NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
1.Basis of Presentation
J2 Global, Inc., together with its subsidiaries (“J2 Global”, the “Company”, “our”, “us”, or “we”), is a leading provider of internet services. Through our Cloud Services business, we provide cloud services to consumers and businesses and license our intellectual property (“IP”) to third parties. In addition, the Cloud Services business includes fax, voice, backup, security, consumer privacy and protection (“CPP”), and email marketing products. Our Digital Media business specializes in the technology, gaming, broadband, business to business (“B2B”), and healthcare markets offering content, tools and services to consumers and businesses.
The accompanying interim condensed consolidated financial statements include the accounts of J2 Global and its direct and indirect wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements although the Company believes that the disclosures made are adequate to make that information not misleading. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these interim financial statements. It is suggested that these financial statements be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2019 included in our Annual Report (Form 10-K) filed with the SEC on March 2, 2020. Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein.
The results of operations for this interim period are not necessarily indicative of the operating results for the full year or for any future period.
COVID-19
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus disease (“COVID-19”) as a pandemic. The global impact of the COVID-19 pandemic has had a negative effect on the global economy, disrupting the financial markets creating increasing volatility and overall uncertainty.
The Company began to experience modest adverse impacts of the COVID-19 pandemic in the second quarter of 2020 and these adverse impacts are expected to continue in the third quarter of 2020, and possibly longer. Despite the modest adverse impacts, there are no indications that the COVID-19 pandemic has resulted in a material decline in the carrying value of assets, (except for equity method investments), or a material change in the estimate of any contingent amounts, recorded in the Company’s condensed consolidated balance sheet as of March 31, 2020. However, there is uncertainty as to the duration and overall impact of the COVID-19 pandemic, which could result in an adverse material change in a future period to the Company’s results of operations, financial position or liquidity.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, including judgments about investment classifications and the reported amounts of net revenue and expenses during the reporting period. The Company believes that its most significant estimates are those related to revenue recognition, valuation and impairment of investments, its assessment of ownership interests as variable interest entities and the related determination of consolidation, share-based compensation expense, fair value of assets acquired and liabilities assumed in connection with business combinations, long-lived and intangible asset impairment, contingent consideration, income taxes and contingencies and allowances for doubtful accounts. On an ongoing basis, management evaluates its estimates based on historical experience and on various other factors that the Company believes to be reasonable under the circumstances. Actual results could materially differ from those estimates.
Additionally, the full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated. However, the Company has made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and the actual results, our condensed consolidated financial statements could be materially affected.
Allowances for Doubtful Accounts
J2 Global reserves for receivables it may not be able to collect. The reserves for the Company’s Cloud Services business are typically driven by the volume of credit card declines and past due invoices and are based on historical experience as well as an evaluation of current market conditions. The reserves for the Company’s Digital Media business are typically driven by past due invoices based on historical experience. On an ongoing basis, management evaluates the adequacy of these reserves.
Revenue Recognition
J2 Global recognizes revenue when the Company satisfies its obligation by transferring control of the goods or services to its customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services (see Note 3 - Revenues).
Principal vs. Agent
The Company determines whether revenue should be reported on a gross or net basis by assessing whether the Company is acting as the principal or an agent in the transaction. If the Company is acting as the principal in a transaction, the Company reports revenue on a gross basis. If the Company is acting as an agent in a transaction, the Company reports revenue on a net basis. In determining whether the Company acts as the principal or an agent, the Company follows the accounting guidance under Topic 606 for principal-agent considerations and assesses: (i) if another party is involved in providing goods or services to the customer and (ii) whether the Company controls the specified goods or services prior to transferring control to the customer.
Sales Taxes
The Company has made an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are (i) both imposed on and concurrent with a specific revenue-producing transaction and (ii) collected by the Company from a customer.
Investments
The Company accounts for its investments in debt securities in accordance with ASC Topic No. 320, Investments - Debt Securities (“ASC 320”). Debt investments are typically comprised of corporate debt securities. J2 Global determines the appropriate classification of its investments at the time of acquisition and evaluates such determination at each balance sheet date. Trading securities are those investments that the Company intends to sell within a few hours or days and are carried at fair value, with unrealized gains and losses included in investment income. Available-for-sale debt securities are those investments J2 Global does not intend to hold to maturity and can be sold. Available-for-sale securities are carried at fair value with unrealized gains and losses included in other comprehensive income. Held-to-maturity securities are those investments which the Company has the ability and intent to hold until maturity and are recorded at amortized cost. All debt securities are accounted for on a specific identification basis.
The Company accounts for its investments in equity securities in accordance with ASC Topic No. 321, Investments - Equity Securities (“ASC 321”) which requires the accounting for equity investments (other than those accounted for using the equity method of accounting) generally be measured at fair value for equity securities with readily determinable fair values. For equity securities without a readily determinable fair value that are not accounted for by the equity method, the Company measures the equity security using cost, less impairment, if any, and plus or minus observable price changes arising from orderly transactions in the same or similar investment from the same issuer. Any unrealized gains or losses will be reported in current earnings (see Note 5 - Investments).
Variable Interest Entities (“VIE”)
A VIE requires consolidation by the entity’s primary beneficiary. The Company evaluates its investments in entities in which it is involved to determine if the entity is a VIE and if so, whether it holds a variable interest and is the primary beneficiary. The Company has determined that it holds a variable interest in its investment as a limited partner in the OCV Fund I, LP (“OCV Fund”, “OCV” or the “Fund”). In determining whether the Company is deemed to be the primary beneficiary of the VIE, both of the following characteristics must be present:
a) the Company has the power to direct the activities of the VIE that most significantly impacts the VIEs economic performance (the power criterion); and
b) the Company has the obligation to absorb losses of the VIE, or the right to receive benefits of the VIE, that could potentially be significant to the VIE (the economic criterion).
The Company has concluded that, as a limited partner, although the obligations to absorb losses or benefit from the gains is not insignificant, the Company does not have “power” over OCV because it does not have the ability to direct the significant decisions which impact the economics of OCV. J2 believes that the OCV general partner, as a single decision maker, holds the ability to make the decisions about the activities that most significantly impact the OCV Fund’s economic performance. As a result, the Company has concluded that it will not consolidate OCV, as it is not the primary beneficiary of the OCV Fund, and will account for this investment under the equity-method of accounting. See Note 5, “Investments”.
OCV qualifies as an investment company under ASC 946 - Financial Services, Investment Companies (“ASC 946”). Under ASC Topic 323, Investments - Equity Method and Joint Ventures, an investor that holds investments that qualify for specialized industry accounting for investment companies in accordance with ASC 946 should record its share of the earnings or losses, realized or unrealized, as reported by its equity method investees in the Condensed Consolidated Statements of Operations.
The Company recognizes its equity in the net earnings or losses relating to the investment in OCV on a one-quarter lag due to the timing and availability of financial information from OCV. If the Company becomes aware of a significant decline in value that is other-than-temporary, the loss will be recorded in the period in which the Company identifies the decline.
Impairment or Disposal of Long-Lived Assets
J2 Global accounts for long-lived assets, which include property and equipment and identifiable intangible assets with finite useful lives (subject to amortization), in accordance with the provisions of FASB ASC Topic No. 360, Property, Plant, and Equipment (“ASC 360”), which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to the expected undiscounted future net cash flows generated by the asset. If it is determined that the asset may not be recoverable, and if the carrying amount of an asset exceeds its estimated fair value, an impairment charge is recognized to the extent of the difference.
J2 Global assessed whether events or changes in circumstances have occurred that potentially indicate the carrying amount of long-lived assets may not be recoverable. No impairment was recorded in in the first quarter of 2020.
The Company classifies its long-lived assets to be sold as held for sale in the period (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for sale, the Company stops recording depreciation expense on the asset. The Company assesses the fair value of a long-lived asset less any costs to sell at each reporting period and until the asset is no longer classified as held for sale.
Business Combinations and Valuation of Goodwill and Intangible Assets
J2 Global applies the acquisition method of accounting for business combinations in accordance with GAAP, which requires the Company to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets, including identifiable intangible assets, and liabilities acquired. Such estimates may be based on significant unobservable inputs and assumptions such as, but not limited to, revenue growth rates, gross margins, customer attrition rates, royalty rates, discount rates and terminal growth rate assumptions. J2 Global uses established valuation techniques and may engage reputable valuation specialists to assist with the valuations. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Intangible assets resulting from the acquisitions of entities accounted for using the acquisition method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable intangible assets are comprised of purchased customer relationships, trademarks and trade names, developed technologies and other intangible assets. Intangible assets subject to amortization are amortized over the period of estimated economic benefit ranging from 1 to 20 years. In accordance with FASB ASC Topic No. 350, Intangibles - Goodwill and Other (“ASC 350”), goodwill and other intangible assets with indefinite lives are not amortized but tested annually for impairment or more frequently if J2 Global believes indicators of impairment exist. In connection with the annual impairment test for goodwill, the Company has the option to perform a qualitative assessment in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then it performs the impairment test upon goodwill. The impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company generally determines the fair value of its reporting units using the income approach methodology of valuation. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, an impairment loss is recognized for the difference. The Company performed a qualitative assessment which determined that one business unit required further consideration and necessitated a quantitative assessment as of March 31, 2020. The qualitative assessment took into consideration macroeconomic, industry and market conditions, overall financial performance and any other relevant company-specific events. The quantitative assessment did not indicate that the fair value was lower than the business unit’s carrying value, accordingly, no impairment was recorded. J2 Global concluded that there were no impairments in the first quarter of 2020.
In addition, the COVID-19 pandemic could have an adverse impact on the Company’s consolidated financial results in the second quarter of 2020, and possibly longer. As of March 31, 2020, there were no indications that the carrying value of goodwill and other intangible assets may not be recoverable. However, a prolonged adverse impact of the COVID-19 pandemic on the Company’s consolidated financial results may require an impairment charge related to one or more of these assets in a future period.
Contingent Consideration
J2 Global measures the contingent earn-out liabilities in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy (see Note 6 - Fair Value Measurements). The Company may use various valuation techniques depending on the terms and conditions of the contingent consideration including a Monte-Carlo simulation. This simulation uses a probability distribution for each significant input to produce hundreds or thousands of possible outcomes and the results are analyzed to determine probabilities of different outcomes occurring. Significant increases or decreases to these inputs in isolation would result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and the amount paid will be recorded in earnings. The amount paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in its consolidated statements of cash flows. Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities.
J2 Global reviews and re-assesses the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could be materially different from the initial estimates or prior quarterly amounts. Changes in the estimated
fair value of its contingent earn-out liabilities are reported in operating income. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income.
Income Taxes
J2 Global’s income is subject to taxation in both the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. J2 Global establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves for tax contingencies are established when the Company believes that certain positions might be challenged despite the Company’s belief that its tax return positions are fully supportable. J2 Global adjusts these reserves in light of changing facts and circumstances, such as the outcome of a tax audit or lapse of a statute of limitations. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
J2 Global accounts for income taxes in accordance with FASB ASC Topic No. 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the net deferred tax assets will not be realized. The valuation allowance is reviewed quarterly based upon the facts and circumstances known at the time. In assessing this valuation allowance, J2 Global reviews historical and future expected operating results and other factors, including its recent cumulative earnings experience, expectations of future taxable income by taxing jurisdiction and the carryforward periods available for tax reporting purposes, to determine whether it is more likely than not that deferred tax assets are realizable.
ASC 740 provides guidance on the minimum threshold that an uncertain income tax benefit is required to meet before it can be recognized in the financial statements and applies to all income tax positions taken by a company. ASC 740 contains a two-step approach to recognizing and measuring uncertain income tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit will be recorded. Uncertain income tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold. J2 Global recognized accrued interest and penalties related to uncertain income tax positions in income tax expense on its consolidated statements of operations.
In addition, on March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was enacted into law and provides for changes to various tax laws that impact businesses. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions and technical corrections to tax depreciation methods for qualified improvement property.
The CARES Act also appropriated funds for the Small Business Administration (“SBA”) Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. The Company did not seek to borrow any funds under the program.
We do not believe these provisions have a significant impact to our current and deferred income tax balances. The Company anticipates it will benefit from the technical correction to tax depreciation related to qualified improvement property and has elected to defer income tax payments and employer side social security payments where eligible. As further guidance is released regarding the CARES Act, we will record adjustments to our tax balances, as necessary.
