SYNACOR, INC., 10-K filed on 3/26/2013
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Mar. 21, 2013
Jun. 29, 2012
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
Synacor, Inc. 
 
 
Entity Central Index Key
0001408278 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2012 
 
 
Amendment Flag
false 
 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
FY 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Non-accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
27,296,894 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 222,146,843 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
CURRENT ASSETS:
 
 
Cash and cash equivalents
$ 41,944 
$ 10,925 
Accounts receivable—net of allowance of $25 and $25
15,624 
14,336 
Deferred income taxes
1,999 
3,534 
Prepaid expenses and other current assets
1,831 
1,811 
Total current assets
61,398 
30,606 
PROPERTY AND EQUIPMENT—Net
11,043 
8,301 
DEFERRED INCOME TAXES, NON-CURRENT
2,527 
2,549 
OTHER LONG-TERM ASSETS
543 
1,926 
GOODWILL
819 
TOTAL ASSETS
76,330 
43,382 
CURRENT LIABILITIES:
 
 
Accounts payable
14,204 
12,498 
Accrued expenses and other current liabilities
7,328 
5,492 
Current portion of bank financing
250 
Current portion of capital lease obligations
2,127 
1,593 
Total current liabilities
23,659 
19,833 
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS
1,712 
2,098 
OTHER LONG-TERM LIABILITIES
148 
71 
Total liabilities
25,519 
22,002 
COMMITMENTS AND CONTINGENCIES (Note 7)
   
   
STOCKHOLDERS’ EQUITY:
 
 
Common stock, $0.01 par value—30,000,000 shares authorized, 3,052,856 issued and 2,733,356 outstanding at December 31, 2011, and 100,000,000 authorized, 27,517,665 issued and 27,198,165 shares outstanding at December 31, 2012
275 
31 
Preferred stock, $0.01 par value—10,000,000 shares authorized, no shares issued and outstanding at December 31, 2012
Treasury stock—at cost, 319,500 shares at December 31, 2011 and 2012
(569)
(569)
Additional paid-in capital
99,449 
45,639 
Accumulated deficit
(48,338)
(52,153)
Accumulated other comprehensive income
(6)
Total stockholders’ equity
50,811 
21,380 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
76,330 
43,382 
Series A Preferred Stock [Member]
 
 
STOCKHOLDERS’ EQUITY:
 
 
Convertible preferred stock
5,077 
Series A-1 Preferred Stock [Member]
 
 
STOCKHOLDERS’ EQUITY:
 
 
Convertible preferred stock
730 
Series B Preferred Stock [Member]
 
 
STOCKHOLDERS’ EQUITY:
 
 
Convertible preferred stock
5,401 
Series C Preferred Stock [Member]
 
 
STOCKHOLDERS’ EQUITY:
 
 
Convertible preferred stock
$ 0 
$ 17,224 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Allowance for doubtful accounts
$ 25 
$ 25 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
100,000,000 
30,000,000 
Common stock, shares issued
27,517,665 
3,052,856 
Common stock, shares outstanding
27,198,165 
2,733,356 
Preferred stock, par value
$ 0.01 
 
Preferred stock, shares authorized
10,000,000 
 
Preferred stock, shares issued
 
Preferred stock, shares outstanding
 
Treasury stock, shares
319,500 
319,500 
Series A Preferred Stock [Member]
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,709,638 
Preferred stock, shares issued
5,548,508 
Preferred stock, shares outstanding
5,548,508 
Series A-1 Preferred Stock [Member]
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
570,344 
Preferred stock, shares issued
570,344 
Preferred stock, shares outstanding
570,344 
Series B Preferred Stock [Member]
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
3,500,000 
Preferred stock, shares issued
2,737,500 
Preferred stock, shares outstanding
2,737,500 
Series C Preferred Stock [Member]
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
2,740,407 
Preferred stock, shares issued
2,740,707 
Preferred stock, shares outstanding
2,740,707 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Income Statement [Abstract]
 
 
 
REVENUE
$ 121,981 
$ 91,060 
$ 66,232 
COSTS AND OPERATING EXPENSES:
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
66,620 
48,661 
36,703 
Research and development (exclusive of depreciation shown separately below)
25,603 
20,228 
18,494 
Sales and marketing
9,120 
8,582 
6,211 
General and administrative (exclusive of depreciation shown separately below)
11,011 
6,879 
5,656 
Depreciation
3,779 
2,667 
2,506 
Total costs and operating expenses
116,133 
87,017 
69,570 
(LOSS) INCOME INCOME FROM OPERATIONS
5,848 
4,043 
(3,338)
OTHER (EXPENSE) INCOME
(17)
(2)
INTEREST EXPENSE
(270)
(109)
(240)
(LOSS) INCOME BEFORE INCOME TAXES
5,579 
3,917 
(3,580)
PROVISION (BENEFIT) FOR INCOME TAXES
1,764 
(6,015)
11 
NET (LOSS) INCOME
3,815 
9,932 
(3,591)
UNDISTRIBUTED EARNINGS ALLOCATED TO PREFERRED STOCKHOLDERS
8,583 
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$ 3,815 
$ 1,349 
$ (3,591)
NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
 
 
 
Basic (in dollars per share)
$ 0.16 
$ 0.59 
$ (1.93)
Diluted (in dollars per share)
$ 0.14 
$ 0.45 
$ (1.93)
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
 
 
 
Basic (in shares)
24,411,194 
2,303,443 
1,865,294 
Diluted (in shares)
28,097,313 1
21,974,403 1
1,865,294 1
Consolidated Statements of Comprehensive (Loss) Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Statement of Other Comprehensive Income [Abstract]
 
 
 
Net (loss) income
$ 3,815 
$ 9,932 
$ (3,591)
Other comprehensive income:
 
 
 
Change in foreign currency translation adjustment
(6)
Comprehensive (loss) income
$ 3,809 
$ 9,932 
$ (3,591)
Conlidated Statements of Stockholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock [Member]
Treasury Stock [Member]
Preferred Stock [Member]
Series A Preferred Stock [Member]
Preferred Stock [Member]
Series A-1 Preferred Stock [Member]
Preferred Stock [Member]
Series B Preferred Stock [Member]
Preferred Stock [Member]
Series C Preferred Stock [Member]
Additional Paid-In Capital [Member]
Accumulated Other Comprehensive Income [Member]
Accumulated Deficit [Member]
Beginning balance at Dec. 31, 2009
$ 13,053 
$ 18 
$ (368)
$ 5,077 
$ 730 
$ 5,401 
$ 17,224 
$ 43,465 
$ 0 
$ (58,494)
Beginning balance, treasury stock, shares at Dec. 31, 2009
 
 
(244,500)
 
 
 
 
 
 
 
Beginning balance, shares at Dec. 31, 2009
 
1,834,946 
 
5,548,508 
570,344 
2,737,500 
2,740,407 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Exercise of common stock options
27 
 
 
 
 
 
26 
 
 
Exercise of common stock options, shares
 
69,207 
 
 
 
 
 
 
 
 
Stock-based compensation expense
868 
 
 
 
 
 
 
868 
 
 
Repurchase of common shares
(201)
 
(201)
 
 
 
 
 
 
 
Repurchase of common shares, shares
 
 
(75,000)
 
 
 
 
 
 
 
Net (loss) income
(3,591)
 
 
 
 
 
 
 
 
(3,591)
Ending balance at Dec. 31, 2010
10,156 
19 
(569)
5,077 
730 
5,401 
17,224 
44,359 
(62,085)
Ending balance, treasury stock, shares at Dec. 31, 2010
 
 
(319,500)
 
 
 
 
 
 
 
