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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 September 30, 2020
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 01803
Burlington, Massachusetts
(Address of principal executive offices) (Zip Code)
(781) 852-3200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueEIGIThe Nasdaq Global Select Market
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ý    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.
1


Large accelerated filer¨  Accelerated filer ý
Non-accelerated filer¨  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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ý
As of November 5, 2020, there were 141,653,878 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.
2


TABLE OF CONTENTS
 
 Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
3


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans, and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:
the occurrence of any event, change or other circumstances that could give rise to the termination of the Agreement and Plan of Merger we have entered into with affiliates of Clearlake Capital Group, L.P. and any inability to complete the proposed merger due to the failure to obtain stockholder approval for the proposed merger or the failure to satisfy other conditions to completion of the proposed merger;
the impact of the COVID-19 pandemic;
the impact of competition;
our ability to attract or retain key personnel;
our reliance on our third-party service providers;
increases in third-party vendor or supplier costs;
the effectiveness of our operating plan and strategies for growth;
the sufficiency of our cash and cash equivalents and operating cash flows to meet our anticipated working capital and capital expenditure requirements, as well as our required principal and interest payments under our indebtedness;
trends and challenges in our business and the markets in which we operate;
our ability to adequately protect our intellectual property;
our ability to monitor and comply with new or modified laws and regulations that currently apply or become applicable to our business.
Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, and we expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of any new information, events, circumstances or otherwise.

4


Endurance International Group Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
December 31, 2019September 30, 2020
Assets(unaudited)
Current assets:
Cash and cash equivalents$111,265 $167,315 
Restricted cash1,732 1,422 
Accounts receivable10,224 9,823 
Prepaid domain name registry fees55,237 58,377 
Prepaid commissions38,435 42,042 
Prepaid and refundable taxes6,810 5,175 
Prepaid expenses and other current assets23,883 22,748 
Total current assets247,586 306,902 
Property and equipment—net85,925 88,349 
Operating lease right-of-use assets90,519 83,224 
Goodwill1,835,310 1,852,780 
Other intangible assets—net245,002 207,579 
Deferred financing costs—net1,778 1,119 
Investments15,000 15,000 
Prepaid domain name registry fees, net of current portion11,107 12,808 
Prepaid commissions, net of current portion48,780 60,864 
Deferred tax asset64 232 
Other assets3,015 2,923 
Total assets$2,584,086 $2,631,780 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$10,054 $13,670 
Accrued expenses64,560 72,534 
Accrued taxes251 461 
Accrued interest23,434 12,360 
Deferred revenue369,475 388,500 
Operating lease liabilities—short term21,193 18,090 
Current portion of notes payable31,606 31,606 
Current portion of financed equipment790 2,447 
Deferred consideration—short term2,201 7,790 
Other current liabilities2,165 2,846 
Total current liabilities525,729 550,304 
Long-term deferred revenue99,652 105,418 
Operating lease liabilities—long term
78,151 74,461 
Notes payable—long term, net of original issue discounts of $16,859 and $13,101 and deferred financing costs of $25,690 and $20,210, respectively
1,649,867 1,623,171 
Financed equipment—long term 202 
Deferred tax liability27,097 34,864 
Deferred consideration—long term 7,087 
Other liabilities6,636 13,552 
Total liabilities2,387,132 2,409,059 
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; 146,259,868 and 147,570,072 shares issued at December 31, 2019 and September 30, 2020, respectively; 146,259,868 and 141,507,297 outstanding at December 31, 2019 and September 30, 2020, respectively
15 16 
Additional paid-in capital996,958 1,021,621 
Treasury stock, at cost, 0 and 6,062,775 shares at December 31, 2019 and September 30, 2020, respectively
 (10,048)
Accumulated other comprehensive loss(4,088)(1,965)
Accumulated deficit(795,931)(786,903)
Total stockholders’ equity196,954 222,721 
Total liabilities and stockholders’ equity$2,584,086 $2,631,780 
See accompanying notes to consolidated financial statements.
5


