SYNACOR, INC., 10-Q filed on 11/14/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
Nov. 10, 2017
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
SYNC 
 
Entity Registrant Name
Synacor, Inc. 
 
Entity Central Index Key
0001408278 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Smaller Reporting Company 
 
Entity Common Stock, Shares Outstanding
 
38,686,068 
Condensed Consolidated Balance Sheets - Unaudited (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
CURRENT ASSETS:
 
 
Cash and cash equivalents
$ 22,932 
$ 14,315 
Accounts receivable, net of allowance of $70 and $263, respectively
20,453 
27,386 
Prepaid expenses and other current assets
6,583 
4,862 
Total current assets
49,968 
46,563 
PROPERTY AND EQUIPMENT, net
20,749 
14,406 
GOODWILL
15,956 
15,943 
INTANGIBLE ASSETS, net
13,230 
14,837 
OTHER LONG-TERM ASSETS
802 
1,650 
Total assets
100,705 
93,399 
CURRENT LIABILITIES:
 
 
Accounts payable
17,791 
18,769 
Accrued expenses and other current liabilities
8,126 
11,684 
Current portion of deferred revenue
11,005 
12,149 
Current portion of capital lease obligations
2,479 
982 
Total current liabilities
39,401 
43,584 
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS
3,981 
1,014 
DEFERRED REVENUE
2,981 
3,917 
LONG-TERM DEBT
 
5,000 
OTHER LONG-TERM LIABILITIES
428 
235 
Total liabilities
46,791 
53,750 
COMMITMENTS AND CONTINGENCIES (Note 8)
   
   
STOCKHOLDERS’ EQUITY:
 
 
Preferred stock – par value $0.01 per share; authorized 10,000,000 shares; none issued
   
   
Common stock – par value $0.01 per share; authorized 100,000,000 shares; 39,451,256 shares issued and 38,635,883 shares outstanding at September 30, 2017 and 31,626,635 shares issued and 30,881,148 shares outstanding at December 31, 2016
395 
316 
Treasury stock – at cost, 815,373 shares at September 30, 2017 and 745,487 shares at December 31, 2016
(1,664)
(1,547)
Additional paid-in capital
141,700 
117,747 
Accumulated deficit
(86,521)
(76,850)
Accumulated other comprehensive income (loss)
(17)
Total stockholders’ equity
53,914 
39,649 
Total liabilities and stockholders’ equity
$ 100,705 
$ 93,399 
Condensed Consolidated Balance Sheets - Unaudited (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 70 
$ 263 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
39,451,256 
31,626,635 
Common stock, shares outstanding
38,635,883 
30,881,148 
Treasury stock, shares
815,373 
745,487 
Condensed Consolidated Statements of Operations - Unaudited (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Income Statement [Abstract]
 
 
 
 
REVENUE
$ 36,269 
$ 31,721 
$ 94,025 
$ 92,457 
COSTS AND OPERATING EXPENSES:
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
17,620 
14,611 
44,644 
41,099 
Technology and development (exclusive of depreciation and amortization shown separately below)
6,748 
6,791 
20,950 
19,255 
Sales and marketing
6,179 
5,907 
19,025 
17,177 
General and administrative (exclusive of depreciation and amortization shown separately below)
4,495 
4,871 
12,820 
15,027 
Depreciation and amortization
2,596 
2,414 
7,004 
6,782 
Total costs and operating expenses
37,638 
34,594 
104,443 
99,340 
LOSS FROM OPERATIONS
(1,369)
(2,873)
(10,418)
(6,883)
GAIN ON SALE OF INVESTMENT
1,902 
 
1,902 
 
OTHER INCOME (EXPENSE)
99 
(38)
172 
206 
INTEREST EXPENSE
(127)
(75)
(328)
(227)
INCOME (LOSS) BEFORE INCOME TAXES
505 
(2,986)
(8,672)
(6,904)
INCOME TAX PROVISION
244 
379 
999 
783 
NET INCOME (LOSS)
$ 261 
$ (3,365)
$ (9,671)
$ (7,687)
NET INCOME (LOSS) PER SHARE:
 
 
 
 
Basic
$ 0.01 
$ (0.11)
$ (0.27)
$ (0.26)
Diluted
$ 0.01 
$ (0.11)
$ (0.27)
$ (0.26)
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET INCOME (LOSS) PER SHARE:
 
