SYNACOR, INC., 10-K filed on 3/12/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Mar. 25, 2015
Jun. 30, 2014
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
Synacor, Inc. 
 
 
Entity Central Index Key
0001408278 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Non-accelerated Filer 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
27,429,665 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 56,216,937 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
CURRENT ASSETS:
 
 
Cash and cash equivalents
$ 25,600 
$ 36,397 
Accounts receivable—net of allowance of $25 and $76
20,479 
14,569 
Prepaid expenses and other current assets
2,292 
1,691 
Deferred income taxes
 
314 
Total current assets
48,371 
52,971 
PROPERTY AND EQUIPMENT—Net
15,128 
14,085 
DEFERRED INCOME TAXES, NON-CURRENT
 
4,455 
OTHER LONG-TERM ASSETS
101 
348 
GOODWILL
1,565 
1,565 
CONVERTIBLE PROMISSORY NOTE
1,000 
1,000 
INVESTMENT IN EQUITY INTEREST
73 
365 
TOTAL ASSETS
66,238 
74,789 
CURRENT LIABILITIES:
 
 
Accounts payable
12,545 
13,573 
Accrued expenses and other current liabilities
8,403 
5,177 
Current portion of capital lease obligations
1,150 
1,946 
Total current liabilities
22,098 
20,696 
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS
1,383 
885 
OTHER LONG-TERM LIABILITIES
275 
977 
Total liabilities
23,756 
22,558 
COMMITMENTS AND CONTINGENCIES (Note 7)
   
   
STOCKHOLDERS’ EQUITY:
 
 
Common stock, $0.01 par value—100,000,000 authorized, 27,684,598 issued and 27,365,098 shares outstanding at December 31, 2013 and 27,944,853 issued and 27,391,709 shares outstanding at December 31, 2014
279 
277 
Preferred stock, $0.01 par value—10,000,000 shares authorized, no shares issued and outstanding at December 31, 2013 and 2014
   
   
Treasury stock—at cost, 319,500 shares at December 31, 2013 and 2014
(1,142)
(569)
Additional paid-in capital
105,961 
102,226 
Accumulated deficit
(62,636)
(49,705)
Accumulated other comprehensive income
20 
Total stockholders’ equity
42,482 
52,231 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 66,238 
$ 74,789 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 388 
$ 76 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
27,944,853 
27,684,598 
Common stock, shares outstanding
27,391,709 
27,365,098 
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
Treasury stock, shares
553,144 
319,500 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Income Statement [Abstract]
 
 
 
REVENUE
$ 106,579 
$ 111,807 
$ 121,981 
COSTS AND OPERATING EXPENSES:
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
57,939 
59,622 
66,620 
Technology and development (exclusive of depreciation shown separately below)
26,259 
28,458 
25,603 
Sales and marketing
10,807 
8,124 
9,120 
General and administrative (exclusive of depreciation shown separately below)
14,249 
11,663 
11,011 
Depreciation
5,126 
4,650 
3,779 
Gain on sale of domain
(1,000)
 
 
Total costs and operating expenses
113,380 
112,517 
116,133 
INCOME (LOSS) FROM OPERATIONS
(6,801)
(710)
5,848 
OTHER INCOME (EXPENSE)
(28)
(37)
INTEREST EXPENSE
(218)
(193)
(270)
INCOME (LOSS) BEFORE INCOME TAXES
(7,047)
(940)
5,579 
PROVISION (BENEFIT) FOR INCOME TAXES
4,821 
(134)
1,764 
LOSS IN EQUITY INTEREST
(1,063)
(561)
 
NET INCOME (LOSS)
$ (12,931)
$ (1,367)
$ 3,815 
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
 
 
 
Basic (in dollars per share)
$ (0.47)
$ (0.05)
$ 0.16 
Diluted (in dollars per share)
$ (0.47)
$ (0.05)
$ 0.14 
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
 
 
 
Basic (in shares)
27,389,793 
27,306,882 
24,411,194 
Diluted (in shares)
27,389,793 
27,306,882 
28,097,313 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Comprehensive Income [Abstract]
 
 
 
Net income (loss)
$ (12,931)
$ (1,367)
$ 3,815 
Other comprehensive income:
 
 
 
Change in foreign currency translation adjustment
18 
(6)
Comprehensive income (loss)
$ (12,913)
$ (1,359)
$ 3,809 
Consolidated Statements of Stockholders' Equity (USD $)
Common Stock [Member]
Treasury Stock [Member]
Additional Paid-In Capital [Member]
Accumulated Deficit [Member]
Accumulated Other Comprehensive Income [Member]
Series A Preferred Stock [Member]
Series A-1 Preferred Stock [Member]
Series B Preferred Stock [Member]
Series C Preferred Stock [Member]
Total
Beginning balance at Dec. 31, 2011
$ 31,000 
$ (569,000)
$ 45,639,000 
$ (52,153,000)
 
$ 5,077,000 
$ 730,000 
$ 5,401,000 
$ 17,224,000 
$ 21,380,000 
Beginning balance, treasury stock, shares at Dec. 31, 2011
 
