SYNACOR, INC., 10-K filed on 3/22/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Mar. 16, 2017
Jun. 30, 2016
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
SYNC 
 
 
Entity Registrant Name
Synacor, Inc. 
 
 
Entity Central Index Key
0001408278 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Smaller Reporting Company 
 
 
Entity Common Stock, Shares Outstanding
 
31,484,756 
 
Entity Public Float
 
 
$ 73,566,083 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
CURRENT ASSETS:
 
 
Cash and cash equivalents
$ 14,315 
$ 15,697 
Accounts receivable—net of allowance of $263 and $372
27,386 
24,341 
Prepaid expenses and other current assets
4,862 
3,290 
Total current assets
46,563 
43,328 
PROPERTY AND EQUIPMENT—Net
14,406 
14,377 
GOODWILL
15,943 
15,187 
INTANGIBLE ASSETS
14,837 
14,798 
OTHER LONG-TERM ASSETS
1,650 
1,336 
TOTAL ASSETS
93,399 
89,026 
CURRENT LIABILITIES:
 
 
Accounts payable
18,769 
9,004 
Accrued expenses and other current liabilities
11,684 
9,765 
Current portion of deferred revenue
12,149 
11,295 
Current portion of capital lease obligations
982 
1,574 
Total current liabilities
43,584 
31,638 
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS
1,014 
1,007 
LONG-TERM DEBT
5,000 
5,000 
DEFERRED REVENUE
3,917 
3,225 
OTHER LONG-TERM LIABILITIES
235 
2,052 
Total liabilities
53,750 
42,922 
COMMITMENTS AND CONTINGENCIES (Note 8)
   
   
STOCKHOLDERS’ EQUITY:
 
 
Preferred stock, $0.01 par value—10,000,000 shares authorized, no shares issued and outstanding at December 31, 2016 and 2015
   
   
Common stock, $0.01 par value—100,000,000 shares authorized; 31,626,635 shares issued and 30,881,148 shares outstanding at December 31, 2016; 30,636,327 shares issued and 29,983,279 shares outstanding at December 31, 2015
316 
306 
Treasury stock—at cost, 745,487 shares at December 31, 2016 and 653,048 shares at December 31, 2015
(1,547)
(1,332)
Additional paid-in capital
117,747 
113,238 
Accumulated deficit
(76,850)
(66,110)
Accumulated other comprehensive (loss) income
(17)
Total stockholders’ equity
39,649 
46,104 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 93,399 
$ 89,026 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 263 
$ 372 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
31,626,635 
30,636,327 
Common stock, shares outstanding
30,881,148 
29,983,279 
Treasury stock, shares
745,487 
653,048 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Income Statement [Abstract]
 
 
 
REVENUE
$ 127,373 
$ 110,245 
$ 106,579 
COSTS AND OPERATING EXPENSES:
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
59,146 
54,423 
57,939 
Technology and development (exclusive of depreciation and amortization shown separately below)
25,612 
20,007 
26,259 
Sales and marketing
22,846 
16,272 
10,807 
General and administrative (exclusive of depreciation and amortization shown separately below)
19,695 
15,543 
14,249 
Depreciation and amortization
9,235 
6,901 
5,126 
Gain on sale of domain
 
 
(1,000)
Total costs and operating expenses
136,534 
113,146 
113,380 
LOSS FROM OPERATIONS
(9,161)
(2,901)
(6,801)
OTHER EXPENSE
(42)
(16)
(28)
INTEREST EXPENSE
(318)
(245)
(218)
LOSS BEFORE INCOME TAXES AND EQUITY INTEREST
(9,521)
(3,162)
(7,047)
PROVISION FOR INCOME TAXES
1,219 
239 
4,821 
LOSS IN EQUITY INTEREST
 
(73)
(1,063)
NET LOSS
$ (10,740)
$ (3,474)
$ (12,931)
NET LOSS PER SHARE:
 
 
 
Basic
$ (0.36)
$ (0.12)
$ (0.47)
Diluted
$ (0.36)
$ (0.12)
$ (0.47)
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET LOSS PER SHARE:
 
 
 
Basic
30,251,685 
28,213,838 
27,389,793 
Diluted
30,251,685 
28,213,838 
27,389,793 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net loss
$ (10,740)
$ (3,474)
$ (12,931)
Other comprehensive loss:
 
 
 
Change in foreign currency translation adjustment, net of tax
(19)
(18)
18 
Comprehensive loss
$ (10,759)
$ (3,492)
$ (12,913)
Consolidated Statements of Stockholders' Equity (USD $)
In Thousands, except Share data
Total
Common Stock [Member]
Treasury Stock [Member]
Additional Paid-In Capital [Member]
Accumulated Deficit [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Beginning balance at Dec. 31, 2013
$ 52,231 
$ 277 
$ (569)
$ 102,226 
$ (49,705)
$ 2 
Beginning balance, shares at Dec. 31, 2013
 
27,684,598 
(319,500)
 
 
 
Exercise of common stock options
68 
 
66 
 
 
Exercise of common stock options, shares
 
246,880 
 
 
 
 
Stock-based compensation cost
3,669 
 
 
3,669 
 
 
Vesting of restricted stock units, shares
 
13,375 
 
 
 
 
Treasury stock withheld to cover tax liability
(11)
 
(11)
 
 
 
Treasury stock withheld to cover tax liability, shares
(4,594)
 
(4,594)
 
 
 
Purchase of treasury stock
(562)
 
(562)
 
 
 
Purchase of treasury stock, shares
(229,050)
 
(229,050)
 
 
 
Net loss
(12,931)
 
 
 
(12,931)
 
Other comprehensive income (loss)
18 
 
 
 
 
18 
Ending balance at Dec. 31, 2014
42,482 
279 
(1,142)
105,961 
(62,636)
20 
Ending balance, shares at Dec. 31, 2014
 
27,944,853 
(553,144)
 
 
 
Exercise of common stock options
70 
 
 
70 
 
 
Exercise of common stock options, shares
 
36,135 
 
 
 
 
Stock and warrants issued in acquisition
3,960 
24 
 
3,936 
 
 
Stock and warrants issued in acquisition, shares
 
2,400,000 
 
 
 
 
Stock-based compensation cost
3,271 
 
 
3,271 
 
 
Vesting of restricted stock units
 
 
 
 
Vesting of restricted stock units, shares
 
255,339 
 
 
 
