SYNACOR, INC., 10-Q filed on 8/9/2019
Quarterly Report
v3.19.2
Cover - shares
6 Months Ended
Jun. 30, 2019
Aug. 05, 2019
Cover page.    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jun. 30, 2019  
Document Transition Report false  
Entity File Number 001-33843  
Entity Registrant Name Synacor, Inc.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 16-1542712  
Entity Address, Address Line One 40 La Riviere Drive, Suite 300  
Entity Address, City or Town Buffalo,  
Entity Address, State or Province NY  
Entity Address, Postal Zip Code 14202  
City Area Code 716  
Local Phone Number 853-1362  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Accelerated Filer  
Entity Small Business true  
Entity Emerging Growth Company false  
Entity Shell Company false  
Title of 12(b) Security Common Stock, $0.01 Par Value  
Trading Symbol SYNC  
Security Exchange Name NASDAQ  
Entity Common Stock, Shares Outstanding   36,061,416
Amendment Flag false  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q2  
Entity Central Index Key 0001408278  
Current Fiscal Year End Date --12-31  
v3.19.2
Condensed Consolidated Balance Sheets - Unaudited - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
CURRENT ASSETS:    
Cash and cash equivalents $ 13,417 $ 15,921
Accounts receivable—net of allowance of $260 and $225 21,894 25,567
Prepaid expenses and other current assets 3,871 3,779
Total current assets 39,182 45,267
PROPERTY AND EQUIPMENT, net 18,384 18,707
OPERATING LEASE RIGHT-OF-USE ASSETS, net 6,333  
GOODWILL 15,947 15,941
INTANGIBLE ASSETS, net 9,482 10,553
OTHER ASSETS 926 995
Total assets 90,254 91,463
CURRENT LIABILITIES:    
Accounts payable 17,096 19,174
Accrued expenses and other current liabilities 5,830 7,849
Current portion of deferred revenue 6,219 6,672
Current portion of long-term debt and finance leases 3,547 2,328
Current portion of operating lease liabilities 2,823  
Total current liabilities 35,515 36,023
LONG-TERM PORTION OF DEBT AND FINANCE LEASES 491 1,367
LONG-TERM PORTION OF OPERATING LEASE LIABILITIES 3,696  
DEFERRED REVENUE 2,860 2,214
DEFERRED INCOME TAXES 270 231
OTHER LONG-TERM LIABILITIES 278 457
Total liabilities 43,110 40,292
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS’ EQUITY:    
Preferred stock – par value $0.01 per share; authorized 10,000,000 shares; none issued 0 0
Common stock – par value $0.01 per share; authorized 100,000,000 shares; 39,917,519 shares issued and 39,061,146 shares outstanding at June 30, 2019 and 39,880,054 shares issued and 39,027,572 shares outstanding at December 31, 2018 399 399
Treasury stock – at cost, 856,373 shares at June 30, 2019 and 852,482 shares at December 31, 2018 (1,905) (1,899)
Additional paid-in capital 145,464 144,739
Accumulated deficit (96,457) (91,726)
Accumulated other comprehensive loss (357) (342)
Total stockholders’ equity 47,144 51,171
Total liabilities and stockholders’ equity $ 90,254 $ 91,463
v3.19.2
Condensed Consolidated Balance Sheets - Unaudited (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts $ 260 $ 225
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, shares authorized (in shares) 10,000,000 10,000,000
Preferred stock, shares issued (in shares) 0 0
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized (in shares) 100,000,000 100,000,000
Common stock, shares issued (in shares) 39,917,519 39,880,054
Common stock, shares outstanding (in shares) 39,061,146 39,027,572
Treasury stock, shares (in shares) 856,373 852,482
v3.19.2
Condensed Consolidated Statements of Operations - Unaudited - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Income Statement [Abstract]        
REVENUE $ 31,849 $ 35,923 $ 63,673 $ 68,838
COSTS AND OPERATING EXPENSES:        
Cost of revenue (exclusive of depreciation and amortization shown separately below) 17,152 18,506 33,658 34,041
Technology and development (exclusive of depreciation and amortization shown separately below) 4,577 5,819 9,123 12,188
Sales and marketing 5,550 6,904 11,541 12,840
General and administrative (exclusive of depreciation and amortization shown separately below) 3,955 4,320 8,420 9,337
Depreciation and amortization 2,567 2,444 5,002 4,879
Total costs and operating expenses 33,801 37,993 67,744 73,285
LOSS FROM OPERATIONS (1,952) (2,070) (4,071) (4,447)
OTHER (EXPENSE) INCOME, net (207) (133) 9 (14)
INTEREST EXPENSE (55) (88) (119) (185)
LOSS BEFORE INCOME TAXES (2,214) (2,291) (4,181) (4,646)
PROVISION FOR INCOME TAXES 273 293 550 313
NET LOSS $ (2,487) $ (2,584) $ (4,731) $ (4,959)
NET LOSS PER SHARE:        
Basic (in dollars per share) $ (0.06) $ (0.07) $ (0.12) $ (0.13)
Diluted (in dollars per share) $ (0.06) $ (0.07) $ (0.12) $ (0.13)
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET LOSS PER SHARE:        
Basic (in shares) 39,056,381 38,823,056 39,047,561 38,808,690
Diluted (in shares) 39,056,381 38,823,056 39,047,561 38,808,690
v3.19.2
Condensed Consolidated Statements of Comprehensive Loss - Unaudited - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Statement of Comprehensive Income [Abstract]        
Net loss $ (2,487) $ (2,584) $ (4,731) $ (4,959)
Other comprehensive loss:        
Changes in foreign currency translation adjustment 122 (111) (15) (175)
Comprehensive loss $ (2,365) $ (2,695) $ (4,746) $ (5,134)
v3.19.2
Condensed Consolidated Statements of Stockholders' Equity - Unaudited - USD ($)
$ in Thousands
Total
Common Stock
Treasury Stock
Additional Paid-in Capital
Accumulated Deficit
Accumulated Other Comprehensive Income (Loss)
Beginning balance (in shares) at Dec. 31, 2017   39,625,980 842,220      
Beginning balance at Dec. 31, 2017 $ 54,345 $ 396 $ (1,881) $ 142,486 $ (86,627) $ (29)
Change in Contract with Customer, Liability [Roll Forward]            
Impact of the adoption of ASC 606, net of tax 2,456       2,456  
Exercise of common stock options (in shares)   61,764        
Exercise of common stock options 85 $ (3)   88    
Stock-based compensation cost 1,124     1,124    
Vesting of restricted stock units, net of treasury stock (in shares)   17,076 6,534      
Vesting of restricted stock units, net of treasury stock (12)   $ (12)      
Net loss (4,959)       (4,959)  
Other comprehensive loss (175)         (175)
Ending balance (in shares) at Jun. 30, 2018   39,704,820 848,754      
Ending balance at Jun. 30, 2018 52,864 $ 393 $ (1,893) 143,698 (89,130) (204)
