SYNACOR, INC., 10-Q filed on 8/14/2017
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2017
Aug. 9, 2017
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q2 
 
Trading Symbol
SYNC 
 
Entity Registrant Name
Synacor, Inc. 
 
Entity Central Index Key
0001408278 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Smaller Reporting Company 
 
Entity Common Stock, Shares Outstanding
 
38,668,410 
Condensed Consolidated Balance Sheets - Unaudited (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2017
Dec. 31, 2016
CURRENT ASSETS:
 
 
Cash and cash equivalents
$ 22,983 
$ 14,315 
Accounts receivable, net of allowance of $160 and $263, respectively
17,775 
27,386 
Prepaid expenses and other current assets
5,018 
4,862 
Total current assets
45,776 
46,563 
PROPERTY AND EQUIPMENT, net
18,338 
14,406 
GOODWILL
15,949 
15,943 
INTANGIBLE ASSETS, net
13,766 
14,837 
OTHER LONG-TERM ASSETS
1,616 
1,650 
Total assets
95,445 
93,399 
CURRENT LIABILITIES:
 
 
Accounts payable
15,960 
18,769 
Accrued expenses and other current liabilities
7,080 
11,684 
Current portion of deferred revenue
12,350 
12,149 
Current portion of capital lease obligations
1,892 
982 
Total current liabilities
37,282 
43,584 
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS
2,897 
1,014 
DEFERRED REVENUE
2,952 
3,917 
LONG-TERM DEBT
 
5,000 
OTHER LONG-TERM LIABILITIES
429 
235 
Total liabilities
43,560 
53,750 
COMMITMENTS AND CONTINGENCIES (Note 8)
   
   
STOCKHOLDERS’ EQUITY:
 
 
Preferred stock – par value $0.01 per share; authorized 10,000,000 shares; none issued
   
   
Common stock – par value $0.01 per share; authorized 100,000,000 shares; 39,105,032 shares issued and 38,330,895 shares outstanding at June 30, 2017 and 31,626,635 shares issued and 30,881,148 shares outstanding at December 31, 2016
391 
316 
Treasury stock – at cost, 774,137 shares at June 30, 2017 and 745,487 shares at December 31, 2016
(1,664)
(1,547)
Additional paid-in capital
139,913 
117,747 
Accumulated deficit
(86,782)
(76,850)
Accumulated other comprehensive income (loss)
27 
(17)
Total stockholders’ equity
51,885 
39,649 
Total liabilities and stockholders’ equity
$ 95,445 
$ 93,399 
Condensed Consolidated Balance Sheets - Unaudited (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Jun. 30, 2017
Dec. 31, 2016
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 160 
$ 263 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
39,105,032 
31,626,635 
Common stock, shares outstanding
38,330,895 
30,881,148 
Treasury stock, shares
774,137 
745,487 
Condensed Consolidated Statements of Operations - Unaudited (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Income Statement [Abstract]
 
 
 
 
REVENUE
$ 31,216 
$ 30,476 
$ 57,756 
$ 60,736 
COSTS AND OPERATING EXPENSES:
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
14,462 
13,516 
27,024 
26,488 
Technology and development (exclusive of depreciation and amortization shown separately below)
6,904 
6,591 
14,202 
12,464 
Sales and marketing
6,185 
5,620 
12,846 
11,270 
General and administrative (exclusive of depreciation and amortization shown separately below)
4,361 
5,134 
8,325 
10,156 
Depreciation and amortization
2,224 
2,270 
4,408 
4,368 
Total costs and operating expenses
34,136 
33,131 
66,805 
64,746 
LOSS FROM OPERATIONS
(2,920)
(2,655)
(9,049)
(4,010)
OTHER INCOME
67 
242 
73 
244 
INTEREST EXPENSE
(114)
(84)
(201)
(152)
LOSS BEFORE INCOME TAXES
(2,967)
(2,497)
(9,177)
(3,918)
INCOME TAX PROVISION
309 
260 
755 
404 
NET LOSS
$ (3,276)
$ (2,757)
$ (9,932)
$ (4,322)
NET LOSS PER SHARE:
 
 
 
 
Basic
$ (0.09)
$ (0.09)
$ (0.29)
$ (0.14)
Diluted
$ (0.09)
$ (0.09)
$ (0.29)
$ (0.14)
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET LOSS PER SHARE:
 