Share-Based Compensation
J2 Global accounts for share-based awards to employees and non-employees in accordance with the provisions of FASB ASC Topic No. 718, Compensation - Stock Compensation (“ASC 718”). Accordingly, J2 Global measures share-based compensation expense at the grant date, based on the fair value of the award, and recognizes the expense over the employee’s requisite service period using the straight-line method. The measurement of share-based compensation expense is based on
several criteria, including but not limited to the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest rate, dividend rate and award cancellation rate. These inputs are subjective and are determined using management’s judgment. If differences arise between the assumptions used in determining share-based compensation expense and the actual factors, which become known over time, J2 Global may change the input factors used in determining future share-based compensation expense. Any such changes could materially impact the Company’s results of operations in the period in which the changes are made and in periods thereafter. The Company estimates the expected term based upon the historical exercise behavior of its employees.
Reclassifications
Certain prior year reported amounts have been reclassified to conform to the 2020 presentation.
2. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. The amendments in this ASU align the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements. In addition, the amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20; instead impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842: Leases. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 Financial Instruments. The amendments in this ASU further clarify certain aspects of ASU No. 2016-13. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. The amendments in this ASU provide transition relief for ASU No. 2016-13 by providing an option to irrevocably elect the fair value option for certain financial assets measured at an amortized cost basis. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. This ASU clarifies the effective dates of each related standards update and staggers such dates among filers and other types of entities. Also in November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This ASU clarifies or addresses certain aspects of Update 2016-13. Specifically, it addresses (1) expected recoveries for purchased financial assets with credit deterioration; (2) transition relief for troubled debt restructuring; (3) disclosures related to accrued interest variables; (4) financial assets secured by collateral maintenance provisions; and (5) a conforming Amendment to Subtopic 805-20. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842). This ASU codifies SEC Staff Accounting Bulletin No. 119. Each of the ASUs previously mentioned are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has adopted these ASUs in the first quarter of 2020 using the modified retrospective method and has determined there is an immaterial impact on its financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove, add, and modify certain disclosures. The ASU removes the following disclosure requirements from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation process for Level 3 fair value measurements; and (4) certain other requirements for nonpublic entities. The ASU adds the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, disclosure of other quantitative information may be more appropriate if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU modifies disclosure requirements in Topic 820 relating to timing of liquidation of an investee’s assets, the disclosure of the date when restrictions from redemption might lapse, the intention of the measurement uncertainty disclosure, and certain other requirements for nonpublic entities. This ASU is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has adopted this ASU in the first quarter of 2020 and has determined there to be an impact on its disclosures (see Note 6 - Fair Value Measurements).
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the effect of this ASU on its financial statements and related disclosures.
In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investment - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this ASU clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the accounting for certain forward contracts and purchased options under Topic 815. This ASU identifies two main areas for improvement: (1) accounting for certain equity securities upon the application or discontinuation of the equity method of accounting and (2) scope considerations for forward contracts and purchased options on certain securities. The amendment states, as it is related to the first area of improvement, that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendment also states, as it is relates to forward contracts and purchased options on certain securities, an entity should consider certain criteria to determine the accounting for those forward contracts and purchased options. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the effect of this ASU on its financial statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments. The amendments in this ASU clarify or address seven areas of improvement: (1) fair value option disclosures; (2) applicability of the portfolio exception in Topic 820 to nonfinancial items; (3) disclosures for depository and lending institutions; (4) cross-reference to line-of-credit or revolving-debt arrangements guidance in Subtopic 470-50; (5) cross-reference to net asset value practical expedient in Subtopic 820-10; (6) interaction of Topic 842 and Topic 326; and (7) interaction of Topic 326 and Subtopic 860-20. This ASU is effective for certain issues upon adoption and others in 2020. The Company has adopted this ASU in the first quarter of 2020 and has determined there is no impact on its financial statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. LIBOR is expected to phased out by 2021. The amendments in this ASU are effective as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the effect of this ASU on its financial statements and related disclosures.
3.Revenues
Digital Media
Digital Media revenues are earned primarily from the delivery of advertising services, from subscriptions to services, data and information, and from licensing.
Revenue is earned from the delivery of advertising services on the Company’s owned and operated websites and on those websites that are part of Digital Media’s advertising network. Depending on the individual contracts with the customer, revenue for these services are recognized over the contract period when any of the following performance obligations are satisfied: (i) when an advertisement is placed for viewing, (ii) when a qualified sales lead is delivered, (iii) when a visitor “clicks through” on an advertisement or (iv) when commissions are earned upon the sale of an advertised product.
Revenue from subscriptions is earned through the granting of access to, or delivery of, data products or services to customers. Subscriptions cover video games and related content, health information, data and other copyrighted material.
Revenues under such agreements are recognized over the contract term for use of the service. Revenues are also earned from listing fees, subscriptions to online publications, and from other sources. Subscription revenues are recognized over time.
J2 Global generates Digital Media revenues through the license of certain assets to clients. Assets are licensed for clients’ use in their own promotional materials or otherwise. Such assets may include logos, editorial reviews, or other copyrighted material. Revenues under such license agreements are recognized over the contract term for use of the asset. Technology assets are also licensed to clients. These assets are recognized over the term of the access period. The Digital Media business also generates revenue from other sources which include marketing and production services. Such other revenues are generally recognized over the period in which the products or services are delivered.
J2 Global also generates Digital Media revenues from transactions involving the sale of perpetual software licenses, related software support and maintenance, hardware used in conjunction with its software, and other related services. Revenue is recognized for these software transactions with multiple performance obligations after (i) the Company has had an approved contract and is committed to perform the respective obligations and (ii) the Company can identify and quantify each obligation and its respective selling price. Once the respective performance obligations have been identified and quantified, revenue will be recognized when the obligations are met, either over time or at a point in time depending on the nature of the obligation.
Revenues from software license performance obligations are generally recognized upfront at the point in time that the software is made available to the customer to download and use. Revenues for related software support and maintenance performance obligations are related to technical support provided to customers as needed and unspecified software product upgrades, maintenance releases and patches during the term of the support period when they are available. The Company is obligated to make the support services available continuously throughout the contract period. Therefore, revenues for support contracts are generally recognized ratably over the contractual period the support services are provided. Hardware product and related software performance obligations, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a bundled performance obligation. The revenues for this bundled performance obligation are generally recognized at the point in time that the hardware and software products are delivered and ownership is transferred to the customer. Other service revenues are generally recognized over time as the services are performed.
The Company records revenue on a gross basis with respect to revenue generated (i) by the Company serving online display and video advertising across its owned and operated web properties, on third-party sites or on unaffiliated advertising networks, (ii) through the Company’s lead-generation business and (iii) through the Company’s subscriptions. The Company records revenue on a net basis with respect to revenue paid to the Company by certain third-party advertising networks who serve online display and video advertising across the Company’s owned-and-operated web properties and certain third-party sites.
Cloud Services
The Company’s Cloud Services revenues substantially consist of monthly recurring subscription and usage-based fees, which are primarily paid in advance by credit card. The Company defers the portions of monthly, quarterly, semi-annually and annually recurring subscription and usage-based fees collected in advance of the satisfaction of performance obligations and recognizes them in the period earned.
Along with our numerous proprietary Cloud Services solutions, the Company also generates revenues by reselling various third-party solutions, primarily through our email security and online backup lines of business. These third-party solutions, along with our proprietary products, allow the Company to offer customers a variety of solutions to better meet their needs. The Company records revenue on a gross basis with respect to reseller revenue because the Company has control of the specified good or service prior to transferring control to the customer.
Revenues from external customers classified by revenue source are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
Digital Media
|
|
|
|
|
2020
|
|
2019
|
|
Advertising
|
|
|
|
|
$
|
115,265
|
|
|
$
|
105,600
|
|
|
Subscription
|
|
|
|
|
45,428
|
|
|
40,378
|
|
|
Other
|
|
|
|
|
1,998
|
|
|
1,705
|
|
|
Total Digital Media revenues
|
|
|
|
|
$
|
162,691
|
|
|
$
|
147,683
|
|
|
|
|
|
|
|
|
|
|
|
Cloud Services
|
|
|
|
|
|
|
|
|
Subscription
|
|
|
|
|
$
|
169,748
|
|
|
$
|
151,790
|
|
|
Other
|
|
|
|
|
36
|
|
|
455
|
|
|
Total Cloud Services revenues
|
|
|
|
|
$
|
169,784
|
|
|
$
|
152,245
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
Elimination of inter-segment revenues
|
|
|
|
|
(83)
|
|
|
(36)
|
|
|
Total Revenues
|
|
|
|
|
$
|
332,393
|
|
|
$
|
299,893
|
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
Point in time
|
|
|
|
|
$
|
6,497
|
|
|
$
|
6,805
|
|
|
Over time
|
|
|
|
|
325,896
|
|
|
293,088
|
|
|
Total
|
|
|
|
|
$
|
332,393
|
|
|
$
|
299,893
|
|
The Company has recorded $68.5 million and $53.2 million of revenue for the three months ended March 31, 2020 and 2019, respectively, which was previously included in the contract liability balance as of the beginning of each respective year.
As of March 31, 2020, the Company acquired $0.5 million of deferred revenue in connection with the Company’s business acquisitions (see Note 4 - Business Acquisitions) which are subject to purchase accounting adjustments.
Performance Obligations
The Company’s contracts with customers may include multiple performance obligations. For such arrangements, revenues are allocated to each performance obligation based on its relative standalone selling price.
The Company satisfies its performance obligations within the Digital Media business upon delivery of services to its customers. In addition, the Company provides content to its advertising partners which the Company sells to its partners’ customer base and receives a revenue share based on the terms of the agreement.
The Company satisfies its performance obligations within the Cloud Services business upon delivery of services to its customers. Payment terms vary by type and location of our customers and the services offered. The term between invoicing and when payment is due is not significant. Due to the nature of the services provided, there are no obligations for returns.
Significant Judgments
In determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is also required to determine the standalone selling price for each distinct performance obligation.
Performance Obligations Satisfied Over Time
The Company’s Digital Media business consists primarily of performance obligations that are satisfied over time. This was determined based on a review of the contracts and the nature of the services offered, where the customer simultaneously receives and consumes the benefit of the services provided. Satisfaction of these performance obligations is evidenced in the following ways:
Advertising
•Website reporting by the Company, the customer, or a third-party contains the delivery evidence needed to satisfy the performance obligations within the advertising contract
•Successfully delivered leads are evidenced by either delivery reports from the Company’s internal lead management systems or through e-mail communication and/or other evidence of delivery showing acceptance of leads by the customer
•Commission is evidenced by direct site reporting from the affiliate or via direct confirmation from the customer
Subscription
•Evidence of delivery is contained in the Company’s systems or from correspondence with the customer which tracks when a customer accepts delivery of any assets, digital keys or download links
The Company has concluded revenue is recognized based on delivery of services over the contract period for advertising and on a straight-line basis over the contract period for subscriptions. The Company believes that the methods described are a faithful depiction of the transfer of goods and services.
The Company’s Cloud Services business consists primarily of performance obligations that are satisfied over time. This has been determined based on the fact that the nature of services offered are subscription based and include fax, voice, backup, security, CPP, and email marketing products where the customer simultaneously receives and consumes the benefit of the services provided regardless of whether the customer uses the services or not. Depending on the individual contracts with the customer, revenue for these services are recognized over the contract period when any of the following materially distinct performance obligations are satisfied:
•Faxing capabilities are provided
•Voice services are provided
•Email marketing services are provided
•Consumer privacy services are provided
•Security solutions, including email and endpoint are provided
•Online data backup capabilities are provided
The Company has concluded that the best measure of progress toward the complete satisfaction of the performance obligation over time is a time-based measure. The Company recognizes revenue on a straight-line basis throughout the subscription period and believes that the method used is a faithful depiction of the transfer of goods and services.
Performance Obligations Satisfied at a Point in Time
The Company’s Digital Media business has technology subscriptions that have standalone functionality. As a result, they are considered to be functional intellectual property where the performance obligations are satisfied at a point in time. This is evidenced once a digital key is delivered to the customer. Once the key is delivered to the customer, the customer has full control of the technology and the Company has no further performance obligations. The Company has concluded that revenue is recognized once the digital key is delivered. The Company believes that this method is a faithful depiction of the transfer of goods and services.