(319,500)
 
 
 
 
 
 
 
 
Beginning balance, shares at Dec. 31, 2011
3,052,856 
 
 
 
 
5,548,508 
570,344 
2,737,500 
2,740,407 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Issuance of common stock upon initial public offering, net of offering costs
5,454,545 
 
22,293,000 
 
 
 
 
 
 
22,347,000 
Issuance of common stock upon initial public offering, net of offering costs, shares
54,000 
 
 
 
 
 
 
 
 
 
Conversion of preferred stock to common stock upon initial public offering
17,395,136 
 
28,258,000 
 
 
(5,077,000)
(730,000)
(5,401,000)
(17,224,000)
 
Conversion of preferred stock to common stock upon initial public offering, shares
174,000 
 
 
 
 
(5,548,508)
(570,344)
(2,737,500)
(2,740,407)
 
Exercise of common stock options
1,615,128 
 
1,196,000 
 
 
 
 
 
 
1,212,000 
Exercise of common stock options, shares
16,000 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
 
 
2,063,000 
 
 
 
 
 
 
2,063,000 
Net income (loss)
 
 
 
3,815,000 
 
 
 
 
 
3,815,000 
Other comprehensive income
 
 
 
 
(6,000)
 
 
 
 
(6,000)
Ending balance at Dec. 31, 2012
275,000 
(569,000)
99,449,000 
(48,338,000)
(6,000)
 
 
 
 
50,811,000 
Ending balance, treasury stock, shares at Dec. 31, 2012
 
(319,500)
 
 
 
 
 
 
 
 
Ending balance, shares at Dec. 31, 2012
27,517,665 
 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Exercise of common stock options
2,000 
 
193,000 
 
 
 
 
 
 
195,000 
Exercise of common stock options, shares
166,933 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
 
 
2,584,000 
 
 
 
 
 
 
2,584,000 
Net income (loss)
 
 
 
(1,367,000)
 
 
 
 
 
(1,367,000)
Other comprehensive income
 
 
 
 
8,000 
 
 
 
 
8,000 
Ending balance at Dec. 31, 2013
277,000 
(569,000)
102,226,000 
(49,705,000)
2,000 
 
 
 
 
52,231,000 
Ending balance, treasury stock, shares at Dec. 31, 2013
 
(319,500)
 
 
 
 
 
 
 
(319,500)
Ending balance, shares at Dec. 31, 2013
27,684,598 
 
 
 
 
 
 
 
 
27,684,598 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Exercise of common stock options
2,000 
 
66,000 
 
 
 
 
 
 
68,000 
Exercise of common stock options, shares
246,880 
 
 
 
 
 
 
 
 
246,880 
Stock-based compensation expense
 
 
3,669,000 
 
 
 
 
 
 
3,669,000 
Vesting of restricted stock units, shares
13,375 
 
 
 
 
 
 
 
 
 
Treasury stock withheld to cover tax
 
(11,000)
 
 
 
 
 
 
 
(11,000)
Treasury stock withheld to cover tax, shares
 
(4,594)
 
 
 
 
 
 
 
 
Purchase of treasury stock
 
(562,000)
 
 
 
 
 
 
 
(562,000)
Purchase of treasury stock, shares
 
(229,050)
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
(12,931,000)
 
 
 
 
 
(12,931,000)
Other comprehensive income
 
 
 
 
18,000 
 
 
 
 
18,000 
Ending balance at Dec. 31, 2014
$ 279,000 
$ (1,142,000)
$ 105,961,000 
$ (62,636,000)
$ 20,000 
 
 
 
 
$ 42,482,000 
Ending balance, treasury stock, shares at Dec. 31, 2014
 
(553,144)
 
 
 
 
 
 
 
(553,144)
Ending balance, shares at Dec. 31, 2014
27,944,853 
 
 
 
 
 
 
 
 
27,944,853 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$ (12,931)
$ (1,367)
$ 3,815 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation
5,126 
4,650 
3,779 
Stock-based compensation expense
3,595 
2,561 
1,999 
Gain on sale of domain
(1,000)
 
 
Loss on disposal of property and equipment
 
 
35 
Change in provision for deferred income taxes
4,769 
(243)
1,557 
Loss in equity interest
1,063 
561 
 
Change in assets and liabilities:
 
 
 
Accounts receivable, net
(5,910)
1,055 
(1,288)
Prepaid expenses and other current assets
(367)
189 
253 
Other long-term assets
247 
220 
380 
Accounts payable
(359)
(527)
2,335 
Accrued expenses and other current liabilities
2,665 
(2,205)
1,715 
Other long-term liabilities
(207)
334 
77 
Net cash provided (used) by operating activities
(3,309)
5,228 
14,657 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(4,982)
(5,920)
(4,269)
Investment of equity interest
(772)
(926)
 
Proceeds from sale of domain
1,000 
 
 
Cash paid for business acquisition
 
(1,011)
(600)
Purchase of convertible promissory note
 
(1,000)
 
