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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

Commission File Number: 1-33472

 

 

 

TECHTARGET, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

04-3483216

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

275 Grove Street Newton, Massachusetts

02466

(Address of principal executive offices)

(zip code)

 

Registrant’s telephone number, including area code: (617) 431-9200

(Former name, former address and formal fiscal year, if changed since last report): Not applicable

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of April 28, 2017, the registrant had 27,444,296 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

Item

 

 

 

Page

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

 

3

 

 

Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2017 and 2016

 

4

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016

 

5

 

 

Notes to Consolidated Financial Statements

 

6

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

 

Controls and Procedures

 

35

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

36

Item 1A.

 

Risk Factors

 

36

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

Item 3.

 

Defaults upon Senior Securities

 

36

Item 4.

 

Mine Safety Disclosures

 

36

Item 5.

 

Other Information

 

36

Item 6.

 

Exhibits

 

36

 

 

Signatures

 

37

 

 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TECHTARGET, INC.

Consolidated Balance Sheets

Unaudited

(In thousands, except share and per share data)

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,619

 

 

$

18,485

 

Short-term investments

 

 

9,990

 

 

 

10,988

 

Accounts receivable, net of allowance for doubtful accounts of $2,038 and $1,961 as

   of March 31, 2017 and December 31, 2016, respectively

 

 

24,584

 

 

 

22,551

 

Prepaid taxes

 

 

4,020

 

 

 

3,961

 

Prepaid expenses and other current assets

 

 

2,957

 

 

 

1,952

 

Total current assets

 

 

58,170

 

 

 

57,937

 

Property and equipment, net

 

 

9,232

 

 

 

9,232

 

Long-term investments

 

 

5,743

 

 

 

7,801

 

Goodwill

 

 

93,506

 

 

 

93,469

 

Intangible assets, net

 

 

570

 

 

 

601

 

Deferred tax assets

 

 

373

 

 

 

139

 

Other assets

 

 

873

 

 

 

898

 

Total assets

 

$

168,467

 

 

$

170,077

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,442

 

 

$

2,100

 

Current portion of term loan

 

 

7,407

 

 

 

6,157

 

Accrued expenses and other current liabilities

 

 

2,313

 

 

 

2,792

 

Accrued compensation expenses

 

 

793

 

 

 

698

 

Income taxes payable

 

 

54

 

 

 

122

 

Deferred revenue

 

 

6,948

 

 

 

6,079

 

Total current liabilities

 

 

18,957

 

 

 

17,948

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term portion of term loan

 

 

29,809

 

 

 

32,286

 

Deferred rent

 

 

1,981

 

 

 

2,080

 

Deferred tax liabilities

 

 

204

 

 

 

200

 

Total liabilities

 

 

50,951

 

 

 

52,514

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, 5,000,000 shares authorized; no shares issued or outstanding

 

 

 

 

 

 

Common stock, $0.001 par value per share, 100,000,000 shares authorized,

   52,696,641 shares issued and 27,429,749 shares outstanding at March 31, 2017 and

   52,601,284 shares issued and 27,495,539 shares outstanding at December 31, 2016

 

 

53

 

 

 

52

 

Treasury stock, 25,266,892 shares at March 31, 2017 and 25,105,745 shares at

   December 31, 2016, at cost

 

 

(164,105

)

 

 

(162,731

)

Additional paid-in capital

 

 

297,929

 

 

 

296,853

 

Accumulated other comprehensive loss

 

 

(211

)

 

 

(248

)

Accumulated deficit

 

 

(16,150

)

 

 

(16,363

)

Total stockholders’ equity

 

 

117,516

 

 

 

117,563

 

Total liabilities and stockholders’ equity

 

$

168,467

 

 

$

170,077

 

 

See accompanying Notes to Consolidated Financial Statements.

3


 

TechTarget, Inc.

Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

Online

 

$

23,409

 

 

$

24,269

 

Events

 

 

168

 

 

 

762

 

Total revenues

 

 

23,577

 

 

 

25,031

 

Cost of revenues:

 

 

 

 

 

 

 

 

Online(1)

 

 

6,895

 

 

 

6,658

 

Events

 

 

41

 

 

 

535

 

Total cost of revenues

 

 

6,936

 

 

 

7,193

 

Gross profit

 

 

16,641

 

 

 

17,838

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling and marketing(1)

 

 

10,693

 

 

 

11,060

 

Product development(1)

 

 

1,943

 

 

 

2,008

 

General and administrative(1)

 

 

3,056

 

 

 

3,210

 

Depreciation

 

 

1,091

 

 

 

1,020

 

Amortization of intangible assets

 

 

40

 

 

 

302

 

Total operating expenses

 

 

16,823

 

 

 

17,600

 

Operating (loss) income

 

 

(182

)

 

 

238

 

Interest and other income (expense), net

 

 

(163

)

 

 

(58

)

(Loss) income before (benefit from) provision for income taxes

 

 

(345

)

 

 

180

 

(Benefit from) provision for income taxes

 

 

(316

)

 

 

228

 

Net loss

 

$

(29

)

 

$

(48

)

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Unrealized gain on investments (net of tax provision of $2 and $12, respectively)

 

$

15

 

 

$

22

 

Foreign currency translation gains

 

 

22

 

 

 

166

 

Other comprehensive income

 

 

37

 

 

 

188

 

Comprehensive income

 

$

8

 

 

$

140

 

Net loss per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.00

)

 

$

(0.00

)

Diluted

 

$

(0.00

)

 

$

(0.00

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

27,532

 

 

 

32,594

 

Diluted

 

 

27,532

 

 

 

32,594

 

 

(1)

Amounts include stock-based compensation expense as follows:

 

Cost of online revenues

 

$

12

 

 

$

27

 

Selling and marketing

 

 

950

 

 

 

922

 

Product development

 

 

34

 

 

 

36

 

General and administrative

 

 

598

 

 

 

565

 

 

See accompanying Notes to Consolidated Financial Statements.

