Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-36131
 
Endurance International Group Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
46-3044956
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
10 Corporate Drive, Suite 300
Burlington, Massachusetts
 
01803
(Address of Principal Executive Offices)
 
(Zip Code)
(781) 852-3200
(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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
  
Accelerated filer
 
Non-accelerated filer
☐  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐


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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
As of April 30, 2018, there were 142,714,375 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.
 


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TABLE OF CONTENTS
 
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements (unaudited)
 
 


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Endurance International Group Holdings, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)

December 31, 2017
 
March 31, 2018
Assets

 

Current assets:

 

Cash and cash equivalents
$
66,493

 
$
86,678

Restricted cash
2,625

 
1,772

Accounts receivable
15,945

 
13,493

Prepaid domain name registry fees
53,805

 
59,690

Prepaid commissions

 
42,746

Prepaid expenses and other current assets
29,327

 
30,653

Total current assets
168,195

 
235,032

Property and equipment—net
95,452

 
87,653

Goodwill
1,850,582

 
1,851,209

Other intangible assets—net
455,440

 
429,797

Deferred financing costs
3,189

 
2,732

Investments
15,267

 
15,241

Prepaid domain name registry fees, net of current portion
10,806

 
11,889

Prepaid commissions, net of current portion

 
41,164

Other assets
2,155

 
3,091

Total assets
$
2,601,086

 
$
2,677,808

Liabilities, redeemable non-controlling interest and stockholders’ equity

 

Current liabilities:

 

Accounts payable
$
11,058

 
$
19,118

Accrued expenses
79,991

 
81,065

Accrued interest
24,457

 
14,979

Deferred revenue
361,940

 
389,734

Current portion of notes payable
33,945

 
33,945

Current portion of capital lease obligations
7,630

 
7,281

Deferred consideration—short term
4,365

 
4,435

Other current liabilities
4,031

 
3,754

Total current liabilities
527,417

 
554,311

Long-term deferred revenue
90,972

 
96,718

Notes payable—long term, net of original issue discounts of $25,811 and $24,752 and deferred financing costs of $37,736 and $36,299, respectively
1,858,300

 
1,835,309

Capital lease obligations—long term
7,719

 
5,837

Deferred tax liability
19,696

 
27,679

Deferred consideration—long term
3,551

 
3,608

Other liabilities
10,426

 
10,157

Total liabilities
2,518,081

 
2,533,619

Stockholders’ equity:

 

Preferred Stock—par value $0.0001; 5,000,000 shares authorized; no shares issued or outstanding

 

Common Stock—par value $0.0001; 500,000,000 shares authorized; 140,190,695 and 140,457,825 shares issued at December 31, 2017 and March 31, 2018, respectively; 140,190,695 and 140,457,487 outstanding at December 31, 2017 and March 31, 2018, respectively
14

 
14

Additional paid-in capital
931,033

 
938,301

Accumulated other comprehensive (loss) income
(541
)
 
1,080

Accumulated deficit
(847,501
)
 
(795,206
)
Total stockholders’ equity
83,005

 
144,189

Total liabilities, redeemable non-controlling interest and stockholders’ equity
$
2,601,086

 
$
2,677,808

See accompanying notes to consolidated financial statements.

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Endurance International Group Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
(in thousands, except share and per share amounts)
 
Three Months Ended March 31,
 
2017

2018
Revenue
$
295,137


$
291,356

Cost of revenue
148,749


133,906

Gross profit
146,388


157,450

Operating expense:



Sales and marketing
72,772


67,356

Engineering and development
20,362


19,917

General and administrative
39,080


38,775

Transaction expenses
580



Total operating expense
132,794


126,048

Income from operations
13,594


31,402

Other income (expense):



Interest income
118


204

Interest expense
(39,516
)

(36,050
)
Total other expense—net
(39,398
)

(35,846
)
Loss before income taxes and equity earnings of unconsolidated entities
(25,804
)

(4,444
)
Income tax expense
5,774


2,617

Loss before equity earnings of unconsolidated entities
(31,578
)

(7,061
)
Equity loss of unconsolidated entities, net of tax


27

Net loss
$
(31,578
)

$
(7,088
)
Net loss attributable to non-controlling interest
226



Excess accretion of non-controlling interest
3,584



Total net loss attributable to non-controlling interest
3,810



Net loss attributable to Endurance International Group Holdings, Inc.
$
(35,388
)

$
(7,088
)
Comprehensive income (loss):



Foreign currency translation adjustments
686


580

Unrealized (loss) gain on cash flow hedge, net of taxes of $38 and ($325) for the three months ended March 31, 2017 and 2018, respectively
(216
)

1,041

Total comprehensive loss
$
(34,918
)

$
(5,467
)
Basic net loss per share attributable to Endurance International Group Holdings, Inc.
$
(0.26
)

$
(0.05
)
Diluted net loss per share attributable to Endurance International Group Holdings, Inc.
$
(0.26
)

$
(0.05
)
Weighted-average common shares used in computing net loss per share attributable to Endurance International Group Holdings, Inc.:


 


Basic
134,935,153

 
140,361,982

Diluted
134,935,153

 
140,361,982

See accompanying notes to consolidated financial statements.

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Endurance International Group Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
 
Three Months Ended
March 31,
 
 
2017
 
2018
Cash flows from operating activities:
 

 

Net loss
 
$
(31,578
)
 
$
(7,088
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 

Depreciation of property and equipment
 
13,111

 
12,068

Amortization of other intangible assets
 
34,267

 
25,735

Amortization of deferred financing costs
 
1,744

 
1,894

Amortization of net present value of deferred consideration
 
190

 
128

Amortization of original issue discounts
 
846

 
1,058

Stock-based compensation
 
12,924

 
6,992

Deferred tax expense
 
3,440

 
492

(Gain) loss on sale of assets
 
(225
)
 
48

Loss of unconsolidated entities
 

 
27

Changes in operating assets and liabilities, net of acquisitions:
 

 

Accounts receivable
 
2,392

 
2,448

Prepaid expenses and other current assets
 
(5,717
)
 
(2,697
)
Accounts payable and accrued expenses
 
(13,467
)
 
595

Deferred revenue
 
15,747

 
10,660

Net cash provided by operating activities
 
33,674

 
52,360

Cash flows from investing activities:
 

 

Purchases of property and equipment
 
(9,258
)
 
(5,254
)
Proceeds from sale of assets
 
251

 

Purchases of intangible assets
 
(33
)
 

Net cash used in investing activities
 
(9,040
)
 
(5,254
)
Cash flows from financing activities:
 

 

Repayments of term loans
 
(8,925
)
 
(25,486
)
Payment of financing costs
 
(92
)
 

Payment of deferred consideration
 
(818
)
 

Principal payments on capital lease obligations
 
(2,037
)
 
(2,230
)
Proceeds from exercise of stock options
 
628

 
25

Net cash used in financing activities
 
(11,244
)
 
(27,691
)
Net effect of exchange rate on cash and cash equivalents and restricted cash
 
2,327

 
(83
)
Net increase in cash and cash equivalents and restricted cash
 
15,717

 
19,332

Cash and cash equivalents and restricted cash:
 

 

Beginning of period
 
56,898

 
69,118

End of period
 
$
72,615

 
$
88,450

Supplemental cash flow information:
 

 

Interest paid
 
$
46,546

 
$
42,091

Income taxes paid
 
$
952

 
$
603

See accompanying notes to consolidated financial statements.

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Endurance International Group Holdings, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Nature of Business
Formation and Nature of Business
Endurance International Group Holdings, Inc. (“Holdings”) is a Delaware corporation, which, together with its wholly owned subsidiary company, EIG Investors Corp. (“EIG Investors”), its primary operating subsidiary company, The Endurance International Group, Inc. (“EIG”), and other subsidiary companies of EIG, collectively form the “Company.” The Company is a leading provider of cloud-based platform solutions designed to help small- and medium-sized businesses succeed online.
EIG and EIG Investors were incorporated in April 1997 and May 2007, respectively, and Holdings was originally formed as a limited liability company in October 2011 in connection with the acquisition by investment funds and entities affiliated with Warburg Pincus and Goldman, Sachs & Co. on December 22, 2011 of a controlling interest in EIG Investors, EIG and EIG’s subsidiary companies. On November 7, 2012, Holdings reorganized as a Delaware limited partnership and on June 25, 2013, Holdings converted into a Delaware C-corporation and changed its name to Endurance International Group Holdings, Inc.

2. Summary of Significant Accounting Policies
Basis of Preparation
The accompanying consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared using accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany transactions were eliminated on consolidation.
Segment Information
From the fourth quarter of fiscal year 2016, through the third quarter of fiscal year 2017, the Company had two reportable segments, web presence and email marketing. The Company experienced significant changes in its management structure during fiscal year 2017, including a change in its chief executive officer, who is the Company's chief operating decision maker ("CODM"). The Company's leadership structure has been revised to centralize management of certain domain-leading brands in order to improve overall performance. As a result of these management changes, management has revised internal financial reporting structures, and broken the former web presence segment into two reportable segments, web presence and domains. The Company's third reportable segment, email marketing, remains unchanged.
The products and services included in each of the three reportable segments are as follows:
Web Presence. The web presence segment consists primarily of the Company's web hosting brands, such as Bluehost and HostGator, and related products such as domain names, website security, website design tools and services, and e-commerce products.
Domain. The domain segment consists of domain-focused brands such as Domain.com, ResellerClub and LogicBoxes as well as certain web hosting brands that are under common management with domain-focused brands. This segment sells domain names and domain management services to resellers and end users, as well as premium domain names, and also generates advertising revenue from domain name parking. It also resells domain names and domain management services to the web presence segment.
Email Marketing. The email marketing segment consists of Constant Contact email marketing tools and related products and the SinglePlatform digital storefront solution.
The Company's segments share certain resources, primarily related to sales and marketing, engineering and general and administrative functions. Management allocates these costs to each respective segment based on a consistently applied methodology, primarily based on a percentage of revenue.
The Company has revised amounts reported for gross profit, net loss and adjusted EBITDA for the web presence and the domain segments in the segment disclosures, which impacted fiscal years 2016 and 2017. The amounts reported for the email marketing segment were not impacted. The revisions arose because of an error in the classification of certain domain registration expenses. Domain segment gross profit, net loss and adjusted EBITDA were overstated by $3.0 million for fiscal year 2016, and by $6.9 million for fiscal year 2017, and web presence segment gross profit, net loss and adjusted EBITDA were understated by equal amounts. Consolidated results were not impacted by this misstatement. See Note 20, Segment Information, for further details.

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Use of Estimates
U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates, judgments and assumptions used in preparing the accompanying consolidated financial statements are based on the relevant facts and circumstances as of the date of the consolidated financial statements. Although the Company regularly assesses these estimates, judgments and assumptions used in preparing the consolidated financial statements, actual results could differ from those estimates. Changes in estimates are recorded in the period in which they become known. The more significant estimates reflected in these consolidated financial statements include estimates of fair value of assets acquired and liabilities assumed under purchase accounting related to the Company’s acquisitions and when evaluating goodwill and long-lived assets for potential impairment, the estimated useful lives of intangible and depreciable assets, revenue recognition for multiple-element arrangements, stock-based compensation, contingent consideration, derivative instruments, certain accruals, reserves and deferred taxes.
Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet as of March 31, 2018, and the related consolidated statements of operations and comprehensive loss and cash flows for the three months ended March 31, 2017 and 2018, and the notes to consolidated financial statements are unaudited. These unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of the Company’s financial position at March 31, 2018, results of operations and cash flows for the three months ended March 31, 2017 and 2018. The consolidated results in the consolidated statements of operations and comprehensive loss are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2018.
Cash Equivalents
Cash and cash equivalents include all highly liquid investments with remaining maturities of three months or less at the date of purchase.
Restricted Cash
Restricted cash is composed of certificates of deposit and cash held by merchant banks and payment processors, which provide collateral against any chargebacks, fees, or other items that may be charged back to the Company by credit card companies and other merchants, and collateral for certain facility leases.
Accounts Receivable
Accounts receivable is primarily composed of cash due from credit card companies for unsettled transactions charged to subscribers’ credit cards. As these amounts reflect authenticated transactions that are fully collectible, the Company does not maintain an allowance for doubtful accounts. The Company also accrues for earned referral fees and commissions, which are governed by reseller or affiliate agreements, when the amount is reasonably estimable.
Prepaid Domain Name Registry Fees
Prepaid domain name registry fees represent amounts that are paid in full at the time a domain is registered by one of the Company’s registrars on behalf of a customer. The registry fees are recognized on a straight-line basis over the term of the domain registration period.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include cash equivalents, accounts receivable, accounts payable and certain accrued expenses, approximate their fair values due to their short maturities. The fair value of the Company's notes payable is based on the borrowing rates currently available to the Company for debt with similar terms and average maturities and approximates their carrying value.
Derivative Instruments and Hedging Activities
FASB Accounting Standards Codification ("ASC") 815, Derivatives and Hedging, or ASC 815, provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

