SYNACOR, INC., 10-Q filed on 5/15/2012
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2012
Apr. 12, 2012
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
Synacor, Inc. 
 
Entity Central Index Key
0001408278 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2012 
 
Amendment Flag
false 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q1 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Non-accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
26,880,005 
Condensed Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
CURRENT ASSETS:
 
 
Cash and cash equivalents
$ 33,120 
$ 10,925 
Accounts receivable - net of allowance of $25 and $25
15,117 
14,336 
Deferred income taxes
3,433 
3,534 
Prepaid expenses and other current assets
2,600 
1,811 
Total current assets
54,270 
30,606 
PROPERTY AND EQUIPMENT - Net
10,387 
8,301 
DEFERRED INCOME TAXES, NON-CURRENT
2,255 
2,549 
OTHER LONG-TERM ASSETS
765 
1,926 
GOODWILL
819 
TOTAL ASSETS
68,496 
43,382 
CURRENT LIABILITIES:
 
 
Accounts payable
12,368 
12,498 
Accrued expenses and other current liabilities
3,749 
5,492 
Current portion of bank financing
125 
250 
Current portion of capital lease obligations
2,338 
1,593 
Total current liabilities
18,580 
19,833 
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS
3,294 
2,098 
OTHER LONG-TERM LIABILITIES
604 
71 
Total liabilities
22,478 
22,002 
COMMITMENTS AND CONTINGENCIES (Note 7)
   
   
STOCKHOLDERS' EQUITY:
 
 
Common stock, $0.01 par value--30,000,000 shares authorized, 3,052,856 issued and 2,733,356 outstanding at December 31, 2011, and 100,000,000 authorized, 27,197,264 issued and 26,877,764 shares outstanding at March 31, 2012
272 
31 
Preferred stock, $0.01 par value--10,000,000 shares authorized, no shares issued and outstanding at March 31, 2012
   
   
Treasury stock - at cost, 319,500 shares at December 31, 2011 and March 31, 2012
(569)
(569)
Additional paid-in capital
97,294 
45,639 
Accumulated deficit
(50,979)
(52,153)
Total stockholders' equity
46,018 
21,380 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
68,496 
43,382 
Series A Preferred Stock
 
 
STOCKHOLDERS' EQUITY:
 
 
Convertible preferred stock
5,077 
Series A One Preferred Stock
 
 
STOCKHOLDERS' EQUITY:
 
 
Convertible preferred stock
730 
Series B Preferred Stock
 
 
STOCKHOLDERS' EQUITY:
 
 
Convertible preferred stock
5,401 
Series C Preferred Stock
 
 
STOCKHOLDERS' EQUITY:
 
 
Convertible preferred stock
$ 0 
$ 17,224 
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Allowance for doubtful accounts
$ 25 
$ 25 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
100,000,000 
30,000,000 
Common stock, shares issued
27,197,264 
3,052,856 
Common stock, shares outstanding
26,877,764 
2,733,356 
Preferred stock, par value
$ 0.01 
 
Preferred stock, shares authorized
10,000,000 
 
Preferred stock, shares issued
   
 
Preferred stock, shares outstanding
   
 
Treasury stock, shares
319,500 
319,500 
Series A Preferred Stock
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,709,638 
Preferred stock, shares issued
5,548,508 
Preferred stock, shares outstanding
5,548,508 
Series A One Preferred Stock
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
570,344 
Preferred stock, shares issued
570,344 
Preferred stock, shares outstanding
570,344 
Series B Preferred Stock
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
3,500,000 
Preferred stock, shares issued
2,737,500 
Preferred stock, shares outstanding
2,737,500 
Series C Preferred Stock
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
2,740,407 
Preferred stock, shares issued
2,740,407 
Preferred stock, shares outstanding
2,740,407 
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Condensed Consolidated Statements of Operations and Comprehensive Income [Abstract]
 
 
REVENUE
$ 30,670 
$ 18,694 
COSTS AND OPERATING EXPENSES:
 
 
Cost of revenue (exclusive of depreciation shown separately below)
16,764 
9,980 
Research and development (exclusive of depreciation shown separately below)
6,288 
4,602 
Sales and marketing
2,377 
1,796 
General and administrative (exclusive of depreciation shown separately below)
2,840 
1,551 
Depreciation
781 
620 
Total costs and operating expenses
29,050 
18,549 
INCOME FROM OPERATIONS
1,620 
145 
OTHER INCOME
 