Practical Expedients
Existence of a Significant Financing Component in a Contract
As a practical expedient, the Company has not assessed whether a contract has a significant financing component because the Company expects at contract inception that the period between payment by the customer and the transfer of promised goods or services by the Company to the customer will be one year or less. In addition, the Company has determined that the payment terms that the Company provides to its customers are structured primarily for reasons other than the provision of finance to the Company. The Company typically charges a single upfront amount for the services because other payment terms would affect the nature of the risk assumed by the Company to provide service given the costs of the customer acquisition and the highly competitive and commoditized nature of the business we operate which allows customers to easily move from one provider to another. This additional risk may make it uneconomical to provide the service.
Costs to Fulfill a Contract
The Company’s revenues are primarily generated from customer contracts that are for one year or less. Costs primarily consist of incentive compensation paid based on the achievements of sales targets in a given period for related revenue streams and are recognized in the month when the revenue is earned. Incentive compensation is paid on the issuance or renewal of the customer contract. As a practical expedient, for amortization periods which are determined to be one year or less, the Company expenses any incremental costs of obtaining the contract with a customer when incurred. For those customers with amortization periods determined to be greater than one year, the Company capitalizes and amortizes the expenses over the period of benefit.
In addition, the Company partners with various affiliates in order to generate a portion of its revenue for certain lines of business. The commissions earned by the Company’s affiliates are incentive based and are paid on the acquisition of new customers in a given period. For those customers with amortization periods determined to be greater than one year, the Company capitalizes and amortizes the expenses over the period of benefit.
Revenues Invoiced
The Company has applied the practical expedient for certain revenue streams to exclude the value of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed.
4.Business Acquisitions
The Company uses acquisitions as a strategy to grow its customer base by increasing its presence in new and existing markets, expand and diversify its service offerings, enhance its technology, and acquire skilled personnel.
The Company completed the following acquisitions during the first three months of fiscal 2020, paying the purchase price in cash in each transaction: (a) an asset purchase of EDC Systems Inc. (operating under the name “SRFax”), acquired on February 18, 2020, a Canadian-based provider of fax solutions; and (b) another immaterial acquisition of a digital media business.
The condensed consolidated statement of operations since the date of each acquisition and balance sheet as of March 31, 2020, reflect the results of operations of all 2020 acquisitions. For the three months ended March 31, 2020, these acquisitions contributed $0.8 million to the Company’s revenues. Net income contributed by these acquisitions was not separately identifiable due to J2 Global’s integration activities and is impracticable to provide. Total consideration for these transactions was $27.0 million, net of cash acquired and assumed liabilities and is subject to certain post-closing adjustments which may increase or decrease the final consideration paid.
The following table summarizes the allocation of the purchase consideration for these acquisitions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities
|
|
Valuation
|
|
Accounts receivable
|
$
|
|
194
|
|
|
|
|
|
|
Property and equipment
|
|
44
|
|
|
|
|
|
|
Trade names
|
|
917
|
|
|
Customer relationships
|
|
8,418
|
|
|
Goodwill
|
|
16,741
|
|
|
|
|
|
|
Other intangibles
|
|
1,336
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
(94)
|
|
|
|
|
|
|
Deferred revenue
|
|
(533)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
|
27,023
|
|
During the three months ended March 31, 2020, the purchase price accounting has been finalized for immaterial consumer privacy and protection businesses. The initial accounting for all 2020 acquisitions is incomplete and subject to change, which may be significant. J2 Global has recorded provisional amounts which may be based upon past acquisitions with similar attributes for certain intangible assets (including trade names, software and customer relationships), preliminary acquisition date working capital and related tax items.
During the three months ended March 31, 2020, the Company recorded adjustments to the initial working capital and to the purchase accounting due to the finalization of prior period acquisitions in the Voice, Backup, Security and CPP businesses which resulted in a net decrease in goodwill of $2.5 million. In addition, the Company recorded adjustments to the initial working capital due to the finalization of prior period acquisitions in the Digital Media business, which resulted in a net decrease in goodwill of $14.0 thousand (see Note 7 - Goodwill and Intangible Assets). Such adjustments had an immaterial impact on the amortization expense within the condensed consolidated statement of operations for the three months ended March 31, 2020.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and represents intangible assets that do not qualify for separate recognition. Goodwill recognized associated with these acquisitions during the three months ended March 31, 2020 is $16.7 million, of which $16.7 million is expected to be deductible for income tax purposes.
5.Investments
Investments consist of equity and debt securities.
The Company determined the equity securities that were received as part of the consideration for the sale of Tea Leaves Health, LLC (“Tea Leaves”) in fiscal year 2017 are without a readily determinable fair value because these securities are privately held, not traded on any public exchanges and not an investment in a mutual fund or similar investment. As a result, management has elected to alternatively measure this investment at cost, less impairment, adjusted for subsequent observable price changes to estimate fair value. The Company will make a “reasonable effort” to identify any observable price changes for identical or similar investments with the issuer that are known are can be reasonably known. Any changes in the carrying value of the equity securities will be reported in current earnings as loss on investments, net. In addition, the Company determined that the shares of redeemable preferred stock that were also received as part of the consideration for the sale of Tea Leaves are corporate debt securities and are classified as available-for-sale securities.
Furthermore, the COVID-19 pandemic has recently had an adverse impact on the global financial markets. A prolonged adverse impact of the COVID-19 pandemic could result in a decline in the equity and debt securities estimated fair value and, thus, a resulting charge to earnings in a future period.
The following table summarizes the gross unrealized gains and losses and estimated fair values for the Company’s securities without a readily determinable fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Impairment
|
|
Adjustments
|
|
Reported Amount
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
Equity securities
|
$
|
54,145
|
|
|
$
|
(23,769)
|
|
|
$
|
(480)
|
|
|
$
|
29,896
|
|
|
Total
|
$
|
54,145
|
|
|
$
|
(23,769)
|
|
|
$
|
(480)
|
|
|
$
|
29,896
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Equity securities
|
$
|
34,977
|
|
|
$
|
(4,164)
|
|
|
$
|
(3,678)
|
|
|
$
|
27,135
|
|
|
Total
|
$
|
34,977
|
|
|
$
|
(4,164)
|
|
|
$
|
(3,678)
|
|
|
$
|
27,135
|
|
In March 2020, a portion of the Company’s investment in equity securities declined in value primarily due to changes in the investee’s capital structure and overall market volatility. During the three months ended March 31, 2020, the Company recorded a $19.6 million impairment loss on equity securities, which is reflected in loss on investments, net in the condensed consolidated statements of operations.
During the year ended December 31, 2019, the Company recorded a $4.2 million impairment loss related to a portion of its equity securities without a readily determinable fair market value which is reflected in other expense, net in the consolidated statements of operations.
In a non-cash transaction of $18.3 million, the Company exchanged shares of redeemable preferred stock that were previously classified as available-for-sale corporate debt securities for a new series of preferred stock, classified as equity securities. During the three months ended March 31, 2020, the Company recognized a loss on exchange of $4.4 million, which is reflected in loss on investments, net in the condensed consolidated statements of operations.
During three months ended March 31, 2020, the Company purchased preferred stock for $0.8 million and recognized a gain of $3.2 million, which is reflected in loss on investments, net in the condensed consolidated statements of operations.
The following table summarizes the gross unrealized gains and losses and fair values for investments classified as available-for-sale investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
511
|
|
|
$
|
122
|
|
|
$
|
—
|
|
|
$
|
633
|
|
|
Total
|
$
|
511
|
|
|
$
|
122
|
|
|
$
|
—
|
|
|
$
|
633
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
23,256
|
|
|
$
|
112
|
|
|
$
|
(698)
|
|
|
$
|
22,670
|
|
|
Total
|
$
|
23,256
|
|
|
$
|
112
|
|
|
$
|
(698)
|
|
|
$
|
22,670
|
|
At March 31, 2020, the Company’s available-for-sale debt securities are carried at fair value, with the unrealized gains and losses reported as a component of other comprehensive income.
The following table summarizes J2 Global’s corporate debt securities designated as available-for-sale, classified by the contractual maturity date of the security (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Due within 1 year
|
$
|
—
|
|
|
$
|
—
|
|
|
Due within more than 1 year but less than 5 years
|
633
|
|
|
22,670
|
|
|
Due within more than 5 years but less than 10 years
|
—
|
|
|
—
|
|
|
Due 10 years or after
|
—
|
|
|
—
|
|
|
Total
|
$
|
633
|
|
|
$
|
22,670
|
|
Recognition and Measurement of Credit Loss of Debt Securities
The Company adopted ASU 2016-13, Financial Instrument-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments in the first quarter of 2020. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. This ASU also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded though an allowance for credit losses rather than a reduction in amortized cost basis of the securities. These changes will result in earlier recognition of credit losses.
The Company’s available-for-sale debt securities are carried at estimated fair value with any unrealized gains and losses, net of taxes, included in accumulated other comprehensive income (loss) in stockholders’ equity. Available- for-sale debt securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Expected credit losses on available-for-sale debt securities are recognized in other expense, net on our condensed consolidated statements of operations, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive loss in stockholders’ equity.
The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of March 31, 2020 and December 31, 2019, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
|
12 Months or Greater
|
|
|
|
Total
|
|
|
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
|
Corporate debt securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
|
12 Months or Greater
|
|
|
|
Total
|
|
|
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
|
Corporate debt securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,047
|
|
|
$
|
(698)
|
|
|
$
|
22,047
|
|
|
$
|
(698)
|
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,047
|
|
|
$
|
(698)
|
|
|
$
|
22,047
|
|
|
$
|
(698)
|
|
As of March 31, 2020 and December 31, 2019, we did not recognize any credit losses related to debt securities.
On September 25, 2017, the Company entered into a commitment to invest $200 million (approximately 76.6% of equity) in the OCV Fund. The total expected commitment to the OCV Fund is expected to be approximately $300 million. The primary purpose of the Fund is to provide a limited number of select investors with the opportunity to realize long-term appreciation from public and private companies, with a particular focus on the technology and life science industries. The general activities of the OCV Fund is to buy, sell, hold and otherwise invest in securities of every kind and nature and rights and options with respect thereto, including, without limitation, stock, notes, bonds, debentures and evidence of indebtedness; to exercise all rights, powers, privileges and other incidents of ownership or possession with respect to securities held or owned by
the OCV Fund; to enter into, make and perform all contracts and other undertakings; and to engage in all activities and transactions as may be necessary, advisable or desirable to carry out the foregoing.
The manager, OCV Management, LLC, and general partner of the Fund are entities with respect to which Richard S. Ressler, Chairman of the Board of Directors (the “Board”) of the Company, is indirectly the majority equity holder and a related party. As a limited partner in the Fund, the Company will pay an annual management fee to the manager equal to 2.0% (reduced by 10% each year beginning with the sixth year) of capital commitments. In addition, subject to the terms and conditions of the Fund’s limited partnership agreement, once the Company has received distributions equal to its invested capital, the Fund’s general partner would be entitled to a carried interest equal to 20%. The Fund has a six year investment period, subject to certain exceptions. The commitment was approved by the Audit Committee of the Board in accordance with the Company’s related-party transaction approval policy.
In the first three months of 2020, the Company received capital call notices from the management of OCV Management, LLC. for $22.8 million, inclusive of certain management fees, of which $22.8 million has been paid for the three months ended March 31, 2020. In the first three months of 2019, the Company received capital call notices from the management of OCV Management, LLC. for $9.8 million, inclusive of certain management fees, of which $9.8 million has been paid for the three months ended March 31, 2019.
The Company recognizes its equity in the net earnings or losses relating to the investment in OCV on a one-quarter lag due to the timing and availability of financial information from OCV. If the Company becomes aware of a significant decline in value that is other-than-temporary, the loss will be recorded in the period in which the Company identifies the decline.
During the three months ended March 31, 2020 and 2019, the Company recognized an investment loss of $4.3 million and $0.5 million, net of tax benefit, respectively. The fiscal 2020 loss was primarily a result of the impairment of two of its investments as a result of COVID-19 in the amount of $7.0 million, net of tax benefit; partially offset by investment income net of tax expense of $2.7 million. The loss is presented in the Company’s condensed consolidated statement of operations as net loss in earnings of equity method investment.
During the three months ended March 31, 2020 and 2019, the Company recognized management fees of $0.8 million and $0.8 million, net of tax benefit, respectively.
