Form 6-K AVG Technologies N.V. For: Nov 04

 

 

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

November 4, 2015

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 September 30, 2015

---

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: November 4, 2015				By:		/s/ John Little
				Name:		John Little
				Title:		Chief Financial Officer and Managing Director

Exhibit 99.1

AVG Announces Third Quarter 2015 Financial Results

Paid users surpass 20 million; Subscription-based revenue grows 28 percent over last year

AMSTERDAM – November 4, 2015 – AVG^® Technologies N.V. (NYSE: AVG), the online security company^™ for more than 200 million monthly active users, today reported results for the third quarter ended September 30, 2015.

Third quarter 2015 highlights

 

•

Revenue grew 17 percent over the same period last year, to $108.2 million; adjusting for foreign exchange movements, third quarter revenue would have grown 20 percent to more than $111 million.

 

•

Total paid users grew 43 percent over the same period last year to over 20 million, driven primarily by strength in the number of paid Mobile users, which surpassed 6 million during the third quarter.

 

•

Subscription-based revenue grew 28 percent over the same period last year and comprised 81 percent of total revenue.

 

•

Operating cash flow was $31.8 million, and, non-GAAP free cash flow exceeded $27 million during the third quarter, resulting in a cash conversion rate of 25 percent.

Third quarter 2015 financial results

Revenue for the third quarter of 2015 was $108.2 million, compared with $92.3 million in the third quarter of 2014, an increase of 17 percent compared to the prior year. Non-GAAP net income for the quarter, which includes $3.8 million in investments being made to enhance the Company’s internal financial controls and procedures, was $22.2 million, or $0.42 per diluted ordinary share. This compares with non-GAAP net income of $29.4 million, or $0.56 per diluted ordinary share for the same period of the prior year.⁽¹⁾

Excluding the aforementioned investments, non-GAAP net income would have been $26 million, or $0.49 per diluted ordinary share. AVG has been implementing new and more robust internal controls that are commensurate with the scale and complexity of the business. The Company believes it is making significant progress towards strengthening its financial controls and believes that these costs will decrease substantially by the first quarter of 2016.

Operating cash flow was $31.8 million for the quarter, compared with $18.6 million for the third quarter last year. Non-GAAP free cash flow was $27.4 million for the quarter, compared with $16.4 million for the same period in the prior year.

GAAP net income for the third quarter was $7.9 million, or $0.14 per diluted ordinary share. This compares with net income of $18.2 million, or $0.35 per diluted ordinary share in the prior year’s third quarter. Operating income was $15.7 million, compared with $23.3 million for the third quarter of 2014.

“Revenue growth in the third quarter was driven by strength in our strategic areas of focus,” said Gary Kovacs, chief executive officer of AVG Technologies. “These results were achieved despite stiff foreign exchange headwinds, as well as a reduction in total platform revenues as we execute our controlled exit from the third-party search business. Our carrier-based distribution channels drove exponential annual mobile revenue growth as well as record SaaS revenue. Revenue from SMB grew 13 percent in the third quarter despite undergoing a significant restructuring of the business to improve our ability to capitalize on this large and growing opportunity. We ended the quarter with 17 million total users of Zen-enabled products, up 54 percent since the end of the second quarter.”

Kovacs continued, “Looking ahead, we will continue to invest in our key focus areas of mobile, SMB, and Zen, and optimize our traditional desktop business. In search, we are seeing market dynamics that have the potential to impact this business, creating uncertainty in our search revenue expectations over the next several quarters. We believe our success in diversifying revenue streams over the past year can mitigate some of this potential impact. We remain completely confident in our long-term growth strategy.

 

(1)

Non-GAAP results for the third quarter of 2015 exclude $4.1 million in share based compensation expense, $7.5 million in acquisition amortization and nil in charges associated with litigation settlements, $1.0 million in acquisition related charges, $0.9 million in charges related to the unwinding of discounts and changes in fair value and $1.2 million in charges associated with the rationalization of the Company’s global operations, offset against 0.8 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 November 4, 2015, AVG is narrowing its previous range for revenue expectations and its financial outlook for fiscal year 2015 as follows:

 

•

Revenue is expected to be in the range of $426 million to $430 million.

 

•

Non-GAAP adjusted net income is expected to be approximately $95 million, or roughly $1.80 per diluted ordinary share.

 

•

GAAP net income is expected to be approximately $42 million; or, roughly $0.75 per diluted ordinary share.

AVG’s expectation of non-GAAP adjusted net income for fiscal year 2015 excludes share-based compensation expense, acquisition amortization and certain other adjustments, and assumes a normalized tax rate of 12.5%. For the purpose of calculating GAAP net income per diluted ordinary share and non-GAAP 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 not 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 third quarter 2015 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: +1 646 254 3366 (USA); +1 514 841 2154 (Canada); +420 225 376 429 (CZ); +44 20 3427 1905 (UK); Conference ID: 1514257.

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, free cash flow 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 and free cash flow, 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 and free cash flow are measures of financial performance and liquidity, respectively, and have limitations as analytical tools, and should not be considered in isolation from, or as substitutes for, 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 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;

 

2

---

•

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, 2015 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 Location Labs acquisition and other acquisitions; our ability to remediate the material weaknesses and other deficiencies identified in our internal controls or IT systems; 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-derived 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 ability to successfully exit the third party search distribution business; 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 third quarter, ended September 30, 2015 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 online security company providing leading software and services to secure devices, data and people. AVG’s award-winning technology is delivered to over 200 million monthly active users worldwide. AVG’s Consumer portfolio includes internet security, performance optimization, and personal privacy and identity protection for mobile devices and desktops. The AVG Business portfolio - delivered by managed service providers, VARs and resellers - offers IT administration, control and reporting, integrated security, and mobile device management that simplify and protect businesses.

All trademarks are the property of their respective owners.

