Form 6-K AVG Technologies N.V. For: Apr 27

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April 27, 2016 4:08 PM EDT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

April 27, 2016

Commission File Number: 001-35408

 

 

AVG TECHNOLOGIES N.V.

 

 

Gatwickstraat 9-39

1043 GL Amsterdam

The Netherlands

(Address of principal executive offices)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  x            Form 40-F  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨

 

 

 

Table of contents

 

Item

   

Description

1.    Press release
2.    AVG Technologies N.V. unaudited condensed consolidated financial statements for the quarter ended March 31, 2016

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AVG TECHNOLOGIES N.V.

 

Date: April 27, 2016     By:  

/s/ John Little

      Name: John Little
      Title: Chief Financial Officer and Managing Director

Exhibit 99.1

AVG Announces First Quarter 2016 Financial Results

Total Mobile Revenues Grow 38 Percent Annually

AMSTERDAM, April 27, 2016 /PRNewswire/ — AVG Technologies N.V. (NYSE: AVG), the online security company™ providing leading software and services to secure devices, data and people, today reported results for the first quarter ended March 31, 2016.

First Quarter 2016 Highlights

 

  •   Achieved quarterly revenue of $107.9 million; Non-GAAP adjusted EPS was $0.44.

 

  •   Revenue from Emerging Businesses, which includes Mobile, VPN and hosted-SMB, grew 57 percent over last year, comprising 28 percent of total revenue.

 

  •   Subscription revenue grew 9 percent over the same period last year.

 

  •   ZEN user base at 53 million.

First quarter 2016 financial results

Revenue for the first quarter of 2016 grew 5 percent to $107.9 million, compared with $102.8 million in the first quarter of 2015.

Non-GAAP adjusted net income for the quarter was $22.9 million, or $0.44 per diluted ordinary share. This compares with non-GAAP adjusted net income of $23.9 million, or $0.46 per diluted ordinary share for the first quarter of 2015. GAAP net income for the quarter was $11.3 million, or $0.22 per diluted ordinary share. This compares with GAAP net income of $11.9 million, or $0.22 per diluted ordinary share in the prior year’s first quarter1.

Non-GAAP adjusted operating income was $29.4 million for the quarter, compared with $31.7 million for the first quarter of 2015. GAAP operating income was $16.3 million for the quarter, compared with $19.8 million for the first quarter of 2015. Operating cash flow was $21.5 million for the quarter, compared with $22.2 million for the first quarter of last year. Free cash flow was $16.2 million for the quarter, compared with $19.9 million for the first quarter of 2015.

“The results for the first quarter reflect our continued progress on our operating and strategic plans, particularly in light of current market conditions,” said Gary Kovacs, chief executive officer. “Revenues from our emerging businesses which includes Mobile, VPN and hosted-SMB, grew 57 percent over the same period last year, comprising 28 percent of total revenue, while search represented just 16 percent. I am also pleased to report that the user migration to ZEN, our cross-platform, multi-device software reached 53 million and we are on track to turn on the monetization engine in the middle of the year. Based on early testing, we remain confident that ZEN will be a key component of our future growth strategy, protecting our users on any device anywhere and anytime they go online.”

 

1  Non-GAAP results for the first quarter of 2016 exclude $3.4 million in share based compensation expense and $8.0 million in acquisition amortization and other adjustments that comprised $0.3 million in acquisition related charges, $0.4 million in charges related to the unwinding of discounts and changes in fair value, $1.1 million in charges associated with the rationalization of the Company’s global operations, and $0.6 million in charges with the Company’s global IT landscape transformation, less $0.7 million in net reversals of capitalized development charges, and adjusted for impact of normalized tax rate of 12.5% as described in the Reconciliation of GAAP measures to non-GAAP measures.

 

1

Financial Outlook

Based on information available as of April 27, 2016, AVG is providing the following outlook for fiscal year 2016 as follows:

 

  •   Revenue outlook is reconfirmed to be in the range of $440 million to $460 million.

 

  •   Non-GAAP adjusted net income is expected to be in the range of $100 million to $104 million; non-GAAP adjusted net income per diluted ordinary share is expected to be in the range of $1.90 to $1.96.

 

  •   GAAP net income is expected to be in the range of $43 million to $49 million; GAAP net income per diluted ordinary share is expected to be in the range of $0.81 to $0.93.

AVG’s expectation of non-GAAP adjusted net income for fiscal year 2016 excludes share-based compensation expense, acquisition amortization and certain other adjustments, and assumes a normalized tax rate of 12.5 percent. For the purpose of calculating GAAP net income per diluted ordinary share and non-GAAP adjusted net income per diluted ordinary share, the Company assumes approximately 53 million weighted-average diluted ordinary shares outstanding for the full year.

The financial information presented in this press release is neither audited nor reviewed.

Conference Call Information

AVG will hold its quarterly conference call today at 4:30 p.m. ET/1:30 p.m. PT/ 10:30 PM CET to discuss its first quarter 2016 financial results, business highlights and outlook. The conference call may be accessed via webcast at http://investors.avg.com or using the following phone numbers and conference ID: +1 718 971 5738 (USA); +1 514 841 2153 (Canada); +420 225 376 428 (CZ); +44 20 3140 8286 (UK); Conference ID: 1924692.

Live and replay versions of the webcast can be accessed via http://investors.avg.com.

Use of Non-GAAP Financial Information

This press release contains supplemental non-GAAP financial measures that are not calculated in accordance with U.S. GAAP. These non-GAAP measures provide additional information on the performance or liquidity of our business that we believe are useful for investors.

Adjusted net income, net debt, free cash flow, cash conversion and their related ratios are non-GAAP measures and should not be considered alternatives to the applicable U.S. GAAP measures. In particular, adjusted net income, net debt, free cash flow, cash conversion and their related ratios, should not be considered as measurements of our financial performance or liquidity under U.S. GAAP, as alternatives to income, operating income or any other performance measures derived in accordance with U.S. GAAP or as alternatives to cash flow from operating activities as a measure of our liquidity.

Adjusted net income, net debt, free cash flow and cash conversion are measures of financial performance and liquidity, and have limitations as analytical tools, and should not be considered in isolation from, or as substitutes for, an analysis of our results of operations, including our operating income and cash flows, as reported under U.S. GAAP. We provide these non-GAAP financial measures because we believe that such measures provide important supplemental information to management and investors about the Company’s core operating results and liquidity, primarily because the non-GAAP financial measures exclude certain expenses and other amounts that management does not consider to be indicative of the Company’s core operating results or business outlook or liquidity. Management uses these non-GAAP financial measures, in addition to the corresponding U.S. GAAP financial measures, in evaluating

 

2

the Company’s operating performance, in planning and forecasting future periods, in making decisions regarding business operations and allocation of resources, and in comparing the Company’s performance against its historical performance. Some of the limitations of adjusted net income and free cash flow and their related ratios as measures are:

 

  •   they do not reflect our cash expenditure or future requirements for capital expenditure or contractual commitments, nor do they reflect the actual cash contributions received from customers;

 

  •   they do not reflect changes in, or cash requirements for, our working capital needs;

 

  •   although amortization and share-based compensation are non-cash charges, the assets being amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and

 

  •   other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, investors should rely on AVG’s consolidated financial statements prepared in accordance with U.S. GAAP and treat the Company’s non-GAAP financial measures as supplemental information only.

