,436

)

Interest expense, net

 

(627

)

 

 

(656

)

 

 

(2,331

)

 

 

(969

)

Other income (expense), net

 

782

 

 

 

102

 

 

 

736

 

 

 

6

 

Loss from continuing operations before income taxes

 

(239,163

)

 

 

(5,510

)

 

 

(251,836

)

 

 

(4,399

)

Income tax (expense) benefit

 

16,631

 

 

 

(1,016

)

 

 

13,917

 

 

 

(1,803

)

Net loss from continuing operations

 

(222,532

)

 

 

(6,526

)

 

 

(237,919

)

 

 

(6,202

)

Net income (loss) from discontinued operations

 

(1,306

)

 

 

(3,914

)

 

 

(11,208

)

 

 

(2,451

)

Net loss

$

(223,838

)

 

$

(10,440

)

 

$

(249,127

)

 

$

(8,653

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

$

(11.62

)

 

$

(0.36

)

 

$

(12.90

)

 

$

(0.35

)

Net income (loss) from discontinued operations

 

(0.07

)

 

 

(0.22

)

 

 

(0.60

)

 

 

(0.14

)

Net loss

$

(11.69

)

 

$

(0.58

)

 

$

(13.50

)

 

$

(0.49

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares - basic and diluted

 

19,151

 

 

 

17,955

 

 

 

18,450

 

 

 

17,583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30,

 

 

Nine months ended September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net loss

$

(223,838

)

 

$

(10,440

)

 

$

(249,127

)

 

$

(8,653

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(41

)

 

 

(7

)

 

 

(91

)

 

 

(63

)

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

 

 

 

 

 

 

 

(562

)

 

 

 

Other comprehensive income (loss), net of tax:

 

(41

)

 

 

(7

)

 

 

(653

)

 

 

(63

)

Comprehensive income (loss)

$

(223,879

)

 

$

(10,447

)

 

$

(249,780

)

 

$

(8,716

)

 

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

 

376

 

 

 

 

 

 

342

 

 

 

 

 

 

 

 

 

 

 

 

342

 

Stock-based compensation expense

 

 

 

 

 

 

 

14,042

 

 

 

 

 

 

 

 

 

 

 

 

14,042

 

Issuance of common stock for acquisitions

 

1,050

 

 

 

 

 

 

10,258

 

 

 

 

 

 

 

 

 

 

 

 

10,258

 

Spin-off of Rightside Group, Ltd.

 

 

 

 

 

 

 

(143,165

)

 

 

 

 

 

 

 

 

 

 

 

(143,165

)

Reverse split

 

 

 

 

(9

)

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

(562

)

 

 

 

 

 

(562

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(91

)

 

 

 

 

 

(91

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(249,127

)

 

 

(249,127

)

Balance at September 30, 2014

 

19,568

 

 

$

2

 

 

$

492,514

 

 

$

(30,767

)

 

$

(151

)

 

$

(333,896

)

 

$

127,702

 

 

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)

 

Nine months ended September 30,

 

 

2014

 

 

2013

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(249,127

)

 

$

(8,653

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

43,356

 

 

 

46,059

 

Deferred income taxes

 

(13,625

)

 

 

2,799

 

Stock-based compensation

 

15,364

 

 

 

21,629

 

Goodwill impairment charge

 

232,270

 

 

 

 

Gain on disposal of businesses

 

(795

)

 

 

 

Gain on other assets, net

 

(5,745

)

 

 

(2,566

)

Other

 

(1,638

)

 

 

(450

)

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

 

 

 

 

 

 

 

Accounts receivable, net

 

4,033

 

 

 

9,264

 

Prepaid expenses and other current assets

 

(1,650

)

 

 

(816

)

Deferred registration costs

 

(8,876

)

 

 

(8,444

)

Deposits with registries

 

(259

)

 

 

(401

)

Other long-term assets

 

(557

)

 

 

(532

)

Accounts payable

 

(5,153

)

 

 

3,214

 

Accrued expenses and other liabilities

 

(472

)

 

 

(3,527

)

Deferred revenue

 

12,296

 

 

 

8,852

 

Net cash provided by operating activities

 

19,422

 

 

 

66,428

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(7,597

)

 

 

(22,760

)

Purchases of intangible assets

 

(5,406

)

 

