OREANDA-NEWS. August 09, 2016. AVG Technologies N.V. (NYSE: AVG), the online security company™ providing leading software and services to secure devices, data and people, today reported results for the second quarter ended June 30, 2016.

Revenue for the second quarter of 2016 was \\$105.0 million, compared with \\$107.8 million in the second quarter of 2015, a decrease of 2.6% compared to the prior year. GAAP net income for the second quarter was \\$6.9 million, or \\$0.13 per diluted ordinary share.  This compares with net income of \\$8.5 million, or \\$0.15 per diluted ordinary share in the prior year's second quarter.

Non-GAAP net income for the second quarter was \\$22.8 million, or \\$0.44 per diluted ordinary share.  This compares with non-GAAP net income of \\$24.6 million, or \\$0.47 per diluted ordinary share for the same period of the prior year.1

GAAP Operating income was \\$12.4 million, compared with \\$13.8 million for the second quarter of 2015.  Operating cash flow was \\$19.3 million for the quarter, compared with \\$15.5 million for the second quarter last year.  Free cash flow was \\$15.1 million for the quarter, compared with \\$11.8 million for the same period in the prior year. 

AVG also reported that it is continuing to make progress on its strategic and operating plans against challenging market conditions.  Subscription revenue continued to expand, growing to 83 percent of total revenues.  Additionally, AVG's shift to mobile products and services continues to progress and total mobile revenue grew substantially during the period, up 28 percent over the same period last year. 

Financial Outlook

Based on information available as of August 8, 2016, AVG is updating its outlook for fiscal year 2016 as follows:

(1)

Revenue outlook is expected to be in the range of \\$430 million to \\$440 million.

(2)

GAAP net income is expected to be in the range of \\$43 million to \\$46 million; GAAP net income per diluted ordinary share is expected to be in the range of \\$0.81 to \\$0.89.

(3)

Non-GAAP adjusted net income is expected to be in the range of \\$100 million to \\$104 million; non-GAAP adjusted net income per diluted ordinary share is expected to be in the range of \\$1.91 to \\$1.99.

AVG's expectation of non-GAAP adjusted net income for fiscal year 2016 excludes share-based compensation expense, acquisition amortization and certain other adjustments, and assumes a normalized tax rate of 12.5%.  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 neither audited nor reviewed.

Purchase Agreement with Avast

On July 7, 2016 AVG and Avast Software announced that they have entered into a purchase agreement in which Avast will offer to purchase all of the outstanding ordinary shares of AVG for \\$25.00 per share in cash, for a total consideration of approximately \\$1.3 billion.  In connection with the agreement, AVG management has elected not to host a conference call to discuss its second quarter earnings results.  The transaction is expected to close between September 15, and October 15, 2016.

Use of Non-GAAP Financial Information

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

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

Adjusted net income, net debt, free cash flow and cash conversion are measures of financial performance and liquidity, and have limitations as analytical tools, and should not be considered in isolation from, or as substitutes for, an analysis of our results of operations, including our operating income and cash flows, as reported under U.S. GAAP. We provide these non-GAAP financial measures because we believe that such measures provide important supplemental information to management and investors about the Company's core operating results and liquidity, primarily because the non-GAAP financial measures exclude certain expenses and other amounts that management does not consider to be indicative of the Company's core operating results or business outlook or liquidity. Management uses these non-GAAP financial measures, in addition to the corresponding U.S. GAAP financial measures, in evaluating the Company's operating performance, in planning and forecasting future periods, in making decisions regarding business operations and allocation of resources, and in comparing the Company's performance against its historical performance. Some of the limitations of adjusted net income and free cash flow and their related ratios as measures are:

  • they do not reflect our cash expenditure or future requirements for capital expenditure or contractual commitments, nor do they reflect the actual cash contributions received from customers;
  • they do not reflect changes in, or cash requirements for, our working capital needs;
  • although amortization and share-based compensation are non-cash charges, the assets being amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and
  • other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures

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

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

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including those relating to an expected range of revenue, net income, diluted EPS, non-GAAP adjusted net income and non-GAAP diluted EPS for the fiscal year ending December 31, 2016 and/or future periods, as well as those relating to the future prospects of AVG. Words such as "expects," "expectation," "intends," "assumes," "believes" and "estimates," variations of such words and similar expressions are also intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those contemplated herein. Factors that could cause or contribute to such differences include but are not limited to: changes in our growth strategies; changes in our future prospects, business development, results of operations and financial condition; the anticipated costs and benefits of our acquisitions; our ability to maintain effective internal controls and procedures; our ability to comply with our credit agreements; changes to the online and computer threat environment and the endpoint security industry; competition from local and international companies, new entrants in the market and changes to the competitive landscape; the adoption of new, or changes to existing, laws and regulations; changes in international or national tax regulations and related proposals; the assumptions underlying the calculation of our key metrics, including the number of our active users, revenue per average active user, subscription revenue per subscriber and platform revenue per thousand searches; potential effects of changes in the applicable search guidelines of our search partners; the status of or changes to our relationships with our partners, including Yahoo!, Google, and other third parties; changes in our and our partners' responses to privacy concerns; our plans to launch new products and online services and monetize our full user base; the performance of our products, including AVG ZEN; our ability to attract and retain active and subscription users; our ability to retain key personnel and attract new talent; our ability to adequately protect our intellectual property; our geographic expansion plans; the outcome of ongoing or any future litigation or arbitration, including litigation or arbitration relating to intellectual property rights; our legal and regulatory compliance efforts, including with respect to PCI compliance; and worldwide economic conditions and their impact on demand for our products and services. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. 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 second quarter, ended June 30, 2016 are not necessarily indicative of the Company's operating results for any future periods.

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

AVG Technologies N.V. LOGO.

About AVG

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

1Non-GAAP results for the second quarter of 2016 exclude \\$5.3 million in share based compensation expense, \\$7.7 million in acquisition amortization, \\$1.9 million in charges associated with the purchase agreement by Avast, \\$0.5 million in acquisition related charges, \\$0.4 million in charges related to the unwinding of discounts and changes in fair value, \\$0.2 million in charges associated with the rationalization of the Company's global operations and \\$1.9 million in charges associated with the Company's global IT landscape transformation, less \\$0.5 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.

AVG Technologies N.V.

Unaudited condensed consolidated balance sheets

(in thousands of U.S. dollars)








December 31,

June 30,

2015

2016

ASSETS


Current assets:





Cash and cash equivalents

\\$

123,767

\\$

96,715

Restricted cash

26,858

10,007

Trade accounts receivable, net

35,717

32,729

Inventories

1,027

705

Prepaid expenses


7,501

11,190

Other current assets

14,888

14,670

Total current assets

209,758

166,016

Non-current restricted cash

226

231

Property and equipment, net

23,508

22,219

Deferred income taxes

38,181

36,907

Intangible assets, net

105,719

90,731

Goodwill

297,434

298,165

Investment

660

660

Other assets

1,728

3,893

Total assets

\\$

677,214

\\$

618,822







LIABILITIES AND SHAREHOLDERS' EQUITY





Current liabilities:





Accounts payable

\\$

11,763

\\$

7,956

Accrued compensation and benefits

18,028

16,160

Accrued expenses and other current liabilities

82,887

48,682

Current portion of long-term debt

2,300

2,300

Income taxes payable

1,200

8,075

Deferred revenue

167,123

160,572

Total current liabilities

283,301

243,745

Long-term debt, less current portion

216,695

216,346

Deferred revenue, less current portion

33,004

30,691

Deferred tax liabilities

29,494

24,643

Other non-current liabilities

7,302

6,444

Total liabilities

569,796

521,869

Redeemable noncontrolling interest

16,800

-

Ordinary shares

727

727

Distributions in excess of capital

(113,211)

(112,048)

Treasury shares

(61,297)

(80,150)

Accumulated other comprehensive loss

(15,181)

(9,360)

Retained earnings

279,580

297,784

Total shareholders' equity

90,618

96,953

Total liabilities and shareholders' equity

\\$

677,214

\\$

618,822







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

Six months ended


June 30,

June 30,

2015

2016

2015

2016

(in thousands of U.S. dollars)

Revenue:











Licenses

\\$

69,907

\\$

65,119

\\$

136,393

\\$

130,552

SaaS

17,834

23,700

32,929

47,083

Search

18,938

14,281

39,267

31,509

Other

1,117

1,929

2,017

3,756

Total revenue

107,796

105,029

210,606

212,900

Cost of revenue:











Software sales

(14,390)

(18,975)

(26,870)

(36,309)

Search and other

(1,321)

(839)

(2,653)

(2,109)

Total cost of revenue

(15,711)

(19,814)

(29,523)

(38,418)

Gross profit

92,085

85,215

181,083

174,482

Operating expenses:











Research and development

(22,089)

(22,439)

(42,766)

(46,162)

Sales and marketing

(33,603)

(28,867)

(62,400)

(57,531)

General and administrative

(22,560)

(21,505)

(42,310)

(42,053)

Total operating expenses

(78,252)

(72,811)

(147,476)

(145,746)

Operating income

13,833

12,404

33,607

28,736

Other expense, net

(2,960)

(3,843)

(7,350)

(7,013)

Income before income taxes

10,873

8,561

26,257

21,723

Income tax provision

(2,330)

(1,612)

(5,792)

(3,519)

Net income

\\$

8,543

\\$

6,949

\\$

20,465

\\$

18,204

Less: Net income (loss) attributable to redeemable noncontrolling interest

18

-

15

(8)

Net income attributable to AVG Technologies N.V.

\\$

8,561

\\$

6,949

\\$

20,480

\\$

18,196

Comprehensive income

8,897

10,129

18,697

24,025

Less: Comprehensive income (loss) attributable to redeemable noncontrolling interest

-

-

-

(8)

Comprehensive income attributable to AVG Technologies N.V.

\\$

8,897

\\$

10,129

\\$

18,697

\\$

24,017

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











Net income

\\$

8,561

\\$

6,949

\\$

20,480

\\$

18,196

Redeemable noncontrolling interest

(603)

-

(1,082)

8

Net income available to ordinary shareholders – basic

\\$

7,958

\\$

6,949

\\$

19,398

\\$

18,204

Net income available to ordinary shareholders – diluted

\\$

7,958

\\$

6,949

\\$

19,398

\\$

18,204

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

\\$

0.15

\\$

0.14

\\$

0.37

\\$

0.36

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

\\$

0.15

\\$

0.13

\\$

0.37

\\$

0.35

Weighted-average shares outstanding – basic

51,936,526

50,787,976

51,768,720

50,902,176

Weighted-average shares outstanding – diluted

52,868,114

51,478,477

52,562,017

51,636,608













AVG Technologies N.V.

Unaudited condensed consolidated statements of cash flows

(in thousands of U.S. dollars)








Three months ended

Six months ended

June 30,

June 30,


2015

2016

2015

2016

OPERATING ACTIVITIES:











Net income

\\$

8,543

\\$

6,949

\\$

20,465

\\$

18,204

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











Depreciation and amortization


13,911

12,022

24,661

23,930

Share-based compensation

3,720

5,283

6,828

8,645

Deferred income taxes

(1,951)

(1,316)

990

(3,727)

Change in the fair value of contingent consideration liabilities

605

438

1,425

794

Amortization of financing costs and loan discount

440

557

870

1,048

Gain on sale of property and equipment

(29)

(25)

(85)

(123)

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

(6,439)

923

(16,538)

1,136

Net change in deferred revenue

(3,335)

(5,498)

(920)

(9,103)

Net cash provided by operating activities

15,465

19,333

37,696

40,804

INVESTING ACTIVITIES:











Purchase of property and equipment and intangible assets

(3,641)

(4,234)

(5,943)

(9,461)

Proceeds from sale of property and equipment

118

92

175

248

Cash payments for acquisitions, net of cash acquired and restricted amounts held in escrow

(31,512)

-

(31,512)

-

(Increase) decrease in restricted cash

(9,608)

10

(9,338)

(2)

Net cash used in investing activities

(44,643)

(4,132)

(46,618)

(9,215)

FINANCING ACTIVITIES:











Payment of contingent consideration

(21,174)

(14,825)

(21,174)

(14,825)

Payment of capitalized lease obligation

(268)

(1,359)

(268)

(1,378)

Redemption of Class B-2 shares

-

(16,800)

-

(16,800)

Debt issuance costs

(123)

(8)

(296)

(29)

Repayments of principal on current credit agreement

(575)

(575)

(1,150)

(1,150)

Proceeds from exercise of share options

7,463

732

9,281

2,524

Dividends paid

-

(48)

-

(48)

Excess tax benefit

229

47

229

74

Repurchase of own shares

-

(8,190)

-

(26,497)

Net cash used in financing activities

(14,448)

(41,026)

(13,378)

(58,129)

Effect of exchange rate fluctuations on cash and cash equivalents

1,158

(832)

581

(512)

Change in cash and cash equivalents

(42,468)

(26,657)

(21,719)

(27,052)

Beginning cash and cash equivalents

159,656

123,372

138,907

123,767

Ending cash and cash equivalents

\\$

117,188

\\$

96,715

\\$

117,188

\\$

96,715



























Three months ended

Six months ended

June 30,

June 30,


2015

2016

2015

2016

Supplemental cash flow disclosures:











Income taxes (paid)/received

\\$

(5,154)

\\$

(2,721)

\\$

(6,368)

\\$

(3,780)

Interest paid

\\$

(5,829)

\\$

(3,409)

\\$

(9,443)

\\$

(6,798)

Supplemental non-cash flow disclosures:











Deferred purchase consideration paid from escrow

\\$

-

\\$

-

\\$

(355)

\\$

(16,848)

Non-cash purchase of property and equipment

\\$

435

\\$

(176)

\\$

977

\\$

569













AVG Technologies N.V.

Reconciliation of GAAP measures to non-GAAP measures

(in thousands of U.S. dollars)






Three months ended

Six months ended

June 30,

June 30,

2015

2016

2015

2016

Gross profit

\\$

92,085

\\$

85,215

\\$

181,083

\\$

174,482

Add back:











- Share-based compensation

47

79

59

126

- Acquisition amortization(1)

2,500

2,281

4,861

4,743

- Other adjustments(2)

68

952

112

1,387

Non-GAAP adjusted gross profit

\\$

94,700

\\$

88,527

\\$

186,115

\\$

180,738

Revenue

107,796

105,029

210,606

212,900

Non-GAAP adjusted gross profit margin

88%

84%

88%

85%













Operating expenses

\\$

(78,252)

\\$

(72,811)

\\$

(147,476)

\\$

(145,746)

Less:











- Share-based compensation

3,673

5,204

6,769

8,519

- Acquisition amortization(1)

4,668

5,464

9,008

10,997

- Other adjustments(2)

6,332

3,468

8,431

4,710

Non-GAAP adjusted operating expenses

\\$

(63,579)

\\$

(58,675)

\\$

(123,268)

\\$

(121,520)













Operating income

\\$

13,833

\\$

12,404

\\$

33,607

\\$

28,736

Add back:











- Share-based compensation

3,720

5,283

6,828

8,645

- Acquisition amortization(1)

7,168

7,745

13,869

15,740

- Other adjustments(2)

6,400

4,420

8,543

6,097

Non-GAAP adjusted operating income

\\$

31,121

\\$

29,852

\\$

62,847

\\$

59,218

Revenue

107,796

105,029

210,606

212,900

Non-GAAP adjusted operating income margin

29%

28%

30%

28%













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

Six months ended

June 30,

June 30,

2015

2016

2015

2016

Net income

\\$

8,543

\\$

6,949

\\$

20,465

\\$

18,204

Add back:











- Share-based compensation

3,720

5,283

6,828

8,645

- Acquisition amortization(1)

7,168

7,745

13,869

15,740

- Other adjustments(2)

6,400

4,420

8,543

6,097

- Provision (Benefit) for income taxes

2,330

1,612

5,792

3,519

Non-GAAP adjusted profit before taxes

\\$

28,161

\\$

26,009

\\$

55,497

\\$

52,205

Less: Estimated provision for income taxes(3)

(3,520)

(3,252)

(6,937)

(6,526)

Non-GAAP adjusted net income

\\$

24,641

\\$

22,757

\\$

48,560

\\$

45,679













Weighted-average shares outstanding - diluted (in thousands)

52,868

51,478

52,562

51,637

Non-GAAP adjusted net income

24,641

22,757

48,560

45,679

Non-GAAP diluted EPS

\\$

0.47

\\$

0.44

\\$

0.92

\\$

0.88





















December 31,

June 30,

2015

2016

Cash and cash equivalents

\\$

123,767

\\$

96,715

Current portion of long-term debt

(2,300)

(2,300)

Long-term debt, less current portion

(216,695)

(216,346)

Net debt

\\$

(95,228)

\\$

(121,931)








Three months ended

Six months ended

June 30,

June 30,

2015

2016

2015

2016

Net cash provided by operating activities

\\$

15,465

\\$

19,333

\\$

37,696

\\$

40,804

Less: payments for property and equipment and intangible assets

(3,641)

(4,234)

(5,943)

(9,461)

Free cash flow(6)

\\$

11,824

\\$

15,099

\\$

31,753

\\$

31,343














Three months ended

Six months ended

June 30,

June 30,

2015

2016

2015

2016

Revenue

\\$

107,796

\\$

105,029

\\$

210,606

\\$

212,900

Free cash flow

11,824

15,099

31,753

31,343

Cash conversion

11%

14%

15%

15%































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

June 30,

June 30,

2015

2016

Total revenue (trailing 12 months)

\\$

403,124

\\$

430,605

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

202

173

Average active users (in millions)(5)

192

188

Twelve months trailing revenue per average active user

\\$

2.10

\\$

2.28







Share-based compensation



(in thousands of U.S. dollars)






Three months ended

Six months ended

June 30,

June 30,

2015

2016

2015

2016

Cost of revenue

\\$

(47)

\\$

(79)

\\$

(59)

\\$

(126)

Research and development

(423)

(892)

(1,154)

(1,516)

Sales and marketing

(862)

(1,602)

(1,411)

(2,118)

General and administrative

(2,388)

(2,710)

(4,204)

(4,885)

Share-based compensation

\\$

(3,720)

\\$

(5,283)

\\$

(6,828)

\\$

(8,645)













Acquisition amortization



(in thousands of U.S. dollars)




Three months ended

Six months ended

June 30,

June 30,

2015

2016

2015

2016

Cost of revenue

\\$

(2,500)

\\$

(2,281)

\\$

(4,861)

\\$

(4,743)

Research and development

(175)

(75)

(350)

(266)

Sales and marketing

(4,782)

(5,384)

(8,612)

(10,721)

General and administrative

289

(5)

(46)

(10)

Acquisition amortization

\\$

(7,168)

\\$

(7,745)

\\$

(13,869)

\\$

(15,740)













Other adjustments



(in thousands of U.S. dollars)




Three months ended

Six months ended

June 30,

June 30,

2015

2016

2015

2016

Cost of revenue

\\$

(68)

\\$

(952)

\\$

(112)

\\$

(1,387)

Research and development

(792)

(495)

(496)

(51)

Sales and marketing

(3,583)

(352)

(4,075)

(1,348)

General and administrative

(1,957)

(2,621)

(3,860)

(3,311)

Other adjustments

\\$

(6,400)

\\$

(4,420)

\\$

(8,543)

\\$

(6,097)













AVG Technologies N.V.
Reconciliation of GAAP measures to non-GAAP measures

  • Includes amortization of acquired intangible assets.
  • Other adjustments between GAAP and non-GAAP measures in the three and six months ended June 30, 2016 comprised \\$1.9 million and \\$1.9 million, respectively, in charges associated with the purchase agreement by Avast, \\$0.4 million and \\$0.7 million, respectively, in acquisition related charges, \\$0.4 million and \\$0.8 million, respectively, in charges related to the unwinding of discounts and changes in fair value, \\$0.1 million and \\$1.2 million, respectively, in charges associated with the rationalization of the Company's global operations and \\$1.9 million and \\$2.7 million, respectively, in charges associated with the Company's global IT landscape transformation, less \\$0.5 million and \\$1.1 million, respectively, in net reversals of capitalized development charges. Other adjustments between GAAP and non-GAAP measures in the three and six months ended June 30, 2015 comprised \\$0.1 million and \\$0.3 million, respectively, in charges associated with litigation settlements, \\$2.3 million and \\$4.1 million, respectively, in acquisition related charges, \\$0.5 million and \\$1.4 million, respectively, in charges related to the unwinding of discounts and changes in fair value, \\$0.6 million and \\$0.7 million, respectively, in charges associated with the rationalization of the Company's global operations and \\$2.9 million and \\$2.9 million, respectively, in charges associated with the Company's reassessment of the useful life of internally developed software, offset against nil and \\$0.8 million, respectively, in net reversals of capitalized development charges.
  • Adjusted for impact of normalized tax rate of 12.5% in the three and six months ended June 30, 2016 and 2015. The normalized tax rate of 12.5% is based on an estimate of our future cash tax rate as well as our recent cash and income statement tax charges.
  • 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.
  • 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.
  • The free cash flow for the three and six months ended June 30, 2016 includes the payment of \\$4.5 million and \\$8.0 million, respectively, relating to the other adjustments referred in note 2 above. The free cash flow for the three and six months ended June 30, 2015 includes the payment of \\$0.8 million and \\$2.4 million, respectively, relating to the other adjustments.

Exhibit 99.2

INDEX TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2016

Unaudited condensed consolidated balance sheets

F-2



Unaudited condensed consolidated statements of comprehensive income

F-4



Unaudited condensed consolidated statements of shareholders' equity

F-6



Unaudited condensed consolidated statements of cash flows

F-7



Notes to the unaudited condensed consolidated interim financial statements

F-9

AVG TECHNOLOGIES N.V.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)








December 31,

June 30,

2015

2016

ASSETS


Current assets:





Cash and cash equivalents

\\$

123,767

\\$

96,715

Restricted cash

26,858

10,007

Trade accounts receivable, net

35,717

32,729

Inventories

1,027

705

Prepaid expenses


7,501

11,190

Other current assets

14,888

14,670

Total current assets

209,758

166,016

Non-current restricted cash

226

231

Property and equipment, net

23,508

22,219

Deferred income taxes

38,181

36,907

Intangible assets, net

105,719

90,731

Goodwill

297,434

298,165

Investment

660

660

Other assets

1,728

3,893

Total assets

\\$

677,214

\\$

618,822







LIABILITIES AND SHAREHOLDERS' EQUITY





Current liabilities:





Accounts payable

\\$

11,763

\\$

7,956

Accrued compensation and benefits

18,028

16,160

Accrued expenses and other current liabilities

82,887

48,682

Current portion of long-term debt

2,300

2,300

Income taxes payable

1,200

8,075

Deferred revenue

167,123

160,572

Total current liabilities

283,301

243,745

Long-term debt, less current portion

216,695

216,346

Deferred revenue, less current portion

33,004

30,691

Deferred tax liabilities

29,494

24,643

Other non-current liabilities

7,302

6,444

Total liabilities

569,796

521,869

Commitments and contingencies (Note 8)





Redeemable noncontrolling interest

16,800

-

Shareholders' equity





Ordinary shares

727

727

Distributions in excess of capital

(113,211)

(112,048)

Treasury shares

(61,297)

(80,150)

Accumulated other comprehensive loss

(15,181)

(9,360)

Retained earnings

279,580

297,784

Total shareholders' equity

90,618

96,953

Total liabilities and shareholders' equity

\\$

677,214

\\$

618,822

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

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

Six months ended


June 30,

June 30,

2015

2016

2015

2016

(in thousands of U.S. dollars)

Revenue:











Licenses

\\$

69,907

\\$

65,119

\\$

136,393

\\$

130,552

SaaS

17,834

23,700

32,929

47,083

Search

18,938

14,281

39,267

31,509

Other

1,117

1,929

2,017

3,756

Total revenue

107,796

105,029

210,606

212,900

Cost of revenue:











Software sales

(14,390)

(18,975)

(26,870)

(36,309)

Search and other

(1,321)

(839)

(2,653)

(2,109)

Total cost of revenue

(15,711)

(19,814)

(29,523)

(38,418)

Gross profit

92,085

85,215

181,083

174,482

Operating expenses:











Research and development

(22,089)

(22,439)

(42,766)

(46,162)

Sales and marketing

(33,603)

(28,867)

(62,400)

(57,531)

General and administrative

(22,560)

(21,505)

(42,310)

(42,053)

Total operating expenses

(78,252)

(72,811)

(147,476)

(145,746)

Operating income

13,833

12,404

33,607

28,736

Other expense, net

(2,960)

(3,843)

(7,350)

(7,013)

Income before income taxes

10,873

8,561

26,257

21,723

Income tax provision

(2,330)

(1,612)

(5,792)

(3,519)

Net income

\\$

8,543

\\$

6,949

\\$

20,465

\\$

18,204

Less: Net income (loss) attributable to redeemable noncontrolling interest

18

-

15

(8)

Net income attributable to AVG Technologies N.V.

\\$

8,561

\\$

6,949

\\$

20,480

\\$

18,196

Other comprehensive income, net of tax











Currency translation (loss), net of tax

336

3,180

(1,783)

5,821

Other comprehensive income (loss)

\\$

336

\\$

3,180

\\$

(1,783)

\\$

5,821

Comprehensive income

\\$

8,897

\\$

10,129

\\$

18,697

\\$

24,017

Less: Comprehensive income (loss) attributable to redeemable noncontrolling interest

-

-

-

-

Comprehensive income attributable to AVG Technologies N.V.

\\$

8,897

\\$

10,129

\\$

18,697

\\$

24,017

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











Net income

\\$

8,561

\\$

6,949

\\$

20,480

\\$

18,196

Redeemable noncontrolling interest

(603)

-

(1,082)

8

Net income available to ordinary shareholders – basic

\\$

7,958

\\$

6,949

\\$

19,398

\\$

18,204

Net income available to ordinary shareholders – diluted

\\$

7,958

\\$

6,949

\\$

19,398

\\$

18,204

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

\\$

0.15

\\$

0.14

\\$

0.37

\\$

0.36

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

\\$

0.15

\\$

0.13

\\$

0.37

\\$

0.35

Weighted-average shares outstanding – basic

51,936,526

50,787,976

51,768,720

50,902,176

Weighted-average shares outstanding – diluted

52,868,114

51,478,477

52,562,017

51,636,608













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

AVG TECHNOLOGIES N.V.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(in thousands of U.S. dollars)


Ordinary Shares

Distributions in excess of capital

Treasury shares

Retained earnings

Accumulated other comprehensive loss

Total share-holder's equity

Balances, December 31, 2015

\\$

727

\\$

(113,211)

\\$

(61,297)

\\$

279,580

\\$

(15,181)

\\$

90,618

Net income attributable to AVG Technologies N.V.

-

-

-

18,196

-

18,196

Other comprehensive loss, net of tax

-

-

-

-

5,821

5,821

Change in redemption value of redeemable noncontrolling interest

-

-

-

8

-

8

Exercise of share options and restricted stock units (including excess tax benefit of \\$11)

-

(5,108)

7,644

-

-

2,536

Tax withholdings related to net share settlement of vested restricted stock units

-

(2,374)

-

-

-

(2,374)

Repurchase of own shares

-

-

(26,497)

-

-

(26,497)

Share-based compensation

-

8,645

-

-

-

8,645

Balances, June 30, 2016

\\$

727

\\$

(112,048)

\\$

(80,150)

\\$

297,784

\\$

(9,360)

\\$

96,953



















There were 54,763,151 ordinary shares issued as of June 30, 2016.

The 3,135,047 ordinary shares held in treasury at December 31, 2015 were reduced by 394,523 ordinary shares used to satisfy the exercise of share options, and increased by 1,393,808 ordinary shares as a result of our share repurchase program, resulting in 4,134,332 ordinary shares held in treasury at June 30, 2016.

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

AVG TECHNOLOGIES N.V.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of U.S. dollars)







Three months ended

Six months ended

June 30,

June 30,


2015

2016

2015

2016

OPERATING ACTIVITIES:











Net income

\\$

8,543

\\$

6,949

\\$

20,465

\\$

18,204

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











Depreciation and amortization


13,911

12,022

24,661

23,930

Share-based compensation

3,720

5,283

6,828

8,645

Deferred income taxes

(1,951)

(1,316)

990

(3,727)

Change in the fair value of contingent consideration liabilities

605

438

1,425

794

Amortization of financing costs and loan discount

440

557

870

1,048

Gain on sale of property and equipment

(29)

(25)

(85)

(123)

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

(6,439)

923

(16,538)

1,136

Net change in deferred revenue

(3,335)

(5,498)

(920)

(9,103)

Net cash provided by operating activities

15,465

19,333

37,696

40,804

INVESTING ACTIVITIES:











Purchase of property and equipment and intangible assets

(3,641)

(4,234)

(5,943)

(9,461)

Proceeds from sale of property and equipment

118

92

175

248

Cash payments for acquisitions, net of cash acquired and restricted amounts held in escrow

(31,512)

-

(31,512)

-

(Increase) decrease in restricted cash

(9,608)

10

(9,338)

(2)

Net cash used in investing activities

(44,643)

(4,132)

(46,618)

(9,215)

FINANCING ACTIVITIES:











Payment of contingent consideration

(21,174)

(14,825)

(21,174)

(14,825)

Payment of capitalized lease obligation

(268)

(1,359)

(268)

(1,378)

Redemption of Class B-2 shares

-

(16,800)

-

(16,800)

Debt issuance costs

(123)

(8)

(296)

(29)

Repayments of principal on current credit agreement

(575)

(575)

(1,150)

(1,150)

Proceeds from exercise of share options

7,463

732

9,281

2,524

Dividends paid

-

(48)

-

(48)

Excess tax benefit

229

47

229

74

Repurchase of own shares

-

(8,190)

-

(26,497)

Net cash used in financing activities

(14,448)

(41,026)

(13,378)

(58,129)

Effect of exchange rate fluctuations on cash and cash equivalents

1,158

(832)

581

(512)

Change in cash and cash equivalents

(42,468)

(26,657)

(21,719)

(27,052)

Beginning cash and cash equivalents

159,656

123,372

138,907

123,767

Ending cash and cash equivalents

\\$

117,188

\\$

96,715

\\$

117,188

\\$

96,715














Three months ended

Six months ended

June 30,

June 30,


2015

2016

2015

2016

Supplemental cash flow disclosures:











Income taxes (paid)/received

\\$

(5,154)

\\$

(2,721)

\\$

(6,368)

\\$

(3,780)

Interest paid

\\$

(5,829)

\\$

(3,409)

\\$

(9,443)

\\$

(6,798)

Supplemental non-cash flow disclosures:











Deferred purchase consideration paid from escrow

\\$

-

\\$

-

\\$

(355)

\\$

(16,848)

Non-cash purchase of property and equipment

\\$

435

\\$

(176)

\\$

977

\\$

569













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

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 Co?peratief U.A.  The Company began trading on February 2, 2012 on the New York Stock Exchange under the ticker symbol AVG.

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

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

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

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

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

The unaudited condensed consolidated financial statements have been prepared on the same basis as the Company's audited consolidated financial statements and, in the opinion of management, reflect all adjustments considered necessary for a fair statement of the Company's financial position as of June 30, 2016, the results of its operations and cash flows for the three and six months ended June 30, 2015 and 2016 and shareholders' equity for the six months ended June 30, 2016.  All adjustments are of a normal recurring nature.  The results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for future periods. 

Business

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

As of June 30, 2016, the Company had the same direct and indirect subsidiaries as described in the Company's audited consolidated financial statements for the financial year ended December 31, 2015, except for AVG VPN Technologies UK Limited., which was incorporated on January 20, 2016 and AVG Technologies GER B.V., which was incorporated on February 1, 2016. In April 2016, the Company redeemed the Class B-2 shares of Location Labs, Inc,, upon which AVG Technologies US, Inc. became the sole shareholder of Location Labs, Inc.

Note 2.   Summary of significant accounting policies

There have been no changes in AVG's significant accounting policies during the six months ended June 30, 2016 as compared with the significant accounting policies described in the Company's audited consolidated financial statements for the financial year ended December 31, 2015, except for the adoption of accounting standards update ASU 2015-03, which was applied retrospectively to all prior periods presented in the financial statements and the debt issuance costs of \\$4,397 related to a recognized debt liability is presented as a direct deduction from the carrying amount of the debt liability, instead of other assets, and for the adoption of accounting standards update ASU 2015-17, which was applied retrospectively to all prior periods presented in the financial statements, all deferred tax liabilities and assets are classified as noncurrent.

Recent accounting standards or updates not yet effective

Revenue recognition

On April 14, 2016, the FASB issued ASU 2016-12—Revenue from contracts with customers (Topic 606). The amendments in this update provide narrow-scope improvements and practical expedients.

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

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

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

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

Financial Instruments

On January 5, 2016 the FASB issued ASU 2016 – 01 — Financial Instruments—Overall—Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement for to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities.

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

Leases

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

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

Share-based compensation

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

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

Note 3.   Segment information

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

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

Three months ended

Six months ended


June 30,

June 30,

2015

2016

2015

2016

Revenue

(in thousands of U.S. dollars)

(in thousands of U.S. dollars)

Consumer

\\$

90,928

\\$

89,435

\\$

178,135

\\$

181,524

SMB

16,868

15,594

32,471

31,376

Total Revenue

107,796

105,029

210,606

212,900













Segment operating income





Consumer

\\$

46,752

\\$

42,359

\\$

90,720

\\$

85,254

SMB

(2,623)

(2,303)

(6,361)

(3,939)

Total segment operating income

44,129

40,056

84,359

81,315













Reconciliation to consolidated operating income











Global operating costs

\\$

(13,008)

\\$

(10,204)

\\$

(21,512)

\\$

(22,097)

Share-based compensation

(3,720)

(5,283)

(6,828)

(8,645)

Acquisition amortization

(7,168)

(7,745)

(13,869)

(15,740)

Other adjustments

(6,400)

(4,420)

(8,543)

(6,097)

Consolidated operating income

13,833

12,404

33,607

28,736

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

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

Note 4.   Related party transactions

For the three and six months ended June 30, 2016, the Company had no related party transactions.

Note 5.   Debt

Credit Agreement dated October 15, 2014

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

As of June 30, 2016, the Company was in compliance with the financial covenant of the Credit Facility and the RCF was left undrawn. 

The Credit Facility is collateralized by certain tangible, intangible, and current assets of the Company with covenants obliging the Company to also pledge new assets over a certain threshold.  The collateral granted by the borrower and certain of its subsidiaries includes, without limitation, present and future pledges, mortgages, first priority floating and fixed charges and security interests with respect to, but not limited to, equity rights, shares and related rights (ownership interests), fixed assets, intellectual property rights (trademarks, copyrights and patents), 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 June 30, 2016, including property and equipment with a carrying value of \\$17,662, intangible assets with a carrying value of \\$27,042, trade accounts receivable of \\$27,543, inventories with a carrying value of \\$697, as well as cash and cash equivalents amounting to \\$84,838.

As of June 30, 2016, the mandatory principal payments under the credit facility are as follows:

(in thousands of U.S. dollars)

2016



\\$

1,150

2017




2,300

2018




2,300

2019




2,300

2020




218,500

Total



\\$

226,550








Note 6.   Fair value measurements

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

•

Level 1:

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



•

Level 2:

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



•

Level 3:

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

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

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


December 31, 2015


Level 1

Level 2

Level 3

Total

Assets

Time deposits(3)

\\$

-

\\$

5

\\$

-

\\$

5

Foreign currency contracts(1)

-

405

-

405

Total assets measured at fair value

-

410

-

410













Liabilities:











Foreign currency contracts(1)

\\$

-

\\$

39

\\$

-

\\$

39

Contingent purchase consideration liabilities(2)

-

-

25,358

25,358

Total liabilities measured at fair value

-

39

25,358

25,397














June 30, 2016


Level 1

Level 2

Level 3

Total

Assets











Time deposits(3)

\\$

-

\\$

5

\\$

-

\\$

5

Foreign currency contracts(1)

-

1,731

-

1,731

Total assets measured at fair value

-

1,736

-

1,736













Liabilities:











Foreign currency contracts(1)

\\$

-

\\$

218

\\$

-

\\$

218

Contingent purchase consideration liabilities(2)

-

-

11,240

11,240

Total liabilities measured at fair value

\\$

-

\\$

218

\\$

11,240

\\$

11,458















(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

Six months ended

June 30,

June 30,


2015

2016

2015

2016


Fair value - beginning of period

\\$

35,113

\\$

25,662

\\$

34,320

\\$

25,358

Additions due to acquisitions

17,618

-

17,618

-

Change in FV of Level 3 liabilities(4)

517

407

1,310

732

Effects of foreign currency exchange

-

(4)

-

(25)

Payment of contingent consideration

(21,174)

(14,825)

(21,174)

(14,825)

Fair value - end of period

\\$

32,074

\\$

11,240

\\$

32,074

\\$

11,240















(4)

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


 

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

There were no assets and liabilities measured and recorded at fair value on a non-recurring basis as of December 31, 2015 and June 30, 2016.

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 June 30, 2016 was \\$226,650 as compared to its carrying amount of \\$218,646.  The valuation of long-term debt considers specific contractual terms, present value concepts and other internal assumptions related to (i) contract maturities; (ii) the uniqueness of the contract terms; and (iii) AVG's creditworthiness or that of AVG's counterparties (adjusted for collateral related to the asset positions).  Based on own calculations, AVG expects that the value will react in a generally proportionate manner to changes in the benchmark interest rate.  Accordingly, the long-term debt is fair valued at par and is classified as Level 3.

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

Note 7.   Restructuring

Restructuring charges during the three and six months ended June 30, 2016 consist of costs associated with the 2012/13 restructuring, the 2013/14 restructuring, the 2015 restructuring as well as the 2016 restructuring. These costs include employee severance pay and related costs, facility restructuring costs, contract termination and other non-cash charges associated with the exit of facilities.

Restructuring charges for the three and six months ended June 30, 2015 and 2016, comprised the following:





June 30, 2015




Three months ended

Six months ended

Employee severance pay and related costs


\\$

257

\\$

257

Non-cancellable lease, contract termination, and other charges



49

99

Other non-cash charges



285

285

Total restructuring charges


\\$

591

\\$

641














June 30, 2016




Three months ended

Six months ended

Employee severance pay and related costs


\\$

100

\\$

991

Non-cancellable lease, contract termination, and other charges



33

203

Other non-cash charges



-

-

Total restructuring charges


\\$

133

\\$

1,194










Restructuring related costs and change in estimates in the three and six months ended June 30, 2016 totaled \\$133 and \\$1,194 respectively. Of these restructuring costs incurred in the three and six months ended June 30, 2016, \\$104 and \\$106 respectively, was included in research and development, \\$-12 and \\$314 respectively in general and administrative, nil and \\$16 respectively in cost of sales, and \\$41 and \\$758 respectively in sales and marketing. The cumulative costs incurred to date, including non-cash charges, were \\$13,270.

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

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

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

Severance and other benefits

Closure and other contractual liabilities

Balance at January 1, 2016

\\$

1,299

\\$

911

Costs incurred and charged to expense

1,151

272

Costs paid or otherwise settled

(1,690)

(244)

Changes in estimates

(160)

(38)

Effects of foreign currency exchange

40

19

Balance at June 30, 2016

\\$

640

\\$

920







Cumulative costs incurred to date, including non-cash charges

\\$

5,724

\\$

7,506







Note 8.   Commitments and contingencies

Lease commitments

AVG leases its facilities and certain equipment under operating leases that expire at various dates through 2022.  Some of the leases contain renewal options, escalation clauses, rent concessions, and leasehold improvement incentives.  Rent expense is recognized on a straight-line basis over the lease term, adjusted for sublease income if applicable.  Rent expense was \\$2,785 and \\$5,378 in the three and six months ended June 30, 2016, respectively, and \\$2,100 and \\$4,541 in the three and six months ended June 30, 2015, respectively.

The following is a schedule by year of minimum future rentals on non-cancellable operating leases as of June 30, 2016:

Lease

Sublease
income

Net lease


Remainder of financial year 2016

\\$

5,279

\\$

(226)

\\$

5,053

2017

10,067

(506)

9,561

2018

9,485

(508)

8,977

2019

9,161

(485)

8,676

2020

6,721

(432)

6,289

Thereafter

17,509

(577)

16,932

Total minimum future lease payments

\\$

58,222

\\$

(2,734)

\\$

55,488










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 June 30, 2016:

Remainder of financial year 2016

\\$

14,151

2017

9,270

2018

4,536

2019

554

2020

500

Thereafter

250

Total minimum future purchase obligations

\\$

29,261




Other commitments

In connection with the Company's business combinations, the Company agreed to pay certain additional amounts contingent upon the achievement of certain revenue targets and other milestones or upon the continued employment with the Company of certain employees of the acquired entities.  The Company recognized such compensation expense of \\$1,224 and \\$420 during the three months ended June 30, 2015 and 2016, respectively and recorded such expense of \\$2,303 and \\$676 during the six months ended June 30, 2015 and 2016, respectively. As of June 30, 2016, the Company estimated that future compensation expense of up to \\$958 may be recognized as expense pursuant to these business combination agreements.  The other contingent purchase consideration as of June 30, 2016 was \\$11,240 and is expected to be paid within the next four months.  Other contingent purchase consideration as of December 31, 2015 was \\$25,358.

Litigation contingencies

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

Note 9.   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:

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

Three months ended

Six months ended

June 30,

June 30,


2015

2016

2015

2016

Revenue:











Netherlands

\\$

1,868

\\$

2,318

\\$

3,866

\\$

4,701

United States

58,021

56,671

113,966

114,923

United Kingdom

15,213

12,966

29,673

26,960

Other countries(1)

32,694

33,074

63,101

66,316

Total

\\$

107,796

\\$

105,029

\\$

210,606

\\$

212,900













(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,

June 30,

2015

2016

(in thousands of U.S. dollars)

Long-lived assets:





Netherlands

\\$

284

\\$

282

Czech Republic

9,469

8,195

United States

9,445

8,467

Canada

2,203

2,302

Other countries(1)

2,107

2,973

Total

\\$

23,508

\\$

22,219







(1)

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

Major customers

Revenues in the three and six months ended June 30, 2015 and 2016 included revenues derived from significant business partners, and are as follows (in percentages of total revenue):


Three months ended

Six months ended

June 30,

June 30,

2015

2016

2015

2016


Yahoo!

15%

12%

15%

13%













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


December 31,

June 30,

2015

2016

(in thousands of U.S. dollars)

Business partner:





Yahoo!

19%

17%







Note 10.   Ordinary shares

Ordinary shares

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

December 31,  2015

Shares

Shares

Shares



authorized

issued

outstanding

Par value

Ordinary shares

120,000,000

54,763,151

51,641,505

\\$

727

Total

120,000,000

54,763,151

51,641,505

\\$

727










June 30, 2016

Shares

Shares

Shares



authorized

issued

outstanding

Par value

Ordinary shares

120,000,000

54,763,151

50,628,819

\\$

727

Total

120,000,000

54,763,151

50,628,819

\\$

727









Treasury shares

During the three and six months ended June 30, 2016, the Company repurchased 418,473 and 1,393,808 ordinary shares, respectively, through its share repurchase program as described below and held these shares in treasury.

As at June 30, 2016 there were 4,134,332 shares held in treasury at a carrying value of \\$80,150.

Share repurchase program

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

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

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

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

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

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

Total number of shares repurchased

1,393,808

Dollar amount of shares repurchased

\\$

26,497

Average price paid per share

\\$

19.01

Range of price paid per share

\\$

16.63 – 20.77



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. 

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

Changes to redeemable noncontrolling interest during the six months ended June 30, 2016 were as follows:

Balance as of December 31, 2015


\\$

16,800

Net profit attributable to redeemable noncontrolling interest



8

Redemption value adjustment recorded in retained earnings



(8)

Redemption of Class B-2 shares



(16,800)

Balance as of June 30, 2016


\\$

-







Note 11.   Share-based compensation

During the three and six months ended June 30, 2016, the Company awarded, under the terms and conditions of the Amended and Restated 2013 Option and RSU Plan, 151,000 and 246,000 stock options, respectively, and 1,450,250 and 1,555,250 restricted stock units (RSUs), respectively, to members of its staff. The RSUs granted in the three months ended June 30, 2016 included a performance condition which affects vesting. The probability of 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

Six months ended

June 30,

June 30,

2015

2016

2015

2016

Cost of revenue

\\$

47

\\$

79

\\$

59

\\$

126

Research and development

423

892

1,154

1,516

Sales and marketing

862

1,602

1,411

2,118

General and administrative

2,388

2,710

4,204

4,885

Total

\\$

3,720

\\$

5,283

\\$

6,828

\\$

8,645













Note 12.   Income taxes

AVG recorded income tax expense of \\$2,330 (21.4 percent effective tax rate) and 1,612 (18.8 percent effective tax rate) in the three months ended June 30, 2015 and 2016, respectively and \\$5,792 (22.1 percent effective tax rate) and \\$3,519 (16.2 percent effective tax rate) in the six months ended June 30, 2015 and 2016, respectively.

 The effective tax rate decreased in the three and six months ended June 30, 2016 compared to the same period last year, primarily due to unfavorable prior period adjustments recognized in 2015, increase in benefits from the Company's Dutch IP innovation box ruling and increase in benefits from tax credits in foreign jurisdictions.

Note 13.   Earnings per share

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

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

Three months ended

Six months ended

June 30,

June 30,

Numerator:

2015

2016

2015

2016

Net income

\\$

8,543

\\$

6,949

\\$

20,465

\\$

18,204

Add: net loss attributable to redeemable noncontrolling interest

18

-

15

(8)

Redeemable noncontrolling interest

(603)

-

(1,082)

8

Net income available to ordinary shareholders - basic

\\$

7,958

\\$

6,949

\\$

19,398

\\$

18,204

Net income available to ordinary shareholders – diluted

\\$

7,958

\\$

6,949

\\$

19,398

\\$

18,204













Denominator:











Weighted-average ordinary shares outstanding – basic

51,936,526

50,787,976

51,768,720

50,902,176

Potential ordinary shares

931,588

690,501

793,297

734,432

Weighted-average ordinary shares outstanding – diluted

52,868,114

51,478,477

52,562,017

51,636,608

Earnings per ordinary share – basic

\\$

0.15

\\$

0.14

\\$

0.37

\\$

0.36

Earnings per ordinary share – diluted

\\$

0.15

\\$

0.13

\\$

0.37

\\$

0.35













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

Three months ended

Six months ended

June 30,

June 30,

2015

2016

2015

2016

Performance restricted stock units

100,000

100,000

100,000

100,000

Options to purchase ordinary shares

425,791

2,176,168

768,009

2,195,034

Anti-dilutive shares

525,791

2,276,168

868,009

2,295,034













Note 14.   Subsequent events

Proposed acquisition by Avast

On July 7, 2016, the Company issued a press release related to the fact that on July 6, 2016, the Company, Avast Holding B.V., a private company with limited liability (besloten vennootschap) organized under the laws of The Netherlands, and Avast Software B.V., a private company with limited liability (besloten vennootschap) organized under the laws of The Netherlands, entered into a definitive purchase agreement, whereby on the terms and subject to the conditions set forth in the Purchase Agreement, Avast has agreed to commence a tender offer to purchase all of the Company's issued and outstanding ordinary shares.

Related to this proposed acquisition and tender offering, the Company has convocated an Extraordinary General Meeting, to be held on August 23, 2016.

It is anticipated that existing debt held by AVG will be repaid as part of the purchase.  Accordingly, any debt provisions regarding a change of control are not expected to be functionally relevant to AVG.