For a reconciliation of these non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with U.S. GAAP, please see “Reconciliation of GAAP to non-GAAP financial measures.” All non-GAAP financial measures should be read in conjunction with the comparable information presented in accordance with U.S. GAAP.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including those relating to an expected range of revenue, net income, diluted EPS, non-GAAP adjusted net income and non-GAAP diluted EPS for the fiscal year ending December 31, 2016 and/or future periods, as well as those relating to the future prospects of AVG. Words such as “expects,” “expectation,” “intends,” “assumes,” “believes” and “estimates,” variations of such words and similar expressions are also intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those contemplated herein. Factors that could cause or contribute to such differences include but are not limited to: changes in our growth strategies; changes in our future prospects, business development, results of operations and financial condition; the anticipated costs and benefits of our acquisitions; our ability to maintain effective internal controls and procedures; our ability to comply with our credit agreements; changes to the online and computer threat environment and the endpoint security industry; competition from local and international companies, new entrants in the market and changes to the competitive landscape; the adoption of new, or changes to existing, laws and regulations; changes in international or national tax regulations and related proposals; the assumptions underlying the calculation of our key metrics, including the number of our active users, revenue per average active user, subscription revenue per subscriber and platform revenue per thousand searches; potential effects of changes in the applicable search guidelines of our search partners; the status of or changes to our relationships with our partners, including Yahoo!, Google, and other third parties; changes in our and our partners’ responses to privacy concerns; our plans to launch new products and online services and monetize our full user base; the performance of our products, including AVG ZEN; our ability to attract and retain active and subscription users; our ability to retain key personnel and attract new talent; our ability to adequately protect our intellectual property; our geographic expansion plans; the outcome of ongoing or any future litigation or arbitration, including litigation or arbitration relating to intellectual property rights; our legal and regulatory compliance efforts, including with respect to PCI compliance; and worldwide economic conditions and their impact on demand for our products and services. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements.

 

3

Further information on these factors and other risks that may affect the Company’s business is included in filings AVG makes with the U.S. Securities and Exchange Commission (“SEC”) from time to time, including its Annual Report on Form 20-F, particularly under the heading “Risk Factors.”

The financial information contained in this press release should be read in conjunction with the consolidated financial statements and notes thereto to be included in the Company’s reports on Form 6-K and Form 20-F. The Company’s results of operations for the first quarter ended March 31, 2016 are not necessarily indicative of the Company’s operating results for any future periods.

These documents are available online from the SEC or in the Investor Relations section of the Company’s website at http://investors.avg.com. Information on the AVG website is not part of this release. All forward-looking statements in this press release are based on information currently available to the Company, and AVG assumes no obligation to update these forward looking statements in light of new information or future events.

About AVG

AVG is the leading provider of software services to secure devices, data and people. AVG’s award-winning consumer portfolio includes internet security, performance optimization, location services, data controls and insights, and privacy and identity protection, for mobile devices and desktops. The AVG Business portfolio, delivered through a global partner network, provides cloud security and remote monitoring and management solutions that protect small and medium businesses around the world.

All trademarks are the property of their respective owners.

 

Investor relations contacts:   
US: Bonnie McBride    Europe: Camelia Isaic
Tel: + 1 415 806 0385    Tel: +420 702 205 848
Email: [email protected]    Email: [email protected]
IR team email: [email protected]   

Press information: http://now.avg.com

 

4

AVG Technologies N.V.

Unaudited condensed consolidated balance sheets

(in thousands of U.S. dollars)

 

     December 31,     March 31,  
     2015     2016  

ASSETS

   

Current assets:

     

Cash and cash equivalents

    $ 123,767      $ 123,372   

Restricted cash

      26,858        10,011   

Trade accounts receivable, net

      35,717        36,475   

Inventories

      1,027        761   

Prepaid expenses

      7,501        10,557   

Other current assets

      14,888        13,590   
  

 

 

    

 

 

  

Total current assets

      209,758        194,766   

Non-current restricted cash

      226        237   

Property and equipment, net

      23,508        23,322   

Deferred income taxes

      38,181        37,912   

Intangible assets, net

      105,719        98,136   

Goodwill

      297,434        298,455   

Investment

      660        660   

Other assets

      1,728        1,731   
  

 

 

    

 

 

  

Total assets

    $ 677,214      $ 655,219   
  

 

 

    

 

 

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Current liabilities:

     

Accounts payable

    $ 11,763      $ 8,900   

Accrued compensation and benefits

      18,028        19,231   

Accrued expenses and other current liabilities

      82,887        62,743   

Current portion of long-term debt

      2,300        2,300   

Income taxes payable

      1,200        5,946   

Deferred revenue

      167,123        164,517   
  

 

 

    

 

 

  

Total current liabilities

      283,301        263,637   

Long-term debt, less current portion

      216,695        216,518   

Deferred revenue, less current portion

      33,004        32,489   

Deferred tax liabilities

      29,494        27,044   

Other non-current liabilities

      7,302        7,449   
  

 

 

    

 

 

  

Total liabilities

      569,796        547,137   
  

 

 

    

 

 

  

Redeemable noncontrolling interest

      16,800        16,800   
  

 

 

    

 

 

  

Ordinary shares

      727        727   

Distributions in excess of capital

      (113,211 )      (110,819 ) 

Treasury shares

      (61,297 )      (76,921 ) 

Accumulated other comprehensive loss

      (15,181 )      (12,540 ) 

Retained earnings

      279,580        290,835   
  

 

 

    

 

 

  

Total shareholders’ equity

      90,618        91,282   
  

 

 

    

 

 

  

Total liabilities and shareholders’ equity

    $ 677,214      $ 655,219   
  

 

 

    

 

 

  

 

5

AVG Technologies N.V.

Unaudited condensed consolidated statements of comprehensive income

(in thousands of U.S. dollars, except for share data and per share data)

 

     Three months ended  
     March 31,  
     2015     2016  
     (in thousands of U.S. dollars)  

Revenue:

     

Licenses

    $ 66,486      $ 65,433   

SaaS

      15,095        23,383   

Search

      20,329        17,228   

Other

      900        1,827   
  

 

 

    

 

 

  

Total revenue

      102,810        107,871   
  

 

 

    

 

 

  

Cost of revenue:

     

Software sales

      (12,480 )      (17,334 ) 

Search and other

      (1,332 )      (1,270 ) 
  

 

 

    

 

 

  

Total cost of revenue

      (13,812 )      (18,604 ) 
  

 

 

    

 

 

  

Gross profit

      88,998        89,267   
  

 

 

    

 

 

  

Operating expenses:

     

Research and development

      (20,677 )      (23,723 ) 

Sales and marketing

      (28,797 )      (28,664 ) 

General and administrative

      (19,750 )      (20,548 ) 
  

 

 

    

 

 

  

Total operating expenses

      (69,224 )      (72,935 ) 
  

 

 

    

 

 

  

Operating income

      19,774        16,332   

Other expense, net

      (4,390 )      (3,170 ) 
  

 

 

    

 

 

  

Income before income taxes

      15,384        13,162   

Income tax provision

      (3,462 )      (1,907 ) 
  

 

 

    

 

 

  

Net income

    $ 11,922      $ 11,255   
  

 

 

    

 

 

  

Less: Net income attributable to redeemable noncontrolling interest

      (3 )      (8 ) 
  

 

 

    

 

 

  

Net income attributable to AVG Technologies N.V.

    $ 11,919      $ 11,247   
  

 

 

    

 

 

  

Comprehensive income

      9,803        13,896   

Less: Comprehensive income attributable to redeemable noncontrolling interest

      (479 )      (8 ) 
  

 

 

    

 

 

  

Comprehensive income attributable to AVG Technologies N.V.

    $ 9,324      $ 13,888   
  

 

 

    

 

 

  

Earnings per share attributable to AVG Technologies N.V. ordinary shareholders:

     

Net income

    $ 11,919      $ 11,247   

Redeemable noncontrolling interest

      (479 )      8   
  

 

 

    

 

 

  

Net income available to ordinary shareholders - basic

    $ 11,440      $ 11,255   
  

 

 

    

 

 

  

Net income available to ordinary shareholders - diluted

    $ 11,440      $ 11,255   

Earnings per share attributable to AVG Technologies N.V. Ordinary shareholders – basic

    $ 0.22      $ 0.22   

Earnings per share attributable to AVG Technologies N.V. Ordinary shareholders – diluted

    $ 0.22      $ 0.22   

Weighted-average shares outstanding – basic

      51,599,964        51,018,326   

Weighted-average shares outstanding – diluted

      52,254,969        51,796,688   

 

6

AVG Technologies N.V.

