UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2014

OR

 

For the transition period from              to              

Commission File: Number 001‑36262

 

Rightside Group, Ltd.

(Exact name of registrant as specified in its charter)

 

 

(425) 298-2500

(Registrant’s telephone number, including area code)

 

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

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

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

 

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

The number of shares of registrant’s common stock outstanding as of November 10, 2014 was 18,492,644.

 

 

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RIGHTSIDE GROUP, LTD.

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS

 

 

 

 

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PART 1.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

Rightside Group, Ltd.

Balance Sheets

(In thousands, except per share amounts)

(Unaudited)

 

 

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

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Rightside Group, Ltd.

Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

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

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Rightside Group, Ltd.

Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

 

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

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Rightside Group, Ltd.

Statement of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

 

 

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

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Rightside Group, Ltd.

Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

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

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Rightside Group, Ltd.

Notes to Financial Statements (Unaudited)

1.  Company Background, Separation from Demand Media and Basis of Presentation

In February 2013, Demand Media, Inc. (“Demand Media”) announced that its board of directors authorized Demand Media to pursue the separation of its business into two distinct publicly traded entities: a new company named Rightside Group, Ltd. (“Rightside,” the “Company,” “our,” “we,” or “us”) focused on domain name services, and Demand Media, a digital media company. On August 1, 2014, Demand Media consummated a tax free distribution of all of the outstanding shares of our common stock on a pro rata basis to Demand Media stockholders (the “separation” or the “spin‑off”) as of the record date. After the spin‑off, we began operating as an independent, publicly traded company.

We were incorporated on July 11, 2013, as a direct, wholly owned subsidiary of Demand Media, a New York Stock Exchange (“NYSE”) listed company that, prior to the spin-off, was a diversified digital media and domain name services company. Prior to our separation from Demand Media on August 1, 2014, Demand Media owned all of the outstanding shares of our capital stock. We have one class of common stock issued and outstanding, and no preferred stock outstanding. In connection with the spin‑off, Demand Media contributed or transferred certain of the subsidiaries and assets relating to Demand Media’s domain name services business to us, and we or our subsidiaries assumed all of the liabilities relating to Demand Media’s domain name services business.

We provide domain name registration and related value‑added service subscriptions to third parties through our wholly owned subsidiaries, eNom, Incorporated (“eNom”) and Name.com. We are also a significant participant in the substantial expansion of the number of available generic Top Level Domains (“gTLDs”) by the Internet Corporation for Assigned Names and Numbers (“ICANN”), with the first gTLDs delegated in October 2013 (the “New gTLD Program”). As part of the New gTLD Program, our domain name services business entered into its first registry operator agreements with ICANN, becoming an accredited registry for new gTLDs, and eNom and Name.com also entered into contracts necessary to participate in the New gTLD Program. We began to provide back‑end domain name registry and related services for gTLDs owned by third‑party domain name registries and we have operations for our own gTLDs.

Separation from Demand Media

Immediately prior to the separation, the authorized shares of Rightside capital stock were increased from 1,000 shares to 120.0 million shares, divided into the following classes: 100.0 million shares of common stock, par value $0.0001 per share, and 20.0 million shares of preferred stock, par value $0.0001 per share. The 1,000 shares of Rightside common stock, par value $0.0001 per share, that were previously issued and outstanding were automatically reclassified as and became 18.4 million shares of common stock, par value $0.0001 per share. The separation was effected by Demand Media through a tax-free dividend involving the distribution of all Rightside common stock held by Demand Media to Demand Media’s stockholders on August 1, 2014.

Upon effectiveness of the separation, holders of Demand Media common stock received one share of Rightside common stock for every five shares of Demand Media common stock they held on the record date. Following completion of the separation, Rightside became an independent, publicly traded company on the NASDAQ Global Select Market using the symbol: “NAME.”

As part of the separation, we entered into various agreements with Demand Media which provide for the allocation between Rightside and Demand Media of certain assets, liabilities, and obligations, and govern the relationship between Rightside and Demand Media after the separation. The agreements became effective as of August 1, 2014, and include the following: Separation and Distribution Agreement, Transition Services Agreement, Employee Matters Agreement and Tax Matters Agreement.