 

(13,263

)

Payments for gTLD applications

 

(12,460

)

 

 

(405

)

Proceeds from gTLD withdrawals, net

 

6,105

 

 

 

2,876

 

Cash received from disposal of business, net of cash disposed

 

13,696

 

 

 

 

Cash paid for acquisitions, net of cash acquired

 

(2,240

)

 

 

(73,229

)

Restricted deposits

 

(1,700

)

 

 

 

Other

 

996

 

 

 

471

 

Net cash used in investing activities

 

(8,606

)

 

 

(106,310

)

Cash flows from financing activities

 

 

 

 

 

 

 

Long-term debt (repayments) borrowings, net

 

(22,500

)

 

 

50,000

 

Proceeds from exercises of stock options and contributions to ESPP

 

343

 

 

 

4,493

 

Repurchases of common stock

 

 

 

 

(4,835

)

Debt issuance costs

 

 

 

 

(1,936

)

Net taxes paid on RSUs and options exercised

 

(2,236

)

 

 

(3,741

)

Cash paid for acquisition holdback

 

(1,942

)

 

 

 

Cash distribution related to spin-off

 

(24,145

)

 

 

 

Other

 

(529

)

 

 

(440

)

Net cash (used in) provided by financing activities

 

(51,009

)

 

 

43,541

 

Effect of foreign currency on cash and cash equivalents

 

(87

)

 

 

(63

)

Change in cash and cash equivalents

 

(40,280

)

 

 

3,596

 

Cash and cash equivalents, beginning of period

 

153,511

 

 

 

102,933

 

Cash and cash equivalents, end of period

$

113,231

 

 

$

106,529

 

 

 

 

 

 

 

 

 

Supplemental disclosure  of cash flows

 

 

 

 

 

 

 

Net non-cash assets assets ditributed as part of spin-off

$

119,020

 

 

$

 

Stock issued for acquisitions

$

10,258

 

 

$

16,281

 

Note receivable related to disposal of a business

$

4,751

 

 

$

 

 

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,” “our,” “we,” or “us”) is a Delaware corporation headquartered in Santa Monica, California. We are a diversified media and technology company that connects individual content creators and artists to sizable consumer audiences across several large and growing lifestyle categories. Our business is comprised of two service offerings, Content & Media and Marketplaces.

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 media and technology 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 & Media and Marketplaces businesses. 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 completed 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. The financial results of Rightside are presented as discontinued operations in our condensed consolidated statements of operations for all periods presented. Unless it is disclosed, all financial results represent continuing operations.

Content & Media

Our Content & Media service offering includes a leading online content creation studio that publishes content to our owned and operated online properties as well as to online properties operated by our customers. Through our innovative content creation platform, DemandStudios.com, a large community of qualified freelance professionals utilizes propriety technology and automated workflow processes to identify topics and create high-quality content in text, video, photography and designed visual formats. This content is published to our leading owned and operated online properties across several key categories, including eHow.com, a how-to reference destination, and Livestrong.com, a health and healthy living destination. We also own and operate Cracked.com, a humor website offering original and engaging comedy-driven text articles, videos and blogs created by our in-house editorial staff, comedians and website enthusiasts. Our content creation studio also provides and publishes content for third-party brands, publishers and advertisers as part of our Content Solutions service.

Marketplaces

Through our Marketplaces service offering, we operate leading artist marketplaces where a large community of artists market and sell original artwork and original designs printed on a wide variety of products. Society6.com, which we acquired in June 2013, provides artists with an online commerce platform to feature and sell their original designs on art prints, phone cases, t-shirts and other products. SaatchiArt.com, which we acquired in August 2014, is an online art gallery that provides a global community of artists a curated environment in which to exhibit and sell their work, consisting of a wide selection of paintings, drawings, sculpture and photography.

 

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

In the opinion of management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, which include only normal recurring

6


adjustments, necessary for the fair statement of our statement of financial position as of September 30, 2014 and our results of operations for the three and nine month periods ended September 30, 2014 and 2013 and our cash flows for the nine month periods ended September 30, 2014 and 2013. The results for the nine month period ended September 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 U.S. Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these condensed consolidated 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 revenue and product costs. As a result of our acquisition of Society6 in June 2013, these amounts are now more significant to us and, accordingly, are shown as separate captions under revenue and operating expenses, respectively, on the condensed consolidated statement of operations. Amounts in 2013 have been reclassified to conform to the 2014 presentation.