 

Investor relations contacts:
US: Bonnie Mc Bride				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,				September 30,
		2014				2015
ASSETS
Current assets:
Cash and cash equivalents		$	138,907			$	144,526
Restricted cash			1,995				17,861
Trade accounts receivable, net			35,408				33,775
Inventories			1,030				942
Deferred income taxes			21,056				21,527
Prepaid expenses			6,946				8,724
Other current assets			5,926				13,011
Total current assets			211,268				240,366
Non-current restricted cash			16,160				9,194
Property and equipment, net			18,000				19,977
Deferred income taxes			26,813				19,019
Intangible assets, net			121,835				111,501
Goodwill			245,369				294,320
Investment			160				660
Other assets			7,484				7,492
Total assets		$	647,089			$	702,529
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	13,603			$	7,544
Accrued compensation and benefits			16,544				15,969
Accrued expenses and other current liabilities			53,098				87,595
Current portion of long-term debt			2,300				2,300
Income taxes payable			2,724				5,770
Deferred tax liabilities			568				325
Deferred revenue			166,815				164,166
Total current liabilities			255,652				283,669
Long-term debt, less current portion			222,625				221,470
Deferred revenue, less current portion			34,028				32,535
Deferred tax liabilities			25,613				27,387
Other non-current liabilities			31,974				14,954
Total liabilities			569,892				580,015
Redeemable noncontrolling interest			40,040				41,701
Ordinary shares			727				727
Distributions in excess of capital			(122,560	)			(116,826	)
Treasury shares			(60,858	)			(47,261	)
Accumulated other comprehensive loss			(12,814	)			(15,188	)
Retained earnings			232,662				259,361
Total shareholders’ equity			37,157				80,813
Total liabilities and shareholders’ equity		$	647,089			$	702,529

 

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								Nine months ended
		September 30,								September 30,
		2014				2015				2014				2015
		(in thousands of U.S. dollars)
Revenue:
Subscription		$	68,619			$	87,826			$	204,134			$	257,103
Platform-derived			23,727				20,357				69,767				61,686
Total revenue			92,346				108,183				273,901				318,789
Cost of revenue:
Subscription			(8,388	)			(15,882	)			(25,433	)			(42,752	)
Platform-derived			(1,790	)			(1,172	)			(10,726	)			(3,825	)
Total cost of revenue			(10,178	)			(17,054	)			(36,159	)			(46,577	)
Gross profit			82,168				91,129				237,742				272,212
Operating expenses:
Research and development			(16,173	)			(22,073	)			(48,443	)			(64,839	)
Sales and marketing			(22,353	)			(30,898	)			(67,385	)			(93,298	)
General and administrative			(20,344	)			(22,459	)			(53,477	)			(64,769	)
Total operating expenses			(58,870	)			(75,430	)			(169,305	)			(222,906	)
Operating income			23,298				15,699				68,437				49,306
Other expense, net			(1,176	)			(4,132	)			(1,625	)			(11,482	)
Income before income taxes and loss from investment in equity affiliate			22,122				11,567				66,812				37,824
Income tax provision			(3,908	)			(3,672	)			(16,970	)			(9,464	)
Net income		$	18,214			$	7,895			$	49,842			$	28,360
Less: Net income attributable to redeemable noncontrolling interest			—				(39	)			—				(24	)
Net income attributable to AVG Technologies N.V.		$	18,214			$	7,856			$	49,842			$	28,336
Comprehensive income			16,585				7,265				47,697				25,962
Less: Comprehensive income attributable to redeemable noncontrolling interest			—				—				—				—
Comprehensive income attributable to AVG Technologies N.V.		$	16,585			$	7,265			$	47,697			$	25,962
Earnings per share attributable to AVG Technologies N.V. ordinary shareholders:
Net income		$	18,214			$	7,856			$	49,842			$	28,336
Redeemable noncontrolling interest			—				(555	)			—				(1,637	)
Net income available to ordinary shareholders - basic		$	18,214			$	7,301			$	49,842			$	26,699
Net income available to ordinary shareholders - diluted		$	18,214			$	7,301			$	49,842			$	26,699
Earnings per share attributable to AVG Technologies N.V. Ordinary shareholders – basic		$	0.35			$	0.14			$	0.95			$	0.51
Earnings per share attributable to AVG Technologies N.V. Ordinary shareholders – diluted		$	0.35			$	0.14			$	0.94			$	0.51
Weighted-average shares outstanding – basic			51,802,221				52,296,314				52,448,593				51,946,521
Weighted-average shares outstanding – diluted			52,197,056				53,289,900				52,803,987				52,806,581

 

6

---

AVG Technologies N.V.

Unaudited condensed consolidated statements of cash flows

(in thousands of U.S. dollars)

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2014				2015				2014				2015
OPERATING ACTIVITIES:
Net income		$	18,214			$	7,895			$	49,842			$	28,360
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			6,861				11,311				22,587				35,972
Share-based compensation			3,746				4,097				9,681				10,925
Deferred income taxes			4,563				4,486				11,572				5,476
Change in the fair value of contingent consideration liabilities			82				793				265				2,218
Amortization of financing costs and loan discount			65				467				191				1,337
Loss (gain) on sale of property and equipment			13				126				(26	)			41
Net change in assets and liabilities, excluding effects of acquisitions and deferred revenue			(6,289	)			5,275				(10,953	)			(11,264	)
Net change in deferred revenue			(8,654	)			(2,680	)			(9,553	)			(3,600	)
Net cash provided by operating activities			18,601				31,770				73,606				69,465
INVESTING ACTIVITIES:
Purchase of property and equipment and intangible assets			(2,164	)			(4,363	)			(8,076	)			(10,306	)
Proceeds from sale of property and equipment			30				29				248				204
Cash payments for acquisitions, net of cash acquired and restricted amounts held in escrow			—				—				—				(31,512	)
Purchase of investment in equity securities			—				(500	)			—				(500	)
Decrease (increase) in restricted cash			1,030				83				1,205				(9,255	)
Net cash used in investing activities			(1,104	)			(4,751	)			(6,623	)			(51,369	)
FINANCING ACTIVITIES:
Payment of contingent consideration			—				—				—				(21,174	)
Payment of capitalized lease obligation			—				(135	)			—				(403	)
Debt issuance costs			—				(92	)			—				(388	)
Repayments of principal on current credit agreement			—				(575	)			(30,000	)			(1,725	)
Proceeds from exercise of share options			39				1,528				1,896				10,809
Excess tax benefit			—				110				—				339
Repurchases of share rights and options from employees			—				—				(1,460	)			—
Repurchase of own shares			(18,912	)			—				(35,334	)			—
Net cash used in financing activities			(18,873	)			836				(64,898	)			(12,542	)
Effect of exchange rate fluctuations on cash and cash equivalents			268				(517	)			(445	)			65
Change in cash and cash equivalents			(1,108	)			27,338				1,640				5,619
Beginning cash and cash equivalents			45,097				117,188				42,349				138,907
Ending cash and cash equivalents		$	43,989			$	144,526			$	43,989			$	144,526