 
 
 
Basic
37,284,973 
30,070,759 
34,228,367 
30,031,286 
Diluted
37,284,973 
30,070,759 
34,228,367 
30,031,286 
Condensed Consolidated Statements of Comprehensive Loss - Unaudited (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net loss
$ (3,276)
$ (2,757)
$ (9,932)
$ (4,322)
Other comprehensive income:
 
 
 
 
Changes in foreign currency translation adjustment
(1)
(187)
44 
(131)
Comprehensive loss
$ (3,277)
$ (2,944)
$ (9,888)
$ (4,453)
Condensed Consolidated Statements of Cash Flows - Unaudited (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net loss
$ (9,932)
$ (4,322)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
Depreciation and amortization
4,408 
4,368 
Capitalized software impairment
256 
 
Stock-based compensation expense
1,323 
1,424 
Provision for deferred income taxes
219 
 
Increase in estimated value of contingent consideration
107 
 
Changes in operating assets and liabilities, net of effect of acquisition:
 
 
Accounts receivable, net
9,611 
6,254 
Prepaid expenses and other assets
(136)
(1,866)
Accounts payable
(3,132)
850 
Accrued expenses and other liabilities
(3,436)
(15)
Deferred revenue
(764)
(1,031)
Net cash (used in) provided by operating activities
(1,476)
5,662 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Acquisition
 
(2,500)
Purchases of property and equipment
(3,576)
(2,004)
Net cash used in investing activities
(3,576)
(4,504)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Proceeds from offering of common stock, net of underwriting costs
20,258 
 
Payments of public offering issuance costs
(212)
 
Repayments of long-term debt
(5,000)
 
Repayments on capital lease obligations
(701)
(838)
Proceeds from exercise of common stock options
786 
336 
Treasury stock shares received to satisfy minimum withholding liabilities
(117)
(66)
Deferred acquisition payment
(1,300)
 
Net cash provided by (used in) financing activities
13,714 
(568)
Effect of exchange rate changes on cash and cash equivalents
NET INCREASE IN CASH AND CASH EQUIVALENTS
8,668 
598 
Cash and cash equivalents, beginning of period
14,315 
15,697 
Cash and cash equivalents, end of period
22,983 
16,295 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
Cash paid for interest
109 
132 
Cash paid for income taxes
394 
 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
 
 
Liability for estimated additional acquisition consideration
 
567 
Property, equipment and service center contracts financed under capital lease
3,488 
673 
Accrued property and equipment expenditures
550 
39 
Stock-based compensation capitalized to property and equipment
$ 86 
$ 101 
The Company and Summary of Significant Accounting Principles
The Company and Summary of Significant Accounting Principles

1.

The Company and Summary of Significant Accounting Principles

Synacor, Inc., together with its consolidated subsidiaries (collectively, the “Company” or “Synacor”), is the trusted technology development, multiplatform services and revenue partner for video, internet and communications providers, device manufacturers, governments and enterprises. Synacor enables its customers to provide their consumers engaging, multiscreen experiences and advertising to their consumers that require scale, actionable data and sophisticated implementation.

Basis of Presentation

The interim unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the interim unaudited condensed consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position for the periods presented. These interim unaudited condensed consolidated financial statements are not necessarily indicative of the results expected for the full fiscal year or for any subsequent period.

The accompanying condensed consolidated balance sheet as of December 31, 2016 was derived from the audited financial statements as of that date, but does not include all the information and footnotes required by U.S. GAAP. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from estimated amounts.

Concentrations of Risk

 

As of June 30, 2017 and December 31, 2016, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable as follows:

 

 

 

Accounts Receivable

 

 

June 30, 2017

 

 

December 31, 2016

Google search

 

 

12

%

 

*

Google advertising affiliate

 

 

15

%

 

*

* - Less than 10%

 

 

 

 

 

 

 

For the three and six months ended June 30, 2017 and 2016, the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows:

 

Revenue

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Google search

 

 

16

%

 

 

14

%

 

 

14

%

 

 

15

%

Google advertising affiliate

 

 

21

%

 

*

 

 

 

17

%

 

*

 

* - Less than 10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three and six months ended June 30, 2017 and 2016, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue:

 

 

 

Cost of Revenue

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Customer A

 

 

13

%

 

 

26

%

 

 

16

%

 

 

28

%

Customer B

 

 

18

%

 

*

 

 

 

10

%

 

*

 

Customer C

 

*

 

 

 

14

%

 

*

 

 

 

12

%

* - Less than 10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recent Accounting Pronouncements

Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, providing additional guidance relating to identifying performance obligations under ASU 2014-09 as well as licensing.

