Enom 2014 Annual Report Download - page 79

F-15
option pricing model. 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 and Hull-White option pricing models require 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 with comparable
characteristics to Demand Media, including similarity in size, lines of business, market capitalization, revenue and financial leverage.
From our inception 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.
Under the Demand Media Employee Stock Purchase Plan (“ESPP”), during any offering period, eligible officers and employees
can purchase a limited amount of Demand Media’s common stock at a discount to the market price in accordance with the terms of the
plan. We use the Black-Scholes-Merton option pricing model to determine the fair value of the ESPP awards granted which is
recognized straight-line over the total offering period. The current offering period commenced in November 2014.
Stock Repurchases
Under a stock repurchase plan, shares repurchased by us are accounted for when the transaction is settled. Repurchased shares
held for future issuance are classified as treasury stock. Shares formally or constructively retired are deducted from common stock at
par value and from additional paid in capital for the excess over par value. If additional paid in capital has been exhausted, the excess
over par value is deducted from retained earnings. Direct costs incurred to acquire the shares are included in the total cost of the
repurchased shares.
Product Development and Software Development Costs
Product development expenses consist primarily of expenses incurred in research and development, software engineering and
web design activities and related personnel compensation to create, enhance and deploy our software infrastructure. Product and
software development costs, other than software development costs qualifying for capitalization, are expensed as incurred. Costs of
computer software developed or obtained for internal use that are incurred in the preliminary project and post implementation stages
are expensed as incurred. Certain costs incurred during the application and development stage, which include compensation and
related expenses, costs of computer hardware and software, and costs incurred in developing additional features and functionality of
the services, are capitalized. The estimated useful life of costs capitalized is evaluated for each specific project. Capitalized costs are
generally amortized using the straight-line method over a three year estimated useful life, beginning in the period in which the
software is ready for its intended use. Unamortized amounts are included in property and equipment, net in the accompanying
consolidated balance sheets. The net book value of capitalized software development costs is $12.0 million (net of $24.7 million
accumulated amortization) and $17.6 million (net of $30.8 million accumulated amortization) as of December 31, 2014 and 2013,
respectively.
Income Taxes
Deferred income taxes are recognized for differences between financial reporting and tax bases of assets and liabilities at the
enacted statutory tax rates in effect for the years in which the temporary differences are expected to reverse. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate the realizability of
deferred tax assets and recognizes a valuation allowance for our deferred tax assets when it is more likely than not that a future benefit
on such deferred tax assets will not be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the
consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon settlement. We recognize interest and penalties accrued related to unrecognized tax benefits in our
income tax (benefit) provision in the accompanying consolidated statements of operations.