Ending balance, shares at Dec. 31, 2010
 
1,904,153 
 
5,548,508 
570,344 
2,737,500 
2,740,407 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Exercise of common stock options
372 
12 
 
 
 
 
 
360 
 
 
Exercise of common stock options, shares
 
1,148,703 
 
 
 
 
 
 
 
 
Stock-based compensation expense
920 
 
 
 
 
 
 
920 
 
 
Net (loss) income
9,932 
 
 
 
 
 
 
 
 
9,932 
Ending balance at Dec. 31, 2011
21,380 
31 
(569)
5,077 
730 
5,401 
17,224 
45,639 
(52,153)
Ending balance, treasury stock, shares at Dec. 31, 2011
(319,500)
 
(319,500)
 
 
 
 
 
 
 
Ending balance, shares at Dec. 31, 2011
 
3,052,856 
 
5,548,508 
570,344 
2,737,500 
2,740,407 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Issuance of common stock upon initial public offering, net of offering costs
22,347 
54 
 
 
 
 
 
22,293 
 
 
Issuance of common stock upoon initial public offering, net of offering costs, shares
 
5,454,545 
 
 
 
 
 
 
 
 
Conversion of preferred stock to common stock upon initial public offering
174 
 
5,077 
730 
5,401 
17,224 
28,258 
 
 
Conversion of preferred stock to common stock upon initial public offering, shares
 
17,395,136 
 
5,548,508 
570,344 
2,737,500 
2,740,407 
 
 
 
Exercise of common stock options
1,212 
16 
 
 
 
 
 
1,196 
 
 
Exercise of common stock options, shares
1,615,128 
1,615,128 
 
 
 
 
 
 
 
 
Stock-based compensation expense
2,063 
 
 
 
 
 
 
2,063 
 
 
Net (loss) income
3,815 
 
 
 
 
 
 
 
 
3,815 
Other comprehensive income
(6)
 
 
 
 
 
 
 
(6)
 
Ending balance at Dec. 31, 2012
$ 50,811 
$ 275 
$ (569)
$ 0 
$ 0 
$ 0 
$ 0 
$ 99,449 
$ (6)
$ (48,338)
Ending balance, treasury stock, shares at Dec. 31, 2012
(319,500)
 
(319,500)
 
 
 
 
 
 
 
Ending balance, shares at Dec. 31, 2012
 
27,517,665 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net (loss) income
$ 3,815 
$ 9,932 
$ (3,591)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
Depreciation
3,779 
2,667 
2,506 
Stock-based compensation expense
1,999 
920 
868 
Loss on disposal of property and equipment
35 
11 
Deferred income taxes
1,557 
(6,083)
Change in assets and liabilities:
 
 
 
Accounts receivable, net
(1,288)
(4,682)
(1,881)
Prepaid expenses and other current assets
253 
(45)
(484)
Other long-term assets
380 
164 
(121)
Accounts payable
2,335 
4,120 
1,081 
Accrued expenses and other current liabilities
1,715 
1,709 
444 
Other long-term liabilities
77 
(35)
(160)
Net cash (used in) provided by operating activities
14,657 
8,678 
(1,333)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(4,269)
(1,848)
(1,558)
Cash paid for business acquisition
(600)
Net cash used in investing activities
(4,869)
(1,848)
(1,558)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings on bank financing
588 
Proceeds from sale/leaseback
794 
Repayment on bank financing
(250)
(500)
(250)
Repayments on capital lease obligations
(2,336)
(1,719)
(2,323)
Proceeds from exercise of common stock options
1,212 
372 
27 
Purchase of treasury stock
(201)
Proceeds from initial public offering
25,364 
Initial public offering costs
(2,753)
(264)
Net cash (used in) provided by financing activities
21,237 
(1,317)
(2,159)
Effect of exchange rate changes on cash and cash equivalents
(6)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
31,019 
5,513 
(5,050)
CASH AND CASH EQUIVALENTS—Beginning of year
10,925 
5,412 
10,462 
CASH AND CASH EQUIVALENTS—End of year
41,944 
10,925 
5,412 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest
259 
110 
247 
Cash paid for income taxes
134 
82 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
 
 
 
Property and equipment acquired under capital lease obligations and bank financing
2,484 
2,185 
1,840 
Accrued business acquisition costs
500 
Accrued property and equipment expenditures
269 
235 
Accrued initial public offering costs
$ 0 
$ 1,042 
$ 0 
The Company and Summary of Significant Accounting Policies
The Company and Summary of Significant Accounting Policies
THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Synacor, Inc., together with its wholly-owned subsidiary, Synacor, Canada, Inc. (collectively, the “Company”), is a leading provider of startpages, TV Everywhere solutions, Identity Management (IDM) and various cloud-based services across multiple devices for cable, satellite, telecom and consumer electronics companies. The Company is also a leading provider of authentication and aggregation solutions for delivery of online content. The Company's technology allows its customers to package a wide array of online content and cloud-based services with their high-speed Internet, communications, television and other offerings. The Company's customers offer the Company's services under their own brands on Internet-enabled devices such as PCs, tablets, smartphones and connected TVs.

Initial Public Offering—    In February 2012, the Company completed its initial public offering whereby 6,818,170 shares of common stock were sold to the public at a price of $5.00 per share. The Company sold 5,454,545 common shares and selling stockholders sold 1,363,625 common shares. The Company received aggregate proceeds of $25,364 from the initial public offering, net of underwriters’ discounts and commissions but before deducting offering expenses of approximately $3,016.
In connection with the initial public offering in February 2012, the Board of Directors of the Company approved a 1-for-2 reverse stock split of the Company’s common stock. All common shares, stock options, and per share information presented in these financial statements reflect the reverse stock split on a retroactive basis for all periods presented. There was no change in the par value of the Company’s common stock. The ratio by which shares of preferred stock were convertible into shares of common stock was adjusted to reflect the effects of the reverse stock split. In addition, in accordance with their rights and consistent with the conversion rates discussed in Note 8, Equity, all shares of the Company’s outstanding preferred stock were converted into common stock upon the closing of the initial public offering.
Basis of Presentation—The consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiary, Synacor Canada, Inc. All intercompany balances and transactions have been eliminated in consolidation.
Accounts Receivable—The Company records accounts receivable at the invoiced amount and does not charge interest on past due invoices. An allowance for doubtful accounts is maintained to reserve for potentially uncollectible accounts receivable. The Company reviews its accounts receivable from customers which are past due to identify specific accounts with known disputes or collectability issues. In determining the amount of the reserve, the Company makes judgments about the creditworthiness of customers based on ongoing credit evaluations.
Property and Equipment—Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
Leasehold improvements
3–10 years
Computer hardware
5 years
Computer software
3 years
Furniture and fixtures
7 years
Other
3–5 years

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the assets.
Long-Lived Assets—The Company reviews the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. For purposes of evaluating and measuring impairment, the Company groups a long-lived asset or assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. There has been no material adjustments to long-lived assets in any of the years presented.
Revenue Recognition—The Company derives revenue from two categories: revenue generated from search and display advertising activities and subscriber-based revenue, each of which is described below. Search and display advertising is recorded on a gross basis, which includes the net amount received from Google under the Company’s agreement with Google. The following table shows the revenue in each category for the years ended December 31, 2010, 2011 and 2012 (in thousands):
 