Net cash used by investing activities
(4,754)
(8,857)
(4,869)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayments on capital lease obligations
(2,258)
(2,121)
(2,336)
Proceeds from exercise of common stock options
68 
195 
1,212 
Purchase of treasury stock
(562)
 
 
Proceeds from initial public offering
 
 
25,364 
Initial public offering costs
 
 
(2,753)
Repayment on bank financing
 
 
(250)
Net cash (used in) provided by financing activities
(2,752)
(1,926)
21,237 
Effect of exchange rate changes on cash and cash equivalents
18 
(6)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(10,797)
(5,547)
31,019 
CASH AND CASH EQUIVALENTS—Beginning of year
36,397 
41,944 
10,925 
CASH AND CASH EQUIVALENTS—End of year
25,600 
36,397 
41,944 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest
219 
165 
259 
Cash paid for income taxes
112 
140 
134 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
 
 
 
Property, equipment, and service contracts financed under capital lease obligations and bank financing
1,961 
1,039 
2,484 
Accrued property and equipment expenditures
117 
719 
269 
Stock-based compensation capitalized to property and equipment
74 
 
 
Treasury stock received to satisfy minimum tax withholding liabilities
11 
 
 
Accrual for business acquisition
 
$ 495 
$ 500 
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, Synacor Canada, Inc. and NTV Internet Holdings, LLC, (collectively, the “Company” or “Synacor”), is a leading provider of start experiences (startpages and homescreens), video solutions, identity anagement (Cloud ID) and various cloud-based services across multiple devices for cable, satellite, telecom and consumer electronics companies. The Company is also a leading provider of authentication and aggregation solutions enabling the delivery of personalized, online content. The Company's technology allows its customers to package a wide array of personalized, online content and cloud-based services with their high-speed Internet, communications, television and other digital offerings. The Company's customers offer the Company's services under their own brands on Internet-enabled devices such as PCs, tablets, smartphones and connected TVs.

Initial Public Offering — In February 2012, the Company completed its initial public offering whereby 6,818,170 shares of common stock were sold to the public at a price of $5.00 per share. The Company sold 5,454,545 common shares and selling stockholders sold 1,363,625 common shares. The Company received aggregate proceeds of $25.4 million from the initial public offering, net of underwriters’ discounts and commissions, but before deducting offering expenses of approximately $3.0 million.

In connection with the initial public offering in February 2012, the Board of Directors of the Company approved a 1-for-2 reverse stock split of the Company’s common stock. All common shares, stock options, and per share information presented in these consolidated financial statements reflect the reverse stock split on a retroactive basis for all periods presented. There was no change in the par value of the Company’s common stock. The ratio by which shares of preferred stock were convertible into shares of common stock was adjusted to reflect the effects of the reverse stock split. In addition, in accordance with their rights and consistent with the conversion rates discussed in Note 8, Equity, all shares of the Company’s outstanding preferred stock were converted into common stock upon the closing of the initial public offering.

Basis of Presentation — The consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles (“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

 

310 years

Computer hardware

 

5 years

Computer software

 

3 years

Furniture and fixtures

 

7 years

Other

 

35 years

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the assets.

Long-Lived Assets — The Company reviews the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. For purposes of evaluating and measuring impairment, the Company groups a long-lived asset or assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. There has been no material impairments to long-lived assets in any of the years presented.

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, 2012, 2013 and 2014, the Company determined goodwill was not impaired.

Revenue Recognition — The Company derives revenue from two categories: revenue generated from advertising activities and subscriber-based revenue, each of which is described below. The following table shows the revenue in each category for the years ended December 31, 2012, 2013 and 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2012

 

2013

 

2014

Search and digital advertising

$

101,559 

 

$

90,447 

 

$

83,906 

Subscriber-based

 

20,422 

 

 

21,360 

 

 

22,673 

Total revenue

$

121,981 

 

$

111,807 

 

$

106,579 

The Company uses Internet advertising to generate revenue from the traffic on its start experiences 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 start experiences. 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. The net payment received from Google is recognized as revenue.

·

Digital advertising includes video, image and text advertisements delivered on one of the Company’s start experiences. 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 cost per impression or cost per action basis. Revenue is recognized based on amounts received from advertising customers as the impressions are delivered or the actions occur, according to contractual rates.

Subscriber-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, e-mail, video solutions,  Cloud ID, security, games and other premium services and paid content. Monthly subscriber levels typically form the basis for calculating and generating subscriber-based revenue. They are generally determined by multiplying a per-subscriber per-month fee by the number of subscribers using the particular services being offered or consumed. In other cases, the fee is fixed. Revenue is recognized from customers as the service is delivered.

Advertising and subscriber-based revenue are recognized when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the selling price is fixed or determinable; and collectability is reasonably assured.

The Company evaluates its relationship between search and digital advertising revenue and its start experience 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 start experiences 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.

Cost of Revenue — Cost of revenue consists of revenue sharing, content acquisition costs and co-location facility costs. Revenue sharing consists of amounts accrued and paid to customers for the Internet traffic on start experiences 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.