 

7

---

		Three months ended								Nine months ended
		September 30,								September 30,
		2014				2015				2014				2015
Supplemental cash flow disclosures:
Income taxes (paid)/received		$	(2,712	)		$	575			$	(8,057	)		$	(5,793	)
Interest paid		$	(144	)		$	(3,423	)		$	(525	)		$	(12,866	)
Supplemental non-cash flow disclosures:
Deferred purchase consideration paid from escrow		$	—			$	—			$	—			$	(355	)
Non-cash purchase of property and equipment		$	—			$	3,223			$	—			$	3,223

 

8

---

AVG Technologies N.V.

Reconciliation of GAAP measures to non-GAAP measures

(in thousands of U.S. dollars)

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2014				2015				2014				2015
Gross profit		$	82,168			$	91,129			$	237,742			$	272,212
Add back:
- Share-based compensation			25				49				39				108
- Acquisition amortization(1)			1,757				2,537				7,151				7,398
- Other adjustments(2)			—				37				—				149
Non-GAAP adjusted gross profit		$	83,950			$	93,752			$	244,932			$	279,867
Revenue			92,346				108,183				273,901				318,789
Non-GAAP adjusted gross profit margin			91	%			87	%			89	%			88	%
Operating expenses		$	(58,870	)		$	(75,430	)		$	(169,305	)		$	(222,906	)
Less:
- Share-based compensation			3,721				4,048				9,642				10,817
- Acquisition amortization(1)			1,578				5,001				4,790				14,009
- Other adjustments(2)			4,442				2,164				7,756				10,595
Non-GAAP adjusted operating expenses		$	(49,129	)		$	(64,217	)		$	(147,117	)		$	(187,485	)
Operating income		$	23,298			$	15,699			$	68,437			$	49,306
Add back:
- Share-based compensation			3,746				4,097				9,681				10,925
- Acquisition amortization(1)			3,335				7,538				11,941				21,407
- Other adjustments(2)			4,442				2,201				7,756				10,744
Non-GAAP adjusted operating income		$	34,821			$	29,535			$	97,815			$	92,382
Revenue			92,346				108,183				273,901				318,789
Non-GAAP adjusted operating income margin			38	%			27	%			36	%			29	%

 

9

---

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								Nine months ended
		September 30,								September 30,
		2014				2015				2014				2015
Net income		$	18,214			$	7,895			$	49,842			$	28,360
Add back:
- Share-based compensation			3,746				4,097				9,681				10,925
- Acquisition amortization(1)			3,335				7,538				11,941				21,407
- Other adjustments(2)			4,442				2,201				7,756				10,744
- Provision (Benefit) for income taxes			3,908				3,672				16,970				9,464
Non-GAAP adjusted profit before taxes		$	33,645			$	25,403			$	96,190			$	80,900
Less: Estimated provision for income taxes(3)			(4,206	)			(3,176	)			(12,024	)			(10,113	)
Non-GAAP adjusted net income		$	29,439			$	22,227			$	84,166			$	70,787
Weighted-average shares outstanding - diluted (in thousands)			52,197				53,290				52,804				52,807
Non-GAAP adjusted net income			29,439				22,227				84,166				70,787
Non-GAAP diluted EPS		$	0.56			$	0.42			$	1.59			$	1.34

 

						December 31, 2014				September 30, 2015
Cash and cash equivalents						$	138,907			$	144,526
Current portion of long-term debt							(2,300	)			(2,300	)
Long-term debt, less current portion							(222,625	)			(221,470	)
Net debt						$	(86,018	)		$	(79,244	)

 

		Three months ended September 30,								Nine months ended September 30,
		2014				2015				2014				2015
Net cash provided by operating activities		$	18,601			$	31,770			$	73,606			$	69,465
Less: payments for property and equipment and intangible assets			(2,164	)			(4,363	)			(8,076	)			(10,306	)
Free cash flow(6)		$	16,437			$	27,407			$	65,530			$	59,159
		Three months ended September 30,								Nine months ended September 30,
		2014				2015				2014				2015
Revenue		$	92,346			$	108,183			$	273,901			$	318,789
Free cash flow			16,437				27,407				65,530				59,159
Cash conversion			18	%			25	%			24	%			19	%

 

10

---

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
		September 30,				September 30,
		2014				2015
Total revenue (trailing 12 months)		$	375,803			$	418,961
Active users at period end (in millions)(4)			188				202
Average active users (in millions)(5)			180				195
Twelve months trailing revenue per average active user		$	2.08			$	2.15

 

Share-based compensation
(in thousands of U.S. dollars)

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2014				2015				2014				2015
Cost of revenue		$	(25	)		$	(49	)		$	(39	)		$	(108	)
Research and development			(900	)			(798	)			(1,696	)			(1,952	)
Sales and marketing			(808	)			(740	)			(1,315	)			(2,151	)
General and administrative			(2,013	)			(2,510	)			(6,631	)			(6,714	)
Share-based compensation		$	(3,746	)		$	(4,097	)		$	(9,681	)		$	(10,925	)

 

Acquisition amortization
(in thousands of U.S. dollars)

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2014				2015				2014				2015
Cost of revenue		$	(1,757	)		$	(2,537	)		$	(7,151	)		$	(7,398	)
Research and development			(175	)			(175	)			(525	)			(525	)
Sales and marketing			(1,403	)			(4,804	)			(4,265	)			(13,416	)
General and administrative			—				(22	)			—				(68	)
Acquisition amortization		$	(3,335	)		$	(7,538	)		$	(11,941	)		$	(21,407	)
Other adjustments
(in thousands of U.S. dollars)

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2014				2015				2014				2015
Cost of revenue		$	—			$	(37	)		$	—			$	(149	)
Research and development			6				(85	)			(1,264	)			(581	)
Sales and marketing			(4	)			(1,012	)			(386	)			(5,087	)
General and administrative			(4,444	)			(1,067	)			(6,106	)			(4,927	)
Other adjustments		$	(4,442	)		$	(2,201	)		$	(7,756	)		$	(10,744	)

 

(1)	Includes amortization of acquired intangible assets.