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As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance in FASB Accounting Standards Update ("ASU") 2011-4, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Property and Equipment
Property and equipment is recorded at cost or fair value if acquired in an acquisition. The Company also capitalizes the direct costs of constructing additional computer equipment for internal use, as well as upgrades to existing computer equipment which extend the useful life, capacity or operating efficiency of the equipment. Capitalized costs include the cost of materials, shipping and taxes. Materials used for repairs and maintenance of computer equipment are expensed and recorded as a cost of revenue. Materials on hand and construction-in-process are recorded as property and equipment. Assets recorded under capital lease are depreciated over the lease term. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows: 
Building
 
Thirty-five years
Software
 
Two to three years
Computers and office equipment
 
Three years
Furniture and fixtures
 
Five years
Leasehold improvements
 
Shorter of useful life or remaining term of the lease
Software Development Costs
The Company accounts for software development costs for internal-use software under the provisions of ASC 350-40, Internal-Use Software. Accordingly, certain costs to develop internal-use computer software are capitalized, provided these costs are expected to be recoverable. During the three months ended March 31, 2017 and 2018, the Company capitalized internal-use software development costs of $2.9 million and $1.6 million, respectively.
Goodwill
Goodwill relates to amounts that arose in connection with the Company’s various business combinations and represents the difference between the purchase price and the fair value of the identifiable intangible and tangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but is subject to periodic review for impairment. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in the equity value of the business, a significant adverse change in certain agreements that would materially affect reported operating results, business climate or operational performance of the business and an adverse action or assessment by a regulator. Additionally, the reorganization or change in the number of reporting units could result in the reassignment of goodwill between reporting units and may trigger an impairment assessment.
In accordance with ASC 350, Intangibles—Goodwill and Other, or ASC 350, the Company is required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. Under U.S. GAAP, a reporting unit is either the equivalent of, or one level below, an operating segment. The Company has historically performed its annual goodwill test as of December 31 of each fiscal year.
As a result of changes in the Company’s management structure during fiscal year 2017, including the change in its chief executive officer / CODM, the Company has revised its internal financial reporting structure, which has resulted in a change to its reporting units. The Company has identified a total of ten reporting units under the new structure. With the increase in reporting units, the Company determined that more time would be required to perform future goodwill impairment tests, and as

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a result, decided to accelerate its annual goodwill impairment test date to October 31 of each fiscal year, starting with the fiscal year 2017 test.
Before testing goodwill at October 31, 2017, the Company allocated assets and liabilities to their respective reporting units. Goodwill was allocated to each reporting unit in accordance with ASC 350-20-40, which requires that goodwill be allocated based on the relative fair values of each reporting unit. After completing this valuation process, the Company allocated goodwill to seven reporting units. The Company did not allocate any goodwill to three smaller reporting units that were determined to have no material fair value.
The carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit. Assets and liabilities were assigned to each reporting unit if the assets or liabilities are employed in the operations of the reporting unit and the asset and liability is considered in the determination of the reporting unit fair value. Certain assets and liabilities are shared by multiple reporting units, and were allocated to each reporting unit based on the relative size of a reporting unit, primarily based on revenue.
The fair value of each reporting unit is determined by the income approach. The Company also compared the fair value from the income approach to a market based approach to validate that the value derived from the income approach was reasonable. For the income approach, fair value is determined based on the present value of estimated future after-tax cash flows, discounted at an appropriate risk adjusted rate. The Company uses internal forecasts to estimate future after-tax cash flows, which includes an estimate of long-term future growth rates based on the long-term outlook for each reporting unit. Actual results may differ from those assumed in each forecast.
The Company derives discount rates using a capital asset pricing model and analyzing published rates for industries relevant to the reporting units to estimate the weighted average cost of capital. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the business and in internally developed forecasts. For fiscal year 2017, the Company used a discount rate of 10.0%, and also performed sensitivity analysis on the discount rates. For the market approach validation, values were derived based on valuation multiples from sales of comparable companies.
The Company has also early adopted the provisions of ASU 2017-4, which eliminates the second step of the goodwill impairment test. As a result, the goodwill impairment test as of October 31, 2017 includes only one step, which is a comparison of the carrying value of each reporting unit to its fair value, and any excess carrying value, up to the amount of goodwill allocated to that reporting unit, is impaired. The goodwill impairment test as of October 31, 2017 resulted in a $12.1 million impairment of goodwill to the Company's domain monetization reporting unit within the domain segment. The impairment is a direct result of a more rapid decline in domain parking revenue than originally expected, and to a lesser extent, reduced sales of premium domain names. Goodwill for this reporting unit has been completely impaired. Goodwill allocated to the other six reporting units was not impaired.
Goodwill as of December 31, 2017 was $1,850.6 million. Approximately $1,820.7 million of this goodwill relates to reporting units where fair value exceeds the carrying value of the respective reporting unit by at least 20%. One reporting unit, the domain.com reporting unit within the domain segment, has a goodwill balance of $29.9 million, and a fair value that exceeds its carrying value by 6%. The Company has one reporting unit, the cloud backup reporting unit within the web presence segment, that has a negative carrying value and has been allocated $2.3 million of goodwill.
During the quarter ended March 31, 2018, the Company further adjusted management responsibilities regarding certain reporting units, which resulted in additional adjustments to internal financial reporting structures. The total number of reporting units remains at ten, however, goodwill was reallocated between reporting units as a result of this change. The Company has preliminarily estimated the amount of goodwill to be reallocated at $48.0 million. The Company has tested goodwill for impairment based on the preliminary goodwill reallocation. No impairment charge is expected as a result of this test.
Goodwill as of March 31, 2018 is $1,851.2 million. The carrying value of goodwill that was allocated to the domain, email marketing and web presence reporting segments was $29.9 million, $604.3 million and $1,217.0 million, respectively. For the three months ended March 31, 2018, no impairment has been recorded.
Long-Lived Assets
The Company’s long-lived assets consist primarily of intangible assets, including acquired subscriber relationships, trade names, intellectual property, developed technology, domain names available for sale and in-process research and development (“IPR&D”). The Company also has long-lived tangible assets, primarily consisting of property and equipment. The majority of the Company’s intangible assets are recorded in connection with its various acquisitions. The Company’s intangible assets are recorded at fair value at the time of their acquisition. The Company amortizes intangible assets over their estimated useful lives.

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Determination of the estimated useful lives of the individual categories of intangible assets is based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives other than developed technology is recognized in accordance with their estimated projected cash flows.
The Company evaluates long-lived intangible and tangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indicators of impairment are present and undiscounted future cash flows are less than the carrying amount, the fair value of the assets is determined and compared to the carrying value. If the fair value is less than the carrying value, then the carrying value of the asset is reduced to the estimated fair value and an impairment loss is charged to expense in the period the impairment is identified. No such impairment losses have been identified in the three months ended March 31, 2017 and 2018.
Indefinite life intangible assets include domain names that are available for sale which are recorded at cost to acquire. These assets are not being amortized and are being tested for impairment annually and whenever events or changes in circumstance indicate that their carrying value may not be recoverable. When a domain name is sold, the Company records the cost of the domain in cost of revenue.
Acquired In-Process Research and Development (IPR&D)
Acquired IPR&D represents the fair value assigned to research and development assets that the Company acquires in connection with business combinations that have not been completed at the date of acquisition. The acquired IPR&D is capitalized as an intangible asset and reviewed on a quarterly basis to determine future use. Any impairment loss of the acquired IPR&D is charged to expense in the period the impairment is identified. No impairment loss was identified during the three months ended March 31, 2017 and 2018.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09 or ASC 606, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. Since then, the FASB has also issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principals versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, and ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, which further elaborate on the original ASU No. 2014-09. The Company adopted the guidance in ASC 606 on January 1, 2018. Revenue is recognized when control of the promised products or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to for those products and services. In general, we determine revenue recognition through the following steps:
Identification of the contract, or contracts, with the customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company provides cloud-based subscription services, which include website hosting and related add-ons, search engine optimization (SEO) services, domain registration services and email marketing.
Website hosting gives subscribers access to an environment where the Company hosts a customer’s website. The related contract terms are generally for one year, but can range from 30 days to 3 years. Website hosting services are typically sold in bundled offerings that include website hosting, domain registration services and various add-ons. The Company recognizes revenue for website hosting and domain registration services over the term of the contract.
The main add-on services related to website hosting are domain privacy, secure sockets layer (SSL) security, site backup and restoration, and website builder tools. These services may be included in website hosting bundles, or they may be purchased on a standalone basis. Certain add-on services are provided by third parties. In cases where the Company is acting as an agent for the sale of third party add-on services, the Company recognizes revenue on a net basis at the time of sale. In cases where the Company is acting as a principal for the sale of third party add-on services (i.e., the Company has the primary responsibility to provide specific goods or services, it has discretion to establish prices and it may assume inventory risk), the Company recognizes revenue on a gross basis over the term of the contract. The revenue for Company-provided add-on services is primarily recognized over the term of the contract.
SEO services are monthly subscriptions that provide a customer with increased traffic to their website over the term of the subscription. Revenue from SEO services is recognized over the monthly term of the contract.

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In the case of domain registration services, the Company is an accredited registrar and can provide registration services to the customer, or it can select an accredited third party registrar to perform these duties. Domain registration services are generally annual subscriptions, but can cover multiple years. Revenue for these services is recognized over time.
Email marketing services provide subscribers with a cloud based platform that can send broadcast emails to a customer list managed by the subscriber. Pricing is based on contract list volume from the prior monthly period, which determines the contractual billing price for the upcoming month. Revenue for this service is recognized over the monthly term of the contract.
Non-subscription based services include certain professional services, primarily website design or re-design services, marketing development fund revenue ("MDF"), premium domain names and domain parking services.
Website design and re-design services are recognized when the service is complete.
Marketing development funds consist of commissions earned by the Company when a third party sells its products or services directly to the Company’s subscribers, and advertising revenue for third party ads placed on Company websites. The Company records revenue when the service is provided and calculates it based on the contractual revenue share arrangement or over the term of the advertisement.
Domain parking allows the Company to monetize certain of its premium domain names by loaning them to specialized third parties that generate advertising revenue from these parked domains on pay per click ("PPC") basis. Revenue is recognized when earned and calculated based on the revenue share arrangement with the third party.
Revenue from the sale of premium domains is recognized when persuasive evidence of an arrangement to sell such domains exists and delivery of an authorization key to access the domain name has occurred. Premium domain names are paid for in advance prior to the delivery of the domain name.
For most of the Company’s performance obligations, the customer simultaneously receives and consumes the service over a period of time as the Company performs the service, resulting in the recognition of revenue over the subscription period. This method provides an appropriate depiction of the timing of the transfer of services to the customer. In limited instances, the customer obtains control of the promised service at a point in time, with no future obligations on the part of the Company. In these instances, the Company recognizes revenue at the point in time control is transferred. The contracts that the Company enters typically do not contain any variable or non-cash considerations.
The Company maintains a reserve for refunds and chargebacks related to revenue that has been recognized and is expected to be refunded, as calculated based on observed historical trends. The Company had a refund and chargeback reserve of $0.5 million and $0.5 million as of December 31, 2017 and March 31, 2018, respectively. The portion of deferred revenue that is expected to be refunded at December 31, 2017 and March 31, 2018 was $1.8 million and $1.8 million, respectively. Based on refund history, approximately 83% of all refunds happen in the same fiscal month that the contract starts or renews, and approximately 96% of all refunds happen within 45 days of the contract start or renewal date.
The Company did not apply any practical expedients during its adoption of ASC 606. The Company elected to use the portfolio method in the calculation of the deferred contract assets.
Contracts with Multiple Performance Obligations
A considerable amount of the Company’s revenue is generated from transactions that are contracts with customers that may include hosting plans, domain name registrations, and other cloud-based products and services. In these cases, the Company determines whether the products and services are distinct performance obligations that should be accounted for separately versus together. The Company allocates revenue to each performance obligation based on its relative standalone selling price, generally based on the price charged to customers. Hosting services, domain name registrations, and other cloud-based products and services have distinct performance obligations and are often sold separately. If the promise is not distinct and therefore not a performance obligation, then the total transaction amount is allocated to the identified performance obligation based on a relative selling price hierarchy. When multiple performance obligations are included in a contract, the total transaction amount for the contract is allocated to the performance obligations based on a relative selling price hierarchy. The Company determines the relative selling price for a performance obligation based on standalone selling price (“SSP”). The Company determines SSP by considering its observed standalone selling prices, competitive prices in the marketplace and management judgment; these standalone selling prices may vary depending upon the particular facts and circumstances related to each deliverable. The Company analyzes the standalone selling prices used in its allocation of transaction amount, at a minimum, on a quarterly basis.
Deferred Revenue
The Company records deferred revenue when cash payments are received or are due in advance of the Company’s performance, including amounts that are refundable. The change in the deferred revenue balance for the three months ended March 31, 2018 is primarily driven by cash payments received or due in advance of the Company satisfying its performance

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obligations, offset by $159.1 million of revenue recognized that were included in the deferred revenue balance at the beginning of the period.
The following table provides a reconciliation of the Company's deferred revenue as of March 31, 2018:
 
Short-term
 
Long-term
 
(in thousands)
Balance at December 31, 2017
$
361,940

 
$
90,972

Effect of adoption of ASC 606 to balances at December 31, 2017
20,275

 
2,882

Recognition of the beginning deferred revenue into revenue, as a result of performance obligations satisfied
(159,134
)
 

Cash received in advance during the period
253,467

 
43,391

Recognition of cash received in the period into revenue, as a result of performance obligations satisfied
(127,341
)
 

Reclassification between short-term and long-term
40,527

 
(40,527
)
Balance at March 31, 2018
$
389,734

 
$
96,718

The difference between the opening and closing balances of the Company’s deferred liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment. During the quarter ended March 31, 2018, the Company recognized $159.1 million and $0.0 million, respectively, from beginning deferred revenue current and long-term balances existing at December 31, 2017. The Company did not recognize any revenue from performance obligations satisfied in prior periods.

