Care.com Inc - FORM 8-K/A - EX-99.2 - EXHIBIT

Attached files

file	filename
8-K/A - 8-K/A - Care.com Inc	citruslane8-k.htm
EX-99.3 - EXHIBIT - Care.com Inc	q3fy148kcitruslaneexh993pr.htm
EX-23.1 - CONSENT OF INDEPENDENT AUDITOR - Care.com Inc	q3fy14citruslaneexh231cons.htm
EX-99.1 - EXHIBIT - Care.com Inc	q3fy148kcitruslaneexh991fs.htm

Citrus Lane, Inc. Exhibit 99.2

Financial Statements

Period Ended June 30, 2014



Contents

Financial Statements (unaudited)

Condensed Balance Sheets as of June 30, 2014 and December 31, 2013		1

Condensed Statements of Operations for the Six Months Ended June 30, 2014 and 2013		2

Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013		3

Notes to Financial Statements as of and for the Six Months Ended June 30, 2014 and 2013		4

Citrus Lane, Inc.

Unaudited Condensed Balance Sheets

(In thousands except share and par value amounts)



		June 30, 2014			December 31, 2013
Assets
Current assets:
	Cash and cash equivalents	$	2,629		$	2,922
	Accounts receivable		54			47
	Inventory		1,636			1,735
	Prepaid expenses and other current assets		517			197
	Total current assets		4,836			4,901
Property and equipment, net			40			53
Other non-current assets			29			37
	Total assets	$	4,905		$	4,991

Liabilities and stockholders' (deficit) equity
Current liabilities:
	Note payable	$	924		$	680
	Accounts payable		1,903			746
	Accrued expenses and other current liabilities		616			209
	Deferred revenue		1,615			1,139
	Total current liabilities		5,058			2,774
Note payable, net of current portion			1,323			902
Other non-current liabilities			88			41
	Total liabilities		6,469			3,717

Commitment and contingencies (Note 8)

Stockholders' (deficit) equity			—			—
	Series seed convertible preferred stock, $.0001 par value:
	2,608,693 shares authorized, issued and outstanding
	at June 30, 2014 and December 31, 2013, respectively		1,491			1,491
	Series A convertible preferred stock, $.0001 par value:
	3,853,417 shares authorized, issued and outstanding
	at June 30, 2014 and December 31, 2013, respectively		5,035			5,035
	Series A-1 convertible preferred stock, $.0001 par value: 2,000,000
	shares authorized; 1,913,497 shares issued and outstanding
	at June 30, 2014 and December 31, 2013, respectively		3,132			3,132
	Common stock, $.0001 par value: 20,000,000 shares authorized;
	5,968,358 and 5,911,379 shares issued and outstanding
	at June 30, 2014 and December 31, 2013, respectively		1			1
	Additional paid-in capital		384			218
	Accumulated deficit		(11,607	)		(8,603	)
	Total stockholders' (deficit) equity		(1,564	)		1,274
	Total liabilities and stockholders' (deficit) equity	$	4,905		$	4,991

See accompanying notes to the financial statements.

Citrus Lane, Inc.

Unaudited Condensed Statements of Operations

(In thousands)



	Six Months Ended
	June 30, 2014			June 30, 2013

Revenue	$	5,015		$	1,881
Cost of revenue		5,017			1,806
Operating expenses:
Selling and marketing		1,855			881
Research and development		457			675
General and administrative		564			388
Depreciation and amortization		15			14
Total operating expenses		2,891			1,958

Operating loss		(2,893	)		(1,883	)

Other expense
Interest expense		(64	)		(18	)
Other expense, net		(47	)		(14	)
Net loss	$	(3,004	)	$	(1,915	)

See accompanying notes to the financial statements.

Citrus Lane, Inc.

Unaudited Condensed Statements of Cash Flows

(In thousands)



	Six months ended
	June 30, 2014			June 30, 2013

Cash flow from operating activities
Net loss	$	(3,004	)	$	(1,915	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		15			14
Amortization of debt issuance costs		14			5
Compensation recognized under stock option plan		86			51
Change in fair value of warrants		47			13
Changes in operating assets and liabilities:
Accounts receivable		(7	)		84
Inventory		99			(342	)
Prepaid expenses and other current assets		(321	)		(128	)
Other non-current assets		7			(3	)
Accounts payable		1,157			278
Accrued expenses and other current liabilities		408			87
Deferred revenue		476			152
Net cash used in operating activities		(1,023	)		(1,704	)

Cash flow from investing activities
Purchases of property and equipment		(1	)		(9	)
Net cash used in investing activities		(1	)		(9	)

Cash flow from financing activities
Proceeds from issuance of secured notes payable		1,000			861
Payments of secured notes payable		(335	)		—
Proceeds from issuance of convertible preferred stock		—			3,132
Proceeds from exercise of stock options		66			3
Net cash provided by financing activities		731			3,996

Net (decrease) increase in cash and cash equivalents		(293	)		2,283
Cash and cash equivalents, beginning of period		2,922			2,743
Cash and cash equivalents, end of period	$	2,629		$	5,026

Supplemental Disclosure of Cash and non-cash activities
Cash paid for interest	$	50		$	13
Issuance of warrants with secured notes payable	$	13		$	28

See accompanying notes to the financial statements.