 

11

---

AVG Technologies N.V.

Reconciliation of GAAP measures to non-GAAP measures

 

(2)

Other adjustments between GAAP and non-GAAP measures in the three and nine months ended September 30, 2015 comprised nil and $0.3 million, respectively, in charges associated with litigation settlements, $1.0 million and $5.1 million, respectively, in acquisition related charges, $0.9 million and $2.2 million, respectively, in charges related to the unwinding of discounts and changes in fair value, $1.2 million and $1.9 million, respectively, in charges associated with the rationalization of the Company’s global operations and nil and $2.9 million, respectively, in charges associated with the Company’s reassessment of the useful life of internally developed software, offset against $0.8 million and $1.7 million, respectively, in net reversals of capitalized development charges. Other adjustments between GAAP and non-GAAP measures in the three and nine months ended September 30, 2014 comprised $4.1 million and $5.3 million, respectively, in acquisition related charges, $0.2 million and $0.9 million, respectively, in charges associated with the rationalization of the Company’s global operations and $0.1 and $1.6 million, respectively, in charges associated with a litigation settlement.

(3)	Adjusted for impact of normalized tax rate of 12.5% in the three and nine months ended September 30, 2015 and 2014. 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.

(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 and nine months ended September 30, 2015 includes the payment of $2.8 million and $5.3 million, respectively, relating to the other adjustments referred in note 2 above. The free cash flow for the three and nine months ended September 30, 2014 includes the payment of $1.2 million and $5.3 million, respectively, relating to the other adjustments.

 

12

Exhibit 99.2

INDEX TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2015

 

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-7

 

F-1

---

AVG TECHNOLOGIES N.V.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)

 

		December 31,				September 30,
		2014				2015
ASSETS
Current assets:
Cash and cash equivalents		$	138,907			$	144,526
Restricted cash			1,995				17,861
Trade accounts receivable, net			35,408				33,775
Inventories			1,030				942
Deferred income taxes			21,056				21,527
Prepaid expenses			6,946				8,724
Other current assets			5,926				13,011
Total current assets			211,268				240,366
Non-current restricted cash			16,160				9,194
Property and equipment, net			18,000				19,977
Deferred income taxes			26,813				19,019
Intangible assets, net			121,835				111,501
Goodwill			245,369				294,320
Investment			160				660
Other assets			7,484				7,492
Total assets		$	647,089			$	702,529
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	13,603			$	7,544
Accrued compensation and benefits			16,544				15,969
Accrued expenses and other current liabilities			53,098				87,595
Current portion of long-term debt			2,300				2,300
Income taxes payable			2,724				5,770
Deferred tax liabilities			568				325
Deferred revenue			166,815				164,166
Total current liabilities			255,652				283,669
Long-term debt, less current portion			222,625				221,470
Deferred revenue, less current portion			34,028				32,535
Deferred tax liabilities			25,613				27,387
Other non-current liabilities			31,974				14,954
Total liabilities			569,892				580,015
Commitments and contingencies (Note 11)
Redeemable noncontrolling interest			40,040				41,701
Shareholders’ equity
Ordinary shares			727				727
Distributions in excess of capital			(122,560	)			(116,826	)
Treasury shares			(60,858	)			(47,261	)
Accumulated other comprehensive loss			(12,814	)			(15,188	)
Retained earnings			232,662				259,361
Total shareholders’ equity			37,157				80,813
Total liabilities and shareholders’ equity		$	647,089			$	702,529

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								Nine months ended
		September 30,								September 30,
		2014				2015				2014				2015
		(in thousands of U.S. dollars)
Revenue:
Subscription		$	68,619			$	87,826			$	204,134			$	257,103
Platform-derived			23,727				20,357				69,767				61,686
Total revenue			92,346				108,183				273,901				318,789
Cost of revenue:
Subscription			(8,388	)			(15,882	)			(25,433	)			(42,752	)
Platform-derived			(1,790	)			(1,172	)			(10,726	)			(3,825	)
Total cost of revenue			(10,178	)			(17,054	)			(36,159	)			(46,577	)
Gross profit			82,168				91,129				237,742				272,212
Operating expenses:
Research and development			(16,173	)			(22,073	)			(48,443	)			(64,839	)
Sales and marketing			(22,353	)			(30,898	)			(67,385	)			(93,298	)
General and administrative			(20,344	)			(22,459	)			(53,477	)			(64,769	)
Total operating expenses			(58,870	)			(75,430	)			(169,305	)			(222,906	)
Operating income			23,298				15,699				68,437				49,306
Other expense, net			(1,176	)			(4,132	)			(1,625	)			(11,482	)
Income before income taxes and loss from investment in equity affiliate			22,122				11,567				66,812				37,824
Income tax provision			(3,908	)			(3,672	)			(16,970	)			(9,464	)
Net income		$	18,214			$	7,895			$	49,842			$	28,360
Less: Net income attributable to redeemable noncontrolling interest			—				(39	)			—				(24	)
Net income attributable to AVG Technologies N.V.		$	18,214			$	7,856			$	49,842			$	28,336
Other comprehensive income, net of tax
Currency translation loss, net of tax			(1,629	)			(591	)			(2,145	)			(2,374	)
Other comprehensive loss		$	(1,629	)		$	(591	)		$	(2,145	)		$	(2,374	)
Comprehensive income		$	16,585			$	7,265			$	47,697			$	25,962
Less: Comprehensive income attributable to redeemable noncontrolling interest			—				—				—				—
Comprehensive income attributable to AVG Technologies N.V.		$	16,585			$	7,265			$	47,697			$	25,962
Earnings per share attributable to AVG Technologies N.V. ordinary shareholders:
Net income		$	18,214			$	7,856			$	49,842			$	28,336
Redeemable noncontrolling interest			—				(555	)			—				(1,637	)
Net income available to ordinary shareholders - basic		$	18,214			$	7,301			$	49,842			$	26,699
Net income available to ordinary shareholders - diluted		$	18,214			$	7,301			$	49,842			$	26,699
Earnings per share attributable to AVG Technologies N.V. Ordinary shareholders – basic		$	0.35			$	0.14			$	0.95			$	0.51
Earnings per share attributable to AVG Technologies N.V. Ordinary shareholders – diluted		$	0.35			$	0.14			$	0.94			$	0.51
Weighted-average shares outstanding – basic			51,802,221				52,296,314				52,448,593				51,946,521
Weighted-average shares outstanding – diluted			52,197,056				53,289,900				52,803,987				52,806,581