INTEREST EXPENSE
(47)
(32)
INCOME BEFORE INCOME TAXES
1,573 
114 
PROVISION FOR INCOME TAXES
399 
NET INCOME
1,174 
111 
COMPREHENSIVE INCOME
1,174 
111 
UNDISTRIBUTED EARNINGS ALLOCATED TO PREFERRED STOCKHOLDERS
 
101 
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$ 1,174 
$ 10 
NET INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
 
 
Basic
$ 0.07 
$ 0.01 
Diluted
$ 0.04 
 
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
 
 
Basic
16,603,579 
1,929,909 
Diluted
26,778,455 
22,211,922 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
NET INCOME
$ 1,174 
$ 111 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation
781 
620 
Stock-based compensation expense
558 
222 
Deferred income taxes
395 
 
Change in assets and liabilities, net of effect of acquisition:
 
 
Accounts receivable, net
(781)
(981)
Prepaid expenses and other current assets
(534)
16 
Other long-term assets
123 
(503)
Accounts payable
236 
1,481 
Accrued expenses and other current liabilities
(1,232)
(590)
Other long-term liabilities
33 
(9)
Net cash provided by operating activities
753 
367 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Purchases of property and equipment
(879)
(230)
Cash paid for business acquisition
(600)
 
Net cash used in investing activities
(1,479)
(230)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Repayment on bank financing
(125)
(125)
Repayments on capital lease obligations
(402)
(628)
Proceeds from exercise of common stock options
559 
14 
Proceeds from initial public offering
25,364 
 
Initial public offering costs
(2,475)
 
Net cash (used in) provided by financing activities
22,921 
(739)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
22,195 
(602)
CASH AND CASH EQUIVALENTS--Beginning of period
10,925 
5,412 
CASH AND CASH EQUIVALENTS--End of period
33,120 
4,810 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
Cash paid for interest
47 
32 
Cash paid for income taxes
27 
 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
 
 
Property and equipment acquired under capital lease obligations
2,343 
 
Accrued business acquisition consideration
500 
 
Accrued initial public offering costs
278 
 
Accrued property and equipment expenditures
$ 122 
$ 496 
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. and its wholly-owned subsidiary, Synacor Canada Inc. (collectively, the “Company”), is a leading provider of authentication and aggregation solutions for delivery of online content and services. The Company delivers solutions as a set of services through its hosted and managed platform, enabling cable and telecom service providers and consumer electronics manufacturers to provide the online content and services that their consumers increasingly demand. The Company’s platform allows its customers to package a wide array of online content and services with their high-speed Internet, communications, television and other offerings. Synacor’s customers offer the Company’s services under their own brands on Internet-enabled devices such as PCs, tablets, smartphones and connected TVs.

Initial Public Offering—In February 2012, the Company completed its initial public offering whereby 6,818,170 shares of common stock were sold to the public at a price of $5.00 per share. The Company sold 5,454,545 common shares and selling stockholders sold 1,363,625 common shares. The Company received aggregate proceeds of $25,364 from the initial public offering, net of underwriters’ discounts and commissions but before deducting offering expenses of $3,016.

In connection with the initial public offering in February 2012, the Board of Directors of the Company approved a 1-for-2 reverse stock split of the Company’s common stock. All common shares, stock options, and per share information presented in these condensed 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 accompanying interim condensed consolidated financial statements are unaudited and have been prepared by the Company’s management in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all significant adjustments, which include all normal recurring adjustments, considered necessary for the fair presentation of the unaudited condensed consolidated financial statements have been included, and the unaudited condensed consolidated financial statements present fairly the financial position and results of operations for the interim periods presented. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on March 30, 2012.

Basis of Consolidation—The condensed consolidated financial statements include the accounts of Synacor, Inc. and its wholly-owned subsidiary, Synacor Canada Inc. All intercompany balances and transactions have been eliminated.

Accounting Estimates—The preparation of financial statements in conformity with GAAP in the U.S. requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. We base our 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 December 31, 2011 and March 31, 2012, and for the three months ended March 31, 2011 and 2012, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable and revenue as follows:

 

                 
    Accounts Receivable  
    December 31,
2011
    March 31,
2012
 

Google

    45     45

Platform Customer A

    11       10  
   
    Revenue  
    Three months ended
March 31,
 
    2011     2012  

Google

    56     61

For the three months ended March 31, 2011 and 2012, the following platform customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue. The costs represent revenue share paid to them for their supply of Internet traffic on our customer branded platforms.