Citrus Lane, Inc.

Notes to the Unaudited Condensed Financial Statements

As of and for the Period Ended June 30, 2014

1. Nature of Business and Basis of Presentation

Nature of Business

Citrus Lane, Inc. (the Company) is a social e-commerce platform focused on children's merchandise that generates revenue through the sale of subscriptions and other e-commerce products to customers in the United States. The Company was formed in 2011 as a C corporation under Delaware law and is headquartered in Mountain View, California.

On July 17, 2014, the Company was acquired by Care.com, Inc. (See Note 9)

Basis of Presentation

The Company has prepared the accompanying unaudited condensed financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements and should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2013. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

In the opinion of management, the Company has prepared the accompanying unaudited condensed financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2014.

Certain Significant Risks and Uncertainties

We operate in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, we believe that changes in any of the following areas could have a significant negative effect on us in terms of our future financial position, results of operations or cash flows: rates of revenue growth; scaling and adaptation of existing technology and network infrastructure; competition in our market; management of our growth; acquisitions and investments; qualified employees and key personnel; protection of our brand and intellectual property; protection of customers’ information and privacy concerns; and security measures related to our website, among other things.

2. Summary of Significant Accounting Policies

The accompanying financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the financial statements.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities, at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to revenue allowances, the valuation of common and preferred stock and warrants to purchase preferred stock, the determination of the fair value of stock-based awards, and the recoverability of the Company’s net deferred tax assets and related valuation allowance. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, when these carrying values are not readily available from other sources. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from the estimates.

Revenue Recognition

The Company generates revenue through sales of merchandise intended for children aged from newborns through age five. The majority of sales are through the sale of subscription discovery boxes (“subscription sales”), whereby customers prepay to receive monthly shipments of a box containing children’s merchandise. The subscriptions offered to our customers are for one, three, six or twelve month terms. The contents of the boxes are changed each month and include four to five different products such as toys, books, snacks and household products. The Company offers different boxes each month that are tailored based on the age and gender of the child.

During 2013 the Company also began selling individual products on an a-la-carte basis through its “add-to-box” and e-commerce shop offerings. “Add-to-box” sales are extra items that customers can add to their subscription box and are shipped with the box. However, while only subscription customers are eligible to make “add-to-box” purchases and the “add-to-box” products are shipped with the subscription discovery boxes, they are nonetheless purchased by the customer separately from the subscription sale. The e-commerce shop offerings are also sold separately from subscription sales.

The Company also generates limited amounts of revenue from vendors that pay the Company to include advertising inserts in the subscription boxes.

The Company recognizes revenue when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. For product sales, these criteria are met when the customer orders an item through the Company’s website via the electronic shopping cart, funds are collected from the customer and the item is shipped to the customer. The Company’s subscription sales are considered to qualify for the proportional performance model, whereby revenue is recognized on a pro rata basis as the boxes are shipped over the term of the subscription. The Company recognizes revenue from advertising inserts when the boxes that include the inserts have been shipped.

To encourage customers to purchase the Company’s products, the Company periodically provides incentive offers. Generally, these promotions include dollar-off and percentage-off discounts to be applied against current purchases. The Company records such discounts as a reduction of the sales price of the related transaction. The Company also grants merchandise credits to participants in the Company’s referral program when the customer referral results in a sale, whereby both the existing customer making the referral and the new customer receive a credit. The Company records these merchandise credits as a reduction of revenue at the time revenue is recognized related to the current purchase triggering the referral credits, with the amount recorded for the credit issued to the existing customer being based on estimated future redemption rates.

Gift cards and online marketplace vouchers are recorded as deferred revenue. The Company recognizes revenue for such gift cards and online marketplace vouchers when redeemed by a customer and the product is shipped. As the gift cards and online marketplace vouchers do not expire, the Company indefinitely records the full value of the unredeemed gift cards and online marketplace vouchers as deferred revenue until redeemed.

Subscription sales are not eligible for return. Individual product sales are eligible for return within thirty days of receipt for merchandise credits, less a return fee to cover shipping and re-stocking costs. In these instances, the Company has established a sales return reserve based on the Company’s historical experience. To date, these reserves have not been significant.