Endurance International Group Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited)
(in thousands, except share and per share amounts)
 Three Months Ended September 30,Nine Months Ended September 30,
 2019202020192020
Revenue$277,193 $278,426 $836,080 $824,607 
Cost of revenue (including impairment of $0 and $17,892 for the three and nine months ended September 30, 2019, respectively)
120,755 116,662 384,196 345,991 
Gross profit156,438 161,764 451,884 478,616 
Operating expense:
Sales and marketing59,143 63,651 191,221 193,904 
Engineering and development28,257 28,425 77,299 79,958 
General and administrative30,309 31,160 92,826 90,937 
Gain on sale of intangible assets   (2,365)
Transaction expenses 461  461 
Total operating expense117,709 123,697 361,346 362,895 
Income from operations38,729 38,067 90,538 115,721 
Other income (expense):
Interest income305 153 910 485 
Interest expense(36,057)(29,959)(110,308)(93,879)
Total other expense—net(35,752)(29,806)(109,398)(93,394)
Income (loss) before income taxes2,977 8,261 (18,860)22,327 
Income tax (benefit) expense (4,839)1,587 3,040 13,299 
Net income (loss)$7,816 $6,674 $(21,900)$9,028 
Comprehensive income (loss):
Foreign currency translation adjustments(1,001)1,245 (1,054)1,122 
Unrealized gain (loss) on cash flow hedge, net of tax benefit (expense) of $(70) and $200 for the three and nine months ended September 30, 2019, respectively, and $(92) and $(323) for the three and nine months ended September 30, 2020, respectively
240 286 (611)1,001 
Total comprehensive income (loss)$7,055 $8,205 $(23,565)$11,151 
Basic net income (loss) per share
$0.05 $0.05 $(0.15)$0.06 
Diluted net income (loss) per share
$0.05 $0.05 $(0.15)$0.06 
Weighted-average common shares used in computing net income (loss) per share:
Basic145,951,755 141,680,469 144,932,834 143,552,324 
Diluted146,301,595 147,178,734 144,932,834 147,334,403 
See accompanying notes to consolidated financial statements.
6


Endurance International Group Holdings, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share amounts)
(unaudited)
 Common StockAdditional
Paid-in
Capital
Treasury StockAccumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders’
Equity
 NumberAmountNumberAmount
Balance—December 31, 2018143,444,178 $14 $961,235  $ $(3,211)$(783,584)$174,454 
Vesting of restricted shares116,526 — — — — — —  
Exercise of stock options892 — 5 — — — — 5 
Other comprehensive gain (loss)— — — — — (1,362)— (1,362)
Net loss — — — — — — (3,488)(3,488)
Stock-based compensation— — 9,016 — — — — 9,016 
Balance—March 31, 2019143,561,596 14 970,256   (4,573)(787,072)178,625 
Vesting of restricted shares2,176,738 — — — — — —  
Exercise of stock options2,918 — 16 — — — — 16 
Other comprehensive gain (loss)— — — — — 458 — 458 
Net loss— — — — — — (26,228)(26,228)
Stock-based compensation— — 9,354 — — — — 9,354 
Balance—June 30, 2019145,741,252 14 979,626   (4,115)(813,300)162,225 
Vesting of restricted shares398,293 1 (1)— — — —  
Exercise of stock options1,331 — 5 — — — — 5 
Other comprehensive gain (loss)— — — — — (761)— (761)
Net income— — — — — — 7,816 7,816 
Stock-based compensation— — 9,143 — — — — 9,143 
Balance—September 30, 2019146,140,876 15 988,773   (4,876)(805,484)178,428 
Vesting of restricted shares117,340 — — — — — —  
Exercise of stock options1,652 — 6 — — — — 6 
Other comprehensive gain (loss)— — — — — 788 — 788 
Net income— — — — — — 9,553 9,553 
Stock-based compensation— — 8,179 — — — — 8,179 
Balance—December 31, 2019146,259,868 $15 $996,958  $ $(4,088)$(795,931)$196,954 
7