Unaudited condensed consolidated statements of cash flows

(in thousands of U.S. dollars)

 

     Three months ended
March 31,		  
     2015     2016  

OPERATING ACTIVITIES:

     

Net income

    $ 11,922      $ 11,255   

Adjustments to reconcile net income to net cash provided by operating activities

     

Depreciation and amortization

      10,750        11,908   

Share-based compensation

      3,108        3,362   

Deferred income taxes

      2,941        (2,411 ) 

Change in the fair value of contingent consideration liabilities

      820        356   

Amortization of financing costs and loan discount

      430        491   

Loss (gain) on sale of property and equipment

      (56 )      (98 ) 

Net change in assets and liabilities, excluding effects of acquisitions and deferred revenue

      (10,099 )      214   

Net change in deferred revenue

      2,415        (3,605 ) 
  

 

 

    

 

 

  

Net cash provided by operating activities

      22,231        21,472   
  

 

 

    

 

 

  

INVESTING ACTIVITIES:

     

Purchase of property and equipment and intangible assets

      (2,302 )      (5,227 ) 

Proceeds from sale of property and equipment

      57        156   

Decrease (increase) in restricted cash

      270        (12 ) 
  

 

 

    

 

 

  

Net cash used in investing activities

      (1,975 )      (5,083 ) 
  

 

 

    

 

 

  

FINANCING ACTIVITIES:

     

Payment of capitalized lease obligation

      —          (19 ) 

Debt issuance costs

      (173 )      (21 ) 

Repayments of principal on current credit agreement

      (575 )      (575 ) 

Proceeds from exercise of share options

      1,818        1,792   

Excess tax benefit

      —          27   

Repurchase of own shares

      —          (18,307 ) 
  

 

 

    

 

 

  

Net cash used in financing activities

      1,070        (17,103 ) 

Effect of exchange rate fluctuations on cash and cash equivalents

      (577 )      319   
  

 

 

    

 

 

  

Change in cash and cash equivalents

      20,749        (395 ) 

Beginning cash and cash equivalents

      138,907        123,767   

Ending cash and cash equivalents

    $ 159,656      $ 123,372   
     Three months ended
March 31,		  
     2015     2016  

Supplemental cash flow disclosures:

     

Income taxes (paid)/received

    $ (1,214 )    $ (1,059 ) 

Interest paid

    $ (3,614 )    $ (3,389 ) 

 

7

AVG Technologies N.V.

Reconciliation of GAAP measures to non-GAAP measures

(in thousands of U.S. dollars)

 

     Three months ended  
     March 31,  
     2015     2016  

Gross profit

    $ 88,998      $ 89,267   

Add back:

     

- Share-based compensation

      12        47   

- Acquisition amortization(1)

      2,361        2,462   

- Other adjustments(2)

      44        435   
  

 

 

    

 

 

  

Non-GAAP adjusted gross profit

    $ 91,415      $ 92,211   
  

 

 

    

 

 

  

Revenue

      102,810        107,871   
  

 

 

    

 

 

  

Non-GAAP adjusted gross profit margin

      89 %      85 % 
  

 

 

    

 

 

  

Operating expenses

    $ (69,224 )    $ (72,935 ) 

Less:

     

- Share-based compensation

      3,096        3,315   

- Acquisition amortization(1)

      4,341        5,533   

- Other adjustments(2)

      2,099        1,242   
  

 

 

    

 

 

  

Non-GAAP adjusted operating expenses

    $ (59,688 )    $ (62,845 ) 
  

 

 

    

 

 

  

Operating income

    $ 19,774      $ 16,332   

Add back:

     

- Share-based compensation

      3,108        3,362   

- Acquisition amortization(1)

      6,702        7,995   

- Other adjustments(2)

      2,143        1,677   
  

 

 

    

 

 

  

Non-GAAP adjusted operating income

    $ 31,727      $ 29,366   
  

 

 

    

 

 

  

Revenue

      102,810        107,871   
  

 

 

    

 

 

  

Non-GAAP adjusted operating income margin

      31 %      27 % 
  

 

 

    

 

 

  

 

8

AVG Technologies N.V.

Reconciliation of GAAP measures to non-GAAP measures

(in thousands of U.S. dollars, except for share data and per share data)

 

     Three months ended  
     March 31,  
     2015     2016  

Net income

    $ 11,922      $ 11,255   

Add back:

     

- Share-based compensation

      3,108        3,362   

- Acquisition amortization(1)

      6,702        7,995   

- Other adjustments(2)

      2,143        1,677   

- Provision (Benefit) for income taxes

      3,462        1,907   
  

 

 

    

 

 

  

Non-GAAP adjusted profit before taxes

    $ 27,337      $ 26,196   
  

 

 

    

 

 

  

Less: Estimated provision for income taxes(3)

      (3,417 )      (3,275 ) 
  

 

 

    

 

 

  

Non-GAAP adjusted net income

    $ 23,920      $ 22,921   
  

 

 

    

 

 

  

Weighted-average shares outstanding - diluted (in thousands)

      52,255        51,797   

Non-GAAP adjusted net income

      23,920        22,921   
  

 

 

    

 

 

  

Non-GAAP diluted EPS

    $ 0.46      $ 0.44   
  

 

 

    

 

 

  
     December 31,     March 31,  
     2015     2016  

Cash and cash equivalents

    $ 123,767      $ 123,372   

Current portion of long-term debt

      (2,300 )      (2,300 ) 

Long-term debt, less current portion

      (216,695 )      (216,518 ) 
  

 

 

    

 

 

  

Net debt

    $ (95,228 )    $ (95,446 ) 
  

 

 

    

 

 

  
     Three months ended  
     March 31,  
     2015     2016  

Net cash provided by operating activities

    $ 22,231      $ 21,472   

Less: payments for property and equipment and intangible assets

      (2,302 )      (5,227 ) 
  

 

 

    

 

 

  

Free cash flow(6)

    $ 19,929      $ 16,245   
  

 

 

    

 

 

  
     Three months ended  
     March 31,  
     2015     2016  

Revenue

    $ 102,810      $ 107,871   

Free cash flow

      19,929        16,246   
  

 

 

    

 

 

  

Cash conversion

      19 %      15 % 
  

 

 

    

 

 

  

 

9

AVG Technologies N.V.

Reconciliation of GAAP measures to non-GAAP measures

(in thousands of U.S. dollars, except for users, active users and revenue per average active user data)

 

     Twelve months ended  
     March 31,      March 31,  
     2015      2016  

Total revenue (trailing 12 months)

    $ 383,337       $ 433,372   

Active users at period end (in millions)(4)

      202         183   

Average active users (in millions)(5)

      195         193   
  

 

 

     

 

 

  

Twelve months trailing revenue per average active user

    $ 1.97       $ 2.25   
  

 

 

     

 

 

  

Share-based compensation

(in thousands of U.S. dollars)

 

     Three months ended  
     March 31,  
     2015     2016  

Cost of revenue

    $ (12 )    $ (47 ) 

Research and development

      (731 )      (624 ) 

Sales and marketing

      (549 )      (516 ) 

General and administrative

      (1,816 )      (2,175 ) 
  

 

 

    

 

 

  

Share-based compensation

    $ (3,108 )    $ (3,362 ) 
  

 

 

    

 

 

  

Acquisition amortization

(in thousands of U.S. dollars)

 

     Three months ended  
     March 31,  
     2015     2016  

Cost of revenue

    $ (2,361 )    $ (2,462 ) 

Research and development

      (175 )      (191 ) 

Sales and marketing

      (3,831 )      (5,337 ) 

General and administrative

      (335 )      (5 ) 
  

 

 

    

 

 

  

Acquisition amortization

    $ (6,702 )    $ (7,995 ) 
  

 

 

    

 

 

  

Other adjustments

(in thousands of U.S. dollars)

 

     Three months ended  
     March 31,  
     2015     2016  

Cost of revenue

    $ (44 )    $ (435 ) 

Research and development

      296        444   

Sales and marketing

      (492 )      (996 ) 

General and administrative

      (1,903 )      (690 ) 
  

 

 

    

 

 

  

Other adjustments

    $ (2,143 )    $ (1,677 ) 
  

 

 

    

 

 

  

 

10

AVG Technologies N.V.