The Company has procedures in place to detect and prevent credit card fraud as the Company has exposure to losses from fraudulent charges. Due to the insignificant losses related to chargebacks, the Company records such losses as incurred.

Shipping and handling charges are included in revenue on a gross basis. Taxes that are collected from customers and remitted to government authorities are presented on a net basis and are excluded from revenue.

Cash and Cash Equivalents

We consider highly liquid investments purchased with an original maturity of 90 days or less at the time of purchase to be cash equivalents. As of June 30, 2014 and December 31, 2013, we did not have any cash equivalents.

Accounts Receivable

The majority of sales are conducted with credit cards and accounts receivable are composed primarily of amounts due from financial institutions related to those credit card sales as well as amounts due from companies that sell our product through online marketplace vouchers. The Company does not maintain an allowance for doubtful accounts as payment is typically received within a few business days after the sale.

Inventories

The Company’s inventories, which consist primarily of children’s toys, apparel and gear, are stated at the lower of cost or market and valued on a first in, first out (FIFO) basis. Inventory costs primarily consist of product costs from suppliers, as well as inbound shipping and handling fees. The majority of the Company’s inventories are not purchased until the Company receives a customer order related to either subscription or individual product sales and is subsequently relieved from inventories when it is delivered to the customer.

Merchandise Deposits

Merchandise deposits represent advance payments to vendors for products for which the Company

has placed a purchase order but does not have title to the inventory.

Property and Equipment

Property and equipment are stated at cost, and are depreciated or amortized using the straight-line method over the estimated useful life of the assets, as follows:



Asset Description		Estimated Useful Life
Computer equipment and software		3 years
Leasehold improvements		Lesser of asset life or lease term
Furniture and fixtures		3 years

Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment.

Deferred Revenue

Deferred revenue primarily consists of payments received in advance of revenue recognition of the product sales described above, and is recognized when the revenue recognition criteria are met. Our customers pay for most product sales in advance, including subscription sales which are typically fully paid in advance regardless of the length of the subscription term. All deferred revenue amounts are expected to be recognized within the twelve months following the balance sheet dates, and accordingly are classified within current liabilities in the accompanying balance sheets.

Stock-Based Compensation

The Company accounts for its stock-based compensation awards in accordance with ASC 718, Compensation—Stock Compensation (ASC 718). ASC 718 requires all stock-based payment arrangements to be recognized in the statements of operations and comprehensive income (loss) based on their estimated fair values. The Company accounts for stock-based payment arrangements with non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees (ASC 505-50), which requires the estimated fair value of the awards to be remeasured at fair value until either a performance commitment is reached or counterparty performance is complete. The Company’s stock-based payment arrangements are comprised solely of options to purchase shares of the Company’s common stock.

The Company estimates the fair value of options to purchase shares of the Company’s common stock using the Black-Scholes-Merton option pricing model. The Black-Scholes-Merton option pricing model requires the input of certain subjective assumptions, including: (i) the estimated fair value of the Company’s common stock, (ii) the expected term of the award, (iii) the expected stock price volatility, (iv) the risk-free interest rate, and (v) the expected dividend rate. In the absence of a public trading market for the Company’s common stock, on each grant date, the Company developed an estimate of the fair value of its common stock in order to determine an exercise price for the option grants. The Company utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to estimate the fair value of its common stock. The assumptions used in the valuation models were based on future expectations combined with management’s judgment. The Company’s Board of Directors determined the estimated fair value of the Company’s common stock underlying its stock-based payment arrangements, with input from management, based on a number of objective and subjective factors, including external market conditions affecting the industry sector, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to the Company’s common stock at the time and the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company. The Company granted options to purchase shares of its common stock at exercise prices not less than the estimated fair value of its common stock as determined by the Board of Directors contemporaneously at the date such grants were made.

The Company uses the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term for options granted to employees as it does not have sufficient historical data to provide a reasonable basis upon which to estimate the expected term. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. For options granted to non-employees, the Company utilizes the contractual term of the arrangement as the basis for the expected term assumption. Due to the lack of a public market for the trading of the Company’s common stock and a lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including stage of product development and nature of industry focus. The Company believes the group selected has sufficiently similar economic and industry characteristics, and includes companies that are most representative of the Company. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock, which is similar to the Company’s peer group.

The Company is also required to estimate forfeitures at the time of grant, and revise those estimates in the subsequent periods if actual forfeitures differ from its estimates. The Company uses historical data to estimate pre-vesting forfeitures and records stock-based compensation expense only for those awards that are expected to vest. To the extent that actual forfeitures differ from the Company’s estimates, the difference is recorded as a cumulative adjustment in the period the estimates were revised. Stock-based compensation expense recognized in the financial statements is based on awards that are ultimately expected to vest. No compensation cost is recorded for options that do not vest.