4


 

TechTarget, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(29

)

 

$

(48

)

Adjustments to reconcile net loss to net cash (used in) provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,131

 

 

 

1,322

 

Provision for bad debt

 

 

205

 

 

 

218

 

Amortization of investment premiums

 

 

77

 

 

 

69

 

Stock-based compensation

 

 

1,594

 

 

 

1,550

 

Amortization of debt issuance costs

 

 

23

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,237

)

 

 

230

 

Prepaid taxes, prepaid expenses and other current assets

 

 

(995

)

 

 

(912

)

Other assets

 

 

31

 

 

 

50

 

Accounts payable

 

 

(658

)

 

 

262

 

Income taxes payable

 

 

(129

)

 

 

(390

)

Accrued expenses and other current liabilities

 

 

(486

)

 

 

(637

)

Accrued compensation expenses

 

 

91

 

 

 

59

 

Deferred revenue

 

 

870

 

 

 

696

 

Other liabilities

 

 

(99

)

 

 

(100

)

Net cash (used in) provided by operating activities

 

 

(611

)

 

 

2,369

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment, and other capitalized assets

 

 

(1,088

)

 

 

(1,147

)

Purchases of investments

 

 

(500

)

 

 

 

Proceeds from sales and maturities of investments

 

 

3,500

 

 

 

 

Net cash provided by (used in) investing activities

 

 

1,912

 

 

 

(1,147

)

Financing activities:

 

 

 

 

 

 

 

 

Tax withholdings related to net share settlements

 

 

(580

)

 

 

(710

)

Purchase of treasury shares and related costs

 

 

(1,374

)

 

 

 

Payment of earnout liabilities

 

 

 

 

 

(459

)

Proceeds from exercise of stock options

 

 

61

 

 

 

61

 

Term loan principal payment

 

 

(1,250

)

 

 

 

Net cash used in financing activities

 

 

(3,143

)

 

 

(1,108

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(24

)

 

 

66

 

Net (decrease) increase in cash and cash equivalents

 

 

(1,866

)

 

 

180

 

Cash and cash equivalents at beginning of period

 

 

18,485

 

 

 

14,783

 

Cash and cash equivalents at end of period

 

$

16,619

 

 

$

14,963

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for taxes, net

 

$

(185

)

 

$

463

 

 

See accompanying Notes to Consolidated Financial Statements.

5


 

TECHTARGET, INC.

Notes to Consolidated Financial Statements

(In thousands, except share and per share data, where otherwise noted, or instances where expressed in millions)

1. Organization and Operations

TechTarget, Inc. and its subsidiaries (the “Company”) is a leading provider of specialized online content for buyers of enterprise information technology (“IT”) products and services, and a leading provider of purchase-intent marketing and sales services for enterprise technology vendors. The Company’s service offerings enable technology vendors to better identify, reach, and influence corporate IT decision makers actively researching specific IT purchases. The Company improves vendors’ ability to impact these audiences for business growth using advanced targeting, analytics, and data services complemented with customized marketing programs that integrate demand generation and brand advertising techniques. The Company operates a network of over 140 websites, each of which focuses on a specific IT sector such as storage, security, or networking. IT professionals have become increasingly specialized, and they have come to rely on the Company’s sector-specific websites for purchasing decision support. The Company’s content platform enables IT professionals to navigate the complex and rapidly changing IT landscape where purchasing decisions can have significant financial and operational consequences. At critical stages of the purchase decision process, these content offerings, through different channels, meet IT professionals’ needs for expert, peer, and IT vendor information and provide a platform on which IT vendors can launch targeted marketing campaigns which generate measurable return on investment. Based upon the logical clustering of users’ respective job responsibilities and the marketing focus of the products being promoted by the Company’s customers, the Company categorizes its content offerings to address the key market opportunities and audience extensions across a portfolio of distinct media groups: Security; Networking; Storage; Data Center and Virtualization Technologies; CIO/IT Strategy; Business Applications and Analytics; Application Architecture and Development; Channel; and TechnologyGuide.com.

2. Summary of Significant Accounting Policies

The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these Notes to Consolidated Financial Statements.