Our common stock share information and related per share amounts included in the condensed consolidated financial statements have been adjusted retroactively for all periods presented to reflect the 1-for-5 reverse stock split of our common stock that was effected on August 1, 2014.

The financial results of Rightside are presented as discontinued operations in our condensed consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013. For additional information relating to our previous domain name services business, please refer to our Annual Report on Form 10-K for the year ended December 31, 2013.

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, are accounted for using the equity method of accounting. Any investments in affiliates over 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 are included in other income (expense), net in our consolidated statements of operations. Investments in 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 of accounting either at fair value or using the cost method of accounting, 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 marketable securities available-for-sale. Realized gains and losses for marketable securities available-for-sale are included in other income (expense), net in our consolidated statements of operations. Unrealized gains and losses, net of taxes, on marketable securities available-for-sale are included in our consolidated financial statements as a component of other comprehensive income (loss) and accumulated other comprehensive income (loss) (“AOCI”), until realized.

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Investments in companies that we do not control or account for under the equity method, and for which we 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.

The cost of marketable securities sold is based upon the specific accounting method used. Any realized gains or losses on the sale of equity investments are reflected as a component of interest income or expense. For the year ended December 31, 2013, unrealized gains on marketable securities available-for-sale was $0.9 million. During the first quarter of 2014, we sold all of these marketable securities, resulting in a reclassification from other comprehensive income of $0.9 million of unrealized gains on marketable securities, which is currently recorded in discontinued operations. The sale of our marketable securities resulted in total realized gains of $1.4 million related to the sale of our marketable securities, which are included in other income (expense), net.

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 and products:

Service Revenue

Content & Media

Advertising Revenue. We generate revenue from advertisements displayed alongside our content on our online properties and certain of our customers’ online properties. Articles, videos and other forms of content generate advertising revenue from a diverse mix of advertising methods including performance-based cost-per-click advertising, in which an advertiser pays only when a visitor clicks on an advertisement; display advertisements, where revenue is dependent upon the number of advertising impressions delivered; and sponsored content or advertising links. 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 other performance criteria. Revenue from performance-based arrangements 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 our advertiser network, 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 in service costs.

Social Media Services. 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 recurring management support fees, overage fees in excess of standard usage terms, outside consulting fees and initial set-up 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. Social media services revenue is recognized when persuasive evidence of an arrangement

8


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 have not been treated as separate deliverables because 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. Outside consulting services performed for customers that have value on a standalone basis are recognized as the services are performed. Any 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.

Content Sales and Licensing Revenue. We also generate revenue from the sale or license of media content, including the creation and distribution of content for third party brands and publishers through our Content Solutions service. Revenue from the sale or perpetual license of media content is recognized when the content has been delivered and the contractual performance obligations have been fulfilled. Revenue from the license of media content is recognized over the period of the license as content is delivered or when other related performance criteria are fulfilled. In circumstances where we distribute our content on third-party properties and the customer acts as the primary obligor, we recognize revenue on a net basis.

Marketplaces

Art Commissions Revenue. We generate service revenue from commissions we receive from facilitating the sale of original art by artists to customers through Saatchi Art. We recognize service revenue arising from the sale of original art net of amounts paid to the artist because we are not the primary obligor in the transaction, we do not have inventory risk, and we do not establish the prices for the art sold. We also recognize this service revenue net of any sales allowances. Revenue is recognized after the original art has been delivered and the return period has expired. Payments received in advance of delivery and completion of the return period are included in deferred revenue in the accompanying condensed consolidated balance sheets. We periodically provide incentive offers to customers to encourage purchases, including percentage discounts off current purchases, free shipping and other offers. VAT, sales and other taxes are not included in revenue because we are a pass-through conduit for collecting and remitting any such taxes.

Product Revenue

Marketplaces

We recognize product revenue from sales of Society6 products upon delivery, net of estimated returns based on historical experience. We recognize product revenue from the sale of prints through Saatchi Art when the prints are delivered and the return period has expired. Payments received in advance of delivery and, with respect to the Saatchi Art prints, prior to completion of the return period 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 revenue is recognized net of sales allowances and return allowances. We periodically provide incentive offers to customers to encourage purchases, including percentage discounts off current purchases, free shipping and other offers. Value-added taxes (“VAT’), sales and other taxes are not included in revenue, as we are a pass-through conduit for collecting and remitting any such taxes.

Service Costs

Service costs consist primarily of payments relating to our revenue-sharing arrangements, such as content creator revenue-sharing arrangements; Internet connection and co-location charges and other platform operating expenses, including depreciation of the systems and hardware used to build and operate our content creation and distribution platform; expenses related to creating, rewriting, or auditing certain content units; and personnel costs relating to in-house editorial, customer service, and information technology.

Product Costs

Product costs consist of outsourced product manufacturing costs, artist royalties and personnel costs.

9


Shipping and Handling

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

Deferred Revenue

Deferred revenue consists of amounts received from customers before we have met all four criteria for the recognition of revenue. Deferred revenue includes payments received from sales of our products on Society6 prior to delivery of such products; payments made for original art and prints sold via Saatchi Art that are collected prior to the completion of the return period; and amounts received from customers of our social media services in advance of our performance of such services. Deferred revenue for social media services is recognized as revenue on a systematic basis that is proportionate to the services that have been rendered.

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 the 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—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 properties on 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 when the underlying economic benefits are expected to be realized and based on our estimates of the projected cash flows from advertising revenue expected to be generated by the deployment of such 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.

Google, the largest provider of search engine referrals to the majority of our online properties, 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 online properties and our customers’ online properties. To date, 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. 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 units from our content library, resulting in $2.4 million, $2.1 million and $5.9 million of related accelerated amortization expense in 2013, 2012 and 2011, respectively. We expect to remove additional content over the next year, which may result in significant additional accelerated amortization in the periods such actions occur.

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.

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Long-lived Assets

We evaluate the recoverability of our long-lived tangible and intangible 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 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. In light of recent revenue declines we have evaluated certain of our long-lived assets for impairment, however, through September 30, 2014, we have identified no such impairment losses. 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.

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 in a manner that indicates 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, a decline in our stock price leading to an extended period when our market capitalization is less than the book value of our net assets 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 September 30, 2014, we determined that we have two reporting units: (1) our Content & Media business, which includes our Society6 business (which has been managed together with the Content & Media business since its acquisition and through the current quarter); and (2) our newly acquired Saatchi Art business. When testing goodwill for impairment, we first perform a qualitative assessment to determine whether it is necessary to perform step one of a two-step goodwill impairment test for each reporting unit. We are required to perform step one only if we conclude that it is more likely than not that a reporting unit’s fair value is less than the carrying value of its assets. Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair values of our reporting units with their respective carrying values, including goodwill. If the estimated fair value of a 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 measure the amount of the impairment loss, if any. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit, but may require valuations of certain internally generated and unrecognized intangible assets such as our software, technology, patents and trademarks.

We test goodwill for impairment in the fourth quarter of each year unless there are interim indicators that suggest that it is more likely than not that goodwill may be impaired. Due to unexpected revenue declines in the third quarter of 2014 attributable to lower traffic and monetization yield on certain of our Content & Media websites, we lowered our future cash flow expectations. As a result of the decline in our cash flow forecast as well as a sustained decline in our market capitalization which remained at a level below the book value of our net assets for an extended period of time, including as of September 30, 2014, we performed an interim assessment of impairment of the goodwill in our Content & Media reporting unit in the third quarter of 2014.  Due to the complexity and effort required to estimate the fair value of the Content & Media reporting unit in step one of the impairment test and to estimate the fair value of all assets and liabilities of the Content & Media reporting unit in the second step of the test, the fair value estimates were derived based on preliminary assumptions and analyses that are subject to change. Based on our preliminary analyses, the implied fair value of goodwill was substantially lower than the carrying value of goodwill for the Content & Media reporting unit and as a result, we estimated that the implied fair value of the goodwill in the Content & Media reporting unit was zero. Accordingly, we recorded our best estimate of $232.3 million for the goodwill impairment charge during the third quarter of 2014, which is included in Goodwill impairment charge in the Consolidated Statements of Operations. The measurement of impairment will be completed in the fourth quarter of 2014 and any adjustment to the preliminary goodwill impairment charge, if any, would be recognized when we finalize the

11


second step of the goodwill impairment test as part of the annual goodwill impairment analysis at that time. In addition, 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 and we may be required to record additional impairment charges in future periods.

 

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. Our stock-based payment awards are comprised principally of restricted stock units, restricted stock awards and stock options.

For stock-based payment awards issued to employees with service and/or performance based vesting conditions the fair value is estimated using the Black-Scholes-Merton option pricing model. For premium-priced stock options with service and/or performance-based vesting conditions the fair value is estimated using the Hull-White 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 expense is classified in the consolidated statement of operations based on the department to which the related employee provides service.

We account for stock-based payment awards issued to non-employees in accordance with the guidance for equity-based payments to non-employees. We believe that the fair value of stock-based payment awards is more reliably measured than the fair value of the services received. Stock option awards to non-employees are accounted for at fair value using the Black-Scholes-Merton option pricing model. 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 and Hull-White option pricing models require 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 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. We use 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.

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We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. We recognize interest and penalties accrued related to unrecognized tax benefits in our income tax (benefit) provision in the accompanying condensed consolidated statements of operations.

Net Income (Loss) Per Share

Basic net 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 income (loss) attributable to common stockholders is increased for cumulative preferred stock dividends earned during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average common shares outstanding plus potentially dilutive common shares. RSUs and other restricted awards are considered outstanding common shares and included in the computation of basic income (loss) per share as of the date that all necessary conditions of vesting are satisfied. RSUs, stock options and stock issued pursuant to the ESPP are excluded from the diluted net income (loss) per share calculation when their impact is antidilutive. We reported a net loss for the three and nine months ended September 30, 2014, and as a result, all potentially dilutive common shares are considered antidilutive for these periods.

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, 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 amounts approximate fair value because they bear interest at variable rates that approximate 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. (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 net income (loss) from discontinued operations in the unaudited condensed 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. The financial results of Rightside are presented as discontinued operations in our accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 (refer to Note 17 for additional information).

 

Our policy for discontinued operations reflects a revised standard on reporting discontinued operations and disclosures of disposals of components of an entity issued by the Financial Accounting Standards Board in April 2014, which changed the criteria for reporting a discontinued operation. The revised standard applies prospectively to new disposals and new held-for-sale classifications of components of an entity that occur 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 Creativebug and CoveritLive businesses, which we classified as held-for-sale in the second quarter of 2014, were not reported as discontinued operations because we concluded that they were not individually significant components of our operations and therefore did not meet the definition of a discontinued operation under the new guidance. We sold our Creativebug business in July 2014 and received $10.0 million in cash,

13


inclusive of $1.0 million held in escrow for one year from the closing date as a holdback amount to cover indemnity claims, resulting in a gain on sale of $0.2 million. We also sold our CoveritLive business in July 2014 and received $4.5 million of cash and promissory note with a principal amount of $5.6 million, resulting in a gain on sale of $0.6 million. Under our prior accounting policy for discontinued operations, the impact of these disposition transactions would have been to reclassify the following activity in our condensed consolidated statements of operations from continuing operations to discontinued operations:

 

 

 

September 30, 2014

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

(in thousands)

 

Service revenue

 

$

261

 

 

$

1,842

 

Service costs

 

 

176

 

 

 

1,038

 

Sales and marketing

 

 

60

 

 

 

559

 

Product development

 

 

80

 

 

 

1,432

 

General and administrative

 

 

65

 

 

 

889

 

Amortization of intangible assets

 

 

62

 

 

 

890

 

Loss before income taxes

 

 

(182

)

 

 

(2,966

)

Income tax benefit

 

 

238

 

 

 

202

 

Net income (loss)

 

$

56

 

 

$

(2,764

)

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Further, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. The new guidance is effective for reporting periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or cumulative effect approach to adopt ASU No. 2014-09. We are currently evaluating the new guidance and have not determined the impact this standard may have on our consolidated financial statements or the method of adoption.