 
Treasury stock withheld to cover tax liability
(190)
 
(190)
 
 
 
Treasury stock withheld to cover tax liability, shares
(99,904)
 
(99,904)
 
 
 
Net loss
(3,474)
 
 
 
(3,474)
 
Other comprehensive income (loss)
(18)
 
 
 
 
(18)
Ending balance at Dec. 31, 2015
46,104 
306 
(1,332)
113,238 
(66,110)
Ending balance, shares at Dec. 31, 2015
29,983,279 
30,636,327 
(653,048)
 
 
 
Exercise of common stock options
1,560 
 
1,552 
 
 
Exercise of common stock options, shares
751,481 
751,481 
 
 
 
 
Stock-based compensation cost
2,957 
 
 
2,957 
 
 
Vesting of restricted stock units
 
 
 
 
Vesting of restricted stock units, shares
 
238,827 
 
 
 
 
Treasury stock withheld to cover tax liability
(215)
 
(215)
 
 
 
Treasury stock withheld to cover tax liability, shares
(92,439)
 
(92,439)
 
 
 
Net loss
(10,740)
 
 
 
(10,740)
 
Other comprehensive income (loss)
(19)
 
 
 
 
(19)
Ending balance at Dec. 31, 2016
$ 39,649 
$ 316 
$ (1,547)
$ 117,747 
$ (76,850)
$ (17)
Ending balance, shares at Dec. 31, 2016
30,881,148 
31,626,635 
(745,487)
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$ (10,740)
$ (3,474)
$ (12,931)
Adjustments to reconcile net loss to net cash and cash equivalents provided (used) by operating activities:
 
 
 
Depreciation and amortization
9,235 
6,901 
5,126 
Stock-based compensation expense
2,771 
3,115 
3,595 
Capitalized software impairment
334 
 
 
Provision for deferred income taxes
143 
 
4,769 
Loss in equity interest
 
73 
1,063 
Gain on sale of domain
 
 
(1,000)
Change in assets and liabilities:
 
 
 
Accounts receivable, net
(2,080)
(362)
(5,910)
Prepaid expenses and other current assets
(1,572)
(547)
(367)
Other long-term assets
(314)
(167)
247 
Accounts payable
8,706 
(3,579)
(359)
Accrued expenses and other current liabilities
580 
2,090 
2,665 
Deferred revenue
1,546 
3,478 
 
Other long-term liabilities
(360)
122 
(207)
Net cash provided (used) by operating activities
8,249 
7,650 
(3,309)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(5,939)
(3,236)
(4,982)
Acquisition net of cash acquired
(2,500)
(17,260)
 
Proceeds from sale of domain
 
 
1,000 
Investment in equity interest
 
 
(772)
Net cash used by investing activities
(8,439)
(20,496)
(4,754)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from bank financing
 
5,000 
 
Repayments on capital lease obligations
(1,672)
(1,442)
(2,258)
Proceeds from exercise of common stock options
1,560 
70 
68 
Purchase of treasury stock and shares received to satisfy minimum tax withholdings
(215)
(190)
(562)
Deferred acquisition payment
(860)
(495)
 
Net cash (used) provided by financing activities
(1,187)
2,943 
(2,752)
Effect of exchange rate changes on cash and cash equivalents
(5)
 
18 
NET DECREASE IN CASH AND CASH EQUIVALENTS
(1,382)
(9,903)
(10,797)
CASH AND CASH EQUIVALENTS—Beginning of year
15,697 
25,600 
36,397 
CASH AND CASH EQUIVALENTS—End of year
14,315 
15,697 
25,600 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest
318 
212 
219 
Cash paid for income taxes
737 
210 
112 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
 
 
 
Property, equipment and service contracts financed under capital lease obligations
982 
1,173 
1,961 
Contingent consideration
567 
1,600 
 
Fair value of common stock and warrants in acquisition
 
3,960 
 
Accrued property and equipment expenditures
227 
21 
117 
Stock-based compensation capitalized to property and equipment
$ 186 
$ 159 
$ 74 
The Company and Summary of Significant Accounting Policies
The Company and Summary of Significant Accounting Policies

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Basis of Presentation —The 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.

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 that 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, exclusive of goodwill, 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 have been no material impairments to long-lived assets in any of the years presented.

The components and estimated economic lives of our amortizable intangible assets were as follows as of December 31, 2016 and 2015:

 

 

 

Estimated

Economic  Life

 

2016

 

 

2015

 

 

 

 

 

(Dollars in thousands)

 

Gross amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

10 years

 

$

14,780

 

 

$

13,400

 

Trademark

 

5 years

 

 

300

 

 

 

300

 

Developed technology

 

5 years

 

 

2,330

 

 

 

1,600

 

Total gross amortizable intangible assets

 

 

 

 

17,410

 

 

 

15,300

 

Accumulated amortization:

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

 

 

(1,961

)

 

 

(391

)

Trademark

 

 

 

 

(78

)

 

 

(18

)

Developed technology

 

 

 

 

(534

)

 

 

(93

)

Total accumulated amortization

 

 

 

 

(2,573

)

 

 

(502

)

Amortizable intangible assets, net

 

 

 

$

14,837

 

 

$

14,798

 

 

Future amortization expense of amortizable intangible assets will be as follows (in thousands):  $2,142 in each of years ending December 31, 2017 through 2019, $2,031 in the year ending December 31, 2020, $1,411 in the year ending December 31, 2021, and $4,969 thereafter.

Goodwill —Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized, but is tested for impairment on an annual basis and more frequently if impairment indicators are present. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its estimated fair value. The Company has determined it is a single reporting unit, and estimates its fair value using a market approach. If the carrying value of the reporting unit were to exceed its estimated fair value, the second step of the goodwill impairment test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge would then be recognized for the excess of the carrying value of goodwill over its implied estimated fair value. The Company conducts its annual goodwill impairment test as of October 1st. For the years ended December 31, 2016, 2015 and 2014, the Company determined goodwill was not impaired.