The following table provides the remaining performance obligation amounts as of March 31, 2018. These amounts are equivalent to the ending deferred revenue balance of $486.5 million, which includes both short and long-term amounts:
 
Web presence
 
Email marketing
 
Domain
 
Total
 
(in thousands)
Remaining performance obligation, short-term
$
274,158

 
$
55,106

 
$
60,470

 
$
389,734

Remaining performance obligation, long-term
80,766

 

 
15,952

 
96,718

Total
$
354,924

 
$
55,106

 
$
76,422

 
$
486,452

This backlog of revenue related to future performance obligations is prepaid by customers and supported by executed contracts with customers. The Company has established a reserve of $0.5 million for refunds and chargebacks, 96% of which is expected to materialize in the first 45 days. The remainder of the deferred revenue is expected to be recognized in future periods.
Deferred Customer Acquisition Costs
As a result of the implementation of ASC 606, the Company now capitalizes the incremental costs directly related to obtaining and fulfilling a contract (such as sales commissions and certain direct sales and marketing success based costs), if these costs are expected to be recovered. These costs are amortized over the period the services are transferred to the customer, which is estimated based on customer churn rates for various segments of the business. The Company includes only those incremental costs that would not have been incurred if the contracts had not been entered into.
 
Short-term
 
Long-term
 
(in thousands)
Balance at December 31, 2017
$

 
$

Adjustments resulting from adoption of ASC 606
43,408

 
40,040

Deferred customer acquisition costs incurred in the period
4,842

 
8,608

Amounts recognized as expense in the period
(12,976
)
 

Impact of foreign exchange rates
1

 
(13
)
Reclassification between short-term and long-term
7,471

 
(7,471
)
Balance at March 31, 2018
$
42,746

 
$
41,164

As of March 31, 2018, the Company has a total of $72.7 million deferred assets relating to costs incurred to obtain or fulfill contracts in its web presence segment, consisting of $0.0 million of incremental, recoverable sales and marketing costs,

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and $72.7 million of recoverable, specific, success-based sales commissions. As of March 31, 2018, the Company has a total of $9.7 million deferred assets relating to costs incurred to obtain or fulfill contracts in its email marketing segment, consisting of $0.0 million of incremental, recoverable sales and marketing costs, and $9.7 million of recoverable, specific, success-based sales commissions. As of March 31, 2018, the Company has a total of $1.5 million deferred assets relating to costs incurred to obtain or fulfill contracts in its domain segment, consisting of $0.0 million of incremental, recoverable sales and marketing costs, and $1.5 million of recoverable, specific, success-based sales commissions. During the three months ended March 31, 2018, the Company recognized total amortization costs related to the above items of $11.9 million, $1.0 million, and $0.1 million in its web presence, email marketing and domain segments, respectively.
Significant Judgments
The Company sells a number of third party cloud based services to enhance a subscriber’s overall website hosting experience. The Company exercises considerable judgment to determine if it is the principal or agent in each of these arrangements, and in some instances, has concluded that it is an agent of the third party and recognizes revenue at time of subscriber purchase in an amount that is net of the revenue share payable to the third party.
The Company exercises judgment to determine the standalone selling price for each distinct performance obligation. In instances where the standalone selling price is not directly observable, such as when we do not sell the product or service separately, we determine the standalone selling price using information that may include a competitive market assessment approach and other observable inputs. The Company typically has more than one standalone selling price for individual products and services.
Judgment is required to determine whether particular types of sales and marketing costs incurred, including commissions, are incremental and recoverable costs incurred to obtain and fulfill the customer contract. In addition, judgment is required to determine the life of the customer over which deferred customer acquisition costs are amortized.
Income Taxes
Income taxes are accounted for in accordance with ASC 740, Accounting for Income Taxes, or ASC 740. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is more likely than not to be realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company had no unrecognized tax benefits in the three months ended March 31, 2017 and $1.6 million in unrecognized tax benefits in the three months ended March 31, 2018.
The Company records interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the three months ended March 31, 2017, the Company did not incur any interest and penalties related to unrecognized tax benefits. During the three months ended March 31, 2018, the Company recognized an immaterial amount of interest and penalties related to unrecognized tax benefits.
Stock-Based Compensation
The Company may issue restricted stock units, restricted stock awards and stock options which vest upon the satisfaction of a performance condition and/or a service condition. The Company follows the provisions of ASC 718, Compensation—Stock Compensation, or ASC 718, which requires employee stock-based payments to be accounted for under the fair value method. Under this method, the Company is required to record compensation cost based on the estimated fair value for stock-based awards granted over the requisite service periods for the individual awards, which generally equals the vesting periods, net of estimated forfeitures. The Company uses the straight-line amortization method for recognizing stock-based compensation expense. In addition, for stock-based awards where vesting is dependent upon achieving certain performance goals, the Company estimates the likelihood of achieving the performance goals against established performance targets.
The Company estimates the fair value of employee stock options on the date of grant using the Black-Scholes option-pricing model, which requires the use of highly subjective estimates and assumptions. For restricted stock awards and restricted stock units granted, the Company estimates the fair value of each restricted stock award or restricted stock unit based on the closing trading price of its common stock on the date of grant.

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Net Loss per Share
The Company considered ASC 260-10, Earnings per Share, or ASC 260-10, which requires the presentation of both basic and diluted earnings per share in the consolidated statements of operations and comprehensive loss. The Company’s basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and, if there are dilutive securities, diluted income per share is computed by including common stock equivalents which includes shares issuable upon the exercise of stock options, net of shares assumed to have been purchased with the proceeds, using the treasury stock method.
 
Three Months Ended
March 31,
 
2017

2018
 
(unaudited)
(in thousands, except share amounts and per share data)
Net loss attributable to Endurance International Group Holdings, Inc.
$
(35,388
)
 
$
(7,088
)
Net loss per share attributable to Endurance International Group Holdings, Inc.:
 
 
 
Basic net loss per share attributable to Endurance International Group Holdings, Inc.
$
(0.26
)
 
$
(0.05
)
Diluted net loss per share attributable to Endurance International Group Holdings, Inc.
$
(0.26
)
 
$
(0.05
)
Weighted-average common shares used in computing net loss per share attributable to Endurance International Group Holdings, Inc.:
 
 


Basic
134,935,153

 
140,361,982

Diluted
134,935,153

 
140,361,982

The following number of weighted average potentially dilutive shares were excluded from the calculation of diluted loss per share because the effect of including such potentially dilutive shares would have been anti-dilutive:
 
Three Months Ended March 31,
 
2017
 
2018
 
(unaudited)
Restricted stock awards and units
3,974,080

 
5,876,438

Options
11,037,570

 
8,969,760

Total
15,011,650

 
14,846,198

Recent Accounting Pronouncements - Recently Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. Since then, the FASB has also issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principals versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, and ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, which further elaborate on the original ASU No. 2014-09. The core principle of these updates is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgments and estimates may be required within the revenue recognition process than are required under previous U.S. GAAP. In July 2015, the FASB approved a one-year deferral of the effective date to January 1, 2018, with early adoption to be permitted as of the original effective date of January 1, 2017. Once this standard becomes effective, companies may use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures) (the "modified retrospective approach"). The Company adopted this guidance on January 1, 2018 using the modified retrospective approach. The new standard impacted the timing of when certain sales incentive payments, primarily to external parties, are charged to expense as these costs must now be deferred over the life of the related customer relationship, whereas previously these amounts were expensed as incurred. In addition, a small portion of the Company's revenue recognition was impacted by this new guidance. The impact to opening retained earnings as a result of the adoption of the new guidance was $59.4 million, which consists of an $83.4 million deferred asset relating to customer acquisition costs and a $6.1 million deferred asset for domain registration costs, partially offset by a $23.1 million liability for deferred revenue, net of a deferred tax liability of $7.0 million. The Company applied the new guidance to all revenue contracts and did not use any practical expedients. The adoption of Topic 606 impacted the results of operations and certain

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balance sheet accounts. The impact of applying Topic 606 on the results for reporting periods and balance sheet beginning after January 1, 2018 are presented under Topic 606, while prior amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605. The impact of applying Topic 606 for the quarter ended March 31, 2018 is as follows:
 
As of March 31, 2018 under topic 606
As of March 31, 2018 under topic 605
Increase (decrease)
Consolidated statement of operations and comprehensive loss data:
(in thousands)
Revenue
$
291,356

$
292,157

$
(801
)
Cost of revenue
133,906

133,954

(48
)
Sales and marketing
67,356

67,831

(475
)
 
 
 
 
Consolidated balance sheet data:
 
 
 
Prepaid commissions, current portion
$
42,746

$

$
42,746

Prepaid commissions, long-term
41,164


41,164

Deferred revenue, current
389,734

388,933

801

Deferred revenue, long-term
96,718

96,718


 
 
 
 
Consolidated statement of cash flow data:
 
 
 
Net income (loss)
$
(7,088
)
$
(7,366
)
$
278

Change in prepaid expenses and other assets
(2,697
)
(3,220
)
523

Change in deferred revenue
10,660

11,461

(801
)
Cash flows from operations
52,360

52,360


In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This new standard enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This amendment is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. This new standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. This amendment is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this standard did not have a material impact on the Company's statement of cash flows.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This new standard clarifies certain statement of cash flow presentation issues. This amendment is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this standard did not have a material impact on the Company's statement of cash flows.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This new standard eliminates step two of the prior goodwill test, and instead requires that an entity perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 31, 2019, and should be applied on a prospective basis. The Company elected to early adopt the provisions of ASU 2017-04 effective in the fourth quarter of fiscal year 2017, which simplified the process of calculating the $12.1 million impairment to goodwill during the fourth quarter of fiscal year 2017.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718). This new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This amendment is effective for annual or interim periods in fiscal years beginning after December 15, 2017, and should be applied prospectively to an award modified on or after the adoption date. The Company adopted this as of January 1, 2018 and will apply this guidance to any modifications, based on the new definition of a modification, for all periods beginning on or after January 1, 2018. During the three months ended March 31, 2018, there were no modifications that would impact the Company's consolidated financial statements.
Recent Accounting Pronouncements - Recently Issued
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than

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12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements, but expects that adoption will materially increase its assets and liabilities.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. This new standard improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This amendment is effective for annual periods beginning after December 15, 2018, and early adoption is permitted. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This new guidance better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to the designation and measurement guidance for qualifying hedging relationships and to the method of presenting hedge results. The amendments in this guidance require an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported, to allow users to better understand the results and costs of an entity's hedging program. This new guidance is effective for fiscal years beginning after December 15, 2019. The amended presentation and disclosure guidance is required only prospectively, while the measurement guidance should be applied to hedges existing at the time of adoption through a one-time cumulative-effect adjustment to accumulated other comprehensive income with respect to the elimination of the separate measurement of ineffectiveness with a corresponding adjustment to the opening balance of the retained earnings. The Company is currently evaluating the impact of its pending adoption of the new guidance on its consolidated financial statements.

3. Acquisitions
The Company accounts for the acquisitions of businesses using the purchase method of accounting. The Company allocates the purchase price to the tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values. Purchased identifiable intangible assets typically include subscriber relationships, trade names, domain names held for sale, developed technology and IPR&D. The methodologies used to determine the fair value assigned to subscriber relationships and domain names held for sale are typically based on the excess earnings method that considers the return received from the intangible asset and includes certain expenses and also considers an attrition rate based on the Company’s internal subscriber analysis and an estimate of the average life of the subscribers. The fair value assigned to trade names is typically based on the income approach using a relief from royalty methodology that assumes that the fair value of a trade name can be measured by estimating the cost of licensing and paying a royalty fee for the trade name that the owner of the trade name avoids. The fair value assigned to developed technology typically uses the cost approach. The fair value assigned to IPR&D is based on the cost approach. If applicable, the Company estimates the fair value of contingent consideration payments in determining the purchase price. The contingent consideration is then adjusted to fair value in subsequent periods as an increase or decrease in current earnings in general and administrative expense in the consolidated statements of operations and comprehensive loss.
Summary of Deferred Consideration Related to Acquisitions
Components of short-term and long-term deferred consideration as of December 31, 2017 and March 31, 2018, consisted of the following:
 
December 31, 2017
 
March 31, 2018
 
Short-
term
 
Long-
term
 
Short-
term
 
Long-
term
 
(in thousands)
AppMachine (Acquired in 2016)
4,365

 
3,551

 
4,435

 
3,608

Total
$
4,365

 
$
3,551

 
$
4,435

 
$
3,608


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4. Property and Equipment and Capital Lease Obligations
Components of property and equipment consisted of the following:
 
December 31, 2017
 
March 31, 2018
 
(in thousands)
Land
$
790

 
$
790

Building
5,037

 
7,091

Software
82,618

 
84,185

Computers and office equipment
153,273

 
155,245

Furniture and fixtures
18,825

 
18,726

Leasehold improvements
22,260

 
21,366

Construction in process
3,800

 
2,884

Property and equipment—at cost
286,603

 
290,287

Less accumulated depreciation
(191,151
)
 
(202,634
)
Property and equipment—net
$
95,452

 
$
87,653

Depreciation expense related to property and equipment for the three months ended March 31, 2017 and 2018 was $13.1 million and $12.1 million, respectively.
Property under capital lease with a cost basis of $17.3 million was included in software as of March 31, 2018. The net carrying value of property under capital lease as of March 31, 2018 was $13.5 million.
5. Fair Value Measurements
The following valuation hierarchy is used for disclosure of the valuation inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
As of December 31, 2017 and March 31, 2018, the Company’s financial assets required to be measured on a recurring basis consist of the 2015 interest rate cap. The Company has classified this interest rate cap, which is discussed in Note 6 below, within Level 2 of the fair value hierarchy.

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Basis of Fair Value Measurements
 
Balance
 
Quoted Prices
in Active Markets
for Identical Items
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Balance at December 31, 2017
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Interest rate cap (included in other assets)
$
452

 

 
$
452

 
$

Total financial assets
$
452

 
$

 
$
452

 
$

Balance at March 31, 2018
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Interest rate cap (included in other assets)
$
1,460

 

 
$
1,460

 
$

Total financial assets
$
1,460

 
$

 
$
1,460

 
$

6. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company entered into a three-year interest rate cap on December 9, 2015 as part of its risk management strategy. The objective of the interest rate cap, designated as a cash flow hedge, involves the receipt of variable amounts from a counter-party if interest rates rise above the strike rate on the contract in exchange for an upfront premium. Therefore, this derivative limits the Company’s exposure if the rate rises, but also allows the Company to benefit when the rate falls.
The effective portion of changes in the fair value of derivatives that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income ("AOCI"), and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Any ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. There was no ineffectiveness recorded in earnings for the three months ended March 31, 2018.
As of March 31, 2018, the Company had one interest rate cap with $500.0 million notional value outstanding that was designated as a cash flow hedge of interest rate risk. The fair value of the interest rate contract included in other assets on the consolidated balance sheet as of March 31, 2018 was $1.5 million, and the Company recognized $0.4 million of interest expense in the Company’s consolidated statement of operations for the three months ended March 31, 2018. The Company recognized a $1.4 million gain, net of a tax expense of $0.3 million, in AOCI for the three months ended March 31, 2018. The Company estimates that a cumulative amount of $0.6 million will be reclassified from AOCI to interest expense (as an increase to interest expense) in the next twelve months.
7. Goodwill and Other Intangible Assets
The following table summarizes the changes in the Company’s goodwill balances from December 31, 2017 to March 31, 2018:

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Table of Contents

 
Web Presence
 
Email Marketing
 
Domain
 
Total
 
Amount
 
(in thousands)
Goodwill balance at December 31, 2017
$
1,216,419

 
$
604,305

 
$
29,858

 
$
1,850,582

Foreign translation impact
627

 

 

 
627

Goodwill balance at March 31, 2018
$
1,217,046

 
$
604,305

 
$
29,858

 
$
1,851,209

In accordance with ASC 350, the Company reviews goodwill and other indefinite-lived intangible assets for indicators of impairment on an annual basis and between tests if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying amount.
At December 31, 2017, other intangible assets consisted of the following:
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Weighted
Average
Useful Life
 
(dollars in thousands)
Developed technology
$
285,911

 
$
149,514

 
$
136,397

 
7 years
Subscriber relationships
659,732

 
431,938

 
227,794

 
7 years
Trade-names
134,054

 
73,019

 
61,035

 
8 years
Intellectual property
34,313

 
27,336

 
6,977

 
5 years
Domain names available for sale
30,458

 
7,221

 
23,237

 
Indefinite
Total December 31, 2017
$
1,144,468

 
$
689,028

 
$
455,440

 
 
During the three months ended March 31, 2017 and 2018, there were no impairment charges of intangible assets.
At March 31, 2018, other intangible assets consisted of the following:
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Weighted
Average
Useful Life
 
(dollars in thousands)
Developed technology
$
286,001

 
$
158,043

 
$
127,958

 
7 years
Subscriber relationships
659,717

 
445,571

 
214,146

 
7 years
Trade-names
134,054

 
75,822

 
58,232

 
8 years
Intellectual property
34,313

 
27,732

 
6,581

 
5 years
Domain names available for sale
30,530

 
7,650

 
22,880

 
Indefinite
Total March 31, 2018
$
1,144,615

 
$
714,818

 
$
429,797

 
 
The estimated useful lives of the individual categories of other intangible assets are based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives is recognized over the period of time the assets are expected to contribute to future cash flows. The Company amortizes finite-lived intangible assets over the period in which the economic benefits are expected to be realized based upon their estimated projected cash flows.
The Company’s amortization expense is included in cost of revenue in the consolidated statement of operations and comprehensive loss in the aggregate amounts of $34.3 million and $25.7 million for the three months ended March 31, 2017 and 2018, respectively.
8. Investments
As of December 31, 2017 and March 31, 2018, the Company’s carrying value of investments in privately-held companies was $15.3 million and $15.2 million, respectively.
In January 2012, the Company made an initial investment of $0.3 million to acquire a 25% interest in BlueZone Labs, LLC (“BlueZone”), a provider of “do-it-yourself” tools and managed search engine optimization services.
The Company also has an agreement with BlueZone to purchase products and services. During the three months ended March 31, 2017 and 2018, the Company purchased $0.5 million and $0.4 million, respectively, of products and services from

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BlueZone, which is included in cost of revenue in the Company’s consolidated statements of operations and comprehensive loss. As of December 31, 2017 and March 31, 2018, $0.1 million and $0.2 million, respectively, relating to the Company’s investment in BlueZone was included in accounts payable and accrued expense in the Company’s consolidated balance sheet. As of December 31, 2017 and March 31, 2018, $0.7 million and $0.7 million, respectively, relating to the Company’s investment in BlueZone was included in prepaid expenses and other current assets in the Company’s consolidated balance sheet.
In May 2014, the Company made a strategic investment of $15.0 million in Automattic, Inc. (“Automattic”), which provides content management systems associated with WordPress. The investment represents less than 5% of the outstanding shares of Automattic and better aligns the Company with an important partner.
Investments in which the Company’s interest is less than 20.0% and which are not classified as available-for-sale securities are carried at the lower of cost or net realizable value unless it is determined that the Company exercises significant influence over the investee company, in which case the equity method of accounting is used. For those investments in which the Company’s voting interest is between 20.0% and 50.0%, the equity method of accounting is used. Under this method, the investment balance, originally recorded at cost, is adjusted to recognize the Company’s share of net earnings or losses of the investee company, as they occur, limited to the extent of the Company’s investment in, advances to and commitments for the investee. These adjustments are reflected in equity (income) loss of unconsolidated entities, net of tax in the Company’s consolidated statements of operations and comprehensive loss. The Company recognized net losses of $0.0 million and $0.0 million for the three months ended March 31, 2017 and 2018, respectively.
From time to time, the Company may make new and follow-on investments and may receive distributions from investee companies. As of March 31, 2018, the Company was not obligated to fund any follow-on investments in these investee companies.
As of March 31, 2018, the Company did not have an equity method investment in which the Company’s proportionate share of the investees’ net income or loss exceeded 10.0% of the Company’s consolidated assets or income from continuing operations.
9. Notes Payable
At December 31, 2017 and March 31, 2018, notes payable, net of original issuance discounts (sometimes referred to as "OID") and deferred financing costs, consisted of the following:
 
 
At December 31, 2017
 
At March 31, 2018
 
 
(in thousands)
2017 First Lien Term Loan
 
$
1,563,197

 
$
1,539,609

Notes
 
329,048

 
329,645

Revolving credit facilities
 

 

Total notes payable
 
1,892,245

 
1,869,254

Current portion of notes payable
 
33,945

 
33,945

Notes payable - long term
 
$
1,858,300

 
$
1,835,309

2017 First Lien Term Loan Facility
In connection with the Company's June 14, 2017 refinancing of its then-outstanding term loans (the "2017 Refinancing"), the Company entered into its current first lien term loan facility (the "2017 Term Loan") with an original balance of $1,697.3 million and a maturity date of February 9, 2023. As of March 31, 2018, the 2017 Term Loan had an outstanding balance of:
 
 
At March 31, 2018
 
(in thousands)
2017 First Lien Term Loan
 
$
1,580,305

Unamortized deferred financing costs
 
(21,454
)
Unamortized original issue discount
 
(19,242
)
Net 2017 First Lien Term Loan
 
1,539,609

Current portion of 2017 First Lien Term Loan
 
33,945

2017 First Lien Term Loan - long term
 
$
1,505,664



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The 2017 Term Loan was issued at a price of 99.75% of par and automatically bears interest at the bank’s reference rate unless the Company gives notice to opt for the LIBOR-based interest rate. The LIBOR-based interest rate for a term loan is 4.00% per annum plus the greater of an adjusted LIBOR and 1.00%. The reference rate for a term loan is 3.00% per annum plus the greatest of the prime rate, the federal funds effective rate plus 0.50%, an adjusted LIBOR for a one-month interest period plus 1.00%, and 2.00%.

The 2017 Term Loan requires quarterly mandatory repayments of principal. During the three months ended March 31, 2018, the Company made one mandatory repayment of $8.5 million and one voluntary repayment of $17.0 million.

Interest is payable on maturity of the elected interest period for a term loan with a LIBOR-based interest rate, which interest period can be one, two, three or six months. Interest is payable at the end of each fiscal quarter for a term loan with a reference rate.
Revolving Credit Facility
In connection with the Company's February 9, 2016 acquisition of Constant Contact and the related financing of that transaction (the "Constant Contact Financing"), the Company entered into a revolving credit facility (the “2016 Revolver”) that replaced the Company's prior revolving credit facility that had been originated in November 2013. The 2016 Revolver has an aggregate available amount of $165.0 million and a maturity date of February 9, 2021. The 2016 Revolver had a "springing" maturity date of August 10, 2019, which is no longer applicable as a result of the 2017 Refinancing. As of December 31, 2017 and March 31, 2018, the Company did not have any balances outstanding under the 2016 Revolver, and the full amount of the facility, or $165.0 million, was unused and available.
The Company has the ability to draw down against the 2016 Revolver using a LIBOR-based interest rate or an alternate base rate. The LIBOR-based interest rate for a revolver loan is 4.0% per annum (subject to a leverage-based step-down) plus an adjusted LIBOR for a selected interest period. The alternate base rate for a revolver loan is 3.0% (subject to a leverage-based step down) plus the greatest of the prime rate, the federal funds rate plus 0.50% and an adjusted LIBOR or a one-month interest period plus 1.00%. There is also a non-refundable commitment fee, equal to 0.50% of the daily unused principal amount of the 2016 Revolver (subject to a leverage-based step down), which is payable in arrears on the last day of each fiscal quarter. Interest is payable on maturity of the elected interest period for a revolver loan with a LIBOR-based interest rate, which interest period can be one, two, three or six months. Interest is payable at the end of each fiscal quarter for a revolver loan with an alternate base rate.
Senior Notes
In connection with the Constant Contact Financing, EIG Investors issued $350.0 million aggregate principal amount of senior notes (the "Senior Notes") with a maturity date of February 1, 2024. The Senior Notes were issued at a price of 98.065% of par and bear interest at the rate of 10.875% per annum. The Senior Notes have been fully and unconditionally guaranteed, on a senior unsecured basis, by the Company and its subsidiaries that guarantee the 2017 Term Loan and the 2016 Revolver (including Constant Contact and certain of its subsidiaries). As of December 31, 2017 and March 31, 2018, the Senior Notes had an outstanding balance of:
 
 
At December 31, 2017
 
At March 31, 2018
 
 
(in thousands)
Senior Notes
 
$
350,000

 
$
350,000

Unamortized deferred financing costs
 
(15,280
)
 
(14,845
)
Unamortized original issuance discount
 
(5,672
)
 
(5,510
)
Net Senior Notes
 
329,048

 
329,645

Current portion of Senior Notes
 

 