The Company is currently in the process of assessing the financial impact of adopting these ASUs and the methods of adoption. The Company currently recognizes subscription license revenue from its Email/Collaboration contracts, which is included within recurring and fee-based revenue, over the life of the contracts (which are typically six months or longer). The Company has tentatively concluded that it is likely that this new guidance will require it to recognize a portion of the revenue from those contracts upon delivery, at the inception of the contracts, which would have the effect of accelerating recognition of revenue on such contracts, and may have a material impact on the Company’s consolidated financial statements. The standard will be effective for the Company beginning January 1, 2018. The Company will adopt the standard as of its effective date of January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company expects to use the latter method.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which amends lease accounting by lessors and lessees. This new standard will require, among other things, that lessees recognize a right-to-use asset and related lease liability for all significant financing and operating leases, and specifies where in the statement of cash flows the related lease payments are to be presented. The standard is effective for years beginning after December 15, 2018, including interim periods within those years (beginning in calendar year 2019 for the Company), and early adoption is permitted. Adoption of ASU 2016-02 is required to be applied on a modified retrospective basis. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements, but currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon the adoption of ASU 2016-02, which will increase the total assets and total liabilities that it reports as compared to reported prior to adoption. The Company expects to adopt the standard as of January 1, 2019.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017, subject to early adoption, which is permitted using a retrospective transition approach. ASU 2016-15 is intended to standardize the classification of certain cash receipts and cash payments in the Statement of Cash Flows, and is effective for the Company in its first quarter of fiscal 2018. The Company expects that it will adopt ASU 2016-15 in the first quarter of fiscal 2018 and is currently evaluating the impact of the pending adoption on its consolidated financial statements.

Recently Adopted

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of stock-based awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification in the statement of cash flows. Effective January 1, 2017, the Company has adopted ASU 2016-09.  The standard eliminated the requirement to defer recognition of excess tax benefits related to employee share-based awards until they are realized through a reduction to income taxes payable.  The Company applied the modified retrospective method and there was no net cumulative-effect adjustment to retained earnings on January 1, 2017 as the increase of $0.7 million in deferred income tax assets for previously unrecognized excess tax benefits was fully offset by a valuation allowance.  As permitted by the ASU, the Company will continue to use an estimated forfeiture rate in determining stock-based compensation expense.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company has adopted the new guidance on a prospective basis during the first quarter of 2017. The adoption of this ASU has not impacted the Company’s consolidated financial statements.

Stock Offering
Stock Offering

2.

Stock Offering

In April 2017, the Company completed an underwritten public offering (the “Offering”) of its common stock in which it sold 5,715,000 shares at a price of $3.50 per share.  Subsequently, in May 2017, and as part of the Offering, the Company completed the sale of 472,846 additional shares of its common stock at the same price upon the exercise of the underwriters’ over-allotment option, for a total of 6,187,846 shares.  The Offering resulted in total net proceeds of $20.0 million, after deducting underwriting discounts and commissions totaling $1.4 million and other offering expenses totaling $0.2 million.

Acquisitions
Acquisitions

3.

Acquisitions

In August 2015, the Company and Zimbra, Inc. (now known as “TZ Holdings”) entered into an agreement under which the Company acquired certain assets relating to TZ Holdings’ email/collaboration products and services business, including certain of its wholly-owned foreign subsidiaries, for cash consideration of $17.3 million, 2.4 million shares of common stock and warrants to purchase 480,000 shares of common stock (collectively valued at $3.2 million). The Company held back an additional 600,000 shares of common stock and warrants to purchase an additional 120,000 shares of common stock (collectively valued at $0.8 million) to secure TZ Holdings’ indemnification obligations including pending claims.  The held back common shares and warrants were released to TZ holdings in March 2017.  The warrants expire on September 14, 2018.