Principles of Consolidation

The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, TechTarget Securities Corporation (“TSC”), TechTarget Limited, TechTarget (HK) Limited (“TTGT HK”), TechTarget (Beijing) Information Technology Consulting Co. Ltd. (“TTGT Consulting”), TechTarget (Australia) Pty Ltd., TechTarget (Singapore) Pte Ltd., E-Magine Médias SAS (“LeMagIT”) and TechTarget Germany GmbH. TSC is a Massachusetts corporation. TechTarget Limited is a subsidiary doing business principally in the United Kingdom. TTGT HK is a subsidiary incorporated in Hong Kong in order to facilitate the Company’s activities in the Asia-Pacific region. Additionally, through its wholly-owned subsidiaries, TTGT HK and TTGT Consulting, the Company effectively controls a variable interest entity (“VIE”), Keji Wangtuo Information Technology Co., Ltd., (“KWIT”), which was incorporated under the laws of the People’s Republic of China (“PRC”). TechTarget (Australia) Pty Ltd. and TechTarget (Singapore) Pte Ltd. are the entities through which the Company does business in Australia and Singapore, respectively; LeMagIT and TechTarget Germany GmbH, both wholly-owned subsidiaries of TechTarget Limited, are entities through which the Company does business in France and Germany, respectively. Bitpipe, Inc., previously a wholly-owned subsidiary, was merged into TechTarget, Inc. in the second quarter of 2016.

PRC laws and regulations prohibit or restrict foreign ownership of Internet-related services and advertising businesses. To comply with these foreign ownership restrictions, the Company operates its websites and provides online advertising services in the PRC through KWIT. The Company entered into certain exclusive agreements with KWIT and its shareholders through TTGT HK, which obligated TTGT HK to absorb all of the risk of loss from KWIT’s activities and entitled TTGT HK to receive all of its residual returns. In addition, the Company entered into certain agreements with the authorized parties through TTGT HK, including Management and Consulting Services, Voting Proxy, Equity Pledge and Option Agreements. TTGT HK assigned all of its rights and obligations to the newly formed wholly foreign-owned enterprise (“WFOE”), TTGT Consulting. TTGT Consulting is established and existing under the laws of the PRC, and is wholly-owned by TTGT HK.

6


 

Based on these contractual arrangements, the Company consolidates the financial results of KWIT as required by Accounting Standards Codification (“ASC”) 810-10, Consolidation: Overall, because the Company holds all the variable interests of KWIT through TTGT Consulting, which is the primary beneficiary of KWIT. Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between the Company and the VIE through the aforementioned agreements, whereby the equity holders of KWIT assigned all of their voting rights underlying their equity interest in KWIT to TTGT Consulting. In addition, through the other aforementioned agreements, the Company demonstrates its ability and intention to continue to exercise the ability to obtain substantially all of the profits and absorb all of the expected losses of KWIT. All significant intercompany accounts and transactions between the Company, its subsidiaries, and KWIT have been eliminated in consolidation.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted (Generally Accepted Accounting Principles, or GAAP) in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of results to be expected for any other interim periods or for the full year. The information included in these consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report and the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Reclassifications

The adoption of a recent accounting pronouncement, described in more detail in the Accounting Guidance Adopted in 2017 section below, resulted in an in immaterial adjustment to the Accumulated Deficit in the prior period Consolidated Balance Sheet and an immaterial reclassification between Operating Activities and Financing Activities in the prior period Consolidated Statement of Cash Flows.  There was no effect on the Consolidated Statement of Operations and Comprehensive Income.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to revenues, long-lived assets, goodwill, the allowance for doubtful accounts, stock-based compensation, earnouts, self-insurance accruals, and income taxes. Estimates of the carrying value of certain assets and liabilities are based on historical experience and on various other assumptions that the Company believes to be reasonable. Actual results could differ from those estimates.

Revenue Recognition

The Company generates substantially all of its revenues from the sale of targeted marketing and advertising campaigns, which are delivered via its network of websites, data analytics solutions, and, historically, events. In all cases, revenues are recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably assured.

The majority of the Company’s online media sales involve multiple service and product offerings, which are described in more detail below. Because neither vendor-specific objective evidence of fair value nor third-party evidence of fair value exists for all elements in the Company’s bundled product offerings, the Company uses an estimated selling price which represents management's best estimate of the stand-alone selling price for each deliverable in an arrangement. The Company establishes best estimates considering multiple factors including, but not limited to, class of client, size of transaction, available media inventory, pricing strategies and market conditions. The Company believes the use of the best estimate of selling price allows revenue recognition in a manner consistent with the underlying economics of the transaction. The Company uses the relative selling price method to allocate consideration at the inception of the arrangement to each deliverable in a multiple element arrangement. The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of the deliverable's best estimated selling price. Revenues are then recognized as delivery occurs. The Company typically offers standard 30 day cancellation terms under its agreements.

7


 

The Company evaluates all deliverables of an arrangement at inception and each time an item is delivered, to determine whether they represent separate units of accounting. Based on this evaluation, the arrangement consideration is measured and allocated to each of these elements. Additionally, the Company offers sales incentives to certain customers, primarily in the form of volume rebates, which are classified as a reduction of revenues and are calculated based on the terms of the specific customer’s contract. The Company accrues for these sales incentives based on contractual terms and historical experience.

Online Offerings

IT Deal Alert™. This suite of products and services includes IT Deal Alert: Qualified Sales Opportunities™, which profiles specific in-progress purchase projects, IT Deal Alert: Priority Engine™, which is a subscription service powered by the Company’s Activity Intelligence™ platform that integrates into salesforce.com and delivers information to allow marketers and sales personnel to identify those accounts who are actively researching new technology purchases, IT Deal Alert: Deal Data™, which is a customized solution aimed at sales intelligence and data scientist functions that makes the Company’s Activity Intelligence data directly consumable by the customer’s internal applications, and IT Deal Alert: TechTarget Research™, which is a subscription product that sources proprietary information about purchase transactions from IT professionals who are making and have recently completed these purchases. Qualified Sales Opportunities revenues are recognized when the Qualified Sales Opportunity is delivered to the Company’s customer, Priority Engine revenues are recognized ratably over the duration of the service, Deal Data revenues are recognized upon delivery of the data to the Company’s customer, and TechTarget Research revenues are recognized when the report is delivered.