The Company’s stock-based payment arrangements are exclusively subject to service based vesting conditions. Compensation expense related to awards to employees with service based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting term. Consistent with the guidance in ASC 505-50, compensation expense related to awards to non-employees with service based vesting conditions is recognized on a straight-line basis based on the then-current estimated fair value at each financial reporting date prior to the measurement date over the associated service period of the award, which is generally the vesting term.

Certain of the Company’s option awards provide the holder the right to exercise prior to the award becoming vested. The early exercise of a stock option is not considered to be a substantive exercise for accounting purposes. Therefore, the payment received by the Company for the exercise price is classified as a liability that is amortized into additional paid-in capital as the associated awards vest. Upon the employee's termination, the Company has a right to repurchase the shares pertaining to the unvested portion of the award at the original purchase price per share.

Warrants to Purchase Contingently Redeemable Securities

The Company has issued warrants to purchase shares of the Company’s series A and series A-1 convertible preferred stock. The Company accounts for warrant instruments that either conditionally or unconditionally obligate the issuer to transfer assets as liabilities regardless of the timing of the redemption feature or price, even though the underlying shares may be classified as permanent or temporary equity. In the case of the warrants to purchase series A convertible preferred stock, there were no authorized and unissued shares of series A convertible preferred stock available at the time the warrants were issued to allow for settlement in stock upon exercise, and as a result the warrants to purchase series A convertible preferred stock have been accounted for as a liability. The liability is remeasured at each balance sheet date with changes to fair value being recognized as a component of other income (expense) in the statement of operations. The Company will continue to remeasure the fair value of the liability for warrants to purchase contingently redeemable securities at the end of each reporting period until the earlier of the exercise or expiration of the applicable warrants or until such time as there is a sufficient number of authorized and unissued shares of the underlying convertible preferred stock. The Company subsequently authorized additional shares of series A convertible preferred stock in July 2014 to allow the warrants to be exercised.

Income Taxes

We account for income taxes in accordance with ASC 740, Income Taxes. ASC 740 is an asset and liability approach that requires recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax basis, and for operating loss and tax credit carryforwards. ASC 740 requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such position are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. At June 30, 2014 and December 31, 2013 we did not have any uncertain tax positions.

Concentrations of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and accounts receivable. We place our cash with a major financial institution in the United States that management assesses to be of high-credit quality in order to limit exposure. The credit risk for our accounts receivable is mitigated by a relatively short collection period and the creditworthiness of the financial institutions. We perform on-going credit evaluations of the financial institutions and monitor the requirement for an allowance for potential credit losses. We have not historically experienced significant credit losses. We have determined that an allowance for potential credit losses is not required at either June 30, 2014 or December 31, 2013.

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:


•	Level 1 inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or 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 (such as interest rates, volatilities, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by market data by correlation or other means.


•	Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Recurring Fair Value Measurements

The Series A preferred stock warrants are measured at fair value on a recurring basis. The fair value of the warrants was determined using the Black-Scholes option-pricing model and the Company has not changed the manner in which it values the fair value of this liability using Level 3 inputs. As of June 30, 2014 and December 31, 2013 the fair value of this liability was approximately $87,000 and $41,000, respectively and are classified within other non-current liabilities in the accompanying balance sheets. During the period ended June 30, 2014 and 2013, the change in fair value of the warrants amounted to approximately $47,000 and $13,000, respectively. Refer to Note 5 for the discussion of the methodology used to measure the fair value of the preferred stock warrants. The Company has no other assets or liabilities that are subject to recurring fair value measurements.

Non-Recurring Fair Value Measurements

We remeasure the fair value of certain assets and liabilities upon the occurrence of certain events. Such assets are comprised of long-lived assets, including property and equipment and intangible assets. No remeasurement of such assets occurred at June 30, 2014 and December 31, 2013. Other financial instruments not measured or recorded at fair value in the accompanying balance sheets principally consist of accounts receivable, accounts payable, and accrued liabilities. The estimated fair values of these instruments approximate their carrying values due to their short-term nature. The Company measures the fair value of preferred stock warrants that are treated as equity at the time of issuance. Refer to Note 5 for the discussion of the methodology used to measure the fair value of the preferred stock warrants.