The following table discloses the carrying amount for the Company’s equity method investment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Equity securities
|
$
|
67,491
|
|
|
$
|
50,274
|
|
|
Maximum exposure to loss
|
$
|
67,491
|
|
|
$
|
50,274
|
|
As a limited partner, the Company’s maximum exposure to loss is limited to its proportional ownership in the partnership. In addition, the Company is not required to contribute capital in an aggregate amount in excess of its capital commitment and any expected losses will not be in excess of the Capital Account. Finally, there are no call or put options, or other types of arrangements, which limit the Company’s ability to participate in losses and returns of the Fund.
6.Fair Value Measurements
J2 Global complies with the provisions of ASC 820, which defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
|
|
|
|
|
|
|
|
|
|
|
|
§
|
Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
|
|
|
|
§
|
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
|
|
§
|
Level 3 – Unobservable inputs which are supported by little or no market activity.
|
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company’s money market funds are classified within Level 1. The Company values these Level 1 investments using quoted market prices.
Certain of the Company’s debt securities are classified within Level 2. The Company values these Level 2 investments based on model-driven valuations using significant inputs derived from or corroborated by observable market data.
The fair value of our senior notes is determined using quoted market prices or dealer quotes for instruments with similar maturities and other terms and credit ratings, which are Level 2 inputs. The fair value of the Credit Facility approximates its carrying amount due to its variable interest rate, which approximates a market interest rate, and is considered a Level 2 input. The fair value of long-term debt at March 31, 2020 and December 31, 2019 was $1.6 billion and $1.8 billion, respectively (see Note 8 - Long-Term Debt).
In 2019, the Company entered into a $5.5 million note payable that was short-term in nature and associated with the quarter’s acquisition activity. In the same year, the Company paid down $5.1 million of the outstanding note. As of March 31, 2020, the carrying value of the note payable approximates fair value and is classified within Level 2.
The Company classifies its contingent consideration liability in connection with acquisitions within Level 3 because factors used to develop the estimated fair value are unobservable inputs, such as volatility and market risks, and are not supported by market activity. For similar reasons, certain of the Company’s available-for-sale debt securities are classified within Level 3. The valuation approaches used to value the Level 3 investments consider unobservable inputs in the market such as time to liquidity, volatility, dividend yield, and breakpoints. Significant increases or decreases in either of the inputs in isolation would result in a significantly lower or higher fair value measurement.
The following table presents the fair values, valuation techniques, unobservable inputs, and ranges of the Company’s financial liabilities categorized within Level 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
|
|
Weighted Average
|
|
Contingent Consideration
|
Option-Based Model
|
|
Risk free rate
|
|
1.9% - 2.9%
|
|
1.9
|
%
|
|
|
|
|
Debt spread
|
|
0.0% - 136.0%
|
|
53.7
|
%
|
|
|
|
|
Probabilities
|
|
5.0% - 100.0%
|
|
65.3
|
%
|
|
|
|
|
Present value factor
|
|
3.6% - 4.8%
|
|
3.6
|
%
|
|
|
|
|
Discount rate
|
|
2.9% - 42.0%
|
|
31.2
|
%
|
|
|
Monte Carlo Simulation
|
|
Risk free rate (1)
|
|
1.5
|
%
|
|
|
|
|
|
|
Discount rate (1)
|
|
10.7
|
%
|
|
|
|
|
|
|
Market volatility
|
|
26.5% - 57.1%
|
|
41.8
|
%
|
|
|
|
|
Counter party risk rate (1)
|
|
1.5
|
%
|
|
|
(1) The input is a defined rate and, as a result, is not presented as a range or weighted average.
The following tables present the fair values of the Company’s financial assets or liabilities that are measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market and other funds
|
$
|
377,695
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
377,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
—
|
|
|
633
|
|
|
—
|
|
|
633
|
|
|
Total assets measured at fair value
|
$
|
377,695
|
|
|
$
|
633
|
|
|
$
|
—
|
|
|
$
|
378,328
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,864
|
|
|
$
|
8,864
|
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,864
|
|
|
$
|
8,864
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market and other funds
|
$
|
395,664
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
395,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
—
|
|
|
623
|
|
|
22,047
|
|
|
22,670
|
|
|
Total assets measured at fair value
|
$
|
395,664
|
|
|
$
|
623
|
|
|
$
|
22,047
|
|
|
$
|
418,334
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
37,887
|
|
|
$
|
37,887
|
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
37,887
|
|
|
$
|
37,887
|
|
The following table presents a reconciliation of the Company’s Level 3 financial liabilities related to contingent consideration that are measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
Affected line item in the Statement of Operations
|
|
Balance as of January 1, 2020
|
$
|
37,887
|
|
|
|
|
Contingent consideration
|
5,035
|
|
|
|
|
Total fair value adjustments reported in earnings
|
(240)
|
|
|
General and administrative
|
|
|
Contingent consideration payments
|
(33,818)
|
|
|
Not applicable
|
|
|
Balance as of March 31, 2020
|
$
|
8,864
|
|
|
|
In connection with the acquisition of Humble Bundle, on October 13, 2017, contingent consideration of up to an aggregate of $40.0 million may be payable upon achieving certain future EBITDA thresholds and had a fair value of $0.1 million and $20.0 million at March 31, 2020 and December 31, 2019, respectively. Due to the Company’s achievement of certain EBITDA targets for the years ended December 31, 2019 and 2018 and the amended contingent consideration agreement, $19.9 million was paid in the first quarter of 2020 and $20.0 million in fiscal 2019. An additional $0.1 million remains payable and is classified as a current liability on the condensed consolidated balance sheet.
In connection with the acquisition of Ekahau Inc., on October 10, 2018, the Company achieved certain revenue thresholds and, as a result, contingent consideration of $9.1 million was paid in the first quarter of 2020. There are no further payments pending related to this acquisition.
In connection with the Company’s other acquisition activity, contingent consideration of up to $19.5 million may be payable upon achieving certain future EBITDA, revenue, and/or unique visitor thresholds and had a combined fair value of $8.8 million and $8.8 million at March 31, 2020 and December 31, 2019, respectively. Due to the achievement of certain thresholds, $4.8 million was paid in the first three months of 2020.
During the three months ended March 31, 2020, the Company recorded an decrease in the fair value of the contingent consideration of $0.2 million and reported such decrease in general and administrative expenses.
7.Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Intangible assets resulting from the acquisitions of entities accounted for using the acquisition method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable intangible assets are comprised of purchased customer relationships, trademarks and trade names, developed technologies and other intangible assets. The fair values of these identified intangible assets are based upon expected future cash flows or income, which take into consideration certain assumptions such as customer turnover, trade names and patent lives. These determinations are primarily based upon the Company’s historical experience and expected benefit of each intangible asset. If it is determined that such assumptions are not accurate, then the resulting change will impact the fair value of the intangible asset. Identifiable intangible assets are amortized over the period of estimated economic benefit, which ranges from one to 20 years.
The changes in carrying amounts of goodwill for the three months ended March 31, 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fax and Martech
|
|
Voice, Backup, Security and CPP
|
|
Total Cloud Services
|
|
Digital Media
|
|
Consolidated
|
|
Balance as of January 1, 2020
|
$
|
397,788
|
|
|
$
|
480,084
|
|
|
$
|
877,872
|
|
|
$
|
755,161
|
|
|
$
|
1,633,033
|
|
|
Goodwill acquired (Note 4)
|
16,119
|
|
|
—
|
|
|
16,119
|
|
|
622
|
|
|
16,741
|
|
|
Purchase accounting adjustments (1)
|
—
|
|
|
(2,539)
|
|
|
(2,539)
|
|
|
(14)
|
|
|
(2,553)
|
|
|
Foreign exchange translation
|
(1,325)
|
|
|
(8,070)
|
|
|
(9,395)
|
|
|
(633)
|
|
|
(10,028)
|
|
|
Balance as of March 31, 2020
|
$
|
412,582
|
|
|
$
|
469,475
|
|
|
$
|
882,057
|
|
|
$
|
755,136
|
|
|
$
|
1,637,193
|
|
(1) Purchase accounting adjustments relate to measurement period adjustments to goodwill in connection with prior business acquisitions (see Note 4 - Business Acquisitions).
Intangible Assets with Indefinite Lives:
Intangible assets are summarized as of March 31, 2020 and December 31, 2019 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
Trade names
|
$
|
27,379
|
|
|
$
|
27,379
|
|
|
Other
|
4,306
|
|
|
4,306
|
|
|
Total
|
$
|
31,685
|
|
|
$
|
31,685
|
|
Intangible Assets Subject to Amortization:
As of March 31, 2020, intangible assets subject to amortization relate primarily to the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
Amortization
Period
|
|
Historical
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Trade names
|
10.2 years
|
|
$
|
193,416
|
|
|
$
|
86,357
|
|
|
$
|
107,059
|
|
|
Patent and patent licenses
|
6.5 years
|
|
67,911
|
|
|
63,754
|
|
|
4,157
|
|
|
Customer relationships (1)
|
8.4 years
|
|
632,667
|
|
|
406,030
|
|
|
226,637
|
|
|
Other purchased intangibles
|
4.4 years
|
|
378,487
|
|
|
221,369
|
|
|
157,118
|
|
|
Total
|
|
|
$
|
1,272,481
|
|
|
$
|
777,510
|
|
|
$
|
494,971
|
|
(1) Historically, the Company has amortized its customer relationship assets in a pattern that best reflects the pace in which the asset’s benefits are consumed. This pattern results in a substantial majority of the amortization expense being recognized in the first 4 to 5 years, despite the overall life of the asset.
As of December 31, 2019, intangible assets subject to amortization relate primarily to the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
Amortization
Period
|
|
Historical
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Trade names
|
10.2 years
|
|
$
|
193,202
|
|
|
$
|
82,552
|
|
|
$
|
110,650
|
|
|
Patent and patent licenses
|
6.5 years
|
|
67,921
|
|
|
63,143
|
|
|
4,778
|
|
|
Customer relationships (1)
|
8.5 years
|
|
630,730
|
|
|
392,228
|
|
|
238,502
|
|
|
Other purchased intangibles
|
4.3 years
|
|
383,195
|
|
|
212,257
|
|
|
170,938
|
|
|
Total
|
|
|
$
|
1,275,048
|
|
|
$
|
750,180
|
|
|
$
|
524,868
|
|
(1) Historically, the Company has amortized its customer relationship assets in a pattern that best reflects the pace in which the asset’s benefits are consumed. This pattern results in a substantial majority of the amortization expense being recognized in the first 4 to 5 years, despite the overall life of the asset.
Amortization expense, included in general and administrative expense, approximated $38.8 million and $37.3 million for the three months ended March 31, 2020 and 2019, respectively. Amortization expense is estimated to approximate $120.2 million, $119.1 million, $73.5 million, $58.4 million and $32.0 million for the remaining nine months of fiscal year 2020 through fiscal year 2024, respectively, and $91.7 million thereafter through the duration of the amortization period.
8. Long-Term Debt
6.0% Senior Notes
On June 27, 2017, J2 Cloud Services, LLC (“J2 Cloud”) and J2 Cloud Co-Obligor (the “Co-Issuer” and together with J2 Cloud, the “Issuers”), wholly-owned subsidiaries of the Company, completed the issuance and sale of $650 million aggregate principal amount of their 6.0% senior notes due in 2025 (the “6.0% Senior Notes”) in a private placement offering exempt from the registration requirements of the Securities Act of 1933. J2 Cloud received proceeds of $636.5 million, after deducting the initial purchasers’ discounts, commissions and offering expenses. The 6.0% Senior Notes are presented as long-term debt, net of deferred issuance costs, on the condensed consolidated balance sheets as of March 31, 2020.
The 6.0% Senior Notes bear interest at a rate of 6.0% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2018. The 6.0% Senior Notes mature on July 15, 2025, and are senior unsecured obligations of the Issuers and are guaranteed on an unsecured basis by certain subsidiaries of J2 Cloud (as defined in the Indenture agreement dated June 27, 2017, the “Indenture”). If J2 Cloud or any of its restricted subsidiaries acquires or creates a domestic restricted subsidiary, other than an insignificant subsidiary (as defined in the Indenture), after the issue date, or any insignificant subsidiary ceases to fit within the definition of insignificant subsidiary, such restricted subsidiary is required to unconditionally guarantee, jointly and severally, on an unsecured basis, the Issuers’ obligations under the 6.0% Senior Notes.