Year Ended December 31,
 
2010
 
2011
 
2012
Search and display advertising
$
45,859

 
$
72,084

 
$
101,559

Subscriber-based
20,373

 
18,976

 
20,422

Total revenue
$
66,232

 
$
91,060

 
$
121,981


The Company uses Internet search and display advertising to generate revenue from the traffic on its startpages.
In the case of search advertising, the Company has a revenue-sharing relationship with Google, pursuant to which it includes a Google-branded search tool on its startpages. When a consumer makes a search query using this tool, the Company delivers the query to Google and they return search results to consumers that include advertiser-sponsored links. If the consumer clicks on a sponsored link, Google receives payment from the sponsor of that link and shares a portion of that payment with the Company, which in turn is shared with the applicable customer. The net payment received from Google is recognized as revenue.
Display advertising revenue is generated when consumers view or click on a text, graphic, or video advertisement that was delivered on one of the Company's startpages. Advertising inventory is filled with advertisements sourced by the Company’s direct sales force, independent advertising sales representatives, and also advertising network partners. Display advertising revenue is calculated on a cost per impression basis, which means the advertiser pays based on the number of times its advertisements appear, or a cost per action basis, which means that an advertiser pays when a consumer performs an action after engaging one of its advertisements. Historically, only a small percentage of display advertising has been calculated on a cost per action basis.
Subscriber-based revenue is defined as subscription fees and other fees that the Company receives from customers for the use of its proprietary technology, including the use of, or access to, e-mail, security, games and other value added services and paid content. Monthly subscriber levels typically form the basis for calculating and generating subscriber-based revenue. They are generally determined by multiplying a per-subscriber per-month fee by the number of subscribers using the particular services being offered or consumed. In other cases, the fee is fixed. Revenue is recognized from customers as the service is delivered.
Search and display advertising and subscriber-based revenue are recognized when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the selling price is fixed or determinable; and collectability is reasonably assured.
The Company evaluates its relationship between search and display advertising partners and customers in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-45, Principal Agent Considerations. The Company has determined that the revenue derived from traffic supplied by its customers is reported on a gross basis because Synacor is the primary obligor (the Company is responsible to its customers for fulfilling search and display advertising services and value added and other services), is involved in the service specifications, performs part of the service, has discretion in supplier selection, has latitude in establishing price and bears credit risk.
Cost of Revenue—Cost of revenue consists of revenue sharing, content acquisition costs and co-location facility costs. Revenue sharing consists of amounts accrued and paid to customers for the traffic on their startpage resulting in the generation of search and display advertising revenue. The revenue-sharing agreements with customers are primarily variable payments based on a percentage of the search and display advertising revenue. Content-acquisition agreements may be based on a fixed payment schedule, on the number of subscribers per month, or a combination of both. Fixed-payment agreements are expensed on a straight-line basis over the term defined in the agreement. Agreements based on the number of subscribers are expensed on a monthly basis. Co-location facility costs consist of rent and operating costs for the Company’s data center facilities.
    
Concentrations of Risk—As of December 31, 2011 and 2012, and for the years ended December 31, 2010, 2011, and 2012 the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable and revenue as follows:
 
Accounts Receivable
 
Revenue
 
2011
 
2012
 
2010
 
2011
 
2012
Google
45
%
 
40
%
 
49
%
 
57
%
 
56
%
Customer A (1)
11

 
9

 
14

 
N/A

 
N/A

Note:
(1)
For this purpose revenue includes only revenue earned directly by the Company from this customer for subscriber-based services and excludes revenue attributable to search and display advertising on the startpage. For the years ended December 31, 2011 and 2012, the revenue earned directly from Customer A was less than 10%.
For the years ended December 31, 2010, 2011 and 2012, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue. The costs represent revenue share paid to customers for their supply of Internet traffic on the Company's startpages.
 
Cost of Revenue
 
2010
 
2011
 
2012
Customer A
21
%
 
14
%
 
20
%
Customer B
25

 
18

 
13

Customer C (1)
N/A

 
11

 
17

Customer D (2)
N/A

 
N/A

 
12

Note:
(1)
For the year ended December 31, 2010, the revenue share payments received by Customer C was less than 10%.
(2)
For the years ended December 31, 2010 and 2011, the revenue share payments received by Customer D were less than 10%.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company places its cash primarily in checking and money market accounts with high credit quality financial institutions, which, at times, have exceeded federally insured limits. At December 31, 2012, the Company had no cash at financial institutions that was in excess of the federally insured limits.
Research and Development—Research and development expenses consist primarily of compensation related expenses incurred for the development of, enhancements to, and maintenance and operation of the Company’s technology and related infrastructures.
Software Development Costs—Costs incurred during the preliminary project stage for software programs are expensed as incurred. External and internal costs incurred during the application development stage of new software development as well as for upgrades and enhancements for software programs that result in additional functionality are capitalized. In 2010 and 2011 the Company had not incurred significant external or internal costs related to the application development stage. In 2012, the Company incurred $778 of combined internal and external costs related to the application development stage. Internal and external training and maintenance costs are expensed as incurred.
Sales and Marketing—Sales and marketing expenses consist primarily of compensation related expenses to the Company’s direct sales and marketing personnel, as well as costs related to advertising, industry conferences, promotional materials, and other sales and marketing programs. Advertising cost is expensed as incurred.
General and Administrative—General and administrative expenses consist primarily of compensation related expenses for executive management, finance, accounting, human resources, and other administrative functions.
Earnings Per Share—Basic earnings per share, or EPS, is calculated in accordance with FASB ASC Topic 260, Earnings per Share, and is calculated using the weighted average number of common shares outstanding during each period. Contingently issuable or repurchasable shares are not used in the calculation of basic earnings per share until the contingency is resolved.
Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. For purposes of this calculation, convertible preferred stock and options are considered to be potential common shares and are only included in the calculation of diluted earnings per share when their effect is dilutive.
The shares used to compute basic and diluted net income per share represent the weighted-average common shares outstanding. The Company’s preferred stockholders have the right to participate with common stockholders in dividends and unallocated income. Net losses are not allocated to the preferred stockholders. Therefore, when applicable, basic and diluted EPS are computed using the two-class method, under which the Company’s undistributed earnings are allocated amongst the common and preferred stockholders.
Stock-Based Compensation—The Company records compensation costs related to stock-based awards in accordance with FASB ASC 718, Compensation—Stock Compensation. Under the fair value recognition provisions of ASC 718, the Company measures stock-based compensation cost at the grant date based on the estimated fair value of the award. Compensation cost is recognized ratably over the requisite service period of the award. The Company utilizes the Black-Scholes option-pricing model to estimate the fair value of stock options granted. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates prevesting forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The total expense recognized over the vesting period will only be for those awards that ultimately vest. See Note 9, Stock-based Compensation, for additional information on stock-based compensation.
Income Taxes—Deferred income tax assets and liabilities are determined based on temporary differences between the financial statement and income tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted income tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established to the extent necessary to reduce deferred income tax assets to amounts that more likely than not will be realized.
The Company accounts for uncertain tax positions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2012, there was no accrued interest or penalties related to uncertain tax positions.
Accounting Estimates—The preparation of financial statements in conformity with GAAP in the U.S. 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.
Fair Value of Financial Instruments—The carrying amounts of the Company’s capital leases and bank financing approximate fair value of these obligations based upon management’s best estimates of interest rates that would be available for similar debt obligations at December 31, 2011 and 2012.
Fair Value Measurements—The provisions of ASC 820, Fair Value Measurements and Disclosures, establishes a framework for measuring the fair value in accounting principles generally accepted in the U.S. and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value as follows:
Level 1—Level 1 inputs are defined as observable inputs such as quoted prices in active markets.
Level 2—Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Level 3 inputs are unobservable inputs that reflect the Company’s determination of assumptions that market participants would use in pricing the asset or liability. These inputs are developed based on the best information available, including the Company’s own data.
In accordance with ASC 820, included within the Company’s cash and cash equivalents as of December 31, 2011 and 2012 are $1,295 and $0, respectively, of money market funds that are classified as Level 1 financial assets. The fair value of cash and cash equivalents are primarily composed of the Company’s investments in money market instruments with original maturities of three months or less. The Company’s cash and cash equivalent balances excluded above are composed of cash, certificates of deposits with original maturities of one month or less, and overnight investments.
Acquisition—In January 2012, the Company acquired the assets of Carbyn, Inc., or Carbyn, an Ontario, Canada-based company. The assets acquired are principally comprised of mobile device software and technology and other intellectual property, which the Company is using to enhance its efforts in the development of next generation web applications for mobile devices. The aggregate purchase price is up to $1,100 for the acquired assets, of which $600 was paid upon consummation of the acquisition and the remaining $500 is due in April 2013 unless such amount is offset in satisfaction of certain indemnification obligations of Carbyn. In addition, the Company hired seven employees from Carbyn who accepted employment with Synacor Canada, Inc., a newly-formed and wholly-owned subsidiary of the Company. The acquisition and its impact on the balance sheet and results of operations are not material. The purchase price was allocated to the assets acquired based on their respective fair values as of the acquisition date, with the amount exceeding the fair value recorded as goodwill of $819.
Joint Venture—In March 2013, the Company entered into a Joint Venture Agreement, pursuant to which it will initially own 50% of the newly formed Synacor China, Ltd (the JV Company). The Company has agreed to provide $400 in initial funding and up to $1,600 in additional funding to the JV Company over the next two years. Subject to the completion of customary regulatory requirements, the JV Company will, through a wholly foreign-owned subsidiary in the People's Republic of China (the “PRC”), supply authentication and aggregation solutions for the delivery of online content and series to customers in the PRC.
Property and Equipment - Net
Property and Equipment - Net
PROPERTY AND EQUIPMENT—NET
As of December 31, property and equipment, net consisted of the following (in thousands):
 