The change in goodwill is as follows for the years ended December 31, 2016 and 2015 (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2016

 

 

2015

 

Balance, beginning of year

 

$

15,187

 

 

$

1,565

 

Technorati acquisition related goodwill (Note 2)

 

$

751

 

 

 

 

Zimbra acquisition related goodwill (Note 2)

 

 

 

 

 

13,622

 

Foreign currency revaluation

 

 

5

 

 

 

 

Balance, end of year

 

$

15,943

 

 

$

15,187

 

 

Revenue Recognition —The Company derives revenue from two categories: revenue generated from its Managed Portals and Advertising activities and Recurring and Fee-Based revenue, each of which is described below. Advertising and Recurring and Fee-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 following table shows the revenue in each category for the years ended December 31, 2016, 2015 and 2014 (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Search and digital advertising

 

$

74,889

 

 

$

78,316

 

 

$

83,906

 

Recurring and fee-based

 

 

52,484

 

 

 

31,929

 

 

 

22,673

 

Total revenue

 

$

127,373

 

 

$

110,245

 

 

$

106,579

 

 

The Company uses internet advertising to generate revenue from the traffic on its Managed Portals categorized as search advertising and digital advertising.

 

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 Managed Portals. 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 is recognized as revenue.

 

Digital advertising includes video, image and text advertisements delivered on one of the Company’s Managed Portals. Advertising inventory is filled with advertisements sourced by the Company’s direct sales force, independent advertising sales representatives, and also advertising network partners. Revenue is generated for the Company when an advertisement displays, otherwise known as an impression, or when consumers view or click an advertisement, otherwise known as an action. Digital advertising revenue is calculated on a per-impression or per-action basis. Revenue is recognized as the impressions are delivered or the actions occur, according to contractual rates.

Recurring and Fee-Based revenue represents 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, email, video solutions, Cloud ID, security services, games and other premium services and paid content. Monthly subscriber levels typically form the basis for calculating and generating Recurring and Fee-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 services are delivered.

The Company evaluates its relationship between search and digital advertising revenue and its Managed Portal customers in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-45, Principal Agent Considerations. The Company has determined that the search and digital advertising revenue derived from the internet traffic on Managed Portals is reported on a gross basis because the Company is the primary obligor (Synacor is responsible to its customers for fulfilling search and digital advertising services and premium 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.

Certain Recurring and Fee-Based revenue is derived from the sale of software licenses on a perpetual or subscription basis, for which revenue is recognized upon receipt of an external agreement and delivery of the software, provided the fees are fixed and determinable, and collection is probable. For agreements that include one or more elements to be delivered at a future date, revenue is recognized using the residual method, under which the vendor-specific objective evidence (“VSOE”) of fair value of the undelivered elements is deferred, and the remaining portion of the agreement fee is recognized as license revenue. If VSOE of fair value has not been established for certain undelivered elements, revenue is deferred until those elements have been delivered or their fair values have been determined.

Cost of Revenue —Cost of revenue consists primarily of revenue sharing, content acquisition costs, co-location facility costs, royalty costs and product support costs. Revenue sharing consists of amounts accrued and paid to customers for the internet traffic on Managed Portals where the Company is the primary obligor, resulting in the generation of search and digital advertising revenue. The revenue-sharing agreements with customers are primarily variable payments based on a percentage of the search and digital 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. Royalty costs consist of amounts due to other parties for sale of mailboxes with third party technology enabled. Product support costs consist of employee and operating costs directly related to the Company’s maintenance and professional services support.

Concentrations of Risk —As of December 31, 2016, the Company had no customers whose outstanding balance due the Company equaled or exceeded 10% of the Company’s total accounts receivable.  As of December 31, 2015, the Company had one customer, Google, whose balance represented approximately 14% of the Company’s accounts receivable balance. For the years ended December 31, 2016, 2015 and 2014 the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows: 

 

 

 

Revenue

 

 

 

2016

 

 

2015

 

 

2014

 

Google

 

 

12

%

 

 

28

%

 

 

42

%

 

For the years ended December 31, 2016, 2015 and 2014, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue.

 

 

 

Cost of Revenue

 

 

 

2016

 

 

2015

 

 

2014

 

Customer A

 

 

22

%

 

 

26

%

 

 

22

%

Customer B

 

*

 

 

 

10

%

 

 

12

%

Customer C

 

*

 

 

*

 

 

 

10

%

Customer D

 

*

 

 

*

 

 

 

12

%

 

* 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 of $0.25 million. Although the Company maintains balances that exceed the federally insured limit, it has not experienced any losses related to these balances and believes credit risk to be minimal.

Software Development Costs —Costs incurred during the preliminary project stage for internal 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 2016, 2015 and 2014, the Company incurred $4.5 million, $2.8 million and $3.4 million of combined internal and external costs related to the application development stage. Internal and external training and maintenance costs are expensed as incurred.

Technology and Development —Technology and development expenses consist primarily of compensation-related expenses incurred for the research and development of, enhancements to, and maintenance and operation of the Company’s products, equipment and related infrastructure.

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 costs are expensed as incurred.  Advertising costs totaled $0.4 million, $0.1 million and $0.0 in 2016, 2015 and 2014, respectively.

General and Administrative —General and administrative expenses consist primarily of compensation related expenses for executive management, finance, accounting, human resources, professional fees and other administrative functions.

Sale of Domain —In June 2014, the Company executed a transaction to sell a domain name of its legacy business. The sale amounted to $1.0 million and the entire amount was recorded as a gain on the sale in the accompanying consolidated statement of operations for the year ended December 31, 2014. The sale was unique to 2014 and no such transactions occurred in the comparative periods.

Earnings (Loss) Per Share —Basic earnings (loss) per share (“EPS”) is calculated in accordance with FASB ASC 260, Earnings per Share, using the weighted average number of common shares outstanding during each period. 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, stock options, warrants and restricted stock units (“RSUs”) are considered to be potential common shares and are only included in the calculation of diluted earnings (loss) per share when their effect is dilutive.

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 pre-vesting 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.

Rights Plan —On July 14, 2014 the board of directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock and adopted a stockholder rights plan (the “Rights Plan”). The Rights were issued on July 14, 2014 to the stockholders of record at the close of business on that date. Each Right allows its holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock (a “ Series A Junior Preferred Share”) for $10.00 per share (the “Exercise Price”), if the Rights become exercisable. This portion of a Series A Junior Preferred Share will give the stockholder approximately the same dividend, voting, and liquidation rights as would one share of common stock. Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights. On July 14, 2014, in conjunction with the adoption of the Rights Plan, the Company designated 2,000,000 shares of its Preferred Stock as Series A Junior Participating Preferred Stock.