Senior Notes - long term
 
$
329,048

 
$
329,645

Interest on the Senior Notes is payable twice a year, on August 1 and February 1.
On January 30, 2017, the Company completed a registered exchange offer for the Senior Notes, as required under the registration rights agreement it entered into with the initial purchasers of the Senior Notes. All of the $350.0 million aggregate principal amount of the Senior Notes was validly tendered for exchange as part of this exchange offer.
Maturity of Notes Payable
The maturity of the notes payable at March 31, 2018 is as follows:

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Amounts maturing in:
(in thousands)
(Remainder of) 2018
$
25,459

2019
33,945

2020
33,945

2021
33,945

2022
33,945

Thereafter
1,769,066

Total
$
1,930,305

Interest
The Company recorded $39.5 million and $36.1 million in interest expense for the three months ended March 31, 2017 and 2018, respectively.
The following table provides a summary of interest rates and interest expense for the three months ended March 31, 2017 and 2018:
 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2018
 
(percentage per annum)
Interest rate—LIBOR
6.00%-6.53%

 
5.46%-5.96%

Interest rate—reference
*

 
*

Interest rate—Senior Notes
10.875
%
 
10.875
%
Non-refundable fee—unused facility
0.50
%
 
0.50
%
 
(dollars in thousands)
Interest expense and service fees
$
36,655

 
$
32,757

Amortization of deferred financing fees
1,744

 
1,894

Amortization of original issue discounts
846

 
1,058

Amortization of net present value of deferred consideration
190

 
128

Other interest expense
81

 
213

Total interest expense
$
39,516

 
$
36,050

* The Company did not have debt bearing interest based on the reference rate for the three months ended March 31, 2017 and 2018.
The Company concluded that the 2017 Refinancing was primarily a debt modification of the existing term loans in accordance with ASC 470-50, Debt: Modifications and Extinguishments, with extinguishment relating only to a few existing lenders that did not participate in the 2017 Refinancing. As a result, during the second quarter of 2017, the Company capitalized $4.2 million of additional OID and $0.9 million of deferred financing costs related to new lenders participating in the 2017 Term Loan. These capitalized costs will be amortized over the remaining life of the loan using the effective interest method. Additionally in the second quarter of 2017, the Company recorded a charge of $1.0 million, included in interest expense, to write off OID and deferred financing costs related to the refinanced debt for lenders not participating in the 2017 Term Loan. Lastly, the Company recorded a charge of $5.5 million during the second quarter of 2017, included in interest expense, for deferred financing costs incurred for the 2017 Term Loan that related to existing lenders that carried over from the refinanced debt.
Debt Covenants
The 2017 Term Loan and 2016 Revolver (together, the "Senior Credit Facilities") require that the Company complies with a financial covenant to maintain a maximum ratio of consolidated senior secured net indebtedness to an adjusted consolidated EBITDA measure.
The Senior Credit Facilities also contain covenants that limit the Company's ability to, among other things, incur additional debt or issue certain preferred shares; pay dividends on or make other distributions in respect of capital stock; make other restricted payments; make certain investments; sell or transfer certain assets; create liens on certain assets to secure debt; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; and enter into certain transactions with affiliates. These covenants are subject to a number of important limitations and exceptions.

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Additionally, the Senior Credit Facilities require the Company to comply with certain negative covenants and specify certain events of default that could result in amounts becoming payable, in whole or in part, prior to their maturity dates.
With the exception of certain equity interests and other excluded assets under the terms of the Senior Credit Facilities, substantially all of the Company's assets are pledged as collateral for the obligations under the Senior Credit Facilities. The indenture with respect to the Senior Notes contains covenants that limit the Company's ability to, among other things, incur additional debt or issue certain preferred shares; pay dividends on or make other distributions in respect of capital stock; make other restricted payments; make certain investments; sell or transfer certain assets; create liens on certain assets to secure debt; consolidate, merge sell or otherwise dispose of all or substantially all of its assets; and enter into certain transactions with affiliates. Upon a change of control as defined in the indenture, the Company must offer to repurchase the Senior Notes at 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, up to, but not including, the repurchase date. These covenants are subject to a number of important limitations and exceptions.
The indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately.
The Company was in compliance with all covenants at March 31, 2018.

10. Stockholders’ Equity
Voting Rights
All holders of common stock are entitled to one vote per share.
Changes in Total Stockholders' Equity
The following table presents the changes in total stockholders’ equity during the three months ended March 31, 2018:
 
Total
Stockholders’
Equity
 
(in thousands)
Balance at December 31, 2017
$
83,005

Stock-based compensation
6,992

Reclassification of stock-compensation liability award
250

Stock option exercises
25

Foreign currency translation adjustment
580

Unrealized loss on derivative
1,041

Adjustment to beginning retained earnings resulting from adoption of ASC 606, net of tax impact of $7.0 million
59,384

Net loss attributable to Endurance International Group Holdings, Inc.
(7,088
)
Balance at March 31, 2018
$
144,189

11. Stock-Based Compensation
2013 Stock Incentive Plan
The Amended and Restated 2013 Stock Incentive Plan (the “2013 Plan”) of the Company became effective upon the closing of its initial public offering ("IPO"). The 2013 Plan provides for the grant of options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards to employees, officers, directors, consultants and advisers of the Company. Under the 2013 Plan, the Company may issue up to 38,000,000 shares of the Company’s common stock. At March 31, 2018, there were 19,642,334 shares available for grant under the 2013 Plan.
2011 Stock Incentive Plan
As of February 9, 2016, the effective date of the acquisition of Constant Contact, the Company assumed and converted certain outstanding equity awards granted by Constant Contact under the Constant Contact 2011 Stock Incentive Plan (the “2011 Plan”) prior to the effective date of the acquisition (the “Assumed Awards”) into corresponding equity awards with respect to shares of the Company’s common stock. In addition, the Company assumed certain shares of Constant Contact common stock, par value $0.01 per share, available for issuance under the 2011 Plan (the “Available Shares”), which will be available for future issuance under the 2011 Plan in satisfaction of the vesting, exercise or other settlement of options and other equity awards that may be granted by the Company following the effective date of the acquisition of Constant Contact in

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reliance on the prior approval of the 2011 Plan by the stockholders of Constant Contact. The Assumed Awards were converted into 2,143,987 stock options and 2,202,846 restricted stock units with respect to the Company’s common stock and the Available Shares were converted into 10,000,000 shares of the Company’s common stock reserved for future awards under the 2011 Plan. At March 31, 2018, there were 8,267,208 shares available for grant under the 2011 Plan.
The Company calculated the fair value of the exchanged awards in accordance with the provisions of ASC 718 as of the acquisition date. The Company allocated the fair value of these awards between the pre-acquisition and post-acquisition stock-based compensation expense. The Company determined that the value of the awards under this plan was $22.3 million, of which $5.4 million was attributed to the pre-acquisition period and recognized as part of the purchase consideration for Constant Contact. The balance of $16.9 million has been attributed to the post-acquisition period, and will be recognized in the
Company’s consolidated statements of operations and comprehensive income (loss) over the vesting period of the awards.
All Plans
The following table presents total stock-based compensation expense recorded in the consolidated statement of operations and comprehensive income (loss) for all awards granted under the Company’s 2013 Plan and 2011 Plan:
 
Three Months Ended
March 31,
 
2017
 
2018
 
(in thousands)
Cost of revenue
$
1,506

 
$
1,543

Sales and marketing
1,854

 
1,097

Engineering and development
1,170

 
1,145

General and administrative
8,394

 
3,207

Total stock-based compensation expense
$
12,924

 
$
6,992

2013 Stock Incentive Plan
The following table provides a summary of the Company’s stock options as of March 31, 2018 and the stock option activity for all stock options granted under the 2013 Plan during the three months ended March 31, 2018:
 
Stock
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value(3)
(in thousands)
Outstanding at December 31, 2017
8,575,150

 
$
12.30

 
 
 
 
Granted
10,344

 
$
7.25

 
 
 
 
Exercised

 
$

 
 
 
 
Forfeited
(157,780
)
 
$
13.18

 
 
 
 
Expired
(803,774
)
 
$
13.00

 
 
 
 
Outstanding at March 31, 2018
7,623,940

 
$
12.20

 
6.7
 
$

Exercisable at March 31, 2018
5,656,129

 
$
12.76

 
6.1
 
$

Expected to vest after March 31, 2018 (1)
1,967,811

 
$
10.59

 
8.3
 
$

Exercisable as of March 31, 2018 and expected to vest (2)
7,623,940

 
$
12.20

 
6.5
 
$

(1) 
This represents the number of unvested options outstanding as of March 31, 2018 that are expected to vest in the future.
(2) 
This represents the number of vested options as of March 31, 2018 plus the number of unvested options outstanding as of March 31, 2018 that are expected to vest in the future.
(3) 
The aggregate intrinsic value was calculated based on the positive difference, if any, between the estimated fair value of the Company’s common stock on March 31, 2018 of $7.40 per share, or the date of exercise, as appropriate, and the exercise price of the underlying options.
Restricted stock units granted under the 2013 Plan generally vest annually over a three-year period, unless otherwise determined by the Company’s board of directors. The following table provides a summary of the Company’s restricted stock unit activity for the 2013 Plan during the three months ended March 31, 2018:

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Restricted Stock
Units
 
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 2017
3,004,137

 
$
7.93

Granted
296,535

 
$
7.25

Vested
(64,145
)
 
$
7.47

Canceled
(84,566
)
 
$
7.83

Non-vested at March 31, 2018
3,151,961

 
$
7.88

Restricted stock awards granted under the 2013 Plan generally vest annually over a four-year period, unless otherwise determined by the Company’s board of directors. Performance-based restricted stock awards are earned based on the achievement of performance criteria established by the Company’s compensation committee and board of directors. The following table provides a summary of the Company’s restricted stock award activity for the 2013 Plan during the three months ended March 31, 2018:
 
Restricted Stock
Awards
 
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 2017
3,432,946

 
$
13.79

Granted

 
$

Vested
(191,173
)
 
$
13.65

Canceled
(2,070,373
)
 
$
14.92

Non-vested at March 31, 2018
1,171,400

 
$
11.81

2015 Performance Based Award
The performance-based restricted stock award granted to the Company’s former chief executive officer ("CEO") Hari Ravichandran during 2015 provided an opportunity for Mr. Ravichandran to earn a fully vested right to up to 3,693,754 shares of the Company’s common stock (the “Award Shares”) over a three-year period beginning July 1, 2015 and ending on June 30, 2018 (the “Performance Period”). Award Shares could be earned based on the Company achieving pre-established, threshold, target and maximum performance metrics.
Award Shares could be earned during each calendar quarter during the Performance Period (each, a “Performance Quarter”) if the Company achieved a threshold, target or maximum level of the performance metric for the Performance Quarter. If the performance metric was less than the threshold level for a Performance Quarter, no Award Shares would be earned during the Performance Quarter. Award Shares that were not earned during a Performance Quarter could be earned later during the then current twelve-month period from July 1st to June 30th during the Performance Period (each, a “Performance Year”), at a threshold, target or maximum level of the performance metric for the Performance Year.
Any Award Shares that were earned during the Performance Period would have vested on June 30, 2018, provided that Mr. Ravichandran was employed by the Company on such date. The requirement that he be employed by the Company on June 30, 2018 would be waived in the event his employment was terminated due to death, disability or by the Company without cause, if he terminated employment with the Company for good reason, or if he was employed by the Company on the date of a change in control (as such terms were defined in Mr. Ravichandran's employment agreement). Upon the occurrence of any of the foregoing events, additional Award Shares could be earned, as provided for in the performance-based restricted stock agreement.
This performance-based award was evaluated quarterly to determine the probability of its vesting and determine the amount of stock-based compensation to be recognized.
In April 2017, the Company announced that its board of directors and Mr. Ravichandran adopted a CEO transition plan whereby Mr. Ravichandran would remain as CEO and serve as a board member while the Company conducted a search to identify his successor. The Company's new President and CEO began employment with the Company on August 22, 2017. Mr. Ravichandran ended his employment with the Company during the fourth quarter of 2017. In accordance with the terms of the 2015 performance based award, upon separation of employment, Mr. Ravichandran received the Award Shares earned with respect to Performance Quarters completed prior to the separation, plus the greater of (a) the target number of Award Shares eligible to be earned in the Performance Quarter in which the separation occurred and (b) the number of Award Shares that would have been earned in the Performance Quarter in which the separation occurred as if Mr. Ravichandran had remained employed through the end of the Performance Quarter. Based on the actual end date of Mr. Ravichandran's employment, the Company used an attribution period of 2.39 years. An aggregate 1,661,439 earned Award Shares vested under this performance