 Common StockAdditional
Paid-in
Capital
Treasury StockAccumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders’
Equity
 NumberAmountNumberAmount
Balance—December 31, 2019146,259,868 $15 $996,958  $ $(4,088)$(795,931)$196,954 
Vesting of restricted shares1,306,607 — — — — — —  
Exercise of stock options3,597 — 13 — — — — 13 
Other comprehensive gain (loss)— — — — — (185)— (185)
Net loss— — — — — — (2,244)(2,244)
Stock-based compensation— — 9,836 — — — — 9,836 
Repurchase of common stock— — — (7,603,620)(12,329)— — (12,329)
Balance—March 31, 2020147,570,072 15 $1,006,807 (7,603,620)(12,329)(4,273)(798,175)192,045 
Vesting of restricted shares1,571,903 1 — — — — — 1 
Exercise of stock options— — — — — — —  
Other comprehensive gain (loss)— — — — — 777 — 777 
Net income— — — — — — 4,598 4,598 
Stock-based compensation— — 9,595 — — — — 9,595 
Repurchase of common stock— — — (1,105,100)(2,099)— — (2,099)
Reissuance of treasury stock(1,571,903)— (2,600)1,571,903 2,600  
Balance—June 30, 2020147,570,072 $16 $1,013,802 (7,136,817)$(11,828)$(3,496)$(793,577)$204,917 
Vesting of restricted shares1,065,241 — — — — — —  
Exercise of stock options8,801 — 52 — — — — 52 
Other comprehensive gain (loss)— — — — — 1,531 — 1,531 
Net income— — — — — — 6,674 6,674 
Stock-based compensation— — 9,547 — — — — 9,547 
Reissuance of treasury stock(1,074,042)— (1,780)1,074,042 1,780 — —  
Balance—September 30, 2020147,570,072 $16 $1,021,621 (6,062,775)$(10,048)$(1,965)$(786,903)$222,721 
See accompanying notes to consolidated financial statements.
8


Endurance International Group Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 Nine Months Ended September 30,
 20192020
Cash flows from operating activities:
Net (loss) income$(21,900)$9,028 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation of property and equipment33,385 38,266 
Amortization of other intangible assets64,137 52,406 
Impairment of long-lived assets17,892  
Amortization of deferred financing costs5,331 5,770 
Amortization of net present value of deferred consideration143 376 
Amortization of original issue discounts3,336 3,622 
Stock-based compensation27,513 28,978 
Deferred tax expense1,942 6,467 
Loss on sale of assets128  
Gain on sale of intangible assets (2,365)
Loss on early extinguishment of debt 83 
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable34 893 
Prepaid and refundable taxes(5,908)1,620 
Prepaid expenses and other current assets5,108 (20,069)
Leases right-of-use asset, net395 519 
Accounts payable and accrued expenses(23,492)4,416 
Deferred revenue7,636 27,222 
Net cash provided by operating activities115,680 157,232 
Cash flows from investing activities:
Businesses acquired in purchase transactions, net of cash acquired(8,875)(16,998)
Purchases of property and equipment(26,796)(30,273)
Proceeds from sale of assets1  
Proceeds from sale of intangible assets 2,705 
Net cash used in investing activities(35,670)(44,566)
Cash flows from financing activities:
Repayments of term loans(75,000)(23,705)
Repayments of senior notes (11,807)
Purchase of treasury stock (14,428)
Principal payments on financed equipment(6,332)(4,723)
Payment of deferred consideration(2,500)(1,500)
Proceeds from exercise of stock options26 66 
Net cash used in financing activities(83,806)(56,097)
Net effect of exchange rate on cash and cash equivalents and restricted cash(483)(829)
Net (decrease) increase in cash and cash equivalents and restricted cash(4,279)55,740 
Cash and cash equivalents and restricted cash:
Beginning of period90,576 112,997 
End of period$86,297 $168,737 
Supplemental cash flow information:
Interest paid$110,886 $93,773 
Income taxes paid$1,715 $4,296 
Assets acquired under equipment financing$ $7,704 
See accompanying notes to consolidated financial statements.
9