 
 
 
Basic
38,471,377 
30,260,172 
35,590,563 
30,108,725 
Diluted
39,940,790 
30,260,172 
35,590,563 
30,108,725 
Condensed Consolidated Statements of Comprehensive Loss - Unaudited (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net income (loss)
$ 261 
$ (3,365)
$ (9,671)
$ (7,687)
Other comprehensive income:
 
 
 
 
Changes in foreign currency translation adjustment
(23)
112 
21 
(19)
Comprehensive income (loss)
$ 238 
$ (3,253)
$ (9,650)
$ (7,706)
Condensed Consolidated Statements of Cash Flows - Unaudited (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net loss
$ (9,671)
$ (7,687)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
Depreciation and amortization
7,004 
6,782 
Capitalized software impairment
256 
 
Stock-based compensation expense
1,928 
2,104 
Gain on sale of long-term investment
(1,902)
 
Provision for deferred income taxes
197 
 
Increase in estimated value of contingent consideration
107 
90 
Changes in operating assets and liabilities, net of effect of acquisition:
 
 
Accounts receivable, net
6,933 
5,313 
Prepaid expenses and other assets
(1,646)
(1,282)
Accounts payable
(1,668)
1,842 
Accrued expenses and other liabilities
(2,369)
1,245 
Deferred revenue
(2,080)
(1,696)
Net cash (used in) provided by operating activities
(2,911)
6,711 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Proceeds from the sale of investment
2,645 
 
Purchases of property and equipment
(5,774)
(4,246)
Acquisition
 
(2,500)
Net cash used in investing activities
(3,129)
(6,746)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Proceeds from offering of common stock, net of underwriting costs
20,258 
 
Payments of public offering issuance costs
(212)
 
Repayments of long-term debt
(5,000)
 
Repayments on capital lease obligations
(914)
(1,242)
Proceeds from exercise of common stock options
1,942 
744 
Treasury stock shares received to satisfy minimum withholding liabilities
(117)
(128)
Deferred acquisition payments
(1,300)
 
Net cash provided by (used in) financing activities
14,657 
(626)
Effect of exchange rate changes on cash and cash equivalents
 
(8)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
8,617 
(669)
Cash and cash equivalents, beginning of period
14,315 
15,697 
Cash and cash equivalents, end of period
22,932 
15,028 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
Cash paid for interest
328 
247 
Cash paid for income taxes
572 
439 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
 
 
Non-cash proceeds from sale investment
257 
 
Liability for estimated additional acquisition consideration
 
567 
Property, equipment and service center contracts financed under capital lease
5,832 
982 
Minimum capital lease payments in accounts payable
454 
 
Accrued property and equipment expenditures
462 
463 
Stock-based compensation capitalized to property and equipment
$ 116 
$ 142 
The Company and Summary of Significant Accounting Principles
The Company and Summary of Significant Accounting Principles

1.

The Company and Summary of Significant Accounting Principles

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

Basis of Presentation

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

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

Accounting Estimates

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

Concentrations of Risk

 

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

 

 

 

Accounts Receivable

 

 

September 30, 2017

 

 

December 31, 2016

Google advertising affiliate

 

 

17

%

 

*

Google search

 

 

9

%

 

*

Advertising customer

 

 

14

%

 

*

* - Less than 10%

 

 

 

 

 

 

 

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

 

 

Revenue

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Google search

 

 

17

%

 

 

10

%

 

 

15

%

 

 

14

%

Google advertising affiliate

 

 

22

%

 

*

 

 

 

19

%

 

*

 

* - Less than 10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

Cost of Revenue

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Customer A

 

 

11

%

 

 

22

%

 

 

13

%

 

 

26

%

Customer B

 

 

27

%

 

*

 

 

 

16

%

 

*

 

Customer C

 

*

 

 

*

 

 

*

 

 

 

10

%

* - Less than 10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recent Accounting Pronouncements

Not Yet Adopted

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

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

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

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

Recently Adopted

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

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

Stock Offering
Stock Offering

2.

Stock Offering

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

Acquisitions
Acquisitions

3.

Acquisitions

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

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

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

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

4.