Beginning balance (in shares) at Mar. 31, 2018   39,638,942 842,220      
Beginning balance at Mar. 31, 2018 54,930 $ 396 $ (1,881) 143,054 (86,546) (93)
Change in Contract with Customer, Liability [Roll Forward]            
Exercise of common stock options (in shares)   49,218        
Exercise of common stock options 85 $ (3)   88    
Stock-based compensation cost 556     556    
Vesting of restricted stock units, net of treasury stock (in shares)   16,660 6,534      
Vesting of restricted stock units, net of treasury stock (12)   $ (12)      
Net loss (2,584)       (2,584)  
Other comprehensive loss (111)         (111)
Ending balance (in shares) at Jun. 30, 2018   39,704,820 848,754      
Ending balance at Jun. 30, 2018 $ 52,864 $ 393 $ (1,893) 143,698 (89,130) (204)
Beginning balance (in shares) at Dec. 31, 2018 39,027,572 39,880,054 852,482      
Beginning balance at Dec. 31, 2018 $ 51,171 $ 399 $ (1,899) 144,739 (91,726) (342)
Change in Contract with Customer, Liability [Roll Forward]            
Exercise of common stock options (in shares)   26,527        
Exercise of common stock options 40     40    
Stock-based compensation cost 685     685    
Vesting of restricted stock units, net of treasury stock (in shares)   10,938 3,891      
Vesting of restricted stock units, net of treasury stock (6)   $ (6)      
Net loss (4,731)       (4,731)  
Other comprehensive loss $ (15)         (15)
Ending balance (in shares) at Jun. 30, 2019 39,061,146 39,917,519 856,373      
Ending balance at Jun. 30, 2019 $ 47,144 $ 399 $ (1,905) 145,464 (96,457) (357)
Beginning balance (in shares) at Mar. 31, 2019   39,905,289 852,607      
Beginning balance at Mar. 31, 2019 $ 49,174 $ 399 $ (1,899) 145,123 (93,970) (479)
Change in Contract with Customer, Liability [Roll Forward]            
Exercise of common stock options (in shares) 26,527 1,708        
Exercise of common stock options $ 3     3    
Stock-based compensation cost 338     338    
Vesting of restricted stock units, net of treasury stock (in shares)   10,522 3,766      
Vesting of restricted stock units, net of treasury stock (6)   $ (6)      
Net loss (2,487)       (2,487)  
Other comprehensive loss $ 122         122
Ending balance (in shares) at Jun. 30, 2019 39,061,146 39,917,519 856,373      
Ending balance at Jun. 30, 2019 $ 47,144 $ 399 $ (1,905) $ 145,464 $ (96,457) $ (357)
v3.19.2
Condensed Consolidated Statements of Cash Flows - Unaudited - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net loss $ (4,731) $ (4,959)
Adjustments to reconcile net loss to net cash and cash equivalents provided by operating activities:    
Depreciation and amortization 5,473 4,879
Capitalized software impairment 226 0
Stock-based compensation expense 655 1,090
Provision for deferred income taxes 40 (119)
Change in allowance for doubtful accounts 34 0
Changes in operating assets and liabilities:    
Accounts receivable, net 3,639 9,942
Prepaid expenses and other assets (23) (882)
Operating lease right-of-use assets and liabilities, net 36  
Accounts payable, accrued expenses and other liabilities (4,030) (10,586)
Deferred revenue 193 (1,946)
Net cash provided by (used in) operating activities 1,512 (2,581)
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchases of property and equipment (2,444) (3,978)
Net cash used in investing activities (2,444) (3,978)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Repayments on long-term debt and finance leases (1,585) (867)
Proceeds from exercise of common stock options 40 103
Purchase of treasury stock and shares received to satisfy minimum tax withholdings (6) (12)
Net cash used in financing activities (1,551) (776)
Effect of exchange rate changes on cash and cash equivalents (21) (187)
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,504) (7,522)
Cash and cash equivalents, beginning of period 15,921 22,476
Cash and cash equivalents, end of period 13,417 14,954
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:    
Cash paid for interest 120 175
Cash paid for income taxes 403 185
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:    
Minimum long-term debt and finance lease payments in accounts payable 88 436
Accrued property and equipment expenditures $ 188 $ 208
v3.19.2
The Company and Summary of Significant Accounting Principles
6 Months Ended
Jun. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
The Company and Summary of Significant Accounting Principles
The Company and Summary of Significant Accounting Principles
Synacor, Inc., together with its consolidated subsidiaries (collectively, the “Company” or “Synacor”), is a digital technology company that provides email and collaboration software, cloud-based identity management platforms, managed web and mobile portals, and advertising solutions. The Company’s customers include communications providers, media companies, government entities and enterprises. Synacor is a trusted partner for enterprise software platforms and monetization solutions that Synacor delivers through public and private cloud software-as-a-service, software licensing, and professional services. Synacor enable clients to deepen their engagement with their consumers and users.
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, 2018 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, 2018.
During the first quarter of 2019, the Company made a change to its segment reporting structure which resulted in two segments 1) Software & Services and 2) Portal & Advertising. As a result certain prior year amounts have been restated to conform to current year’s presentation. Historical Amounts in Note 2 – Revenue from Contracts with Customers, Note 4 - Goodwill and Intangible Assets and Note 7 – Segment Information have been restated to reflect these changes in reportable segments.
Additionally, the Company has reclassified certain costs and expenses in the consolidated statement of operations for the three and six months ended June 30, 2018, amounting to $0.3 million and $0.6 million respectively, from technology and development to cost of revenue to conform to the current period presentation. These reclassifications had no effect on previously reported total costs and operating expenses and net loss.
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, 2019 and December 31, 2018, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable as follows:
 