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, 2014		$	727			$	(122,560	)		$	(60,858	)		$	232,662			$	(12,814	)		$	37,157
Net income attributable to AVG Technologies N.V.			—				—				—				28,336				—				28,336
Other comprehensive loss, net of tax			—				—				—				—				(2,374	)			(2,374	)
Change in redemption value of redeemable noncontrolling interest			—				—				—				(1,637	)			—				(1,637	)
Exercise of share options and restricted stock units (including excess tax benefit of $339)			—				(2,449	)			13,597				—				—				11,148
Tax withholdings related to net share settlement of vested restricted stock units			—				(2,742	)			—				—				—				(2,742	)
Share-based compensation			—				10,925				—				—				—				10,925
Balances, September 30, 2015		$	727			$	(116,826	)		$	(47,261	)		$	259,361			$	(15,188	)		$	80,813

There were 54,763,151 ordinary shares issued as of September 30, 2015.

The 3,121,646 ordinary shares held in treasury at December 31, 2014 were reduced by 698,203 ordinary shares used to satisfy the exercise of share options, resulting in 2,423,443 ordinary shares held in treasury at September 30, 2015.

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 September 30,								Nine months ended September 30,
		2014				2015				2014				2015
OPERATING ACTIVITIES:
Net income		$	18,214			$	7,895			$	49,842			$	28,360
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			6,861				11,311				22,587				35,972
Share-based compensation			3,746				4,097				9,681				10,925
Deferred income taxes			4,563				4,486				11,572				5,476
Change in the fair value of contingent consideration liabilities			82				793				265				2,218
Amortization of financing costs and loan discount			65				467				191				1,337
Loss (gain) on sale of property and equipment			13				126				(26	)			41
Net change in assets and liabilities, excluding effects of acquisitions and deferred revenue			(6,289	)			5,275				(10,953	)			(11,264	)
Net change in deferred revenue			(8,654	)			(2,680	)			(9,553	)			(3,600	)
Net cash provided by operating activities			18,601				31,770				73,606				69,465
INVESTING ACTIVITIES:
Purchase of property and equipment and intangible assets			(2,164	)			(4,363	)			(8,076	)			(10,306	)
Proceeds from sale of property and equipment			30				29				248				204
Cash payments for acquisitions, net of cash acquired and restricted amounts held in escrow			—				—				—				(31,512	)
Purchase of investment in equity securities			—				(500	)			—				(500	)
Decrease (increase) in restricted cash			1,030				83				1,205				(9,255	)
Net cash used in investing activities			(1,104	)			(4,751	)			(6,623	)			(51,369	)
FINANCING ACTIVITIES:
Payment of contingent consideration			—				—				—				(21,174	)
Payment of capitalized lease obligation			—				(135	)			—				(403	)
Debt issuance costs			—				(92	)			—				(388	)
Repayments of principal on current credit agreement			—				(575	)			(30,000	)			(1,725	)
Proceeds from exercise of share options			39				1,528				1,896				10,809
Excess tax benefit			—				110				—				339
Repurchases of share rights and options from employees			—				—				(1,460	)			—
Repurchase of own shares			(18,912	)			—				(35,334	)			—
Net cash used in financing activities			(18,873	)			836				(64,898	)			(12,542	)
Effect of exchange rate fluctuations on cash and cash equivalents			268				(517	)			(445	)			65
Change in cash and cash equivalents			(1,108	)			27,338				1,640				5,619
Beginning cash and cash equivalents			45,097				117,188				42,349				138,907
Ending cash and cash equivalents		$	43,989			$	144,526			$	43,989			$	144,526

 

F-5

---

		Three months ended September 30,								Nine months ended September 30,
		2014				2015				2014				2015
Supplemental cash flow disclosures:
Income taxes (paid)/received		$	(2,712	)		$	575			$	(8,057	)		$	(5,793	)
Interest paid		$	(144	)		$	(3,423	)		$	(525	)		$	(12,866	)
Supplemental non-cash flow disclosures:
Deferred purchase consideration paid from escrow		$	—			$	—			$	—			$	(355	)
Non-cash purchase of property and equipment		$	—			$	3,223			$	—			$	3,223

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

 

F-6

---

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, 2014 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, 2014.

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 September 30, 2015, the results of its operations and cash flows for the three and nine months ended September 30, 2014 and 2015 and shareholders’ equity for the nine months ended September 30, 2015. All adjustments are of a normal recurring nature. The results for the nine months ended September 30, 2015 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 September 30, 2015, 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, 2014, except for AVG Technologies Israel Ltd., which merged with AVG Mobile Technologies Ltd., with AVG Mobile Technologies Ltd. being the surviving entity, on January 1, 2015, for AVG Technologies HK, Limited, which was deregistered and dissolved on February 18, 2015, the sale of the subsidiary Location Labs Pvt. Ltd., India, the acquisition of Privax Ltd. on May 6, 2015 and the dissolution of TuneUp Corporation, following the completion of integrating its business with the Company in August 2015.

 

F-7

---

Note 2. Summary of significant accounting policies

There have been no changes in AVG’s significant accounting policies during the nine months ended September 30, 2015 as compared with the significant accounting policies described in the Company’s audited consolidated financial statements for the financial year ended December 31, 2014.

Subsequent to the filing of our Annual Report on Form 20-F for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on April 10, 2015, it was determined that the total purchase price for the purchase of the business of Location Labs should have been $181,924, or $4,209 higher than initially concluded. While preparing the first installment payment of the contingent consideration for the acquisition, the Company noted that the cash settlement of the awards cancelled in connection with the acquisition was to be settled by an additional payment. This resulted in an increase in the total purchase price, deferred purchase consideration and, consequently, goodwill. There is no impact to our net financial position, results of operations or cash flows for the year ended December 31, 2014. The Company has determined that the consolidated financial statements for the year ended December 31, 2014 are not materially misstated and could continue to be relied upon.