2011
 
2012
Computer equipment (1)
$
13,032

 
$
17,630

Computer software
1,409

 
3,715

Furniture and fixtures
1,049

 
1,050

Leasehold improvements
690

 
732

Work in process
760

 
226

Other
173

 
173

 
17,113

 
23,526

Less accumulated depreciation (2)
(8,812
)
 
(12,483
)
Total property and equipment—net
$
8,301

 
$
11,043

Notes:
(1)
Includes equipment under capital lease obligations of approximately $3,442 and $5,882 as of December 31, 2011 and 2012, respectively.
(2)
Includes $687 and $1,834 of accumulated depreciation of equipment under capital leases as of December 31, 2011 and 2012, respectively.
Accrued Expenses and Other Current Liabilities
Accrued Expenses and Other Current Liabilities
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, accrued expenses and other current liabilities consisted of the following (in thousands):
 
2011
 
2012
Accrued compensation
$
3,612

 
$
4,265

Accrued content fees
334

 
555

Accrued business acquisition consideration

 
500

Unearned revenue on contracts
255

 
297

Other
1,291

 
1,711

Total
$
5,492

 
$
7,328

Bank Financing
Bank Financing
BANK FINANCING
During 2012 the Company repaid in full its term loan principal amount of $250 outstanding as of December 31, 2011.
The Company has the ability to borrow $6,000 under a revolving credit line until July 2013. Any borrowings under the revolving credit line accrue interest at the greater of 4% or prime rate plus margin of 0.25% and must be repaid by July 2013. There were no borrowings outstanding on the revolving credit line as of December 31, 2011 or 2012.
The revolving credit line agreement contains provisions that would allow the lender to accelerate repayment of any borrowing upon a material adverse change as defined in the agreement. The term loan and the revolving credit line agreement contain certain financial performance and reporting covenants, and at December 31, 2011 and 2012, the Company was in compliance with the covenants.
Income Taxes
Income Taxes
INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, 2010, 2011, and 2012, comprised the following (in thousands):
 
2010
 
2011
 
2012
Current:
 
 
 
 
 
United States Federal
$
2

 
$
47

 
$
151

State

 
7

 
20

Foreign
9

 
14

 
36

Total current provision for income taxes
11

 
68

 
207

Deferred:
 
 
 
 
 
United States Federal
(786
)
 
1,954

 
1,022

State
(158
)
 
373

 
535

Foreign

 
40

 

Total deferred (benefit) provision for income taxes
(944
)
 
2,367

 
1,557

Less increase (decrease) in valuation allowance
944

 
(8,450
)
 

Net deferred provision (benefit) for income taxes

 
(6,083
)
 
1,557

Total (benefit) provision for income taxes
$
11

 
$
(6,015
)
 
$
1,764


    





The income tax effects of significant temporary differences and carryforwards that give rise to deferred income tax assets and liabilities as of December 31, 2011 and 2012 are as follows (in thousands):
 
2011
 
2012
Deferred income tax assets:
 
 
 
Stock and other compensation expense
$
351

 
$
835

Net operating losses
6,179

 
2,763

Research and development credits

 
1,676

Other federal and state carryforwards
116

 
375

Other
89

 
71

Gross deferred tax assets
6,735

 
5,720

Deferred income tax liabilities:
 
 
 
Fixed assets
(621
)
 
(566
)
Other
(5
)
 
(1
)
Gross deferred tax liabilities
(626
)
 
(567
)
Subtotal
6,109

 
5,153

Less unrecognized tax benefit liability
(26
)
 
(627
)
Net deferred tax assets
$
6,083

 
$
4,526

 
 
 
 
Recorded as:
 
 
 
Current deferred tax assets
$
3,534

 
$
1,999

Non-current deferred tax assets
2,549

 
2,527

Net deferred tax assets
$
6,083

 
$
4,526


A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
 
2010
 
2011
 
2012
Balance—beginning of year
$

 
$
244

 
$
26

Additions for tax positions of prior years
244

 

 
601

Reductions for tax positions of prior years

 
(218
)
 

Balance—end of year
$
244

 
$
26

 
$
627


The tax positions at the end of 2010 and 2011 were primarily related to changes in tax depreciation methods related to fixed assets placed in service in prior years. The tax positions at the end of 2012 were primarily related to research and development carryforwards.
If the $627 of unrecognized tax benefits as of December 31, 2012 is recognized, approximately $614 would decrease the effective tax rate in the period in which each of the benefits is recognized. The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is placed. The Company does not expect any material changes to its unrecognized tax benefits within the next twelve months.
    
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2011 and 2012, penalties and interest were immaterial.

The Company files income tax returns in the U.S. federal jurisdiction as well as many U.S. states and foreign jurisdictions. The tax years 2003 to 2011 remain open to examination by the major jurisdictions in which the Company is subject to tax. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized. The Company is currently not under examination in any major taxing jurisdictions.