 

                 
    Cost of Revenue  
    Three months ended
March 31,
 
    2011     2012  

Platform Customer A

    17     20

Platform Customer B (1)

    N/A       18  

Platform Customer C

    23       13  

Platform Customer D (1)

    N/A       11  

 

Note:

 

(1) For the three months ended March 31, 2011, the revenue share payments received by Platform Customers B and D were less than 10%.

Fair Value Measurements—The provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures, establishes a framework for measuring the fair value in accounting principles generally accepted in the U.S. and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value as follows:

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

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

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

In accordance with ASC 820, included within the Company’s cash and cash equivalents at March 31, 2012 are $1,296 of money market funds that are classified as Level 1 financial assets. The fair value of cash and cash equivalents are primarily composed of the Company’s investments in money market instruments with original maturities of three months or less. The Company’s cash and cash equivalent balances excluded above are composed of cash, certificates of deposits with original maturities of one month or less, and overnight investments.

In May 2011, the FASB issued guidance that establishes a global standard for applying fair value measurement. In addition to a few updates to the measurement guidance it includes enhanced disclosure requirements. The most significant change for companies reporting under GAAP is an expansion of the disclosures required for Level 3 measurements; that is, measurements based on unobservable inputs, such as a company’s own data. The Company adopted this authoritative guidance in the first quarter of 2012 and the adoption did not have a material impact on the financial statements.

The estimated fair value of the bank financing liabilities and capital lease obligations approximate their carrying value.

Recently Issued Accounting Standards—In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board, Securities and Exchange Commission, Emerging Issues Task Force, American Institute of Certified Public Accountants or other authoritative accounting bodies to determine the potential impact they may have on the Company’s Financial Statements. Based upon this review, except as noted below, management does not expect any of the recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company’s Financial Statements. In September 2011, the Financial Accounting Standards Board (FASB) issued a revised accounting standard, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company has adopted this standard in the first quarter of 2012 and the adoption will not have a material impact on the financial statements.

In June 2011, the FASB issued new authoritative guidance on comprehensive income that eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. In December 2011, the requirement regarding the presentation of reclassification adjustments out of accumulated other comprehensive income was deferred indefinitely. The Company adopted this authoritative guidance in the first quarter of 2012 and the adoption did not have a material impact on the financial statements.

Acquisition—In January 2012, the Company acquired the assets of Carbyn Inc., or Carbyn, an Ontario, Canada-based company. The assets acquired are principally comprised of mobile device software and technology and other intellectual property, which the Company expects to enhance its efforts in the development of next generation web applications for mobile devices. The aggregate purchase price is up to $1,100 for the acquired assets, of which $600 was paid upon consummation of the acquisition and the remaining $500 is due in April 2013 unless such amount is offset in satisfaction of certain indemnification obligations of Carbyn. In addition, the Company hired seven employees from Carbyn who have accepted employment with Synacor Canada, Inc., a newly-formed and wholly-owned subsidiary of the Company. The acquisition and its impact on the balance sheet and results of operations are not material. The purchase price was allocated to the assets acquired based on their respective fair values as of the acquisition date, with the amount exceeding the fair value recorded as goodwill of $819.

Property and Equipment - Net
Property and Equipment - Net

2. Property and Equipment—Net

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

 

                 
    December 31,
2011
    March 31,
2012
 

Computer equipment (1)

  $ 13,032     $ 15,473  

Computer software

    1,409       2,098  

Furniture and fixtures

    1,049       1,049  

Leasehold improvements

    690       690  

Other

    933       669  
   

 

 

   

 

 

 
      17,133       19,979  

Less accumulated depreciation (2)

    (8,812     (9,592
   

 

 

   

 

 

 

Total property and equipment—net

  $ 8,301     $ 10,387  
   

 

 

   

 

 

 

 

Notes:

(1) Includes equipment under capital lease obligations of approximately $3,442 and $5,819 as of December 31, 2011 and March 31, 2012, respectively.
(2) Includes $687 and $889 of accumulated depreciation of equipment under capital leases as of December 31, 2011 and March 31, 2012, respectively.
Accrued Expenses and Other Current Liabilities
Accrued Expenses and Other Current Liabilities

3. Accrued Expenses and Other Current Liabilities

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

 

                 
    December 31,
2011
    March 31,
2012
 

Accrued compensation

  $ 3,612     $ 1,987  

Accrued content fees

    334       641  

Unearned revenue on contracts

    255       335  

Other

    1,291       786  
   

 

 

   

 

 

 

Total

  $ 5,492     $ 3,749  
   

 

 

   

 

 

 

 

Capital Lease Obligations
Capital Lease Obligations

4. Capital Lease Obligations

The Company leases certain equipment under capital lease agreements with interest rates ranging from 3% to 7%.

Capital lease commitments as of March 31, 2012 can be summarized as follows (in thousands, unaudited):

 

         

Year ending December 31:

     

2012

  $ 1,965  

2013

    2,229  

2014

    1,654  

2015

    213  
   

 

 

 

Gross lease commitment

    6,061  

Less interest

    (429
   

 

 

 

Net lease commitments

  $ 5,632  
   

 

 

 
Income Taxes
Income Taxes

5. Income Taxes

In order to determine the quarterly provision for income taxes, the Company considers the estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates, and also the current income taxes based on actual quarterly income. Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

The Company is subject to income tax in the United States, as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax and may also be subject to current U.S. income tax.

The Company recorded income tax expense of $3 and $399 for the three months ended March 31, 2011 and 2012, respectively, resulting in an effective tax rate of 3% and 25%, respectively.

During the current period, the Company performed an analysis of its research and development activities for periods prior to 2012. As a result, the Company recognized a tax benefit of $304 for the three months ended March 31, 2012. The effective tax rate for the three months ended March 31, 2012 is not necessarily indicative of the effective tax rate that may be expected for the fiscal year ending December 31, 2012. Factors that impact the income tax provision include, but are not limited to, stock-based compensation expense and the recognition of research and development tax benefits.

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

6. Information About Segment and Geographic Areas

The Company considers operating segments to be components of the Company in which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a total Company basis, accompanied by information about revenue by major service line for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the Company level. Accordingly, the Company has determined that it has a single reporting segment and operating unit structure of providing personalized Internet platforms and online entertainment services to high-speed Internet subscribers.

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

 

      XXXXXX       XXXXXX  
    Three Months Ended
March 31,
 
    2011     2012  

Revenue

               

United States

  $ 18,533     $ 30,515  

United Kingdom

    161       155  
   

 

 

   

 

 

 

Total revenue

  $ 18,694     $ 30,670  
   

 

 

   

 

 

 

 

      XXXXXXXX       XXXXXXXX  
    December 31,
2011
    March 31,
2012
 

Long-lived tangible assets

               

United States

  $ 7,680     $ 9,821  

Netherlands

    621       566  
   

 

 

   

 

 

 

Total long-lived tangible assets

  $ 8,301     $ 10,387  
   

 

 

   

 

 

 
Commitments and Contingencies
Commitments and Contingencies

7. Commitments and Contingencies

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

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

 

         

Year ending December 31:

     

2012

  $ 5,643  

2013

    4,480  

2014

    1,434  

2015

    1,080  

2016 and thereafter

    1,401  
   

 

 

 

Total contract commitments

  $ 14,038  
   

 

 

 
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 million with a par value of $0.01 per share.

Preferred Stock—Effective on February 15, 2012, the Company’s board of directors and stockholders approved the Fifth Amended and Restated Certificate of Incorporation. The total number of preferred shares that the Company is authorized to issue is 10,000,000 with a par value of $0.01 per share.

Conversion—Each share of Series A, A-1, B, and C preferred stock was convertible at the option of the holder at any time into common stock. The conversion rate was the quotient obtained by dividing the original issue price of the Series A, A-1, B, or C by the conversion price. Subsequent to the Second Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation, the conversion price was adjusted to effect a conversion of one preferred share into one and one-half common shares, as explained in Note 1, The Company and Summary of Significant Accounting Policies. The conversion price was subject to adjustment as set forth in the restated certificate of incorporation for certain dilutive issuances, splits, and combinations, as therein defined. Conversion was automatic upon either the consent of the holders of 66% of the outstanding shares of preferred stock or the effective date of a firm commitment underwritten public offering of the Company’s common stock in which the post-offering valuation on a fully diluted basis was at least $150 million and the proceeds are not less than $25 million. All shares of the Company’s outstanding preferred stock were converted into common stock in February 2012 in connection with the Company’s initial public offering.

Stock-based Compensation
Stock-based Compensation

9. Stock-based Compensation

The Company recorded stock-based compensation expense of $222 and $558 for the three months ended March 31, 2011 and 2012, respectively. No income tax deduction is allowed for incentive stock options. Accordingly, no deferred income tax asset is recorded for the expense related to these options. Stock option grants of non-qualified stock options result in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised.

Total stock-based compensation expense included in the accompanying condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2011 and 2012, is as follows (in thousands):

 

                 
    Three Months Ended
March 31,
 
    2011     2012  

Research and development

  $ 71     $ 107  

Sales and marketing

    49       74  

General and administrative

    102       377  
   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 222     $ 558  
   

 

 

   

 

 

 

Stock Option Plans—The Company has adopted three stock option plans, which authorize the grant of up to 8,296,777 options to officers and other key employees to purchase the Company’s common stock, subject to the terms of the plans. The options generally vest ratably over four years. The options are generally exercisable after the date of grant, and typically expire 10 years from their respective grant dates or earlier if employment is terminated. In connection with the early exercise of stock options, the Company has the right, but not the obligation, to repurchase unvested shares of common stock upon termination of the individual’s service to the Company at the original price per share. During the three months ended March 31, 2012 there were no early exercises.

A summary of the status of options granted under all option plans is presented below:

 

                 
    Number of
Stock
Options
    Weighted
Average
Exercise
Price
 

Outstanding—January 1, 2012

    5,082,776     $ 2.14  

Granted

    238,000       5.96  

Exercised

    (1,294,727     0.43  

Forfeited

    (86,932     3.25  
   

 

 

         

Outstanding—March 31, 2012

    3,939,117       2.90  
   

 

 

         

Expected to vest—March 31, 2012

    3,600,727       2.82  
   

 

 

         

Vested and exercisable—March 31, 2012

    1,733,894       1.75  
   

 

 

         

The weighted-average remaining contractual life of the options outstanding and expected to vest was 7.4 years as of March 31, 2012. The aggregate intrinsic value for outstanding, expected to vest, and vested and exercisable shares were $18,356, $17,067, and $10,074, respectively, as of March 31, 2012. The total intrinsic value of options exercised during the three months ended March 31, 2012 was $6,797. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s estimated stock value and the exercise price, multiplied by the number of in-the-money stock options) had all stock option holders exercised their stock options on the balance sheet date. This amount will change based on the fair market value of the Company’s stock.

The Company uses the Black-Scholes-Merton option-pricing model to determine the fair value of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by the estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of the Company’s common stock, the Company’s expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates, and expected dividends, which are estimated as follows:

 

   

Fair Value of Common Stock—Because the Company’s stock had not been publicly traded at the time of grants, it estimated the fair value of common stock.

 

   

Expected Term—The expected term represents the period of time the stock options are expected to be outstanding and is based on the “simplified method” allowed under SEC guidance. The Company uses the “simplified method” due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options.

 

   

Volatility—Since the Company does not have a significant trading history for its common stock, the expected stock price volatility was estimated by taking the average historic price volatility for publicly-traded options of comparable industry peers similar in size, stage of life cycle and financial leverage, based on daily price observations over a period equivalent to the expected term of the stock option grants. The Company did not rely on implied volatilities of traded options in its industry peers’ common stock because the volume of activity was relatively low. The Company intends to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of its common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

 

   

Risk-Free Interest Rate—The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

 

   

Dividend Yield—The expected dividend yield is 0% based upon the Company’s historical practice of electing not to declare or pay cash dividends on its common stock.

In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. The forfeiture rate is estimated based on historical experience. To the extent the actual forfeiture rate is different from the estimate, stock-based compensation expense is adjusted accordingly.

In connection with the preparation of the Company’s financial statements, the Company engaged an unrelated valuation specialist, or Valuation Specialist, as defined under the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to assist Company management in estimating the fair value of its common stock in connection with options granted. In the valuation report dated December 2011, the Valuation Specialist retrospectively valued the Company’s common stock as of December 15, 2011.

The following is the valuation date and corresponding common stock fair value used for the January 2012 grant:

 

         

Valuation Date

  Common Stock
Fair Value
Per Share
 

December 15, 2011

  $ 5.96  

For the December 15, 2011 valuation, the Company began using the probability-weighted expected return method, or PWERM, to determine the fair value of common stock. Under this method, the assumptions regarding various exit scenarios were as follows: 55% staying private, 30% initial public offering, 10% strategic sale and 5% distressed sale/dissolution. The valuation analysis indicated an aggregate equity value of $185.2 million and a fair value for common stock of $5.96 per share.