3. Supplemental Balance Sheet Information

Prepaid expenses and other current assets consisted of the following (in thousands):



	June 30, 2014		December 31, 2013
Merchandise deposit	$	389	$	112
Prepaid expenses		69		51
Other current assets		59		34
	$	517	$	197

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



	June 30, 2014			December 31, 2013
Computer equipment	$	86		$	85
Leasehold improvements		10			10
Funiture and fixtures		4			4
		100			99
Less: accumulated depreciation		(60	)		(46	)
Property and equipment, net	$	40		$	53

4. Debt

Secured Notes Payable

On January 13, 2013, the Company entered into a loan and security agreement (“Loan Agreement”) with a lender to borrow up to $1,750,000 through September 30, 2013, and made borrowings under the Loan Agreement of $875,000 in February 2013 and an additional $875,000 in September 2013. The $1,750,000 borrowed under the original Loan Agreement bears interest at 5.25% and the repayment schedule involves monthly interest-only payments through September 2013 and then thirty monthly installment payments of principle and interest commencing in October 2013.

On December 31, 2013, the Company and the lender entered into an amendment to the Loan Agreement which provided additional borrowings of up to $1,000,000 through October 31, 2014. The Company borrowed the additional $1,000,000 in March 2014. Borrowings under the amended Loan Agreement bear interest at 5.0% and the repayment schedule involves monthly interest-only payments through October 2014 and then thirty monthly installment payments of principle and interest commencing in November 2014. The amount outstanding under the Loan Agreement as of June 30, 2014 and December 31, 2013 was approximately $2,247,000 and $1,582,000, respectively. The Company paid the entire amount outstanding on the note payable in July 2014, in connection with the acquisition by Care.com.

In January 2013, in connection with Loan Agreement, the Company issued a fully vested warrant to purchase 45,559 shares of the Company’s Series A preferred stock. The fair value of the warrants at issuance, in the aggregate amount of approximately $28,000, was recorded as a debt issuance cost and is being amortized as additional interest expense over the term of the notes. The Company recognized approximately $7,000 and $2,000 of additional interest expense for the periods ended June 30, 2014 and 2013, respectively, associated with this Series A preferred stock warrant. Also on December 31, 2013, the Company issued a warrant to purchase shares of the Company’s Series A-1 preferred stock in connection with the amendment of the Loan Agreement. The first tranche included warrants to purchase 12,859 shares that were fully vested upon issuance of the amendment to the Loan Agreement and the second tranche included a warrant to purchase another 12,859 shares which were issued and fully vested upon the funding date of the amended Loan Agreement (March 2014). The fair value of the first and second tranche of warrants was approximately $13,000 and $13,000, respectively, and are recorded as a debt issuance cost which will be amortized as additional interest expense over the term of the notes. The Company recognized approximately $3,000 additional interest expense for the period ended June 30, 2014 associated with this Series A-1 preferred stock warrant.

At June 30, 2014, the future principal payments under the Loan Agreement are summarized below (in thousands):



Fiscal year
	2014 (remainder)	$	411
	2015		1,104
	2016		591
	2017		141
Total		$	2,247

5. Stockholders’ Equity

Convertible Preferred Stock

As of June 30, 2014, the authorized capital stock of the Company included 8,462,110 shares of preferred stock, par value $0.0001 per share, of which: (i) 2,608,693 shares have been designated as Series Seed convertible preferred stock (“Series Seed Preferred Stock”), (ii) 3,853,417 shares have been designated as Series A convertible preferred stock (“Series A Preferred Stock”), and (iii) 2,000,000 shares have been designated as Series A-1 Preferred Stock, and all collectively “Preferred Stock.” On June 18, 2013, the Company issued a total of 1,913,497 shares of Series A-1 Preferred Stock at a purchase price per share of $1.6462. In connection with the issuance of Series A-1 Preferred Stock, the rights, preferences, and privileges for all classes of preferred stock then-existing were modified, as follows:

Voting

The holders of shares of preferred stock are entitled to vote, together with the holders of common stock as a single class, on all matters submitted for vote to the stockholders of the Company. The holders of shares of preferred stock are entitled to the number of votes equal to the number of shares of common stock into which the shares of the applicable series of preferred stock held by such holder are convertible at the time of such vote.

Dividends

The holders of shares of preferred stock are entitled to receive dividends prior and in preference to any common stock dividends at the applicable dividend rate, when and if declared by the board of directors. Such dividends are not cumulative. The dividend rates are $0.046 per annum for Series Seed Preferred Stock, $0.1059 per annum for Series A Preferred Stock, and $0.1317 per annum for Series A-1 Preferred Stock, subject to adjustment, as defined. After payment of such dividends, any additional dividends or distributions shall be distributed among all holders of Common Stock and Preferred Stock in proportion to the number of shares of common stock held under an assumed conversion of Preferred Stock. As of June 30, 2014, no dividends have been declared or paid since the Company’s inception.

Liquidation

In the event of any Liquidation Event, as defined, either voluntary or involuntary, the holders of the preferred stock are entitled to receive, prior and in preference to any distribution of the proceeds of such Liquidation Event (the “Proceeds”) to the holders of common stock, an amount per share equal to the greater of (i) the sum of the applicable Original Issue Price, as defined, for such series of preferred stock, plus declared but unpaid dividends on such share or (ii) such amount per share as would have been payable had each such share of preferred stock been converted into common stock immediately prior to the Liquidation Event. If upon the occurrence of such event the Proceeds are insufficient to permit the payment to such holders of the full preferential amounts, then the Proceeds shall be distributed ratably to holders of the Preferred Stock in proportion to the full preferential amounts. The applicable Original Issue Price is $0.575 for Series Seed Preferred Stock, $1.3235 for Series A Preferred Stock and $1.6462 for Series A-1 Preferred Stock.

After the payment of all preferential amounts required to be paid to the holders of preferred stock, the holders of shares of common stock then outstanding shall be entitled to receive the remaining assets of the Company available for distribution.

Each of the following events shall be considered a Liquidation Event unless the holders of at least a majority of preferred stock elect otherwise:


•	The sale, transfer, exclusive license or other disposition of all or substantially all the assets or intellectual property of the Company.


•	A merger or consolidation of the Company with or into another entity, except one in which the holders of capital stock of the Company immediately prior to such merger or consolidation continue to hold at least 50% of the voting power of the capital stock of the Company or the surviving or acquiring entity.


•	The transfer to a person or group of affiliated persons of the Company’s securities if, after such closing, such person or group of affiliated persons would hold 50% or more of the outstanding voting stock of the Company.


•	A liquidation, dissolution or winding up of the Company.

Conversion

Voluntary Conversion

Each share of preferred stock is convertible at any time at the option of the holder into such number of shares of common stock as is determined by dividing the applicable Original Issue Price for such series by the applicable Conversion Price for such series (the “Conversion Rate”). The initial Conversion Price per share for each series of preferred stock shall be the Original Issue Price applicable to such series, subject to adjustment.

The Conversion Price of the preferred stock is subject to adjustment as follows:


•	The Company issues additional shares of common stock for consideration less than the Conversion Price applicable to a series of preferred stock in effect at that time.


•	Any split, subdivision or combination of the outstanding common stock. The preferred stock Conversion Price shall be adjusted to reflect a proportionate number of shares to be received upon conversion.


•	Any dividend or distribution to the holders of common stock payable in additional shares of common stock. The preferred stock Conversion Price shall be adjusted to reflect a proportionate number of shares to be received upon conversion.

No adjustment in the applicable Conversion Price shall be made as the result of issuance of additional shares of common stock if (a) the consideration per share is equal to or greater than the Conversion Price in effect immediately prior to the issuance or (b) the common stock is issued with the unanimous approval of the Board of Directors.

As of June 30, 2014, the conversion rate is 1:1, but is subject to adjustment in the future as described herein.

Mandatory Conversion

Each share of preferred stock shall automatically be converted into common stock at the Conversion Rate in effect at the time of conversion, upon the earlier of:


A.	the closing of the sale of common stock to the public in an IPO pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, resulting in at least $25 million of gross proceeds (a “Qualified Public Offering”), or


B.	a date specified by the vote of holders of a majority of the preferred stock then outstanding.

Redemption

The preferred stock is not redeemable at the option of the holder thereof.

The Company evaluated each series of its preferred stock and determined that each individual series is considered an equity host under ASC Topic 815, Derivatives and Hedging. In making this determination, the Company’s analysis followed the whole instrument approach which compares an individual feature against the entire preferred stock instrument which includes that feature. The Company’s analysis was based on a consideration of the economic characteristics and risks of each series of preferred stock. More specifically, the Company evaluated all of the stated and implied substantive terms and features, including: (i) the existence and nature of any redemption features, (ii) whether the holders of preferred stock were entitled to dividends, (iii) the voting rights of the preferred stock and (iv) the existence and nature of any conversion rights. As a result of the Company’s conclusion that the preferred stock represents an equity host, the conversion feature of all series of preferred stock is considered to be clearly and closely related to the associated preferred stock host instrument. Accordingly, the conversion feature of all series of preferred stock is not considered an embedded derivative that requires bifurcation.

The Company accounts for potentially beneficial conversion features under ASC Topic 470-20, Debt with Conversion and Other Options. At the time of each of the issuances of convertible preferred stock, the Company’s common stock into which each series of the Company’s preferred stock is convertible had an estimated fair value less than the effective conversion prices of the convertible preferred stock. Therefore, there was no beneficial conversion feature on the respective issuance dates.