Additionally, TZ Holdings was eligible to receive cash consideration of up to $2.0 million (the “Earn-Out Consideration”) upon the satisfaction of certain business performance milestones following the closing of the transaction, subject to and contingent upon any reduction to satisfy indemnification claims including pending claims. The acquisition date fair value of this contingent consideration was estimated to be $1.6 million. The Company paid $0.9 million of the earn-out consideration to TZ Holdings in November 2016, and the final payment of $0.7 million was made in May 2017.

In connection with the Company’s February 2016 acquisition of Technorati, the Company withheld $0.5 million of the purchase price to secure Technorati’s indemnification obligations under the Asset Purchase Agreement, and the Company owed approximately $0.1 million in post-closing working capital adjustments. These amounts were paid in March 2017.

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

4.

Goodwill and Other Intangible Assets

The change in goodwill is as follows for the six months ended June 30, 2017 and 2016 (in thousands):

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

Balance – beginning of period

 

$

15,943

 

 

$

15,187

 

Acquisition of Technorati

 

 

 

 

 

751

 

Effect of foreign currency translation

 

 

6

 

 

 

11

 

Balance – end of period

 

$

15,949

 

 

$

15,949

 

 

Intangible assets consisted of the following (in thousands):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Customer and publisher relationships

 

$

14,780

 

 

$

14,780

 

Technology

 

 

2,330

 

 

 

2,330

 

Trademark

 

 

300

 

 

 

300

 

 

 

 

17,410

 

 

 

17,410

 

Less accumulated amortization

 

 

(3,644

)

 

 

(2,573

)

Intangible assets, net

 

$

13,766

 

 

$

14,837

 

 

Amortization of intangible assets totaled $0.6 million and $0.6 million for the three months ended June 30, 2017 and 2016, respectively, and $1.1 million and $1.0 million for the six months ended June 30, 2017 and 2016, respectively.

Property and Equipment - Net
Property and Equipment - Net

5.

Property and Equipment – Net

Property and equipment, net consisted of the following (in thousands):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Computer equipment (1)

 

$

26,751

 

 

$

23,438

 

Computer software

 

 

17,476

 

 

 

15,198

 

Furniture and fixtures

 

 

2,469

 

 

 

2,062

 

Leasehold improvements

 

 

1,381

 

 

 

1,463

 

Work in process (primarily software development costs)

 

 

5,827

 

 

 

4,572

 

Other

 

 

254

 

 

 

249

 

 

 

 

54,158

 

 

 

46,982

 

Less accumulated depreciation (2)

 

 

(35,820

)

 

 

(32,576

)

Property and equipment, net

 

$

18,338

 

 

$

14,406

 

 

Notes:

 

(1)

Includes equipment and software held under capital leases of $8.7 million and $5.2 million as of June 30, 2017 and December 31, 2016, respectively.

(2)

Includes $4.0 million and $3.4 million of accumulated depreciation of equipment under capital leases as of June 30, 2017 and December 31, 2016, respectively.

 

Depreciation expense totaled $1.7 million and $1.7 million for the three months ended June 30, 2017 and 2016, respectively, and $3.3 million and $3.3 million, for the six months ended June 30, 2017 and 2016, respectively.

Accrued Expenses and Other Current Liabilities
Accrued Expenses and Other Current Liabilities

6.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Accrued compensation

 

$

3,913

 

 

$

6,860

 

Accrued content fees

 

 

1,158

 

 

 

1,788

 

Accrued business acquisition consideration

 

 

 

 

 

1,193

 

Other

 

 

2,009

 

 

 

1,843

 

Total

 

$

7,080

 

 

$

11,684

 

 

 

Information About Segment and Geographic Areas
Information About Segment and Geographic Areas

7.

Information About Segment and Geographic Areas

Operating segments are components of the Company in which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a total company basis, accompanied by information about revenue by major service line for purposes of allocating resources and evaluating financial performance. Profitability measures by service line are not prepared or used. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the company level. Accordingly, the Company has determined that it has a single reporting segment and operating unit structure.