Goodwill and Other Intangible Assets

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Balance – beginning of period

 

$

15,943

 

 

$

15,187

 

Acquisition of Technorati

 

 

 

 

 

751

 

Effect of foreign currency translation

 

 

13

 

 

 

11

 

Balance – end of period

 

$

15,956

 

 

$

15,949

 

 

Intangible assets consisted of the following (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Customer and publisher relationships

 

$

14,780

 

 

$

14,780

 

Technology

 

 

2,330

 

 

 

2,330

 

Trademark

 

 

300

 

 

 

300

 

 

 

 

17,410

 

 

 

17,410

 

Less accumulated amortization

 

 

(4,180

)

 

 

(2,573

)

Intangible assets, net

 

$

13,230

 

 

$

14,837

 

 

Amortization of intangible assets totaled $0.6 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively, and $1.6 million and $1.5 million for the nine months ended September 30, 2017 and 2016, respectively.

Property and Equipment - Net
Property and Equipment - Net

5.

Property and Equipment – Net

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

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Computer equipment (1)

 

$

28,782

 

 

$

23,438

 

Computer software

 

 

18,075

 

 

 

15,198

 

Furniture and fixtures

 

 

2,601

 

 

 

2,062

 

Leasehold improvements

 

 

1,638

 

 

 

1,463

 

Work in process (primarily software development costs)

 

 

7,468

 

 

 

4,572

 

Other

 

 

126

 

 

 

249

 

 

 

 

58,690

 

 

 

46,982

 

Less accumulated depreciation (2)

 

 

(37,941

)

 

 

(32,576

)

Property and equipment, net

 

$

20,749

 

 

$

14,406

 

 

Notes:

 

(1)

Includes equipment and software held under capital leases of $11.1 million and $5.2 million as of September 30, 2017 and December 31, 2016, respectively.

(2)

Includes $4.6 million and $3.4 million of accumulated depreciation of equipment under capital leases as of September 30, 2017 and December 31, 2016, respectively.

 

Depreciation expense totaled $2.1 million and $1.9 million for the three months ended September 30, 2017 and 2016, respectively, and $5.4 million and $5.3 million, for the nine months ended September 30, 2017 and 2016, respectively.

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

6.

Accrued Expenses and Other Current Liabilities

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

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Accrued compensation

 

$

4,429

 

 

$

6,860

 

Accrued content fees

 

 

1,289

 

 

 

1,788

 

Accrued business acquisition consideration

 

 

 

 

 

1,193

 

Other

 

 

2,408

 

 

 

1,843

 

Total

 

$

8,126

 

 

$

11,684

 

 

 

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

7.

Information About Segment and Geographic Areas

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

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

30,742

 

 

$

27,169

 

 

$

77,600

 

 

$

79,787

 

International

 

 

5,527

 

 

 

4,552

 

 

 

16,425

 

 

 

12,670

 

Total revenue

 

$

36,269

 

 

$

31,721

 

 

$

94,025

 

 

$

92,457

 

 

 

 

September 30, 2017

 

 

December 31,

2016

 

Long-lived tangible assets:

 

 

 

 

 

 

 

 

United States

 

$

19,952

 

 

$

13,519

 

Canada

 

 

526

 

 

 

573

 

Other international

 

 

271

 

 

 

314

 

Total long-lived tangible assets

 

$

20,749

 

 

$

14,406

 

 

Commitments and Contingencies
Commitments and Contingencies

8.

Commitments and Contingencies

Contract Commitments

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

 

Year ending December 31,

 

 

 

 

2017 (remaining - three months)

 

$

225

 

2018

 

 

900

 

2019

 

 

900

 

2020

 

 

300

 

Total

 

$

2,325

 

 

Capital Lease Commitments —

Capital lease commitments for the remainder of 2017 and for the following three years as of September 30, 2017 are summarized as follows (in thousands):

 

Years Ending December 31,

 

Capital Lease

Commitments

 

2017 (three months remaining)

 

$

719

 

2018

 

 

2,712

 

2019

 

 

2,351

 

2020

 

 

1,152

 

Total minimum capital lease commitments

 

 

6,934

 

Less-amount representing interest

 

 

474

 

Total capital lease obligations

 

 

6,460

 

Less-current portion of capital lease obligations

 

 

2,479

 

Long-term portion of capital lease obligations

 

$

3,981

 

Litigation

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

Stock-based Compensation
Stock-based Compensation

9.

