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1. |
The Company and Summary of Significant Accounting Principles |
Synacor, Inc., together with its consolidated subsidiaries (collectively, the “Company” or “Synacor”), is the trusted technology development, multiplatform services and revenue partner for video, internet and communications providers, device manufacturers, governments and enterprises. Synacor enables its customers to provide their consumers engaging, multiscreen experiences and advertising to their consumers that require scale, actionable data and sophisticated implementation.
Basis of Presentation —
The interim unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the interim unaudited condensed consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position for the periods presented. These interim unaudited condensed consolidated financial statements are not necessarily indicative of the results expected for the full fiscal year or for any subsequent period.
The accompanying condensed consolidated balance sheet as of December 31, 2016 was derived from the audited financial statements as of that date, but does not include all the information and footnotes required by U.S. GAAP. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Accounting Estimates —
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from estimated amounts.
Concentrations of Risk —
As of June 30, 2017 and December 31, 2016, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable as follows:
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Accounts Receivable |
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June 30, 2017 |
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December 31, 2016 |
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Google search |
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12 |
% |
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* |
Google advertising affiliate |
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15 |
% |
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* |
* - Less than 10% |
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For the three and six months ended June 30, 2017 and 2016, the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows:
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Revenue |
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2017 |
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2016 |
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2017 |
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2016 |
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Google search |
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16 |
% |
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14 |
% |
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14 |
% |
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15 |
% |
Google advertising affiliate |
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21 |
% |
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* |
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17 |
% |
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* |
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* - Less than 10% |
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For the three and six months ended June 30, 2017 and 2016, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue:
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Cost of Revenue |
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2017 |
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2016 |
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2017 |
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2016 |
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Customer A |
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13 |
% |
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26 |
% |
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16 |
% |
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28 |
% |
Customer B |
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18 |
% |
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* |
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10 |
% |
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* |
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Customer C |
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* |
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14 |
% |
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* |
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12 |
% |
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* - Less than 10% |
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Recent Accounting Pronouncements —
Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, providing additional guidance relating to identifying performance obligations under ASU 2014-09 as well as licensing.
The Company is currently in the process of assessing the financial impact of adopting these ASUs and the methods of adoption. The Company currently recognizes subscription license revenue from its Email/Collaboration contracts, which is included within recurring and fee-based revenue, over the life of the contracts (which are typically six months or longer). The Company has tentatively concluded that it is likely that this new guidance will require it to recognize a portion of the revenue from those contracts upon delivery, at the inception of the contracts, which would have the effect of accelerating recognition of revenue on such contracts, and may have a material impact on the Company’s consolidated financial statements. The standard will be effective for the Company beginning January 1, 2018. The Company will adopt the standard as of its effective date of January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company expects to use the latter method.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which amends lease accounting by lessors and lessees. This new standard will require, among other things, that lessees recognize a right-to-use asset and related lease liability for all significant financing and operating leases, and specifies where in the statement of cash flows the related lease payments are to be presented. The standard is effective for years beginning after December 15, 2018, including interim periods within those years (beginning in calendar year 2019 for the Company), and early adoption is permitted. Adoption of ASU 2016-02 is required to be applied on a modified retrospective basis. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements, but currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon the adoption of ASU 2016-02, which will increase the total assets and total liabilities that it reports as compared to reported prior to adoption. The Company expects to adopt the standard as of January 1, 2019.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017, subject to early adoption, which is permitted using a retrospective transition approach. ASU 2016-15 is intended to standardize the classification of certain cash receipts and cash payments in the Statement of Cash Flows, and is effective for the Company in its first quarter of fiscal 2018. The Company expects that it will adopt ASU 2016-15 in the first quarter of fiscal 2018 and is currently evaluating the impact of the pending adoption on its consolidated financial statements.
Recently Adopted
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of stock-based awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification in the statement of cash flows. Effective January 1, 2017, the Company has adopted ASU 2016-09. The standard eliminated the requirement to defer recognition of excess tax benefits related to employee share-based awards until they are realized through a reduction to income taxes payable. The Company applied the modified retrospective method and there was no net cumulative-effect adjustment to retained earnings on January 1, 2017 as the increase of $0.7 million in deferred income tax assets for previously unrecognized excess tax benefits was fully offset by a valuation allowance. As permitted by the ASU, the Company will continue to use an estimated forfeiture rate in determining stock-based compensation expense.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company has adopted the new guidance on a prospective basis during the first quarter of 2017. The adoption of this ASU has not impacted the Company’s consolidated financial statements.
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2. |
Stock Offering |
In April 2017, the Company completed an underwritten public offering (the “Offering”) of its common stock in which it sold 5,715,000 shares at a price of $3.50 per share. Subsequently, in May 2017, and as part of the Offering, the Company completed the sale of 472,846 additional shares of its common stock at the same price upon the exercise of the underwriters’ over-allotment option, for a total of 6,187,846 shares. The Offering resulted in total net proceeds of $20.0 million, after deducting underwriting discounts and commissions totaling $1.4 million and other offering expenses totaling $0.2 million.
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3. |
Acquisitions |
In August 2015, the Company and Zimbra, Inc. (now known as “TZ Holdings”) entered into an agreement under which the Company acquired certain assets relating to TZ Holdings’ email/collaboration products and services business, including certain of its wholly-owned foreign subsidiaries, for cash consideration of $17.3 million, 2.4 million shares of common stock and warrants to purchase 480,000 shares of common stock (collectively valued at $3.2 million). The Company held back an additional 600,000 shares of common stock and warrants to purchase an additional 120,000 shares of common stock (collectively valued at $0.8 million) to secure TZ Holdings’ indemnification obligations including pending claims. The held back common shares and warrants were released to TZ holdings in March 2017. The warrants expire on September 14, 2018.
Additionally, TZ Holdings was eligible to receive cash consideration of up to $2.0 million (the “Earn-Out Consideration”) upon the satisfaction of certain business performance milestones following the closing of the transaction, subject to and contingent upon any reduction to satisfy indemnification claims including pending claims. The acquisition date fair value of this contingent consideration was estimated to be $1.6 million. The Company paid $0.9 million of the earn-out consideration to TZ Holdings in November 2016, and the final payment of $0.7 million was made in May 2017.
In connection with the Company’s February 2016 acquisition of Technorati, the Company withheld $0.5 million of the purchase price to secure Technorati’s indemnification obligations under the Asset Purchase Agreement, and the Company owed approximately $0.1 million in post-closing working capital adjustments. These amounts were paid in March 2017.
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4. |
Goodwill and Other Intangible Assets |
The change in goodwill is as follows for the six months ended June 30, 2017 and 2016 (in thousands):
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Six Months Ended |
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June 30, |
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|||||
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2017 |
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2016 |
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Balance – beginning of period |
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$ |
15,943 |
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$ |
15,187 |
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Acquisition of Technorati |
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— |
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|
|
751 |
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Effect of foreign currency translation |
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|
6 |
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|
|
11 |
|
Balance – end of period |
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$ |
15,949 |
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$ |
15,949 |
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Intangible assets consisted of the following (in thousands):
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June 30, 2017 |
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December 31, 2016 |
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Customer and publisher relationships |
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$ |
14,780 |
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$ |
14,780 |
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Technology |
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2,330 |
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|
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2,330 |
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Trademark |
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|
300 |
|
|
|
300 |
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|
|
|
17,410 |
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|
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17,410 |
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Less accumulated amortization |
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(3,644 |
) |
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(2,573 |
) |
Intangible assets, net |
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$ |
13,766 |
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$ |
14,837 |
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Amortization of intangible assets totaled $0.6 million and $0.6 million for the three months ended June 30, 2017 and 2016, respectively, and $1.1 million and $1.0 million for the six months ended June 30, 2017 and 2016, respectively.
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5. |
Property and Equipment – Net |
Property and equipment, net consisted of the following (in thousands):
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June 30, 2017 |
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December 31, 2016 |
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Computer equipment (1) |
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$ |
26,751 |
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$ |
23,438 |
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Computer software |
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17,476 |
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15,198 |
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Furniture and fixtures |
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2,469 |
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|
|
2,062 |
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Leasehold improvements |
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1,381 |
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|
|
1,463 |
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Work in process (primarily software development costs) |
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5,827 |
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|
|
4,572 |
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Other |
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|
254 |
|
|
|
249 |
|
|
|
|
54,158 |
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|
|
46,982 |
|
Less accumulated depreciation (2) |
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|
(35,820 |
) |
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|
(32,576 |
) |
Property and equipment, net |
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$ |
18,338 |
|
|
$ |
14,406 |
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Notes:
(1) |
Includes equipment and software held under capital leases of $8.7 million and $5.2 million as of June 30, 2017 and December 31, 2016, respectively. |
(2) |
Includes $4.0 million and $3.4 million of accumulated depreciation of equipment under capital leases as of June 30, 2017 and December 31, 2016, respectively. |
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Depreciation expense totaled $1.7 million and $1.7 million for the three months ended June 30, 2017 and 2016, respectively, and $3.3 million and $3.3 million, for the six months ended June 30, 2017 and 2016, respectively. |
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6. |
Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities consisted of the following (in thousands):
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June 30, 2017 |
|
|
December 31, 2016 |
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Accrued compensation |
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$ |
3,913 |
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$ |
6,860 |
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Accrued content fees |
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|
1,158 |
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|
|
1,788 |
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Accrued business acquisition consideration |
|
|
— |
|
|
|
1,193 |
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Other |
|
|
2,009 |
|
|
|
1,843 |
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Total |
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$ |
7,080 |
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$ |
11,684 |
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7. |
Information About Segment and Geographic Areas |
Operating segments are components of the Company in which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a total company basis, accompanied by information about revenue by major service line for purposes of allocating resources and evaluating financial performance. Profitability measures by service line are not prepared or used. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the company level. Accordingly, the Company has determined that it has a single reporting segment and operating unit structure.
The following tables set forth revenue and long-lived tangible assets by geographic area (in thousands):
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2017 |
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2016 |
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2017 |
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2016 |
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Revenue: |
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|
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|
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|
|
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United States |
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$ |
25,190 |
|
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$ |
26,149 |
|
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$ |
46,858 |
|
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$ |
52,619 |
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International |
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6,026 |
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|
4,327 |
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$ |
10,898 |
|
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|
8,117 |
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Total revenue |
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$ |
31,216 |
|
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$ |
30,476 |
|
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$ |
57,756 |
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$ |
60,736 |
|
|
|
June 30, 2017 |
|
|
December 31, 2016 |
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Long-lived tangible assets: |
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|
|
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|
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United States |
|
$ |
17,488 |
|
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$ |
13,519 |
|
Canada |
|
|
549 |
|
|
|
573 |
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Other international |
|
|
301 |
|
|
|
314 |
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Total long-lived tangible assets |
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$ |
18,338 |
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$ |
14,406 |
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8. |
Commitments and Contingencies |
Contract Commitments —
The Company is obligated to make minimum payments under various contracts with vendors and other business partners, principally for revenue-share and content arrangements. Contract commitments as of June 30, 2017 are as follows (in thousands):
Year ending December 31, |
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|
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2017 (remaining - six months) |
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$ |
690 |
|
2018 |
|
$ |
900 |
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2019 |
|
$ |
900 |
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2020 |
|
$ |
300 |
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Total |
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$ |
2,790 |
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Litigation —
From time to time, the Company is a party to legal actions. In the opinion of management, the outcome of these matters is not expected to have a material impact on the consolidated financial statements of the Company.
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9. |
Stock-based Compensation |
The Company has stock-based employee compensation plans for which compensation cost is recognized in its financial statements. The cost is measured at the grant date, based on the fair value of the award, determined using the Black-Scholes option pricing model, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).
No income tax deduction is allowed for incentive stock options (“ISOs”). Accordingly, no deferred income tax asset is recorded for the potential tax deduction related to these options. Expense related to stock option grants of non-qualified stock options (“NSOs”) results in a temporary difference, which gives rise to a deferred tax asset.
Total stock-based compensation expense included in the accompanying condensed consolidated statements of operations for the periods presented, is as follows (in thousands):
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2017 |
|
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2016 |
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2017 |
|
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2016 |
|
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Technology and development |
|
$ |
206 |
|
|
$ |
202 |
|
|
$ |
414 |
|
|
$ |
443 |
|
Sales and marketing |
|
|
190 |
|
|
|
208 |
|
|
|
358 |
|
|
|
431 |
|
General and administrative |
|
|
280 |
|
|
|
277 |
|
|
|
551 |
|
|
|
550 |
|
Total stock-based compensation expense |
|
$ |
676 |
|
|
$ |
687 |
|
|
$ |
1,323 |
|
|
$ |
1,424 |
|
Stock Option Activity – A summary of the stock option activity for the six months ended June 30, 2017 is presented below:
|
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Number of Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term (years) |
|
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Aggregate Intrinsic Value (in thousands) |
|
||||
Outstanding at January 1, 2017 |
|
|
8,756,174 |
|
|
$ |
2.53 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,313,900 |
|
|
$ |
3.20 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(452,329 |
) |
|
$ |
1.73 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(142,540 |
) |
|
$ |
2.15 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017 |
|
|
9,475,205 |
|
|
$ |
2.67 |
|
|
|
6.98 |
|
|
$ |
10,675 |
|
Vested and expected to vest at June 30, 2017 |
|
|
9,084,191 |
|
|
$ |
2.67 |
|
|
|
6.90 |
|
|
$ |
10,282 |
|
Vested and exercisable at June 30, 2017 |
|
|
5,251,473 |
|
|
$ |
2.79 |
|
|
|
5.66 |
|
|
$ |
5,870 |
|
Aggregate intrinsic value represents the difference between the Company’s closing stock price of its common stock and the exercise price of outstanding, in-the-money options. The Company’s closing stock price as reported on the Nasdaq Global Market as of June 30, 2017 was $3.65 per share. The total intrinsic value of options exercised for the six months ended June 30, 2017 was $0.7 million. The weighted average fair value of options issued during the six months ended June 30, 2017 amounted to $1.55 per option share.
As of June 30, 2017, the unrecognized compensation cost related to non-vested options granted, for which vesting is probable, and adjusted for estimated forfeitures, was approximately $5.0 million. This cost is expected to be recognized over a weighted-average period of 2.7 years. The total fair value of shares vested was $0.9 million for the six months ended June 30, 2017.
In addition, the Company may, from time to time, grant Restricted Stock Units (“RSUs”) to its employees. A summary of RSU activity for the six months ended June 30, 2017 is presented below:
|
|
Number of Shares |
|
|
Weighted Average Fair Value |
|
||
Unvested—January 1, 2017 |
|
|
319,889 |
|
|
$ |
2.31 |
|
Granted |
|
|
— |
|
|
|
— |
|
Released |
|
|
(125,130 |
) |
|
$ |
2.47 |
|
Forfeited |
|
|
(5,316 |
) |
|
$ |
1.86 |
|
Unvested—June 30, 2017 |
|
|
189,443 |
|
|
$ |
2.89 |
|
June 30, 2017 |
|
|
184,399 |
|
|
$ |
2.87 |
|
|
11. Subsequent Events
In July 2013, the Company made a $1.0 million strategic investment (in the form of a convertible promissory note, the “note”) in Blazer and Flip Flops, Inc. (“B&FF”), doing business as “The Experience Engine,” a privately-held Delaware corporation. The Company desired to gain access to the expertise of B&FF’s principals in integrating its customers’ systems with their customers’ devices, including smartphones and tablets. In March 2015, the note was converted into preferred stock of B&FF and has since been accounted for as a cost method investment.
Subsequent to June 30, 2017, B&FF was acquired by accesso Technology Group, plc, a U.K. public company, and the Company received, in connection with the sale of its investment in B&FF, cash consideration of $2.2 million and expects to receive stock in the acquiring company valued at approximately $0.4 million. In addition, the Company stands to receive contingent consideration of cash and stock totaling approximately $0.4 million, which was held back to secure B&FF’s indemnification obligations under the purchase and sale agreement. These amounts, valued at approximately $0.2 million, may be received after the 18-month indemnification period expires. The Company expects to record a gain on sale of investment totaling approximately $1.8 million in the three months ending September 30, 2017.
Effective in July, 2017, the Company executed agreements to lease computer hardware and software, and receive associated support and maintenance services, in connection with the Company’s build-out of redundant data centers to support new email revenue opportunities. These agreements require payments over a three-year period totaling approximately $3.5 million.
|
Basis of Presentation —
The interim unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the interim unaudited condensed consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position for the periods presented. These interim unaudited condensed consolidated financial statements are not necessarily indicative of the results expected for the full fiscal year or for any subsequent period.
The accompanying condensed consolidated balance sheet as of December 31, 2016 was derived from the audited financial statements as of that date, but does not include all the information and footnotes required by U.S. GAAP. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Accounting Estimates —
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from estimated amounts.
Concentrations of Risk —
As of June 30, 2017 and December 31, 2016, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable as follows:
|
|
Accounts Receivable |
||||
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
Google search |
|
|
12 |
% |
|
* |
Google advertising affiliate |
|
|
15 |
% |
|
* |
* - Less than 10% |
|
|
|
|
|
|
For the three and six months ended June 30, 2017 and 2016, the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows:
|
Revenue |
|
||||||||||||||
|
Three Months Ended |
|
|
Six Months Ended |
|
|||||||||||
|
June 30, |
|
|
June 30, |
|
|||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Google search |
|
|
16 |
% |
|
|
14 |
% |
|
|
14 |
% |
|
|
15 |
% |
Google advertising affiliate |
|
|
21 |
% |
|
* |
|
|
|
17 |
% |
|
* |
|
||
* - Less than 10% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2017 and 2016, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue:
|
|
Cost of Revenue |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Customer A |
|
|
13 |
% |
|
|
26 |
% |
|
|
16 |
% |
|
|
28 |
% |
Customer B |
|
|
18 |
% |
|
* |
|
|
|
10 |
% |
|
* |
|
||
Customer C |
|
* |
|
|
|
14 |
% |
|
* |
|
|
|
12 |
% |
||
* - Less than 10% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements —
Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, providing additional guidance relating to identifying performance obligations under ASU 2014-09 as well as licensing.
The Company is currently in the process of assessing the financial impact of adopting these ASUs and the methods of adoption. The Company currently recognizes subscription license revenue from its Email/Collaboration contracts, which is included within recurring and fee-based revenue, over the life of the contracts (which are typically six months or longer). The Company has tentatively concluded that it is likely that this new guidance will require it to recognize a portion of the revenue from those contracts upon delivery, at the inception of the contracts, which would have the effect of accelerating recognition of revenue on such contracts, and may have a material impact on the Company’s consolidated financial statements. The standard will be effective for the Company beginning January 1, 2018. The Company will adopt the standard as of its effective date of January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company expects to use the latter method.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which amends lease accounting by lessors and lessees. This new standard will require, among other things, that lessees recognize a right-to-use asset and related lease liability for all significant financing and operating leases, and specifies where in the statement of cash flows the related lease payments are to be presented. The standard is effective for years beginning after December 15, 2018, including interim periods within those years (beginning in calendar year 2019 for the Company), and early adoption is permitted. Adoption of ASU 2016-02 is required to be applied on a modified retrospective basis. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements, but currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon the adoption of ASU 2016-02, which will increase the total assets and total liabilities that it reports as compared to reported prior to adoption. The Company expects to adopt the standard as of January 1, 2019.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017, subject to early adoption, which is permitted using a retrospective transition approach. ASU 2016-15 is intended to standardize the classification of certain cash receipts and cash payments in the Statement of Cash Flows, and is effective for the Company in its first quarter of fiscal 2018. The Company expects that it will adopt ASU 2016-15 in the first quarter of fiscal 2018 and is currently evaluating the impact of the pending adoption on its consolidated financial statements.
Recently Adopted
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of stock-based awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification in the statement of cash flows. Effective January 1, 2017, the Company has adopted ASU 2016-09. The standard eliminated the requirement to defer recognition of excess tax benefits related to employee share-based awards until they are realized through a reduction to income taxes payable. The Company applied the modified retrospective method and there was no net cumulative-effect adjustment to retained earnings on January 1, 2017 as the increase of $0.7 million in deferred income tax assets for previously unrecognized excess tax benefits was fully offset by a valuation allowance. As permitted by the ASU, the Company will continue to use an estimated forfeiture rate in determining stock-based compensation expense.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company has adopted the new guidance on a prospective basis during the first quarter of 2017. The adoption of this ASU has not impacted the Company’s consolidated financial statements.
|
As of June 30, 2017 and December 31, 2016, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable as follows:
|
|
Accounts Receivable |
||||
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
Google search |
|
|
12 |
% |
|
* |
Google advertising affiliate |
|
|
15 |
% |
|
* |
* - Less than 10% |
|
|
|
|
|
|
For the three and six months ended June 30, 2017 and 2016, the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows:
|
Revenue |
|
||||||||||||||
|
Three Months Ended |
|
|
Six Months Ended |
|
|||||||||||
|
June 30, |
|
|
June 30, |
|
|||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Google search |
|
|
16 |
% |
|
|
14 |
% |
|
|
14 |
% |
|
|
15 |
% |
Google advertising affiliate |
|
|
21 |
% |
|
* |
|
|
|
17 |
% |
|
* |
|
||
* - Less than 10% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2017 and 2016, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue:
|
|
Cost of Revenue |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Customer A |
|
|
13 |
% |
|
|
26 |
% |
|
|
16 |
% |
|
|
28 |
% |
Customer B |
|
|
18 |
% |
|
* |
|
|
|
10 |
% |
|
* |
|
||
Customer C |
|
* |
|
|
|
14 |
% |
|
* |
|
|
|
12 |
% |
||
* - Less than 10% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in goodwill is as follows for the six months ended June 30, 2017 and 2016 (in thousands):
|
|
Six Months Ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
Balance – beginning of period |
|
$ |
15,943 |
|
|
$ |
15,187 |
|
Acquisition of Technorati |
|
|
— |
|
|
|
751 |
|
Effect of foreign currency translation |
|
|
6 |
|
|
|
11 |
|
Balance – end of period |
|
$ |
15,949 |
|
|
$ |
15,949 |
|
Intangible assets consisted of the following (in thousands):
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
||
Customer and publisher relationships |
|
$ |
14,780 |
|
|
$ |
14,780 |
|
Technology |
|
|
2,330 |
|
|
|
2,330 |
|
Trademark |
|
|
300 |
|
|
|
300 |
|
|
|
|
17,410 |
|
|
|
17,410 |
|
Less accumulated amortization |
|
|
(3,644 |
) |
|
|
(2,573 |
) |
Intangible assets, net |
|
$ |
13,766 |
|
|
$ |
14,837 |
|
|
Property and equipment, net consisted of the following (in thousands):
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
||
Computer equipment (1) |
|
$ |
26,751 |
|
|
$ |
23,438 |
|
Computer software |
|
|
17,476 |
|
|
|
15,198 |
|
Furniture and fixtures |
|
|
2,469 |
|
|
|
2,062 |
|
Leasehold improvements |
|
|
1,381 |
|
|
|
1,463 |
|
Work in process (primarily software development costs) |
|
|
5,827 |
|
|
|
4,572 |
|
Other |
|
|
254 |
|
|
|
249 |
|
|
|
|
54,158 |
|
|
|
46,982 |
|
Less accumulated depreciation (2) |
|
|
(35,820 |
) |
|
|
(32,576 |
) |
Property and equipment, net |
|
$ |
18,338 |
|
|
$ |
14,406 |
|
Notes:
(1) |
Includes equipment and software held under capital leases of $8.7 million and $5.2 million as of June 30, 2017 and December 31, 2016, respectively. |
(2) |
Includes $4.0 million and $3.4 million of accumulated depreciation of equipment under capital leases as of June 30, 2017 and December 31, 2016, respectively. |
|
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
||
Accrued compensation |
|
$ |
3,913 |
|
|
$ |
6,860 |
|
Accrued content fees |
|
|
1,158 |
|
|
|
1,788 |
|
Accrued business acquisition consideration |
|
|
— |
|
|
|
1,193 |
|
Other |
|
|
2,009 |
|
|
|
1,843 |
|
Total |
|
$ |
7,080 |
|
|
$ |
11,684 |
|
|
The following tables set forth revenue and long-lived tangible assets by geographic area (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
25,190 |
|
|
$ |
26,149 |
|
|
$ |
46,858 |
|
|
$ |
52,619 |
|
International |
|
|
6,026 |
|
|
|
4,327 |
|
|
$ |
10,898 |
|
|
|
8,117 |
|
Total revenue |
|
$ |
31,216 |
|
|
$ |
30,476 |
|
|
$ |
57,756 |
|
|
$ |
60,736 |
|
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
||
Long-lived tangible assets: |
|
|
|
|
|
|
|
|
United States |
|
$ |
17,488 |
|
|
$ |
13,519 |
|
Canada |
|
|
549 |
|
|
|
573 |
|
Other international |
|
|
301 |
|
|
|
314 |
|
Total long-lived tangible assets |
|
$ |
18,338 |
|
|
$ |
14,406 |
|
|
Contract commitments as of June 30, 2017 are as follows (in thousands
Year ending December 31, |
|
|
|
|
2017 (remaining - six months) |
|
$ |
690 |
|
2018 |
|
$ |
900 |
|
2019 |
|
$ |
900 |
|
2020 |
|
$ |
300 |
|
Total |
|
$ |
2,790 |
|
|
Total stock-based compensation expense included in the accompanying condensed consolidated statements of operations for the periods presented, is as follows (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Technology and development |
|
$ |
206 |
|
|
$ |
202 |
|
|
$ |
414 |
|
|
$ |
443 |
|
Sales and marketing |
|
|
190 |
|
|
|
208 |
|
|
|
358 |
|
|
|
431 |
|
General and administrative |
|
|
280 |
|
|
|
277 |
|
|
|
551 |
|
|
|
550 |
|
Total stock-based compensation expense |
|
$ |
676 |
|
|
$ |
687 |
|
|
$ |
1,323 |
|
|
$ |
1,424 |
|
Stock Option Activity – A summary of the stock option activity for the six months ended June 30, 2017 is presented below:
|
|
Number of Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term (years) |
|
|
Aggregate Intrinsic Value (in thousands) |
|
||||
Outstanding at January 1, 2017 |
|
|
8,756,174 |
|
|
$ |
2.53 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,313,900 |
|
|
$ |
3.20 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(452,329 |
) |
|
$ |
1.73 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(142,540 |
) |
|
$ |
2.15 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017 |
|
|
9,475,205 |
|
|
$ |
2.67 |
|
|
|
6.98 |
|
|
$ |
10,675 |
|
Vested and expected to vest at June 30, 2017 |
|
|
9,084,191 |
|
|
$ |
2.67 |
|
|
|
6.90 |
|
|
$ |
10,282 |
|
Vested and exercisable at June 30, 2017 |
|
|
5,251,473 |
|
|
$ |
2.79 |
|
|
|
5.66 |
|
|
$ |
5,870 |
|
A summary of RSU activity for the six months ended June 30, 2017 is presented below:
|
|
Number of Shares |
|
|
Weighted Average Fair Value |
|
||
Unvested—January 1, 2017 |
|
|
319,889 |
|
|
$ |
2.31 |
|
Granted |
|
|
— |
|
|
|
— |
|
Released |
|
|
(125,130 |
) |
|
$ |
2.47 |
|
Forfeited |
|
|
(5,316 |
) |
|
$ |
1.86 |
|
Unvested—June 30, 2017 |
|
|
189,443 |
|
|
$ |
2.89 |
|
June 30, 2017 |
|
|
184,399 |
|
|
$ |
2.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|