Reconciliation of GAAP measures to non-GAAP measures

 

(1) Includes amortization of acquired intangible assets.
(2) Other adjustments between GAAP and non-GAAP measures in the three months ended March 31, 2016 comprised $0.3 million in acquisition related charges, $0.4 million in charges related to the unwinding of discounts and changes in fair value, $1.1 million in charges associated with the rationalization of the Company’s global operations, and $0.6 million in charges with the Company’s global IT landscape transformation, less $0.7 million in net reversals of capitalized development charges. Other adjustments between GAAP and non-GAAP measures in the three months ended March 31, 2015 comprised $0.3 million in charges associated with litigation settlements, $2.0 million in acquisition related charges, $0.8 million in charges related to the unwinding of discounts and changes in fair value and $0.1 million in charges associated with the rationalization of the Company’s global operations, offset against $0.9 million in net reversals of capitalized development charges.
(3) Adjusted for impact of normalized tax rate of 12.5% in the three months ended March 31, 2016 and 2015. The normalized tax rate of 12.5% is based on an estimate of our future cash tax rate as well as our recent cash and income statement tax charges.
(4) Active users are those that (i) have downloaded and installed our free software on a PC and have connected to our server at least once in the previous 30 days, (ii) represent a unique mobile device, which has contacted our server once in the preceding 30-day period, (iii) have a valid subscription license for our software solutions or (iv) represent a unique device using our secure search solution that has made at least one secure search in the preceding 30-day period. Beginning in 2015 we began to convert a number of our free users to our Zen enabled products. We continue to improve our internal systems and in March 2016 reported the number of Zen users as 53 million users based on these improvements. The ZEN user number as at the end of December 2015 would have been 51 million users if measured on a similar basis rather than the 47 million we reported. We do not have data for Zen users based on this new counting methodology prior to December 2015. There is no change to the total number of users reported at December 31, 2015 or March 31, 2016.
(5) The number of average active users is calculated as the simple average of active users at the beginning of a period and the end of a period.
(6) The free cash flow for the three months ended March 31, 2016 includes the payment of $3.5 million relating to the other adjustments referred in note 2 above. The free cash flow for the three months ended March 31, 2015 includes the payment of $1.6 million relating to the other adjustments.

 

11

Exhibit 99.2

INDEX TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2016

 

Unaudited condensed consolidated balance sheets

      F-2   

Unaudited condensed consolidated statements of comprehensive income

      F-3   

Unaudited condensed consolidated statements of shareholders’ equity

      F-4   

Unaudited condensed consolidated statements of cash flows

      F-5   

Notes to the unaudited condensed consolidated interim financial statements

      F-6   

 

F-1

AVG TECHNOLOGIES N.V.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)

 

     December 31,     March 31,  
     2015     2016  

ASSETS

   

Current assets:

     

Cash and cash equivalents

    $ 123,767      $ 123,372   

Restricted cash

      26,858        10,011   

Trade accounts receivable, net

      35,717        36,475   

Inventories

      1,027        761   

Prepaid expenses

      7,501        10,557   

Other current assets

      14,888        13,590   
  

 

 

    

 

 

  

Total current assets

      209,758        194,766   

Non-current restricted cash

      226        237   

Property and equipment, net

      23,508        23,322   

Deferred income taxes

      38,181        37,912   

Intangible assets, net

      105,719        98,136   

Goodwill

      297,434        298,455   

Investment

      660        660   

Other assets

      1,728        1,731   
  

 

 

    

 

 

  

Total assets

    $ 677,214      $ 655,219   
  

 

 

    

 

 

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Current liabilities:

     

Accounts payable

    $ 11,763      $ 8,900   

Accrued compensation and benefits

      18,028        19,231   

Accrued expenses and other current liabilities

      82,887        62,743   

Current portion of long-term debt

      2,300        2,300   

Income taxes payable

      1,200        5,946   

Deferred revenue

      167,123        164,517   
  

 

 

    

 

 

  

Total current liabilities

      283,301        263,637   

Long-term debt, less current portion

      216,695        216,518   

Deferred revenue, less current portion

      33,004        32,489   

Deferred tax liabilities

      29,494        27,044   

Other non-current liabilities

      7,302        7,449   
  

 

 

    

 

 

  

Total liabilities

      569,796        547,137   
  

 

 

    

 

 

  

Commitments and contingencies (Note 8)

     

Redeemable noncontrolling interest

      16,800        16,800   

Shareholders’ equity

     

Ordinary shares

      727        727   

Distributions in excess of capital

      (113,211 )      (110,819 ) 

Treasury shares

      (61,297 )      (76,921 ) 

Accumulated other comprehensive loss

      (15,181 )      (12,540 ) 

Retained earnings

      279,580        290,835   
  

 

 

    

 

 

  

Total shareholders’ equity

      90,618        91,282   
  

 

 

    

 

 

  

Total liabilities and shareholders’ equity

    $ 677,214      $ 655,219   
  

 

 

    

 

 

  

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

F-2

AVG TECHNOLOGIES N.V.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands of U.S. dollars, except for share data and per share data)

 

     Three months ended  
     March 31,  
     2015     2016  
     (in thousands of U.S. dollars)  

Revenue:

     

Licenses

    $ 66,486      $ 65,433   

SaaS

      15,095        23,383   

Search

      20,329        17,228   

Other

      900        1,827   
  

 

 

    

 

 

  

Total revenue

      102,810        107,871   
  

 

 

    

 

 

  

Cost of revenue:

     

Software sales

      (12,480 )      (17,334 ) 

Search and other

      (1,332 )      (1,270 ) 
  

 

 

    

 

 

  

Total cost of revenue

      (13,812 )      (18,604 ) 
  

 

 

    

 

 

  

Gross profit

      88,998        89,267   
  

 

 

    

 

 

  

Operating expenses:

     

Research and development

      (20,677 )      (23,723 ) 

Sales and marketing

      (28,797 )      (28,664 ) 

General and administrative

      (19,750 )      (20,548 ) 
  

 

 

    

 

 

  

Total operating expenses

      (69,224 )      (72,935 ) 
  

 

 

    

 

 

  

Operating income

      19,774        16,332   

Other expense, net

      (4,390 )      (3,170 ) 
  

 

 

    

 

 

  

Income before income taxes

      15,384        13,162   

Income tax provision

      (3,462 )      (1,907 ) 
  

 

 

    

 

 

  

Net income

    $ 11,922      $ 11,255   
  

 

 

    

 

 

  

Less: Net income attributable to redeemable noncontrolling interest

      (3 )      (8 ) 
  

 

 

    

 

 

  

Net income attributable to AVG Technologies N.V.

    $ 11,919      $ 11,247   
  

 

 

    

 

 

  

Other comprehensive income, net of tax

     

Currency translation loss, net of tax

      (2,119 )      2,641   
  

 

 

    

 

 

  

Other comprehensive income/(loss)

    $ (2,119 )    $ 2,641   
  

 

 

    

 

 

  

Comprehensive income

    $ 9,803      $ 13,896   
  

 

 

    

 

 

  

Less: Comprehensive income attributable to redeemable noncontrolling interest

      (479 )      (8 ) 
  

 

 

    

 

 

  

Comprehensive income attributable to AVG Technologies N.V.