Concentrations of Risk As of December 31, 2013 and 2014, and for the years ended December 31, 2012, 2013 and 2014 the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable and revenue as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts Receivable

 

2013

 

2014

Google

47 

%

 

23 

%

Portal Customer

11 

%

 

12 

%

Advertising Customer (1)

N/A

 

 

11 

%

Note: (1) As of December 31, 2013, the accounts receivable of the Advertising Customer was less than 10%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

2012

 

2013

 

2014

Google

56 

%

 

51 

%

 

42 

%

 

For the years ended December 31, 2012, 2013 and 2014, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

2012

 

2013

 

2014

Customer A

20 

%

 

22 

%

 

22 

%

Customer B

13 

%

 

13 

%

 

12 

%

Customer C

17 

%

 

12 

%

 

10 

%

Customer D

12 

%

 

11 

%

 

12 

%

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 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 2012, 2013 and 2014, the Company incurred $0.8 million, $3.0 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 cost is expensed as incurred.

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

Earnings (Loss) Per Share — Basic earnings (loss) per share (“EPS”) is calculated in accordance with FASB ASC 260, Earnings per Share, and is calculated using the weighted average number of common shares outstanding during each period. Contingently issuable or repurchasable shares are not used in the calculation of basic earnings (loss) per share until the contingency is resolved.

Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. For purposes of this calculation, convertible preferred stock and options are considered to be potential common shares and are only included in the calculation of diluted earnings (loss) per share when their effect is dilutive.

The shares used to compute basic and diluted net income (loss) per share represent the weighted-average common shares outstanding. The Company's preferred stockholders had the right to participate with common stockholders in dividends and unallocated income. Net losses were not allocated to the preferred stockholders. Therefore, when applicable basic and diluted EPS were computed using the two-class method, under which the Company's undistributed earnings are allocated amongst the common and preferred stockholders.

Stock-Based Compensation — The Company records compensation costs related to stock-based awards in accordance with FASB ASC 718, Compensation—Stock Compensation. Under the fair value recognition provisions of ASC 718, the Company measures stock-based compensation cost at the grant date based on the estimated fair value of the award. Compensation cost is recognized ratably over the requisite service period of the award. The Company utilizes the Black-Scholes option-pricing model to estimate the fair value of stock options granted. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates prevesting forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The total expense recognized over the vesting period will only be for those awards that ultimately vest.

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 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.

The Rights will expire on July 14, 2017, provided that if the Company’s stockholders have not ratified the Rights Plan by July 14, 2015, the Rights will expire on such date.

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, 2014, there was no accrued interest or penalties related to uncertain tax positions.

Reduction In Workforce — On September 28, 2014, the Company's board of directors approved a cost reduction plan. The plan involves a reduction in the Company’s workforce by approximately 70 employees. The pretax 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 statement of operations for the year ended December 31, 2014. As of December 31, 2014, $0.3 million of the reduction in workforce costs remain in accrued expenses and other current liabilities on the accompanying consolidated balance sheet.

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.

Fair Value of Financial Instruments —  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 Company’s financial assets and liabilities include its capital lease obligations, accrued contingent consideration to Teknision, Inc. and its convertible promissory note. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis. 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, 2013 and 2014. 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 in the next 12 months.

Investments and Fair Value Measurements — 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). B&FF is a professional services company whose principals have experience integrating its customers’ systems with their customers’ devices, including smartphones and tablets.

The investment in B&FF is considered an available-for-sale security and is reported on the Company’s consolidated balance sheets as a convertible promissory note.

The provisions of ASC 820, Fair Value Measurements and Disclosures, establishes a framework for measuring the fair value in accounting principles generally accepted in the U.S. and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value as follows:

Level 1—Level 1 inputs are defined as observable inputs such as quoted prices in active markets.

Level 2—Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3—Level 3 inputs are unobservable inputs that reflect the Company’s determination of assumptions that market participants would use in pricing the asset or liability. These inputs are developed based on the best information available, including the Company’s own data.

The Company classifies its investment in B&FF within Level 3 because it is valued using unobservable inputs. As of December 31, 2013 and 2014 the estimated fair value is equal to the purchase price of $1.0 million.

Recent Accounting Pronouncements  — In May 2014, the FASB issued Accounting Standards Update No. 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 entities 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. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently in the process of evaluating the impact the adoption of ASU 2014-09 will have on its consolidated financial statements.

Property and Equipment—Net
Property and Equipment—Net

2. PROPERTY AND EQUIPMENT—NET

As of December 31, 2013 and 2014 property and equipment, net consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

2014

Computer equipment

$

19,361 

 

$

21,194 

Computer software

 

4,625 

 

 

10,741 

Furniture and fixtures

 

1,634 

 

 

1,847 

Leasehold improvements

 

1,044 

 

 

1,389 

Work in process (primarily software development costs)

 

3,893 

 

 

1,203 

Other

 

173 

 

 

173 

 

 

30,730 

 

 

36,547 

Less accumulated depreciation

 

(16,645)

 

 

(21,419)

Total property and equipment—net

$

14,085 

 

$

15,128 

Property and equipment includes computer equipment and software held under capital leases of approximately $5.3 million and $4.8 million as of December 31, 2013 and 2014, respectively. Accumulated depreciation of computer equipment and software held under capital leases amounted to $2.1 million and $2.7 million as of December 31, 2013 and 2014, respectively.