Accounts Receivable
 
June 30, 2019
 
December 31, 2018
Portal & Advertising Customer A
13
%
 
15
%
For the three and six months ended June 30, 2019 and 2018, the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows:
 
 
Revenue
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Google search
 
12
%
 
14
%
 
12
%
 
14
%
Google advertising affiliate
 
*

 
12
%
 
*

 
14
%
Portal & Advertising Customer A
 
12
%
 
*

 
13
%
 
*

* - Less than 10%
 
 
 
 
 
 
 
 
For the three and six months ended June 30, 2019 and 2018, 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
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Portal & Advertising Customer B
 
28
%
 
30
%
 
29
%
 
26
%

Recent Accounting Pronouncements
Not Yet Adopted
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2018-15Customer’s Accounting For Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement with the requirements for capitalizing implementation costs incurred for an internal-use software license. Adoption of this guidance is required for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and early adoption is permitted. Entities are permitted to choose to adopt the new guidance (1) prospectively for eligible costs incurred on or after the date this guidance is first applied or (2) retrospectively. The Company is evaluating the impact of this new accounting standard on its financial statements.
Recently Adopted
On January 1, 2019 the Company adopted ASU No. 2016-2Leases (Topic 842) (ASU 2016-2), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use (ROU) assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provides an additional, optional transition method with which to adopt the new leases standard. This additional transition method allows for a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, rather than in the earliest period presented in the financial statements, as originally required by ASU 2016-2. The Company adopted the standard using the additional transition method introduced by ASU 2018-11. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. For information regarding the impact of Topic 842 adoption, see Significant Accounting Policies - Leases and Note 3 — Leases.
The Company considers the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable, or had or are expected to have minimal impact on the Company’s financial statements and related disclosures.
Significant Accounting Policies – Leases
On January 1, 2019, the Company adopted Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating prior periods. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840.
The Company elected the package of practical expedients permitted under the transition guidance, which allowed for the carryforward of historical lease classification, on whether a contract was or contains a lease, and of the assessment of initial direct costs for any leases that existed prior to January 1, 2019. The Company also elected to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term.
On January 1, 2019, the Company recognized additional ROU assets of $10.2 million, with corresponding liabilities of $10.4 million on the condensed consolidated balance sheet. The difference between the lease liability and the ROU asset represents the existing deferred rent liabilities balances before adoption, resulting from historical straight-lining of rent expense, which was reclassified upon adoption to reduce the measurement of the initial ROU asset. This was in addition to the $3.4 million of finance lease ROU assets previously reported in property and equipment, net as capital leases. The adoption did not impact our beginning stockholders’ equity, and did not have a material impact on the condensed consolidated statement of operations and statement of cash flows for the three and six months ended June 30, 2019.
Under Topic 842, the Company determines if an arrangement is a lease and classifies that lease as either an operating or finance lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, only payments that are fixed and determinable at the time of commencement are considered. As many of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is a hypothetical rate based on factors including the Company’s credit rating. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the options will be exercised.
Operating leases are included in operating lease right-of-use assets, operating lease liabilities, and current and long-term operating lease liabilities on our condensed consolidated balance sheets. Finance leases are included in property and equipment-net, and on the current and long-term portion of debt and finance leases on our condensed consolidated balance sheets.
Significant Accounting Policies – Goodwill and Segments
During the first quarter of 2019, the Company made changes to its segment reporting structure that resulted in two reportable segments: 1) Software & Services and 2) Portal & Advertising. Previously the Company concluded that it had one reportable segment. This change resulted in two reporting units for the purpose of impairment analysis for goodwill.
The Company evaluates goodwill for impairment for each of its reporting units at least annually, during the fourth quarter, and whenever events occur or circumstances change, such as changes in the business climate, poor indicators of operating performance or the sale or disposition of a significant portion of a reporting unit. The Company is required to evaluate goodwill for impairment when there is a change in reporting units.
Companies may perform a qualitative assessment as the initial step in the annual goodwill impairment testing process for all or selected reporting units. Companies are also allowed to bypass the qualitative analysis and perform a quantitative analysis if desired. Economic uncertainties and the length of time from the calculation of a baseline fair value are factors that we consider in determining whether to perform a quantitative test.
When the Company evaluates the potential for goodwill impairment using a qualitative assessment, the Company considers factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative two-step impairment test.
Quantitative testing first requires a comparison of the fair value of each reporting unit to its carrying value. The fair value of each reporting unit is determined using a combination of an income approach and a market approach. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured.
The income approach uses a discounted cash flow method to estimate the fair value of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating margins and cash flows, the terminal growth rate and the discount rate. The Company projects revenue growth rates, operating margins and cash flows based on each reporting unit's current business, expected developments and operational strategies typically over a five-year period.
The market approach determines fair value based on available market pricing for comparable assets. Valuation multiples were calculated utilizing actual transaction prices and revenue or EBITDA data from target companies deemed similar to the reporting unit. Valuation multiples were then applied to certain operating statistics such as revenue or EBITDA, and an estimated control premium was applied.
If the carrying amount of the reporting unit exceeds the reporting unit’s fair value as determined using the two valuation methodologies described above, an impairment loss is recognized in the amount by which the carrying value of the reporting unit exceeds the fair value of the reporting unit.
The determination of our assumptions is subjective and requires significant estimates. Changes in these estimates and assumptions could materially affect the results of our reviews for impairment of goodwill.
Impairment Analysis
As stated above during the first quarter of 2019, the Company made changes to our segment reporting structure that resulted in two reportable segments: 1) Software & Services and 2) Portal & Advertising. This change also resulted in two reporting units used to review goodwill for impairment. The Company performed a quantitative test for both reporting units and both reporting units fair value exceeded carrying value.
In accordance with ASC 350-20-35, the Company assesses goodwill of an entity (or a reporting unit) for impairment if an event occurs or circumstances change that indicate that the fair value of the entity (or the reporting unit) may be below its carrying amount (a triggering event). As a result of the such assessment of relevant events and circumstances, the Company performed a quantitative test for the Portal & Advertising segment as of June 30, 2019 for which the fair value exceeded the carrying value.
As such, no impairment charges were recorded for the three and six months ended June 30, 2019.
v3.19.2
Revenue from Contracts with Customers
6 Months Ended
Jun. 30, 2019
Revenue from Contract with Customer [Abstract]  
Revenue from Contracts with Customers
Revenue from Contracts with Customers
The Company generates all of its revenue from contracts with customers. Many of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices of software licenses are typically estimated using the residual approach. Standalone selling prices of services are typically estimated based on observable transactions when these services are sold on a standalone basis. The Company usually expects payment within 30 to 90 days from the invoice date (fulfillment of performance obligations or per contract terms). None of the Company’s contracts as of June 30, 2019 contained a significant financing component. Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to its customers as part of a revenue-share arrangement, are recognized as deferred revenue.
Disaggregation of revenue
The following table provides information about disaggregated revenue for the three and six months ended June 30, 2019 and 2018 by the timing of revenue recognition, and includes a reconciliation of the disaggregated revenue by reportable segment (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Software & Services
 