The Rights will not be exercisable until 10 days after the public announcement that a person or group has become an “Acquiring Person” by obtaining beneficial ownership of 10% or more of the Company’s outstanding common stock (the “Distribution Date”). If a person or group becomes an Acquiring Person, each Right will entitle its holder (other than such Acquiring Person) to purchase for $10.00 per share, a number of shares of the Company’s common stock having a market value of twice such price based on the market price of the common stock prior to such acquisition. Additionally, if the Company is acquired in a merger or similar transaction after the Distribution Date, each Right will entitle its holder (other than such Acquiring Person) to purchase for $10.00 per share, a number of shares of the acquiring corporation with a market value of $20.00 per share based on the market price of the acquiring corporation’s stock, prior to such merger. In addition, at any time after a person or group becomes an Acquiring Person, but before such Acquiring Person or group owns 50% or more of the Company’s common stock, the board of directors may exchange one share of the Company’s common stock for each outstanding Right (other than Rights owned by such Acquiring Person, which would have become void). An Acquiring Person will not be entitled to exercise the Rights.

On April 20, 2015, the Company’s stockholders ratified the Rights Plan. The Company expects that the Rights Plan will expire on July 14, 2017 in accordance with its terms.

On August 18, 2015, the Company amended the definition of “Acquiring Person” to provide that (i) issuances of securities under plans, contracts or arrangements approved by the board of directors or its compensation committee as compensation for service as a director, employee or consultant of Synacor or any of its subsidiaries will not trigger the exercisability of the Rights and (ii) issuances of securities in consideration for the acquisition of assets or a business in a transaction approved by the board of directors will not trigger the exercisability of the Rights.

Business Combinations —The Company records its business combinations under the acquisition method of accounting. Under this method, the Company allocates the purchase price of each acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The fair value of identifiable intangible assets is based upon detailed valuations that use various assumptions made by management. Any excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired is allocated to goodwill. All direct acquisition-related costs are expensed as incurred.

The following methodology and assumptions are considered relevant to the fair value judgments related to acquired intangible assets and assumed liabilities:

 

Technology and Trademark intangible assets—valued based on discounted cash flows using the relief from royalty method (a form of an income approach)

 

Customer Relationship—valued based on a multi-period excess earnings method (a form of an income approach)

 

Deferred Revenue—valued based on a cost approach using estimated costs to be incurred in connection with the continuing legal obligation associated with acquired contracts plus a reasonable profit margin.

Business assumptions, such as projections of revenue, costs to fulfill acquired contracts, applicable royalty rates, and future profitability are key assumptions included in the methods described above.

In circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments it expects to make as of the acquisition date. The Company remeasures this liability each reporting period and records changes in the fair value through other expense in the consolidated statement of operations. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing, amount of, or the likelihood of achieving the applicable contingent consideration.

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 (“NOL”) 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, 2016 and 2015, accrued interest or penalties related to uncertain tax positions was insignificant.

Reduction In Workforce —On September 28, 2014, the Company’s board of directors approved a cost reduction plan. The plan involved a reduction in the Company’s workforce by approximately 70 employees. The pre-tax severance charge and outplacement services resulting from the reduction in workforce, combined with the Company’s separation from its former Chief Operating Officer, amounted to $1.3 million. Of the $1.3 million in costs, $0.5 million was recorded to technology and development, $0.2 million was recorded to sales and marketing and $0.6 million was recorded to general and administrative in the accompanying consolidated statement of operations for the year ended December 31, 2014.

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.

Investment — In July 2013, the Company made a $1.0 million investment (in the form of a convertible promissory note) in a privately held Delaware corporation called Blazer and Flip Flops, Inc. (“B&FF” doing business as The Experience Engine). In March 2015, the note was converted into preferred stock of B&FF and is accounted for as a cost method investment. B&FF is a professional services company whose principals have experience integrating its customers’ systems with their customers’ devices, including smartphones and tablets.

Fair Value Measurements —Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis at each reporting period. The fair value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximates their carrying value due to their short-term nature. The carrying amounts of the Company’s capital leases 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, 2016 and 2015. The carrying value of our long-term debt approximates its fair value due to its variable interest rate. The fair value of accrued contingent consideration recorded by the Company represents the estimated fair value of the contingent consideration the Company expects to pay.

The provisions of FASB 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.

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

The Company is currently in the process of assessing the financial impact of adopting these ASUs and the methods of adoption. The Company currently recognizes subscription revenue from its Email/Collaboration contracts, which is included within recurring and fee-based revenue, over the life of the contracts (which are typically six months or longer). The Company has tentatively concluded that it is likely that this new guidance will require it to recognize a portion of the revenue from those contracts upon delivery, at the inception of the contracts, which would have the effect of accelerating recognition of revenue on such contracts, and may have a material impact on the Company’s consolidated financial statements. The standard will be effective for the Company beginning January 1, 2018, and adoption as of the original effective date of January 1, 2017 is permitted. The Company anticipates adopting the standard as of its effective date of January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company has not yet determined which transition method it will use.

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) which amends lease accounting by lessors and lessees. This new standard will require, among other things, that lessees recognize a right-to-use asset and related lease liability for all significant financing and operating leases, and specifies where in the statement of cash flows the related lease payments are to be presented. The standard is effective for years beginning after December 15, 2018, including interim periods within those years (beginning in calendar year 2019 for the Company), and early adoption is permitted. Adoption of ASU 2016-02 is required to be applied on a modified retrospective basis. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements, but currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon the adoption of ASU 2016-02, which will increase the total assets and total liabilities that it reports as compared to reported prior to adoption. The Company has not yet determined whether it will adopt the standard in advance of the required effective date.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of stock-based awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for the Company in the first quarter of 2017. The guidance will be applied either prospectively, retrospectively, or using a modified retrospective transition method, depending on the area covered in this update. The Company will adopt ASU 2016-09 in the first quarter of 2017.  The adoption of this ASU is not expected to have a significant impact to our consolidated financial statements.

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

Acquisitions
Acquisitions

2. ACQUISITIONS

Technorati

On February 19, 2016, the Company entered into an Asset Purchase Agreement to acquire substantially all of the assets of Technorati, Inc. (“Technorati”), an advertising technology company, for $3.0 million in cash (the “Purchase Price”). The Company completed the acquisition on February 26, 2016 (the “Closing”).

The Company’s motivations for completing the acquisition included the expectation that the acquisition would drive additional advertising demand, accelerate its content and advertising syndication strategy by giving the Company access to over 1,000 new publishers, and adding new tools for publishers to its existing platform. The Company also anticipated synergies and economies of scale by combining Technorati’s publisher network, proprietary SmartWrapper solution and other advertising technology with its existing network of Managed Portals and Advertising solutions.

The assets acquired include Technorati’s intellectual property and advertising technology platforms, customer and publisher relationships, accounts receivable and equipment. The Company also assumed certain obligations of Technorati, including post-Closing obligations under contracts assigned to the Company and the payment of outstanding liabilities to its publishers. Ten of Technorati’s employees commenced employment with Synacor.

The Company paid $2.5 million of the Purchase Price at the Closing and withheld $0.5 million of the Purchase Price to secure Technorati’s indemnification obligations under the Asset Purchase Agreement. As of December 31, 2016, the Company owed Technorati approximately $0.1 million in post-closing working capital adjustments. Pursuant to the terms of the Asset Purchase Agreement, Technorati shall indemnify the Company for breaches of its representations and warranties, breaches of covenants and certain other matters. The representations and warranties set forth in the Asset Purchase Agreement generally survived for 12 months following the Closing, with longer survival periods for certain fundamental representations and warranties.  There have been no claims for such breaches to date.

Consideration and Allocation of Purchase Price –

The transaction was accounted for as a purchase of a business in accordance with FASB ASC Topic 805, Business Combinations.  Under this guidance, the fair value of the consideration was determined and the assets acquired and liabilities assumed have been recorded at their estimated fair values as of the date of acquisition.  The excess of the consideration over the estimated fair values has been recorded as goodwill.

The transaction consideration, as well as the allocation of the purchase price to the assets acquired and liabilities assumed as of the date of the acquisition are presented in the table below.  Management is responsible for determining, as of the Closing, the fair value of tangible and identifiable intangible assets acquired and liabilities assumed, and the estimated useful lives for any depreciable and amortizable assets.  Management considered a number of factors, including reference to a valuation analysis performed solely for the purpose of this allocation in accordance with ASC Topic 805.  The Company’s estimates are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.  This analysis required the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur.

Consideration (in thousands):

 

Cash consideration

 

$

2,500

 

Fair value of indemnification holdback

 

 

500

 

Fair value of post-closing working capital adjustment

 

 

67

 

Total consideration

 

$

3,067

 

 

Purchase price allocation (in thousands):

 

Assets acquired:

 

 

 

 

Accounts receivable

 

$

965

 

Property and equipment

 

 

96

 

Customer and publisher relationships

 

 

1,380

 

Technology

 

 

730

 

Goodwill

 

 

751

 

Total assets acquired

 

 

3,922

 

Liabilities assumed:

 

 

 

 

Accounts payable and accrued expenses

 

 

855

 

Net assets acquired

 

$

3,067

 

 

The Company has used its best estimates and assumptions to value the assets acquired and liabilities assumed, and the purchase price allocation is not expected to materially change. It is expected that acquired goodwill will be deductible for United States tax purposes.  The Company is amortizing technology and customer and publisher relationships over estimated useful lives of five years.

The indemnification holdback and post-closing working capital adjustment were accrued in Accrued Expenses and Other Current Liabilities at December 31, 2016 and were paid to the seller subsequent to that date.

The Company is not able to determine the amount of revenue and earnings recognized in the post-acquisition period as a result of integration activities.

Zimbra

On August 18, 2015 the Company and Sync Holdings, LLC, its wholly-owned subsidiary, entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Zimbra, Inc. (now known as TZ Holdings) to acquire certain assets related to TZ Holdings’ email/collaboration products and services business, including certain of its wholly-owned foreign subsidiaries. The business acquired by the Company pursuant to the Asset Purchase Agreement is referred to herein as “Zimbra” or the “Purchased Business.” The Purchased Business includes software for email/collaboration, calendaring, file sharing, activity streams and social networks, among other things. The Zimbra software is used globally by service providers, governments and companies. The Company completed the acquisition (the “Acquisition”) on September 14, 2015 (the “Closing”).

Purchase Price —The total purchase price paid (including the fair value of the contingent consideration described below) for the Purchased Business was approximately $22.9 million. At the Closing, in consideration for the Purchased Business, the Company paid TZ Holdings $17.3 million in cash and issued to TZ Holdings 2.4 million shares of its common stock (such shares, the “Closing Stock Consideration”), valued at $3.1 million, and warrants to purchase 480,000 shares of common stock (the “Closing Warrants”). Additionally, TZ Holdings was eligible to receive additional consideration, estimated at $2.5 million, consisting of contingent cash consideration, warrants and additional shares of common stock, as described below.

Contingent Consideration — TZ Holdings was eligible to receive up to an additional $2.0 million (the “Earn Out Consideration”) in cash upon the satisfaction of certain business performance milestones related to Zimbra after the Closing, subject to and contingent upon any reduction to satisfy indemnification claims (including pending claims), as further described in the Asset Purchase Agreement. The fair value of this contingent consideration was determined to be $1.6 million and was included in consideration paid.  Of this amount, $0.9 million was paid during the year ended December 31, 2016, and the Company has a liability for estimated additional Earn Out Consideration in the amount of $0.6 million at December 31, 2016, to be paid during the second quarter of 2017.  This liability is included in accrued expenses and other current liabilities.

Holdback —In addition to the Earn Out Consideration, the Company has held back an additional 600,000 shares of common stock (the “Holdback Stock” and together with the Closing Stock Consideration, the “Stock Consideration”) and warrants to purchase an additional 120,000 shares of common stock (the “Holdback Warrants” and together with the Closing Warrants, the “Warrants”) to secure TZ Holdings’ indemnification obligations under the Asset Purchase Agreement. Any Holdback Shares and Holdback Warrants not used to satisfy indemnification claims (including pending claims) will be released to TZ Holdings eighteen months following the Closing. The Company recorded the Holdback Stock and the Holdback Warrants based on its estimated fair value at the Closing.

Additionally, the Company has assumed certain obligations of TZ Holdings, including the performance of TZ Holdings’ post-closing obligations under contracts assigned to the Company.

Consideration:

 

Cash consideration

 

$

17,310

 

Fair value of 2,400,000 shares of common stock issued on

   September 14, 2015

 

 

3,132

 

Fair value of Closing and Holdback Warrants (warrants to

   purchase an aggregate of 600,000 shares of common stock)

 

 

45

 

Fair value of the Holdback Stock (600,000 shares of common

   stock) on September 14, 2015

 

 

783

 

Fair value of contingent consideration

 

 

1,600

 

Total purchase price

 

$

22,870

 

 

In connection with the Acquisition, TZ Holdings agreed not to sell, transfer or otherwise dispose of any portion of the Stock Consideration until the first anniversary of the Closing. Upon the first anniversary of the Closing, the restrictions will lapse with respect to 1/6th of the Stock Consideration, and upon the completion of each of the five months thereafter, the restrictions will lapse with respect to an additional 1/6th of the Stock Consideration. Following the lapse of such restrictions, TZ Holdings may transfer the Stock Consideration solely to its stockholders.

Allocation of Purchase Price —The purchase price allocation was determined in accordance with the accounting treatment of a business combination in accordance with the FASB ASC Topic 805, Business Combinations. Under the guidance, the fair value of the consideration was determined and the assets acquired and liabilities assumed have been recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair values has been recorded as goodwill.

The allocation of purchase price to the assets acquired and liabilities assumed as the date of the acquisition is presented in the table below. Management is responsible for determining the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed as of the Closing. Management considered a number of factors, including reference to an analysis under FASB ASC Topic 805 solely for the purpose of allocating the purchase price to the assets acquired and liabilities assumed. The Company’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that occur.

 

Assets acquired:

 

 

 

 

Cash and cash equivalents

 

$

50

 

Accounts receivable

 

 

3,500

 

Prepaid expenses and other current assets

 

 

451

 

Property and equipment

 

 

1,194

 

Other long-term assets

 

 

68

 

Goodwill

 

 

13,622

 

Intangible assets

 

 

15,300

 

Total assets acquired

 

 

34,185

 

 

Liabilities assumed:

 

 

 

 

Accounts payable

 

 

134

 

Accrued expenses and other current liabilities

 

 

409

 

Deferred revenue

 

 

10,400

 

Capital lease obligations

 

 

317

 

Other long-term liabilities

 

 

55

 

Total liabilities assumed

 

 

11,315

 

Net assets acquired

 

$

22,870

 

 

During the fiscal year 2015, acquisition costs of $0.5 million were recorded in general and administrative expenses in the consolidated statement of operations.

Pro Forma Results —The following unaudited pro forma information presents the combined results of operations as if the acquisition of Zimbra had been completed on January 1, 2014, the beginning of the comparable prior annual reporting periods. The unaudited pro forma results include adjustments to reflect: (i) the carve-out of revenue and expenses relating to the portion of the Zimbra business not acquired; (ii) the elimination of depreciation and amortization from Zimbra’s historical financial statements and the inclusion of depreciation and amortization based on the fair values of acquired property, plant and equipment and intangible assets; (iii) the fair value of deferred revenue liabilities assumed; (iv) recognition of the post-acquisition share-based compensation expense related to stock options that were granted to Zimbra employees who accepted employment with Synacor; (v) the elimination of intercompany revenue and expenses between Zimbra and Synacor; and (iv) the elimination of acquisition-related expenses.

The unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating the two companies. Accordingly, these unaudited pro forma results are presented for informational purpose only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations

Set forth below is the unaudited pro forma consolidated results of operations of the Company and Zimbra as if the Acquisition occurred as of January 1, 2014, the beginning of the earliest year presented (in thousands, except per share amounts):

 

 

 

Years Ended December 31,

 

 

 

2015

 

 

2014

 

Revenue

 

$

130,077

 

 

$

134,207

 

Operating loss

 

$

(2,944

)

 

$

(9,485

)

Net loss

 

$

(4,608

)

 

$

(16,017

)

Net loss per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.16

)

 

$

(0.54

)

Diluted

 

$

(0.16

)

 

$

(0.54

)

 

Property and Equipment-Net
Property and Equipment-Net

3. PROPERTY AND EQUIPMENT—NET

As of December 31, 2016 and 2015, property and equipment-net consisted of the following (in thousands):

 

 

 

2016

 

 

2015

 

Computer equipment

 

$

23,438

 

 

$

23,324

 

Computer software

 

 

15,198

 

 

 

12,748

 

Furniture and fixtures

 

 

2,062

 

 

 

1,945

 

Leasehold improvements

 

 

1,463

 

 

 

1,532

 

Work in process

 

 

4,572

 

 

 

2,065

 

Other

 

 

249

 

 

 

252

 

 

 

 

46,982

 

 

 

41,866

 

Less accumulated depreciation

 

 

(32,576

)

 

 

(27,489

)

Total property and equipment—net

 

$

14,406

 

 

$

14,377

 

 

Property and equipment includes computer equipment and software held under capital leases of approximately $5.2 million and $4.1 million as of December 31, 2016 and 2015, respectively. Accumulated depreciation of computer equipment and software held under capital leases amounted to $3.4 million and $1.8 million as of December 31, 2016 and 2015, respectively.

Depreciation expense was $7.2 million, $6.4 million, and $5.1 million for the years ended December 31, 2016, 2015, and 2014, respectively.  An impairment of internally-developed software totaling $0.3 million was recorded in 2016 and charged to general and administrative expense.

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

4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

As of December 31, 2016 and 2015, accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

2016

 

 

2015

 

Accrued compensation

 

$

6,860

 

 

$

6,112

 

Accrued content fees

 

 

1,788

 

 

 

1,964

 

Accrued business acquisition consideration

 

 

1,193

 

 

 

 

Other

 

 

1,843

 

 

 

1,689

 

Total

 

$

11,684

 

 

$

9,765

 

 

Long-Term Debt
Long-Term Debt

5. LONG-TERM DEBT

In September 2013, the Company entered into a Loan and Security Agreement, with Silicon Valley Bank (“SVB”), which was most recently amended in November 2016 (as amended, the “Loan Agreement”). The Loan Agreement provides for a $12.0 million secured revolving line of credit with a stated maturity of September 2018. The credit facility is available for cash borrowings, subject to a formula based upon eligible accounts receivable. As of December 31, 2016, $5.0 million was outstanding under the Loan Agreement; and subject to the operation of the borrowing formula, an additional $7.0 million was available for draw under the Loan Agreement.