Core Online. The Company’s core online offerings enable its customers to reach and influence prospective buyers through content marketing programs designed to generate demand for their solutions, and through display advertising and other brand programs that influence consideration by prospective buyers.

Demand Solutions. As part of its demand solutions campaign offerings, the Company may guarantee a minimum number of sales leads to be delivered over the course of the campaign. The Company determines the content necessary to achieve performance guarantees. Scheduled end dates of campaigns sometimes need to be extended, pursuant to the terms of the arrangement, to satisfy lead guarantees. The Company estimates a revenue reserve necessary to adjust revenue recognition for extended campaigns. These estimates are based on the Company’s experience in managing and fulfilling these offerings. The customer generally has cancellation privileges which normally require advance notice by the customer and require proportional payment by the customer for the portion of the campaign services provided by the Company. The Company recognizes revenues on duration-based campaigns ratably over the duration of the campaigns, which is usually less than six months and recognizes revenues on contracts where pricing is based on cost per lead during the period in which leads are delivered to its customers.

Brand Solutions. Brand solutions consist mostly of banner revenue, which is recognized in the period in which the banner impressions, engagements or clicks occur and microsite revenue, which is recognized over the period during which the microsites are live.

Custom Content Creation. Custom content revenues are recognized when the creation is completed and delivered to the customer.

Other. Includes list rental revenue, which is recognized in the period in which the Company delivers the customer’s content to a list of the Company’s registered members, and revenues from third-party revenue sharing arrangements, which is primarily recognized on a net basis in the period in which the services are performed.

Events

Revenues from vendor-sponsored events, whether sponsored exclusively by a single vendor or in a multi-vendor sponsored event, are recognized upon completion of the event in the period the event occurs. Historically, the majority of the Company’s events were free to qualified attendees and certain events were based on a paid attendee model, but the Company announced on February 14, 2017 that it will be phasing out its events products. The Company recognizes revenues for paid attendee events upon completion of the events.

Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. The Company excludes from its deferred revenue and accounts receivable balances amounts for which it has billed in advance prior to the start of a campaign or the delivery of services.

8


 

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts receivable, accounts payable, and long-term debt. With the exception of long-term debt, the carrying value of these instruments approximates their estimated fair values due to their short-term nature and liquidity. See Note 3 for further information on the fair value of the Company’s investments. The Company classifies all of its short-term and long-term investments as available-for-sale. Amounts outstanding under the Company’s long-term debt are subject to variable rates of interest based on market rates, and as such, the Company believes the carrying amount of these obligations approximates fair value.

Long-lived Assets, Goodwill and Indefinite-lived Intangible Assets

Long-lived assets consist primarily of property and equipment, capitalized software, goodwill and other intangible assets. The Company reviews long-lived assets, including property and equipment and finite intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that would trigger an impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset or an adverse action or a significant decrease in the market price. A specifically identified intangible asset must be recorded as a separate asset from goodwill if either of the following two criteria is met: (1) the intangible asset acquired arises from contractual or other legal rights; or (2) the intangible asset is separable. Accordingly, intangible assets consist of specifically identified intangible assets. Goodwill is the excess of any purchase price over the estimated fair value of net tangible and intangible assets acquired.

Goodwill and indefinite-lived intangible assets are not amortized but are reviewed annually for impairment or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have an indefinite life are amortized over their estimated useful lives, which range from five to ten years, using methods of amortization that are expected to reflect the estimated pattern of economic use, and are reviewed for impairment when events or changes in circumstances suggest that the assets may not be recoverable. Consistent with the Company’s determination that it has only one reporting segment, it has been determined that there is a single reporting unit and goodwill is therefore tested for impairment at the entity level. The Company performs its annual test of impairment of goodwill as of December 31st of each year and whenever events or changes in circumstances suggest that the carrying amount may not be recoverable using the two step process required by ASC 350, Intangibles – Goodwill and Other (“ASC 350”). The first step of the impairment test is to identify potential impairment by comparing the reporting unit’s fair value with its net book value (or carrying amount), including goodwill. The fair value is estimated based on a market value approach. If the fair value of the reporting unit exceeds its carrying amount, the reporting unit’s goodwill is not considered to be impaired and the second step of the impairment test is not performed. Whenever indicators of impairment become present, the Company would perform the second step and compare the implied fair value of the reporting unit’s goodwill, as defined by ASC 350, to its carrying value to determine the amount of the impairment loss, if any. As of December 31, 2016, there were no indications of impairment based on the step one analysis, and the Company’s estimated fair value exceeded its goodwill carrying value by a significant margin. There were no indications of impairment as of March 31, 2017.

Based on the aforementioned evaluation, the Company believes that, as of the balance sheet dates presented, none of the Company’s goodwill or other long-lived assets were impaired. The Company did not have any intangible assets with indefinite lives as of March 31, 2017 or December 31, 2016.