The following tables set forth revenue and long-lived tangible assets by geographic area (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

25,190

 

 

$

26,149

 

 

$

46,858

 

 

$

52,619

 

International

 

 

6,026

 

 

 

4,327

 

 

$

10,898

 

 

 

8,117

 

Total revenue

 

$

31,216

 

 

$

30,476

 

 

$

57,756

 

 

$

60,736

 

 

 

 

June 30, 2017

 

 

December 31,

2016

 

Long-lived tangible assets:

 

 

 

 

 

 

 

 

United States

 

$

17,488

 

 

$

13,519

 

Canada

 

 

549

 

 

 

573

 

Other international

 

 

301

 

 

 

314

 

Total long-lived tangible assets

 

$

18,338

 

 

$

14,406

 

 

Commitments and Contingencies
Commitments and Contingencies

8.

Commitments and Contingencies

Contract Commitments

The Company is obligated to make minimum payments under various contracts with vendors and other business partners, principally for revenue-share and content arrangements. Contract commitments as of June 30, 2017 are as follows (in thousands):

 

Year ending December 31,

 

 

 

 

2017 (remaining - six months)

 

$

690

 

2018

 

$

900

 

2019

 

$

900

 

2020

 

$

300

 

Total

 

$

2,790

 

 

Litigation

From time to time, the Company is a party to legal actions. In the opinion of management, the outcome of these matters is not expected to have a material impact on the consolidated financial statements of the Company.

Stock-based Compensation
Stock-based Compensation

9.

Stock-based Compensation

The Company has stock-based employee compensation plans for which compensation cost is recognized in its financial statements. The cost is measured at the grant date, based on the fair value of the award, determined using the Black-Scholes option pricing model, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).

No income tax deduction is allowed for incentive stock options (“ISOs”). Accordingly, no deferred income tax asset is recorded for the potential tax deduction related to these options. Expense related to stock option grants of non-qualified stock options (“NSOs”) results in a temporary difference, which gives rise to a deferred tax asset.

Total stock-based compensation expense included in the accompanying condensed consolidated statements of operations for the periods presented, is as follows (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Technology and development

 

$

206

 

 

$

202

 

 

$

414

 

 

$

443

 

Sales and marketing

 

 

190

 

 

 

208

 

 

 

358

 

 

 

431

 

General and administrative

 

 

280

 

 

 

277

 

 

 

551

 

 

 

550

 

Total stock-based compensation expense

 

$

676

 

 

$

687

 

 

$

1,323

 

 

$

1,424

 

 

Stock Option Activity – A summary of the stock option activity for the six months ended June 30, 2017 is presented below:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term (years)

 

 

Aggregate

Intrinsic

Value (in

thousands)

 

Outstanding at January 1, 2017

 

 

8,756,174

 

 

$

2.53

 

 

 

 

 

 

 

 

 

Granted

 

 

1,313,900

 

 

$

3.20

 

 

 

 

 

 

 

 

 

Exercised

 

 

(452,329

)

 

$

1.73

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(142,540

)

 

$

2.15

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2017

 

 

9,475,205

 

 

$

2.67

 

 

 

6.98

 

 

$

10,675

 

Vested and expected to vest at June 30, 2017

 

 

9,084,191

 

 

$

2.67

 

 

 

6.90

 

 

$

10,282

 

Vested and exercisable at June 30, 2017

 

 

5,251,473

 

 

$

2.79

 

 

 

5.66

 

 

$

5,870

 

 

Aggregate intrinsic value represents the difference between the Company’s closing stock price of its common stock and the exercise price of outstanding, in-the-money options. The Company’s closing stock price as reported on the Nasdaq Global Market as of June 30, 2017 was $3.65 per share. The total intrinsic value of options exercised for the six months ended June 30, 2017 was $0.7 million. The weighted average fair value of options issued during the six months ended June 30, 2017 amounted to $1.55 per option share.

As of June 30, 2017, the unrecognized compensation cost related to non-vested options granted, for which vesting is probable, and adjusted for estimated forfeitures, was approximately $5.0 million. This cost is expected to be recognized over a weighted-average period of 2.7 years. The total fair value of shares vested was $0.9 million for the six months ended June 30, 2017.