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, EIG Investors Corp. (“EIG Investors”), its primary operating subsidiary, The Endurance International Group, Inc. (“EIG”), and other subsidiaries 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 of a controlling interest in EIG Investors, EIG and EIG's subsidiaries by investment funds and entities affiliated with Warburg Pincus and Goldman, Sachs & Co. ("Goldman") on December 22, 2011. 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.
On November 1, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Razorback Technology Intermediate Holdings, Inc., a Delaware corporation (the “Parent”), and Razorback Technology, Inc., a Delaware corporation and a wholly owned subsidiary of the Parent (the “Merger Sub”). See Note 19, Subsequent Events.
2. Summary of Significant Accounting Policies
Basis of Preparation
The accompanying consolidated financial statements, which include the accounts of Holdings 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.
Although the Company believes the disclosures included herein are adequate to ensure that the consolidated financial statements are fairly presented, certain information and footnote disclosures to the financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, the consolidated financial statements and the footnotes included herein should be read in conjunction with the audited financial statements and the footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
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 chief operating decision maker ("CODM"). The Company has determined that its chief executive officer is the Company's CODM.
The Company previously reported its financial results in three reportable segments: web presence, email marketing and domain. In conjunction with the process of simplifying the organization, the Company modified its internal reporting structure to reflect certain changes in its structure and leadership, and also changed the name of the email marketing segment to the "digital marketing" segment. This resulted in consolidation of its domain segment into the web presence segment. Starting with the three months ended March 31, 2020, the Company reports its financial results in two segments - web presence (including the former domain segment) and digital marketing. The Company recast the comparative information for the three and nine months ended September 30, 2019 to conform with the two-segment presentation.
The Company has identified two reportable segments: web presence and digital marketing. The Company has determined that it does not satisfy aggregation criteria for these operating segments, and that each segment meets the quantitative threshold of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 280, Segment Reporting. Therefore, both operating segments are reportable segments.
The Company's segments share certain resources, primarily related to sales and marketing, engineering and development, 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.
10


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.
A new strain of coronavirus that causes the disease known as COVID-19 was identified in late 2019 and has spread globally. In March 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic, based on the rapid increase in infections worldwide.
The COVID-19 pandemic continues to evolve as of the date of these consolidated financial statements. As such, the extent of the pandemic’s impact on the Company's financial condition, liquidity, and future results of operations is uncertain. Management is continuing to execute its 2020 operating plan while actively monitoring the impact of COVID-19 on the Company, including its customers, industry, operations, suppliers, workforce and liquidity. The Company expects to see tax-related liquidity benefits from the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The Company is closely monitoring the impact of the COVID-19 pandemic on its business. To date, the Company believes that the pandemic has contributed to increased demand for its products and services, since many small- and medium-sized businesses have moved more of their business online due to COVID-19 related lockdowns and other restrictions. However, the Company cannot predict whether and to what extent this level of demand will continue.
Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet as of September 30, 2020, and the related consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2020, the consolidated statements of cash flows for the nine months ended September 30, 2019 and 2020, the consolidated statements of changes in stockholders' equity for the three and nine months ended September 30, 2019 and 2020, 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 as of September 30, 2020, results of operations for the three and nine months ended September 30, 2019 and 2020, cash flows for the nine months ended September 30, 2019 and 2020, and changes in stockholders' equity for the three and nine months ended September 30, 2019 and 2020. The results in the consolidated statements of operations and comprehensive income (loss) are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2020.
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 customers’ 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
11


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 ASC 815, Derivatives and Hedging, 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.
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") No. 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 at fair value if the property and equipment is 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 equipment financing 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: 
BuildingThirty-five years
Software
Two to three years
Computers and office equipmentThree years
Furniture and fixturesFive years
Leasehold improvementsShorter 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 FASB 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 and nine months ended September 30, 2019, the Company capitalized internal-use software development costs of $3.8 million and $11.1 million, respectively. During the three and nine
12


months ended September 30, 2020, the Company capitalized internal-use software development costs of $4.3 million and $13.7 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 Company's business, a significant adverse change in 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, a 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 ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 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 performs its annual goodwill test as of October 31 of each fiscal year. As of December 31, 2019, the Company had identified a total of ten reporting units, and goodwill has been allocated to five of these reporting units. As of September 30, 2020, after the acquisition of WaJao, Inc., doing business as Retention Science ("Retention Science"), the Company identified a total of eleven reporting units and goodwill has been allocated to six of these reporting units. The Company also early adopted the provisions of ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350), which eliminates the second step of the goodwill impairment test. As a result, the Company's goodwill impairment test 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, is impaired. Goodwill has been 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.
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 are 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's fair value. Certain assets and liabilities are shared by multiple reporting units, and are allocated to each reporting unit based on its relative size, primarily based on revenue.
The Company determines the fair value of each reporting unit by utilizing the income approach and the market approach. 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 derives its discount rates by using a capital asset pricing model and analyzing published rates for industries relevant to its 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 its business and in its internally developed forecasts. For fiscal year 2019, the Company used a discount rate of 10.5% for all but three of its reporting units. For two of these reporting units, which are experiencing declining cash flows, the Company used a discount rate of 13.0% and  13.5%, respectively, to adjust for the risk in the projected cash flows. For the remaining reporting unit, which had just been acquired in September 2019, the Company used a discount rate of 15.5%, to adjust for the risk in the projected cash flows. The Company also performed sensitivity analysis on its discount rates. The Company uses internal forecasts to estimate future after-tax cash flows, which include an estimate of long-term future growth rates based on the Company's view of the long-term outlook for each reporting unit. Actual results may differ from those assumed in the Company's forecasts.
For the market approach, the Company utilizes two different approaches: market multiples for publicly traded companies, and market multiples based on the acquisition value of comparable companies that were sold.
For the fiscal year 2019 goodwill impairment analysis, the Company compared the fair value from the income approach to the two market approaches, which included a valuation multiple of comparable public companies and a valuation multiple from sales of comparable companies. For three of the Company's reporting units, which represent approximately 97% of the Company's goodwill, the Company established the fair value based on the average fair value from all three valuation approaches. For two of the remaining reporting units, which represent approximately 3% of the Company's goodwill, the Company established fair value based on the income approach only, because these reporting units are experiencing declining cash flows. The Company calculated and recognized a partial impairment of $10.0 million for one of these reporting units and a full impairment of $2.3 million for the second of these reporting units, both of which were recorded as an operating expense in the consolidated statements of operations and other comprehensive income (loss) in the three months ended December 31, 2019. For the other two reporting units for which the income approach was used, the Company had just acquired one reporting unit (Ecomdash) in the three months ended September 30, 2019, and was in the process of disposing of the other reporting unit (SinglePlatform) through a sale in December 2019.
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Goodwill as of December 31, 2019 was $1,835.3 million. The carrying value of goodwill that was allocated to the web presence and digital marketing segments was approximately $1,231.9 million and $603.4 million, respectively. The fair value of all but three reporting units with goodwill at December 31, 2019 exceeded each reporting unit's carrying value by at least 20%.
Of the other three reporting units with less than 20% excess of fair value over carrying value, one reporting unit is forecast to experience continuing negative growth in both revenue and cash flows. Given this fact pattern, the Company relied upon the income approach in order to quantify the impact of persistent negative growth expectations and to develop a fair value for this reporting unit. The goodwill allocated to this reporting unit as of December 31, 2019 was $52.0 million. The Company expects that cash flows for this unit will continue to decline, which could result in goodwill impairment charges for this reporting unit at some point in the future.
The second reporting unit with less than a 20% excess of fair value over carrying value was acquired in September 2019. Based on the short duration between the acquisition date and the testing date, and lacking indications of specific events that either positively or negatively impacted the carrying value, fair value on this reporting unit approximated the allocated goodwill. Goodwill for this reporting unit as of December 31, 2019 was approximately $7.0 million.
The third reporting unit represents a combination of different hosting brands, which the Company will continue to monitor in the future. Though near term cash flows are projected to decline for this unit, growth in the cash flows is expected to return after further investments in engineering and development and sales and marketing are made. This reporting unit's fair value was established using three valuation methods, equally weighted. As the reporting unit passed the goodwill impairment test with equal weight given to the three approaches, the Company did not adjust the weight given to the three valuation approaches. As of December 31, 2019, the fair value of this reporting unit, as estimated based upon its future projections, exceeded its carrying value by less than 4%. In the event the Company's investments in engineering and development and sales and marketing do not generate the anticipated improvement in future operating performance for this unit, then future impairments may be recognized for this reporting unit. Goodwill for this reporting unit as of December 31, 2019 was approximately $1.2 billion.
Because of the deterioration of economic conditions as a result of the COVID-19 pandemic, the Company reassessed its annual goodwill impairment test as of September 30, 2020. The Company performed a qualitative analysis, noting that the Company’s operating performance, both current and future based on updated projections, is in line with the projections used for the 2019 annual impairment test. The Company also noted that its market capitalization continues to exceed the book value of the stockholders’ equity. Based on the Company’s analysis, the Company has concluded that an impairment event has not been triggered, and as such, no impairment has been recorded.
Goodwill as of September 30, 2020 was $1,852.8 million. The carrying value of goodwill that was allocated to the web presence and digital marketing reporting segments was approximately $1,232.2 million and $620.6 million, respectively. For the three and nine months ended September 30, 2020, as noted above, no impairment triggering events were identified and 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 and domain names available for sale. 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.
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.
Indefinite life intangible assets include domain names that are available for sale which are recorded at the 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.
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During the three and nine months ended September 30, 2019, the Company recognized an impairment charge of $0.0 million and $17.9 million, respectively, relating primarily to premium domain name intangible assets acquired in 2014, which was recorded in cost of revenue in the consolidated statements of operations and comprehensive income (loss). The impairment resulted from market conditions that adversely impacted cash flows from these assets, and these market conditions are expected to continue. The Company valued its premium domain name assets based on a discounted projected cash flows from these assets using a discount rate of 11.6%, which resulted in an impairment of $16.2 million. The balance of the impairment charge was primarily related to developed technology intangible assets associated with the premium domain business which were valued using a relief from royalty approach. During the three and nine months ended September 30, 2020, the Company recorded no impairment charge associated with these intangible assets.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASC 606, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. Since then, the FASB has also issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations, ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, and ASU No. 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, the Company determines 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 web hosting and related add-ons, search engine optimization ("SEO") services, domain registration services and email marketing.
Web hosting gives customers 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 three years. Web hosting services are typically sold in bundled offerings that include web hosting, domain registration services and various add-ons. The Company recognizes revenue for web hosting and domain registration services over the term of the contract.
The main add-on services related to web hosting are domain privacy, website security, secure sockets layer security, site backup and restoration, and web builder tools. These services may be included in web 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.
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 the life of the subscription.
Email marketing services provide customers with a cloud-based platform that can send broadcast emails to a contact list managed by the customer. Pricing is based on contact 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.
Inventory management and marketplace listing services provide customers with a cloud-based platform that integrates standard inventory management features with order management and shipping management capabilities across multiple channels. Pricing is primarily based on order volume from the prior monthly period. For inventory management customers who subscribe to an annual plan, revenue is recognized ratably over the term of the contract. Inventory management professional services are also provided to customers on demand, and are recognized into revenue upon completion.
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Retention Science provides customers with an artificial intelligence customer data platform and email marketing automation solutions. Pricing is primarily based on volume and the level of customization of the solution provided to the customer. Revenue, including revenue from professional services, is recognized ratably over the term of the contract, while overages are recognized one month in arrears.
Non-subscription-based services include certain professional services, primarily website design or re-design services, marketing development fund ("MDF") revenue, 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 customers, 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 a pay-per-click 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.
The contracts that the Company enters into typically do not contain any variable or non-cash consideration.
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 $0.3 million and $0.4 million as of December 31, 2019 and September 30, 2020, respectively. The portion of deferred revenue that was expected to be refunded at December 31, 2019 and September 30, 2020 was $1.9 million and $1.9 million, respectively. Based on refund history, approximately 84% of all refunds happen in the same fiscal month that the contract starts or renews, and approximately 95% 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 web 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 ("SSP"), generally based on the price charged to customers. Web 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 SSP. The Company determines SSP by considering its observed SSPs, competitive prices in the marketplace and management judgment; these SSPs may vary depending upon the particular facts and circumstances related to each deliverable. The Company analyzes the SSPs 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 following table provides a reconciliation of the Company's deferred revenue as of September 30, 2020:
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 Short-termLong-term
(unaudited, in thousands)
Balance at December 31, 2019$369,475 $99,652 
Recognition of beginning deferred revenue into revenue, as a result of performance obligations satisfied(319,426)