Allowance for Doubtful Accounts

The Company reduces gross trade accounts receivable for an allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The allowance for doubtful accounts is reviewed on a regular basis, and all past due balances are reviewed individually for collectability. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Provisions for doubtful accounts are recorded in general and administrative expense.

Property and Equipment and Other Capitalized Assets

Property and equipment and other capitalized assets are stated at cost. Property and equipment acquired through acquisitions of businesses are initially recorded at fair value. Depreciation is calculated on the straight-line method based on the month the asset is placed in service.

9


 

Internal-Use Software and Website Development Costs

The Company capitalizes costs incurred during the development of its website applications and infrastructure as well as certain costs relating to internal-use software. The estimated useful life of costs capitalized is evaluated for each specific project. Capitalized internal-use software and website development costs are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized only if the carrying amount of the asset is not recoverable and exceeds its fair value. The Company capitalized internal-use software and website development costs of $0.8 million and $0.7 million for the three months ended March 31, 2017 and 2016, respectively.

Income Taxes

The Company’s deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. A valuation allowance is established against net deferred tax assets if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return using a “more likely than not” threshold as required by the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes (“ASC 740”).

The Company recognizes interest and penalties related to unrecognized tax benefits, if any, in income tax expense.

Stock-Based Compensation

The Company has two stock-based employee compensation plans which are more fully described in Note 9. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized in the Consolidated Statements of Operations and Comprehensive Income using the straight-line method over the vesting period of the award. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock option awards.

Comprehensive Income

Comprehensive income includes all changes in equity during a period, except those resulting from investments by stockholders and distributions to stockholders. The Company's comprehensive income includes changes in the fair value of the Company’s unrealized gains on available for sale securities and foreign currency translation adjustments.

There were no reclassifications out of accumulated other comprehensive income in the periods ended March 31, 2017 or 2016.

Foreign Currency

The functional currency for each of the Company’s subsidiaries is the local currency of the country in which it is incorporated. All assets and liabilities are translated into U.S. dollar equivalents at the exchange rate in effect on the balance sheet date or at a historical rate. Revenues and expenses are translated at average exchange rates. Translation gains or losses are recorded in stockholders’ equity as an element of accumulated other comprehensive loss.

Net Loss Per Share

Basic earnings per share is computed based on the weighted average number of common shares and vested restricted stock awards outstanding during the period. Because the holders of unvested restricted stock awards do not have nonforfeitable rights to dividends or dividend equivalents, the Company does not consider these awards to be participating securities that should be included in its computation of earnings per share under the two-class method. Diluted earnings per share is computed using the weighted average number of common shares and vested, undelivered restricted stock awards outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to stock option and restricted stock award programs using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of stock options and restricted stock awards is computed using the average market price for the respective period. In addition, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of stock options and restricted stock awards that are in-the-money. This results in the “assumed” buyback of additional shares, thereby reducing the dilutive impact of stock options and restricted stock awards.

10


 

Recent Accounting Pronouncements

Accounting Guidance Adopted in 2017

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted the provisions of the new standard on January 1, 2017. Implementing the new pronouncement resulted in the Company recognizing tax benefits and tax deficiencies related to stock compensation deductions as a component of the provision for income tax expense in the reporting period in which they occur. Additionally, the Company has applied the modified retrospective adoption approach, which resulted in the Company recording deferred tax assets of approximately $0.2 million with an offsetting entry to retained earnings. ASU 2016-09 also requires the presentation of excess tax benefit from stock options as an operating activity on the consolidated statement of cash flows instead of as a financing activity, which resulted in an immaterial reclassification in the consolidated statement of cash flows for the first quarter of 2016.  

Accounting Guidance Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. As a result, this guidance is now effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017 (January 1, 2018 for the Company) and early adoption is permitted only as of annual reporting periods (including interim reporting periods within those reporting periods) beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which further clarifies the implementation guidance on principal versus agent considerations contained in ASU 2014-09. In April and May 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, and ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, respectively, each of which provide further implementation guidance for ASU 2014-09.  The Company is currently in the process of assessing the adoption methodology, which allows the standard to be applied retrospectively to each prior period presented, or with the cumulative effect recognized as of the date of initial application.  The Company continues to progress in its evaluation of the impact of the adoption of the standard on other areas of its consolidated financial statements but has not yet determined whether the effect will be material to either its reported revenue or its accounting for deferred commissions balances.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and disclosures. However, the Company anticipates that this standard will have a material impact on its financial position, primarily due to office space operating leases, for which the company will be required to recognize lease assets and lease liabilities on its Consolidated Balance Sheets. The Company will continue to assess the potential impacts of this standard, including the impact the adoption of this guidance will have on its results of operations or cash flows, if any.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (step 2 of the goodwill impairment test) and instead requires only a one-step quantitative impairment test, performed by comparing the fair value of goodwill with its carrying amount. ASU 2017-04 is effective on a prospective basis effective for goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and disclosures.

11


 

3. Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, short-term and long-term investments and contingent consideration. The fair value of these financial assets and liabilities was determined based on three levels of input as follows: 

 

Level 1. Quoted prices in active markets for identical assets and liabilities;

 

Level 2. Observable inputs other than quoted prices in active markets; and

 

Level 3. Unobservable inputs.