The nine month period ended September 30, 2015 includes an out of period correction of $2,542 increasing revenue and decreasing deferred revenue related to prior years. Management believes this out of period correction is not material to the current period financial statements or any previously issued financial statements and is not expected to be material to the annual consolidated financial statements for the year ending December 31, 2015.

Recent accounting standards or updates not yet effective

Revenue recognition

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.

 

F-8

---

Debt issuance costs

In April 2015, the FASB issued ASC No. 2015-03: Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. In August 2015, the FASB issued further guidance in ASC No. 2015-15 Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Lone-of-Credit Arrangements. To simplify presentation of debt issuance costs, the new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying value of the debt. The recognition and measurement guidance for debt issuance costs are not affected by this update. Early adoption is permitted. The adoption of this standard is expected to equally decrease noncurrent assets and noncurrent liabilities. It is expected not to have an impact on the Company’s net financial position, results of operations or cash flows.

Business combinations – Measurement period adjustments

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to restate prior period financial statements for measurement period adjustments in a business combination. The cumulative effect of a measurement period adjustment as a result of a change in the provisional amounts, calculated as if the accounting had been completed as of the acquisition date, is required to be recorded in the reporting period in which the adjustment amount is determined, rather than retrospectively. Further, ASU 2015-16 requires that the acquirer present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in the current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for interim and annual reporting periods beginning after December 15, 2015 and should be applied prospectively to adjustments to provisional amounts that occur after the effective date. Early adoption is permitted for financial statements that have not yet been made available for issuance. We have not determined the impact the adoption of ASU 2015-16 on January 1, 2016 will have on our consolidated 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.

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

 

		Three months ended September 30,								Nine months ended September 30,
		2014				2015				2014				2015
		(in thousands of U.S. dollars)								(in thousands of U.S. dollars)
Revenue
Consumer		$	77,676			$	91,555			$	230,795			$	269,691
SMB			14,670				16,628				43,106				49,098
Total Revenue			92,346				108,183				273,901				318,789
Segment operating income
Consumer		$	43,333			$	43,636			$	119,111			$	134,360
SMB			1,184				(1,145	)			5,599				(7,517	)
Total segment operating income			44,517				42,491				124,710				126,843
Reconciliation to consolidated operating income
Global operating costs		$	(9,696	)		$	(12,956	)		$	(26,895	)		$	(34,461	)
Share-based compensation			(3,746	)			(4,097	)			(9,681	)			(10,925	)
Acquisition amortization			(3,335	)			(7,538	)			(11,941	)			(21,407	)
Other adjustments			(4,442	)			(2,201	)			(7,756	)			(10,744	)
Consolidated operating income			23,298				15,699				68,437				49,306

 

F-9

---

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. Acquisitions

Purchase of the business of Privax Ltd.

On May 6, 2015, the Company completed the acquisition of all of the outstanding stock of Privax Ltd. (“Privax”), a leading global provider of desktop and mobile privacy services for consumers. The acquisition of Privax adds to the existing portfolio of security software and services available to AVG’s customer base. Supplemental pro forma information for Privax was not material to AVG’s financial results and was therefore not included. AVG incurred acquisition-related transaction costs of $1,700 that were recorded in general and administrative expenses for the nine months ended September 30, 2015.

The following table summarizes the fair values of the net assets acquired as of the acquisition date. The purchase price allocations for these net assets are based on preliminary valuations and are subject to change as the Company obtains additional information during the acquisition measurement period:

 

Net assets, excluding intangible assets		$	3,011
Intangible assets			16,795
Goodwill(1)			46,035
Deferred taxes			(3,895	)
Total purchase consideration		$	61,946

 

(1)	The goodwill resulted primarily from the Company’s expectation of synergies from the integration of Privax products with the Company’s existing solutions and is allocated to the Company’s Consumer segment. The balance of goodwill is not expected to be deductible for tax purposes.

The following table reflects the estimated fair values and useful lives of the acquired intangible assets identified based on our purchase accounting assessments:

 

		Estimated fair values				Useful lives (years)
Trademarks		$	4,049				9
Developed technology			4,464				3
Customer relationships			8,282				4
Total intangible assets(2)		$	16,795

 

F-10

---

The acquisition date fair value of the consideration transferred consisted of the following:

 

Components of consideration:
Cash consideration		$	35,874
Deferred consideration(3)			8,454
Contingent consideration(4)			17,618
Total purchase consideration		$	61,946

 

(2)	Amortization for developed technology is recognized in cost of revenue. Amortization for trademarks and customer relationships is recognized in sales and marketing.

(3)	Consists of $9 million cash held in escrow, reported on the face of the consolidated condensed balance sheets in long-term restricted cash, and other adjustments, which amount is subject to a final working capital true-up.

(4)	Reflects the acquisition date fair value of the following additional cash consideration to be measured and expected to be paid in the third quarter of 2016 upon the achievement of the following:

 

a.

Payout of $10 million upon achievement of certain product and integration milestones; and

b.

Payout of $10 million upon achievement of certain performance-based targets relating to future product sales.

Payouts for a. and b. respectively, are exclusive of one another and are currently expected to be fully achieved.

Note 5. Intangible assets and goodwill

Amortization expense for intangible assets was $8,698 and $28,435 in the three and nine months ended September 30, 2015, respectively, and was $6,521 and $16,173 in the three and nine months ended September 30, 2014, respectively.

As of September 30, 2015, estimated amortization expense for intangible assets for each of the next five years and thereafter is as follows:

 

		(in thousands of U.S. dollars)
2015		$	8,470
2016			30,757
2017			23,893
2018			15,479
2019			11,708
Thereafter			19,886
Total			110,193

The table above excludes amortization of intangible assets under development of $1,018 as per September 30, 2015.

At December 31, 2014 and September 30, 2015, there was $303 of indefinite-lived trade names and other intangible assets recorded.