The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries, as such earnings are to be reinvested offshore indefinitely. The income tax liability would be insignificant if these earnings were to be repatriated.
On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012 (the "2012 Act"). Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts paid or incurred on or before December 31, 2011. The 2012 Act extends the research credit for two years to December 31, 2013. The extension of the research credit is retroactive and includes amounts paid or incurred after December 31, 2011. The retroactive tax effects for 2012 and the tax effects for 2013 will be recognized by the Company in the 2013 financial statements.
Income tax (benefit) expense for the years ended December 2010, 2011, and 2012, differs from the expected income tax (benefit) expense calculated using the statutory U.S. Federal income tax rate as follows (dollars in thousands):
 
2010
 
2011
 
2012
Federal income tax (benefit) expense at statutory rate
$
(1,217
)
 
34
 %
 
$
1,332

 
34
 %
 
$
1,895

 
34
 %
State and local taxes—net of federal benefit
(158
)
 
4

 
251

 
6

 
310

 
6

Foreign taxes

 

 
54

 
1

 
14

 

Expiration of or changes to federal and state NOLs
135

 
(4
)
 
(42
)
 
(1
)
 
446

 
8

Federal research and development credit

 

 

 

 
(1,676
)
 
(30
)
Valuation allowance
944

 
(26
)
 
(7,959
)
 
(203
)
 

 

Permanent differences
256

 
(7
)
 
349

 
9

 
291

 
5

Uncertain tax position current activity

 

 

 

 
586

 
11

Other
51

 
(1
)
 

 

 
(102
)
 
(2
)
Total
$
11

 
 %
 
$
(6,015
)
 
(154
)%
 
$
1,764

 
32
 %

The Company had federal and state net operating loss (“NOL”) carryforwards of approximately $7,300 and $6,400, respectively, at December 31, 2012. In addition, the Company has approximately $2,000 of NOL carryforwards created by windfall tax benefits relating to stock compensation for which no deferred tax assets have been recorded. The Company had federal and state NOLs of approximately $16,100 and $14,700, respectively, at December 31, 2011. The NOLs will begin to expire in 2023. At December 31, 2010 due to the uncertainty as to the ability to generate sufficient taxable income in the future and utilize the NOLs before they expire, the Company had recorded a valuation allowance to reduce the net deferred tax asset to zero. At December 31, 2011, the Company weighed the positive and negative evidence and determined that it will more likely than not be able to generate sufficient taxable income in the future to be able to utilize the entire NOL in future periods. Therefore, the valuation allowance had been reduced to zero as of December 31, 2011.
Information About Segment and Geographic Areas
Information About Segment and Geographic Areas
INFORMATION ABOUT SEGMENT AND GEOGRAPHIC AREAS
The Company considers operating segments to be 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. 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 table sets forth revenue and long-lived tangible assets by geographic area (in thousands):
 
Years Ended December 31,
 
2010
 
2011
 
2012
Revenue:
 
 
 
 
 
United States
$
65,180

 
$
90,062

 
$
121,306

United Kingdom
766

 
998

 
675

Netherlands
286

 

 

Total revenue
$
66,232

 
$
91,060

 
$
121,981

 
Years Ended December 31,
 
2011
 
2012
Long-lived tangible assets:
 
 
 
United States
$
7,680

 
$
10,638

Netherlands
621

 
405

Total long-lived tangible assets
$
8,301

 
$
11,043

Commitments and Contingencies
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
Lease Commitments—The Company leases office space and data center space under operating lease agreements and certain equipment under capital lease agreements with interest rates ranging from 3% to 7%.
Rent expense for operating leases was approximately $1,048, $1,099, and $1,529 for 2010, 2011, and 2012, respectively.
Lease commitments as of December 31, 2012 can be summarized as follows (in thousands):
Years Ending
December 31
Operating
Lease Commitments
2013
$
1,339

2014
1,041

2015
639

2016 and thereafter
118

Total lease commitments
$
3,137


Years Ending
December 31
Capital
Lease Commitments
2013
$
2,280

2014
1,640

2015 and thereafter
133

Gross lease commitment
4,053

Less interest
(214
)
Net lease commitments
$
3,839


    




Contract Commitments—The Company is obligated to make payments under various contracts with vendors and other business partners, principally for revenue-share and content arrangements. Contract commitments as of December 31, 2012 can be summarized as follows (in thousands):
Years Ending
December 31
Contract
Commitments
2013
$
4,648

2014
1,419

2015
1,080

2016
1,080

2017 and thereafter
360

Total contract commitments
$
8,587


Litigation—From time to time, the Company is a party to legal actions. In the opinion of management, the outcome of these matters will not have a material impact on the financial statements of the Company.
Equity
Equity
EQUITY
Common Stock—Effective on February 15, 2012, the Company's board of directors and stockholders approved the Fifth Amended and Restated Certificate of Incorporation. The total number of common shares that the Company is authorized to issue is 100,000,000 with a par value of $0.01 per share.
Preferred Stock Effective on February 15, 2012, the Company's board of directors and stockholders approved the Fifth Amended and Restated Certificate of Incorporation. The total number of preferred shares that the Company is authorized to issue is 10,000,000 with a par value of $0.01 per share.

Conversion Each share of Series A, A-1, B, and C preferred stock was convertible at the option of the holder at any time into common stock. The conversion rate was the quotient obtained by dividing the original issue price of the Series A, A-1, B, or C by the conversion price. Subsequent to the Second Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation, the conversion price was adjusted to effect a conversion of one preferred share into one and one-half common shares, as explained in Note 1, The Company and Summary of Significant Accounting Policies. The conversion price was subject to adjustment as set forth in the restated certificate of incorporation for certain dilutive issuances, splits, and combinations, as therein defined. Conversion was automatic upon either the consent of the holders of 66% of the outstanding shares of preferred stock or the effective date of a firm commitment underwritten public offering of the Company's common stock in which the post-offering valuation on a fully diluted basis was at least $150 million and the proceeds are not less than $25 million. All shares of the Company's outstanding preferred stock were converted into common stock in February 2012 in connection with the Company's initial public offering.
Stock-based Compensation
Stock-based Compensation
STOCK-BASED COMPENSATION
The Company recorded $868, $920 and $1,999 of stock-based compensation expense for the years ended December 31, 2010, 2011, and 2012, respectively. No income tax deduction is allowed for incentive stock options ("ISOs"). Accordingly, no deferred income tax asset is recorded for the expense related to these options. Stock option grants of non-qualified stock options ("NSOs") result in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised.
Total stock-based compensation expense included in the accompanying consolidated statements of operations and comprehensive income for the years ended December 31, 2010, 2011, and 2012, is as follows (in thousands):
 
2010
 
2011
 
2012
Research and development
$
398

 
$
295

 
$
523

Sales and marketing
202

 
203

 
404

General and administrative
268

 
422

 
1,072

Total stock-based compensation expense
$
868

 
$
920

 
$
1,999


Equity Incentive Plans—The Company has four stock option plans, which authorize the Company to grant of up to 8,170,359 stock options (ISOs and NSOs), stock appreciation rights, restricted stock, restricted stock units (“RSUs”), and performance cash awards. The ISOs and NSOs will be granted at a price per share not less than the fair value of the Company's common stock at the date of grant. Options granted to date generally vest over a four-year period with 25% vesting at the end of one year and the remaining 75% vesting monthly thereafter. Options granted generally are exercisable up to 10 years. The Company began granting RSUs in December 2012, which generally vest over a four year period with 25% vesting at the end of one year and the remaining 75% vesting quarterly thereafter.
    
Stock Option Activity—A summary of stock option activity for the year ended December 31, 2012 is as follows:
 
Number of
Stock
Options
 
Weighted
Average
Exercise
Price
 
Aggregate Intrinsic Value (in thousands)
 
Weighted Average Remaining Contractual Term (in years)
Outstanding—January 1, 2012
5,082,776

 
$
2.14

 
 
 
 
Granted
1,341,075

 
7.56

 
 
 
 
Exercised
(1,615,128
)
 
0.75

 
 
 
 
Forfeited
(297,916
)
 
4.99

 
 
 
 
Outstanding—December 31, 2012
4,510,807

 
4.06

 
$
9,066

 
7.44
Expected to vest—December 31, 2012
4,123,598

 
3.92

 
$
8,680

 
7.30
Vested and exercisable—December 31, 2012
1,943,335

 
2.14

 
$
6,495

 
5.48

    
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 as of December 31, 2012 was $5.47. The total intrinsic value of options exercised was approximately $170, $6,461 and $7,622 for the years ended December 31, 2010, 2011 and 2012, respectively. The weighted-average grant date fair value of options granted was $0.72, $1.89 and $3.97 and for the years ended December 31, 2010, 2011 and 2012, respectively.
As of December 31, 2012, total unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested stock options was approximately $5,769 which is expected to be recognized over a weighted-average period of 3.16 years.
The following table summarizes information about outstanding and vested stock options as of December 31, 2012:
Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Number of Options Outstanding
 
Number of Options Vested and Exercisable
$
0.04

 
1.02
 
48,132

 
48,132

0.20

 
2.07
 
246,080

 
246,080

0.93

 
4.10
 
335,799

 
335,799

2.40

 
6.59
 
37,873

 
25,695

2.52

 
4.90
 
603,098

 
600,251

2.58

 
5.97
 
58,069

 
56,415

2.68

 
6.82
 
133,782

 
46,667

2.88

 
7.24
 
463,564

 
203,410

3.32

 
7.73
 
1,015,878

 
322,319

3.70

 
7.91
 
91,000

 
27,110

5.82

 
8.47
 
149,457

 

5.96

 
7.74
 
426,000

 
30,624

6.71

 
8.33
 
24,000

 

7.10

 
7.89
 
523,225

 

7.61

 
8.28
 
217,000

 

11.14

 
7.99
 
63,000

 

15.00

 
8.11
 
12,250

 

15.45

 
8.13
 
62,600

 
833

 
 
 
 
4,510,807

 
1,943,335


    
    


RSU Activity—A summary of RSU activity for the year ended December 31, 2012, is as follows:
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
Unvested—January 1, 2012

 

Granted
50,000

 
$
5.82

Released

 

Forfeited

 

Unvested—December 31, 2012
50,000

 
$
5.82

Expected to vest —December 31, 2012
42,500

 
$
5.82


As of December 31, 2012, total unrecognized compensation cost, adjusted for estimated forfeitures, related to RSUs was approximately $242, which is expected to be recognized over the next 3.91 years.
    
Stock-Based Compensation Expense—The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the fair value of the Company's common stock, the expected term (the period of time that the options granted are expected to be outstanding), the volatility of the Company's common stock, a risk-free interest rate, and expected dividends. The Company also estimates forfeitures of unvested stock options. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is recorded for options that do not vest. The Company uses the simplified calculation of expected life described in the SEC's Staff Accounting Bulletin No. 107, Share-Based Payment, and volatility is based on an average of the historical volatilities of the common stock of several entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The Company uses an expected dividend yield of zero, as it does not anticipate paying any dividends in the foreseeable future. Expected forfeitures are based on the
Company's historical experience.
The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the periods presented:     
 
2010
 
2011
 
2012
Volatility
53
%
 
51
%
 
58
%
Expected dividend yield

 

 

Risk-free rate
2.4
%
 
1.6
%
 
1.4
%
Expected term (in years)
6.25

 
6.25

 
6.25

Net Income Per Common Share Data
Net Income Per Common Share Data
NET (LOSS) INCOME PER COMMON SHARE DATA
Basic and diluted net (loss) income per common share is presented in conformity with the two-class method required for participating securities. The Company has determined that its Series A, A-1, B and C convertible preferred stock represented participating securities because they participated with common stock in dividends and unallocated income. Historically, the Company has not paid dividends. The holders of the Series A, A-1, B and C convertible preferred stock did not have a contractual obligation to share in the losses of the Company. The Company considers its preferred stock to be participating securities and, in accordance with the two-class method, earnings allocated to preferred stock and the related number of outstanding shares of preferred stock have been excluded from the computation of basic and diluted net income (loss) per common share.
The table below summarizes the calculation of basic and diluted net (loss) income per share for the years ended December 31, 2010, 2011 and 2012 (in thousands, except share and per share amounts):
 
Year Ended December 31,
 
2010
 
2011
 
2012
Net (loss) income
$
(3,591
)
 
$
9,932

 
$
3,815

Less: Undistributed earnings allocated to preferred stockholders

 
(8,583
)
 

Net (loss) income attributable to common stockholders
$
(3,591
)
 
$
1,349

 
$
3,815

Weighted-average common shares used to compute net income (loss) per share attributable to common stockholders
1,865,294

 
2,303,443

 
24,411,194

Basic net (loss) income per share attributable to common stockholders
$
(1.93
)
 
$
0.59

 
$
0.16

Diluted net (loss) income per share attributable to common stockholders:
 
 
 
 
 
Net (loss) income
$
(3,591
)
 
$
1,349

 
$
3,815

Add: Undistributed earnings allocated to preferred stockholders

 
8,583

 

Net (loss) income attributable to common stockholders
$
(3,591
)
 
$
9,932

 
$
3,815

Number of shares used in basic calculation
1,865,294

 
2,303,443

 
24,411,194

Weighted-average effect of dilutive securities
 
 
 
 
 
Add:
 
 
 
 
 
Conversion of preferred stock (as-if converted basis)

 
17,395,136

 
1,948,635

Stock options

 
2,275,824

 
1,737,484

Number of shares used in diluted calculation (1)
1,865,294

 
21,974,403

 
28,097,313

Diluted net (loss) income per share attributable to common stockholders
$
(1.93
)
 
$
0.45

 
$
0.14

Note:
(1)
Stock options and convertible preferred shares are not included in the calculation of diluted net loss per share for the year ended December 31, 2010 because the Company had a net loss for that year. Accordingly, the inclusion of these equity awards would have had an antidilutive effect on the calculation of diluted loss per share.
The following equivalent shares were excluded from the calculation of diluted net (loss) income per share because their effect would have been anti-dilutive for the periods presented:
 
Year Ended December 31,
Antidilutive Equity Awards
2010
 
2011
 
2012
Stock options
2,342,694

 
367,250

 
137,850

Convertible preferred shares
17,395,136

 

 

Total
19,737,830

 
367,250

 
137,850

Employee Benefit Plan
Employee Benefit Plan
EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) profit sharing plan that covers substantially all employees. Under the plan, eligible employees are permitted to contribute a portion of gross compensation not to exceed standard limitations provided by the Internal Revenue Service. The Company maintains the right to match employee contributions; however, no matching contributions were made during the years ended December 31, 2010, 2011, or 2012.
The Company and Summary of Significant Accounting Policies (Policies)
Initial Public Offering—    In February 2012, the Company completed its initial public offering whereby 6,818,170 shares of common stock were sold to the public at a price of $5.00 per share. The Company sold 5,454,545 common shares and selling stockholders sold 1,363,625 common shares. The Company received aggregate proceeds of $25,364 from the initial public offering, net of underwriters’ discounts and commissions but before deducting offering expenses of approximately $3,016.
In connection with the initial public offering in February 2012, the Board of Directors of the Company approved a 1-for-2 reverse stock split of the Company’s common stock. All common shares, stock options, and per share information presented in these financial statements reflect the reverse stock split on a retroactive basis for all periods presented. There was no change in the par value of the Company’s common stock. The ratio by which shares of preferred stock were convertible into shares of common stock was adjusted to reflect the effects of the reverse stock split. In addition, in accordance with their rights and consistent with the conversion rates discussed in Note 8, Equity, all shares of the Company’s outstanding preferred stock were converted into common stock upon the closing of the initial public offering.
Basis of Presentation—The consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiary, Synacor Canada, Inc. All intercompany balances and transactions have been eliminated in consolidation.
Accounts Receivable—The Company records accounts receivable at the invoiced amount and does not charge interest on past due invoices. An allowance for doubtful accounts is maintained to reserve for potentially uncollectible accounts receivable. The Company reviews its accounts receivable from customers which are past due to identify specific accounts with known disputes or collectability issues. In determining the amount of the reserve, the Company makes judgments about the creditworthiness of customers based on ongoing credit evaluations.
Property and Equipment—Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
Leasehold improvements
3–10 years
Computer hardware
5 years
Computer software
3 years
Furniture and fixtures
7 years
Other
3–5 years

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the assets.
Long-Lived Assets—The Company reviews the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. For purposes of evaluating and measuring impairment, the Company groups a long-lived asset or assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. There has been no material adjustments to long-lived assets in any of the years presented.
Revenue Recognition—The Company derives revenue from two categories: revenue generated from search and display advertising activities and subscriber-based revenue, each of which is described below. Search and display advertising is recorded on a gross basis, which includes the net amount received from Google under the Company’s agreement with Google. The following table shows the revenue in each category for the years ended December 31, 2010, 2011 and 2012 (in thousands):
 
Year Ended December 31,
 
2010
 
2011
 
2012
Search and display advertising
$
45,859

 
$
72,084

 
$
101,559

Subscriber-based
20,373

 
18,976

 
20,422

Total revenue
$
66,232

 
$
91,060

 
$
121,981


The Company uses Internet search and display advertising to generate revenue from the traffic on its startpages.
In the case of search advertising, the Company has a revenue-sharing relationship with Google, pursuant to which it includes a Google-branded search tool on its startpages. When a consumer makes a search query using this tool, the Company delivers the query to Google and they return search results to consumers that include advertiser-sponsored links. If the consumer clicks on a sponsored link, Google receives payment from the sponsor of that link and shares a portion of that payment with the Company, which in turn is shared with the applicable customer. The net payment received from Google is recognized as revenue.
Display advertising revenue is generated when consumers view or click on a text, graphic, or video advertisement that was delivered on one of the Company's startpages. Advertising inventory is filled with advertisements sourced by the Company’s direct sales force, independent advertising sales representatives, and also advertising network partners. Display advertising revenue is calculated on a cost per impression basis, which means the advertiser pays based on the number of times its advertisements appear, or a cost per action basis, which means that an advertiser pays when a consumer performs an action after engaging one of its advertisements. Historically, only a small percentage of display advertising has been calculated on a cost per action basis.
Subscriber-based revenue is defined as subscription fees and other fees that the Company receives from customers for the use of its proprietary technology, including the use of, or access to, e-mail, security, games and other value added services and paid content. Monthly subscriber levels typically form the basis for calculating and generating subscriber-based revenue. They are generally determined by multiplying a per-subscriber per-month fee by the number of subscribers using the particular services being offered or consumed. In other cases, the fee is fixed. Revenue is recognized from customers as the service is delivered.
Search and display advertising and subscriber-based revenue are recognized when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the selling price is fixed or determinable; and collectability is reasonably assured.
The Company evaluates its relationship between search and display advertising partners and customers in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-45, Principal Agent Considerations. The Company has determined that the revenue derived from traffic supplied by its customers is reported on a gross basis because Synacor is the primary obligor (the Company is responsible to its customers for fulfilling search and display advertising services and value added and other services), is involved in the service specifications, performs part of the service, has discretion in supplier selection, has latitude in establishing price and bears credit risk.
Cost of Revenue—Cost of revenue consists of revenue sharing, content acquisition costs and co-location facility costs. Revenue sharing consists of amounts accrued and paid to customers for the traffic on their startpage resulting in the generation of search and display advertising revenue. The revenue-sharing agreements with customers are primarily variable payments based on a percentage of the search and display advertising revenue. Content-acquisition agreements may be based on a fixed payment schedule, on the number of subscribers per month, or a combination of both. Fixed-payment agreements are expensed on a straight-line basis over the term defined in the agreement. Agreements based on the number of subscribers are expensed on a monthly basis. Co-location facility costs consist of rent and operating costs for the Company’s data center facilities.
Concentrations of Risk—As of December 31, 2011 and 2012, and for the years ended December 31, 2010, 2011, and 2012 the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable and revenue as follows:
 
Accounts Receivable
 
Revenue
 
2011
 
2012
 
2010
 
2011
 
2012
Google
45
%
 
40
%
 
49
%
 
57
%
 
56
%
Customer A (1)
11

 
9

 
14

 
N/A

 
N/A

Note:
(1)
For this purpose revenue includes only revenue earned directly by the Company from this customer for subscriber-based services and excludes revenue attributable to search and display advertising on the startpage. For the years ended December 31, 2011 and 2012, the revenue earned directly from Customer A was less than 10%.
For the years ended December 31, 2010, 2011 and 2012, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue. The costs represent revenue share paid to customers for their supply of Internet traffic on the Company's startpages.
 
Cost of Revenue
 
2010
 
2011
 
2012
Customer A
21
%
 
14
%
 
20
%
Customer B
25

 
18

 
13

Customer C (1)
N/A

 
11

 
17

Customer D (2)
N/A

 
N/A

 
12

Note:
(1)
For the year ended December 31, 2010, the revenue share payments received by Customer C was less than 10%.
(2)
For the years ended December 31, 2010 and 2011, the revenue share payments received by Customer D were less than 10%.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company places its cash primarily in checking and money market accounts with high credit quality financial institutions, which, at times, have exceeded federally insured limits. At December 31, 2012, the Company had no cash at financial institutions that was in excess of the federally insured limits.
Research and Development—Research and development expenses consist primarily of compensation related expenses incurred for the development of, enhancements to, and maintenance and operation of the Company’s technology and related infrastructures.
Software Development Costs—Costs incurred during the preliminary project stage for software programs are expensed as incurred. External and internal costs incurred during the application development stage of new software development as well as for upgrades and enhancements for software programs that result in additional functionality are capitalized. In 2010 and 2011 the Company had not incurred significant external or internal costs related to the application development stage. In 2012, the Company incurred $778 of combined internal and external costs related to the application development stage. Internal and external training and maintenance costs are expensed as incurred.
Sales and Marketing—Sales and marketing expenses consist primarily of compensation related expenses to the Company’s direct sales and marketing personnel, as well as costs related to advertising, industry conferences, promotional materials, and other sales and marketing programs. Advertising cost is expensed as incurred.
General and Administrative—General and administrative expenses consist primarily of compensation related expenses for executive management, finance, accounting, human resources, and other administrative functions.
Earnings Per Share—Basic earnings per share, or EPS, is calculated in accordance with FASB ASC Topic 260, Earnings per Share, and is calculated using the weighted average number of common shares outstanding during each period. Contingently issuable or repurchasable shares are not used in the calculation of basic earnings per share until the contingency is resolved.
Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. For purposes of this calculation, convertible preferred stock and options are considered to be potential common shares and are only included in the calculation of diluted earnings per share when their effect is dilutive.
The shares used to compute basic and diluted net income per share represent the weighted-average common shares outstanding. The Company’s preferred stockholders have the right to participate with common stockholders in dividends and unallocated income. Net losses are not allocated to the preferred stockholders. Therefore, when applicable, basic and diluted EPS are computed using the two-class method, under which the Company’s undistributed earnings are allocated amongst the common and preferred stockholders.
Stock-Based Compensation—The Company records compensation costs related to stock-based awards in accordance with FASB ASC 718, Compensation—Stock Compensation. Under the fair value recognition provisions of ASC 718, the Company measures stock-based compensation cost at the grant date based on the estimated fair value of the award. Compensation cost is recognized ratably over the requisite service period of the award. The Company utilizes the Black-Scholes option-pricing model to estimate the fair value of stock options granted. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates prevesting forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The total expense recognized over the vesting period will only be for those awards that ultimately vest. See Note 9, Stock-based Compensation, for additional information on stock-based compensation.
Income Taxes—Deferred income tax assets and liabilities are determined based on temporary differences between the financial statement and income tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted income tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established to the extent necessary to reduce deferred income tax assets to amounts that more likely than not will be realized.
The Company accounts for uncertain tax positions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense.
Accounting Estimates—The preparation of financial statements in conformity with GAAP in the U.S. 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.
Fair Value of Financial Instruments—The carrying amounts of the Company’s capital leases and bank financing approximate fair value of these obligations based upon management’s best estimates of interest rates that would be available for similar debt obligations at December 31, 2011 and 2012.
Fair Value Measurements—The provisions of ASC 820, Fair Value Measurements and Disclosures, establishes a framework for measuring the fair value in accounting principles generally accepted in the U.S. and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value as follows:
Level 1—Level 1 inputs are defined as observable inputs such as quoted prices in active markets.
Level 2—Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Level 3 inputs are unobservable inputs that reflect the Company’s determination of assumptions that market participants would use in pricing the asset or liability. These inputs are developed based on the best information available, including the Company’s own data.
In accordance with ASC 820, included within the Company’s cash and cash equivalents as of December 31, 2011 and 2012 are $1,295 and $0, respectively, of money market funds that are classified as Level 1 financial assets. The fair value of cash and cash equivalents are primarily composed of the Company’s investments in money market instruments with original maturities of three months or less. The Company’s cash and cash equivalent balances excluded above are composed of cash, certificates of deposits with original maturities of one month or less, and overnight investments.
Acquisition—In January 2012, the Company acquired the assets of Carbyn, Inc., or Carbyn, an Ontario, Canada-based company. The assets acquired are principally comprised of mobile device software and technology and other intellectual property, which the Company is using to enhance its efforts in the development of next generation web applications for mobile devices. The aggregate purchase price is up to $1,100 for the acquired assets, of which $600 was paid upon consummation of the acquisition and the remaining $500 is due in April 2013 unless such amount is offset in satisfaction of certain indemnification obligations of Carbyn. In addition, the Company hired seven employees from Carbyn who accepted employment with Synacor Canada, Inc., a newly-formed and wholly-owned subsidiary of the Company. The acquisition and its impact on the balance sheet and results of operations are not material.
The Company and Summary of Significant Accounting Policies (Tables)
Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
Leasehold improvements
3–10 years
Computer hardware
5 years
Computer software
3 years
Furniture and fixtures
7 years
Other
3–5 years
As of December 31, property and equipment, net consisted of the following (in thousands):
 
2011
 
2012
Computer equipment (1)
$
13,032

 
$
17,630

Computer software
1,409

 
3,715

Furniture and fixtures
1,049

 
1,050

Leasehold improvements
690

 
732

Work in process
760

 
226

Other
173

 
173

 
17,113

 
23,526

Less accumulated depreciation (2)
(8,812
)
 
(12,483
)
Total property and equipment—net
$
8,301

 
$
11,043

Notes:
(1)
Includes equipment under capital lease obligations of approximately $3,442 and $5,882 as of December 31, 2011 and 2012, respectively.
(2)
Includes $687 and $1,834 of accumulated depreciation of equipment under capital leases as of December 31, 2011 and 2012, respectively.
The following table shows the revenue in each category for the years ended December 31, 2010, 2011 and 2012 (in thousands):
 
Year Ended December 31,
 
2010
 
2011
 
2012
Search and display advertising
$
45,859

 
$
72,084

 
$
101,559

Subscriber-based
20,373

 
18,976

 
20,422

Total revenue
$
66,232

 
$
91,060

 
$
121,981

As of December 31, 2011 and 2012, and for the years ended December 31, 2010, 2011, and 2012 the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable and revenue as follows:
 
Accounts Receivable
 
Revenue
 
2011
 
2012
 
2010
 
2011
 
2012
Google
45
%
 
40
%
 
49
%
 
57
%
 
56
%
Customer A (1)
11

 
9

 
14

 
N/A

 
N/A

Note:
(1)
For this purpose revenue includes only revenue earned directly by the Company from this customer for subscriber-based services and excludes revenue attributable to search and display advertising on the startpage. For the years ended December 31, 2011 and 2012, the revenue earned directly from Customer A was less than 10%.
For the years ended December 31, 2010, 2011 and 2012, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue. The costs represent revenue share paid to customers for their supply of Internet traffic on the Company's startpages.
 
Cost of Revenue
 
2010
 
2011
 
2012
Customer A
21
%
 
14
%
 
20
%
Customer B
25

 
18

 
13

Customer C (1)
N/A

 
11

 
17

Customer D (2)
N/A

 
N/A

 
12

Note:
(1)
For the year ended December 31, 2010, the revenue share payments received by Customer C was less than 10%.
(2)
For the years ended December 31, 2010 and 2011, the revenue share payments received by Customer D were less than 10%.
Property and Equipment - Net (Tables)
Schedule of property and equipment
Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
Leasehold improvements
3–10 years
Computer hardware
5 years
Computer software
3 years
Furniture and fixtures
7 years
Other
3–5 years
As of December 31, property and equipment, net consisted of the following (in thousands):
 
2011
 
2012
Computer equipment (1)
$
13,032

 
$
17,630

Computer software
1,409

 
3,715

Furniture and fixtures
1,049

 
1,050

Leasehold improvements
690

 
732

Work in process
760

 
226

Other
173

 
173

 
17,113

 
23,526

Less accumulated depreciation (2)
(8,812
)
 
(12,483
)
Total property and equipment—net
$
8,301

 
$
11,043

Notes:
(1)
Includes equipment under capital lease obligations of approximately $3,442 and $5,882 as of December 31, 2011 and 2012, respectively.
(2)
Includes $687 and $1,834 of accumulated depreciation of equipment under capital leases as of December 31, 2011 and 2012, respectively.
Accrued Expenses and Other Current Liabilities (Tables)
Schedule of accrued expenses and other current liabilities
 
2011
 
2012
Accrued compensation
$
3,612

 
$
4,265

Accrued content fees
334

 
555

Accrued business acquisition consideration

 
500

Unearned revenue on contracts
255

 
297

Other
1,291

 
1,711

Total
$
5,492

 
$
7,328

Income Taxes (Tables)
The provision (benefit) for income taxes for the years ended December 31, 2010, 2011, and 2012, comprised the following (in thousands):
 
2010
 
2011
 
2012
Current:
 
 
 
 
 
United States Federal
$
2

 
$
47

 
$
151

State

 
7

 
20

Foreign
9

 
14

 
36

Total current provision for income taxes
11

 
68

 
207

Deferred:
 
 
 
 
 
United States Federal
(786
)
 
1,954

 
1,022

State
(158
)
 
373

 
535

Foreign

 
40

 

Total deferred (benefit) provision for income taxes
(944
)
 
2,367

 
1,557

Less increase (decrease) in valuation allowance
944

 
(8,450
)
 

Net deferred provision (benefit) for income taxes

 
(6,083
)
 
1,557

Total (benefit) provision for income taxes
$
11

 
$
(6,015
)
 
$
1,764

The income tax effects of significant temporary differences and carryforwards that give rise to deferred income tax assets and liabilities as of December 31, 2011 and 2012 are as follows (in thousands):
 
2011
 
2012
Deferred income tax assets:
 
 
 
Stock and other compensation expense
$
351

 
$
835

Net operating losses
6,179

 
2,763

Research and development credits

 
1,676

Other federal and state carryforwards
116

 
375

Other
89

 
71

Gross deferred tax assets
6,735

 
5,720

Deferred income tax liabilities:
 
 
 
Fixed assets
(621
)
 
(566
)
Other
(5
)
 
(1
)
Gross deferred tax liabilities
(626
)
 
(567
)
Subtotal
6,109

 
5,153

Less unrecognized tax benefit liability
(26
)
 
(627
)
Net deferred tax assets
$
6,083

 
$
4,526

 
 
 
 
Recorded as:
 
 
 
Current deferred tax assets
$
3,534

 
$
1,999

Non-current deferred tax assets
2,549