 

3. Property and Equipment

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

 

 

September 30,

 

 

 

 

December 31,

 

 

2014

 

 

 

 

2013

 

Computers and other related equipment

$

28,295

 

 

 

 

$

43,010

 

Purchased and internally developed software

 

48,553

 

 

 

 

 

65,632

 

Furniture and fixtures

 

3,000

 

 

 

 

 

3,868

 

Leasehold improvements

 

7,591

 

 

 

 

 

9,075

 

 

 

87,439

 

 

 

 

 

121,585

 

Less accumulated depreciation

 

(63,104

)

 

 

 

 

(79,392

)

Property and equipment, net

$

24,335

 

 

 

 

$

42,193

 

 

14


As a result of shortening our estimated useful lives for certain assets, we recorded accelerated depreciation expense of approximately $0.2 million and $0.1 million for the three months ended September 30, 2014 and 2013, respectively, and $1.1 million and $0.6 million for the nine months ended September 30, 2014 and 2013, respectively.

 

Total depreciation expense for the periods shown is classified as follows (in thousands):

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Service costs

$

1,559

 

 

$

2,226

 

 

$

5,123

 

 

$

7,381

 

Sales and marketing

 

37

 

 

 

65

 

 

 

115

 

 

 

217

 

Product development

 

135

 

 

 

150

 

 

 

382

 

 

 

497

 

General and administrative

 

1,112

 

 

 

1,089

 

 

 

3,628

 

 

 

2,714

 

Discontinued operations

 

559

 

 

 

1,576

 

 

 

4,662

 

 

 

4,526

 

Total depreciation

$

3,402

 

 

$

5,106

 

 

$

13,910

 

 

$

15,335

 

 

4. Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

September 30, 2014

 

 

Gross carrying amount

 

 

Accumulated amortization

 

 

Net carrying amount

 

Owned website names

$

3,409

 

 

$

(3,320

)

 

$

89

 

Customer relationships

 

8,607

 

 

 

(8,607

)

 

 

-

 

Artist relationships

 

12,482

 

 

 

(4,013

)

 

 

8,469

 

Media content

 

142,008

 

 

 

(108,216

)

 

 

33,792

 

Technology

 

28,041

 

 

 

(22,265

)

 

 

5,776

 

Non-compete agreements

 

253

 

 

 

(127

)

 

 

126

 

Trade names

 

10,371

 

 

 

(5,297

)

 

 

5,074

 

Content publisher relationships

 

2,092

 

 

 

(2,065

)

 

 

27

 

 

$

207,263

 

 

$

(153,910

)

 

$

53,353

 

 

 

 

December 31, 2013

 

 

Gross carrying amount

 

 

Accumulated amortization

 

 

Net carrying amount

 

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

 

 

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

 

The table below includes accelerated amortization charges that were immaterial for the three months ended September 30, 2014 and $0.1 million for the three months ended September 30, 2013, and $1.6 million and $0.5 million, for the nine months ended September 30, 2014 and 2013, respectively, as a result of our removal of certain content units from our library.

15


Total amortization expense for the periods shown is classified as shown below (in thousands):

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Service costs

$

5,419

 

 

$

6,572

 

 

$

17,489

 

 

$

19,774

 

Sales and marketing

 

841

 

 

 

791

 

 

 

3,828

 

 

 

1,078

 

Product development

 

989

 

 

 

1,175

 

 

 

3,184

 

 

 

3,310

 

General and administrative

 

138

 

 

 

199

 

 

 

701

 

 

 

470

 

Discontinued operations

 

645

 

 

 

1,877

 

 

 

4,244

 

 

 

6,092

 

Total amortization

$

8,032

 

 

$

10,614

 

 

$

29,446

 

 

$

30,724

 

 

 

 

5. Other Assets

Other assets consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

gTLD deposits

$

-

 

 

$

21,252

 

Long-term portion of promissory note

 

4,402

 

 

 

-

 

Other

 

1,551

 

 

 

4,070

 

Other assets

$

5,953

 

 

$

25,322

 

 

During July of 2014 we sold our CoveritLive business and received a promissory note with a principal amount of $5.6 million and an estimated fair value of $4.8 million at September 30, 2014, of which the long-term portion was recorded in other long-term assets.

Other assets at December 31, 2013 includes $0.9 million of restricted cash comprising a collateralized letter of credit relating to applications we made under a program designed to expand the total number of domain name suffixes, or gTLDs, approved by the Internet Corporation for Assigned Names and Numbers (“ICANN”) prior to the Separation. Following the Separation, we no longer have any obligations relating to applications under such program or such letter of credit.

 

6. Other Balance Sheet Items

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