 
 
 
 
 
 
 
Products and services transferred over time
 
$
8,388

 
$
9,042

 
$
17,263

 
$
17,828

Products transferred at a point in time
 
2,200

 
3,784

 
4,483

 
5,683

Total Software & Services
 
$
10,588

 
$
12,826

 
$
21,746

 
$
23,511

Portal & Advertising
 
 
 
 
 
 
 
 
Products and services transferred over time
 
$
1,202

 
$
1,964

 
$
2,708

 
$
4,051

Products transferred at a point in time
 
20,059

 
21,133

 
39,219

 
41,276

Total Portal & Advertising
 
$
21,261

 
$
23,097

 
$
41,927

 
$
45,327

Total Revenue
 
$
31,849

 
$
35,923

 
$
63,673

 
$
68,838


Revenue disaggregated by geography, based on the billing address of our customer, consists of the following (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
 
United States
 
$
26,974

 
$
29,354

 
$
53,248

 
$
56,392

International
 
4,875

 
6,569

 
10,425

 
12,446

Total revenue
 
$
31,849

 
$
35,923

 
$
63,673

 
$
68,838


Remaining Performance Obligations
Deferred revenue is recorded when cash payments are received or due in advance of revenue recognition from software licenses, professional services, and maintenance agreements. The timing of revenue recognition may differ from the timing of billings to customers. The changes in deferred revenue, inclusive of both current and long-term, are as follows (in thousands):
(in thousands)
 
Beginning balance - January 1, 2019
$
8,886

Recognition of deferred revenue
(5,888
)
Deferral of revenue
6,416

Effect of foreign currency translation
(335
)
Ending balance - June 30, 2019
$
9,079


The majority of the deferred revenue balance above relates to the maintenance and support contracts for the Company's email software licenses. These are recognized straight-line over the life of the contract, with the majority of the balance being recognized within the next twelve months.
Practical Expedients
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed.
v3.19.2
Leases
6 Months Ended
Jun. 30, 2019
Leases [Abstract]  
Leases
Leases
The Company enters into various noncancelable operating lease agreements for certain of our offices, data centers, colocations and network equipment. The Company’s leases have original lease periods expiring between 2019 and 2024. Many
leases include one or more options to renew. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. The Company’s variable lease payments are immaterial and its lease agreements do not contain any material residual value guarantees or material restrictive covenants. Operating lease costs are included in cost of revenue and general and administrative costs in the Company’s condensed consolidated statements of operations. Finance amortization lease costs are included in depreciation and amortization, and finance lease interest costs are included in interest expense in the Company’s condensed consolidated statements of operations.
The components of lease costs, lease term and discount rate are as follows (lease cost in thousands):
 
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
Finance lease cost
 
 
 
 
Amortization of right-of-use assets
 
$
958

 
$
1,586

Interest
 
211

 
400

Operating lease cost
 
1,129

 
2,219

Total lease cost
 
$
2,298

 
$
4,205

 
 
 
 
 
Weighted Average Remaining Lease Term
 
 
 
 
Operating leases
 
2.2

Years
Finance leases
 
1.1

Years
 
 
 
 
 
Weighted Average Discount Rate
 
 
 
 
Operating leases
 
6.0

%
Finance leases
 
5.9

%

The following is a schedule, by years, of maturities of lease liabilities as of June 30, 2019 (in thousands):
 
 
Operating Leases
 
Finance Leases
The remainder of 2019
 
$
1,785

 
$
2,181

2020
 
2,286

 
2,283

2021
 
1,605

 
107

2022
 
944

 

2023
 
448

 

2024
 
36

 

Total undiscounted cash flows
 
$
7,104

 
$
4,571

Less imputed interest
 
(585
)
 
(533
)
Present value of lease liabilities
 
$
6,519

 
$
4,038


As of June 30, 2019, the Company has entered into a finance lease that will commence in the third quarter of 2019 with future lease payments of $1.1 million, with a noncancelable lease term of 3 years. This lease is not reflected in the table above.
As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 and under Accounting Standard Codification Topic 840, the predecessor to Topic 842, the following is a summary of annual future minimum lease and rental commitments under noncancelable operating leases as of December 31, 2018 (in thousands):
Year Ending December 31,
 
Operating Lease
Commitments
2019
 
$
5,276

2020
 
3,101

2021
 
1,594

2022
 
782

2023
 
250

2024
 
33

Total lease commitments
 
$
11,036


Supplemental cash flow information related to leases are as follows (in thousands):
 
 
Six Months Ended
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
2,324

Operating cash flows from financing leases
 
$
400

Financing cash flows from finance leases
 
$
1,586

 
 
 
Lease liabilities arising from obtaining right-of-use-assets:
 
 
Operating leases
 
$
64

Finance leases
 
$
1,925


v3.19.2
Goodwill and Intangible Assets
6 Months Ended
Jun. 30, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Intangible Assets
Goodwill and Intangible Assets
As described in Note 1 - The Company and Summary of Significant Accounting Principles, the Company changed its reportable segments during the first quarter of 2019. Goodwill was assigned to the new reportable segments on the relative fair value basis.
The changes in the carrying amount of Goodwill for the six months ended June 30, 2019 are as follows (in thousands):
 
Software & Services
 
Portal & Advertising
 
Total
December 31, 2018
$
11,318

 
$
4,623

 
$
15,941

Effect of foreign currency translation
6

 

 
6

June 30, 2019
$
11,324

 
$
4,623

 
$
15,947


As described in Note 1 - The Company and Summary of Significant Accounting Principles, there were no goodwill impairment losses recorded during the three and six months ending June 30, 2019. The Company has no accumulated impairment losses.
Intangible assets consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Customer and publisher relationships
$
14,780

 
$
14,780

Technology
2,330

 
2,330

Trademark
300

 
300

Intangible assets, gross
17,410

 
17,410

Less accumulated amortization
(7,928
)
 