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based award and the remaining 2,032,315 unearned Award Shares were forfeited. All charges relating to this award were recognized prior to December 31, 2017. During the three months ended March 31, 2018, no charge was recognized with respect to this award.
2016 Performance Based Awards
On February 16, 2016, the compensation committee of the board of directors of the Company approved the grant of performance-based restricted stock awards to the Company’s chief financial officer (“CFO”), chief operating officer (“COO”) and chief administrative officer (“CAO”). Based on the Company's achievement of Constant Contact revenue, adjusted EBITDA and cash flow metrics, these shares vested on March 31, 2017 and each executive earned the maximum number of shares subject to his or her award. The CFO earned 223,214 shares of the Company’s stock, the COO earned 260,416 shares of the Company’s stock, and the CAO earned 148,810 shares of the Company’s stock. These earned shares vested on March 31, 2017. During the three months ended March 31, 2017, the Company recognized $1.2 million of stock-based compensation expense related to these performance-based awards, which was the last quarter stock-based compensation was recorded relating to these awards.
New CEO Award
On August 11, 2017, the Company and Jeffrey H. Fox entered into an employment agreement (the “Employment Agreement”) appointing Mr. Fox as the Company’s president and chief executive officer effective upon his employment start date (the “Effective Date”) of August 22, 2017. The Employment Agreement provides for Mr. Fox to receive, on the Effective Date, an equity award under the 2013 Plan with a total value of $10,375,000 as of August 11, 2017, split between an award of 1,032,500 restricted stock units (the “RSU Award”) and an option to purchase 612,419 shares of the Company’s common stock (the “Stock Option Grant”).
Two Hundred Eighty-Two Thousand Five Hundred (282,500) of the restricted stock units subject to the RSU Award vested immediately on the Effective Date, but are subject to a requirement that Mr. Fox hold the shares underlying such restricted stock units until the earlier of the third anniversary of the Effective Date, his death or disability (as defined in the Employment Agreement) or a change in control of the Company (as defined in the Employment Agreement). The Company recorded a charge of $2.2 million for these immediately vested shares during the three months ended September 30, 2017. The remaining 750,000 restricted stock units subject to the RSU Award will vest over a three-year period, with 250,000 of such restricted stock units vesting annually on the anniversary of the Effective Date. The Stock Option Grant will vest over a three-year period, with one-third of the total number of shares subject to the Stock Option Grant vesting on the first anniversary of the Effective Date and the remainder vesting in equal monthly installments thereafter.
2011 Stock Incentive Plan
The following table provides a summary of the Company’s stock options as of March 31, 2018 and the stock option activity for all stock options granted under the 2011 Plan during the three months ended March 31, 2018:
 
Stock
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual Term
(In Years)
 
Aggregate
Intrinsic
Value(3)
(in thousands)
Outstanding at December 31, 2017
888,260

 
$
8.75

 
 
 
 
Granted

 
$

 
 
 
 
Exercised
(4,338
)
 
$
5.87

 
 
 
 
Forfeited
(3,666
)
 
$
9.96

 
 
 
 
Expired
(25,691
)
 
$
9.00

 
 
 
 
Outstanding at March 31, 2018
854,565

 
$
8.75

 
4.1
 
$
314

Exercisable at March 31, 2018
569,682

 
$
8.41

 
3.8
 
$
291

Expected to vest after March 31, 2018 (1)
284,883

 
$
9.44

 
4.8
 
$
11

Exercisable as of March 31, 2018 and expected to vest (2)
854,565

 
$
8.75

 
4.1
 
$
314

(1) 
This represents the number of unvested options outstanding as of March 31, 2018 that are expected to vest in the future.
(2) 
This represents the number of vested options as of March 31, 2018 plus the number of unvested options outstanding as of March 31, 2018 that are expected to vest in the future.

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(3) 
The aggregate intrinsic value was calculated based on the positive difference, if any, between the estimated fair value of the Company’s common stock on March 31, 2018 of $7.15 per share, or the date of exercise, as appropriate, and the exercise price of the underlying options.
Unless otherwise determined by the Company’s board of directors, restricted stock units granted under the 2011 Plan generally vest annually over a three- or a four-year period. The following table provides a summary of the Company’s restricted stock unit activity for the 2011 Plan during the three months ended March 31, 2018:
 
Restricted Stock
Units
 
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 2017
1,541,141

 
$
8.30

Granted
41,379

 
$
7.25

Vested
(8,818
)
 
$
7.30

Canceled
(34,577
)
 
$
8.58

Non-vested at March 31, 2018
1,539,125

 
$
8.27

Under both the 2011 and 2013 Plans combined, as of March 31, 2018 the Company has approximately $11.0 million of unrecognized stock-based compensation expense related to option awards that will be recognized over 1.9 years and approximately $32.1 million of unrecognized stock-based compensation expense related to restricted stock awards and restricted stock units that will be recognized over 2.1 years.
12. Accumulated Other Comprehensive Income
The following table presents the components of accumulated other comprehensive income (loss):
 
 
Foreign Currency Translation Adjustments
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Total
 
 
(in thousands)
Balance at December 31, 2017
 
$
696

 
$
(1,237
)
 
$
(541
)
Other comprehensive income (loss)
 
580

 
1,041

 
1,621

Balance at March 31, 2018
 
$
1,276

 
$
(196
)
 
$
1,080

13. Variable Interest Entity
The Company, through a subsidiary formed in China, has entered into various agreements with Shanghai Xiao Lan Network Technology Co., Ltd (“Shanghai Xiao”) and its shareholders that allow the Company to effectively control Shanghai Xiao, making it a variable interest entity (“VIE”). Shanghai Xiao has a technology license that allows it to provide local hosting services to customers located in China.
The shareholders of Shanghai Xiao cannot transfer their equity interests without the approval of the Company, and as a result, are considered de facto agents of the Company in accordance with ASC 810-10-25-43. The Company and its de facto agents acting together have the power to direct the activities that most significantly impact the entity’s economic performance and they have the obligation to absorb losses and the right to receive benefits from the entity. In situations where a de facto agency relationship is present, one party is required to be identified as the primary beneficiary. The factors considered include the presence of a principal/agent relationship, the relationship and significance of activities to the reporting entity, the variability associated with the VIE’s anticipated economics and the design of the VIE. The analysis is qualitative in nature and is based on weighting the relative importance on each of the factors in relation to the specifics of the VIE arrangement. Upon the execution of the agreements with Shanghai Xiao and its shareholders, the Company performed an analysis and concluded that the Company is the party that is most closely associated with Shanghai Xiao, as it is the most exposed to the variability of the VIE’s economics and therefore is the primary beneficiary of the VIE.
As of and for the period ended March 31, 2018, the financial position and results of operations of Shanghai Xiao are consolidated within, but are not material to, the Company’s consolidated financial position or results of operations.

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14. Revenue
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
The Company recorded a net increase to opening retained earnings of $59.4 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to customer acquisition costs. The impact to revenue and customer acquisition costs during the three months ended March 31, 2018 as a result of applying Topic 606 was a decrease of $0.8 million and an increase of $0.5 million, respectively.
During the three months ended March 31, 2018, the Company recognized $291.4 million of revenue, the majority of which was derived from contracts with customers.
During the three months ended March 31, 2018, the Company did not incur any impairment losses on any receivables or contract assets arising from the Company’s contracts with customers.
During the three months ended March 31, 2018, the Company did not incur any credit losses on any receivables or contract assets, arising from the Company’s contracts with customers.
In accordance with ASC 606, the Company disaggregates revenue from contracts with customers based on the timing of revenue recognition. The Company determined that disaggregating revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. As discussed in Note 20. Segment Information, the Company business consists of the web presence, domain and email marketing segments:
 
Three Months Ended March 31, 2018
 
Web presence
 
Email marketing
 
Domain
 
Total
 
(in thousands)
Subscriber revenue:
 
 
 
 
 
 
 
Direct revenue from subscribers
$
143,813

 
$
101,034

 
$
13,636

 
$
258,483

Professional services
3,383

 
390

 
99

 
3,872

Reseller revenue
5,754

 
859

 
13,381

 
19,994

Total subscriber revenue
$
152,950

 
$
102,283

 
$
27,116

 
$
282,349

 
 
 
 
 
 
 
 
Non-subscriber revenue:
 
 
 
 
 
 
 
MDF
$
1,838

 
$
164

 
$
29

 
$
2,031

Premium domains
31

 

 
5,189

 
5,220

Domain parking
198

 

 
1,558

 
1,756

Total non-subscriber revenue:
$
2,067

 
$
164

 
$
6,776

 
$
9,007

Subscriber revenue is primarily recognized over time, when the services are performed, except for third party products for which the Company acts as an agent. Revenue from third party products for which the Company acts as an agent is recognized at a point in time, when the revenue is earned.
Revenue, classified by the major geographic areas in which the Company’s customers are located, was as follows:
 
Three Months Ended March 31, 2018
 
Web presence
 
Email marketing
 
Domain
 
Total
 
(in thousands)
Domestic
$
104,016

 
$
93,980

 
$
12,934

 
$
210,930

International
51,001

 
8,467

 
20,958

 
80,426

Total
$
155,017

 
$
102,447

 
$
33,892

 
$
291,356


15. Redeemable Non-controlling Interest
On January 6, 2016, the Company increased it stake from 49.0% to a 57.5% controlling interest in WZ UK, an entity specialized in marketing certain of the Company's products. The minority investors could put their non-controlling interest, or NCI, to the Company within pre-specified put periods. As the NCI was subject to a put option that was outside the control of the Company, it was deemed a redeemable non-controlling interest and was not recorded in permanent equity, and was

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presented in mezzanine redeemable non-controlling interest on the consolidated balance sheet. The Company increased its ownership to 77.5% in May of 2016.
On July 13, 2016, the Company entered into a restructuring of the arrangements with the minority shareholders that resulted in the merger of two entities, Resume Labs Limited and Pseudio Limited, into WZ UK, and acquired an increased ownership of the consolidated entity which brought the Company's ownership of WZ UK to 86.4%. The restructuring significantly reduced the amount of the potential redemption amount payable to the minority shareholders, and gave the Company the flexibility to reduce investments in this business. Based on these reduced investments, the estimated value of the non-controlling interest was below the expected redemption amount of $25.0 million, which resulted in $14.2 million of excess accretion that reduced income available to common shareholders for the period starting on the date of the restructuring through the redemption date of July 1, 2017. The Company recognized excess accretion of $3.6 million for the three months ended March 31, 2017, respectively, which is reflected in net loss attributable to accretion of non-controlling interest in the Company’s consolidated statements of operations and comprehensive loss. Prior to the third quarter of 2016, the Company did not have any accretion amounts in excess of fair value. On July 7, 2017, the Company redeemed the remaining redeemable non-controlling interest for $25.0 million.
16. Income Taxes
The Company files income tax returns in the United States for federal income taxes and in various state jurisdictions. The Company also files in several foreign jurisdictions. In the normal course of business, the Company is subject to examination by tax authorities throughout the world. Since the Company is in a loss carry-forward position, it is generally subject to U.S. federal and state income tax examinations by tax authorities for all years for which a loss carry-forward is utilized. One of the Company’s subsidiaries, Constant Contact, Inc., is under audit by the U.S. Internal Revenue Service and the New York City Department of Finance for periods December 31, 2015 and February 9, 2016. The Company is also currently under audit in India for fiscal years ended March 31, 2014, 2015 and 2016 and Israel for the fiscal years ended December 31, 2012, 2013, 2014 and 2015.
The Company recognizes, in its consolidated financial statements, the effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. During the quarter ended September 31, 2017, management has concluded that the Company’s material tax positions require the recording of an ASC 740-10 reserve, with interest and penalties, for uncertain income tax positions as of September 30, 2017. The Company has unrecognized tax positions at December 31, 2017 and March 31, 2018 of $1.1 million and $1.6 million, respectively, that would affect its effective tax rate. The Company does not expect a significant change in the liability for unrecognized tax benefits in the next 12 months.
The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluated all available positive and negative evidence, and weighted the evidence based on its objectivity. Evidence the Company considered included:
 
Net Operating Losses (“NOL”) incurred from the Company’s inception to March 31, 2018;
Expiration of various federal, state and foreign tax attributes;
Reversals of existing temporary differences;
Composition and cumulative amounts of existing temporary differences; and
Forecasted profit before tax.
The Company updates the scheduling of the reversal of the consolidated U.S. deferred tax assets and liabilities each quarter, as the deferred tax liabilities have continued to decrease and the Company generated pre-tax losses. Based on the analysis of the above evidence, the Company increased its valuation allowance by $0.7 million at March 31, 2018.
For the three months ended March 31, 2017 and 2018, the Company recognized a tax expense of $5.8 million and $2.6 million, respectively, in the consolidated statements of operations and comprehensive loss. The income tax expense for the three months ended March 31, 2018 was primarily attributable to a federal and state deferred tax expense of $0.7 million due primarily to the different book and tax treatment of goodwill, a federal and state current income tax expense of $0.7 million and a foreign current tax expense of $1.2 million.
As of December 31, 2017, the Company had NOL carry-forwards available to offset future U.S. federal taxable income of approximately $157.6 million and future state taxable income of approximately $128.6 million. These NOL carry-forwards expire on various dates through 2037.
As of December 31, 2017, the Company had NOL carry-forwards in foreign jurisdictions available to offset future foreign taxable income by approximately $26.7 million. The Company has loss carry-forwards that begin to expire in 2021 in in China totaling $0.7 million. The Company has loss carry-forwards that begin to expire in 2020 in the Netherlands

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totaling $12.6 million. The Company also has loss carry-forwards in the United Kingdom and Singapore of $13.2 million and $0.2 million, respectively, which have an indefinite carry-forward period. A recent U.K. tax law change provides that U.K. losses can only offset 50% of trading profits incurred after April 1, 2017.
In addition, the Company has $3.4 million of U.S. federal capital loss carry-forwards and $1.4 million in state capital loss carry-forwards, generally expiring through 2021. As of December 31, 2017, the Company had U.S. tax credit carryforwards available to offset future U.S. federal and state taxes of approximately $17.6 million and $12.3 million, respectively. These credit carryforwards expire on various dates through 2037.
Utilization of the NOL carry-forwards may be subject to an annual limitation due to the ownership change rules under Section 382 of the Internal Revenue Code (“Section 382 limitation”). Ownership changes can limit the amount of net operating loss and other tax attributes that a company can use each year to offset future taxable income and taxes payable.
Tax Cuts and Jobs Act
On December 22, 2017, the United States enacted tax reform legislation by passage of the commonly named Tax Cuts and Jobs Act which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. As a result of enactment of the legislation, the Company incurred an additional one-time income tax benefit on the re-measurement of certain deferred tax assets and liabilities in the amount of $16.9 million for the year ended December 31, 2017. The legislation also introduced substantial international tax reform that moves the U.S. toward a territorial system, in which income earned in other countries will generally not be subject to U.S. taxation. The accumulated foreign earnings of U.S. shareholders of certain foreign corporations will be subject to a one-time transition tax. Amounts held in cash or cash equivalents will be subject to a 15.5% tax, while amounts held in illiquid assets will be subject to an eight percent tax. Due to an accumulated deficit in the undistributed earnings of our foreign subsidiaries, the one-time transition tax will not apply to the us. Additionally, the legislation also contains provisions which would generally limit our deduction for interest expense to 30% of adjusted taxable earnings before interest, taxes, depreciation and amortization ("Tax EBITDA"). The legislation includes provisions which provide a deduction related to intangible income that is owned in the U.S., an additional tax charge related to income from intangibles owned outside the U.S., and a new base-erosion and anti-abuse tax. Although the Company has substantially completed its work on the effects of the Tax Cuts and Jobs Act, it continues to evaluate certain sections of the new law that may be pertinent to the Company's tax situation.

17. Severance and Other Exit Costs
The Company continues to evaluate its data center, sales and marketing, support and engineering operations and the general and administrative function in an effort to optimize its cost structure. As a result, the Company may incur charges for employee severance, exiting facilities and restructuring data center commitments and other related costs.
2018 Restructuring Plan
In January 2018, the Company announced plans to eliminate approximately 71 positions, primarily in the Asia Pacific region and to a lesser extent in the U.S., in order to streamline operations and create operational efficiencies (the "2018 Restructuring Plan"). During the three months ended March 31, 2018, the Company incurred severance costs of $1.7 million and paid $0.8 million and had a remaining accrued severance liability of $0.9 million as of March 31, 2018 in connection with the 2018 Restructuring Plan.
The Company expects to complete severance charges related to the 2018 Restructuring Plan during the year ending December 31, 2018.
2017 Restructuring Plan
In January 2017, the Company announced plans to close certain offices as part of a plan to consolidate certain web presence customer support operations, resulting in severance costs. These severance charges were associated with the elimination of approximately 660 positions, primarily in customer support. Additionally, the Company implemented additional restructuring plans to create operational efficiencies and synergies related to the Constant Contact acquisition, which resulted in additional severance charges for the elimination of approximately 50 positions. During the three months ended March 31, 2018, in connection with these plans (together, the “2017 Restructuring Plan”), the Company incurred severance costs of $0.1 million and paid $1.9 million. The Company had a remaining accrued severance liability of $1.9 million as of March 31, 2018.
In connection with the 2017 Restructuring Plan, the Company closed offices in Orem, Utah and relocated certain employees to our Tempe, Arizona office. During the three months ended March 31, 2018, the Company recorded a reduction to facility charges of $0.2 million due to adjustments and paid $0.1 million. The Company had a remaining accrued facility liability of $0.0 million as of March 31, 2018.

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The Company expects to complete severance charges related to the 2017 Restructuring Plan during the year ending December 31, 2018.
2016 Restructuring Plan
In connection with the Company’s acquisition of Constant Contact on February 9, 2016, the Company implemented a plan to create operational efficiencies and synergies resulting in severance costs and facility exit costs (the “2016 Restructuring Plan”).
The severance charges were associated with the elimination of approximately 265 positions across the business. The Company incurred all employee-related charges associated with the 2016 Restructuring Plan during the year ended December 31, 2016 and all severance payments were complete at December 31, 2017. There is no severance accrual remaining as of March 31, 2018.
The 2016 Restructuring Plan included the closure of offices in San Francisco, California, Delray Beach, Florida, New York, New York, Miami, Florida, the United Kingdom and Brazil, and the relocation of certain employees to our Austin, Texas office. The Company also closed a portion of the Constant Contact offices in Waltham, Massachusetts. During the three months ended March 31, 2018, the Company recorded an adjustment to the Waltham facilities charge for future lease payments of $0.1 million due to a change in estimated sublease income. The Company paid $0.5 million of facility costs related to the 2016 Restructuring Plan during the three months ended March 31, 2018 and had a remaining accrued facility liability of $4.9 million as of March 31, 2018.
Other than the adjustment mentioned above, the Company completed facility-related charges associated with the 2016 Restructuring Plan during the year ended December 31, 2016, and expects to complete facility exit cost payments related to this plan during the year ending December 31, 2022.
Activity of Combined Restructuring Plans
The following table provides a summary of the aggregate activity for the three months ended March 31, 2018 related to the Company’s combined restructuring plans' severance accrual:
 
Employee 
Severance
 
(in thousands)
 
Total
Balance at December 31, 2017
$
3,668

Severance charges
1,760

Cash paid
(2,631
)
Balance at March 31, 2018
$
2,797

The following table provides a summary of the aggregate activity for the three months ended March 31, 2018 related to the Company’s combined restructuring plans' facilities exit accrual:
 
Facilities
 
(in thousands)
 
Total
Balance at December 31, 2017
$
6,005

Facility adjustments
(231
)
Sublease income received
164

Cash paid
(858
)
Balance at March 31, 2018
$
5,080

The following table presents restructuring charges recorded in the consolidated statements of operations and comprehensive income (loss) for the periods presented:

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For the Three Months Ended March 31,
 
2017
 
2018
 
(in thousands)
Cost of revenue
$
2,743

 
$
547

Sales and marketing
1,374

 
12

Engineering and development
652

 
308

General and administrative
858

 
662

Total restructuring charges
$
5,627

 
$
1,529

18. Commitments and Contingencies
From time to time, the Company is involved in legal proceedings or subject to claims arising in the ordinary course of its business. The Company is not presently involved in any such legal proceeding or subject to any such claim that, in the opinion of its management, would have a material adverse effect on its business, operating results or financial condition. However, the results of such legal proceedings or claims cannot be predicted with certainty, and regardless of the outcome, can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. Neither the ultimate outcome of the matters listed below nor an estimate of any probable losses or any reasonably possible losses (other than the reserves specifically discussed below) can be assessed at this time.
The Company received a subpoena dated December 10, 2015 from the Boston Regional Office of the SEC, requiring the production of certain documents, including, among other things, documents related to its financial reporting, including operating and non-GAAP metrics, refund, sales and marketing practices and transactions with related parties. The Company is fully cooperating with the SEC’s investigation. The Company is also in discussions with the Boston Regional Office regarding a potential resolution of its investigation, and reserved $8.0 million during the three months ended September 30, 2017, in connection with a potential resolution of both this investigation and the Constant Contact investigation discussed below. The Company can make no assurances as to whether the investigation will be resolved by agreement and/or the time or resources that will need to be devoted to this investigation or its final outcome, or the impact, if any, of this investigation or any related legal or regulatory proceedings on the Company’s business, financial condition, results of operations and cash flows.
On May 4, 2015, Christopher Machado, a purported holder of the Company’s common stock, filed a civil action in the United States District Court for the District of Massachusetts against the Company and its former chief executive officer and former chief financial officer, captioned Machado v. Endurance International Group Holdings, Inc., et al., Civil Action No. 1:15-cv-11775-GAO. The plaintiff filed an amended complaint on December 8, 2015, and a second amended complaint on March 18, 2016. The Company moved to dismiss the second amended complaint, but before the court ruled on the Company's motion, with the Company's assent, the plaintiff filed a third amended complaint on June 30, 2017. In the third amended complaint, plaintiffs Christopher Machado and Michael Rubin allege claims for violations of Section 10(b) and 20(a) of the Exchange Act, and Sections 11, 12(a)(2), and 15 of the Securities Act, on behalf of a purported class of purchasers of the Company’s securities between October 25, 2013 and December 16, 2015, including persons or entities who purchased or acquired the Company's shares pursuant or traceable to the registration statement and prospectus issued in connection with the Company's October 25, 2013 initial public offering. The plaintiffs challenge as false or misleading certain of the Company’s disclosures about the total number of subscribers, average revenue per subscriber, the number of customers paying over $500 per year for the Company’s products and services, and the average number of products sold per subscriber. The plaintiffs seek, on behalf of themselves and the purported class, compensatory damages, rescissory damages as to class members who purchased shares pursuant to the offering and the plaintiffs' costs and expenses of litigation. The Company moved to dismiss the third amended complaint on August 29, 2017. The plaintiffs' memorandum in opposition to the Company's motion to dismiss was filed on October 30, 2017 and the Company's reply memorandum was filed on December 14, 2017. On January 12, 2018, the parties filed a joint motion to stay all proceedings pending the outcome of a mediation between the parties scheduled for February 23, 2018. The court granted the stay on February 21, 2018. The parties did not resolve the matter at the mediation on February 23, 2018, but have continued to productively discuss a potential resolution of this matter. On March 20, 2018, the court granted the parties' joint motion to continue the stay of all proceedings. The Company has recorded a reserve in connection with a possible settlement of this action, although no agreement has been reached with the plaintiffs. The aggregate amount of this reserve and the reserve for the Constant Contact McGee litigation discussed below is $8.5 million, which was recorded during the three months ended March 31, 2018. If the parties agree on a settlement, it will be subject to court approval.  The Company can make no assurance that the parties will agree on a settlement, or that the court will approve any such settlement.
Constant Contact
On February 9, 2016, the Company acquired all of the outstanding shares of common stock of Constant Contact.

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On December 10, 2015, Constant Contact received a subpoena from the Boston Regional Office of the SEC, requiring the production of documents pertaining to Constant Contact’s sales, marketing, and customer retention practices, as well as periodic public disclosure of financial and operating metrics. The Company is fully cooperating with the SEC’s investigation. As discussed above, the Company is in discussions with the Boston Regional Office regarding a potential resolution of its investigation, and reserved $8.0 million during the three months ended September 30, 2017, in connection with a potential resolution of both this investigation and the Endurance investigation discussed above. The Company currently expects that any settlement arising from the SEC investigation of Constant Contact will involve asserted scienter-based claims. The Company can make no assurances as to whether the investigation will be resolved by agreement and/or the time or resources that will need to be devoted to this investigation or its final outcome, or the impact, if any, of this investigation or any related legal or regulatory proceedings on the Company’s business, financial condition, results of operations and cash flows.
On August 7, 2015, a purported class action lawsuit, William McGee v. Constant Contact, Inc., et al, was filed in the United States District Court for the District of Massachusetts against Constant Contact and two of its former officers. An amended complaint, which named an additional former officer as a defendant, was filed December 19, 2016. The lawsuit asserts claims under Sections 10(b) and 20(a) of the Exchange Act, and is premised on allegedly false and/or misleading statements, and non-disclosure of material facts, regarding Constant Contact’s business, operations, prospects and performance during the proposed class period of October 23, 2014 to July 23, 2015. The parties mediated the claims on March 27, 2018, and as a result of that mediation reached an agreement in principle with the lead plaintiff, which is subject to approval by the court. In connection with that agreement, the Company has recorded a reserve. The aggregate amount of this reserve and the reserve for the Endurance Machado litigation discussed above is $8.5 million, which was recorded during the three months ended March 31, 2018. The Company cannot make any assurances as to whether the settlement will be approved by the court.
In August 2012, RPost Holdings, Inc., RPost Communications Limited and RMail Limited, or collectively, RPost, filed a complaint in the United States District Court for the Eastern District of Texas that named Constant Contact as a defendant in a lawsuit. The complaint alleged that certain elements of Constant Contact’s email marketing technology infringe five patents held by RPost. RPost sought an award for damages in an unspecified amount and injunctive relief. In February 2013, RPost amended its complaint to name five of Constant Contact’s marketing partners as defendants. Under Constant Contact’s contractual agreements with these marketing partners, Constant Contact is obligated to indemnify them for claims related to patent infringement. Constant Contact filed a motion to sever and stay the claims against its partners and multiple motions to dismiss the claims against it. In January 2014, the case was stayed pending the resolution of certain state court and bankruptcy actions involving RPost, to which Constant Contact is not a party. Meanwhile, RPost asserted the same patents it asserted against Constant Contact in litigation against GoDaddy. In June 2016, GoDaddy succeeded in invalidating all of those RPost patents, with Endurance filing an amicus brief in the Federal Circuit in support of GoDaddy’s position in November 2016. RPost's efforts to appeal, including filing a writ of certiorari with the United States Supreme Court, which was denied on December 11, 2017, were unsuccessful. All claims asserted by RPost against Constant Contact in December 2012 thus remain invalid except for one claim from one patent which RPost did not assert against GoDaddy. Constant Contact has notified RPost that Constant Contact believes the remaining claim is invalid in light of the other litigation that RPost lost. On December 12, 2017, Constant Contact moved to lift the stay in the District Court in order to file a Motion for Judgment on the Pleadings invalidating all of the RPost patents-in-suit. While this motion was pending, RPost voluntarily dismissed all of its patent claims against Constant Contact and the defendant marketing partners of Constant Contact on December 29, 2017. On January 19, 2018, the district court entered an order dismissing the lawsuit.
19. Related Party Transactions
The Company has various agreements in place with related parties. Below are details of significant related party transactions that occurred during the three months ended March 31, 2017 and 2018.
Tregaron:
The Company has contracts with Tregaron India Holdings, LLC and its affiliates, including Diya Systems (Mangalore) Private Limited, Glowtouch Technologies Pvt. Ltd. and Touchweb Designs, LLC (collectively, “Tregaron”), for outsourced services, including email- and chat-based customer and technical support, network monitoring, engineering and development support and web design and web building services, and an office space lease. These entities are owned directly or indirectly by family members of the Company’s former chief executive officer, who is also a holder of more than 5.0% of the Company's capital stock.
The following table presents the amounts of related party transactions recorded in the consolidated statements of operations and comprehensive income (loss) for the periods presented relating to services provided by Tregaron and its

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affiliates under these agreements:
 
Three Months Ended
March 31,
 
2017
 
2018
 
(in thousands)
Cost of revenue
$
2,900

 
$
3,700

Sales and marketing
100

 
175

Engineering and development
450

 
400

General and administrative
50

 
25

Total related party transaction expense, net
$
3,500

 
$
4,300

As of December 31, 2017, approximately $1.5 million was included in accounts payable and accrued expense relating to services provided by Tregaron. As of March 31, 2018, approximately $3.1 million was included in accounts payable and accrued expense relating to services provided by Tregaron.
Innovative Business Services, LLC:
The Company also has agreements with Innovative Business Services, LLC (“IBS”), which provides multi-layered third-party security and website performance applications that are sold by the Company. During the three months ended March 31, 2018, IBS was indirectly majority owned by a director of the Company and by the Company’s former chief executive officer, who is a holder of more than 5.0% of the Company's capital stock. During the quarter ended March 31, 2017, the Company’s principal agreement with this entity was amended to permit the Company to purchase a specific IBS website performance product at no charge, and in exchange, to increase the revenue share to IBS on certain website performance products. The Company records revenue on the sale of IBS products on a net basis, since the Company views IBS as the primary obligor to deliver these services. As a result, the revenue share paid by the Company to IBS is recorded as contra-revenue. Further, IBS pays the Company a fee on sales made by IBS directly to customers of the Company. The Company records these fees as revenue.
The following table presents the amounts of related party transactions recorded in the consolidated statements of operations and comprehensive income (loss) for the periods presented relating to services provided by IBS and its affiliates under these agreements:

 
Three Months Ended
March 31,
 
2017
 
2018
 
(in thousands)
Revenue
$
(1,100
)
 
$
(1,200
)
Revenue (contra)
2,200

 
2,250

Total related party transaction impact to revenue
$
1,100

 
$
1,050

Cost of revenue
200

 
150

Total related party transaction expense, net
$
1,300

 
$
1,200

As of December 31, 2017 and March 31, 2018, approximately $0.2 million and $0.1 million, respectively, was included in prepaid expenses and other current assets relating to the Company’s agreements with IBS.
As of December 31, 2017 and March 31, 2018, approximately $1.3 million and $1.5 million, respectively was included in accounts payable and accrued expense relating to the Company’s agreements with IBS.
As of December 31, 2017 and March 31, 2018, approximately $0.7 million and $0.8 million, respectively, was included in accounts receivable relating to the Company’s agreements with IBS.
Goldman, Sachs & Co.:
The Company entered into a three-year interest rate cap on December 9, 2015 with a subsidiary of Goldman, Sachs & Co. ("Goldman"). The Company paid $3.0 million to the Goldman subsidiary as a premium for the interest rate cap during the year ended December 31, 2016. No further premiums are payable under this interest rate cap. Goldman is a significant stockholder of the Company. Refer to Note 5: Fair Value Measurements, for further details.

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Goldman Sachs Lending Partners LLC, a subsidiary of Goldman, was one of the joint bookrunners and joint lead arrangers for the 2017 Refinancing. In that capacity, Goldman Sachs Lending Partners LLC received an arrangement fee of $0.5 million, and was reimbursed for an immaterial amount of expenses.
20. Segment Information
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the CODM.
The Company experienced significant changes in its management structure during fiscal year 2017, including a change in its chief executive officer, who is the Company's CODM. The Company's leadership structure has been revised to centralize management of certain domain leading brands in order to improve overall performance. As a result of these management changes, management has revised internal financial reporting structures, and broken the former web presence segment into two reportable segments, web presence and domains. The Company's third reportable segment, email marketing, remains unchanged.
The products and services included in each of the three reportable segments are as follows:
Web Presence. The web presence segment consists primarily of the Company's web hosting brands, such as Bluehost and HostGator, and related products such as domain names, website security, website design tools and services, and e-commerce products.
Domain. The domain segment consists of domain-focused brands such as Domain.com, ResellerClub and LogicBoxes as well as certain web hosting brands that are under common management with domain-focused brands. This segment sells domain names and domain management services to resellers and end users, as well as premium domain names, and also generates advertising revenue from domain name parking. It also resells domain names and domain management services to the web presence segment.
Email marketing. The email marketing segment consists of Constant Contact email marketing tools and related products and our SinglePlatform digital storefront solution.
The Company measures profitability of these segments based on revenue, gross profit, and adjusted EBITDA. The accounting policies of each segment are the same as those described in the summary of significant accounting policies; please refer to Note 2: Summary of Significant Accounting Policies, for further details. The following tables contain financial information for each reportable segment for the three months ended March 31, 2017 and 2018:



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Three Months Ended
March 31, 2017

Web presence
 
Email marketing
 
Domain
 
Total
 
(in thousands)

(as revised)
Revenue(1)
$
164,009

 
$
97,789

 
$
33,339

 
$
295,137

Gross profit
$
77,870

 
$
59,772

 
$
8,746

 
146,388

 
 
 
 
 
 
 
 
Net (loss) income
$
(19,018
)
 
$
(7,952
)
 
$
(4,608
)
 
(31,578
)
Interest expense, net(2)
16,390

 
22,519

 
489

 
39,398

Income tax expense (benefit)
8,493

 
(4,777
)
 
2,058

 
5,774

Depreciation
8,419

 
3,873

 
819

 
13,111

Amortization of other intangible assets
14,551

 
18,362

 
1,354

 
34,267

Stock-based compensation
9,790

 
1,824

 
1,310

 
12,924

Restructuring expenses
2,128

 
3,292

 
207

 
5,627

Transaction expenses and charges

 
580

 

 
580

Adjusted EBITDA
$
40,753

 
$
37,721

 
$
1,629

 
$
80,103

 
 
 
 
 
 
 
 
 
Three Months Ended
March 31, 2018
 
Web presence
 
Email marketing
 
Domain
 
Total
 
(in thousands)
Revenue(1)
$
155,017

 
$
102,447

 
$
33,892

 
$
291,356

Gross profit
$
74,373

 
$
72,177

 
$
10,900

 
157,450

 
 
 
 
 
 
 
 
Net (loss) income
$
(17,108
)
 
$
15,129

 
$
(5,109
)
 
(7,088
)
Interest expense, net(2)
16,986

 
16,409

 
2,451

 
35,846

Income tax expense (benefit)
6,321

 
(5,607
)
 
1,903

 
2,617

Depreciation
7,977

 
3,146

 
945

 
12,068

Amortization of other intangible assets
12,008

 
13,093

 
634

 
25,735

Stock-based compensation
5,073

 
1,408

 
511

 
6,992

Restructuring expenses
812

 
162

 
555

 
1,529

(Gain) loss of unconsolidated entities
27

 

 

 
27

Shareholder litigation reserve
5,745

 
1,500

 
1,255

 
8,500

Adjusted EBITDA
$
37,841

 
$
45,240

 
$
3,145

 
$
86,226

 
 
 
 
 
 
 
 
Total Assets
1,648,557

 
903,345

 
106,540

 
 
(1) 
Revenue excludes intercompany transactions relating to domain sales and domain services from the domain segment to the web presence segment of $3.3 million and $2.7 million for the three months ended March 31, 2017 and 2018, respectively.
(2) 
Interest expense includes impact of amortization of deferred financing costs, original issuance discounts and interest income.
The Company has revised amounts reported for gross profit, net loss and adjusted EBITDA for the web presence and the domain segments in the segment disclosures, which impacted fiscal years 2016 and 2017. The amounts reported for the email marketing segment were not impacted. The revisions arose because of an error in the classification of certain domain registration expenses. Domain segment gross profit, net loss and adjusted EBITDA were overstated by $3.0 million for fiscal year 2016, and by $6.9 million for fiscal year 2017, and web presence segment gross profit, net loss and adjusted EBITDA were understated by equal amounts. Consolidated results were not impacted by this misstatement. The following table reflects the differences between the amounts as reported and the amounts as revised for gross profit, net loss and adjusted EBITDA for

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the web presence and domain segments for the quarter ended March 31, 2017:
 
Three Months Ended
March 31, 2017
 
Web presence
 
Domain
 
(in thousands)
 
(as reported)
 
(as revised)
 
(as reported)
 
(as revised)
Gross profit
$
76,746

 
$
77,870

 
$
9,870

 
$
8,746

Net loss
$
(21,049
)
 
$
(19,018
)
 
$
(2,577
)
 
$
(4,608
)
Adjusted EBITDA
$
39,629

 
$
40,753

 
$
2,753

 
$
1,629

21. Subsequent Events
The Company evaluated all subsequent events occurring through May 4, 2018 to determine if any such events should be reflected in these financial statements. There were no material recognized subsequent events recorded in the March 31, 2018 financial statements.
22. Supplemental Guarantor Financial Information
In February 2016, EIG Investors Corp., a wholly-owned subsidiary of the Company (the “Issuer”), issued $350.0 million aggregate principal amount of its 10.875% Senior Notes due 2024 (refer to Note 9: Notes Payable in the consolidated financial statements), which it exchanged for new 10.875% Senior Notes due 2024 pursuant to a registration statement on Form S-4. The registered exchange offer for the Senior Notes was completed on January 30, 2017. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company, and the following wholly-owned subsidiaries: The Endurance International Group, Inc., Bluehost Inc., FastDomain Inc., Domain Name Holding Company, Inc., Endurance International Group – West, Inc., HostGator.com LLC, A Small Orange, LLC, Constant Contact, Inc., and SinglePlatform, LLC, (collectively, the “Subsidiary Guarantors”), subject to certain customary guarantor release conditions. The Company’s other domestic subsidiaries and its foreign subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) have not guaranteed the Senior Notes.
The Company sold two immaterial guarantors, CardStar, Inc. and CardStar Publishing, LLC (collectively, "CardStar"), during the quarter ended December 31, 2016. CardStar was released and discharged from the guarantee as a result of the sale and no longer guarantees the debt of the Company as of December 1, 2016. Proceeds from the sale of CardStar were approximately $0.1 million.
The following tables present supplemental condensed consolidating balance sheet information of the Company (“Parent”), the Issuer, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries as of December 31, 2017 and March 31, 2018, supplemental condensed consolidating results of operations for the three months ended March 31, 2017 and 2018, and cash flow information for the three months ended March 31, 2017 and 2018:

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Table of Contents

Condensed Consolidating Balance Sheets
December 31, 2017
(in thousands)
 
 Parent
 Issuer
 Guarantor Subsidiaries
 Non-Guarantor Subsidiaries
 Eliminations
 Consolidated
Assets:
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
$
92

$
2

$
54,473

$
11,926

$

$
66,493

Restricted cash


2,472

153


2,625

Accounts receivable


12,386

3,559


15,945

Prepaid domain name registry fees


28,291

25,514


53,805

Prepaid expenses & other current assets
(12
)
86

20,062

9,191