The fair value hierarchy of the Company’s financial assets and liabilities carried at fair value and measured on a recurring basis is as follows:

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using

 

 

 

March 31,

2017

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (1) and commercial paper(2)

 

$

4,394

 

 

$

95

 

 

$

4,299

 

 

$

 

Short-term investments(2)

 

 

9,990

 

 

 

 

 

 

9,990

 

 

 

 

Long-term investments(2)

 

 

5,743

 

 

 

 

 

 

5,743

 

 

 

 

Total assets

 

$

20,127

 

 

$

95

 

 

$

20,032

 

 

$

 

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using

 

 

 

December 31,

2016

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

4,301

 

 

$

4,301

 

 

$

 

 

$

 

Short-term investments(2)

 

 

10,988

 

 

 

 

 

 

10,988

 

 

 

 

Long-term investments(2)

 

 

7,801

 

 

 

 

 

 

7,801

 

 

 

 

Total assets

 

$

23,090

 

 

$

4,301

 

 

$

18,789

 

 

$

 

 

(1)

Included in cash and cash equivalents on the accompanying Consolidated Balance Sheets; valued at quoted market prices in active markets.

(2)

Short-term and long-term investments consist of municipal bonds, corporate bonds, U.S. Treasury securities, and government agency bonds; their fair value is calculated using an interest rate yield curve for similar instruments. 

4. Cash, Cash Equivalents, and Investments  

Cash and cash equivalents consist of highly liquid investments with maturities of three months or less at date of purchase. Cash equivalents are carried at cost, which approximates their fair market value. Cash and cash equivalents consisted of the following:

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Cash

 

$

12,225

 

 

$

14,184

 

Money market funds and commercial paper

 

 

4,394

 

 

 

4,301

 

Total cash and cash equivalents

 

$

16,619

 

 

$

18,485

 

 

12


 

The Company’s short-term and long-term investments are accounted for as available for sale securities. These investments are recorded at fair value with the related unrealized gains and losses included in accumulated other comprehensive loss, a component of stockholders’ equity, net of tax. The cumulative unrealized loss, net of taxes, was $15 and $30 as of March 31, 2017 and December 31, 2016, respectively. Realized gains and losses on the sale of these investments are determined using the specific identification method. There were no realized gains or losses during the three months ended March 31, 2017 or 2016.

Short-term and long-term investments consisted of the following:

 

 

 

March 31, 2017

 

 

 

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Short-term and long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

1,998

 

 

$

 

 

$

(2

)

 

$

1,996

 

Government agency bonds

 

 

2,509

 

 

 

1

 

 

 

(3

)

 

 

2,507

 

Municipal bonds

 

 

8,744

 

 

 

 

 

 

(17

)

 

 

8,727

 

Corporate bonds

 

 

2,506

 

 

 

 

 

 

(3

)

 

 

2,503

 

Total short-term and long-term investments

 

$

15,757

 

 

$

1

 

 

$

(25

)

 

$

15,733

 

 

 

 

December 31, 2016

 

 

 

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Short-term and long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

1,998

 

 

$

 

 

$

(1

)

 

$

1,997

 

Government agency bonds

 

 

5,012

 

 

 

1

 

 

 

(2

)

 

 

5,011

 

Municipal bonds

 

 

9,817

 

 

 

 

 

 

(42

)

 

 

9,775

 

Corporate bonds

 

 

2,009

 

 

 

 

 

 

(3

)

 

 

2,006

 

Total short-term and long-term investments

 

$

18,836

 

 

$

1

 

 

$

(48

)

 

$

18,789

 

 

The Company had twenty four debt securities in an unrealized loss position at March 31, 2017. All of these securities have been in such a position for no more than eight months. The unrealized loss on those securities was approximately $25 and the fair value was $14.7 million. At March 31, 2016, the Company had seven debt securities in an unrealized loss position, and the unrealized loss on those securities was immaterial and the fair value was $9.0 million at that date. The Company uses specific identification when reviewing these investments for impairment. Because the Company does not intend to sell the investments that are in an unrealized loss position and it is not likely that the Company will be required to sell any investments before recovery of their cost basis, the Company does not consider those investments with an unrealized loss to be other-than-temporarily impaired at March 31, 2017.

The Company’s investments have contractual maturity dates that range from May 2017 to January 2019. All income generated from these investments is recorded as interest income.

5. Intangible Assets

The following table summarizes the Company’s intangible assets, net:

 

 

 

 

 

 

 

As of March 31, 2017

 

 

 

Estimated

Useful Lives

(Years)

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Customer, affiliate and advertiser relationships

 

5–9

 

 

$

6,839

 

 

$

(6,825

)

 

$

14

 

Developed websites, technology and patents

 

 

10

 

 

 

1,196

 

 

 

(740

)

 

 

456

 

Trademark, trade name and domain name

 

5–8

 

 

 

1,756

 

 

 

(1,675

)

 

 

81

 

Proprietary user information database and Internet traffic

 

 

5

 

 

 

1,153

 

 

 

(1,134

)

 

 

19

 

Total intangible assets

 

 

 

 

 

$

10,944

 

 

$

(10,374

)

 

$

570

 

13


 

 

 

 

 

 

 

 

As of December 31, 2016

 

 

 

Estimated

Useful Lives

(Years)

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Customer, affiliate and advertiser relationships

 

5–9

 

 

$

6,826

 

 

$

(6,807

)

 

$

19

 

Developed websites, technology and patents

 