Convertible Preferred Stock Warrants

Below is a summary of warrants outstanding as of June 30, 2014 and December 31, 2013:



	June 30, 2014	December 31, 2013
	June 30, 2014	December 31, 2013
Series A Preferred Stock Warrants	45,559	45,559
Series A-1 Preferred Stock Warrants	25,718	12,859
	71,277	58,418

In January 2013, the Company issued a fully vested warrant to purchase 45,559 shares of the Company’s Series A preferred stock in connection with the Loan Agreement. Also in December 2013, the Company issued a warrant to purchase shares of the Company’s Series A-1 preferred stock in connection with the amendment of the Loan Agreement. The number of shares were issued in two tranches based on 1) .075% of the Company’s outstanding capital stock on a fully diluted basis as of the Loan Agreement amendment issuance date plus 2) .075% of the Company’s outstanding capital stock on a fully diluted bases measured on the funding date of the amendment to the Loan Agreement. The first tranche included 12,859 shares that were fully vested upon issuance of the amendment to the Loan Agreement and the second tranche included 12,859 shares which were issued and fully vested upon the funding date of the amended Loan Agreement (March 2014). No warrants have been exercised as of June 30, 2014.

Below is a summary of the terms and accounting treatment for the warrants outstanding at June 30, 2014:



	Shares	Weighted-Average Exercise Price		Balance Sheet Classification
	Shares	Weighted-Average Exercise Price		Balance Sheet Classification
Series A Preferred Stock Warrants	45,559	$	1.32	Liability
Series A-1 Preferred Stock Warrants	25,718	$	1.65	Equity
	71,277	$	1.44

The warrants have contractual expiration dates ranging in 2023. However, the warrants will otherwise terminate if not exercised within two years of a public offering.

The Company determined the fair value of the warrants to purchase preferred stock at the time of issuance and on each re-measurement date based on input from management and the Board of Directors, which utilized an independent valuation of the Company's enterprise value, determined utilizing an analytical valuation model. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities at the time and the likelihood of achieving a liquidity event, such as an initial public offering or a sale of the Company. Additionally, stock price volatility, contractual term of the warrants, risk free interest rates and dividend yield assumptions are also considered in the fair value determination. Any changes in the assumptions used in the valuation could materially affect the financial results of the Company. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement.

The analytical valuation model used was the Black Scholes Model and included the following assumptions:



	June 30, 2014	December 31, 2013
Fair value of underlying instrument	$2.61	$1.40
Expected volatility	53.00%	53.00%
Expected term	8.66 years	9.16 years
Risk-free interest rate	2.35%	2.87%
Expected dividend yield	–%	–%

Common Stock

As of June 30, 2014, the authorized capital stock of the Company included 20,000,000 shares of Common Stock, par value $0.0001 per share. The voting, dividend and liquidation rights of the holders of shares of Common Stock are subject to and qualified by the rights, powers and preferences of the holders of shares of preferred stock. The Common Stock has the following characteristics:

Voting

The holders of shares of Common Stock are entitled to one vote for each share of Common Stock held at all meetings of stockholders and written actions in lieu of meetings.

Dividends

The holders of shares of Common Stock are entitled to receive dividends, if and when declared by the board of directors. Cash dividends may not be declared or paid to holders of shares of common stock until paid on each series of outstanding preferred stock in accordance with their respective terms. As of June 30, 2014, no dividends have been declared or paid since the Company’s inception.

Liquidation

After payment to the holders of shares of preferred stock of their liquidation preferences, the holders of shares of Common Stock are entitled to share ratably in the Company’s assets available for distribution to stockholders, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or upon the occurrence of a deemed liquidation event.

6. Stock-Based Compensation

On March 18, 2011, the Company’s stockholders approved the 2011 Stock Option and Grant Plan (the Plan), as previously adopted by the Company’s Board of Directors on March 17, 2011. The maximum number of shares of common stock initially reserved for issuance under the Plan was 1,656,587, subject to adjustment as set forth in the Plan. On June 1, 2011, the Company’s Board of Directors approved an increase of 626,087 shares to the plan reserve. On March 30, 2012, the Company’s Board of Directors approved an increase of 922,970 shares to the plan reserve. As of June 30, 2014, there is an aggregate of 3,205,644 shares of common stock reserved for issuance under the Plan. For purposes of this limitation, the shares of common stock underlying any awards that are forfeited, canceled, withheld upon exercise of an option or settlement of an award to cover the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of common stock or otherwise terminated other than by exercise, in each case will be added back to the shares of common stock available for issuance under the Plan. The shares available for issuance under the Plan may be authorized but unissued shares of common stock or shares of common stock reacquired by the Company. No award may be granted under the Plan after the tenth anniversary of the date the Plan is adopted by the Board of Directors or the date the Plan is approved by the Company’s security holders, whichever is earlier. As of June 30, 2014, there remained 511,515 shares available for future issuance under the Plan.

The Plan provides for the issuance of incentive and non-qualified stock options, restricted stock awards, restricted stock unit awards and unrestricted stock awards to officers, employees, directors and consultants of the Company. Through June 30, 2014, only options to purchase shares of the Company’s common stock have been issued under the Plan. Options are generally issued with exercise prices of not less than 100% of the fair value of the Company’s common stock on the date of grant. Option grant agreements may permit the exercise of all or a portion of the award immediately at grant prior to vesting; provided that the option shares issued upon such exercise are subject to restrictions and a vesting schedule identical to the vesting schedule of the related stock option. Options exercised prior to vesting are not considered to be substantive exercises for accounting purposes; therefore, the payment received by the Company for the exercise price is recognized as a liability which is amortized into equity over the vesting term. Options granted to employees generally vest over four years, either with 25% vesting upon the one-year anniversary of the date of grant and the remaining 75% vesting monthly over the remaining 36 months or ratably over 48 months from the date of grant. Options granted to non-employees generally vest on a monthly basis over the expected service period to the Company. Options expire ten years from the date of grant. The Company issues new shares to satisfy the exercise of options to purchase shares of the Company’s common stock.

The following table summarizes the effects of stock-based compensation arrangements as recorded in the accompanying statements of operations for the periods presented (in thousands):



	Six Months ended
	June 30, 2014		June 30, 2013

Cost of revenue	$	6	$	4
Research and development		18		23
Selling and marketing		19		22
General and administrative		43		2
	$	86	$	51

The Company recognized stock-based compensation expense of approximately $40,000 and $14,000 during the six months ended June 30, 2014 and 2013, respectively, related to stock-based compensation arrangements with non-employees, and is included in the table above.

7. Income Taxes

For both the six months ended June 30, 2014 and 2013, the Company did not record any income tax expense. The Company’s management has evaluated the positive and negative evidence bearing upon the realizability of its net deferred tax assets. As required by the provisions of ASC 740, Income Taxes, management has determined that it is more likely than not that the Company will not recognize the benefits of federal and state net deferred tax assets for financial reporting purposes. Accordingly, the deferred tax assets have been fully reserved at June 30, 2014 and December 31, 2013.

Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available. There are currently no federal or state audits in progress.

8. Commitments and Contingencies

Leases

On June 30, 2011, we entered into a lease agreement for 6,159 rentable square feet of office space in Mountain View California. The initial term of the facility lease is 24 months commencing on July 11, 2011 and expiring on July 11, 2013. Base rent for the first year is $5,235 month and $5,543 per month for the second year. We are responsible for paying our proportionate share of certain operating expenses related to the facility. On April 5, 2013 we amended the lease agreement to extend the expiration date of the lease to April 30, 2014. The base monthly rent for the extended period is $5,543 per month.

On January 22, 2014, the Company entered into a lease amendment for its existing real estate lease which had an expiration date of April 30, 2014. The lease expiration date was extended to December 31, 2014 and the base monthly rent remained at $5,543 per month through that date. The lease amendment also contained a letter of intent for the parties to further extend the lease for 2015 and 2016. As of September 23, 2014 the Company has not executed an amendment, or entered into a new lease agreement thereby extending the lease.

Legal Matters

From time to time we may be party to litigation arising in the ordinary course of our business. At June 30, 2014, to the best of our knowledge, no material legal proceedings are currently pending or threatened.

9. Subsequent Events

We consider events and transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates, or to identify matters that require additional disclosure. Subsequent events have been evaluated through October 2, 2014, the date these financial statements are considered issued.

On July 17, 2014, the Company was acquired by Care.com, Inc. (Care.com). The purchase price consisted of $22.9 million in cash and 0.4 million shares of Care.com common stock (valued at $4.3 million). In addition, up to $16.4 million in cash and up to an additional 0.1 million additional shares of Care.com common stock (valued at $1.2 million) will be payable if certain milestones are achieved in 2015 and 2016. As part of the transaction, the Company also exchanged both vested and unvested options to purchase the Company's common stock for options to purchase Care.com common stock at an exchange ratio implied by the value of the consideration received by the shareholders of the Company (valued at $3.8 million). Of this value, $5.0 million was placed in an escrow account as a holdback for potential unrecorded liabilities to satisfy indemnification provisions contained in the purchase agreement. The terms of these exchanged unvested options which were assumed by the Company were not modified.

Care.com Inc - FORM 8-K/A - EX-99.2 - EXHIBIT - October 2, 2014

Attached files

Care.com Inc Reports