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

3. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

As of December 31, 2013 and 2014, accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

2014

Accrued compensation

$

2,787 

 

$

4,066 

Accrued content fees

 

580 

 

 

1,745 

Accrued business acquisition consideration

 

 -

 

 

495 

Unearned revenue on contracts

 

247 

 

 

642 

Other

 

1,563 

 

 

1,455 

Total

$

5,177 

 

$

8,403 

 

Bank Financing
Bank Financing

4. BANK FINANCING

In September 2013, the Company entered into a Loan and Security Agreement, with Silicon Valley Bank (“SVB”), which was amended in October 2014 (as amended, the “Loan Agreement”). The Loan Agreement provides for a $10.0 million secured revolving line of credit with a stated maturity of September 27, 2015. The credit facility is available for cash borrowings, subject to a formula based upon eligible accounts receivable. As of December 31, 2014,  $10.0 million was available under the revolving credit line. As of December 31, 2013 and 2014, there were no outstanding borrowings.

 

Borrowings under the Loan Agreement bear interest, at the Company’s election, at an annual rate of either 0.50% above the “prime rate” as published in The Wall Street Journal or LIBOR for the relevant period plus 3.00%. 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 the Lender 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, the Lender 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, 2014, the Company was in compliance with the covenants.

Income Taxes
Income Taxes

5. INCOME TAXES

Income (loss) from continuing operations before income taxes included income from domestic operations of $5.5 million, $(1.1) million and $(7.1) million for the years ended December 31, 2012, 2013 and 2014, and income from foreign operations of $0.1 million, $0.2 million and $0.1 million for the years ended December 31, 2012, 2013 and 2014.

The provision (benefit) for income taxes for the years ended December 31, 2012, 2013 and 2014, comprised the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2013

 

2014

Current:

 

 

 

 

 

 

 

 

United States Federal

$

151 

 

$

16 

 

$

21 

State

 

20 

 

 

22 

 

 

24 

Foreign

 

36 

 

 

71 

 

 

Total current provision for income taxes

 

207 

 

 

109 

 

 

52 

Deferred:

 

 

 

 

 

 

 

 

United States Federal

 

1,022 

 

 

(119)

 

 

4,135 

State

 

535 

 

 

(97)

 

 

634 

Foreign

 

 -

 

 

(27)

 

 

 -

Net deferred provision (benefit) for income taxes

 

1,557 

 

 

(243)

 

 

4,769 

Total provision (benefit) for income taxes

$

1,764 

 

$

(134)

 

$

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, 2013 and 2014 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

2014

Deferred income tax assets:

 

 

 

 

 

Stock and other compensation expense

$

1,516 

 

$

2,838 

Net operating losses

 

2,255 

 

 

3,533 

Research and development credits

 

1,676 

 

 

1,676 

Other federal and state carryforwards

 

414 

 

 

304 

Other

 

15 

 

 

294 

Gross deferred tax assets

 

5,876 

 

 

8,645 

Valuation allowances

 

 -

 

 

(7,504)

 

 

5,876 

 

 

1,141 

Deferred income tax liabilities:

 

 

 

 

 

Fixed assets

 

(469)

 

 

(457)

Other

 

(11)

 

 

(57)

Gross deferred tax liabilities

 

(480)

 

 

(514)

Subtotal

 

5,396 

 

 

627 

Less unrecognized tax benefit liability related to deferred items

 

(627)

 

 

(627)

Net deferred tax assets

$

4,769 

 

$

 -

 

 

 

 

 

 

Recorded as:

 

 

 

 

 

Current deferred tax assets

$

314 

 

$

 -

Non-current deferred tax assets

 

4,455 

 

 

 -

Net deferred tax assets

$

4,769 

 

$

 -

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2013

 

2014

Balance—beginning of year

$

26 

 

$

627 

 

$

627 

Additions for tax positions of prior years

 

601 

 

 

 -

 

 

 -

Reductions for tax positions of prior years

 

 -

 

 

 -

 

 

 -

Balance—end of year

$

627 

 

$

627 

 

$

627 

The tax positions at the end of 2012, 2013 and 2014 were primarily related to research and development carryforwards.

If the $0.6 million of unrecognized tax benefits as of December 31, 2014 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, 2013 and 2014, penalties and interest were immaterial.

The Company files income tax returns in the U.S. federal jurisdiction as well as many U.S. states and foreign jurisdictions. The tax years 2003 to 2013 remain open to examination by the major jurisdictions in which the Company is subject to tax. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized. The Company is currently not under examination in any major taxing jurisdictions.