The Issuers may redeem some or all of the 6.0% Senior Notes at any time on or after July 15, 2020 at specified redemption prices plus accrued and unpaid interest, if any, to, but excluding the redemption date. Before July 15, 2020, in connection with certain equity offerings, the Issuers also may redeem up to 35% of the 6.0% Senior Notes at a price equal to 106.0% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding the redemption date. In addition, at any time prior to July 15, 2020, the Issuers may redeem some or all of the 6.0% Senior Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, plus an applicable “make-whole” premium.
The Indenture contains certain restrictive and other covenants applicable to J2 Cloud and subsidiaries designated as restricted subsidiaries including, but not limited to, restrictions on (i) paying dividends or making distributions on J2 Cloud’s membership interests or repurchasing J2 Cloud’s membership interests; (ii) making certain restricted payments; (iii) creating liens or entering into sale and leaseback transactions; (iv) entering into transactions with affiliates; (v) merging or consolidating with another company; and (vi) transferring and selling assets. These covenants include certain exceptions. Violation of these covenants could result in a default which could result in the acceleration of outstanding amounts if such default is not cured or waived within the time periods outlined in the Indenture. Restricted payments, specifically dividend payments, are applicable only if J2 Cloud and subsidiaries designated as restricted subsidiaries has a leverage ratio of greater than 3.0 to 1.0. In addition, if such leverage ratio is in excess of 3.0 to 1.0, the restriction on restricted payments is subject to various exceptions, including
an exception for the payment of restricted payments up to $75 million. These contractual provisions did not, as of March 31, 2020, restrict J2 Cloud’s ability to pay dividends to J2 Global, Inc. The company is in compliance with its debt covenants as of March 31, 2020. In addition, based on current expectations and assumptions about the COVID-19 pandemic, the Company does not anticipate the COVID-19 pandemic to impact the compliance with its debt covenants.
As of March 31, 2020 and December 31, 2019, the estimated fair value of the 6.0% Senior Notes was approximately $653.3 million and $689.8 million, respectively, and was based on the quoted market prices of debt instruments with similar terms, credit rating and maturities of the 6.0% Senior Notes which are Level 2 inputs (see Note 6 - Fair Value Measurements).
3.25% Convertible Notes
On June 10, 2014, J2 Global issued $402.5 million aggregate principal amount of 3.25% convertible senior notes due June 15, 2029 (the “3.25% Convertible Notes”). The 3.25% Convertible Notes bear interest at a rate of 3.25% per annum, payable semiannually in arrears on June 15 and December 15 of each year. Beginning with the six-month interest period commencing on June 15, 2021, the Company must pay contingent interest on the 3.25% Convertible Notes during any six-month interest period if the trading price per $1,000 principal amount of the 3.25% Convertible Notes for each of the five trading days immediately preceding the first day of such interest period equals or exceeds $1,300. Any contingent interest payable on the 3.25% Convertible Notes will be in addition to the regular interest payable on the 3.25% Convertible Notes.
Holders may surrender their 3.25% Convertible Notes for conversion at any time prior to the close of business on the business day immediately preceding the maturity date only if one or more of the following conditions is satisfied: (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the closing sale price of J2 Global common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs is more than 130% of the applicable conversion price of the 3.25% Convertible Notes on each such trading day; (ii) during the five consecutive business day period following any ten consecutive trading day period in which the trading price for the 3.25% Convertible Notes for each such trading day was less than 98% of the product of (a) the closing sale price of J2 Global common stock on each such trading day and (b) the applicable conversion rate on each such trading day; (iii) if J2 Global calls any or all of the 3.25% Convertible Notes for redemption, at any time prior to the close of business on the business day prior to the redemption date; (iv) upon the occurrence of specified corporate events; or (v) during either the period beginning on, and including, March 15, 2021 and ending on, but excluding, June 20, 2021 or the period beginning on, and including, March 15, 2029 and ending on, but excluding, the maturity date. J2 Global will settle conversions of the 3.25% Convertible Notes by paying or delivering, as the case may be, cash, shares of J2 Global common stock or a combination thereof at J2 Global’s election. The Company currently intends to satisfy its conversion obligation by paying and delivering a combination of cash and shares of the Company’s common stock, where cash will be used to settle each $1,000 of principal and the remainder, if any, will be settled via shares of the Company’s common stock.
During the fourth quarter of 2019, the last reported sale price of the Company’s common stock exceeded 130% of the conversion price for at least 20 trading days ending on, and including, the last trading day of the quarter. As a result, the 3.25% Convertible Notes were convertible at the option of the holders during the quarter beginning January 1, 2020 and ending March 31, 2020. Since the Company intended to settle the principal amount in cash, the net carrying amount of the 3.25% Convertible Notes was classified within current liabilities on the consolidated balance sheet as of December 31, 2019.
During the first quarter of 2020, the last reported sale price of the Company’s common stock did not meet the conversion price threshold requirements of the 3.25% Convertible Notes and, accordingly, the 3.25% Convertible Notes are no longer convertible at the option of the holders. As a result, the net carrying amount of the 3.25% Convertible Notes was reclassified back to long-term debt on the condensed consolidated balance sheet as of March 31, 2020.
As of March 31, 2020, the conversion rate is 14.7632 shares of J2 Global common stock for each $1,000 principal amount of 3.25% Convertible Notes, which represents a conversion price of approximately $67.74 per share of J2 Global common stock. The conversion rate is subject to adjustment for certain events as set forth in the indenture governing the 3.25% Convertible Notes, but will not be adjusted for accrued interest. In addition, following certain corporate events that occur on or prior to June 20, 2021, J2 Global will increase the conversion rate for a holder that elects to convert its 3.25% Convertible Notes in connection with such a corporate event.
J2 Global may not redeem the 3.25% Convertible Notes prior to June 20, 2021. On or after June 20, 2021, J2 Global may redeem for cash all or part of the 3.25% Convertible Notes at a redemption price equal to 100% of the principal amount of
the 3.25% Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 3.25% Convertible Notes.
Holders have the right to require J2 Global to repurchase for cash all or part of their 3.25% Convertible Notes on each of June 15, 2021 and June 15, 2024 at a repurchase price equal to 100% of the principal amount of the 3.25% Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the relevant repurchase date. In addition, if a fundamental change, as defined in the indenture governing the 3.25% Convertible Notes, occurs prior to the maturity date, holders may require J2 Global to repurchase for cash all or part of their 3.25% Convertible Notes at a repurchase price equal to 100% of the principal amount of the 3.25% Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The 3.25% Convertible Notes are the Company’s general senior unsecured obligations and rank: (i) senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated in right of payment to the 3.25% Convertible Notes; (ii) equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; (iii) effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and (iv) structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries.
Accounting for the 3.25% Convertible Notes
In accordance with ASC 470-20, Debt with Conversion and Other Options, convertible debt that can be settled for cash is required to be separated into the liability and equity component at issuance, with each component assigned a value. The value assigned to the liability component is the estimated fair value, as of the issuance date, of similar debt without the conversion feature. The difference between the cash proceeds and estimated fair value of the liability component, representing the value of the conversion premium assigned to the equity component, is recorded as a debt discount on the issuance date. This debt discount is amortized to interest expense using the effective interest method over the period from the issuance date through the first stated repurchase date on June 15, 2021.
J2 Global estimated the borrowing rates of similar debt without the conversion feature at origination to be 5.79% for the 3.25% Convertible Notes and determined the debt discount to be $59.0 million. As a result, a conversion premium after tax of $37.7 million was recorded in additional paid-in capital. The aggregate debt discount is amortized as interest expense over the period from the issuance date through the first stated repurchase date on June 15, 2021, which management believes is the expected life of the 3.25% Convertible Notes using an interest rate of 5.81%. As of March 31, 2020, the remaining period over which the unamortized debt discount will be amortized is 1.2 years.
The 3.25% Convertible Notes are carried at face value less any unamortized debt discount and debt issuance costs. The fair value of the 3.25% Convertible Notes at each balance sheet date is determined based on recent quoted market prices or dealer quotes for the 3.25% Convertible Notes, which are Level 1 inputs (see Note 6 - Fair Value Measurements). If such information is not available, the fair value is determined using cash-flow models of the scheduled payments discounted at market interest rates for comparable debt without the conversion feature. As of March 31, 2020 and December 31, 2019, the estimated fair value of the 3.25% Convertible Notes was approximately $487.8 million and $583.6 million, respectively.
1.75% Convertible Notes
On November 15, 2019, J2 Global issued $550.0 million aggregate principal amount of 1.75% convertible senior notes due November 1, 2026 (the “1.75% Convertible Notes”). J2 Global received proceeds of $537.1 million in cash, net of purchasers’ discounts and commissions and other debt issuance costs. A portion of the net proceeds were used to pay off all amounts outstanding under the Credit Facility (see Note 10 - Commitments and Contingencies). The 1.75% Convertible Notes bear interest at a rate of 1.75% per annum, payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2020. The 1.75% Convertible Notes will mature on November 1, 2026, unless earlier converted or repurchased.
Holders may surrender their 1.75% Convertible Notes for conversion at any time prior to the close of business on the business day immediately preceding July 1, 2026 only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on March 31, 2020 (and only during such calendar quarter), if the last reported sale price of J2 Global common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding the calendar quarter is greater than 130% of the applicable conversion price of the 1.75% Convertible Notes on each such applicable trading day; (ii)
during the five business day period following any 10 consecutive trading day period in which the trading price per $1,000 principal amount of 1.75% Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of J2 Global common stock and the applicable conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after July 1, 2026, and prior to the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their notes at any time, regardless of the foregoing circumstances. J2 Global will settle conversions of the 1.75% Convertible Notes by paying or delivering, as the case may be, cash, shares of J2 Global common stock or a combination thereof at J2 Global’s election. The Company currently intends to satisfy its conversion obligation by paying and delivering a combination of cash and shares of the Company’s common stock, where cash will be used to settle each $1,000 of principal and the remainder, if any, will be settled via shares of the Company’s common stock. Holders of the notes will have the right to require the Company to repurchase for cash all or any portion of their notes upon the occurrence of certain corporate events, subject to certain conditions. During the first quarter of 2020 and the fourth quarter of 2019, the last reported sale price of the Company’s common stock did not meet the conversion price threshold requirements of the 1.75% Convertible Notes. Therefore, the net carrying amount of the 1.75% Convertible Notes is classified as long-term debt on the consolidated balance sheets.
As of March 31, 2020, the conversion rate is 7.9864 shares of J2 Global common stock for each $1,000 principal amount of 1.75% Convertible Notes, which represents an conversion price of approximately $125.21 per share of J2 Global common stock. The conversion rate is subject to adjustment for certain events as set forth in the indenture governing the 1.75% Convertible Notes, but will not be adjusted for accrued interest. In addition, upon the occurrence of a “Make-Whole Fundamental Change” (as defined in the 1.75% Convertible Note Indenture), J2 Global will increase the conversion rate for a holder that elects to convert its 1.75% Convertible Notes in connection with such a corporate event in certain circumstances.
J2 Global may not redeem the 1.75% Convertible Notes prior to November 1, 2026, and no sinking fund is provided for the 1.75% Convertible Notes.
The 1.75% Convertible Notes are the Company’s general senior unsecured obligations and rank: (i) senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 1.75% Convertible Notes; (ii) equal in right of payment to the Company’s existing and future indebtedness that is not so subordinated, including its existing 3.25% Convertible Notes due 2029; (iii) effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and (iv) structurally junior to all existing and future indebtedness and other liabilities incurred by the Company’s subsidiaries, including the existing 6% Senior Notes due 2025.
Accounting for the 1.75% Convertible Notes
In accordance with ASC 470-20, Debt with Conversion and Other Options, convertible debt that can be settled for cash is required to be separated into the liability and equity component at issuance, with each component assigned a value. The value assigned to the liability component is the effective fair value, as of the issuance date, of similar debt without the conversion feature. The difference between the cash proceeds and estimated fair value of the liability component, representing the value of the conversion premium assigned to the equity component, is recorded as a debt discount on the issuance date. This debt discount is amortized to interest expense using the effective interest method over the period from the issuance date through the maturity date of November 1, 2026.