Stock-based Compensation

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

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

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Technology and development

 

$

190

 

 

$

238

 

 

$

604

 

 

$

681

 

Sales and marketing

 

 

142

 

 

 

173

 

 

 

500

 

 

 

604

 

General and administrative

 

 

273

 

 

 

269

 

 

 

824

 

 

 

819

 

Total stock-based compensation expense

 

$

605

 

 

$

680

 

 

$

1,928

 

 

$

2,104

 

 

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

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term (years)

 

 

Aggregate

Intrinsic

Value (in

thousands)

 

Outstanding at January 1, 2017

 

 

8,756,174

 

 

$

2.53

 

 

 

 

 

 

 

 

 

Granted

 

 

1,486,400

 

 

 

3.21

 

 

 

 

 

 

 

 

 

Exercised

 

 

(858,438

)

 

 

2.24

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(678,005

)

 

 

3.64

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

 

8,706,131

 

 

$

2.59

 

 

 

7.16

 

 

$

3,267

 

Vested and expected to vest at September 30, 2017

 

 

8,380,530

 

 

$

2.58

 

 

 

7.09

 

 

$

3,173

 

Vested and exercisable at September 30, 2017

 

 

4,959,229

 

 

$

2.59

 

 

 

6.13

 

 

$

1,934

 

 

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 September 30, 2017 was $2.70 per share. The total intrinsic value of options exercised for the nine months ended September 30, 2017 was $1.0 million. The weighted average fair value of options issued during the nine months ended September 30, 2017 amounted to $1.55 per option share.

As of September 30, 2017, the unrecognized compensation cost related to non-vested options granted, for which vesting is probable, and adjusted for estimated forfeitures, was approximately $4.4 million. This cost is expected to be recognized over a weighted-average period of 2.6 years. The total fair value of shares vested was $1.5 million for the nine months ended September 30, 2017.

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

 

 

 

Number of Shares

 

 

Weighted Average

Fair Value

 

Unvested—January 1, 2017

 

 

319,889

 

 

$

2.71

 

Granted

 

 

 

 

 

 

Released

 

 

(174,236

)

 

 

2.51

 

Forfeited

 

 

(18,427

)

 

 

2.96

 

Unvested—September 30, 2017

 

 

127,226

 

 

$

2.95

 

Unvested expected to vest—September 30, 2017

 

 

123,975

 

 

$

2.93

 

 

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

10.

Net Income (Loss) Per Common Share Data

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

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

The following table presents the calculation of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Basic net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) (in thousands)

 

$

261

 

 

$

(3,365

)

 

$

(9,671

)

 

$

(7,687

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

38,471,377

 

 

 

30,260,172

 

 

 

35,590,563

 

 

 

30,108,725

 

Basic net income (loss) per share

 

$

0.01

 

 

$

(0.11

)

 

$

(0.27

)

 

$

(0.26

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) (in thousands)

 

$

261

 

 

$

(3,365

)

 

$

(9,671

)

 

$

(7,687

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

38,471,377

 

 

 

30,260,172

 

 

 

35,590,563

 

 

 

30,108,725

 

Add - potentially dilutive securities (options, RSUs and warrants)

 

 

1,469,413

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - diluted

 

 

39,940,790

 

 

 

30,260,172

 

 

 

35,590,563

 

 

 

30,108,725

 

Diluted net income (loss) per share

 

$

0.01

 

 

$

(0.11

)

 

$

(0.27

)

 

$

(0.26

)

 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Anti-dilutive equity awards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and Restricted Stock Units

 

 

2,393,118

 

 

 

9,664,771

 

 

 

8,833,357

 

 

 

9,664,771

 

Warrants

 

 

 

 

 

480,000

 

 

 

600,000

 

 

 

480,000

 

 

Sale of Investment
Sale of Investment

11.

Sale of Investment

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

During the three months ended September 30, 2017, B&FF was acquired by accesso Technology Group, plc, a U.K. public company, and the Company received, in connection with the sale of its investment in B&FF, cash consideration of $2.2 million and stock in the acquiring company valued at approximately $0.4 million. This stock was sold in September 2017 for $0.5 million.  In addition, the Company stands to receive contingent consideration of cash and stock totaling approximately $0.5 million, which was held back to secure B&FF’s indemnification obligations under the purchase and sale agreement. These amounts have been valued at approximately $0.3 million, and may be received after the 18-month indemnification period expires. The Company recorded a gain on sale of investment totaling $1.9 million in the three months ended September 30, 2017.