Borrowings under the Loan Agreement bear interest, at the Company’s election, at an annual rate based on either the “prime rate” as published in The Wall Street Journal or LIBOR for the relevant period.  If the Company’s liquidity coverage ratio (the ratio of cash plus eligible accounts receivable to borrowings under the Agreement) exceeds 2.75 to 1, LIBOR-based advances bear interest at LIBOR plus 3.5% and prime rate advances bear interest at the prime rate plus 1.0%.  If the Company’s liquidity coverage ratio falls below 2.75 to 1, LIBOR-based advances bear interest at LIBOR plus 4.0% and prime rate advances bear interest at the prime rate plus 1.5%.  For LIBOR advances, interest is payable (i) on the last day of a LIBOR interest period or (ii) on the last day of each calendar quarter. For prime rate advances, interest is payable (a) on the first day of each month and (b) on each date a prime rate advance is converted into a LIBOR advance.

The Company’s obligations to SVB are secured by a first priority security interest in all our assets, including our intellectual property. The Loan Agreement contains customary events of default, including non-payment of principal or interest, violations of covenants, material adverse changes, cross-default, bankruptcy and material judgments. Upon the occurrence of an event of default, SVB may accelerate repayment of any outstanding balance. The Loan Agreement also contains certain financial covenants and other agreements that are customary in loan agreements of this type, including restrictions on paying dividends and making distributions to our stockholders. As of December 31, 2016, the Company was in compliance with the covenants.

Income Taxes
Income Taxes

6. INCOME TAXES

Loss from continuing operations before income taxes included income from domestic operations of $(10.2) million, $(2.9) million and $(7.1) million for the years ended December 31, 2016, 2015 and 2014, and income (loss) from foreign operations of $0.7 million, $(0.3) million $0.1 million for the same years.

The provision for income taxes for the years ended December 31, 2016, 2015 and 2014, was comprised of the following (in thousands):

 

 

 

2016

 

 

2015

 

 

2014

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

United States Federal

 

$

-

 

 

$

(1

)

 

$

21

 

State

 

 

40

 

 

 

45

 

 

 

24

 

Foreign

 

 

1,036

 

 

 

195

 

 

 

7

 

Total current provision for income taxes

 

 

1,076

 

 

 

239

 

 

 

52

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

United States Federal

 

 

95

 

 

 

 

 

 

4,135

 

State

 

 

48

 

 

 

 

 

 

634

 

Foreign

 

 

-

 

 

 

 

 

 

 

Net deferred provision for income taxes

 

 

143

 

 

 

 

 

 

4,769

 

Total provision for income taxes

 

$

1,219

 

 

$

239

 

 

$

4,821

 

 

The income tax effects of significant temporary differences and carryforwards that give rise to deferred income tax assets and liabilities as of December 31, 2016 and 2015 are as follows (in thousands):

 

 

 

2016

 

 

2015

 

Deferred income tax assets:

 

 

 

 

 

 

 

 

Stock and other compensation expense

 

$

4,576

 

 

$

3,997

 

Net operating losses

 

 

5,907

 

 

 

3,212

 

Research and development credits

 

 

1,676

 

 

 

1,676

 

Other federal, state and foreign carryforwards

 

 

1,151

 

 

 

618

 

Fixed assets

 

 

246

 

 

 

-

 

Intangible assets

 

 

557

 

 

 

 

 

Other

 

 

838

 

 

 

341

 

Gross deferred tax assets

 

 

14,951

 

 

 

9,844

 

Valuation allowances

 

 

(14,030

)

 

 

(8,846

)

 

 

 

921

 

 

 

998

 

Deferred income tax liabilities:

 

 

 

 

 

 

 

 

Fixed assets

 

 

(29

)

 

 

(290

)

Intangible assets and other

 

 

(392

)

 

 

(81

)

Gross deferred tax liabilities

 

 

(421

)

 

 

(371

)

Subtotal

 

 

500

 

 

 

627

 

Less unrecognized tax benefit liability related to deferred items

 

 

(627

)

 

 

(627

)

Net deferred tax liability (included in other long-term liabilities)

 

$

(127

)

 

$

 

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

 

 

2016

 

 

2015

 

 

2014

 

Balance—beginning of year

 

$

627

 

 

$

627

 

 

$

627

 

Additions for tax positions of prior years

 

 

 

 

 

 

 

 

 

Reductions for tax positions of prior years

 

 

 

 

 

 

 

 

 

Balance—end of year

 

$

627

 

 

$

627

 

 

$

627

 

 

The unrecognized tax benefits at the end of 2016, 2015 and 2014 were primarily related to research and development carryforwards.

If the $0.6 million of unrecognized tax benefits as of December 31, 2016 were recognized, approximately $0.6 million 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 income tax assets on which an unrecognized tax benefit liability 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, 2016 and 2015, penalties and interest were insignificant.

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 2004 to 2016 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.

Income tax expense for the years ended December 31, 2016, 2015 and 2014 differs from the expected income tax benefit calculated using the statutory U.S. Federal income tax rate as follows (dollars in thousands):

 

 

 

2016

 

 

2015

 

 

2014

 

Federal income tax (benefit) expense at statutory rate

 

$

(3,237

)

 

 

34

%

 

$

(1,075

)

 

 

34

%

 

$

(2,390

)

 

 

34

%

State and local taxes—net of federal benefit

 

 

75

 

 

 

(1

)

 

 

30

 

 

 

(1

)

 

 

(410

)

 

 

6

 

Foreign taxes

 

 

1,036

 

 

 

(11

)

 

 

195

 

 

 

(6

)

 

 

(1

)

 

 

 

Valuation allowance

 

 

3,299

 

 

 

(34

)

 

 

928

 

 

 

(29

)

 

 

7,504

 

 

 

(107

)

Permanent differences

 

 

3

 

 

 

 

 

 

144

 

 

 

(5

)

 

 

262

 

 

 

(4

)

Other

 

 

43

 

 

 

(1

)

 

 

17

 

 

 

(1

)

 

 

(144

)

 

 

2

 

Total

 

$

1,219

 

 

 

(13

)%

 

$

239

 

 

 

(8

)%

 

$

4,821

 

 

 

(69

)%

 

The Company had federal and state NOL carryforwards of approximately $14.4 million and $13.9 million, respectively, at December 31, 2016. In addition, the Company has approximately $2.2 million of NOL carryforwards created by windfall tax benefits relating to stock compensation for which no deferred income tax assets have been recorded in accordance with the rules under FASB ASC 718. The NOLs will begin to expire in 2027. The Company has weighed the positive and negative evidence, including cumulative pre-tax losses, and determined that it is more likely than not that the deferred income tax assets, primarily related to the NOLs, will not be realized and, therefore, a full valuation allowance has been recorded against the net deferred income tax assets as of December 31, 2016 and 2015.

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

7. INFORMATION ABOUT SEGMENT AND GEOGRAPHIC AREAS

Operating segments are components of the Company in which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews operating results and 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. 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,

 

 

 

2016

 

 

2015

 

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

110,071

 

 

$

105,228

 

 

$

105,872

 

International

 

 

17,302

 

 

 

5,017

 

 

 

707

 

Total revenue

 

$

127,373

 

 

$

110,245

 

 

$

106,579

 

 

 

 

As of December 31,

 

 

 

2016

 

 

2015

 

Long-lived tangible assets:

 

 

 

 

 

 

 

 

United States

 

$

13,519

 

 

$

12,909

 

Canada

 

 

573

 

 

 

726

 

International

 

 

314

 

 

 

742

 

Total long-lived tangible assets

 

$

14,406

 

 

$

14,377

 

 

Commitments and Contingencies
Commitments and Contingencies

8. 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 $3.1 million, $2.6 million and $2.5 million for 2016, 2015 and 2014, respectively.

Lease commitments over the next five years as of December 31, 2016 can be summarized as follows (in thousands):

 

Years Ending December 31,

 

Operating Lease

Commitments

 

2017

 

$

2,378

 

2018

 

 

1,727

 

2019

 

 

766

 

2020

 

 

492

 

2021 and thereafter

 

 

368

 

Total lease commitments

 

$

5,731

 

 

Years Ending December 31,

 

Capital Lease

Commitments

 

2017

 

$

1,056

 

2018

 

 

680

 

2019

 

 

403

 

2020 and thereafter

 

 

9

 

Total minimum capital lease commitments

 

 

2,148

 

Less-amount representing interest

 

 

152

 

Total capital lease obligations

 

 

1,996

 

Less-current portion of capital lease obligations

 

 

982

 

Long-term portion of capital lease obligations

 

$

1,014

 

 

Contract Commitments —The Company is obligated to make payments under various contracts with vendors and other business partners, principally for revenue-share arrangements. Contract commitments as of December 31, 2016 can be summarized as follows (in thousands):

 

Years Ending December 31,

 

Contract

Commitments

 

2017

 

$

1,560

 

Total contract commitments

 

$

1,560

 

 

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

Equity
Equity

9. EQUITY

Stock Repurchases —In February 2014, the board of directors approved a Stock Repurchase Program, which authorizes a repurchase of up to $5.0 million worth of the Company’s outstanding common stock. The Stock Repurchase Program has no expiration date, and may be suspended or discontinued at any time without notice.

The following table sets forth the shares of common stock repurchased through the program:

 

 

 

Years Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Shares of common stock repurchased

 

 

 

 

 

 

 

 

229,050

 

Value of common stock repurchased (in thousands)

 

$

 

 

$

 

 

$

562

 

 

Withhold to Cover —During the years ended December 31, 2016, 2015 and 2014, certain employees, in lieu of paying withholding taxes on the vesting of certain shares of restricted stock awards, authorized the withholding of shares of the Company’s common stock to satisfy their minimum statutory tax withholding requirements related to such vesting. These shares were recorded as treasury stock using the cost method at the per share closing price on the date of vesting. Shares and cost of the Company’s common stock withheld to cover minimum statutory tax withholding requirements during the years ended December 31, 2016, 2015 and 2014 were as follows:

 

 

 

Years Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Shares withheld

 

 

92,439

 

 

 

99,904

 

 

 

4,594

 

Cost (in thousands)

 

$

215

 

 

$

190

 

 

$

11

 

 

Warrants —Warrants to purchase 480,000 shares of common stock were issued as a component of the consideration transferred for the acquisition of the Zimbra assets (see Note 2). These warrants are exercisable at $3.00 per share and have a three-year life.

Stock-based Compensation
Stock-based Compensation

10. STOCK-BASED COMPENSATION

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 the blended average historic price volatility for Synacor Inc. and its industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in the technology industry, some larger and some similar in size, at a similar stage of life cycle and having similar financial leverage. 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 (excluding replacement options in conjunction with modifications described below) during the periods presented:

 

 

 

Years Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Volatility

 

 

49

%

 

 

52

%

 

 

58

%

Expected dividend yield

 

 

%

 

 

%

 

 

%

Risk-free rate

 

 

1.4

%

 

 

1.7

%

 

 

1.9

%

Expected term (in years)

 

 

6.25

 

 

 

6.25

 

 

 

6.25

 

 

The Company recorded $2.8 million, $3.1 million, and $3.6 million of stock-based compensation expense for the years ended December 31, 2016, 2015, and 2014, respectively. No income tax deduction is allowed for incentive stock options (“ISOs”). Accordingly, no deferred income tax asset is recorded for the potential tax deduction related to these options. Expense related to stock option grants of non-qualified stock options (“NSOs”) results in a temporary difference, which gives rise to a deferred tax asset.

Total stock-based compensation expense included in the accompanying consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014, is as follows (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Technology and development

 

$

921

 

 

$

936

 

 

$

1,621

 

Sales and marketing

 

 

784

 

 

 

942

 

 

 

599

 

General and administrative

 

 

1,066

 

 

 

1,237

 

 

 

1,375

 

Total stock-based compensation expense

 

$

2,771

 

 

$

3,115

 

 

$

3,595

 

 

Equity Incentive Plans —The Company has four stock option plans (the 2000 Stock Plan, the 2006 Stock Plan, the 2012 Equity Incentive Plan and the Special Purpose Recruitment Plan), which, as of December 31, 2016, authorize the Company to grant up to 10,094,180 stock options (ISOs and NSOs), stock appreciation rights, restricted stock, 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. RSUs generally vest over a three year period with one-sixth vesting at the end of each six month period.

Special Purpose Recruitment Plan —During 2013, our shareholders approved the Special Purpose Recruitment Plan from which equity compensation awards are granted to newly-hired employees. One million shares of common stock were reserved for issuance and have all been granted under this plan.

Stock Option Activity —A summary of stock option activity for the year ended December 31, 2016 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, 2016

 

 

8,695,918

 

 

$

2.57