 

10

 

 

 

1,178

 

 

 

(705

)

 

 

473

 

Trademark, trade name and domain name

 

5–8

 

 

 

1,749

 

 

 

(1,664

)

 

 

85

 

Proprietary user information database and Internet traffic

 

 

5

 

 

 

1,146

 

 

 

(1,122

)

 

 

24

 

Total intangible assets

 

 

 

 

 

$

10,899

 

 

$

(10,298

)

 

$

601

 

 

Intangible assets are amortized over their estimated useful lives, which range from five to ten years, using methods of amortization that are expected to reflect the estimated pattern of economic use. The remaining amortization expense will be recognized over a weighted-average period of approximately 3.18 years. Amortization expense was $40 and $0.3 million for the three months ended March 31, 2017 and 2016, respectively. Amortization expense is recorded within operating expenses as the intangible assets consist of customer-related assets which generate website traffic that the Company considers to be in support of selling and marketing activities. The Company did not write off any fully amortized intangible assets in the first quarter of 2017. The Company wrote off $0.1 million of fully amortized intangible assets in the first quarter of 2016. The change in the gross carrying amount of intangible assets during the three months ended March 31, 2017 was due to foreign currency translation gains and losses.

The Company expects amortization expense of intangible assets to be as follows:

 

Years Ending December 31:

 

Amortization

Expense

 

2017 (April 1st – December 31st)

 

$

120

 

2018

 

 

99

 

2019

 

 

83

 

2020

 

 

70

 

2021

 

 

85

 

Thereafter

 

 

113

 

 

 

$

570

 

 

14


 

6. Net Loss Per Common Share

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per common share is as follows:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(29

)

 

$

(48

)

Denominator:

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

Weighted average shares of common stock and vested,

   undelivered restricted stock awards outstanding

 

 

27,532,277

 

 

 

32,594,064

 

Diluted:

 

 

 

 

 

 

 

 

Weighted average shares of common stock and vested,

   undelivered restricted stock awards outstanding

 

 

27,532,277

 

 

 

32,594,064

 

Effect of potentially dilutive shares (1)

 

 

 

 

 

 

Total weighted average shares of common stock and vested,

   undelivered restricted stock awards outstanding and

   potentially dilutive shares

 

 

27,532,277

 

 

 

32,594,064

 

Net Loss Per Share:

 

 

 

 

 

 

 

 

Basic net loss per share

 

$

(0.00

)

 

$

(0.00

)

Diluted net loss per share

 

$

(0.00

)

 

$

(0.00

)

 

(1)

In calculating diluted net loss per share, 0.4 million  shares related to outstanding stock options and unvested, undelivered restricted stock awards were excluded for each of the three months ended March 31, 2017 and 2016 because they were anti-dilutive. Additionally, shares used to calculate diluted net loss per share exclude the 0.6 million shares related to outstanding stock options and unvested restricted stock awards from the three months ended March 31, 2017 that would have been dilutive if the Company had reported net income during that period.

7. Term Loan Agreement

On May 9, 2016, the Company entered into a Senior Secured Credit Facilities Credit Agreement for a term loan (the “Term Loan Agreement”). Under the Term Loan Agreement, the Company borrowed and received $50 million in aggregate principal amount pursuant to a five-year term loan (the “Term Loan”). The borrowings under the Term Loan Agreement are secured by a lien on substantially all of the assets of the Company, including a pledge of the stock of certain of its wholly-owned subsidiaries. As of March 31, 2017, the carrying amount of the Term Loan was $37.2 million.

At the Company’s option, the Term Loan Agreement bears interest at either an annual rate of 1.50% plus the higher of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 0.50%, or the London Interbank Offered Rate (“LIBOR”) plus 2.50%.  The applicable interest rate was 3.31% at March 31, 2017, representing LIBOR plus the applicable margin of 2.50%.  Interest expense under the Term Loan Agreement was $0.3 million during the three months ended March 31, 2017, which includes non-cash interest expense of $23 related to the amortization of deferred issuance costs. During the three months ended March 31, 2017, the Company made principal payments totaling $1.3 million. During the fiscal year ended December 31, 2016, the Company made principal payments totaling $11.3 million which included a $10.0 million pre-payment in excess of the contractual amounts due.

The Term Loan Agreement requires us to maintain compliance with certain covenants, including leverage and fixed charge coverage ratio covenants. At March 31, 2017, the Company was in compliance with all covenants under the Term Loan Agreement.

15


 

8. Commitments and Contingencies

Operating Leases

The Company conducts its operations in leased office facilities under various noncancelable operating lease agreements that expire through December 2021. The Company leases approximately 110,000 square feet of office space in Newton, Massachusetts under three separate coterminous leases (the “Newton Leases”), which expire in February 2020.    Certain of the Newton Leases contain rent concessions, which the Company is receiving over the life of the Newton Leases. 

Certain of the Company’s operating leases include lease incentives and escalating payment amounts and are renewable for varying periods. The Company is recognizing the related rent expense on a straight-line basis over the term of the lease, taking into account the lease incentives and escalating lease payments. Total rent expense under the Company’s leases was approximately $1.1 million for the each of the first quarter of 2017 and 2016.    