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Basis of Presentation

After the separation on August 1, 2014, our financial statements are presented on a consolidated basis, as we became a separate consolidated group. Our balance sheet, statement of operations, statement of stockholders’ equity and statement of cash flows include the accounts of Rightside and our wholly-owned subsidiaries.  These consolidated financial statements reflect our financial position, results of operations, statement of comprehensive income (loss), equity and cash flows as a separate company and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Prior to the separation on August 1, 2014, our financial statements were prepared on a condensed combined basis and presented as carve-out financial statements, as we were not a separate consolidated group.  Our financial statements were derived from the financial statements and accounting records of Demand Media. 

We have prepared the accompanying unaudited financial statements in accordance with GAAP for interim financial reporting. All intercompany accounts and transactions were eliminated in consolidation. In our opinion, we have included all adjustments necessary for a fair presentation. These adjustments consist of normal recurring items. We will refer to condensed combined and condensed consolidated financial statements as “financial statements,” “balance sheets,” “statement of operations,” “statement of cash flow” and “statement of stockholders’ equity” herein.

Prior to the separation on August 1, 2014, our financial statements assume the allocation to us of certain Demand Media corporate expenses relating to Rightside (refer to Note 13—Transactions with Related Parties and Parent Company Investment for further information). The accounting for income taxes is computed for our company on a separate tax return basis (refer to Note 9—Income Taxes for further information).

All significant intercompany accounts and transactions, other than those with Demand Media, have been eliminated in preparing the financial statements. All transactions between us and Demand Media have been included in these financial statements and are deemed to be settled. The total net effect of the settlement of these transactions is reflected in the statements of cash flow as a financing activity and in the combined balance sheets as “Parent company investment.” Parent company investment in the balance sheets represents Demand Media’s historical investment in our company, the net effect of cost allocations from transactions with Demand Media and our accumulated earnings.

Prior to the separation on August 1, 2014, the financial statements included expense allocations for certain: (1) corporate functions historically provided by Demand Media, including, but not limited to, finance, legal, information technology, human resources, communications, compliance, and other shared services; (2) employee benefits and incentives; and (3) stock‑based compensation.

These expenses have been allocated to us on a direct basis when identifiable, with the remainder allocated on a pro rata basis calculated as a percentage of our revenue, headcount or expenses to Demand Media’s consolidated results. We consider the basis on which these expenses were allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by us during the periods presented. The allocations do not, however, reflect the expense that we would have incurred as an independent company for the periods presented. Actual costs that may have been incurred if we had been a stand‑alone company would depend on a number of factors, including, but not limited to, the chosen organizational structure, the costs of being a stand‑alone publicly traded company, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure. Following our separation from Demand Media, we will perform these functions using our own resources and purchased services. For an interim period, however, some of these functions will continue to be provided by Demand Media under a transition services agreement, which are planned to extend for a period up to 18 months. Costs incurred by Demand Media to complete the spin‑off were not allocated to us.

We have prepared the unaudited interim financial statements on the same basis as the audited financial statements and have included all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our statement of financial position, results of operations, and cash flows. The results for the three and nine months ended September 30, 2014, are not necessarily indicative of the results expected for the full year. The balance sheet as of December 31, 2013, has been derived from our audited combined financial statements for the year ended

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December 31, 2013, included in our Form 10 as filed with the Securities and Exchange Commission (“SEC”) on July 14, 2014.

The interim unaudited financial statements have been prepared in accordance with GAAP. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited combined financial statements and notes thereto included in our Form 10 as filed with the SEC on July 14, 2014.

 

2.  Summary of Significant Accounting Policies

Refer to our audited combined financial statements included in our Form 10 as filed with the SEC on July 14, 2014, for a complete discussion of all significant accounting policies.