A summary of the option grants and assumptions used in the Black-Scholes option-pricing model to value the options during the three months ended March 31, 2012, is as follows:

 

                                                 

Grant Date

  Options
Granted
    Weighted-
Average
Fair Value
    Expected
Life of
Options

(In years)
    Risk-Free
Interest
Rate
    Expected
Volatility
    Expected
Dividend
Yield
 

January 6, 2012

    238,000     $ 5.96       6.25       1.40     53     — 

 

Stock option information at March 31, 2012, is as follows:

 

          000000       000000       000000       000000  

Exercise Price

    Number of Options
Outstanding
    Weighted-Average
Exercise Price
    Number of Options
Vested and
Exercisable
    Weighted-Average
Exercise Price
 
$ 0.04       51,633     $ 0.04       51,633     $ 0.04  
  0.20       285,032       0.20       285,032       0.20  
  0.93       398,089       0.92       398,089       0.92  
  2.40       53,974       2.40       29,760       2.40  
  2.52       646,007       2.52       628,040       2.52  
  2.58       59,769       2.58       48,681       2.58  
  2.68       252,136       2.68       106,123       2.68  
  2.88       547,406       2.88       186,536       2.88  
  3.32       1,043,321       3.32       —         3.32  
  3.70       95,500       3.70       —         3.70  
  5.96       506,250       5.96       —         5.96  
       

 

 

           

 

 

         
          3,939,117       2.90       1,733,894       1.75  
       

 

 

           

 

 

         

As of March 31, 2012, the unrecognized compensation cost related to non-vested options granted, for which vesting is probable, under the plan was approximately $3,333. This cost is expected to be recognized over a weighted-average period of 1.4 years. The total fair value of shares vested was $423 during the three months ended March 31, 2012.

Net Income Per Common Share Data
Net Income Per Common Share Data

10. Net Income Per Common Share Data

Basic and diluted net income per common share for the three months ended March 31, 2011 is presented in conformity with the two-class method required for participating securities. The Company determined that its Series C, B, A, and A-1 convertible preferred stock represented participating securities because they participated with common stock in dividends and unallocated income. Historically, the Company has not paid dividends. The holders of the Series C, B, A, and A-1 convertible preferred stock did not have a contractual obligation to share in the losses of the Company. 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 have been excluded from the computation of basic and diluted net income per common share.

The following table presents the calculation of basic and diluted net income per share for the three-month periods ended March 31, 2011 and 2012 (in thousands, except share and per share amounts):

 

                 
    Three Months Ended,
March 31,
 
    2011     2012  

Net income

  $ 111     $ 1,174  

Less: undistributed earnings allocated to preferred stockholders

    (101     —    
   

 

 

   

 

 

 

Net income attributable to common stockholders

  $ 10     $ 1,174  
   

 

 

   

 

 

 

Weighted-average common shares used to compute net income per share attributable to common stockholders

    1,929,909       16,603,579  
   

 

 

   

 

 

 

Basic net income per share attributable to common stockholders

  $ 0.01     $ 0.07  
   

 

 

   

 

 

 

Diluted net income per share attributable to common stockholders:

               

Net income

  $ 10     $ 1,174  

Add: Undistributed earnings allocated to preferred stockholders

    101       —    
   

 

 

   

 

 

 

Net income attributable to common stockholders

  $ 111     $ 1,174  
   

 

 

   

 

 

 

Number of shares used in basic calculation

    1,929,909       16,603,579  

Weighted-average effect of dilutive securities

               

Add:

               

Conversion of preferred stock (as-if converted basis)

    17,395,136       7,837,369  

Stock options

    2,886,877       2,337,507  
   

 

 

   

 

 

 

Number of shares used in diluted calculation

    22,211,922       26,778,455  
   

 

 

   

 

 

 

Diluted net income per share attributable to common stockholders

  $ —       $ 0.04  
   

 

 

   

 

 

 

 

The following equivalent shares were excluded from the calculation of diluted net income per share because their effect would have been anti-dilutive for the periods presented:

 

                 
    Three Months Ended
March 31,
 
    2011     2012  

Antidilutive equity awards

               

Stock options

    574,875       506,250