In addition, the Company may, from time to time, grant Restricted Stock Units (“RSUs”) to its employees. A summary of RSU activity for the six months ended June 30, 2017 is presented below:

 

 

 

Number of Shares

 

 

Weighted Average

Fair Value

 

Unvested—January 1, 2017

 

 

319,889

 

 

$

2.31

 

Granted

 

 

 

 

 

 

Released

 

 

(125,130

)

 

$

2.47

 

Forfeited

 

 

(5,316

)

 

$

1.86

 

Unvested—June 30, 2017

 

 

189,443

 

 

$

2.89

 

June 30, 2017

 

 

184,399

 

 

$

2.87

 

 

Net Income (Loss) Per Common Share Data
Net Income (Loss) Per Common Share Data

10.

Net Income (Loss) Per Common Share Data

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. The Company’s potential common shares consist of the incremental common shares issuable upon the exercise of stock options, and to a lesser extent, shares issuable upon the release of RSUs. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method.

Stock options, warrants and Restricted Stock Units are not included in the calculation of diluted net loss per share for the three and six months ended June 30, 2017 and 2016 because the Company had a net loss for those periods. The inclusion of these equity awards would have had an antidilutive effect on the calculation of diluted loss per share. As such, the Company’s calculations of basic and diluted net loss per share are identical.

The following table presents the calculation of basic and diluted net loss per share for the three and six months ended June 30, 2017 and 2016:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss (in thousands)

 

$

(3,276

)

 

$

(2,757

)

 

$

(9,932

)

 

$

(4,322

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

37,284,973

 

 

 

30,070,759

 

 

 

34,228,367

 

 

 

30,031,286

 

Basic and diluted net loss per share

 

$

(0.09

)

 

$

(0.09

)

 

$

(0.29

)

 

$

(0.14

)

 

The following securities were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Anti-dilutive equity awards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and Restricted Stock Units

 

 

9,664,648

 

 

 

9,892,119

 

 

 

9,664,648

 

 

 

9,892,119

 

Warrants

 

 

600,000

 

 

 

480,000

 

 

 

600,000

 

 

 

480,000

 

 

Subsequent Events
Subsequent Events

11. Subsequent Events

In July 2013, the Company made a $1.0 million strategic investment (in the form of a convertible promissory note, the “note”) in Blazer and Flip Flops, Inc. (“B&FF”), doing business as “The Experience Engine,” a privately-held Delaware corporation. The Company desired to gain access to the expertise of B&FF’s principals in integrating its customers’ systems with their customers’ devices, including smartphones and tablets. In March 2015, the note was converted into preferred stock of B&FF and has since been accounted for as a cost method investment.

Subsequent to June 30, 2017, B&FF was acquired by accesso Technology Group, plc, a U.K. public company, and the Company received, in connection with the sale of its investment in B&FF, cash consideration of $2.2 million and expects to receive stock in the acquiring company valued at approximately $0.4 million. In addition, the Company stands to receive contingent consideration of cash and stock totaling approximately $0.4 million, which was held back to secure B&FF’s indemnification obligations under the purchase and sale agreement. These amounts, valued at approximately $0.2 million, may be received after the 18-month indemnification period expires. The Company expects to record a gain on sale of investment totaling approximately $1.8 million in the three months ending September 30, 2017.

Effective in July, 2017, the Company executed agreements to lease computer hardware and software, and receive associated support and maintenance services, in connection with the Company’s build-out of redundant data centers to support new email revenue opportunities. These agreements require payments over a three-year period totaling approximately $3.5 million.

The Company and Summary of Significant Accounting Principles (Policies)

Basis of Presentation

The interim unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the interim unaudited condensed consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position for the periods presented. These interim unaudited condensed consolidated financial statements are not necessarily indicative of the results expected for the full fiscal year or for any subsequent period.

The accompanying condensed consolidated balance sheet as of December 31, 2016 was derived from the audited financial statements as of that date, but does not include all the information and footnotes required by U.S. GAAP. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from estimated amounts.