The Company and Summary of Significant Accounting Principles (Policies)

Basis of Presentation

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

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

Accounting Estimates

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

Concentrations of Risk

 

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

 

 

 

Accounts Receivable

 

 

September 30, 2017

 

 

December 31, 2016

Google advertising affiliate

 

 

17

%

 

*

Google search

 

 

9

%

 

*

Advertising customer

 

 

14

%

 

*

* - Less than 10%

 

 

 

 

 

 

 

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

 

 

Revenue

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Google search

 

 

17

%

 

 

10

%

 

 

15

%

 

 

14

%

Google advertising affiliate

 

 

22

%

 

*

 

 

 

19

%

 

*

 

* - Less than 10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

Cost of Revenue

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Customer A

 

 

11

%

 

 

22

%

 

 

13

%

 

 

26

%

Customer B

 

 

27

%

 

*

 

 

 

16

%

 

*

 

Customer C

 

*

 

 

*

 

 

*

 

 

 

10

%

* - Less than 10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recent Accounting Pronouncements

Not Yet Adopted

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

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

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

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

Recently Adopted

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

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

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

 

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

 

 

 

Accounts Receivable

 

 

September 30, 2017

 

 

December 31, 2016

Google advertising affiliate

 

 

17

%

 

*

Google search

 

 

9

%

 

*

Advertising customer

 

 

14

%

 

*

* - Less than 10%

 

 

 

 

 

 

 

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

 

 

Revenue

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Google search

 

 

17

%

 

 

10

%

 

 

15

%

 

 

14

%

Google advertising affiliate

 

 

22

%

 

*

 

 

 

19

%

 

*

 

* - Less than 10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

Cost of Revenue

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Customer A

 

 

11

%

 

 

22

%

 

 

13

%

 

 

26

%

Customer B

 

 

27

%

 

*

 

 

 

16

%

 

*

 

Customer C

 

*

 

 

*

 

 

*

 

 

 

10

%

* - Less than 10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and Other Intangible Assets (Tables)

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Balance – beginning of period

 

$

15,943

 

 

$

15,187

 

Acquisition of Technorati

 

 

 

 

 

751

 

Effect of foreign currency translation

 

 

13

 

 

 

11

 

Balance – end of period

 

$

15,956

 

 

$

15,949

 

 

Intangible assets consisted of the following (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Customer and publisher relationships

 

$

14,780

 

 

$

14,780

 

Technology

 

 

2,330

 

 

 

2,330

 

Trademark

 

 

300

 

 

 

300

 

 

 

 

17,410

 

 

 

17,410

 

Less accumulated amortization

 

 

(4,180

)

 

 

(2,573

)

Intangible assets, net

 

$

13,230

 

 

$

14,837

 

 

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

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

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Computer equipment (1)

 

$

28,782

 

 

$

23,438

 

Computer software

 

 

18,075

 

 

 

15,198

 

Furniture and fixtures

 

 

2,601

 

 

 

2,062

 

Leasehold improvements

 

 

1,638

 

 

 

1,463

 

Work in process (primarily software development costs)

 

 

7,468

 

 

 

4,572

 

Other

 

 

126

 

 

 

249

 

 

 

 

58,690

 

 

 

46,982

 

Less accumulated depreciation (2)

 

 

(37,941

)

 

 

(32,576

)

Property and equipment, net

 

$

20,749

 

 

$

14,406

 

 

Notes:

 

(1)

Includes equipment and software held under capital leases of $11.1 million and $5.2 million as of September 30, 2017 and December 31, 2016, respectively.

(2)

Includes $4.6 million and $3.4 million of accumulated depreciation of equipment under capital leases as of September 30, 2017 and December 31, 2016, respectively.

 

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

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

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Accrued compensation

 

$

4,429

 

 

$

6,860

 

Accrued content fees

 

 

1,289

 

 

 

1,788

 

Accrued business acquisition consideration

 

 

 

 

 

1,193

 

Other

 

 

2,408

 

 

 

1,843

 

Total

 

$

8,126

 

 

$

11,684

 

 

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

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017