Recently Adopted Accounting Guidance

In February 2013, the FASB issued ASU 2013-2, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU 2013-2), to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-2 requires presentation, either on the face of the financial statements or in the notes, of amounts reclassified out of accumulated other comprehensive income by component and by net income line item. ASU 2013-2 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. We adopted ASU 2013-2 in the first quarter of fiscal 2014. The adoption of ASU 2013-2 did not have a significant impact on our financial statements, but did require additional disclosures.

Recent Accounting Guidance Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 outlines a new, 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 new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and early adoption is not permitted. The standard can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact that this updated standard will have on our financial statements and footnote disclosures.

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period (ASU 2014-12), which requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our financial statements.

In August 2014, the FASB issued ASU 2014-15 related to going concern. The new guidance explicitly requires that management assess an entity's ability to continue as a going concern and may require additional detailed disclosures. ASU 2014-15 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our financial statements.

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3.  Property and Equipment

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

 

 

 

 

Depreciation and software amortization expense, including the acceleration of depreciation, as a result of the shortening of the estimated useful lives for certain assets of $0.8 million in the first quarter of 2014, is shown by classification below (in thousands):

 

 

 

 

 

 

 

 

4.  Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

 

 

 

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

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

 

 

 

 

 

 

Estimated future amortization expense related to intangible assets held at September 30, 2014 (in thousands):

 

 

 

 

 

 

 

5.  Other Assets

Other long‑term assets and gTLD deposits consisted of the following (in thousands):

 

 

 

 

 

We paid $19.5 million during the nine months ended September 30, 2014, and $3.9 million during the year ended December 31, 2013, for certain gTLD applications under the New gTLD Program. Payments for gTLD applications represent amounts paid directly to ICANN or third parties in the pursuit of gTLD operator rights, the

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majority of which was paid to Donuts Inc. as described in Note 8— Commitments and Contingencies. These deposits would be applied to the purchase of the gTLD if we are awarded the gTLD operator rights or these deposits may be returned to us if we withdraw our interest in the gTLD application.

 

The net gain related to the withdrawals of our interest in certain gTLD applications was $8.6 million for the three months ended September 30, 2014, and $14.3 million for the nine months ended September 30, 2014. The net gain related to the withdrawals of our interest in certain gTLD applications was $1.3 million for the three months ended September 30, 2013, and $2.6 million for the nine month periods ended September 30, 2013. We recorded these gains in gain on other assets, net on the statements of operations.

 

Other assets include $1.2 million as of September 30, 2014, and $0.9 million as of December 31, 2013, of restricted cash comprising a collateralized letter of credit connected with the SVB Credit Facility. Subsequent to September 30, 2014, the restriction was released and we reclassified the $1.2 million to cash and cash equivalents. .  

6.  Other Balance Sheet Items

Accounts receivable consisted of the following (in thousands):

 

 

 

 

Based on the nature of our business transactions, we do not have an allowance for uncollectible receivables.

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

 

 

 

 

 

 

 

 

 

7.  Debt

Silicon Valley Bank Credit Facility

In August 2014, we entered into a $30.0 million revolving credit facility (“SVB Credit Facility”) with Silicon Valley Bank (“SVB”). Under this facility we may repay and reborrow until the maturity date in August 2017. The SVB Credit Facility includes a letter of credit sub-limit of up to $15.0 million. 

The SVB Credit Facility provides us with the option to select the annual interest rate on borrowings in an amount equal to: (1) a base rate determined by reference to the highest of: (a) the prime rate; (b) 0.50% per annum above the federal funds effective rate; and (c) the Eurodollar base rate for an interest period of one month plus 1.00%, plus a margin ranging from 1.00% to 1.50%, depending on our consolidated senior leverage ratio (as determined under the SVB Credit Facility), or (2) a Eurodollar base rate determined by reference to LIBOR for the interest period equivalent to such

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borrowing adjusted for certain reserve requirements, plus a margin ranging from 2.00% to 2.50%, depending on our consolidated senior leverage ratio (as determined under the SVB Credit Facility).

We pay fees on the portion of the facility that is not drawn.  The unused fee is payable to SVB in arrears on a quarterly basis in an amount equal to 0.250% multiplied by the daily amount by which the aggregate commitments exceed the sum of the outstanding amount of loans and the outstanding amount of letter of credit obligations.

The SVB Credit Facility allows SVB to require mandatory prepayments of outstanding borrowings from amounts otherwise required to prepay term loans under the Tennenbaum Credit Facility.

The SVB Credit Facility contains customary representations and warranties, events of default and affirmative and negative covenants. This facility has financial covenants, including a requirement that we maintain a minimum consolidated fixed charge coverage ratio, a maximum consolidated senior leverage ratio, a maximum consolidated net leverage ratio, and minimum liquidity.  As of September 30, 2014, we were in compliance with the covenants under the SVB Credit Facility.

We incurred $0.5 million in fees to establish this facility that we have capitalized on our balance sheet as deferred financing costs, which we will amortize on a straight-line basis into interest expense over the term of the SVB Credit Facility. As of September 30, 2014, we had letters of credit with a face amount of $11.0 million that were issued under the SVB Credit Facility.  We have made no other borrowings under this facility.

Tennenbaum Credit Facility

In August 2014, we entered into a $30.0 million term loan credit facility with certain funds managed by Tennenbaum Capital Partners LLC (the “Tennenbaum Credit Facility”). Under this facility, interest is based on a rate per year equal to LIBOR plus 8.75%. Interest on the term loans is payable quarterly, beginning September 30, 2014. Quarterly principal payments of $375,000 on the term loan begin March 31, 2015. Once repaid, the term loans may not be reborrowed. All amounts outstanding under the facility are due and payable in full on the maturity date in August 2019. We may prepay any principal amount outstanding on the term loan plus a premium of 4.00% (if prepaid in the first year), 2.50% (second year), 1.00% (third year), and 0.00% thereafter, plus customary “breakage” costs with respect to LIBOR loans.

Under this facility we are subject to mandatory prepayments from 50% of excess cash flow, which is paid on the first of the following to occur:  (1) maturity, termination or refinancing of the SVB Credit Facility or the acceleration and termination of the SVB Credit Facility, or (2) from the excess cash flow as of December 31, 2014, and each subsequent fiscal year thereafter.  In addition, mandatory prepayments, to the extent not used to prepay loans and cash collateralize letters of credit and permanently reduce the commitments under the SVB Credit Facility, are required from certain asset sales and insurance and condemnation events, subject to customary reinvestment rights. Mandatory prepayments are also required from the issuances of certain indebtedness. These mandatory prepayments are subject to a prepayment premium that is the same as for voluntary prepayments.

The Tennenbaum Credit Facility contains financial covenants and customary representations and warranties, events of default and affirmative and negative covenants. As of September 30, 2014, we were in compliance with the covenants under the Tennenbaum Credit Facility.

In connection with the Tennenbaum Credit Facility, we issued warrants to purchase up to an aggregate of 997,710 shares of common stock. The warrants have an exercise price of $15.05 per share and will be exercisable in accordance with their terms at any time on or after February 6, 2015, through August 6, 2019. The warrants contain a “cashless exercise” feature that allows the warrant holders to exercise such warrants by surrendering a number of shares underlying the portion of the warrant being exercised with a fair market value equal to the aggregate exercise price payable to us.

We estimated the fair value of the warrants by using the Black-Scholes Option Pricing Method ("Black-Scholes"). Under the Black-Scholes approach our key assumptions included the following: stock price of $14.49, strike

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price of $15.05, volatility of 42.44%, risk-free rate of 1.67%, dividend yield of 0% and 5 year term. We used the resulting fair value to allocate the proceeds from the Tennenbaum Credit Facility between liability and equity.

Since the warrants are classified as equity, we allocated the proceeds from the debt and warrants using the relative fair value method.  Under this method we allocated $4.4 million to the warrants which we recorded to equity, with the remaining portion assigned to the liability component.  The excess of the principal amount of the credit facility over its carrying value of $25.6 million represents a note discount that we will amortize to interest expense over the term of the Tennenbaum Credit Facility.