Future minimum lease payments under the Company’s noncancelable operating leases at March 31, 2017 are as follows:

 

Years Ending December 31:

 

Minimum Lease

Payments

 

2017 (April 1st – December 31st)

 

$

3,588

 

2018

 

 

4,990

 

2019

 

 

4,922

 

2020

 

 

975

 

2021

 

 

390

 

 

 

$

14,865

 

 

Litigation

From time to time and in the ordinary course of business, the Company may be subject to various claims, charges, and litigation. At March 31, 2017 and December 31, 2016, the Company did not have any pending claims, charges, or litigation that it expects would have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

9. Stock-Based Compensation  

Stock Option Plans

In September 1999, the Company approved a stock option plan (the “1999 Plan”) that provided for the issuance of shares of common stock incentives. The 1999 Plan provided for the granting of incentive stock options (“ISOs”), nonqualified stock options (“NSOs”), and stock grants. These incentives were offered to the Company’s employees, officers, directors, consultants, and advisors. Each option is exercisable at such times and subject to such terms as determined by the Company’s Board of Directors (the “Board”); grants generally vest over a four year period, and expire no later than ten years after the grant date.

In April 2007, the Board approved the 2007 Stock Option and Incentive Plan (the “2007 Plan”), which was approved by the stockholders of the Company and became effective upon the consummation of the Company’s IPO in May 2007. Effective upon the consummation of the IPO, no further awards were made pursuant to the 1999 Plan, but any outstanding awards under the 1999 Plan remain in effect and continue to be subject to the terms of the 1999 Plan. The 2007 Plan allows the Company to grant ISOs, NSOs, stock appreciation rights, deferred stock awards, restricted stock and other awards. Under the 2007 Plan, stock options may not be granted at less than fair market value on the date of grant, and grants generally vest over a three to four year period. Stock options granted under the 2007 Plan expire no later than ten years after the grant date. Additionally, beginning with awards made in August 2015, the Company has the option to direct a net issuance of shares for satisfaction of tax liability with respect to vesting of awards and delivery of shares.  Prior to August 2015, this choice of settlement method was solely at the discretion of the award recipient.

The Company has reserved for issuance an aggregate of 2,911,667 shares of common stock under the 2007 Plan plus an additional annual increase to be added automatically on January 1 of each year, beginning on January 1, 2008, equal to the lesser of (a) 2% of the outstanding number of shares of common stock (on a fully-diluted basis) on the immediately preceding December 31 and (b) such lower number of shares as may be determined by the compensation committee of the Board. The number of shares available for issuance under the 2007 Plan is subject to adjustment in the event of a stock split, stock dividend or other change in capitalization. Generally, shares that are forfeited or canceled from awards under the 2007 Plan also will be available for future awards. To date, 8,224,334 shares have been added to the 2007 Plan in accordance with the automatic annual increase. In addition, shares subject to stock options returned to the 1999 Plan, as a result of their expiration, cancellation or termination, are automatically made available for issuance under the 2007 Plan. As of March 31, 2017, a total of 3,699,551 shares were available for grant under the 2007 Plan. The 2007 Plan will expire in May 2017, and the Company is proposing a new plan in conjunction with its annual meeting of stockholders, which is scheduled to be held on June 16, 2017.

16


 

Accounting for Stock-Based Compensation

The Company uses the Black-Scholes option pricing model to calculate the grant date fair value of an award.

The expected volatility of options granted has been determined using a weighted average of the historical volatility of the Company’s stock for a period equal to the expected life of the option. The expected life of options has been determined utilizing the “simplified” method. The risk-free interest rate is based on a zero coupon U.S. treasury instrument whose term is consistent with the expected life of the stock options. The Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero. The Company applied an estimated annual forfeiture rate in determining the expense recorded in each period.

A summary of the stock option activity under the Company’s stock option plans for the three months ended March 31, 2017 is presented below:

 

Year-to-Date Activity

 

Options

Outstanding

 

 

Weighted-

Average

Exercise Price

Per Share

 

 

Weighted-

Average

Remaining

Contractual

Term in

Years

 

 

Aggregate

Intrinsic

Value

 

Options outstanding at December 31, 2016

 

 

861,380

 

 

$

9.42

 

 

 

 

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(12,375

)

 

 

4.96

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding at March 31, 2017

 

 

849,005

 

 

$

9.48

 

 

 

1.99

 

 

$

1,486

 

Options exercisable at March 31, 2017

 

 

849,005

 

 

$

9.48

 

 

 

1.99

 

 

$

1,486

 

Options vested or expected to vest at March 31, 2017

 

 

849,005

 

 

$

9.48

 

 

 

1.99

 

 

$

1,486

 

 

During the three months ended March 31, 2017 and 2016 the total intrinsic value of options exercised (i.e. the difference between the market price at exercise and the price paid by the employee to exercise the options) was not material. The total amount of cash received from exercise of these options was approximately $0.1 million during each of the three months ended March 31, 2017 and 2016.

Restricted Stock Awards

Restricted stock awards are valued at the market price of a share of the Company’s common stock on the date of the grant. A summary of the restricted stock award activity under the 2007 Plan for the three months ended March 31, 2017 is presented below:

 

Year-to-Date Activity

 

Shares

 

 

Weighted-

Average

Grant Date

Fair Value

Per Share

 

 

Aggregate

Intrinsic

Value

 

Nonvested outstanding at December 31, 2016

 

 

1,640,790

 

 

$

8.54

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

 

Vested