Enom 2013 Annual Report Download - page 91

significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a
loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant
negative industry or economic trends or significant underperformance relative to expected historical or projected future results of operations.
Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. As of December 31,
2013, we determined that we have three reporting units. We perform an assessment whether a reporting unit's fair value is less than our carrying
value of its assets. If the fair value of the reporting unit exceeds the carrying value, goodwill is not considered to be impaired and no additional
steps are necessary. If, however, the fair value of a reporting unit is less than its carrying value, then a second step is performed to determine the
amount of the impairment loss. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair
value. The estimate of fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting
unit, but may require valuations of certain internally generated and unrecognized intangible assets such as our software, technology, patents and
trademarks. We performed our annual impairment analysis in the fourth quarter of the year ended December 31, 2013, and based on the results
of the annual impairment test, the fair value of each reporting unit exceeded its carrying value and therefore no impairment of goodwill existed at
December 31, 2013.
Operating Leases
For operating leases that include rent- free periods or escalation clauses over the term of the lease, we recognize rent expense on a
straight-line basis and the difference between expense and amounts paid are recorded as deferred rent in current and long-term liabilities.
Advertising Costs
Advertising costs are expensed as incurred and generally consist of Internet based advertising, sponsorships, and trade shows. Such costs
are included in sales and marketing expense in our consolidated statements of operations. Advertising expense was $2.5 million, $2.8 million
and $2.7 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Stock-Based Compensation
We measure and recognize compensation expense for all share-based payment awards made to employees, non-employees and directors
based on the grant date fair values of the awards. For stock option awards to employees with service and/or performance based vesting
conditions the fair value is estimated using the Black-Scholes-Merton option pricing model. The value of an award that is ultimately expected to
vest is recognized as expense over the requisite service periods in our consolidated statements of operations. We elected to treat share-based
payment awards, other than performance awards, with graded vesting schedules and time-based service conditions as a single award and
recognize stock-based compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. Stock-based
compensation expenses are classified in the consolidated statement of operations based on the department to which the related employee reports.
Our stock-based awards are comprised principally of stock options, restricted stock units and restricted stock awards.
We account for share-based payment awards and stock options issued to non-employees in accordance with the guidance for equity-based
payments to non-employees. Stock option awards to non-employees are accounted for at fair value using the Black-Scholes-Merton option
pricing model. We believe that the fair value of share-based payment awards and stock options is more reliably measured than the fair value of
the services received. The fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting
increase in value, if any, is recognized as expense during the period the related services are rendered.
The Black-Scholes-
Merton option pricing model requires management to make assumptions and to apply judgment in determining the fair
value of our awards. The most significant assumptions and judgments include the expected volatility, expected term of the award and estimated
forfeiture rates.
We estimated the expected volatility of our awards from the historical volatility of selected public companies within the Internet and
media industry with comparable characteristics to Demand Media, including similarity in size, lines of business, market capitalization, revenue
and financial leverage. From our inc eption through December 31, 2008, the weighted average expected life of options was calculated using the
simplified method as prescribed under guidance by the SEC. This decision was based on the lack of relevant historical data due to our limited
experience and the lack of an active market for our common stock. Effective January 1, 2009, we calculated the weighted average expected life
of our options based upon our historical experience of option exercises combined with estimates of the post-vesting holding period. The-
risk free
interest rate is based on the implied yield currently available on U.S. Treasury notes with terms approximately equal to the expected life of the
option. The expected dividend rate is zero as we currently have no history or expectation of paying cash dividends on our common stock. The
forfeiture rate is established based on applicable historical forfeiture patterns adjusted for any expected changes in future periods.
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