J2 Global estimated the borrowing rates of similar debt without the conversion feature at origination to be 5.5% for the 1.75% Convertible Notes and determined the debt discount to be $118.9 million. As a result, a conversion premium after tax of $88.1 million (net of $2.8 million of the deferred issuance costs) are recorded in additional paid-in capital. The aggregate debt discount is amortized as interest expense over the period from the issuance date through the maturity date of November 1, 2026, which management believes is the expected life of the 1.75% Convertible Notes using an interest rate of 5.5%. As of March 31, 2020, the remaining period over which the unamortized debt discount will be amortized is 6.6 years.
In connection with the issuance of the 1.75% Convertible Notes, the Company incurred $12.9 million of deferred issuance costs, which primarily consisted of the underwriters’ discount, legal and other professional service fees. Of the total deferred issuance costs incurred, $10.1 million of such deferred issuance costs were attributable to the liability component and are recorded within other assets and are being amortized to interest expense through the maturity date. The unamortized balance, as of March 31, 2020, was $9.7 million. The remaining $2.8 million of the deferred issuance costs were netted with the equity component in additional paid-in capital at the issuance date.
The 1.75% Convertible Notes are carried at face value less any unamortized debt discount and issuance costs. The fair value of the 1.75% Convertible Notes at each balance sheet date is determined based on recent quoted market prices or dealer quotes for the 1.75% Convertible Notes, which are Level 1 inputs (see Note 6 - Fair Value Measurements). If such information is not available, the fair value is determined using cash-flow models of the scheduled payments discounted at market interest rates for comparable debt without the conversion feature. As of March 31, 2020 and December 31, 2019, the estimated fair value of the 1.75% Convertible Notes was approximately $507.3 million and $559.6 million, respectively.
Credit Facility
During the three months ended March 31, 2020, the Company did not draw down any amounts under its Credit Facility. The Company has capitalized a total of $0.4 million in debt issuance costs, which are being amortized to interest expense over the life of the Credit Facility. As of March 31, 2020, these debt issuance costs, net of amortization, were $0.3 million. The related interest expense was zero for the three months ended March 31, 2020 and zero for the three months ended March 31, 2019. See Note 10, “Commitments and Contingencies” for additional information.
Long-term debt as of March 31, 2020 and December 31, 2019 consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
6.0% Senior Notes
|
$
|
650,000
|
|
|
$
|
650,000
|
|
|
Convertible Notes:
|
|
|
|
|
3.25% Convertible Notes
|
402,499
|
|
|
402,500
|
|
|
1.75% Convertible Notes
|
550,000
|
|
|
550,000
|
|
|
Total Notes
|
1,602,499
|
|
|
1,602,500
|
|
|
|
|
|
|
|
Less: Unamortized discount
|
133,726
|
|
|
139,981
|
|
|
Deferred issuance costs
|
13,327
|
|
|
14,058
|
|
|
Total long-term debt
|
1,455,446
|
|
|
1,448,461
|
|
|
Less: current portion
|
—
|
|
|
385,532
|
|
|
Total long-term debt, less current portion
|
$
|
1,455,446
|
|
|
$
|
1,062,929
|
|
9.Leases
J2 Global leases certain facilities and equipment under non-cancelable operating and finance leases which expire at various dates through 2036. Office and equipment leases are typically for terms of three to five years and generally provide renewal options for terms up to an additional five years. Some of the Company’s leases include options to terminate within one year.
In certain agreements in which the Company leases office space where the Company is the tenant, it subleases the site to various other companies through a sublease agreement.
Finance leases are not material to the Company’s condensed consolidated financial statements and are therefore not included in the disclosures below.
The components of lease expense were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
|
|
|
$
|
7,104
|
|
|
$
|
5,761
|
|
|
Short-term lease cost
|
|
|
|
|
445
|
|
455
|
|
|
Total lease cost
|
|
|
|
|
$
|
7,549
|
|
|
$
|
6,216
|
|
Supplemental balance sheet information related to leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Operating leases
|
|
|
|
|
Operating lease right-of-use assets
|
$
|
115,455
|
|
|
$
|
125,822
|
|
|
Total operating lease right-of-use assets
|
$
|
115,455
|
|
|
$
|
125,822
|
|
|
|
|
|
|
|
Operating lease liabilities, current
|
$
|
26,715
|
|
|
$
|
26,927
|
|
|
Operating lease liabilities, noncurrent
|
93,687
|
|
|
104,070
|
|
|
Total operating lease liabilities
|
$
|
120,402
|
|
|
$
|
130,997
|
|
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
7,411
|
|
|
$
|
5,243
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
$
|
1,790
|
|
|
$
|
2,748
|
|
Other supplemental operating lease information consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
Operating leases:
|
|
|
|
|
Weighted average remaining lease term
|
6.6 years
|
|
5.9 years
|
|
Weighted average discount rate
|
4.37
|
%
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of operating lease liabilities as of March 31, 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
Fiscal Year:
|
|
|
|
|
2020 (remainder)
|
$
|
21,588
|
|
|
|
|
2021
|
27,905
|
|
|
|
|
2022
|
25,479
|
|
|
|
|
2023
|
20,013
|
|
|
|
|
2024
|
13,449
|
|
|
|
|
Thereafter
|
34,023
|
|
|
|
|
Total lease payments
|
$
|
142,457
|
|
|
|
|
Less: Imputed interest
|
22,055
|
|
|
|
|
Present value of operating lease liabilities
|
$
|
120,402
|
|
|
|
Sublease
Total sublease income for the three months ended March 31, 2020 and 2019 was $0.8 million and $0.9 million for the three months ended March 31, 2020 and 2019, respectively. Total estimated aggregate sublease income to be received in the future is $9.0 million.
Significant Judgments
Discount Rate
The majority of the J2 Global’s leases are discounted using the Company’s incremental borrowing rate as the rate implicit in the lease is not readily determinable.
Options
The lease term is generally the minimum noncancelable period of the lease. The Company does not include option periods unless the Company determined it is reasonably certain of exercising the option at inception or when a triggering event occurs.
Practical Expedients
As a practical expedient, the Company has not separated lease components from nonlease components for its real property operating leases. Certain of the Company’s leases contain nonlease components such as maintenance and certain utility costs.
In addition, the Company elected and applied the available transition practical expedients upon adoption. By electing these practical expedients, the Company did:
•not reassess whether expired or existing contracts contain leases under the new definition of a lease;
•not reassess lease classification for expired or existing leases; and
•not reassess whether previously capitalized initial direct costs would qualify for capitalization under Topic 842.
10.Commitments and Contingencies
Litigation
From time to time, J2 Global and its affiliates are involved in litigation and other legal disputes or regulatory inquiries that arise in the ordinary course of business. Any claims or regulatory actions against J2 Global and its affiliates, whether meritorious or not, could be time consuming and costly, and could divert significant operational resources. The outcomes of such matters are subject to inherent uncertainties, carrying the potential for unfavorable rulings that could include monetary damages and injunctive relief.
On February 17, 2011, Emmanuel Pantelakis (“Pantelakis”) filed suit against a J2 Global affiliate in the Ontario Superior Court of Justice (No. 11-50673), alleging that the J2 Global affiliate breached a contract relating to Pantelakis’s use of the Campaigner service. The J2 Global affiliate filed a responsive pleading on March 23, 2011 and responses to undertakings on July 16, 2012. On November 6, 2012, Pantelakis filed a second amended statement of claim, reframing his lawsuit as a negligence action. The J2 Global affiliate filed an amended statement of defense on April 8, 2013. Discovery has closed, with the exception of one issue. There is an anticipated trial date of February 2021.
On January 21, 2016, Davis Neurology, P.A. filed a putative class action against two J2 Global affiliates in the Circuit Court for the County of Pope, State of Arkansas (58-cv-2016-40), alleging violations of the TCPA. The case was removed to the U.S. District Court for the Eastern District of Arkansas (No. 4:16-cv-00682). On March 20, 2017, the District Court granted a motion for judgment on the pleadings filed by the J2 Global affiliates and dismissed all claims against the J2 Global affiliates. On July 23, 2018, the Eighth Circuit Court of Appeals vacated the judgment and remanded to district court with instructions to return the case to state court. On January 29, 2019, after further appeals were exhausted, the case was remanded to the Arkansas state court. On April 1, 2019, the state court granted a motion for class certification filed by the plaintiff in 2016. Because the prior removal to federal court had deprived the state court of jurisdiction, the J2 Global affiliates had not yet filed an opposition brief to the 2016 motion when the state court granted the motion. The J2 Global affiliates appealed the order. On July 15, 2019, the J2 Global affiliates removed the case to federal court pursuant to the Class Action Fairness Act of 2005. On November 26, 2019 the court denied the Plaintiff’s motion to remand. On December 20, 2019, the court granted the Plaintiff’s motion for leave to amend its complaint. The J2 Global affiliates have moved to dismiss the amended pleading.
J2 Global does not believe, based on current knowledge, that the foregoing legal proceedings or claims, after giving effect to existing accrued liabilities, are likely to have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could have a material effect on J2 Global’s consolidated financial position, results of operations, or cash flows in a particular period.
The Company has not accrued for any material loss contingencies relating to these legal proceedings because materially unfavorable outcomes are not considered probable by management. It is the Company’s policy to expense as incurred legal fees related to various litigations.
Credit Agreement
On January 7, 2019, J2 Cloud Services, LLC entered into a Credit Agreement (the “Credit Agreement”) with certain lenders from time to time party thereto (collectively, the “Lenders”) and MUFG Union Bank, N.A., as sole lead arranger and as administrative agent for the Lenders (the “Agent”). Pursuant to the Credit Agreement, as amended in July and August 2019, the Lenders have provided J2 Cloud Services with a credit facility of $200.0 million (the “Credit Facility”) through December 31, 2020. On November 15, 2019, the Company reduced its borrowing capacity from $200.0 million to $100.0 million. The proceeds of the Credit Facility are intended to be used for working capital and general corporate purposes of J2 Cloud and its subsidiaries, including to finance certain permitted acquisitions and capital expenditures in accordance with the terms of the Credit Agreement. As of March 31, 2020, were no amounts outstanding under the Credit Facility.
At J2 Cloud’s option, amounts borrowed under the Credit Agreement will bear interest at either (i) a base rate equal to the greatest of (x) the Federal Funds Effective Rate (as defined in the Credit Agreement) in effect on such day plus 1/2 of 1% per annum, (y) the rate of interest per annum most recently announced by the Agent as its U.S. Dollar “Reference Rate” and (z) one month LIBOR plus 1.00% or (ii) a rate per annum equal to LIBOR divided by 1.00 minus the LIBOR Reserve Requirements (as defined in the Credit Agreement), in each case, plus an applicable margin. The applicable margin relating to any base rate loan will range from 0.50% to 1.50% and the applicable margin relating to any LIBOR loan will range from 1.50% to 2.50%, in each case, depending on the total leverage ratio of J2 Cloud.
The final maturity of the Credit Facility will occur on January 7, 2024. J2 Cloud is permitted to make voluntary prepayments of the Credit Facility at any time without payment of a premium or penalty.
The obligations under the Credit Facility and certain cash management are and will be fully and unconditionally guaranteed by certain of J2 Cloud’s existing and subsequently acquired or organized direct and indirect domestic subsidiaries pursuant to a guarantee agreement and secured by a lien on the equity interests of certain of J2 Cloud’s foreign subsidiaries.
The Credit Agreement contains financial maintenance covenants, including (i) a maximum total leverage ratio as of the last date of any fiscal quarter not to exceed 3.00:1.00 for J2 Cloud and its restricted subsidiaries; (ii) a maximum total leverage ratio as of the last date of any fiscal quarter not to exceed 3.25:1.00 for J2 and its restricted subsidiaries; and (iii) a minimum EBITDA of not less than $50.0 million for any fiscal quarter for J2 Cloud and its restricted subsidiaries. The Credit Agreement also contains restrictive covenants that limit, among other things, J2 Cloud’s and its restricted subsidiaries’ ability to incur additional indebtedness, create, incur or assume liens, consolidate, merge, liquidate or dissolve, pay dividends or make other distributions or other restricted payments, make or hold any investments, enter into certain transactions with affiliates, sell assets other than on terms specified by the Credit Agreement, amend the terms of certain other indebtedness and organizational
documents and change their lines of business and fiscal years, in each case, subject to customary exceptions. The Credit Agreement also sets forth customary events of default, including, among other things, the failure to make timely payments under the Credit Facility, the failure to satisfy certain covenants, cross-default and cross-acceleration to other material debt for borrowed money, the occurrence of a change of control and specified events of bankruptcy and insolvency.
Non-Income Related Taxes
The Company does not collect and remit sales and use, telecommunication, or similar taxes and fees in certain jurisdictions where the Company believes such taxes are not applicable or legally required. Several states and other taxing jurisdictions have presented or threatened the Company with assessments, alleging that the Company is required to collect and remit such taxes there.
The Company is currently under audit or is subject to audit for indirect taxes in various states, municipalities and foreign jurisdictions. The Company has a $21.2 million reserve established for these matters. It is reasonably possible that additional liabilities could be incurred resulting in additional expense, which could have a material impact our financial results.
11.Income Taxes
The Company’s tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate adjusted for discrete interim period tax impacts. Each quarter the Company updates its estimated annual effective tax rate and, if the estimate changes, makes a cumulative adjustment. The Company’s effective tax rate was 132.5% and (0.9)% for the three months ended March 31, 2020 and 2019, respectively. The Company’s increased rate is primarily a result of an increase in tax expense during the period to establish a valuation allowance on deferred tax assets related to the impairment of certain investments. In addition, during the three months ended March 31 2019, the Company had a decrease in the effective rate as a result of a reduction in its reserve for uncertain tax positions with no similar event for the three months ended March 31, 2020. (Loss) income before income taxes included income from domestic operations of $(18.9) million and $2.5 million for the three months ended March 31, 2020 and 2019, respectively, and income from foreign operations of $25.5 million and $30.1 million for the three months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020 and December 31, 2019, the Company had $54.1 million and $52.5 million, respectively, in liabilities for uncertain income tax positions. Accrued interest and penalties related to unrecognized tax benefits are recognized in income tax expense on the Company’s consolidated statement of operations.
Cash paid for income taxes net of refunds received was $6.6 million and $6.7 million for the three months ended March 31, 2020 and 2019, respectively.
Certain taxes are prepaid during the year and, where appropriate, included within prepaid expenses and other current assets on the condensed consolidated balance sheet. The Company’s prepaid taxes were $3.7 million and $3.7 million at March 31, 2020 and December 31, 2019, respectively.
Income Tax Audits:
The Company is in various stages of audit by the U.S. Internal Revenue Service (“IRS”) for its 2012 through 2016 tax years. As of March 31, 2020, the audits are ongoing.
J2 Global is under income tax audit by the California Franchise Tax Board (the “FTB”) for its tax years 2012 and 2013. The FTB, however, has suspended its audit for 2012 and 2013 pending the outcome of the IRS audit for such tax years. In August 2018, the FTB notified the Company that it will commence an audit of tax years 2015 and 2016. As of March 31, 2020, the audits are ongoing.
In June 2019, the New York State Department of Taxation and Finance (“NYS”) notified the Company that it will commence an audit for tax year 2015. As of March 31, 2020, the audit is ongoing.
It is reasonably possible that these audits may conclude in the next 12 months and that the uncertain tax positions the Company has recorded in relation to these tax years may change compared to the liabilities recorded for these periods. If the recorded uncertain tax positions are inadequate to cover the associated tax liabilities, the Company would be required to record additional tax expense in the relevant period, which could be material. If the recorded uncertain tax positions are adequate to
cover the associated tax liabilities, the Company would be required to record any excess as a reduction in tax expense in the relevant period, which could be material. However, it is not currently possible to estimate the amount, if any, of such change.
12.Stockholders’ Equity
Common Stock Repurchase Program
In February 2012, the Company’s Board of Directors approved a program authorizing the repurchase of up to five million shares of our common stock through February 20, 2013 (the “2012 Program”) which was subsequently extended through February 20, 2021.
In November 2018 and May 2019, the Company entered into Rule 10b5-1 trading plans with a broker to facilitate the repurchase program. 600,000 shares were repurchased under the share repurchase program in 2018 at an aggregate cost of $42.5 million and were subsequently retired in March 2019. During the three month period ended March 31, 2020, the Company repurchased 680,016 shares under this program at an aggregate cost of $55.6 million, which were subsequently retired. Cumulatively at March 31, 2020, 3.6 million shares were repurchased at an aggregate cost of $172.6 million (including an immaterial amount of commission fees).
In July 2016, the Company acquired and subsequently retired 935,231 shares of J2 Global common stock in connection with the acquisitions of Integrated Global Concepts, Inc. As a result of the purchase of J2 Global common stock, the Company’s Board of Directors approved a reduction in the number of shares available for purchase under the 2012 Program by the same amount. As a result of the acquired shares through acquisition and the purchase of J2 Global common stock through the Company’s share repurchase program, the number of shares available for purchase under the 2012 Program is 460,803 shares of J2 Global common stock.
Periodically, participants in J2 Global’s stock plans surrender to the Company shares of J2 Global stock to pay the exercise price or to satisfy tax withholding obligations arising upon the exercise of stock options or the vesting of restricted stock. During the three month period ended March 31, 2020, the Company purchased 80,516 shares from plan participants for this purpose.
Dividends
The following is a summary of each dividend declared during fiscal year 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend per Common Share
|
|
Record Date
|
|
Payment Date
|
|
February 6, 2019
|
|
$
|
0.4450
|
|
|
February 25, 2019
|
|
March 12, 2019
|
|
May 2, 2019
|
|
$
|
0.4550
|
|
|
May 20, 2019
|
|
June 4, 2019
|
Future dividends are subject to Board approval. Based on the significant number of current investment opportunities within the Company’s portfolio of businesses and the historic returns from prior investments, the Board of Directors suspended dividend payments for the foreseeable future after the June 4, 2019 payment.
13.Stock Options and Employee Stock Purchase Plan
J2 Global’s share-based compensation plans include the 2007 Stock Plan (the “2007 Plan”), 2015 Stock Option Plan (the “2015 Plan”) and 2001 Employee Stock Purchase Plan (the “Purchase Plan”). Each plan is described below.
The 2007 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units and other share-based awards. 4,500,000 shares of J2 Global common stock are authorized to be used for 2007 Plan purposes. Options under the 2007 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the fair market value of J2 Global’s common stock on the date of grant for incentive stock options and not less than 85% of the fair market value of J2 Global’s common stock on the date of grant for non-statutory stock options. As of March 31, 2020, 53,811 shares underlying options and 340 shares of restricted units were outstanding under the 2007 Plan. The 2007 Plan terminated on February 14, 2017.
The 2015 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance share units and other share-based awards and is intended as a successor plan to the 2007 Plan since no further grants will be made under the 2007 Plan. 4,200,000 shares of J2 Global common stock are authorized to be used for 2015 Plan purposes. Options under the 2015 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the higher of the par value or 100% of the fair market value of J2 Global’s common stock subject to the option on the date the option is granted. As of March 31, 2020, 423,000 shares underlying options and 194,187 shares of restricted stock units were outstanding under the 2015 Plan.
All stock option grants are approved by “outside directors” within the meaning of Internal Revenue Code Section 162(m).
Stock Options
The following table represents stock option activity for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2020
|
518,341
|
|
|
$
|
65.77
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
(41,530)
|
|
|
22.92
|
|
|
|
|
|
|
Canceled
|
—
|
|
|
—
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
476,811
|
|
|
$
|
69.51
|
|
|
6.9
|
|
$
|
2,619,831
|
|
|
Exercisable at March 31, 2020
|
172,211
|
|
|
$
|
59.94
|
|
|
5.4
|
|
$
|
2,585,331
|
|
|
Vested and expected to vest at March 31, 2020
|
382,175
|
|
|
$
|
68.14
|
|
|
6.7
|
|
$
|
2,619,410
|
|
The total intrinsic values of options exercised during the three months ended March 31, 2020 and 2019 were $3.0 million and $8.0 million, respectively.
The Company recognized $0.2 million and $0.2 million of compensation expense related to stock options for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and December 31, 2019, unrecognized stock compensation related to non-vested stock options granted under each of the share-based compensation plans approximated $6.6 million and $6.8 million, respectively. Unrecognized stock compensation expense related to non-vested stock options granted under these plans is expected to be recognized ratably over a weighted-average period of 5.7 years (i.e., the remaining requisite service period).
Fair Value Disclosure
J2 Global uses the Black-Scholes option pricing model to calculate the fair value of each option grant. The expected volatility is based on historical volatility of the Company’s common stock. The Company estimates the expected term based upon the historical exercise behavior of our employees. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company uses an annualized dividend yield based upon the per share dividends declared by its Board of Directors. Estimated forfeiture rates were 11.57% and 12.63% as of March 31, 2020 and 2019, respectively.
Restricted Stock and Restricted Stock Units
J2 Global has awarded restricted stock and restricted stock units to its Board of Directors and senior staff pursuant to certain share-based compensation plans. Compensation expense resulting from restricted stock and restricted unit grants is measured at fair value on the date of grant and is recognized as share-based compensation expense over the applicable vesting period. Vesting periods are approximately one year for awards to members of the Company’s Board of Directors, five years for senior staff (excluding market-based awards discussed below) and eight years for the Chief Executive Officer.
Restricted Stock - Awards with Market Conditions
J2 Global has awarded certain key employees market-based restricted stock awards pursuant to the 2015 Plan. The market-based awards have vesting conditions that are based on specified stock price targets of the Company’s common stock. Market conditions were factored into the grant date fair value using a Monte Carlo valuation model, which utilized multiple input variables to determine the probability of the Company achieving the specified stock price targets with a 20-day and 30-day lookback (trading days). Stock-based compensation expense related to an award with a market condition will be recognized over the requisite service period using the graded-vesting method regardless of whether the market condition is satisfied, provided that the requisite service period has been completed. During the three months ended March 31, 2020 and 2019, the Company awarded 82,112 and 72,734 market-based restricted stock awards, respectively. The per share weighted average grant-date fair values of the market-based restricted stock awards granted during the three months ended March 31, 2020 and 2019 were $70.99 and $69.99, respectively.
The weighted-average fair values of market-based restricted stock awards granted have been estimated utilizing the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
Underlying stock price at valuation date
|
$
|
91.17
|
|
|
$
|
84.58
|
|
|
Expected volatility
|
27.0
|
%
|
|
28.3
|
%
|
|
Risk-free interest rate
|
0.71
|
%
|
|
2.53
|
%
|
Restricted stock award activity for the three months ended March 31, 2020 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
Nonvested at January 1, 2020
|
1,105,059
|
|
|
$
|
64.76
|
|
|
Granted
|
1,268
|
|
|
98.63
|
|
|
Vested
|
(173,708)
|
|
|
65.97
|
|
|
Canceled
|
(4,681)
|
|
|
77.13
|
|
|
Nonvested at March 31, 2020
|
927,938
|
|
|
$
|
64.51
|
|
Restricted stock unit award activity for the three months ended March 31, 2020 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2020
|
20,874
|
|
|
|
|
|
|
Granted
|
179,361
|
|
|
|
|
|
|
Vested
|
(3,788)
|
|
|
|
|
|
|
Canceled
|
(1,920)
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
194,527
|
|
|
4.6
|
|
$
|
14,560,346
|
|
|
Vested and expected to vest at March 31, 2020
|
115,546
|
|
|
3.9
|
|
$
|
8,648,626
|
|
The Company recognized $5.6 million and $4.5 million of compensation expense related to restricted stock, restricted stock units and market-based restricted stock for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and December 31, 2019, the Company had unrecognized share-based compensation cost of approximately $54.3 million and $46.1 million, respectively, associated with these awards. This cost is expected to be recognized over a weighted-average period of 4.6 years for awards and 5.6 years for units.
Employee Stock Purchase Plan
The Purchase Plan provides for the issuance of a maximum of two million shares of the Company’s common stock. Under the Purchase Plan, eligible employees can have up to 15% of their earnings withheld, up to certain maximums, to be used to purchase shares of J2 Global common stock at certain plan-defined dates. The price of the J2 Global common stock purchased under the Purchase Plan for the offering periods is equal to 85% of the lesser of the fair market value of a share of common stock of the Company on the beginning or the end of the offering period.
J2 Global determined that a plan provision exists which allows for the more favorable of two exercise prices, commonly referred to as a “look-back” feature. The purchase price discount and the look-back feature cause the Purchase Plan to be compensatory and the Company to recognize compensation expense. The compensation cost is recognized on a straight-line basis over the requisite service period. The Company used the Black-Scholes option pricing model to calculate the estimated fair value of the purchase right issued under the ESPP. The expected volatility is based on historical volatility of the Company’s common stock. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company uses an annualized dividend yield based upon the per share dividends declared by its Board of Directors. Estimated forfeiture rates were 5.80% and 1.96% as of March 31, 2020 and 2019, respectively.
For the three months ended March 31, 2020 and 2019, zero shares were purchased under the Purchase Plan, respectively. Cash received upon the issuance of J2 Global common stock under the Purchase Plan was zero for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, 1,523,568 shares were available under the Purchase Plan for future issuance.
The Company recognized $0.5 million and $0.4 million of compensation expense related to the Purchase Plan for the three months ended March 31, 2020 and 2019, respectively.
The compensation expense related to the Purchase Plan has been estimated utilizing the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
Risk-free interest rate
|
1.57%
|
|
2.32%
|
|
Expected term (in years)
|
0.5
|
|
0.5
|
|
Dividend yield
|
—%
|
|
1.19%
|
|
Expected volatility
|
23.95%
|
|
22.17%
|
|
Weighted average volatility
|
23.95%
|
|
22.17%
|
14.Earnings Per Share
The components of basic and diluted earnings per share are as follows (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Numerator for basic and diluted net income per common share:
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to J2 Global, Inc. common shareholders
|
|
|
|
|
$
|
(6,404)
|
|
|
$
|
32,449
|
|
|
Net (loss) income available to participating securities (a)
|
|
|
|
|
—
|
|
|
(424)
|
|
|
Net (loss) income available to J2 Global, Inc. common shareholders
|
|
|
|
|
$
|
(6,404)
|
|
|
$
|
32,025
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average outstanding shares of common stock
|
|
|
|
|
47,620,774
|
|
|
47,560,749
|
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
Equity incentive plans (b)
|
|
|
|
|
—
|
|
|
89,013
|
|
|
Convertible debt (b) (c)
|
|
|
|
|
—
|
|
|
859,419
|
|
|
Common stock and common stock equivalents
|
|
|
|
|
47,620,774
|
|
|
48,509,181
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
$
|
(0.13)
|
|
|
$
|
0.67
|
|
|
Diluted
|
|
|
|
|
$
|
(0.13)
|
|
|
$
|
0.66
|
|
(a)Represents unvested share-based payment awards that contain certain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid).
(b)For the three months ended March 31, 2020, the Company reported a net loss attributable to common shareholders. As a result, equity incentive awards of 40,074 and incremental shares of common stock issuable upon conversion of the 3.25% and 1.75% Convertible Notes of 1,460,431 and zero, respectively, were excluded from the calculation of diluted EPS.
(c)Represents the incremental shares issuable upon conversion of the 3.25% Convertible Notes due June 15, 2029 and 1.75% Convertible Notes due November 1, 2026 by applying the treasury stock method when the average stock price exceeds the conversion price of the Convertible Notes (see Note 8 - Long Term Debt).
Exclusive of the effect of the net loss incurred by the Company, for the three months ended March 31, 2020 and 2019, there were zero options outstanding, respectively, which were excluded from the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common stock.
15.Segment Information
In accordance with ASC Topic 280, Segment Reporting: (Topic 280), the Company’s businesses are based on the organizational structure used by the chief operating decision maker (“CODM”) for making operating and investment decisions and for assessing performance. The CODM views the Company as two businesses: Cloud Services and Digital Media. However, in accordance with the aggregation criteria within ASC Topic 280, J2 Global’s operating segments have been aggregated into three reportable segments: (i) Fax and Martech (formerly Email Marketing); (ii) Voice, Backup, Security, and Consumer Privacy and Protection; and (iii) Digital Media. In connection with the Highwinds Capital, Inc. and Cloak Holdings, LLC acquisition in the second quarter of 2019, the Company renamed its Voice, Backup and Security reportable segment to include its newly acquired consumer privacy and protection business, now the Voice, Backup, Security and Consumer Privacy and Protection segment.
The Company’s Cloud Services business is driven primarily by subscription revenues that are relatively higher margin, stable and predictable from quarter to quarter with some seasonal weakness in the fourth quarter. The Company’s Digital Media business is driven primarily by advertising and subscription revenues, has relatively higher sales and marketing expense and has seasonal strength in the fourth quarter.
The accounting policies of the businesses are the same as those described in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2020. The Company evaluates performance based on revenue, gross margin and profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses.
Information on reportable segments and reconciliation to consolidated income from operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Revenue by reportable segment:
|
|
|
|
|
|
|
|
|
Fax and Martech
|
|
|
|
|
$
|
94,667
|
|
|
$
|
93,283
|
|
|
Voice, Backup, Security, and CPP
|
|
|
|
|
75,117
|
|
|
58,962
|
|
|
Cloud Services Total
|
|
|
|
|
169,784
|
|
|
152,245
|
|
|
|
|
|
|
|
|
|
|
|
Digital Media
|
|
|
|
|
162,691
|
|
|
147,683
|
|
|
Elimination of inter-segment revenues
|
|
|
|
|
(83)
|
|
|
(36)
|
|
|
Total segment revenues
|
|
|
|
|
332,392
|
|
|
299,892
|
|
|
Corporate (1)
|
|
|
|
|
1
|
|
|
1
|
|
|
Total revenues
|
|
|
|
|
$
|
332,393
|
|
|
$
|
299,893
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit by reportable segment:
|
|
|
|
|
|
|
|
|
Fax and Martech
|
|
|
|
|
$
|
82,166
|
|
|
$
|
78,719
|
|
|
Voice, Backup, Security, and CPP
|
|
|
|
|
49,258
|
|
|
41,043
|
|
|
Cloud Services Total
|
|
|
|
|
131,424
|
|
|
119,762
|
|
|
|
|
|
|
|
|
|
|
|
Digital Media
|
|
|
|
|
141,920
|
|
|
129,153
|
|
|
Elimination of inter-segment gross profit
|
|
|
|
|
(83)
|
|
|
(36)
|
|
|
Total segment gross profit
|
|
|
|
|
273,261
|
|
|
248,879
|
|
|
Corporate (1)
|
|
|
|
|
1
|
|
|
1
|
|
|
Total gross profit
|
|
|
|
|
$
|
273,262
|
|
|
$
|
248,880
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs by reportable segment (2):
|
|
|
|
|
|
|
|
|
Fax and Martech
|
|
|
|
|
$
|
31,714
|
|
|
$
|
34,102
|
|
|
Voice, Backup, Security, and CPP
|
|
|
|
|
43,976
|
|
|
27,127
|
|
|
Cloud Services Total
|
|
|
|
|
75,690
|
|
|
61,229
|
|
|
|
|
|
|
|
|
|
|
|
Digital Media
|
|
|
|
|
136,968
|
|
|
130,167
|
|
|
Elimination of inter-segment direct costs
|
|
|
|
|
(83)
|
|
|
(36)
|
|
|
Total segment direct costs
|
|
|
|
|
212,575
|
|
|
191,360
|
|
|
Corporate (1)
|
|
|
|
|
5,440
|
|
|
6,658
|
|
|
Total direct costs (2)
|
|
|
|
|
$
|
218,015
|
|
|
$
|
198,018
|
|
|
|
|
|
|
|
|
|
|
|
Operating income by reportable segment:
|
|
|
|
|
|
|
|
|
Fax and Martech
|
|
|
|
|
$
|
50,452
|
|
|
$
|
44,617
|
|
|
Voice, Backup, Security, and CPP
|
|
|
|
|
5,282
|
|
|
13,916
|
|
|
Cloud Services Total
|
|
|
|
|
55,734
|
|
|
58,533
|
|
|
|
|
|
|
|
|
|
|
|
Digital Media
|
|
|
|
|
4,952
|
|
|
(1,014)
|
|
|
Total segment operating income
|
|
|
|
|
60,686
|
|
|
57,519
|
|
|
Corporate (1)
|
|
|
|
|
(5,439)
|
|
|
(6,657)
|
|
|
Total income from operations
|
|
|
|
|
$
|
55,247
|
|
|
$
|
50,862
|
|
|
|
|
|
|
|
|
|
|
|
(1) Corporate includes costs associated with general and administrative and other expenses that are managed on a global basis and that are not directly attributable to any particular segment.
|
|
|
|
|
|
|
|
|
(2) Direct costs for each segment include other operating expenses that are directly attributable to the segment, such as employee compensation expense, local sales and marketing expenses, engineering and network operations expense, depreciation and amortization and other administrative expenses.
|
|
|
|
|
|
|
|
The CODM does not use Balance Sheet and Cash Flow information in connection with operating and investment decisions other than as presented for Cloud Services and Digital Media. Accordingly, the following segment information is presented for Cloud Services and Digital Media.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Assets:
|
|
|
|
|
Cloud Services
|
$
|
1,405,497
|
|
|
$
|
1,466,969
|
|
|
Digital Media
|
1,462,212
|
|
|
1,561,024
|
|
|
Total assets from Cloud Services and Digital Media
|
2,867,709
|
|
|
3,027,993
|
|
|
Corporate
|
501,184
|
|
|
477,853
|
|
|
Total assets
|
$
|
3,368,893
|
|
|
$
|
3,505,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2020
|
|
2019
|
|
Capital expenditures:
|
|
|
|
|
Cloud Services
|
$
|
11,248
|
|
|
$
|
3,502
|
|
|
Digital Media
|
15,637
|
|
|
9,029
|
|
|
Total capital expenditures from Cloud Services and Digital Media
|
26,885
|
|
|
12,531
|
|
|
Corporate
|
—
|
|
|
—
|
|
|
Total capital expenditures
|
$
|
26,885
|
|
|
$
|
12,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Cloud Services
|
|
|
|
|
$
|
20,839
|
|
|
$
|
13,349
|
|
|
Digital Media
|
|
|
|
|
32,556
|
|
|
35,179
|
|
|
Total depreciation and amortization from Cloud Services and Digital Media
|
|
|
|
|
53,395
|
|
|
48,528
|
|
|
Corporate
|
|
|
|
|
585
|
|
|
681
|
|
|
Total depreciation and amortization
|
|
|
|
|
$
|
53,980
|
|
|
$
|
49,209
|
|
J2 Global maintains operations in the U.S., Canada, Ireland, Japan and other countries. Geographic information about the U.S. and all other countries for the reporting periods is presented below. Such information attributes revenues based on jurisdictions where revenues are reported (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
$
|
270,309
|
|
|
$
|
231,343
|
|
|
Canada
|
|
|
|
|
16,570
|
|
|
17,053
|
|
|
Ireland
|
|
|
|
|
13,003
|
|
|
15,623
|
|
|
All other countries
|
|
|
|
|
32,511
|
|
|
35,874
|
|
|
|
|
|
|
|
$
|
332,393
|
|
|
$
|
299,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
Long-lived assets:
|
|
|
|
|
United States
|
$
|
688,360
|
|
|
$
|
701,580
|
|
|
All other countries
|
78,504
|
|
|
76,927
|
|
|
Total
|
$
|
766,864
|
|
|
$
|
778,507
|
|
16.Accumulated Other Comprehensive Income
The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of tax, for the three months ended March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Investments
|
|
Foreign Currency Translation
|
|
Total
|
|
Beginning balance
|
$
|
(275)
|
|
|
$
|
(46,187)
|
|
|
$
|
(46,462)
|
|
|
Other comprehensive income (loss)
|
708
|
|
|
(8,714)
|
|
|
(8,006)
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
708
|
|
|
(8,714)
|
|
|
(8,006)
|
|
|
Ending balance
|
$
|
433
|
|
|
$
|
(54,901)
|
|
|
$
|
(54,468)
|
|
The following table provides details about reclassifications out of accumulated other comprehensive loss for the three months ended March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Loss Components
|
|
Amount Reclassified from Accumulated Other Comprehensive Loss
|
|
|
|
Affected Line Item in the Statement of Operations
|
|
|
|
Three Months Ended
March 31, 2020
|
|
|
|
|
|
Unrealized loss on available-for-sale investments
|
|
$
|
698
|
|
|
|
|
Loss on investments, net
|
|
|
|
698
|
|
|
|
|
Income before income taxes
|
|
|
|
—
|
|
|
|
|
Income tax expense
|
|
Total reclassifications for the period
|
|
$
|
698
|
|
|
|
|
Net Loss
|
17.Subsequent Events
In April 2020, the Company repurchased 319,984 shares under its share repurchase program at an aggregate cost of $23.6 million, which were subsequently retired.