    $ 9,324      $ 13,888   
  

 

 

    

 

 

  

Earnings per share attributable to AVG Technologies N.V. ordinary shareholders:

     

Net income

    $ 11,919      $ 11,247   

Redeemable noncontrolling interest

      (479 )      8   
  

 

 

    

 

 

  

Net income available to ordinary shareholders - basic

    $ 11,440      $ 11,255   
  

 

 

    

 

 

  

Net income available to ordinary shareholders - diluted

    $ 11,440      $ 11,255   

Earnings per share attributable to AVG Technologies N.V. Ordinary shareholders – basic

    $ 0.22      $ 0.22   

Earnings per share attributable to AVG Technologies N.V. Ordinary shareholders – diluted

    $ 0.22      $ 0.22   

Weighted-average shares outstanding – basic

      51,599,964        51,018,326   

Weighted-average shares outstanding – diluted

      52,254,969        51,796,688   

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

F-3

AVG TECHNOLOGIES N.V.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands of U.S. dollars)

 

     Ordinary
Shares		      Distributions
in excess of
capital		     Treasury
shares		     Retained
earnings		      Accumulated
other
comprehensive
loss		     Total
share-
holder’s
equity		  

Balances, December 31, 2015

    $ 727       $ (113,211 )    $ (61,297 )    $ 279,580       $ (15,181 )    $ 90,618   

Net income attributable to AVG Technologies N.V.

      —           —          —          11,247         —          11,247   

Other comprehensive loss, net of tax

      —           —          —          —           2,641        2,641   

Change in redemption value of redeemable noncontrolling interest

      —           —          —          8         —          8   

Exercise of share options and restricted stock units (including excess tax benefit of $22)

      —           (869 )      2,683        —           —          1,814   

Repurchase of own shares

      —           —          (18,307 )      —           —          (18,307 ) 

Share-based compensation

      —           3,261        —          —           —          3,261   
  

 

 

     

 

 

    

 

 

    

 

 

     

 

 

    

 

 

  

Balances, March 31, 2016

    $ 727       $ (110,819 )    $ (76,921 )    $ 290,835       $ (12,540 )    $ 91,282   
  

 

 

     

 

 

    

 

 

    

 

 

     

 

 

    

 

 

  

There were 54,763,151 ordinary shares issued as of March 31, 2016.

The 3,135,047 ordinary shares held in treasury at December 31, 2015 were reduced by 138,514 ordinary shares used to satisfy the exercise of share options and were increased by 975,335 ordinary shares repurchased an transferred to treasury, resulting in 3,971,868 ordinary shares held in treasury at March 31, 2016.

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

F-4

AVG TECHNOLOGIES N.V.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of U.S. dollars)

 

     Three months ended  
     March 31,  
     2015     2016  

OPERATING ACTIVITIES:

     

Net income

    $ 11,922      $ 11,255   

Adjustments to reconcile net income to net cash provided by operating activities

     

Depreciation and amortization

      10,750        11,908   

Share-based compensation

      3,108        3,362   

Deferred income taxes

      2,941        (2,411 ) 

Change in the fair value of contingent consideration liabilities

      820        356   

Amortization of financing costs and loan discount

      430        491   

Loss (gain) on sale of property and equipment

      (56 )      (98 ) 

Net change in assets and liabilities, excluding effects of acquisitions and deferred revenue

      (10,099 )      214   

Net change in deferred revenue

      2,415        (3,605 ) 
  

 

 

    

 

 

  

Net cash provided by operating activities

      22,231        21,472   
  

 

 

    

 

 

  

INVESTING ACTIVITIES:

     

Purchase of property and equipment and intangible assets

      (2,302 )      (5,227 ) 

Proceeds from sale of property and equipment

      57        156   

Decrease (increase) in restricted cash

      270        (12 ) 
  

 

 

    

 

 

  

Net cash used in investing activities

      (1,975 )      (5,083 ) 
  

 

 

    

 

 

  

FINANCING ACTIVITIES:

     

Payment of capitalized lease obligation

      —          (19 ) 

Debt issuance costs

      (173 )      (21 ) 

Repayments of principal on current credit agreement

      (575 )      (575 ) 

Proceeds from exercise of share options

      1,818        1,792   

Excess tax benefit

      —          27   

Repurchase of own shares

      —          (18,307 ) 
  

 

 

    

 

 

  

Net cash used in financing activities

      1,070        (17,103 ) 

Effect of exchange rate fluctuations on cash and cash equivalents

      (577 )      319   
  

 

 

    

 

 

  

Change in cash and cash equivalents

      20,749        (395 ) 

Beginning cash and cash equivalents

      138,907        123,767   

Ending cash and cash equivalents

    $ 159,656      $ 123,372   
     Three months ended  
     March 31,  
     2015     2016  

Supplemental cash flow disclosures:

     

Income taxes (paid)/received

    $ (1,214 )    $ (1,059 ) 

Interest paid

    $ (3,614 )    $ (3,389 ) 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

F-5

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of U.S. dollars – except for share data and per share data, unless otherwise stated)

Note 1. Organization and basis of presentation and business

Organization and basis of presentation

AVG Technologies N.V. (“the Company”) is a limited liability company (“Naamloze Vennootschap”) incorporated under Dutch law by deed of incorporation dated March 3, 2011, then under the name AVG Holding Coöperatief U.A. The Company began trading on February 2, 2012 on the New York Stock Exchange under the ticker symbol AVG.

The accompanying unaudited condensed consolidated financial statements include the financial results and position of the Company and of its subsidiaries (collectively “AVG”).

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the applicable rules and regulations of the SEC for financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.

The December 31, 2015 condensed consolidated balance sheet included herein was derived from the Company’s audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP for complete financial statements. However, AVG believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for each of the three years in the period ended December 31, 2015.

Certain prior year amounts in these notes and in the consolidated financial statements have been reclassified to conform to the accompanying unaudited condensed consolidated financial statements. In 2015, on the consolidated statements of income, filed on Form 20-F on April 25, 2016, the Company began to break down its subscription revenue, separately stating SaaS revenues from Licenses revenues, and the Company began to break down its platform-derived revenue and separately stating Search revenue from other platform-derived revenue. For comparison purposes, the Company has reclassified prior comparative periods to reflect the new method of presentation of revenue.

In addition, prior year amounts have been reclassified due to the adoption of new accounting standards updates. Please refer to Note 2 for further details.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s audited consolidated financial statements and, in the opinion of management, reflect all adjustments considered necessary for a fair statement of the Company’s financial position as of March 31, 2016, the results of its operations and cash flows for the three months ended March 31, 2015 and 2016 and shareholders’ equity for the three months ended March 31, 2016. All adjustments are of a normal recurring nature. The results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for future periods.

Business

AVG is primarily engaged in the development and sale of online service solutions and Internet security software branded under the AVG name.

As of March 31, 2016, the Company had the same direct and indirect subsidiaries as described in the Company’s audited consolidated financial statements for the financial year ended December 31, 2015, except for AVG VPN Technologies UK Limited., which was incorporated on January 20, 2016 and AVG Technologies GER B.V., which was incorporated on February 1, 2016.

 

F-6

Note 2. Summary of significant accounting policies

There have been no changes in AVG’s significant accounting policies during the three months ended March 31, 2016 as compared with the significant accounting policies described in the Company’s audited consolidated financial statements for the financial year ended December 31, 2015, except for the adoption of accounting standards update ASU 2015-03, which was applied retrospectively to all prior periods presented in the financial statements and the debt issuance costs of $4.397 related to a recognized debt liability is presented as a direct deduction from the carrying amount of the debt liability, instead of other assets, and for the adoption of accounting standards update ASU 2015-17, which was applied retrospectively to all prior periods presented in the financial statements, all deferred tax liabilities and assets are classified as noncurrent.

Recent accounting standards or updates not yet effective

Revenue recognition

On April 14, 2016, the FASB issued ASU 2016-10—Revenue from contracts with customers (Topic 606). The amendments in this update clarify the guidance on identifying performance obligations and implementation of licensing guidance.

On March 17, 2016, the FASB issued ASU 2016-08—Revenue from contracts with customers (Topic 606). The amendments in this update clarify the implementation guidance on principal versus agent considerations.

On August 12, 2015, the FASB issued ASU 2015-14—Revenue from contracts with customers (Topic 606). The amendments in this update defer the effective date of Update 2014-09 for all entities by one year.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from contract with customers. The main objective in developing this update is to provide guidance and conformity with respect to the fact that previous revenue recognition requirements in U.S. generally accepted accounting principles (GAAP) differ from those in International Financial Reporting Standards (IFRS), and both sets of requirements were in need of improvement. Previous revenue recognition guidance in U.S. GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. Accordingly, the FASB and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards Update 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date established in ASU 2014-09. The amendments in ASU 2014-09 are now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company has not yet selected a transition method. The Company is currently evaluating the appropriate transition method and the impact of adoption on the consolidated financial statements and related disclosures.