 

F-11

---

The following table presents the changes in the carrying amount of goodwill for the nine months ended September 30, 2015:

 

		Consumer				SMB				Total
		(in thousands of U.S. dollars)
Net balance as of December 31, 2014		$	216,903			$	28,466			$	245,369
Acquired through acquisitions(1)			50,263				570				50,833
Effects of foreign currency rate changes			(333	)			(1,549	)			(1,882	)
Net balance as of September 30, 2015(2)		$	266,833			$	27,487			$	294,320

 

(1)

The Consumer segment includes goodwill associated with the acquisition of Privax. The remaining activity reflects adjustments for the effect on goodwill of changes to net assets acquired or purchase consideration during the measurement period, which were not significant to our previously reported financial information.

(2)	There were no accumulated goodwill impairment losses as of September 30, 2015.

Note 6. Investments

On September 17, 2015, the Company acquired a 2.4% interest in Kernel Labs LLC for cash consideration of $500. The Company has accounted for this investment under the cost method. There are no identified events or changes in circumstances that may have a significant adverse effect on fair value of the investment as of September 30, 2015.

Note 7. Related party transactions

For the three and nine months ended September 30, 2015, the Company had no related party transactions.

Note 8. 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 September 30, 2015, 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-12

---

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 September 30, 2015, including property and equipment with a carrying value of $12,162 , intangible assets with a carrying value of $27,387, trade accounts receivable of $29,371, inventories with a carrying value of $932, as well as cash and cash equivalents amounting to $132,623.

As of September 30, 2015, the mandatory principal payments under the credit facility are as follows:

 

		(in thousands of U.S. dollars)
2015		$	575
2016			2,300
2017			2,300
2018			2,300
2019			2,300
2020			218,500
Total		$	228,275

Note 9. 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-13

---

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, 2014
		Level 1				Level 2				Level 3				Total
Assets
Foreign currency contracts(1)		$	—			$	697			$	—			$	697
Total assets measured at fair value			—				697				—				697
Liabilities:
Foreign currency contracts(1)		$	—			$	42			$	—			$	42
Contingent purchase consideration liabilities(2)			—				—				34,320				34,320
Total liabilities measured at fair value			—				42				34,320				34,362
		September 30, 2015
		Level 1				Level 2				Level 3				Total
Assets
Time deposits(3)		$	—			$	40,000			$	—			$	40,000
Foreign currency contracts(1)			—				652				—				652
Total assets measured at fair value			—				40,652				—				40,652
Liabilities:
Foreign currency contracts(1)		$	—			$	186			$	—			$	186
Contingent purchase consideration liabilities(2)			—				—				32,711				32,711
Total liabilities measured at fair value		$	—			$	186			$	32,711			$	32,897

 

(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 September 30,								Nine months ended September 30,
		2014				2015				2014				2015
Fair value - beginning of period		$	2,167			$	32,074			$	1,984			$	34,320
Additions due to acquisitions			—				—				—				17,618
Change in FV of Level 3 liabilities(4)			82				749				265				2,059
Effects of foreign currency exchange			1				(112	)			1				(112	)
Payment of contingent consideration			—				—				—				(21,174	)
Fair value - end of period		$	2,250			$	32,711			$	2,250			$	32,711

 

(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.

 

F-14

---

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, 2014 and September 30, 2015.

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 September 30, 2015 was $228,275 as compared to its carrying amount of $223,770. 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, 2014 was $230,000 as compared to its carrying amount of $224,925. 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 10. Restructuring

Restructuring charges during the nine months ended September 30, 2015 consist of costs associated with the 2012/13 restructuring and the 2013/14 restructuring, as well as with the sale of the Company’s subsidiary, Location Labs Pvt. Ltd., India which represented a research development facility. 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 and nine months ended September 30, 2014 and 2015, comprised the following:

 

		September 30, 2014
		Three months ended				Nine months ended
Employee severance pay and related costs		$	(12	)		$	680
Non-cancelable lease, contract termination, and other charges			171				172
Other non-cash charges			—				1,181
Total restructuring charges		$	159			$	2,033
		September 30, 2015
		Three months ended				Nine months ended
Employee severance pay and related costs		$	1,096			$	1,353
Non-cancelable lease, contract termination, and other charges			87				186
Other non-cash charges			—				285
Total restructuring charges		$	1,183			$	1,824

 

F-15

---

Restructuring related costs and change in estimates in the three and nine months ended September 30, 2015 totaled $1,183 and $1,824 respectively. Of these restructuring costs incurred in the three and nine months ended September 30, 2015, $407 and $664 respectively, was included in research and development, $125 and $509 respectively in general and administrative, and $651 and $651 respectively in sales and marketing. The cumulative costs incurred to date, including non-cash charges, were $10,277.

The table above includes restructuring costs associated with the closure and sale of the Location Labs India offices which totaled $150 in Employee severance pay and related costs and $285 in Other non-cash charges for the nine months ended September 30, 2015.

During the financial year 2012, the Company initiated 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. AVG completed the rationalization of operations during the second quarter of financial year 2013, including vacating and ceasing use of facilities identified under its rationalization plan. 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, 2015		$	508			$	1,025
Costs incurred and charged to expense			1,353				186
Costs paid or otherwise settled			(1,058	)			(168	)
Effects of foreign currency exchange			(20	)			(79	)
Balance at September 30, 2015		$	783			$	964
Cumulative costs incurred to date, including non-cash charges		$	3,058			$	7,219

Note 11. 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 $2,532 and $7,476 in the three and nine months ended September 30, 2015, respectively, and $1,888 and $5,287 in the three and nine months ended September 30, 2014, respectively.

 

F-16

---

The following is a schedule by year of minimum future rentals on non-cancelable operating leases as of September 30, 2015:

 

		Lease				Sublease income				Net lease
Remainder of financial year 2015		$	2,111			$	(109	)		$	2,002
2016			7,512				(436	)			7,076
2017			5,142				(332	)			4,810
2018			4,363				(185	)			4,178
2019			4,246				(185	)			4,061
Thereafter			6,744				(370	)			6,374
Total minimum future lease payments		$	30,118			$	(1,617	)		$	28,501

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 September 30, 2015:

 

Remainder of financial year 2015		$	2,141
2016			4,954
2017			1,644
2018			361
2019			156
Thereafter			65
Total minimum future purchase obligations		$	9,321

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 $10 and $761 during the three months ended September 30, 2014 and 2015, respectively and recorded such expense of $2,107 and $3,064 during the nine months ended September 30, 2014 and 2015, respectively. As of September 30, 2015, the Company estimated that future compensation expense of up to $1,767 may be recognized as expense pursuant to these business combination agreements. The other contingent purchase consideration as of September 30, 2015 was $32,711 and is expected to be paid within the next ten months. Other contingent purchase consideration as of December 31, 2014 was $34,320.

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 AVG’s financial condition or results of operations.

 

F-17

---

Note 12. 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.

The following table represents revenue attributed to our products and services:

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2014				2015				2014				2015
Revenue:
Licenses(1)		$	65,405			$	67,065			$	195,206			$	203,413
SaaS			3,214				20,761				8,928				53,690
Search			22,799				19,058				67,347				58,326
Other			928				1,299				2,420				3,360
Total		$	92,346			$	108,183			$	273,901			$	318,789

 

(1)	Licenses include product license charges and ongoing subscription and support.

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

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2014				2015				2014				2015
Revenue:
Netherlands		$	2,111			$	3,148			$	6,466			$	7,014
United States			46,514				59,177				134,995				173,144
United Kingdom			13,882				14,497				39,354				44,170
Other countries(1)			29,839				31,361				93,086				94,461
Total		$	92,346			$	108,183			$	273,901			$	318,789

 

(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,				September 30,
		2014				2015
		(in thousands of U.S. dollars)
Long-lived assets:
Netherlands		$	332			$	319
Czech Republic			9,431				6,962
United States			6,462				8,482
Canada			442				2,393
Other countries(1)			1,333				1,821
Total		$	18,000			$	19,977

 

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

 

F-18

---

Major customers

Revenues in the three and nine months ended September 30, 2014 and 2015 included revenues derived from significant business partners, and are as follows (in percentages of total revenue):

 

		Three months ended September 30,								Nine months ended September 30,
		2014				2015				2014				2015
Yahoo!			16	%			15	%			14	%			15	%
Google			8	%			3	%			11	%			3	%

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

 

		December 31,				September 30,
		2014				2015
		(in thousands of U.S. dollars)
Business partner:
Yahoo!			21	%			21	%
Google			5	%			3	%

Note 13. Ordinary shares

Ordinary shares

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

 

		December 31, 2014
		Shares authorized				Shares issued				Shares outstanding				Par value
Ordinary shares			120,000,000				54,763,151				51,641,505			$	727
Total			120,000,000				54,763,151				51,641,505			$	727
		September 30, 2015
		Shares authorized				Shares issued				Shares outstanding				Par value
Ordinary shares			120,000,000				54,763,151				52,339,708			$	727
Total			120,000,000				54,763,151				52,339,708			$	727

 

F-19

---

Treasury shares

During the three and nine months ended September 30, 2015, the Company did not re-purchase any ordinary shares.

As at September 30, 2015 there were 2,423,443 shares held in treasury at a carrying value of $47,261.

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 nine months ended September 30, 2015 were as follows:

 

Balance as of December 31, 2014		$	40,040
Net profit attributable to redeemable noncontrolling interest			24
Redemption value adjustment recorded in retained earnings			1,637
Balance as of September 30, 2015		$	41,701

Note 14. Share-based compensation

During the three and nine months ended September 30, 2015, the Company awarded, under the terms and conditions of the Amended and Restated 2013 Option and RSU Plan, 46,000 and 802,500 stock options, respectively, and 26,000 and 518,500 restricted stock units (RSUs), respectively, to members of its staff. The RSUs granted in the three months ended September 30, 2015 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 September 30,								Nine months ended September 30,
		2014				2015				2014				2015
Cost of revenue		$	25			$	49			$	39			$	108
Research and development			900				798				1,696				1,952
Sales and marketing			808				740				1,315				2,151
General and administrative			2,013				2,510				6,631				6,714
Total		$	3,746			$	4,097			$	9,681			$	10,925

 

F-20

---

Note 15. Income taxes

AVG recorded income tax expense of $3,908 (17.7 percent effective tax rate) and $3,672 (31.7 percent effective tax rate) in the three months ended September 30, 2014 and 2015, respectively and $16,970 (25.4 percent effective tax rate) and $9,464 (25.0 percent effective tax rate) in the nine months ended September 30, 2014 and 2015, respectively.

The effective tax rate decreased slightly in the nine months ended September 30, 2015 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 16. 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 September 30,								Nine months ended September 30,
		2014				2015				2014				2015
Numerator:
Net income		$	18,214			$	7,895			$	49,842			$	28,360
Add: net loss attributable to redeemable noncontrolling interest			—				(39	)			—				(24	)
Redeemable noncontrolling interest			—				(555	)			—				(1,637	)
Net income available to ordinary shareholders - basic		$	18,214			$	7,301			$	49,842			$	26,699
Net income available to ordinary shareholders - diluted		$	18,214			$	7,301			$	49,842			$	26,699
Denominator:
Weighted-average ordinary shares outstanding – basic			51,802,221				52,296,314				52,448,593				51,946,521
Potential ordinary shares			394,835				993,586				355,394				860,060
Weighted-average ordinary shares outstanding – diluted			52,197,056				53,289,900				52,803,987				52,806,581
Earnings per ordinary share – basic		$	0.35			$	0.14			$	0.95			$	0.51
Earnings per ordinary share – diluted		$	0.35			$	0.14			$	0.94			$	0.51

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.

 

F-21

---

		Three months ended September 30,								Nine months ended September 30,
		2014				2015				2014				2015
Performance restricted stock units			100,000				100,000				100,000				100,000
Options to purchase ordinary shares			2,038,123				416,692				1,563,362				650,903
Anti-dilutive shares			2,138,123				516,692				1,663,362				750,903

Note 17. Subsequent events

On October 7, 2015, the Company acquired certain assets of Flayvr Media Ltd. in a transaction designed to consolidate its current presence in the mobile market. The acquisition will be accounted for as a business combination. The total consideration of the purchase agreement consists of two components to be paid in cash: (i) consideration of approximately $3.5 million, and (ii) earn-out payments for an amount up to $2.4 million that is dependent on achievement of certain performance metrics, subsequent to acquisition.

 

F-22