Concentrations of Risk

 

As of June 30, 2017 and December 31, 2016, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable as follows:

 

 

 

Accounts Receivable

 

 

June 30, 2017

 

 

December 31, 2016

Google search

 

 

12

%

 

*

Google advertising affiliate

 

 

15

%

 

*

* - Less than 10%

 

 

 

 

 

 

 

For the three and six months ended June 30, 2017 and 2016, the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows:

 

Revenue

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Google search

 

 

16

%

 

 

14

%

 

 

14

%

 

 

15

%

Google advertising affiliate

 

 

21

%

 

*

 

 

 

17

%

 

*

 

* - Less than 10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three and six months ended June 30, 2017 and 2016, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue:

 

 

 

Cost of Revenue

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Customer A

 

 

13

%

 

 

26

%

 

 

16

%

 

 

28

%

Customer B

 

 

18

%

 

*

 

 

 

10

%

 

*

 

Customer C

 

*

 

 

 

14

%

 

*

 

 

 

12

%

* - Less than 10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recent Accounting Pronouncements

Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, providing additional guidance relating to identifying performance obligations under ASU 2014-09 as well as licensing.

The Company is currently in the process of assessing the financial impact of adopting these ASUs and the methods of adoption. The Company currently recognizes subscription license revenue from its Email/Collaboration contracts, which is included within recurring and fee-based revenue, over the life of the contracts (which are typically six months or longer). The Company has tentatively concluded that it is likely that this new guidance will require it to recognize a portion of the revenue from those contracts upon delivery, at the inception of the contracts, which would have the effect of accelerating recognition of revenue on such contracts, and may have a material impact on the Company’s consolidated financial statements. The standard will be effective for the Company beginning January 1, 2018. The Company will adopt the standard as of its effective date of January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company expects to use the latter method.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which amends lease accounting by lessors and lessees. This new standard will require, among other things, that lessees recognize a right-to-use asset and related lease liability for all significant financing and operating leases, and specifies where in the statement of cash flows the related lease payments are to be presented. The standard is effective for years beginning after December 15, 2018, including interim periods within those years (beginning in calendar year 2019 for the Company), and early adoption is permitted. Adoption of ASU 2016-02 is required to be applied on a modified retrospective basis. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements, but currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon the adoption of ASU 2016-02, which will increase the total assets and total liabilities that it reports as compared to reported prior to adoption. The Company expects to adopt the standard as of January 1, 2019.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017, subject to early adoption, which is permitted using a retrospective transition approach. ASU 2016-15 is intended to standardize the classification of certain cash receipts and cash payments in the Statement of Cash Flows, and is effective for the Company in its first quarter of fiscal 2018. The Company expects that it will adopt ASU 2016-15 in the first quarter of fiscal 2018 and is currently evaluating the impact of the pending adoption on its consolidated financial statements.

Recently Adopted

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of stock-based awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification in the statement of cash flows. Effective January 1, 2017, the Company has adopted ASU 2016-09.  The standard eliminated the requirement to defer recognition of excess tax benefits related to employee share-based awards until they are realized through a reduction to income taxes payable.  The Company applied the modified retrospective method and there was no net cumulative-effect adjustment to retained earnings on January 1, 2017 as the increase of $0.7 million in deferred income tax assets for previously unrecognized excess tax benefits was fully offset by a valuation allowance.  As permitted by the ASU, the Company will continue to use an estimated forfeiture rate in determining stock-based compensation expense.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company has adopted the new guidance on a prospective basis during the first quarter of 2017. The adoption of this ASU has not impacted the Company’s consolidated financial statements.

The Company and Summary of Significant Accounting Principles (Tables)
Schedule of Concentrations Equal to or Exceeding 10% of Company's Accounts Receivable, Revenue, and Cost of Revenue

 

As of June 30, 2017 and December 31, 2016, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable as follows:

 

 

 

Accounts Receivable

 

 

June 30, 2017

 

 

December 31, 2016

Google search

 

 

12

%

 

*

Google advertising affiliate

 

 

15

%

 

*

* - Less than 10%

 

 

 

 

 

 

 

For the three and six months ended June 30, 2017 and 2016, the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows:

 

Revenue

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Google search

 

 

16

%

 

 

14

%

 

 

14

%

 

 

15

%

Google advertising affiliate

 

 

21

%

 

*

 

 

 

17

%

 

*

 

* - Less than 10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three and six months ended June 30, 2017 and 2016, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue:

 

 

 

Cost of Revenue

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Customer A

 

 

13

%

 

 

26

%

 

 

16

%

 

 

28

%

Customer B

 

 

18

%

 

*

 

 

 

10

%

 

*

 

Customer C

 

*

 

 

 

14

%

 

*

 

 

 

12

%

* - Less than 10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and Other Intangible Assets (Tables)