Financial Instruments

On January 5, 2016 the FASB issued ASU 2016 – 01 — Financial Instruments—Overall—Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income the portion of

 

F-7

the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement for to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities.

The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

Leases

On February 25, 2016 the FASB issued ASU 2016 – 02 — Leases, Topic 842. The amendments in this update are to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company has chosen not to early adopt this standard. The adoption of this standard, although it will increase reported assets and liabilities, however, it is not expected to have any further material impact on the Company’s financial statements.

Share-based compensation

On March 30, 2016 the FASB issued ASU 2016 – 09 — Compensation – Stock Compensation, Topic 718. The amendments in this update are to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.

The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company has chosen not to early adopt this standard. The adoption of this standard, although it will increase reported assets and liabilities, is not expected to have a material impact on the Company’s financial statements.

Note 3. Segment information

The Company has two segments, Consumer and SMB, which reflects how the Company’s operations are managed, how operating performance within the Company is evaluated by the Management Board and other senior management and the structure of its internal financial reporting.

 

F-8

The following table presents summarized information by segment and a reconciliation from consolidated segment operating income to consolidated operating income:

 

     Three months ended  
     March 31,  
     2015      2016  
     (in thousands of U.S. dollars)  

Revenue

      

Consumer

    $ 87,208       $ 92,088   

SMB

      15,602         15,783   
  

 

 

     

 

 

  

Total Revenue

      102,810         107,871   
  

 

 

     

 

 

  

Segment operating income

   

Consumer

    $ 43,945       $ 42,992   

SMB

      (3,714 )       (1,627 ) 
  

 

 

     

 

 

  

Total segment operating income

      40,231         41,365   
  

 

 

     

 

 

  

Reconciliation to consolidated operating income

      

Global operating costs

    $ (8,504 )     $ (11,999 ) 

Share-based compensation

      (3,108 )       (3,362 ) 

Acquisition amortization

      (6,702 )       (7,995 ) 

Other adjustments

      (2,143 )       (1,677 ) 
  

 

 

     

 

 

  

Consolidated operating income

    $ 19,774       $ 16,332   
  

 

 

     

 

 

  

The global operating costs include general and administrative and other corporate expenses that are managed on a global basis and that are not directly attributable to any segment. The other adjustments primarily include charges associated with litigation settlements, acquisition related charges, accelerated amortization and charges associated with the rationalization of the Company’s global operations.

The Company’s chief operating decision maker is not provided with nor reviews assets and capital expenditures on a segment basis for purposes of allocating resources or assessing performance, and accordingly such information is not provided.

Note 4. Related party transactions

For the three months ended March 31, 2016, the Company had no related party transactions.

Note 5. Debt

Credit Agreement dated October 15, 2014

On October 15, 2014, the Company entered into senior secured credit facilities in the amount of up to $250 million with Morgan Stanley Senior Funding, Inc. and HSBC Securities (USA) Inc. as joint lead arrangers and joint lead book runners, HSBC Bank USA, N.A. as Administrative Agent and HSBC Bank Plc as issuing bank (the “Credit Facility”). The facilities consist of a term loan (the “Term Loan”) of up to $200 million and a revolving credit facility (“RCF”) of up to $50 million whose terms are 6 years and 5 years, respectively. In December 2014 the Term Loan was increased to $230 million.

As of March 31, 2016, the Company was in compliance with the financial covenant of the Credit Facility and the RCF was left undrawn.

The Credit Facility is collateralized by certain tangible, intangible, and current assets of the Company with covenants obliging the Company to also pledge new assets over a certain threshold. The collateral granted by the borrower and certain of its subsidiaries includes, without limitation, present and future pledges, mortgages, first priority floating and fixed charges and security interests with respect to, but not limited to, equity rights, shares and related rights (ownership interests), fixed assets, intellectual property rights (trademarks, copyrights and patents),

 

F-9

intercompany and trade receivables, bank accounts, insurance claims and commercial claims. Certain assets presented on the consolidated balance sheets have been pledged as collateral as of March 31, 2016, including property and equipment with a carrying value of $18,220 , intangible assets with a carrying value of $23,967, trade accounts receivable of $31,098, inventories with a carrying value of $752, as well as cash and cash equivalents amounting to $112,482.

As of March 31, 2016, the mandatory principal payments under the credit facility are as follows:

 

     (in thousands of U.S. dollars)  

2016

    $ 1,725   

2017

      2,300   

2018

      2,300   

2019

      2,300   

2020

      218,500   
  

 

 

  

Total

    $ 227,125   
  

 

 

  

Note 6. Fair value measurements

The Company measures and reports its derivative instruments and contingent purchase consideration liabilities at fair value. Fair value is defined as an exit price that would be received for the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

 

•    Level 1:

   Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

•    Level 2:

   Observable inputs that reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•    Level 3:

   Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

 

F-10

Assets and liabilities measured and recorded at fair value on a recurring basis

The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy:

 

     December 31, 2015  
     Level 1      Level 2      Level 3      Total  

Assets

            

Time deposits(3)

    $ —         $ 5       $ —         $ 5   

Foreign currency contracts(1)

      —           405         —           405   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total assets measured at fair value

      —           410         —           410   
  

 

 

     

 

 

     

 

 

     

 

 

  

Liabilities:

            

Foreign currency contracts(1)

    $ —         $ 39       $ —         $ 39   

Contingent purchase consideration liabilities(2)

      —           —           25,358         25,358   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total liabilities measured at fair value

      —           39         25,358         25,397   
  

 

 

     

 

 

     

 

 

     

 

 

  
     March 31, 2016  
     Level 1      Level 2      Level 3      Total  

Assets

            

Time deposits(3)

    $ —         $ 5       $ —         $ 5   

Foreign currency contracts(1)

      —           1,158         —           1,158   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total assets measured at fair value

      —           1,163         —           1,163   
  

 

 

     

 

 

     

 

 

     

 

 

  

Liabilities:

            

Foreign currency contracts(1)

    $ —         $ 245       $ —         $ 245   

Contingent purchase consideration liabilities(2)

      —           —           25,662         25,662   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total liabilities measured at fair value

    $ —         $ 245       $ 25,662       $ 25,907   
  

 

 

     

 

 

     

 

 

     

 

 

  

 

(1) Contract fair values are determined based on quoted prices for similar assets in active markets using inputs such as currency rates and forward points.
(2) The fair values of the contingent purchase consideration liabilities were determined for each arrangement individually. The fair value is determined using the income approach with significant inputs that are not observable in the market. Key assumptions include discount rates consistent with the level of risk of achievement and probability adjusted financial projections. The expected outcomes are recorded at net present value, which requires adjustment over the life of the instruments for changes in risks and probabilities.
(3) Time deposits are classified as part of cash and cash equivalents on the condensed consolidated balance sheets.

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities:

 

     Three months ended  
     March 31,  
     2015      2016  

Fair value - beginning of period

    $ 34,320       $ 25,358   

Change in FV of Level 3 liabilities(4)

      793         325   

Effects of foreign currency exchange

      —           (21 ) 
  

 

 

     

 

 

  

Fair value - end of period

    $ 35,113       $ 25,662   
  

 

 

     

 

 

  

 

F-11

(4) The change in fair value of the contingent purchase consideration liabilities, which was included in general and administrative expenses, is due to the passage of time used to develop the estimate.

Assets and liabilities measured and recorded at fair value on a non-recurring basis

There were no assets and liabilities measured and recorded at fair value on a non-recurring basis as of December 31, 2015 and March 31, 2016, respectively.

Assets and liabilities for which fair value is only disclosed

The carrying amounts of cash and cash equivalents, trade accounts receivable and accounts payable reported in the consolidated balance sheets approximate their respective fair values because of the short term nature of these accounts.