The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries, as such earnings are to be reinvested offshore indefinitely. The income tax liability would be insignificant if these earnings were to be repatriated.

Income tax (benefit) expense for the years ended December 31, 2012, 2013 and 2014, differs from the expected income tax (benefit) expense calculated using the statutory U.S. Federal income tax rate as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2013

 

2014

Federal income tax (benefit) expense at statutory rate

$

1,895 

 

34 

%

 

$

(320)

 

(34)

%

 

$

(2,390)

 

(34)

%

State and local taxes—net of federal benefit

 

310 

 

 

 

 

(75)

 

(8)

 

 

 

(410)

 

(6)

 

Foreign taxes

 

14 

 

 -

 

 

 

(3)

 

 -

 

 

 

(1)

 

 -

 

Expiration of or changes to federal and state NOLs

 

446 

 

 

 

 

 -

 

 -

 

 

 

 -

 

 -

 

Federal research and development credit

 

(1,676)

 

(30)

 

 

 

 -

 

 -

 

 

 

 -

 

 -

 

Valuation allowance

 

 -

 

 -

 

 

 

 -

 

 -

 

 

 

7,504 

 

107 

 

Permanent differences

 

291 

 

 

 

 

264 

 

28 

 

 

 

262 

 

 

Uncertain tax position current activity

 

586 

 

11 

 

 

 

 -

 

 -

 

 

 

 -

 

 -

 

Other

 

(102)

 

(2)

 

 

 

 -

 

 -

 

 

 

(144)

 

(2)

 

Total

$

1,764 

 

32 

%

 

$

(134)

 

(14)

%

 

$

4,821 

 

69 

%

The Company had federal and state NOL carryforwards of approximately $6.0 million and $5.8 million, respectively, at December 31, 2014. In addition, the Company has approximately $1.9 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 recent 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, 2014.

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

6. 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,

 

2012

 

2013

 

2014

Revenue:

 

 

 

 

 

 

 

 

United States

$

121,306 

 

$

111,122 

 

$

105,872 

International

 

675 

 

 

685 

 

 

707 

Total revenue

$

121,981 

 

$

111,807 

 

$

106,579 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

2013

 

2014

Long-lived tangible assets:

 

 

 

 

 

United States

$

13,825 

 

$

14,573 

Canada

 

 -

 

 

502 

International

 

260 

 

 

53 

Total long-lived tangible assets

$

14,085 

 

$

15,128 

 

 

Commitments and Contingencies
Commitments and Contingencies

7. COMMITMENTS AND CONTINGENCIES

Lease Commitments — The Company leases office space and data center space under operating lease agreements and certain equipment under capital lease agreements with interest rates ranging from 3% to 7%.

Rent expense for operating leases was approximately $1.5 million, $1.7 million and $2.5 million for 2012, 2013 and 2014, respectively.

Lease commitments as of December 31, 2014 can be summarized as follows (in thousands):

 

 

 

 

 

 

 

Years Ending December 31,

Operating
Lease
Commitments

2015

$

2,393 

2016

 

1,411 

2017

 

1,193 

2018

 

1,029 

2019

 

384 

Total lease commitments

$

6,410 

 

 

 

 

 

 

 

 

 

 

Years Ending December 31,

Capital
Lease
Commitments

2015

$

1,233 

2016

 

1,050 

2017

 

365 

Total minimum capital lease commitments

 

2,648 

Less amount representing interest

 

115 

 

 

2,533 

Current portion of capital lease obligations

 

1,150 

Long-term portion of capital lease obligations

$

1,383 

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, 2014 can be summarized as follows (in thousands):

 

 

 

 

 

 

 

 

Years Ending December 31,

Contract
Commitments

2015

$

1,905 

2016

 

1,080 

2017

 

360 

Total contract commitments

$

3,345 

 

Teknision Acquisition — The balance of the approximately $1.0 million purchase price to acquire the assets of Teknision, Inc. ("Teknision") is due in May 2015 unless such amount is offset in satisfaction of certain indemnification obligations of Teknision. The remaining payment of $0.5 million is recorded in accrued expenses and other current liabilities on the consolidated balance sheet as of December 31, 2014.

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

Equity
Equity

8. EQUITY

Common Stock — Effective on February 15, 2012, the Company's board of directors and stockholders approved the Fifth Amended and Restated Certificate of Incorporation. The total number of common shares that the Company is authorized to issue is 100,000,000 with a par value of $0.01 per share.

Preferred Stock — Effective on February 15, 2012, the Company's board of directors and stockholders approved the Fifth Amended and Restated Certificate of Incorporation. The total number of preferred shares that the Company is authorized to issue is 10,000,000 with a par value of $0.01 per share, 2,000,000 of which have been designated as Series A Junior Participating Preferred Stock pursuant to the Rights Plan. None have been issued to date.

