Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in thousands, except share and per share data)
1. Description of Business, Basis of Presentation and Summary of Significant Accounting Policies
Angie’s List, Inc. (collectively with its wholly owned subsidiaries, the “Company”, “we”, “us” or “our”) operates a national local services consumer review service and marketplace where members can research, shop for and purchase local services for critical needs, as well as rate and review the providers of these services. Ratings and reviews, which are available to members free-of-charge, assist members in identifying and hiring a provider for their local service needs. The Company’s services are provided in markets located across the continental United States.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP were condensed or omitted pursuant to such rules and regulations. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include all information and footnotes necessary for fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
. The accompanying unaudited condensed consolidated balance sheet as of
December 31, 2016
was derived from the audited consolidated financial statements as of that date but does not include all disclosures required by U.S. GAAP, including certain notes thereto.
The condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered, in the opinion of management, necessary to fairly report the results for the periods presented. Operating results from interim periods are not necessarily indicative of results to be expected for the fiscal year as a whole.
For additional information, including a discussion of the Company’s significant accounting policies, refer to the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
Operating Segments
Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company manages its business on the basis of
one
operating segment.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes as well as the disclosure of contingent assets and liabilities and reported revenue and expenses. Actual results could differ from those estimates.
Significant Accounting Policies
During the three months ended
March 31, 2017
, there were no material changes to the Company’s significant accounting policies from those described in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
Prior Year Presentation
In connection with the Company’s early adoption of Financial Accounting Standards Board (the “FASB”) Accounting Standards Update No. 2016-09 during the third quarter of 2016, the Company was required to record a modified retrospective transition adjustment at the time of adoption to reflect an increase in stock-based compensation expense for 2016 related to the Company’s forfeitures election under the new standard. Although this adjustment was recorded during the third quarter of 2016, given the modified retrospective nature of the adjustment, the Company was precluded from presenting the full amount of the adjustment for the quarter ended September 30, 2016 and was instead required to update amounts previously reported, yielding a retrospective increase to general and administrative expense for the quarter ended March 31, 2016. As a result, the general and administrative expense, operating loss, net loss and corresponding per share figures presented in the condensed consolidated statement of operations for the three months ended
March 31, 2016
differ from amounts previously reported.
Income Taxes - Valuation Allowance
The Company evaluates whether it will realize the benefits of its net deferred tax assets and establishes a valuation allowance to reduce the carrying value of its deferred tax assets to the amount considered more likely than not to be recognized. Deferred tax assets arise as a result of tax loss carryforwards and various differences between the book basis and the tax basis of such assets. The Company periodically reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. Should there be a change in the ability to recover deferred tax assets, the tax provision would be adjusted in the period in which the assessment is changed. There was no change to the Company’s assessment during the
three
months ended
March 31, 2017
. While the Company reported net income for the
three
months ended
March 31, 2017
, any taxable income for the period will ultimately be reduced by net operating loss carryforwards. The Company maintains a full valuation allowance against its deferred tax assets, and as a result, there is no federal income tax expense recorded in the condensed consolidated statement of operations for the
three
months ended
March 31, 2017
.
Contractual Obligations
The Company’s contractual obligations primarily consist of long-term operating leases expiring through 2021 and long-term debt comprised of a
$60,000
term loan scheduled to mature on September 26, 2019. In March 2017, the Company provided notice of termination, effective May 1, 2018, of an operating lease for office space that was previously scheduled to conclude in April 2020, yielding a reduction in the Company’s future minimum lease payment obligations. There were no other significant changes in the Company’s contractual obligations during the three months ended
March 31, 2017
from those disclosed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
. Total combined future minimum payment obligations as of
March 31, 2017
under long-term operating leases amounted to approximately
$3,049
, including
$1,599
in 2017,
$933
in 2018,
$369
in 2019,
$140
in 2020 and
$8
in 2021. The Company had
$57,879
in outstanding borrowings, net of unamortized deferred financing fees and unamortized fees paid to the lender, under the term loan as of
March 31, 2017
.
Stock-Based Compensation
On June 29, 2016, the Company granted
3,034,329
performance awards of restricted stock units (“PRSUs”) under a long-term incentive plan (the “2016 LTIP”) to its executive officers and other members of the Company’s senior leadership team as of that date. The PRSUs granted are contingent upon the Company’s performance with respect to certain predetermined Total Cumulative Revenue targets over the
33
-month period commencing April 1, 2016 and concluding December 31, 2018, subject to the Company’s achievement of a predetermined cumulative Adjusted EBITDA threshold over the same time period. Of the
3,034,329
PRSUs granted,
2,633,570
PRSUs remained outstanding as of
March 31, 2017
, representing the number of shares to be issued at the
100%
target achievement level for this award. The decline from the number of PRSUs granted under the 2016 LTIP is due to forfeitures since the date of grant. During the first quarter of 2017, the Company cancelled the “stretch” component of the 2016 LTIP such that the maximum achievement level under this award is now the
100%
target achievement level. Accordingly, the number of shares ultimately issued could be
0%
or range from
75%
(threshold achievement level) to
100%
(target, and now maximum, achievement level) of the number of PRSUs outstanding, based on the Company’s performance in relation to the performance conditions, and linear interpolation will be applied should Total Cumulative Revenue fall between the threshold and target achievement levels. Any PRSUs earned under the 2016 LTIP will vest in full on May 31, 2019, subject to continued employment as of that date. The Company evaluates whether or not to recognize stock-based compensation expense for these awards over the vesting period based on the projected probability of achievement of the aforementioned performance conditions as of the end of each reporting period during the performance period and may periodically adjust the recognition of such expense, as necessary, in response to any changes in the Company’s forecasts with respect to the performance conditions. For the
three
months ended
March 31, 2017
, the Company did not recognize any stock-based compensation expense related to the 2016 LTIP based on the Company’s determination that achievement of the performance conditions was not probable as of that date.
Proposed Merger with IAC/HomeAdvisor
On May 1, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with IAC/InterActiveCorp (“IAC”), Halo TopCo, Inc., a wholly owned subsidiary of IAC (“NewCo”) and Casa Merger Sub, Inc., a direct wholly owned subsidiary of NewCo (“Merger Sub”).
The Merger Agreement provides that, subject to the terms and conditions of the Merger Agreement, prior to the effective time of the Merger, IAC will contribute its HomeAdvisor business, along with certain cash, to NewCo in exchange for shares of NewCo Class B common stock. At the effective time of the Merger, the Company will become a subsidiary of NewCo through a subsidiary merger in which the outstanding shares of the Company’s common stock will be converted into shares of NewCo Class A common stock and/or cash (the “Merger”). NewCo will be renamed ANGI Homeservices Inc. and will apply to list its Class A common stock on the NASDAQ.
Subject to the terms and conditions of the Merger Agreement, the Company will merge with a subsidiary of ANGI Homeservices Inc., and the Company’s stockholders may elect to receive, in exchange for each share of the Company’s common stock owned, either
one
share of ANGI Homeservices Inc. Class A common stock, or
$8.50
per share in cash. Elections by the Company’s stockholders will be subject to proration to the extent the total number of stockholders electing to receive cash would result in payment of more than
$130,000
. The ANGI Homeservices Inc. Class A common stock issued in the Merger will possess
one
vote per share and is expected to be listed for trading on the NASDAQ Stock Market at the closing of the transaction. ANGI Homeservices Inc. will also issue shares of Class B common stock, possessing
10
votes per share, to IAC in exchange for the contribution by IAC of its HomeAdvisor business. Upon the closing of the transaction, depending on the number of Company stockholders electing to receive cash, former stockholders of the Company will hold NewCo Class A common stock representing between
10%
and
13%
of the value and less than
2%
of the total voting power of NewCo’s stock, and IAC will hold NewCo Class B common stock representing between approximately
87%
and
90%
of the value and approximately
98%
of the total voting power of NewCo’s stock.
The completion of the Merger is subject to certain conditions, including the receipt of the necessary approval from the Company’s stockholders, the satisfaction of certain regulatory approvals and other customary closing conditions. The transaction is expected to close in the fourth quarter of 2017.
The Merger Agreement provides certain termination rights for the Company and IAC. Upon termination of the Merger Agreement under specified circumstances, such as the Company accepting a superior proposal or the Company’s Board of Directors withdrawing its recommendation regarding the Merger, or failure to obtain the necessary approval from the Company’s stockholders, the Company may be required to pay IAC a termination fee of
$20,000
.
The Company’s pursuit of strategic alternatives, culminating in the execution of the Merger Agreement, did not materially impact the Company’s condensed consolidated financial statements for the three months ended March 31, 2017. For additional information on the Merger Agreement, please refer to the Current Report on Form 8-K we filed with the U.S. Securities and Exchange Commission on May 3, 2017, including a copy of the Merger Agreement filed as Exhibit 2.1 thereto.
Recent Accounting Pronouncements - Not Yet Adopted
In January 2017, the FASB issued Accounting Standards Update No. 2017-04:
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”). The amendments in this update simplify the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit. ASU 2017-04 will be effective for the Company in fiscal year 2020, but early adoption is permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15:
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). The amendments in this update add to or clarify existing U.S. GAAP guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASU 2016-15 will be effective for the Company in fiscal year 2018, but early adoption is permitted. The guidance set forth in this update must be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating the impact of this update on the consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13:
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). The amendments in this update add to U.S. GAAP a current expected credit loss impairment model that is based on expected losses rather than incurred losses, requiring consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. ASU 2016-13 will be effective for the Company in fiscal year 2020, but early adoption is permitted beginning in 2019. The Company is currently evaluating the impact of this update on the consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02:
Leases (Topic 842)
(“ASU 2016-02”). The amendments in this update require lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 will be effective for the Company in fiscal year 2019, but early adoption is permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01:
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”). The amendments in this update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In particular, the amendments in this update supersede, for public business entities, the requirement to disclose the methods and significant assumptions used in calculating the fair value of financial instruments required to be disclosed for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 will be effective for the Company in fiscal year 2018, but early adoption is permitted. The Company does not believe the adoption of the guidance set forth in this update will have a material impact on the consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09:
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”). This update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” This update also requires significantly expanded disclosures related to revenue recognition. In March 2016, the FASB issued Accounting Standards Update No. 2016-08:
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(“ASU 2016-08”)
,
amending the principal-versus-agent implementation guidance set forth in ASU 2014-09. Among other things, ASU 2016-08 clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued Accounting Standards Update No. 2016-10:
Identifying Performance Obligations and Licensing
(“ASU 2016-10”), which amends certain aspects of the guidance set forth in the FASB’s new revenue standard related to identifying performance obligations and licensing implementation. In May 2016, the FASB issued Accounting Standards Update No. 2016-12:
Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”), amending certain aspects of ASU 2014-09 to address implementation issues identified by the FASB’s transition resource group and clarify the new revenue standard’s core revenue recognition principles. In December 2016, the FASB issued Accounting Standards Update No. 2016-20:
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
(“ASU 2016-20”), which clarified or corrected unintended application of certain aspects of the guidance set forth under ASU 2014-09. ASU 2014-09 will be effective for the Company in fiscal year 2018 following the issuance of Accounting Standards
Update No. 2015-14:
Deferral of the Effective Date
in August 2015, which deferred the effective date of ASU 2014-09 by one year.
The Company continues to analyze the full impact of the adoption of ASU 2014-09, which could result in material differences between current revenue recognition practices and those required under the new guidance. As of the date of these condensed consolidated financial statements, the Company has substantially completed the diagnostic assessment phase of its ASU 2014-09 adoption, including preliminary assessment and project planning, revenue stream scoping and reviews of certain contracts. As part of the Company’s ongoing evaluation of ASU 2014-09, the following revenue streams were identified: membership revenue, service provider advertising revenue and service provider e-commerce revenue. Each of these revenue streams will continue to be further evaluated in detail based on the criteria established under ASU 2014-09 and will serve as the basis for the accounting analysis and documentation as it relates to the impact of the standard. The significant implementation matters yet to be addressed under ASU 2014-09 include completing the final analysis of the impact to the consolidated financial statements and calculating the transition adjustment, if any, upon adoption of the standard, internal controls considerations and disclosure requirements.
The Company currently anticipates adopting ASU 2014-09 effective January 1, 2018 utilizing the modified retrospective method of adoption. Accordingly, upon adoption, the Company currently anticipates recognizing the cumulative effect of adopting this guidance as an adjustment to the opening balance of the accumulated deficit within the consolidated balance sheet for the period of adoption, and prior periods will not be retrospectively adjusted. While the Company has completed a preliminary assessment of the key provisions of ASU 2014-09, the evaluation of the full impact of the standard on the consolidated financial statements and related disclosures is ongoing, and the Company is therefore not yet able to reasonably estimate the financial statement impact of ASU 2014-09 upon adoption. The Company continues to actively monitor outstanding issues currently being addressed by the FASB’s Transition Resource Group as conclusions reached by this group may impact the Company’s application of ASU 2014-09.
2. Net Income (Loss) Per Common Share
Basic and diluted net income (loss) per common share are computed by dividing consolidated net income (loss) by the basic and diluted weighted-average number of common shares outstanding, respectively, for the period. Basic net income (loss) per common share was
$0.03
and
$(0.08)
for the
three
months ended
March 31, 2017
and
2016
, respectively. Diluted net income (loss) per common share was
$0.03
and
$(0.08)
for the
three
months ended
March 31, 2017
and
2016
, respectively.
The following table shows the calculation of the diluted weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2017
|
|
2016
|
Weighted-average number of common shares outstanding — basic
|
|
59,508,503
|
|
|
58,613,879
|
|
Total dilutive effect of outstanding share-based payments
|
|
353,397
|
|
|
—
|
|
Weighted-average number of common shares outstanding — diluted
|
|
59,861,900
|
|
|
58,613,879
|
|
The following potentially dilutive share-based payments were not included in the diluted net income (loss) per common share calculations as the impact would have been antidilutive for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2017
|
|
2016
|
Stock options
|
|
6,768,262
|
|
|
7,394,111
|
|
Restricted stock units
|
|
2,875,876
|
|
|
1,290,502
|
|
Performance awards of restricted stock units
|
|
3,088,801
|
|
|
232,208
|
|
Shares to be purchased under employee stock purchase plan
|
|
31,514
|
|
|
—
|
|
The PRSUs outstanding under the 2016 LTIP as of
March 31, 2017
were not included in the computation of diluted net income (loss) per common share as the number of shares that will ultimately be issued is contingent upon the Company’s achievement of certain predetermined performance conditions and does not meet the criteria for inclusion per the applicable U.S. GAAP guidance.
3. Fair Value Measurements
Whenever possible, quoted prices in active markets are used to determine the fair value of the Company’s financial instruments. The Company’s financial instruments are not held for trading or other speculative purposes. The estimated fair value of financial instruments was determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may materially impact the estimated fair value amounts.
Fair Value Hierarchy
Fair value is based on the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with Accounting Standards Codification (“ASC”) 820,
Fair Value Measurement
(“ASC 820”), the Company categorized the financial assets and liabilities that are adjusted to fair value based on the priority of the inputs to the valuation technique, following the three-level fair value hierarchy prescribed by ASC 820, as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level 3: Unobservable inputs that are used when little or no market data is available.
Valuation Techniques
The Company’s money market fund investments, the maturities for which are less than 90 days, are classified as cash equivalents within Level 1 of the fair value hierarchy on the basis of valuations using quoted market prices. Short-term investments consist of certificates of deposit and U.S. Treasury securities with maturities of more than 90 days but less than one year. As many fixed income securities do not trade daily, fair values are often derived using recent trades of securities with similar features and characteristics. When recent trades are not available, pricing models are used to determine these prices. These models calculate fair values by discounting future cash flows at estimated market interest rates. Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry and structure of the asset. Typical inputs and assumptions to pricing models include, but are not limited to, a combination of benchmark yields, reported trades, issuer spreads, liquidity, benchmark securities, bids, offers, reference data and industry and economic events. The Company’s fixed income certificates of deposit and U.S. Treasury securities are valued using recent trades or pricing models and are therefore classified within Level 2 of the fair value hierarchy.
Recurring Fair Value Measurements
There were no movements between fair value measurement levels for the Company’s cash equivalents and investments in the
three
months ended
March 31, 2017
or in
2016
, and there were no material unrealized gains or losses as of
March 31, 2017
or
December 31, 2016
.
The following tables summarize the Company’s financial instruments at fair value based on the fair value hierarchy for each class of instrument as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at March 31, 2017 Using
|
|
|
Carrying Value at
March 31, 2017
|
|
Quoted Prices in Active Markets
for Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
6,791
|
|
|
$
|
6,791
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investments:
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
11,200
|
|
|
—
|
|
|
11,198
|
|
|
—
|
|
U.S. Treasury securities
|
|
1,000
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
Total assets
|
|
$
|
18,991
|
|
|
$
|
6,791
|
|
|
$
|
12,198
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2016 Using
|
|
|
Carrying Value at
December 31, 2016
|
|
Quoted Prices in Active Markets
for Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
2,419
|
|
|
$
|
2,419
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investments:
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
13,840
|
|
|
—
|
|
|
13,837
|
|
|
—
|
|
U.S. Treasury securities
|
|
2,701
|
|
|
—
|
|
|
2,702
|
|
|
—
|
|
Total assets
|
|
$
|
18,960
|
|
|
$
|
2,419
|
|
|
$
|
16,539
|
|
|
$
|
—
|
|
The Company reviews its investment portfolio for other-than-temporary impairment whenever events or changes in circumstances indicate the carrying amount of the investment may be impaired, considering such factors as the duration, severity and reason for the decline in value as well as the potential recovery period. The Company did not recognize any other-than-temporary impairment losses during the
three
months ended
March 31, 2017
or
2016
.
The carrying amount of the term loan approximates fair value, using Level 2 inputs, as this borrowing bears interest at a variable (market) rate at
March 31, 2017
and
December 31, 2016
.
Non-Recurring Fair Value Measurements
The Company has certain assets that are measured at fair value on a non-recurring basis under circumstances and events that are adjusted to fair value in certain circumstances when the carrying values are more than the fair values. The categorization of the framework used to price the assets in the event of an impairment is considered a Level 3 measurement due to the subjective nature of the unobservable inputs used to determine the fair value.
Assets and liabilities acquired in business combinations are recorded at their fair value as of the date of acquisition using Level 2 and Level 3 inputs.
The carrying amounts of accounts receivable and accounts payable reported in the condensed consolidated balance sheets approximate fair value.
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets was comprised of the following as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Prepaid and deferred commissions
|
|
$
|
9,546
|
|
|
$
|
8,869
|
|
Other prepaid expenses and current assets
|
|
11,128
|
|
|
8,133
|
|
Total prepaid expenses and other current assets
|
|
$
|
20,674
|
|
|
$
|
17,002
|
|
5. Property, Equipment and Software
Property, equipment and software was comprised of the following as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Furniture and equipment
|
|
$
|
16,473
|
|
|
$
|
16,439
|
|
Land
|
|
3,466
|
|
|
3,466
|
|
Buildings and improvements
|
|
20,771
|
|
|
20,768
|
|
Software
|
|
5,873
|
|
|
5,853
|
|
Capitalized website and software development costs
|
|
62,331
|
|
|
60,811
|
|
Total property, equipment and software
|
|
108,914
|
|
|
107,337
|
|
Less accumulated depreciation
|
|
(28,420
|
)
|
|
(24,623
|
)
|
Total property, equipment and software, net
|
|
$
|
80,494
|
|
|
$
|
82,714
|
|
6. Accrued Liabilities
Accrued liabilities was comprised of the following as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Accrued sales commissions
|
|
$
|
1,847
|
|
|
$
|
1,469
|
|
Sales and use tax
|
|
3,789
|
|
|
3,792
|
|
Accrued compensation
|
|
6,020
|
|
|
7,369
|
|
Uninvoiced accounts payable
|
|
6,297
|
|
|
4,333
|
|
Legal settlement accrual
|
|
145
|
|
|
2,601
|
|
Other accrued liabilities
|
|
4,368
|
|
|
3,564
|
|
Total accrued liabilities
|
|
$
|
22,466
|
|
|
$
|
23,128
|
|
7. Debt and Credit Arrangements
Long-term debt, net, was comprised of the following as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Term loan
|
|
$
|
60,000
|
|
|
$
|
60,000
|
|
Unamortized deferred financing fees
|
|
(973
|
)
|
|
(1,071
|
)
|
Unamortized fees paid to lender
|
|
(1,148
|
)
|
|
(1,287
|
)
|
Total debt, net
|
|
57,879
|
|
|
57,642
|
|
Less current maturities
|
|
(2,250
|
)
|
|
(1,500
|
)
|
Total long-term debt, net
|
|
$
|
55,629
|
|
|
$
|
56,142
|
|
On September 26, 2014, the Company entered into a financing agreement for a
$60,000
term loan and a
$25,000
delayed draw term loan.
On June 10, 2016, the Company entered into a first amendment to the financing agreement which, among other things, (i) extended the commencement of the Company’s quarterly repayment obligations under the term loan from September 30, 2016 to September 30, 2017; (ii) revised the financial covenant for minimum consolidated EBITDA, as defined in the financing agreement, for periods ending after June 30, 2016; (iii) revised the financial covenant related to minimum required liquidity; (iv) removed the financial covenant related to minimum membership revenue for periods ending after March 31, 2016; and (v) modified the basis for the calculation of the applicable interest rate.
On November 1, 2016, the Company entered into a second amendment to the financing agreement which, among other things, (i) added a new financial covenant related to consolidated active service provider contract value beginning with the period ending December 31, 2016; (ii) revised the financial covenant for minimum consolidated EBITDA, as defined in the financing agreement and subsequently modified under the second amendment, for periods ending after September 30, 2016; (iii) revised the financial covenant related to minimum required liquidity; (iv) modified the basis for the calculation of the applicable interest rate; (v) modified the dates under which the prepayment premium is applicable; and (vi) modified certain terms related to the delayed draw term loan. Additionally, the second amendment set forth a fee to be paid by the Company to the lender, in three equal annual installments, in connection with the execution of the amendment, and this fee was capitalized along with the existing unamortized fees paid to lender contra liability and is being amortized to interest expense over the remaining term of the financing agreement.
The financing agreement requires monthly interest payments on the first business day of each month until maturity on any principal amounts outstanding under either debt facility. In accordance with the second amendment to the financing agreement, if the Company’s consolidated EBITDA for the trailing four consecutive fiscal quarters is less than
$20,000
or the Company’s qualified cash, as defined in the financing agreement, is less than
$20,000
as of the applicable period end, amounts outstanding under the financing agreement bear interest at a per annum rate, at the option of the Company, equal to (i) the LIBOR rate for the interest period in effect, subject to a floor of
0.5%
, plus
9.5%
or (ii) the reference rate, which is based on the prime rate as published by the Wall Street Journal, subject to a floor of
3.25%
, plus
8.5%
. If the Company’s qualified cash is greater than
$20,000
, and the Company’s consolidated EBITDA for the trailing four consecutive fiscal quarters is:
|
|
•
|
greater than
$20,000
but less than
$25,000
, the applicable LIBOR interest rate is
8.5%
, and the applicable reference interest rate is
7.5%
;
|
|
|
•
|
greater than
$25,000
but less than
$30,000
, the applicable LIBOR interest rate is
7.5%
, and the applicable reference interest rate is
6.5%
; or
|
|
|
•
|
greater than
$30,000
, the applicable LIBOR interest rate is
6.5%
, and the applicable reference interest rate is
5.5%
.
|
The financing agreement obligates the Company to make quarterly principal payments on the term loan of
$750
on the last day of each calendar quarter, commencing with the quarter ending September 30, 2017, and to repay the remaining balance of the term loan at maturity. The Company is required to make principal payments on the outstanding balance of the delayed draw term loan equal to
1.25%
of the amount of such loan funded at or prior to the last day of each calendar quarter and to repay the remaining outstanding balance of the delayed draw term loan at maturity. From the effective date of the financing agreement through September 26, 2017, the Company is also required to pay a commitment fee equal to
0.75%
per annum of the unborrowed amounts of the delayed draw term loan.
The Company may prepay the amounts outstanding under the financing agreement at any time and is required to prepay the loans with (i) the net proceeds of certain asset sales, issuances of debt or equity, and certain casualty events, and (ii) up to
50%
of consolidated excess cash flow, as defined in the financing agreement, for each fiscal year during the term of the financing agreement. As specified by the second amendment to the financing agreement, the Company must pay a
1%
premium on prepayments made on or before November 1, 2017, subject to certain exceptions set forth in the financing agreement. The Company’s obligations under the financing agreement are guaranteed by each of its subsidiaries and are secured by first priority security interests in all of their respective assets and a pledge of the equity interests of the Company’s subsidiaries. The term loan and the delayed draw term loan mature on September 26, 2019. As of
March 31, 2017
, the Company had
$57,879
in outstanding borrowings under the term loan, net of unamortized deferred financing fees of
$973
and unamortized fees paid to the lender of
$1,148
, both of which are being amortized into interest expense over the term of the financing agreement, and availability of
$25,000
under the delayed draw term loan.
The financing agreement contains various restrictive covenants, including restrictions on the Company’s ability to dispose of assets, make acquisitions or investments, incur debt or liens, make distributions to stockholders or repurchase outstanding stock, enter into related-party transactions and make capital expenditures, other than upon satisfaction of the conditions set forth in the financing agreement. The Company is also required to comply with certain financial covenants, including minimum consolidated EBITDA, as defined in the financing agreement and subsequently modified under the second amendment, minimum liquidity, minimum consolidated active service provider contract value and maximum consolidated capital expenditures. Upon an event of default, which includes certain customary events such as, among other things, a failure to make required payments when due, a failure to comply with covenants, certain bankruptcy and insolvency events, defaults under other material indebtedness, or a change in control, the lenders may accelerate amounts outstanding, terminate the agreement and foreclose on all collateral. The Company was in compliance with all financial and non-financial covenants at
March 31, 2017
.
8. Commitments and Contingencies
The Company is regularly involved in litigation, both as a plaintiff and as a defendant, relating to its business and operations. The Company assesses the likelihood of any judgments or outcomes with respect to these matters and determines loss contingency assessments on a gross basis after assessing the probability of incurrence of a loss and whether a loss is reasonably estimable. In addition, the Company considers other relevant factors that could impact its ability to reasonably estimate a loss. A determination of the amount of reserves required, if any, for these contingencies is made after analyzing each matter. The Company’s reserves may change in the future due to new developments or changes in strategy in handling these matters. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes the final outcome of the matters listed below will not have a material adverse effect on its business, consolidated financial position, results of operations or cash flows. Regardless of the outcome, litigation can adversely impact the Company as a result of defense and settlement costs, diversion of management resources and other factors.
Moore, et al. v. Angie’s List, Inc., 2:15cv-01243-SD.
On March 11, 2015, a lawsuit seeking class action status was filed against the Company in the U.S. District Court for the Eastern District of Pennsylvania. The lawsuit alleged claims for breaches of contract and the covenant of good faith and fair dealing, fraud and fraudulent inducement, unjust enrichment and violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law premised on the allegations that the Company does not disclose that it accepts advertising payments from service providers or that the payments allegedly impact the service provider letter-grade ratings, the content and availability of reviews about the provider and the provider’s place in search-result rankings. The Company filed a motion to dismiss on May 13, 2015, which was granted in part on August 7, 2015. In particular, the plaintiff’s claims for breach of the covenant of good faith and fair dealing and unjust enrichment were dismissed from the action. On April 19, 2016, the parties agreed to settle the claims on a class-wide basis. Among other relief, the settlement provided for a cash payment of up to
$2,350
to create a fund for the payment of cash to settlement class members and for the payment of plaintiffs’ attorneys’ fees and costs as approved by the Court. Settlement class members were given the option of sharing in the cash fund or selecting a free period of membership of up to
four months
depending on the date and length of their membership with Angie’s List. The settlement also provided certain prospective relief in the form of enhanced explanations in the Company’s membership agreement and in responses to frequently asked questions concerning, among other things, the advertising revenue earned from service providers. The Company recorded a
$3,500
contingent liability related to this matter in the first quarter of 2016, and this amount included the estimated cost of the cash fund described above as well as the payment of reasonable notice and administration costs, attorneys’ fees and an assumption of revenue the Company would forego as a result of certain class members selecting the option for a free period of membership. On December 12, 2016, the Court entered an order granting final approval of the settlement. One class member appealed the order, but the plaintiff settled with the class member, and the class member stipulated to dismiss the appeal. On January 13, 2017, the Third Circuit Court of Appeals entered an order dismissing the appeal, and the settlement became final and effective as of that date.
The Company, with the assistance of its third-party settlement administrator, is now in the process of administering the settlement. On January 30, 2017, the Company made the above-referenced cash payment into an escrow account to be paid to the class members who selected the cash class benefit, as well as to plaintiffs’ counsel. On February 13, 2017, the Company updated its membership agreement and relevant website FAQs to include the above-referenced enhanced explanations regarding advertising revenue earned from service providers. Also, in February 2017, the Company provided instructions on how to redeem membership extensions to the class members who selected the membership extension class benefit. The aforementioned contingent legal liability was subsequently reduced by
$671
following completion of the election period for settlement class members during the fourth quarter of 2016. The Company’s accrual for this matter was
$2,601
and
$145
as of December 31, 2016 and March 31, 2017, respectively. Although class members may redeem their membership extension class benefit for up to two years, the Company considers this matter closed.
Williams, et al. v. Angie’s List, Inc., 1:16-cv-878
.
On April 20, 2016, a group of former employees filed a lawsuit in the United States District Court for the Southern District of Indiana. The lawsuit alleges the Company failed to pay (i) wages earned in a timely manner as required under Indiana Wage Statutes and (ii) overtime wages in violation of the Fair Labor Standards Act (29 U.S.C. §§ 206-07) and is requesting payment of all damages, including unpaid wages, interest, attorneys’ fees and other charges. Six amended complaints were filed, adding additional named plaintiffs, and the Company filed its answer to the sixth amended complaint on April 10, 2017. The plaintiffs filed a motion for conditional certification on June 10, 2016, and the Company filed its response brief in opposition on July 15, 2016. The Court denied the plaintiffs’ motion for conditional certification on November 30, 2016 but allowed the plaintiffs to refile with a more narrow class definition. On December 9, 2016, the plaintiffs filed a renewed motion for conditional certification. The Company filed its response to the renewed motion on January 6, 2017, and the plaintiffs filed their reply on January 17, 2017. The Court denied the plaintiffs’ renewed motion for conditional certification on April 28, 2017. The Company is currently unable to determine the likely outcome or reasonably estimate the amount or range of potential liability, if any, related to this matter, and accordingly, has not established any reserve for this matter.
Crabtree, et al. v. Angie’s List, Inc., 1:16-cv-877
. On April 20, 2016, three former employees filed a lawsuit in the United States District Court for the Southern District of Indiana. The lawsuit alleges the Company failed to pay (i) wages earned in a timely manner as required under Indiana Wage Statutes and (ii) overtime wages in violation of the Fair Labor Standards Act (29 U.S.C. §§ 206-07) and is requesting payment of all damages, including unpaid wages, interest, attorneys’ fees and other charges. The plaintiffs filed a first amended complaint in May 2016, adding one additional Indiana wage statute claim. The Company filed its answer and defenses on June 9, 2016. Discovery with respect to this matter is ongoing. The Company is currently unable to determine the likely outcome or reasonably estimate the amount or range of potential liability, if any, related to this matter, and accordingly, has not established any reserve for this matter.