The fair value of long-term debt as of March 31, 2016 was $227,125 as compared to its carrying amount of $218,818. The valuation of long-term debt considers specific contractual terms, present value concepts and other internal assumptions related to (i) contract maturities; (ii) the uniqueness of the contract terms; and (iii) AVG’s creditworthiness or that of AVG’s counterparties (adjusted for collateral related to the asset positions). Based on own calculations, AVG expects that the value will react in a generally proportionate manner to changes in the benchmark interest rate. Accordingly, the long-term debt is fair valued at par and is classified as Level 3.

The fair value of long-term debt as of December 31, 2015 was $227,700 as compared to its carrying amount of $218,995. The valuation of long-term debt considers specific contractual terms, present value concepts and other internal assumptions related to (i) contract maturities; (ii) the uniqueness of the contract terms; and (iii) the Company’s creditworthiness or that of the Company’s counterparties (adjusted for collateral related to the asset positions). Based on the Company’s calculations, the Company expects that the value will react in a generally proportionate manner to changes in the benchmark interest rate. Accordingly, the long-term debt was fair valued at par and was classified as Level 3.

Note 7. Restructuring

Restructuring charges during the three months ended March 31, 2016 consist of costs associated with the 2012/13, the 2013/14 restructuring, the 2015 restructuring as well as the 2016 restructuring. These costs include employee severance pay and related costs, facility restructuring costs, contract termination and other non-cash charges associated with the exit of facilities.

Restructuring charges for the three months ended March 31, 2015 and 2016, comprised the following:

 

     March 31, 2015  
     Three months
ended		  

Non-cancelable lease, contract termination, and other charges

      50   

Total restructuring charges

    $ 50   
  

 

 

  
     March 31, 2016  
     Three months
ended		  

Employee severance pay and related costs

    $ 891   

Non-cancelable lease, contract termination, and other charges

      170   

Other non-cash charges

      —     
  

 

 

  

Total restructuring charges

    $ 1,061   
  

 

 

  

 

F-12

Restructuring related costs and change in estimates in the three months ended March 31, 2016 totaled $1,061. Of these restructuring costs incurred in the three months ended March 31, 2016, $16 was included in cost of sales, $2 was included in research and development, $326 in general and administrative, and $717 in sales and marketing. The cumulative costs incurred to date, including non-cash charges, were $13,137.

The 2016 restructuring activities include rationalization of the Company’s global operations and restructuring of its marketing function. The 2015 restructuring plan includes costs associated with restructuring activities of its SMB operations and the rationalization of its acquired Location Labs and Norman businesses. As a result of these actions, positions were made redundant in several places globally.

The 2012/13 restructuring was initiated during the financial year 2012, and included the rationalization of the Company’s global operations, involving a wind down of its subsidiaries in Germany, China and Hong Kong, and their business activities were absorbed by other AVG entities. The remaining lease obligations will be settled over the remaining lease terms which expire in fiscal year 2022.

The following table summarizes the changes in the rationalization of operations related liabilities:

 

     Severance
and other
benefits		      Closure
and other
contractual
liabilities		  

Balance at January 1, 2016

    $ 1,299       $ 911   

Costs incurred and charged to expense

      931         170   

Costs paid or otherwise settled

      (978 )       (132 ) 

Changes in estimates

      (40 )       —     

Effects of foreign currency exchange

      63         41   
  

 

 

     

 

 

  

Balance at March 31, 2016

    $ 1,275       $ 990   
  

 

 

     

 

 

  

Cumulative costs incurred to date, including non-cash charges

    $ 5,702       $ 7,435   

The Company has accrued for all expected costs related to its restructuring programs. Additional costs to be incurred are expected to be immaterial. The Company expects the restructuring programs to be substantially completed in 2017. All costs related to the leased office space in Darmstadt, Germany, including future lease payments, have been accrued. The lease term for this cease-used facility which is partially sublet, will end in 2022.

Note 8. Commitments and contingencies

Lease commitments

AVG leases its facilities and certain equipment under operating leases that expire at various dates through 2022. Some of the leases contain renewal options, escalation clauses, rent concessions, and leasehold improvement incentives. Rent expense is recognized on a straight-line basis over the lease term, adjusted for sublease income if applicable. Rent expense was $2,655 and $2.591 in the three months ended March 31, 2015 and March 31, 2016, respectively.

The following is a schedule by year of minimum future rentals on non-cancelable operating leases as of March 31, 2016:

 

     Lease      Sublease
income		      Net lease  

Remainder of financial year 2016

    $ 7,540       $ (387 )     $ 7,153   

2017

      7,615         (413 )       7,202   

2018

      6,702         (267 )       6,435   

2019

      6,408         (243 )       6,165   

2020

      4,104         (188 )       3,916   

Thereafter

      8,692         (188 )       8,504   
  

 

 

     

 

 

     

 

 

  

Total minimum future lease payments

    $ 41,061       $ (1,686 )     $ 39,375   
  

 

 

     

 

 

     

 

 

  

 

F-13

Purchase obligations

The Company has purchase obligations that are associated with agreements for purchases of goods or services. Management believes that cancellation of these contracts is unlikely and thus the Company expects to make future cash payments according to the contract terms.

The following is a schedule by year of purchase obligations as of March 31, 2016:

 

Remainder of financial year 2016

    $ 17,270   

2017

      5,947   

2018

      770   

2019

      503   

2020

      500   

Thereafter

      250   
  

 

 

  

Total minimum future purchase obligations

    $ 25,240   
  

 

 

  

Other commitments

In connection with the Company’s business combinations, the Company agreed to pay certain additional amounts contingent upon the achievement of certain revenue targets and other milestones or upon the continued employment with the Company of certain employees of the acquired entities. The Company recognized such compensation expense of $1,079 and $256 during the three months ended March 31, 2015 and 2016, respectively. As of March 31, 2016, the Company estimated that future compensation expense of up to $1,048 may be recognized as expense pursuant to these business combination agreements. The other contingent purchase consideration as of March 31, 2016 was $25,662 and is expected to be paid within the next seven months. Other contingent purchase consideration as of December 31, 2015 was $25,358.

Litigation contingencies

The Company is involved in legal proceedings, disputes and claims in the ordinary course of business. While the outcome of these matters is currently not determinable, the final resolution of these lawsuits, disputes and claims individually, or in the aggregate, is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

Note 9. Product, services, geographic and major customer information

Revenues are attributed to countries based on the location of the Company’s channel partners as well as end-users of the Company.

 

F-14

The following table represents revenue attributed to countries based on the location of the end-users:

 

     Three months ended  
     March 31,  
     2015      2016  

Revenue:

      

Netherlands

    $ 1,998       $ 2,382   

United States

      55,945         58,254   

United Kingdom

      14,460         13,991   

Other countries(1)

      30,407         33,244   
  

 

 

     

 

 

  

Total

    $ 102,810       $ 107,871   
  

 

 

     

 

 

  

 

(1) No individual country represented more than 10% of the respective totals.

The table below lists the Company’s property and equipment, net, by country.

 

     December 31,      March 31,  
     2015      2016  
     (in thousands of U.S. dollars)  

Long-lived assets:

      

Netherlands

    $ 284       $ 262   

Czech Republic

      9,469         9,281   

United States

      9,445         8,900   

Canada

      2,203         2,432   

Other countries(1)

      2,107         2,447   
  

 

 

     

 

 

  

Total

    $ 23,508       $ 23,322   
  

 

 

     

 

 

  

 

(1) No individual country represented more than 10% of the respective totals.

Major customers

Revenues in the three months ended March 31, 2015 and 2016 included revenues derived from significant business partners, and are as follows (in percentages of total revenue):

 

     Three months ended  
     March 31,  
     2015     2016  

Yahoo!

      16 %      14 % 

Accounts receivable balances with significant business partners are as follows (in percentage of total accounts receivable):

 

    

December 31,

     March 31,  
     2015     2016  
     (in thousands of U.S. dollars)  

Business partner:

     

Yahoo!

      19 %      19 % 

 

F-15

Note 10. Ordinary shares

Ordinary shares

The Company’s authorized, issued and outstanding ordinary shares consist of the following:

 

     December 31, 2015  
     Shares      Shares      Shares         
     authorized      issued      outstanding      Par value  

Ordinary shares

      120,000,000         54,763,151         51,628,104       $ 727   

Total

      120,000,000         54,763,151         51,628,104       $ 727   
     March 31, 2016  
     Shares      Shares      Shares         
     authorized      issued      outstanding      Par value  

Ordinary shares

      120,000,000         54,763,151         50,791,283       $ 727   

Total

      120,000,000         54,763,151         50,791,283       $ 727   

Treasury shares

During the three months ended March 31, 2016, the Company repurchased 975,335 ordinary shares through its share repurchase programs as described below and held these shares in treasury.

As at March 31, 2016 there were 3,971,868 shares held in treasury at a carrying value of $76,921.

Share repurchase program

On March 1, 2016, the Company announced the second tranche of its previously announced 1,666,667 share repurchase program, as announced on November 9, 2015 and subsequently on December 17, 2015. Under the second tranche, the Company was allowed to repurchase up to 200,001 of its ordinary shares (the “shares”) between March 1, 2016 and May 10, 2016. The Company completed the second tranche and the 2015 share repurchase program on March 14, 2016.

On March 29, 2016, the Company announced that it has adopted an additional share repurchase program under which it intends to repurchase up to 500,000 of its shares to cover the Company’s obligations to deliver shares under its employee stock options incentive and restricted share units plans.

The share repurchase was authorized by the Company’s shareholders on June 11, 2015 and approved by the Supervisory Board. Under the share repurchase program, the Company has authorization to repurchase a maximum number of 500,000 shares between March 30, 2016 and September 30, 2016.

The share repurchase program does not require the Company to acquire any specific number of shares and may be terminated by the Company at any time without prior notice.

 

F-16

The share repurchase program will be done in one tranche. The Company has mandated JMP Securities LLC (“JMP”), a full service Broker-Dealer, to execute the tranche of open market repurchases (including repurchases from JMP acting as principal). For that, JMP will decide on the timing of the share repurchases independently of, and without being influenced by, the Company. JMP is a full service Broker-Dealer.

The following table summarizes the Company’s total share repurchases under these programs:

 

Total number of shares repurchased

      975,335   

Dollar amount of shares repurchased

    $ 18,307   

Average price paid per share

    $ 18.83   

Range of price paid per share

    $ 16.63 – 20.29   

Redeemable noncontrolling interest

On October 15, 2014, the Company acquired 99.899% ownership interest in WaveMarket, Inc., doing business as Locations Labs. The holders of Class B shares of Location Labs owned the remaining 0.101% interest. The Class B shares contain redemption features whereby interests held are redeemable at the option of the holder and is not solely within our control. The redemption is deemed probable but the Class B shares are not currently redeemable and therefore the Company is charging accretion changes to adjust the redeemable noncontrolling interest each reporting period to its estimated redemption value after the attribution of net income or loss of the subsidiary. Any adjustment to the redemption value will impact retained earnings.

Changes to redeemable noncontrolling interest during the three months ended March 31, 2016 were as follows:

 

Balance as of December 31, 2015

    $ 16,800   

Net profit attributable to redeemable noncontrolling interest

      8   

Redemption value adjustment recorded in retained earnings

      (8 ) 
  

 

 

  

Balance as of March 31, 2016

    $ 16,800   
  

 

 

  

Note 11. Share-based compensation

During the three months ended March 31, 2016, the Company awarded, under the terms and conditions of the Amended and Restated 2013 Option and RSU Plan, 95,000 stock options, and 105,000 restricted stock units (RSUs), to members of its staff. The RSUs granted in the three months ended March 31, 2016 included a performance condition which affects vesting. Achievement of the performance conditions was considered in recognizing compensation expense relating to these RSUs.

The following table sets forth the total share-based compensation expense under the Amended and Restated 2013 Option and RSU Plan.

 

     Three months ended  
     March 31,  
     2015      2016  

Cost of revenue

    $ 12       $ 47   

Research and development

      731         624   

Sales and marketing

      549         516   

General and administrative

      1,816         2,175   
  

 

 

     

 

 

  

Total

    $ 3,108       $ 3,362   
  

 

 

     

 

 

  

 

F-17

Note 12. Income taxes

AVG recorded income tax expense of $3,462 (22.5 percent effective tax rate) and $1,907 (14.5 percent effective tax rate) in the three months ended March 31, 2015 and 2016, respectively.

The effective tax rate decreased in the three months ended March 31, 2016 compared to the same period last year, primarily due to increased benefits from the Company’s Dutch IP innovation box ruling as a result of lower tax expense add-back from original deferred tax assets step up and decrease in deferred tax rate differential from centralized deferred revenue effected by the IP box regime tax rate.

Note 13. Earnings per share

Basic earnings available to ordinary shareholders per share is computed based on the weighted-average number of ordinary shares outstanding during each period. Diluted earnings available to ordinary shareholders per share is computed based on the weighted-average number of ordinary shares outstanding during each period, plus potential ordinary shares considered outstanding during the period, as long as the inclusion of such shares is not anti-dilutive. Potential ordinary shares consist of the incremental ordinary shares issuable upon the exercise of share options (using the treasury shares method).

The following table sets forth the computation of basic and diluted earnings per outstanding ordinary share:

 

     Three months ended  
     March 31,  
     2015      2016  

Numerator:

      

Net income

    $ 11,922       $ 11,255   

Add: net loss attributable to redeemable noncontrolling interest

      (3 )       (8 ) 

Redeemable noncontrolling interest

      (479 )       8   
  

 

 

     

 

 

  

Net income available to ordinary shareholders - basic

    $ 11,440       $ 11,255   
  

 

 

     

 

 

  

Net income available to ordinary shareholders - diluted

    $ 11,440       $ 11,255   
  

 

 

     

 

 

  

Denominator:

      

Weighted-average ordinary shares outstanding – basic

      51,599,964         51,018,326   

Potential ordinary shares

      655,005         778,362   
  

 

 

     

 

 

  

Weighted-average ordinary shares outstanding – diluted

      52,254,969         51,796,688   
  

 

 

     

 

 

  

Earnings per ordinary share – basic

    $ 0.22       $ 0.22   

Earnings per ordinary share – diluted

    $ 0.22       $ 0.22   

 

F-18

The following securities that could potentially dilute basic earnings per share in the future have been excluded from the above computation of earnings per share as their inclusion would have been anti-dilutive.

 

     Three months ended  
     March 31,  
     2015      2016  

Performance restricted stock units

      100,000         100,000   

Options to purchase ordinary shares

      1,110,227         2,213,901   
  

 

 

     

 

 

  

Anti-dilutive shares

      1,210,227         2,313,901   
  

 

 

     

 

 

  

Note 14. Subsequent events

Announcement of Jeffrey Ross as the Company’s new chief financial officer

On March 29, 2016 the Company announced that Jeffrey Ross was named chief financial officer. Mr. Ross joined the company in early April and will assume the role and title of CFO the day following the Company’s 2016 first quarter earnings announcement. Mr. Ross will be a member of the Company’s Management Board upon appointment by the General Meeting of Shareholders, after which Mr. Little will resign as a member of the Management Board and continue his employment with the Company during the transition process. The Supervisory Board of the Company will nominate Mr. Ross for appointment to the Company’s Management Board at its Annual General Meeting of Shareholders on June 9, 2016.

Redemption Class B-2 shares Location Labs, Inc.

In April 2016, the Company redeemed the Class B-2 shares of Location Labs, Inc. for $16,800. Class B-2 shares were puttable to the Company by the shareholders for a six month period commencing on January 1, 2016 for a maximum nominal value of $16,800.

Location Labs contingent consideration payment

In April 2016, the Company paid the selling shareholders of Location Labs the second installment of the contingent purchase consideration of $13,462, due to Location Labs fulfilling the financial metrics upon which this installment was payable.

 

F-19


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