Conversion  Prior to the Company's initial public offering, each share of Series A, A-1, B, and C preferred stock was convertible at the option of the holder at any time into common stock. The conversion rate was the quotient obtained by dividing the original issue price of the Series A, A-1, B, or C by the conversion price. Subsequent to the Second Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation, the conversion price was adjusted to effect a conversion of one preferred share into one and one-half common shares, as explained in Note 1, The Company and Summary of Significant Accounting Policies. The conversion price was subject to adjustment as set forth in the restated certificate of incorporation for certain dilutive issuances, splits, and combinations, as therein defined. Conversion was automatic upon either the consent of the holders of 66% of the outstanding shares of preferred stock or the effective date of a firm commitment underwritten public offering of the Company's common stock in which the post-offering valuation on a fully diluted basis was at least $150.0 million and the proceeds were not less than $25.0 million. All shares of the Company's outstanding preferred stock were converted into common stock in February 2012 in connection with the Company's initial public offering.

 

Stock 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 Company repurchased all shares with cash resources.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2012

 

2013

 

2014

Shares of common stock repurchased

 -

 

 -

 

229,050 

Value of common stock repurchased (in thousands)

$

 -

 

$

 -

 

$

562 

 

Withhold to Cover — During the year ended December 31, 2014, certain employees, in lieu of paying withholding taxes on the vesting of certain shares of restricted stock awards, authorized the withholding of 4,594 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. No shares of the Company's common stock were withheld to cover minimum statutory tax withholding requirements during the years ended December 31, 2012 and 2013.

Stock-based Compensation
Stock-based Compensation

9. 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 an average of the historical volatilities of the common stock of several entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The Company uses an expected dividend yield of zero, as it does not anticipate paying any dividends in the foreseeable future. Expected forfeitures are based on the Company's historical experience.

The following table presents the weighted-average assumptions used to estimate the fair value of options granted (excluding replacement options in conjunction with modifications described below) during the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2012

 

2013

 

2014

Volatility

58 

%

 

59 

%

 

58 

%

Expected dividend yield

 -

%

 

 -

%

 

 -

%

Risk-free rate

1.4 

%

 

1.4 

%

 

1.9 

%

Expected term (in years)

6.25 

 

 

6.25 

 

 

6.25 

 

The Company recorded $2.0 million, $2.6 million and $3.6 million of stock-based compensation expense for the years ended December 31, 2012, 2013 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") result 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, 2012, 2013 and 2014, is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2012

 

2013

 

2014

Technology and development

$

523 

 

$

1,184 

 

$

1,621 

Sales and marketing

 

404 

 

 

348 

 

 

599 

General and administrative

 

1,072 

 

 

1,029 

 

 

1,375 

Total stock-based compensation expense

$

1,999 

 

$

2,561 

 

$

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 authorize the Company to grant up to 9,210,020 stock options (ISOs and NSOs), stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and performance cash awards. The ISOs and NSOs will be granted at a price per share not less than the fair value of the Company's common stock at the date of grant. Options granted to date generally vest over a four-year period with 25% vesting at the end of one year and the remaining 75% vesting monthly thereafter. Options granted generally are exercisable up to 10 years. The Company began granting RSUs in December 2012, which generally vest over a 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 are reserved for issuance under this plan.

Stock Option Activity A summary of stock option activity for the year ended December 31, 2014 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, 2014

 

5,770,168 

 

$

3.85 

 

 

 

 

 

Granted

 

5,056,895 

 

$

2.54 

 

 

 

 

 

Exercised

 

(246,880)

 

$

0.28 

 

 

 

 

 

Forfeited

 

(3,824,393)

 

$

4.10 

 

 

 

 

 

Outstanding—December 31, 2014

 

6,755,790 

 

$

2.86 

 

$

322 

 

7.32 

Expected to vest—December 31, 2014

 

6,350,929 

 

$

2.85 

 

$

318 

 

7.19 

Vested and exercisable—December 31, 2014

 

2,996,632 

 

$

3.17 

 

$

293 

 

5.05 

Aggregate intrinsic value represents the difference between the Company's closing stock price of its common stock and the exercise price of outstanding, in-the-money options. The Company's closing stock price as reported on the NASDAQ as of December 31, 2014 was $2.00. The total intrinsic value of options exercised was approximately $7.6 million, $0.2 million and $0.5 million for the years ended December 31, 2012, 2013 and 2014, respectively. The weighted-average grant date fair value of options granted was $3.97 per share, $1.86 per share and $1.31 per share for the years ended December 31, 2012, 2013 and 2014, respectively.

As of December 31, 2014, total unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested stock options was approximately $5.8 million, which is expected to be recognized over a weighted-average period of 2.79 years.

Option Modifications — Pursuant to the transition agreement the Company entered into in March 2014 with Ronald Frankel, its former President and CEO, 752,725 of Mr. Frankel's options to purchase common stock of the Company were modified to accelerate vesting for options that would have otherwise been forfeited during the transition period to the beginning of the transition period ("Transition Date"), and the period options are exercisable is now the earlier of the third anniversary of the Transition Date or the original 10 year contractual term of each option. The total incremental expense resulting from Mr. Frankel's modification was $0.2 million.