(6,857
)
Intangible assets, net
$
9,482

 
$
10,553


Amortization of intangible assets totaled $0.5 million for the three months ended June 30, 2019 and 2018, and $1.1 million for the six months ended June 30, 2019 and 2018.  Based on acquired intangible assets recorded at June 30, 2019,
amortization is expected to be $1.1 million for the remainder of 2019, $2.0 million in 2020, $1.4 million in 2021, $1.3 million in 2022, and $1.3 million in 2023.
v3.19.2
Property and Equipment - Net
6 Months Ended
Jun. 30, 2019
Property, Plant and Equipment [Abstract]  
Property and Equipment - Net
Property and Equipment – Net
Property and equipment, net consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Computer equipment
$
29,419

 
$
27,294

Computer software
32,918

 
27,422

Furniture and fixtures
1,623

 
1,618

Leasehold improvements
1,247

 
1,256

Work in process (primarily software development costs)
839

 
4,584

Other
179

 
179

Property and equipment, gross
66,225

 
62,353

Less accumulated depreciation
(47,841
)
 
(43,646
)
Property and equipment, net
$
18,384

 
$
18,707


Depreciation expense totaled $2.5 million and $1.9 million for the three months ended June 30, 2019 and 2018, respectively. Depreciation expense totaled $4.4 million and $3.8 million for the six months ended June 30, 2019 and 2018, respectively.
Property and equipment includes computer equipment and software held under finance leases of $10.3 million and $8.4 million as of June 30, 2019 and December 31, 2018, respectively. Accumulated depreciation of computer equipment and software held under finance leases amounted to $6.5 million as of June 30, 2019. Accumulated depreciation of computer equipment and software held under capital leases amounted to $5.0 million as of December 31, 2018, respectively.
For the three months ended June 30, 2019 and 2018, the Company capitalized a total of $0.8 million and $1.1 million of costs that occurred during the application development phase, related to the development of internal-use software. The Company capitalized a total of $0.4 million and $0.5 million of costs related to the development of software for sale or license for the months three ended June 30, 2019 and 2018 that occurred after technological feasibility had been achieved.
For the six months ended June 30, 2019 and 2018, the Company capitalized a total of $1.5 million and $1.9 million of costs that occurred during the application development phase, related to the development of internal-use software. The Company capitalized a total of $0.7 million and $0.8 million of costs related to the development of software for sale or license for the six months ended June 30, 2019 and 2018 that occurred after technological feasibility had been achieved.
Amortization of software capitalized for internal use was $1.0 million for the three months ended June 30, 2019 and 2018, and $2.1 million for the six months ended June 30, 2019 and 2018, respectively, and included in depreciation and amortization in the consolidated statement of operations. Amortization of software for sale or license was $0.4 million for the three and six months ended June 30, 2019 and was not material for the three and six months ended June 30, 2018.
There were no impairment charges related to software, previously capitalized for internal use, for the three months ended June 30, 2019. Impairment charges related to the six months ended June 30, 2019 were $0.2 million and were included in general and administrative expense in the consolidated statement of operations. There were no impairment charges during the three and six months ended June 30, 2018. The impairment charges are a result of circumstances that indicated that the carrying values of the assets were not fully recoverable. The Company utilizes the discounted cash flow method to determine the fair value of the capitalized software assets. 
The following table sets forth long-lived tangible assets by geographic area (in thousands):
 
June 30, 2019
 
December 31, 2018
Long-lived tangible assets:
 
 
 
United States
$
17,948

 
$
18,217

International
436

 
490

Total long-lived tangible assets
$
18,384

 
$
18,707


v3.19.2
Accrued Expenses and Other Current Liabilities
6 Months Ended
Jun. 30, 2019
Accounts Payable and Accrued Liabilities, Current [Abstract]  
Accrued Expenses and Other Current Liabilities
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Accrued compensation
$
3,925

 
$
5,801

Accrued content fees and other costs of revenue
343

 
342

Accrued taxes
225

 
206

Other
1,337

 
1,500

Total
$
5,830

 
$
7,849


Included in accrued compensation are accrued severance costs. In 2018, the Company initiated a cost reduction program to drive overall efficiency while adding capacity and streamlining the organization. These actions resulted in workforce reductions, office consolidations and consolidating operations. The below table summarizes the activity in the accrued severance account (in thousands).
 
June 30, 2019
Balance at January 1, 2019
$
274

Charged to expense

Cash payments
(208
)
Balance at June 30, 2019
$
66


v3.19.2
Segment Information
6 Months Ended
Jun. 30, 2019
Segment Reporting [Abstract]  
Segment Information
Segment Information
During the first quarter of 2019, the Company made changes to its segment reporting structure that resulted in two reportable segments: 1) Software & Services and 2) Portal & Advertising. All historical amounts have been restated to reflect this change in reportable segments. Software & Services generates revenue by providing cloud-based identity management solutions and email/collaboration products. Portal & Advertising generates managed portal fees and advertising revenue from its traffic on its Managed Portals and other advertising solutions it provides for publishers.
The Company’s operations are organized and managed by type of products and services and segment information is reported accordingly. The Company’s chief operating decision maker (the “CODM”) is its Chief Executive Officer. The CODM reviews financial performance and allocates resources by reportable segment. There have been no operating segments aggregated to arrive at the Company’s reportable segments.
The accounting policies of each segment are the same as those described in the summary of significant accounting policies, refer to Note 1— Summary of Significant Accounting Policies, for further details. The Company evaluates the performance of its segments and allocates resources to them based on Segment Adjusted EBITDA. Segment Adjusted EBITDA is defined as EBITDA (earnings before interest, income taxes, depreciation and amortization) adjusted for certain non-cash items and other non-recurring income and expenses.
Revenue for all operating segments include only transactions with unaffiliated customers and there is no intersegment revenue.
The Company does not account for, and does not report to management, its assets or capital expenditures by segment other than goodwill and intangible assets used for impairment analysis purposes.
The tables below summarize the financial information for the Company’s reportable segments for the three and six months ended June 30, 2019 and 2018 (in thousands). The “Corporate Unallocated Expenses” category, as it relates to Segment Adjusted EBITDA, primarily includes corporate overhead costs, such as rent, payroll and related benefit costs and professional services which are not directly attributable to any individual segment.
 
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
 
Revenue
 
Cost of revenue (1)
 
Segment Adjusted
EBITDA
 
Revenue
 
Cost of revenue (1)
 
Segment Adjusted
EBITDA
Software & Services
 
$
10,588

 
$
3,234

 
$
2,794

 
$
21,746

 
$
6,737

 
$
5,588

Portal & Advertising
 
21,261

 
13,918

 
2,534

 
41,927

 
26,921

 
5,155

Corporate Unallocated Expenses
 

 

 
(3,713
)
 

 

 
(7,424
)
Total Company
 
$
31,849

 
$
17,152

 
$
1,615

 
$
63,673

 
$
33,658

 
$
3,319

 
Three Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2018
 
 
Revenue
 
Cost of revenue (1)
 
Segment Adjusted
EBITDA
 
Revenue
 
Cost of revenue (1)
 
Segment Adjusted
EBITDA
Software & Services
 
$
12,826

 
$
3,149

 
$
4,393

 
$
23,511

 
$
6,257

 
$
6,890

Portal & Advertising
 
23,097

 
15,357

 
964

 
45,327

 
27,784

 
4,012

Corporate Unallocated Expenses
 

 

 
(4,178
)
 

 

 
(9,112
)
Total Company
 
$
35,923

 
$
18,506

 
$
1,179

 
$
68,838

 
$
34,041

 
$
1,790

Notes:
(1) Exclusive of depreciation and amortization shown separately on the condensed consolidated statements of operations
The following table reconciles total Segment Adjusted EBITDA to Net loss:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Total Segment Adjusted EBITDA
 
$
1,615

 
$
1,179

 
$
3,319

 
$
1,790

Less:
 
 
 
 
 
 
 
 
Provision for income taxes
 
(273
)
 
(293
)
 
(550
)
 
(313
)
Interest expense
 
(55
)
 
(88
)
 
(119
)
 
(185
)
Other (expense) income, net
 
(207
)
 
(133
)
 
9

 
(14
)
Depreciation and amortization
 
(2,986
)
 
(2,444
)
 
(5,473
)
 
(4,879
)
Capitalized software impairment
 

 

 
(226
)
 

Stock-based compensation expense
 
(324
)
 
(537
)
 
(655
)
 
(1,090
)
Restructuring costs
 

 
(268
)
 

 
(268
)
Certain legal expenses *
 
(257
)
 

 
(523
)
 

Certain professional services fees**
 

 

 
(513
)
 

Net loss
 
$
(2,487
)
 
$
(2,584
)
 
$
(4,731
)
 
$
(4,959
)
*
"Certain legal expenses" include legal fees and other related expenses outside the ordinary course of business.
**
“Certain professional services fees” includes fees and expenses related to merger and acquisition activities.
v3.19.2
Commitments and Contingencies
6 Months Ended
Jun. 30, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
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, 2019 are as follows (in thousands):
Year ending December 31,
 
2019 (remaining six months)
450

2020
753

Total
$
1,203



Litigation
The Company and its Chief Executive Officer and former Chief Financial Officer were named as defendants in a federal securities class action lawsuit filed on April 4, 2018 in the United States District Court for the Southern District of New York. The class includes persons who purchased the Company’s shares between May 4, 2016 and March 15, 2018. The plaintiff alleged that the Company made materially false and misleading statements regarding its contract with AT&T and the timing of revenue to be derived therefrom, and that as a result, class members suffered losses because Synacor shares traded at artificially inflated prices. The plaintiff sought an unspecified amount of damages, as well as interest, attorneys’ fees and legal expenses. The court appointed a lead plaintiff and approved plaintiff’s selection of lead counsel on July 6, 2018. On October 16, 2018 the court appointed new lead counsel and confirmed the lead plaintiff. The plaintiff filed an amended complaint on November 2, 2018 and the Company filed a motion to dismiss on December 17, 2018. The plaintiff filed its opposition to the Motion to Dismiss on January 19, 2019 and the Company filed its reply to plaintiff’s opposition on February 15, 2019. The Company disputes these claims and intends to defend them vigorously. The Company cannot yet determine whether it is probable that a loss will be incurred in connection with this complaint, nor can the Company reasonably estimate the potential loss, if any. Legal fees and liabilities related to this lawsuit are covered by D&O insurance after the Company reaches its deductible.
In addition, the Company is, from time to time, party to litigation arising in the ordinary course of business. It does not believe that the outcome of these claims will have a material adverse effect on its consolidated financial position, results of operations or cash flows based on the status of proceedings at this time. However, these matters are subject to inherent uncertainties and the Company’s view of these matters may change in the future.
v3.19.2
Stock-based Compensation
6 Months Ended
Jun. 30, 2019
Share-based Payment Arrangement [Abstract]  
Stock-based Compensation
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).
The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the periods indicated:
 
 
Six Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2018
Weighted average grant date fair value
 
$
1.00

 
$
0.98

Expected dividend yield
 
%
 
%
Expected stock price volatility
 
66
%
 
48
%
Risk-free interest rate
 
2.3
%
 
2.7
%
Expected life of options (in years)
 
6.09

 
6.25


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
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Technology and development
 
$
92

 
$
134

 
$
195

 
$
268

Sales and marketing
 
111

 
126

 
226

 
264

General and administrative
 
121

 
277

 
234

 
558

Total stock-based compensation expense
 
$
324

 
$
537

 
$
655

 
$
1,090


Stock Option Activity – A summary of the stock option activity for the six months ended June 30, 2019 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, 2019
 
7,669,093

 
$
2.51

 
 
 
 
Granted
 
379,800

 
1.64

 
 
 
 
Exercised
 
(26,527
)
 
1.48

 
 
 
 
Forfeited
 
(96,000
)
 
2.19

 
 
 
 
Expired
 
(240,981
)
 
2.52

 
 
 
 
Outstanding at June 30, 2019
 
7,685,385

 
$
2.47

 
6.10
 
$
54

Vested and expected to vest at June 30, 2019
 
7,598,746

 
$
2.48

 
6.07
 
$
54

Vested and exercisable at June 30, 2019
 
5,891,864

 
$
2.53

 
5.36
 
$
47


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, 2019 was $1.56 per share. The total intrinsic value of options exercised for the three and six months ended June 30, 2019 was minimal. The weighted average fair value of options granted during the six months ended June 30, 2019 amounted to $1.00 per option share.
As of June 30, 2019, the unrecognized compensation cost related to options granted, for which vesting is probable, and adjusted for estimated forfeitures, was approximately $2.0 million. This cost is expected to be recognized over a weighted-average remaining period of 2.4 years.
RSU Activity —A summary of RSU activity for the six months ended June 30, 2019 is as follows:
 
 
Number of Shares
 
Weighted Average
Fair Value
Unvested—January 1, 2019
 
11,346

 
$
3.60

Granted
 
383,500

 
1.76

Released
 
(10,938
)
 
3.62

Forfeited
 
(2,000
)
 
1.76

Unvested June 30, 2019
 
381,908

 
$
1.76

Unvested expected to vest-June 30, 2019
 
381,918

 
$
1.76


As of June 30, 2019, total unrecognized compensation cost, adjusted for estimated forfeitures, related to RSUs was $0.5 million. This cost is expected to be recognized over a weighted-average remaining period of 2.7 years.
v3.19.2
Net (Loss) Income Per Common Share Data
6 Months Ended
Jun. 30, 2019
Earnings Per Share [Abstract]  
Net (Loss) Income Per Common Share Data
Net Loss Per Common Share Data
Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net 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, warrants, 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.
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
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Anti-dilutive equity awards:
 
 
 
 
 
 
 
 
Stock options
 
7,547,855

 
8,741,361

 
7,588,267

 
8,741,361

Restricted stock units
 
388,169

 
34,607

 
262,561

 
34,607

Warrants
 

 
600,000

 

 
600,000


v3.19.2
Subsequent Event (Notes)
6 Months Ended
Jun. 30, 2019
Subsequent Events [Abstract]  
Subsequent Events [Text Block]
Subsequent Event
On August 7, 2019, the Company entered into a new Loan and Security Agreement, the "Agreement", with Silicon Valley Bank, or the "Lender". The Lender agreed to provide a $12.0 million secured revolving line of credit, the “credit facility”. The credit facility is available for cash borrowings, subject to a Borrowing Base formula based upon eligible accounts receivable. The maturity of the Agreement is two years from the date of the Agreement. Any borrowings under the Agreement bear interest, based on an interest rate dependent on cash liquidity for the relevant period. Cash liquidity is defined as cash plus (a) the lesser of (i) the Revolving Line or (ii) the amount available under the Borrowing Base minus (b) the outstanding principal balance of any Advances. If cash liquidity is greater than $20.0 million then the interest rate is the greater of the "prime rate” as published in The Wall Street Journal (WSJ) for the relevant period plus 0.50% or 5.50%. If cash liquidity is less than $20.0 million then the interest rate is the greater of WSJ prime rate plus 1.00% or 6.00%. The Agreement maintains certain reporting requirements, conditions, and covenants. The financial covenants include that the Company must maintain a Minimum Liquidity Coverage greater than or equal to 2.25:1.00. Additionally, when cash liquidity falls below $20.0 million, the Agreement includes certain trailing six month Free Cash Flow requirements, tested on a quarterly basis.
v3.19.2
The Company and Summary of Significant Accounting Principles (Policies)
6 Months Ended
Jun. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation
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, 2018 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, 2018.
Accounting Estimates
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.
Recent Accounting Pronouncements
Recent Accounting Pronouncements
Not Yet Adopted
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2018-15Customer’s Accounting For Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement with the requirements for capitalizing implementation costs incurred for an internal-use software license. Adoption of this guidance is required for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and early adoption is permitted. Entities are permitted to choose to adopt the new guidance (1) prospectively for eligible costs incurred on or after the date this guidance is first applied or (2) retrospectively. The Company is evaluating the impact of this new accounting standard on its financial statements.
Recently Adopted
On January 1, 2019 the Company adopted ASU No. 2016-2Leases (Topic 842) (ASU 2016-2), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use (ROU) assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provides an additional, optional transition method with which to adopt the new leases standard. This additional transition method allows for a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, rather than in the earliest period presented in the financial statements, as originally required by ASU 2016-2. The Company adopted the standard using the additional transition method introduced by ASU 2018-11. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. For information regarding the impact of Topic 842 adoption, see Significant Accounting Policies - Leases and Note 3 — Leases.
The Company considers the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable, or had or are expected to have minimal impact on the Company’s financial statements and related disclosures.
Significant Accounting Policies – Leases
On January 1, 2019, the Company adopted Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating prior periods. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840.
The Company elected the package of practical expedients permitted under the transition guidance, which allowed for the carryforward of historical lease classification, on whether a contract was or contains a lease, and of the assessment of initial direct costs for any leases that existed prior to January 1, 2019. The Company also elected to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term.
On January 1, 2019, the Company recognized additional ROU assets of $10.2 million, with corresponding liabilities of $10.4 million on the condensed consolidated balance sheet. The difference between the lease liability and the ROU asset represents the existing deferred rent liabilities balances before adoption, resulting from historical straight-lining of rent expense, which was reclassified upon adoption to reduce the measurement of the initial ROU asset. This was in addition to the $3.4 million of finance lease ROU assets previously reported in property and equipment, net as capital leases. The adoption did not impact our beginning stockholders’ equity, and did not have a material impact on the condensed consolidated statement of operations and statement of cash flows for the three and six months ended June 30, 2019.
Under Topic 842, the Company determines if an arrangement is a lease and classifies that lease as either an operating or finance lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, only payments that are fixed and determinable at the time of commencement are considered. As many of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is a hypothetical rate based on factors including the Company’s credit rating. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the options will be exercised.
Operating leases are included in operating lease right-of-use assets, operating lease liabilities, and current and long-term operating lease liabilities on our condensed consolidated balance sheets. Finance leases are included in property and equipment-net, and on the current and long-term portion of debt and finance leases on our condensed consolidated balance sheets.
Significant Accounting Policies – Goodwill and Segments
During the first quarter of 2019, the Company made changes to its segment reporting structure that resulted in two reportable segments: 1) Software & Services and 2) Portal & Advertising. Previously the Company concluded that it had one reportable segment. This change resulted in two reporting units for the purpose of impairment analysis for goodwill.
The Company evaluates goodwill for impairment for each of its reporting units at least annually, during the fourth quarter, and whenever events occur or circumstances change, such as changes in the business climate, poor indicators of operating performance or the sale or disposition of a significant portion of a reporting unit. The Company is required to evaluate goodwill for impairment when there is a change in reporting units.
Companies may perform a qualitative assessment as the initial step in the annual goodwill impairment testing process for all or selected reporting units. Companies are also allowed to bypass the qualitative analysis and perform a quantitative analysis if desired. Economic uncertainties and the length of time from the calculation of a baseline fair value are factors that we consider in determining whether to perform a quantitative test.
When the Company evaluates the potential for goodwill impairment using a qualitative assessment, the Company considers factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative two-step impairment test.
Quantitative testing first requires a comparison of the fair value of each reporting unit to its carrying value. The fair value of each reporting unit is determined using a combination of an income approach and a market approach. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured.
The income approach uses a discounted cash flow method to estimate the fair value of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating margins and cash flows, the terminal growth rate and the discount rate. The Company projects revenue growth rates, operating margins and cash flows based on each reporting unit's current business, expected developments and operational strategies typically over a five-year period.
The market approach determines fair value based on available market pricing for comparable assets. Valuation multiples were calculated utilizing actual transaction prices and revenue or EBITDA data from target companies deemed similar to the reporting unit. Valuation multiples were then applied to certain operating statistics such as revenue or EBITDA, and an estimated control premium was applied.
If the carrying amount of the reporting unit exceeds the reporting unit’s fair value as determined using the two valuation methodologies described above, an impairment loss is recognized in the amount by which the carrying value of the reporting unit exceeds the fair value of the reporting unit.
The determination of our assumptions is subjective and requires significant estimates. Changes in these estimates and assumptions could materially affect the results of our reviews for impairment of goodwill.
Impairment Analysis
As stated above during the first quarter of 2019, the Company made changes to our segment reporting structure that resulted in two reportable segments: 1) Software & Services and 2) Portal & Advertising. This change also resulted in two reporting units used to review goodwill for impairment. The Company performed a quantitative test for both reporting units and both reporting units fair value exceeded carrying value.
v3.19.2
The Company and Summary of Significant Accounting Principles (Tables)
6 Months Ended
Jun. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Schedule of Concentrations Equal to or Exceeding 10% of Company's Accounts Receivable, Revenue, and Cost of Revenue
As of June 30, 2019 and December 31, 2018, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable as follows:
 
Accounts Receivable
 
June 30, 2019
 
December 31, 2018
Portal & Advertising Customer A
13
%
 
15
%
For the three and six months ended June 30, 2019 and 2018, the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows:
 
 
Revenue
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Google search
 
12
%
 
14
%
 
12
%
 
14
%
Google advertising affiliate
 
*

 
12
%
 
*

 
14
%
Portal & Advertising Customer A
 
12
%
 
*

 
13
%
 
*

* - Less than 10%
 
 
 
 
 
 
 
 
For the three and six months ended June 30, 2019 and 2018, 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
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Portal & Advertising Customer B
 
28
%
 
30
%
 
29
%
 
26
%

v3.19.2
Revenue from Contracts with Customers (Tables)
6 Months Ended
Jun. 30, 2019
Revenue from Contract with Customer [Abstract]  
Summary of Timing of Revenue Recognition, Includes Reconciliation of Disaggregated Revenue by Reportable Segment
The following table provides information about disaggregated revenue for the three and six months ended June 30, 2019 and 2018 by the timing of revenue recognition, and includes a reconciliation of the disaggregated revenue by reportable segment (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Software & Services
 
 
 
 
 
 
 
 
Products and services transferred over time
 
$
8,388

 
$
9,042

 
$
17,263

 
$
17,828

Products transferred at a point in time
 
2,200

 
3,784

 
4,483

 
5,683

Total Software & Services
 
$
10,588

 
$
12,826

 
$
21,746

 
$
23,511

Portal & Advertising
 
 
 
 
 
 
 
 
Products and services transferred over time
 
$
1,202

 
$
1,964

 
$
2,708

 
$
4,051

Products transferred at a point in time
 
20,059

 
21,133

 
39,219

 
41,276

Total Portal & Advertising
 
$
21,261

 
$
23,097

 
$
41,927

 
$
45,327

Total Revenue
 
$
31,849

 
$
35,923

 
$
63,673

 
$
68,838


Summary of Revenue Disaggregated by Geography Areas
Revenue disaggregated by geography, based on the billing address of our customer, consists of the following (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
 
United States
 
$
26,974

 
$
29,354

 
$
53,248

 
$
56,392

International
 
4,875

 
6,569

 
10,425

 
12,446

Total revenue
 
$
31,849

 
$
35,923

 
$
63,673

 
$
68,838


Schedule of Contract with Customer, Asset and Liability The changes in deferred revenue, inclusive of both current and long-term, are as follows (in thousands):
(in thousands)
 
Beginning balance - January 1, 2019
$
8,886

Recognition of deferred revenue
(5,888
)
Deferral of revenue
6,416

Effect of foreign currency translation
(335
)
Ending balance - June 30, 2019
$
9,079


v3.19.2
Leases (Tables)
6 Months Ended
Jun. 30, 2019
Leases [Abstract]  
Schedule of Components of Lease Costs, Lease Term and Discount Rate
The components of lease costs, lease term and discount rate are as follows (lease cost in thousands):
 
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
Finance lease cost
 
 
 
 
Amortization of right-of-use assets
 
$
958

 
$
1,586

Interest
 
211

 
400

Operating lease cost
 
1,129

 
2,219

Total lease cost
 
$
2,298

 
$
4,205

 
 
 
 
 
Weighted Average Remaining Lease Term
 
 
 
 
Operating leases
 
2.2

Years
Finance leases
 
1.1

Years
 
 
 
 
 
Weighted Average Discount Rate
 
 
 
 
Operating leases
 
6.0

%
Finance leases
 
5.9

%

Schedule of Maturities of Operating Leases Liabilities
The following is a schedule, by years, of maturities of lease liabilities as of June 30, 2019 (in thousands):
 
 
Operating Leases
 
Finance Leases
The remainder of 2019
 
$
1,785

 
$
2,181

2020
 
2,286

 
2,283

2021
 
1,605

 
107

2022
 
944

 

2023
 
448

 

2024
 
36

 

Total undiscounted cash flows
 
$
7,104

 
$
4,571

Less imputed interest
 
(585
)
 
(533
)
Present value of lease liabilities
 
$
6,519

 
$
4,038


Schedule of Maturities of Finance Leases Liabilities
The following is a schedule, by years, of maturities of lease liabilities as of June 30, 2019 (in thousands):
 
 
Operating Leases
 
Finance Leases
The remainder of 2019
 
$
1,785

 
$
2,181

2020
 
2,286

 
2,283

2021
 
1,605

 
107

2022
 
944

 

2023
 
448

 

2024
 
36

 

Total undiscounted cash flows
 
$
7,104

 
$
4,571

Less imputed interest
 
(585
)
 
(533
)
Present value of lease liabilities
 
$
6,519