We incurred $3.2 million in fees to establish the Tennenbaum Credit Facility that we have capitalized on our balance sheet as deferred financing costs, which we will amortize on an effective interest method into interest expense over the term of the SVB Credit Facility.

We estimated the fair value of the Tennenbaum Credit Facility using a discounted cash flow model with Level 3 inputs.  Under this approach, we estimated the fair value to approximate its carrying value of $25.7 million as of September 30, 2014.

The following table presents our debt outstanding on the Tennenbaum Credit Facility (in thousands):

 

 

 

The following table presents the interest expense on the Tennenbaum Credit Facility (in thousands):

 

 

 

 

 

 

 

8.  Commitments and Contingencies

Leases

We conduct our operations utilizing leased office facilities in various locations and lease certain equipment under non‑cancelable operating and capital leases. Our leases expire between August 2015 and April 2019. In February 2014, we executed the First Amendment to Lease to obtain additional space for our headquarters in Kirkland, Washington and to extend the lease to April 2019. 

Letters of Credit

We have issued letters of credit totaling $11.0 million under our SVB Credit Facility as of September 30, 2014.

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Credit Facilities

In August 2014, we entered into the $30.0 million Tennenbaum Credit Facility, which matures in August 2019. The principal amount of the term loans is scheduled to be repaid in quarterly installments of $375,000 beginning March 31, 2015. Once repaid, term loans may not be reborrowed. All amounts outstanding under the facility are due and payable in full on the maturity date in August 2019.

Litigation

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

Taxes

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

Domain Name Agreement

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

Donuts Agreement

As part of our initiative to pursue the acquisition of gTLD operator rights, we have entered into a gTLD acquisition agreement (“gTLD Agreement”) with Donuts Inc. (“Donuts”). The gTLD Agreement provides us with rights to acquire the operating and economic rights to certain gTLDs. These rights are shared equally with Donuts and are associated with specific gTLDs (“Covered gTLDs”) for which Donuts is the applicant under the New gTLD Program. We have the right, but not the obligation, to make further deposits with Donuts in the pursuit of acquisitions of Covered gTLDs, for example as part of the ICANN auction process. The operating and economic rights for each Covered gTLD will be determined through a process whereby we and Donuts each select gTLDs from the pool of Covered gTLDs, with the number of selections available to each party based upon the proportion of the total acquisition price of all Covered gTLDs that they funded. Gains on sale of our interest in Covered gTLDs will be recognized when realized, while losses will be recognized when deemed probable. Separately, we entered into an agreement to provide certain back‑end registry services for gTLD operator rights owned by Donuts for a period of five years commencing from the launch of Donut’s first gTLD. Outside of the collaboration, we are not an investor in Donuts nor involved in any joint venture with Donuts or its affiliates.

Indemnifications Arrangements

 

In the normal course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. Those indemnities include intellectual property indemnities to our customers, indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware and indemnities related to our lease agreements. In addition, our advertiser and distribution partner agreements contain certain indemnification provisions, which are generally consistent with those prevalent in our industry. We have not incurred significant obligations under indemnification provisions historically and do not expect to

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incur significant obligations in the future. Accordingly, we have not recorded any liability for these indemnities, commitments and guarantees in the balance sheets.

 

9.  Income Taxes

Our effective tax rate differs from the statutory rate primarily as a result of state taxes and nondeductible stock option expenses. The effective tax rate was (64.6%) for the three months ended September 30, 2014, and 33.2% for the nine months ended September 30, 2014, compared to 34.8% for the three months ended September 30, 2013, and 27.9% for the nine months ended September 30, 2013.

We recorded an income tax benefit of $1.6 million during the three months ended September 30, 2014, compared to an income tax benefit of $1.4 million during the same period in 2013. The increase was primarily due to increased book losses from our domestic operations during the period, which were not offset by books gains in our international operations.  

We recorded an income tax benefit of $1.6 million during the nine months ended September 30, 2014, compared to an income tax benefit of $1.9 million during the same period in 2013, representing a decreased benefit of $0.3 million. The decreased benefit was primarily due to the reversal of deferred tax assets as a result of cancelled stock options in the 2014 periods as compared to the 2013 periods.

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

 

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

 

10.  Employee Benefit Plan

We have a defined contribution plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering all our full‑time employees who meet certain eligibility requirements. Eligible employees may defer up to 90% of their pre‑tax eligible compensation, up to the annual maximum allowed by the Internal Revenue Service. Effective January 1, 2013, we began matching a portion of the employee contributions under the 401(k) Plan up to a defined maximum. Our contributions to the 401(k) Plan were $0.2 million, and $0.1 million for the three months ended September 30, 2014 and 2013, and $0.5 million and $0.4 million for the nine months ended September 30, 2014 and 2013.

 

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11.  Stock‑based Compensation

Our stock-based award plan grants restricted stock, stock options, stock bonuses, stock appreciation rights, and restricted stock units (“RSUs”).

On August 1, 2014, as part of the spin-off and the resulting conversion of equity awards, we had 1.1 million RSUs and options outstanding. Stock option holders received one Rightside stock option for every five Demand Media stock options.  Holders of RSUs received 1.71 Rightside RSUs for every five Demand Media RSUs.

In August 2014, we granted 0.4 million RSUs related to new employee, executive and board of director grants. The stock-based award information presented in this note has been updated to reflect the conversion of equity awards that occurred on August 1, 2014.

As of September 30, 2014, we had 2.6 million shares of common stock reserved for future grants under our equity plan.  Our stock-based awards generally vest over four years and are subject to the employee’s continued employment with us.  We also estimate forfeiture rates at the time of grants and revise the estimates in subsequent periods if actual forfeitures differ from our estimates. We record share-based compensation net of estimated forfeitures.

The following table summarizes the stock‑based compensation expense related to stock‑based awards that has been included in the following line items within the statements of operations for each of the periods presented (in thousands):

 

 

 

The following table presents our stock option activity for the nine months ended September 30, 2014, recast to reflect the conversion of five Demand Media stock options to one Rightside stock option on August 1, 2014 (in thousands, except for per share amounts and contractual term):

 

 

The following table presents a summary of restricted stock unit award activity for the nine months ended September 30, 2014, recast to reflect the conversion of five Demand Media RSUs to 1.71 Rightside RSUs (in thousands, except for per share amounts):

 

 

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As of September 30, 2014, we had $8.7 million of unrecognized stock-based compensation, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 2.9 years.

 

 

12.  Business Segments

We operate in one operating segment. Our chief operating decision maker (“CODM”) manages our operations on a combined basis for purposes of evaluating financial performance and allocating resources. The CODM reviews separate revenue information for our domain name services and aftermarket services. All other financial information is reviewed by the CODM on a combined basis. Our operations are located in the United States, Ireland, Canada, Australia and Cayman Islands. Revenue generated outside of the United States is not material for any of the periods presented.

 

Revenue derived from our Domain name services and Aftermarket and other service offering is as follows (in thousands):

 

 

 

 

 

 

 

13.  Transactions with Related Parties and Parent Company Investment

Prior to the separation on August 1, 2014, our financial statements included direct costs of Rightside incurred by Demand Media on our behalf and an allocation of certain general corporate costs incurred by Demand Media. Direct costs include finance, legal, human resources, technology development, and other services and have been determined based on a direct basis when identifiable, with the remainder allocated on a pro rata basis calculated as a percentage of our revenue, headcount or expenses to Demand Media’s consolidated results. General corporate costs include, but are not limited to, executive oversight, accounting, internal audit, treasury, tax, and legal. The allocations of general corporate costs are based primarily on estimated time incurred and/or activities associated with us. Management believes the allocations of corporate costs from Demand Media are reasonable. Costs incurred by Demand Media to complete the spin‑off have not been allocated to us. However, the financial statements may not include all of the costs that would have been incurred had we been a stand‑alone company during the periods presented and may not reflect our financial position, results of operations and cash flows had we been a stand‑alone company during the periods presented.

Prior to the separation on August 1, 2014, we recorded the following costs incurred and allocated by Demand Media in our statements of operations as follows (in thousands):