Effective August 4, 2014, the compensation committee of the Company's board of directors agreed to modify all outstanding employee options with an exercise price of $3.00 per share or greater, other than options held by directors and executive officers, by resetting the exercise price per share to the closing price of the Company's common stock on August 4, 2014. As a result of the modification, 203 employees had a total of 1,547,382 options reset to an exercise price of $2.38 per share. The total incremental compensation expense resulting from the August 2014 modification is $0.6 million. During the year ended December 31, 2014, the Company recorded $0.4 million expense related to the modification. The remaining expense will be recorded over the remaining requisite service period.

Non-plan Option Grant  On August 4, 2014, the Company appointed Himesh Bhise as President and CEO of the Company. In conjunction with the effective date of Mr. Bhise's first day of employment, and as part of Mr. Bhise's compensation, the Company awarded Mr. Bhise options to purchase 2,001,338 shares of the Company's common stock with an exercise price of $2.38 per share.

RSU Activity A summary of RSU activity for the year ended December 31, 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Stock Options

 

Weighted Average Exercise Price

Unvested—January 1, 2014

 

45,000 

 

$

5.46 

Granted

 

913,638 

 

$

2.22 

Released

 

(13,375)

 

$

5.68 

Forfeited

 

(111,475)

 

$

2.48 

Unvested—December 31, 2014

 

833,788 

 

$

2.31 

Expected to vest —December 31, 2014

 

775,981 

 

$

2.43 

As of December 31, 2014, total unrecognized compensation cost, adjusted for estimated forfeitures, related to RSUs was approximately $1.7 million, which is expected to be recognized over the next 2.59 years.

Investment in Equity Interest
Investment in Equity Interest

10. INVESTMENT IN EQUITY INTEREST

In March 2013, the Company entered into a Joint Venture Agreement, pursuant to which it owns 50% of the outstanding common stock and 100% of the preferred shares of Synacor China, Ltd., or the JV Company. The Company provided $0.9 million of funding to the JV Company during the year ended December 31, 2013, and $0.8 million of funding during the year ended December 31, 2014. The JV Company will, through its wholly foreign-owned subsidiary in the People's Republic of China (the “PRC”), supply authentication and aggregation solutions for the delivery of online content and services to customers in the PRC.

The investment in the JV Company is being accounted for using the equity method and is classified as an investment in equity interest on the Company’s consolidated balance sheets. The Company records its share of the results of the JV Company within earnings in equity interest. Because the Company provided nearly all of the capital to form the JV Company, the Company has recorded 100% of the losses incurred by the JV Company within earnings in equity interest in its 2013 and 2014 consolidated statements of operations. Since acquiring its interest in the JV Company during 2013, the Company has recorded, in accumulated deficit, cumulative losses in equity interest of $1.6 million.

The following tables present summarized financial information for the JV Company (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2013

 

2014

 

 

 

 

 

 

Revenue

$

 -

 

$

 -

Loss from operations

 

(561)

 

 

(1,063)

Net loss

$

(561)

 

$

(1,063)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

2013

 

2014

Total assets

$

442 

 

$

78 

Total liabilities

$

77 

 

$

 

 

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

11. 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. In addition, for the year ended December 31, 2012, the potential common shares included the conversion of preferred stock on an as if converted basis prior to the Company's initial public offering in February 2012. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method. The Company considered its preferred stock to be participating securities and, in accordance with the two-class method, earnings allocated to preferred stock and the related number of outstanding shares of preferred stock were excluded from the computation of basic and diluted net income (loss) per common share.

The following table presents the calculation of basic and diluted net income (loss) per share for the years ended December 31, 2012, 2013 and 2014 (in thousands, except share and per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2012

 

2013

 

2014

Basic net income (loss) per share:

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

$

3,815 

 

$

(1,367)

 

$

(12,931)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

24,411,194 

 

 

27,306,882 

 

 

27,389,793 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

$

0.16 

 

$

(0.05)

 

$

(0.47)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per share:

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

$

3,815 

 

$

(1,367)

 

$

(12,931)

Denominator:

 

 

 

 

 

 

 

 

Number of shares used in the basic computation

 

24,411,194 

 

 

27,306,882 

 

 

27,389,793 

Add weighted-average effect of dilutive securities:

 

 

 

 

 

 

 

 

Conversion of preferred stock (as if converted basis)

 

1,948,635 

 

 

 -

 

 

 -

Stock options and RSUs

 

1,737,484 

 

 

 -

 

 

 -

Number of shares used in diluted calculation

 

28,097,313 

 

 

27,306,882 

 

 

27,389,793 

 

 

 

 

 

 

 

 

 

Dilutive net income (loss) per share

$

0.14 

 

$

(0.05)

 

$

(0.47)

Stock options and RSUs are not included in the calculation of diluted net loss per share for the years ended December 31, 2013 and 2014 because the Company had a net loss for those years. Accordingly, the inclusion of these equity awards would have had an antidilutive effect on the calculation of diluted loss per share.

The following equivalent shares were excluded from the calculation of diluted net income (loss) per share because their effect would have been antidilutive for the periods presented: