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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, and enterprises. Synacor delivers 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, 2015 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, 2015.
Accounting Estimates —
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from estimated amounts.
Concentrations of Risk —
As of September 30, 2016 and December 31, 2015, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable as follows:
Accounts Receivable | ||||||||
September 30, 2016 |
December 31, 2015 |
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13 | % | 14 | % |
For the three and nine months ended September 30, 2016 and 2015, the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows:
Revenue | ||||||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
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10 | % | 28 | % | 14 | % | 31 | % |
For the three and nine months ended September 30, 2016 and 2015, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue. The costs represent revenue share paid to customers for their supply of Internet traffic on the Company’s start experiences:
Cost of Revenue | ||||||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
Customer A |
22 | % | 29 | % | 26 | % | 28 | % | ||||||||
Customer B |
Less than 10 | % | 10 | % | 10 | % | 10 | % | ||||||||
Customer C |
Less than 10 | % | 10 | % | Less than 10 | % | 10 | % |
Recent Accounting Pronouncements —
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09 (ASU 2014-09) Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, providing additional guidance relating to identifying performance obligations under ASU 2014-09 as well as licensing.
The Company is currently in the process of assessing the financial impact of adopting these ASUs and the methods of adoption. The Company currently recognizes subscription revenue from its’ Email/Collaboration contracts over the life of the contracts (which are typically six months or longer). The Company has tentatively concluded that it is likely that this new guidance will require it to recognize a portion of the revenue from those contracts upon delivery, at the inception of the contracts, which would have the effect of accelerating recognition of revenue on such contracts, and may have a material impact on the Company’s consolidated financial statements. The standard will be effective for the Company beginning January 1, 2018, and adoption as of the original effective date of January 1, 2017 is permitted. The Company anticipates adopting the standard as of its effective date of January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company has not yet determined which transition method it will use.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing a modified retrospective approach. Early adoption is permitted. The Company is in the process of assessing the impact of the adoption of this ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the ASU provides that its different provisions be applied prospectively, retrospectively, or using a modified retrospective method, depending on the provision. The Company is in the process of assessing the impact of the adoption of this ASU on its consolidated financial statements.
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2. | Acquisitions |
Technorati –
On February 19, 2016, the Company entered into an Asset Purchase Agreement to acquire substantially all of the assets of Technorati, Inc. (“Technorati”), an advertising technology company, for $3.0 million in cash (the “Purchase Price”). The Company completed the acquisition on February 26, 2016 (the “Closing”). The Company expects the acquisition of Technorati to drive additional advertising demand, to accelerate its content and advertising syndication strategy by giving the Company access to over 1,000 new publishers, and to add new tools for publishers to its existing platform. The Company expects to realize synergies and economies of scale by combining Technorati’s publisher network, proprietary SmartWrapper solution and other advertising technology with its existing network of Managed Portals and Advertising solutions.
The assets acquired include Technorati’s intellectual property and advertising technology platforms, customer and publisher relationships, accounts receivable and equipment. The Company also assumed certain obligations of Technorati, including post-Closing obligations under contracts assigned to the Company and the payment of outstanding liabilities to its publishers. Ten of Technorati’s employees commenced employment with Synacor.
The Company paid $2.5 million of the Purchase Price at the Closing, withheld $0.5 million of the purchase price to secure Technorati’s indemnification obligations under the Asset Purchase Agreement, and owes Technorati approximately $0.1 million in post-closing working capital adjustments. Pursuant to the terms of the Asset Purchase Agreement, Technorati shall indemnify the Company for breaches of its representations and warranties, breaches of covenants and certain other matters. The representations and warranties set forth in the Asset Purchase Agreement generally survive for 12 months following the Closing, with longer survival periods for certain fundamental representations and warranties.
Consideration and Allocation of Purchase Price –
The transaction was accounted for as a purchase in accordance with FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Under this guidance, the fair value of the consideration was determined and the assets acquired and liabilities assumed have been recorded at their estimated fair values as of the date of acquisition. The excess of the consideration over the estimated fair values has been recorded as goodwill.
The estimated transaction consideration, as well as the preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the date of the acquisition are presented in the table below. Management is responsible for determining, as of the Closing, the fair value of tangible and identifiable intangible assets acquired and liabilities assumed, and the estimated useful lives for any depreciable and amortizable assets. Management considered a number of factors, including reference to a valuation analysis performed solely for the purpose of this allocation in accordance with ASC Topic 805. The Company’s estimates are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. This analysis required the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur.
Consideration (in thousands):
Cash consideration |
$ | 2,500 | ||
Fair value of indemnification holdback |
500 | |||
Fair value of post-closing working capital adjustment |
67 | |||
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Total consideration |
$ | 3,067 | ||
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Purchase price allocation (in thousands):
Assets acquired: |
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Accounts receivable |
$ | 965 | ||
Property and equipment |
96 | |||
Customer and publisher relationships |
1,380 | |||
Technology |
730 | |||
Goodwill |
751 | |||
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Total assets acquired |
3,922 | |||
Liabilities assumed: |
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Accounts payable and accrued expenses |
855 | |||
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Net assets acquired |
$ | 3,067 | ||
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While the Company has used its best estimates and assumptions to value the assets acquired and liabilities assumed, the purchase price allocation is preliminary and could change during the measurement period, not to exceed one year, if new information is obtained about the facts and circumstances that existed as of the Closing, that if known would have resulted in the recognition of additional assets or liabilities or resulted in changes in the recorded values of assets and liabilities. It is expected that acquired goodwill will be deductible for United States tax purposes. The Company will amortize technology and customer and publisher relationships over estimated useful lives of five years.
Acquisition costs of $0.1 million were incurred during the first quarter of 2016 and charged to general and administrative expense.
Zimbra –
As more fully discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, on August 18, 2015 the Company and Sync Holdings, LLC, its wholly-owned subsidiary, entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Zimbra, Inc. (now known as TZ Holdings) to acquire certain assets related to TZ Holdings’ email/collaboration products and services business, including certain of its wholly-owned foreign subsidiaries. The business acquired by the Company pursuant to the Asset Purchase Agreement is referred to herein as “Zimbra” or the “Purchased Business.” The Purchased Business includes software for email/collaboration, calendaring, file sharing, activity streams and social networks, among other things. The Zimbra software is used globally by service providers, governments and companies. The Company completed the acquisition (the “Acquisition”) on September 14, 2015 (the “Closing”).
Pro Forma Results—
The following unaudited pro forma information presents the combined results of the Company’s operations as if the acquisition of Zimbra had been completed on January 1, 2015, the beginning of the comparable prior reporting periods. The unaudited pro forma results include adjustments to reflect: (i) the carve-out of revenue and expenses relating to the portion of the Zimbra business not acquired; (ii) the elimination of depreciation and amortization from Zimbra’s historical financial statements and the inclusion of depreciation and amortization based on the fair values of acquired property, plant and equipment and intangible assets; (iii) the fair value of deferred revenue liabilities assumed; (iv) recognition of the post-acquisition share-based compensation expense related to stock options that were granted to Zimbra employees who accepted employment with Synacor; (v) the elimination of intercompany revenue and expenses between Zimbra and Synacor; and (vi) the elimination of acquisition-related expenses.
The unaudited pro forma results do not reflect any cost-saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating the two companies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the periods presented, nor are they indicative of future results of operations.
Set forth below is the unaudited pro forma consolidated results of operations of the Company and Zimbra for the three and nine months ended September 30, 2015 as if the Acquisition had occurred on January 1, 2015 (in thousands, except per share amounts):
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2015 | 2015 | |||||||
Revenue |
$ | 32,434 | $ | 97,066 | ||||
Operating income (loss) |
8 | $ | (3,911 | ) | ||||
Net loss |
(276 | ) | $ | (3,698 | ) | |||
Net loss per share (basic and diluted) |
$ | (0.01 | ) | $ | (0.12 | ) |
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3. | Fair Value Measurements |
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 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 also 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 claims including pending claims.
Additionally, TZ Holdings is 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. Should the business performance milestones be met, the payments under this arrangement will be partially due in the fourth quarter of 2016 and partially in the second quarter of 2017. The fair value of the Earn-Out Consideration was originally determined to be $1.6 million, and was adjusted to $1.5 million in the third quarter of 2016, with the adjustment credited to Sales and Marketing expense. The liability for Earn-Out Consideration is included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2016. Approximately $0.9 million of the liability for Earn-Out Consideration was paid to TZ Holdings subsequent to September 30, 2016.
The provisions of ASC Topic 820, Fair Value Measurements and Disclosures, establish a framework for measuring the fair value in accordance with U.S. GAAP and establish 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 the Earn-Out Consideration within Level 3 because it is valued using unobservable inputs. There was a decrease of $0.1 million to the Company’s estimate of the fair value of the Earn-Out Consideration during the three and nine months ended September 30, 2016.
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4. | Goodwill and Other Intangible Assets |
The change in goodwill is as follows for nine months ended September 30, 2016 (in thousands):
Nine Months Ended | ||||
September 30, 2016 | ||||
Balance – beginning of period |
$ | 15,187 | ||
Acquisition of Technorati |
751 | |||
Effect of foreign currency translation |
11 | |||
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Balance – end of period |
$ | 15,949 | ||
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Intangible assets, net consisted of the following (in thousands):
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Customer and publisher relationships |
$ | 14,780 | $ | 13,400 | ||||
Technology |
2,330 | 1,600 | ||||||
Trademark |
300 | 300 | ||||||
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17,410 | 15,300 | |||||||
Less accumulated amortization |
(2,034 | ) | (502 | ) | ||||
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Intangible assets, net |
$ | 15,376 | $ | 14,798 | ||||
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Amortization of intangible assets for the three months ended September 30, 2016 and 2015 was $0.5 million and $0.1 million, respectively. Amortization of intangible assets for the nine months ended September 30, 2016 and 2015 was $1.5 million and $0.1 million, respectively.
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5. | Property and Equipment – Net |
Property and equipment, net consisted of the following (in thousands):
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Computer equipment (1) |
$ | 23,542 | $ | 23,324 | ||||
Computer software |
18,916 | 14,813 | ||||||
Furniture and fixtures |
2,001 | 1,945 | ||||||
Leasehold improvements |
1,405 | 1,532 | ||||||
Other |
252 | 252 | ||||||
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46,116 | 41,866 | |||||||
Less accumulated depreciation (2) |
(31,301 | ) | (27,489 | ) | ||||
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Property and equipment, net |
$ | 14,815 | $ | 14,377 | ||||
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Depreciation expense for the three months ended September 30, 2016 and 2015 was $1.9 million and $1.5 million, respectively. Depreciation expense for the nine months ended September 30, 2016 and 2015 was $5.3 million and $4.6 million, respectively.
Notes:
(1) | Includes equipment and software held under capital leases of $5.1 million and $4.1 million as of September 30, 2016 and December 31, 2015, respectively. |
(2) | Includes $3.0 million and $1.8 million of accumulated depreciation of equipment under capital leases as of September 30, 2016 and December 31, 2015, respectively. |
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6. | Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities consisted of the following (in thousands):
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Accrued compensation |
$ | 6,167 | $ | 6,112 | ||||
Accrued content fees |
2,942 | 1,964 | ||||||
Contingent consideration |
1,510 | — | ||||||
Accrued business acquisition consideration |
567 | — | ||||||
Other |
2,079 | 1,689 | ||||||
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Total |
$ | 13,265 | $ | 9,765 | ||||
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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):
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenue: |
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United States |
$ | 27,169 | $ | 25,556 | $ | 79,787 | $ | 76,623 | ||||||||
International |
4,552 | 795 | 12,670 | 1,174 | ||||||||||||
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Total revenue |
$ | 31,721 | $ | 26,351 | $ | 92,457 | $ | 77,797 | ||||||||
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September 30, | December 31, | |||||||||||||||
2016 | 2015 | |||||||||||||||
Long-lived tangible assets: |
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United States |
$ | 13,842 | $ | 12,909 | ||||||||||||
Canada |
627 | 726 | ||||||||||||||
Other international |
346 | 742 | ||||||||||||||
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Total long-lived tangible assets |
$ | 14,815 | $ | 14,377 | ||||||||||||
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8. | Commitments and Contingencies |
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 September 30, 2016 are summarized as follows (in thousands):
Year ending December 31, |
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2016 (remaining three months) |
$ | 1,050 | ||
2017 |
2,080 | |||
2018 |
720 | |||
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Total |
$ | 3,850 | ||
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Contingent Consideration —
In connection with the Company’s acquisition of certain email/collaboration assets from TZ Holdings in September 2015 (see Notes 2 and 3), the Company is obligated to pay contingent cash consideration totaling up to $2.0 million 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. This liability is valued at $1.5 million, and at September 30, 2016 is included in accrued expenses and other current liabilities. Approximately $0.9 million of this liability was paid subsequent to September 30, 2016. Additionally, the Company held back 600,000 shares of common stock and warrants to purchase 120,000 shares of common stock (collectively valued at $0.8 million) to secure indemnification claims against TZ Holdings including pending claims.
In connection with the Company’s acquisition of the Technorati assets (see Note 2), the Company withheld $0.5 million of the purchase price to secure Technorati’s indemnification obligations under the Asset Purchase Agreement, with payment under this arrangement due in the first quarter of 2017. Additionally, the Company owes approximately $0.1 million in post-closing working capital adjustments. This amount is included in accrued expenses and other current liabilities at September 30, 2016.
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. No such asset is recognized in the accompanying balance sheets as the Company has fully reserved its net deferred tax assets due to the uncertainty of future realization of those assets.
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 September 30, |
Nine Months Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
Technology and development |
$ | 238 | $ | 224 | $ | 681 | $ | 694 | ||||||||
Sales and marketing |
173 | 231 | 604 | 716 | ||||||||||||
General and administrative |
269 | 355 | 819 | 942 | ||||||||||||
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Total stock-based compensation expense |
$ | 680 | $ | 810 | $ | 2,104 | $ | 2,352 | ||||||||
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Stock Option Activity – A summary of the stock option activity for the nine months ended September 30, 2016 is presented below:
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value (in thousands) |
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Outstanding at January 1, 2016 |
8,695,918 | $ | 2.57 | |||||||||||||
Granted |
1,503,500 | $ | 2.20 | |||||||||||||
Exercised |
(382,781 | ) | $ | 2.25 | ||||||||||||
Forfeited or expired |
(551,438 | ) | $ | 2.01 | ||||||||||||
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Outstanding at September 30, 2016 |
9,265,199 | $ | 2.55 | 6.76 | $ | 5,913 | ||||||||||
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Vested and expected to vest at September 30, 2016 |
8,862,505 | $ | 2.57 | 6.76 | $ | 5,590 | ||||||||||
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Vested and exercisable at September 30, 2016 |
4,804,258 | $ | 2.98 | 4.96 | $ | 2,178 | ||||||||||
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Aggregate intrinsic value represents the difference between the Company’s closing stock price of its common stock and the exercise price of outstanding, in-the-money options. The Company’s closing stock price as reported on the NASDAQ Global Market as of September 30, 2016 was $2.91 per share. The total intrinsic value of options exercised for the nine months ended September 30, 2016 was $0.3 million. The weighted average fair value of options issued during the nine months ended September 30, 2016 amounted to $1.08 per option share.
As of September 30, 2016, the unrecognized compensation cost related to non-vested options granted, for which vesting is probable, and adjusted for estimated forfeitures, was approximately $4.5 million. This cost is expected to be recognized over a weighted-average period of 2.6 years. The total fair value of shares vested was $1.5 million for the nine months ended September 30, 2016.
In addition, the Company may, from time to time, grant Restricted Stock Units (“RSUs”) to its employees. A summary of RSU activity for the nine months ended September 30, 2016 is presented below:
Number of Shares |
Weighted Average Fair Value |
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Unvested - January 1, 2016 |
437,595 | $ | 2.31 | |||||
Shares granted |
139,500 | $ | 3.63 | |||||
Shares vested |
(160,811 | ) | $ | 2.53 | ||||
Forfeited or expired |
(16,712 | ) | $ | 2.69 | ||||
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Unvested - September 30, 2016 |
399,572 | $ | 2.67 | |||||
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Expected to vest - September 30, 2016 |
381,673 | $ | 2.64 | |||||
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11. | Subsequent Events |
Subsequent to September 30, 2016, the Company and certain of its subsidiaries, together with its lender, Silicon Valley Bank, amended the Company’s Loan and Security Agreement (the “Agreement”) to modify the financial covenants the Company must meet under the Agreement and the interest rate structure under the Agreement. Provided that the company’s liquidity coverage ratio (the ratio of cash plus eligible accounts receivable to borrowings under the Agreement) exceeds 2.75, borrowings bear interest at an annual rate of either 1.00% above the “prime rate” as published in The Wall Street Journal or LIBOR for the relevant period plus 3.50%, at the Company’s option. In the event that the liquidity coverage ratio is 2.75 or below, borrowings under the Agreement bear interest at an annual rate of 1.50% above the prime rate or 4.00% above LIBOR, at the Company’s option.
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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, 2015 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, 2015.
Accounting Estimates —
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from estimated amounts.
Concentrations of Risk —
As of September 30, 2016 and December 31, 2015, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable as follows:
Accounts Receivable | ||||||||
September 30, 2016 |
December 31, 2015 |
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13 | % | 14 | % |
For the three and nine months ended September 30, 2016 and 2015, the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows:
Revenue | ||||||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
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10 | % | 28 | % | 14 | % | 31 | % |
For the three and nine months ended September 30, 2016 and 2015, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue. The costs represent revenue share paid to customers for their supply of Internet traffic on the Company’s start experiences:
Cost of Revenue | ||||||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
Customer A |
22 | % | 29 | % | 26 | % | 28 | % | ||||||||
Customer B |
Less than 10 | % | 10 | % | 10 | % | 10 | % | ||||||||
Customer C |
Less than 10 | % | 10 | % | Less than 10 | % | 10 | % |
Recent Accounting Pronouncements —
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09 (ASU 2014-09) Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, providing additional guidance relating to identifying performance obligations under ASU 2014-09 as well as licensing.
The Company is currently in the process of assessing the financial impact of adopting these ASUs and the methods of adoption. The Company currently recognizes subscription revenue from its’ Email/Collaboration contracts over the life of the contracts (which are typically six months or longer). The Company has tentatively concluded that it is likely that this new guidance will require it to recognize a portion of the revenue from those contracts upon delivery, at the inception of the contracts, which would have the effect of accelerating recognition of revenue on such contracts, and may have a material impact on the Company’s consolidated financial statements. The standard will be effective for the Company beginning January 1, 2018, and adoption as of the original effective date of January 1, 2017 is permitted. The Company anticipates adopting the standard as of its effective date of January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company has not yet determined which transition method it will use.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing a modified retrospective approach. Early adoption is permitted. The Company is in the process of assessing the impact of the adoption of this ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the ASU provides that its different provisions be applied prospectively, retrospectively, or using a modified retrospective method, depending on the provision. The Company is in the process of assessing the impact of the adoption of this ASU on its consolidated financial statements.
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As of September 30, 2016 and December 31, 2015, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable as follows:
Accounts Receivable | ||||||||
September 30, 2016 |
December 31, 2015 |
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13 | % | 14 | % |
For the three and nine months ended September 30, 2016 and 2015, the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows:
Revenue | ||||||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
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10 | % | 28 | % | 14 | % | 31 | % |
For the three and nine months ended September 30, 2016 and 2015, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue. The costs represent revenue share paid to customers for their supply of Internet traffic on the Company’s start experiences:
Cost of Revenue | ||||||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
Customer A |
22 | % | 29 | % | 26 | % | 28 | % | ||||||||
Customer B |
Less than 10 | % | 10 | % | 10 | % | 10 | % | ||||||||
Customer C |
Less than 10 | % | 10 | % | Less than 10 | % | 10 | % |
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Consideration (in thousands):
Cash consideration |
$ | 2,500 | ||
Fair value of indemnification holdback |
500 | |||
Fair value of post-closing working capital adjustment |
67 | |||
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Total consideration |
$ | 3,067 | ||
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Purchase price allocation (in thousands):
Assets acquired: |
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Accounts receivable |
$ | 965 | ||
Property and equipment |
96 | |||
Customer and publisher relationships |
1,380 | |||
Technology |
730 | |||
Goodwill |
751 | |||
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Total assets acquired |
3,922 | |||
Liabilities assumed: |
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Accounts payable and accrued expenses |
855 | |||
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Net assets acquired |
$ | 3,067 | ||
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Set forth below is the unaudited pro forma consolidated results of operations of the Company and Zimbra for the three and nine months ended September 30, 2015 as if the Acquisition had occurred on January 1, 2015 (in thousands, except per share amounts):
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2015 | 2015 | |||||||
Revenue |
$ | 32,434 | $ | 97,066 | ||||
Operating income (loss) |
8 | $ | (3,911 | ) | ||||
Net loss |
(276 | ) | $ | (3,698 | ) | |||
Net loss per share (basic and diluted) |
$ | (0.01 | ) | $ | (0.12 | ) |
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The change in goodwill is as follows for nine months ended September 30, 2016 (in thousands):
Nine Months Ended | ||||
September 30, 2016 | ||||
Balance – beginning of period |
$ | 15,187 | ||
Acquisition of Technorati |
751 | |||
Effect of foreign currency translation |
11 | |||
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Balance – end of period |
$ | 15,949 | ||
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Intangible assets, net consisted of the following (in thousands):
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Customer and publisher relationships |
$ | 14,780 | $ | 13,400 | ||||
Technology |
2,330 | 1,600 | ||||||
Trademark |
300 | 300 | ||||||
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17,410 | 15,300 | |||||||
Less accumulated amortization |
(2,034 | ) | (502 | ) | ||||
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Intangible assets, net |
$ | 15,376 | $ | 14,798 | ||||
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Property and equipment, net consisted of the following (in thousands):
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Computer equipment (1) |
$ | 23,542 | $ | 23,324 | ||||
Computer software |
18,916 | 14,813 | ||||||
Furniture and fixtures |
2,001 | 1,945 | ||||||
Leasehold improvements |
1,405 | 1,532 | ||||||
Other |
252 | 252 | ||||||
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46,116 | 41,866 | |||||||
Less accumulated depreciation (2) |
(31,301 | ) | (27,489 | ) | ||||
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Property and equipment, net |
$ | 14,815 | $ | 14,377 | ||||
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Notes:
(1) | Includes equipment and software held under capital leases of $5.1 million and $4.1 million as of September 30, 2016 and December 31, 2015, respectively. |
(2) | Includes $3.0 million and $1.8 million of accumulated depreciation of equipment under capital leases as of September 30, 2016 and December 31, 2015, respectively. |
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Accrued expenses and other current liabilities consisted of the following (in thousands):
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Accrued compensation |
$ | 6,167 | $ | 6,112 | ||||
Accrued content fees |
2,942 | 1,964 | ||||||
Contingent consideration |
1,510 | — | ||||||
Accrued business acquisition consideration |
567 | — | ||||||
Other |
2,079 | 1,689 | ||||||
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Total |
$ | 13,265 | $ | 9,765 | ||||
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The following tables set forth revenue and long-lived tangible assets by geographic area (in thousands):
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenue: |
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United States |
$ | 27,169 | $ | 25,556 | $ | 79,787 | $ | 76,623 | ||||||||
International |
4,552 | 795 | 12,670 | 1,174 | ||||||||||||
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Total revenue |
$ | 31,721 | $ | 26,351 | $ | 92,457 | $ | 77,797 | ||||||||
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September 30, | December 31, | |||||||||||||||
2016 | 2015 | |||||||||||||||
Long-lived tangible assets: |
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United States |
$ | 13,842 | $ | 12,909 | ||||||||||||
Canada |
627 | 726 | ||||||||||||||
Other international |
346 | 742 | ||||||||||||||
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Total long-lived tangible assets |
$ | 14,815 | $ | 14,377 | ||||||||||||
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Contract commitments as of September 30, 2016 are summarized as follows (in thousands):
Year ending December 31, |
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2016 (remaining three months) |
$ | 1,050 | ||
2017 |
2,080 | |||
2018 |
720 | |||
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Total |
$ | 3,850 | ||
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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 September 30, |
Nine Months Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
Technology and development |
$ | 238 | $ | 224 | $ | 681 | $ | 694 | ||||||||
Sales and marketing |
173 | 231 | 604 | 716 | ||||||||||||
General and administrative |
269 | 355 | 819 | 942 | ||||||||||||
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Total stock-based compensation expense |
$ | 680 | $ | 810 | $ | 2,104 | $ | 2,352 | ||||||||
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Stock Option Activity – A summary of the stock option activity for the nine months ended September 30, 2016 is presented below:
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value (in thousands) |
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Outstanding at January 1, 2016 |
8,695,918 | $ | 2.57 | |||||||||||||
Granted |
1,503,500 | $ | 2.20 | |||||||||||||
Exercised |
(382,781 | ) | $ | 2.25 | ||||||||||||
Forfeited or expired |
(551,438 | ) | $ | 2.01 | ||||||||||||
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Outstanding at September 30, 2016 |
9,265,199 | $ | 2.55 | 6.76 | $ | 5,913 | ||||||||||
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Vested and expected to vest at September 30, 2016 |
8,862,505 | $ | 2.57 | 6.76 | $ | 5,590 | ||||||||||
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Vested and exercisable at September 30, 2016 |
4,804,258 | $ | 2.98 | 4.96 | $ | 2,178 | ||||||||||
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A summary of RSU activity for the nine months ended September 30, 2016 is presented below:
Number of Shares |
Weighted Average Fair Value |
|||||||
Unvested - January 1, 2016 |
437,595 | $ | 2.31 | |||||
Shares granted |
139,500 | $ | 3.63 | |||||
Shares vested |
(160,811 | ) | $ | 2.53 | ||||
Forfeited or expired |
(16,712 | ) | $ | 2.69 | ||||
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Unvested - September 30, 2016 |
399,572 | $ | 2.67 | |||||
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Expected to vest - September 30, 2016 |
381,673 | $ | 2.64 | |||||
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