The change in goodwill is as follows for the six months ended June 30, 2017 and 2016 (in thousands):

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

Balance – beginning of period

 

$

15,943

 

 

$

15,187

 

Acquisition of Technorati

 

 

 

 

 

751

 

Effect of foreign currency translation

 

 

6

 

 

 

11

 

Balance – end of period

 

$

15,949

 

 

$

15,949

 

 

Intangible assets consisted of the following (in thousands):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Customer and publisher relationships

 

$

14,780

 

 

$

14,780

 

Technology

 

 

2,330

 

 

 

2,330

 

Trademark

 

 

300

 

 

 

300

 

 

 

 

17,410

 

 

 

17,410

 

Less accumulated amortization

 

 

(3,644

)

 

 

(2,573

)

Intangible assets, net

 

$

13,766

 

 

$

14,837

 

 

Property and Equipment - Net (Tables)
Schedule of Property and Equipment

Property and equipment, net consisted of the following (in thousands):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Computer equipment (1)

 

$

26,751

 

 

$

23,438

 

Computer software

 

 

17,476

 

 

 

15,198

 

Furniture and fixtures

 

 

2,469

 

 

 

2,062

 

Leasehold improvements

 

 

1,381

 

 

 

1,463

 

Work in process (primarily software development costs)

 

 

5,827

 

 

 

4,572

 

Other

 

 

254

 

 

 

249

 

 

 

 

54,158

 

 

 

46,982

 

Less accumulated depreciation (2)

 

 

(35,820

)

 

 

(32,576

)

Property and equipment, net

 

$

18,338

 

 

$

14,406

 

 

Notes:

 

(1)

Includes equipment and software held under capital leases of $8.7 million and $5.2 million as of June 30, 2017 and December 31, 2016, respectively.

(2)

Includes $4.0 million and $3.4 million of accumulated depreciation of equipment under capital leases as of June 30, 2017 and December 31, 2016, respectively.

 

Accrued Expenses and Other Current Liabilities (Tables)
Schedule of Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Accrued compensation

 

$

3,913

 

 

$

6,860

 

Accrued content fees

 

 

1,158

 

 

 

1,788

 

Accrued business acquisition consideration

 

 

 

 

 

1,193

 

Other

 

 

2,009

 

 

 

1,843

 

Total

 

$

7,080

 

 

$

11,684

 

 

Information About Segment and Geographic Areas (Tables)
Schedule of Revenue and Long Lived Tangible Assets by Geographic Area

The following tables set forth revenue and long-lived tangible assets by geographic area (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

25,190

 

 

$

26,149

 

 

$

46,858

 

 

$

52,619

 

International

 

 

6,026

 

 

 

4,327

 

 

$

10,898

 

 

 

8,117

 

Total revenue

 

$

31,216

 

 

$

30,476

 

 

$

57,756

 

 

$

60,736

 

 

 

 

June 30, 2017

 

 

December 31,

2016

 

Long-lived tangible assets:

 

 

 

 

 

 

 

 

United States

 

$

17,488

 

 

$

13,519

 

Canada

 

 

549

 

 

 

573

 

Other international

 

 

301

 

 

 

314

 

Total long-lived tangible assets

 

$

18,338

 

 

$

14,406

 

 

Commitment and Contingencies (Tables)
Schedule of Contract Commitments

Contract commitments as of June 30, 2017 are as follows (in thousands

 

Year ending December 31,

 

 

 

 

2017 (remaining - six months)

 

$

690

 

2018

 

$

900

 

2019

 

$

900

 

2020

 

$

300

 

Total

 

$

2,790

 

 

Stock-based Compensation (Tables)

Total stock-based compensation expense included in the accompanying condensed consolidated statements of operations for the periods presented, is as follows (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Technology and development

 

$

206

 

 

$

202

 

 

$

414

 

 

$

443

 

Sales and marketing

 

 

190

 

 

 

208

 

 

 

358

 

 

 

431

 

General and administrative

 

 

280

 

 

 

277

 

 

 

551

 

 

 

550

 

Total stock-based compensation expense

 

$

676

 

 

$

687

 

 

$

1,323

 

 

$

1,424

 

 

Stock Option Activity – A summary of the stock option activity for the six months ended June 30, 2017 is presented below: