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A N N U A L
R E P O R T
DEAR FELLOW SHAREHOLDERS
We finished 2016 a stronger company, with a compelling
product portfolio, an advertising platform at scale,
a deeply talented team, and market validation of our
strategy as significant new customers continue to adopt
our platforms. Our 2016 revenue was $127.4 million,
delivering year-over-year growth of 16%. And Synacor
is poised to deliver accelerated growth in 2017.
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We continue to execute well against our four-pillar growth
c
strategy and deliver excellence for our customers. We
st at
are (1) increasing value for our current customers, (2)
arerearrearreee
innovating on our product platforms, (3) winning new
customers, and (4) extending into international and
enterprise markets.
Here are just a few highlights of our 2016 accomplishments:
• We won the AT&T contract to redevelop the att.net
desktop, mobile and native app portal to enhance user
engagement and experience. We expect the product
development effort to support AT&T will benefit many
of our customers.
• We created Synacor Media, a direct and
programmatic advertising platform, which combines
Technorati and Synacor capabilities and reaches more
than 200 million monthly unique visitors.
• We jumpstarted our email business. We grew
customers, added more than 350 channel partners,
re-energized our more than 1500 strong partner
community, and re-engaged our open source
community of nearly 400 million mailboxes.
• We debuted our end-to-end video platform,
launching iOS and Android TV Everywhere apps for
our first two service provider customers.
• We won and delivered cloud-based identity
management for HBO GO, partnered with Apple to
power Single Sign On, and participated in industry-
wide standard setting.
We continue to build momentum at Synacor. In 2017,
look for us to deploy the AT&T portal, expand mobile
monetization, win new customers across all our product
lines, demonstrate impact from our open source and
partner community, and make our technology platforms
more valuable.
We remain well positioned in the attractive and growing
digital markets of advertising, email and collaboration,
and video. We are focused on our path to 3/30/300 -
revenue of $300 million and adjusted EBITDA of $30
million in 2019.
Thank you, our shareholders, for your continued support.
The team at Synacor, my fellow Board members, and I
are working with fierce resolve every day to reward the
confidence you have placed in us. I am enthusiastic about
our prospects for fiscal 2017 and grateful to be on this
exciting journey with you: enabling our customers to
deepen engagement with their hundreds of millions
of consumers around the world.
Sincerely,
Himesh Bhise
CEO and Member, Synacor Board of Directors
SYNACOR, INC / ANNUAL REPORT 2016
1
MISSION
We enable our
customers to
better engage
with their
consumers
FINANCIAL PERFORMANCE
REVENUE, $MILLIONS
16% year-over-year increase
$110.2
$127.4
2015
2016
PATH TO 3/30/300
3YRS
2019
$30M
IN EBITDA
$300M
IN REVENUE
SYNACOR, INC / ANNUAL REPORT 2016
3
2016: SUCCESSFUL YEAR
WITH STRONG MARKET VALIDATION
Designed New Digital Experiences
Won AT&T Contract
Launched highly rated mobile app
Added 50+ top media brands
Created Synacor Media
Developed a direct and programmatic advertising solution
reaching more than 200M monthly uniques
Valuable expertise that delivers on ad buyers’ spend
and performance targets
Jumpstarted Email Business
Launched Zimbra Open Source Support
Added 350+ channel partners
Re-energized open source community
of 400M mailboxes
Helped Customers Reimagine TV
Launched end-to-end TVE
and OTT solutions for operators
Cloud ID + Apple + HBO
2017: FOUR PILLAR STRATEGY FOR GROWTH
1
INCREASE VALUE FOR EXISTING CUSTOMERS BY
OPTIMIZING CONSUMER EXPERIENCE AND MONETIZATION
Launch AT&T
Expand programmatic business and mobile monetization
Grow publisher reach
2
INNOVATE ON SYNACOR-AS-A-PLATFORM
FOR ADVANCED SERVICES
Grow Zimbra Open Source Support adoption
Extend Cloud ID into new verticals
6
SYNACOR, INC / ANNUAL REPORT 2016
3
WIN NEW CUSTOMERS IN CURRENT
AND RELATED VERTICALS
Win new portal customers
Expand government email customer base
Garner new video platform and content provider customers
4
EXTEND PRODUCT PORTFOLIO INTO
EMERGING GROWTH AREAS
Leverage partner community to accelerate
email feature development
Win customers in new geographies
SYNACOR, INC / ANNUAL REPORT 2016
7
COMPANY OFFICES
Boston | Buffalo | Dallas | London | Los Angeles | New York
Ottawa | Pune | San Francisco | Singapore | Tokyo | Toronto
8
SYNACOR, INC / ANNUAL REPORT 2016
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
(cid:3) 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 001-33843
Synacor, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
40 La Riviere Drive, Suite 300
Buffalo, New York
(Address of principal executive offices)
16-1542712
(I.R.S. Employer
Identification No.)
14202
(Zip Code)
(716) 853-1362
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class)
Common Stock, $0.01 par value
(Name of each exchange on which registered)
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None.
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:3) No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:3) No ⌧
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 (cid:3)
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 (cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
(cid:3)
(cid:3) (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
(cid:3)
⌧
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:3) No ⌧
The aggregate market value of shares of common stock held by non-affiliates as of June 30, 2016, the last business day of the registrant’s most recently
completed second fiscal quarter, computed by reference to the closing sale price of $3.08 per share on The Nasdaq Global Market on June 30, 2016, was
approximately $73,566,083. For purposes of this disclosure, shares of common stock held by persons who held more than 10% of the outstanding shares of
common stock at such time and shares held by executive officers and directors of the registrant have been excluded because such persons may be deemed to
be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.
As of March 16, 2017, there were 31,484,756 shares of the registrant’s common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement to be used in connection with the registrant’s 2017 Annual Meeting of Stockholders are incorporated
by reference into Part III of this Form 10-K to the extent stated. That Proxy Statement will be filed within 120 days of registrant’s fiscal year ended
December 31, 2016.
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements that reflect our current views with respect to future
events or our future financial performance, are based on information currently available to us, and involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially
from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. All
statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including
statements containing the words “believes,” “can,” “expects,” “anticipates,” “estimates,” “intends,” “objective,” “plans,” “possibly,”
“potential,” “predicts,” “targets,” “likely,” “may,” “might,” “would,” “should,” “could,” and similar expressions or phrases (including
the negatives of such expressions or phrases). We intend all such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to,
statements in the sections of this Annual Report on Form 10-K titled “Trends Affecting Our Business” and “Key Initiatives” as well as
statements about:
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•
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our expected future financial performance;
our expectations regarding our operating expenses;
our strategies and business plan;
our ability to maintain or broaden relationships with existing customers and develop relationships with new customers;
our success in anticipating market needs or developing new or enhanced services and products to meet those needs;
our expectations regarding market acceptance of our services and products;
our ability to recruit and retain qualified technical and other key personnel;
our competitive position in our industry, as well as innovations by our competitors;
our success in managing growth;
our expansion in international markets;
our ability to successfully integrate assets and personnel from our acquisitions;
our success in identifying and managing potential acquisitions;
our capacity to protect our confidential information and intellectual property rights;
our need to obtain additional funding and our ability to obtain funding in the future on acceptable terms; and
anticipated trends and challenges in our business and the markets in which we operate.
Any forward-looking statements contained in this Annual Report on Form 10-K are based upon our historical performance and
our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a
representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. All
forward-looking statements involve risks, assumptions and uncertainties. Given these risks, assumptions and uncertainties, you should
not place undue reliance on any forward-looking statements. The occurrence of the events described, and the achievement of the
expected results, depend on many factors, some or all of which are not predictable or within our control.
Actual results may differ materially from expected results. See “Risk Factors” and elsewhere in this Annual Report on Form 10-
K for a more complete discussion of these risks, assumptions and uncertainties and for other risks, assumptions and uncertainties.
These risks, assumptions and uncertainties are not necessarily all of the important factors that could cause actual results to differ
materially from those expressed in any of our forward-looking statements.
Other unknown or unpredictable factors also could harm our results. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Annual Report on Form 10-K might not occur, and we therefore qualify all of our forward-
looking statements by these cautionary statements. Any forward-looking statement made by us in this Annual Report on Form 10-K
speaks only as of the date on which it is made. Except as required by law, we undertake no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
Unless expressly indicated or the context requires otherwise, the terms “Synacor,” “Company,” “we,” “us,” and “our” in this
document refer to Synacor, Inc., a Delaware corporation, and, where appropriate, our wholly-owned subsidiaries.
1
PART I
ITEM 1.
BUSINESS
Our Business
We enable our customers to better engage with their consumers. Our customers include video, internet and communications
providers, device manufacturers, governments and enterprises. We are their trusted technology development, multiplatform services
and revenue partner. Our customers use our technology platforms and services to scale their businesses and extend their subscriber
relationships. We deliver managed portals, advertising solutions, email and collaboration platforms, end-to-end video solutions and
cloud-based identity management.
We enable our customers to provide their consumers engaging, multiscreen experiences with products that require scale,
actionable data and sophisticated implementation. Through our Managed Portals and Advertising solutions, we enable our customers
to earn incremental revenue by monetizing media among their consumers. At the same time, because consumers have high
expectations for their online experience as a result of advances in video, mobile and social, we provide, through our Recurring and
Fee-Based Revenue solutions, a suite of products and services that helps our customers successfully meet those high expectations by
enabling them to deliver to their consumers access to the same digital content across all devices, including PCs, tablets, smartphones
and connected TVs.
Products and Services
Our Managed Portals and Advertising solutions provide our customers with substantial revenue opportunities generated by their
consumers’ engagement across devices. Managed Portals and Advertising solutions generated 59% of our revenue for 2016.
Our Managed Portals are intended to be daily destinations for consumers and are delivered across devices and under our
customers’ own brand names. To help our customers increase their consumers’ engagement, we deliver relevant content, such as top
news, entertainment, and long- and short-form video and apps, on our Managed Portals. We have licensing and distribution
agreements with a wide range of programmers and content and service providers. In addition, consumers have the ability through our
portals to manage their email and messaging, pay bills, receive special promotions and perform other account management needs.
We monetize the online traffic generated by consumers through search advertising, digital advertising (including video), and
syndicated content on our Managed Portals. As we monetize our customers’ online traffic on our Managed Portals, we share a portion
of this revenue with our customers, resulting in a mutually beneficial partnership.
Our Recurring and Fee-Based Revenue solutions generated 41% of our revenue for 2016 and are comprised of our End-to-End
Advanced Video Services, Email/Collaboration Services, and paid content and premium services:
•
•
End-to-End Advanced Video Services include our Cloud ID Authentication Platform and Search & Discovery Metadata
Platform. Our End-to-End Advanced Video Services offering is a highly-reliable, economically efficient, managed service
that enables our customers to provide their consumers with TV Everywhere and multiscreen Over The Top (OTT)
services.
Cloud ID Authentication
Consumers can watch TV on a myriad of devices, but many find the login process frustrating. Synacor Cloud ID
addresses this issue by offering home-based auto-authentication and social login, which improve the consumer experience
by reducing login failures.
Search & Discovery Metadata Platform
Once a consumer is authenticated, our Search & Discovery Metadata Platform helps them find their desired content
successfully and easily. We curate videos every day and have compiled more than 2.2 million long- and short-form videos
from hundreds of sources. We believe that we fill an important role for our customers as use of streaming video increases
and consumers’ video content consumption preferences shift away from traditional viewing habits.
Our Email/Collaboration Services include white-label hosting, security and migration. With the acquisition of certain
assets related to the Zimbra Email/Collaboration products and services business (the “Zimbra assets” or “Zimbra”) in
2015, our software and managed service offering now supports a network of over 1,000 value-added resellers, or VARs,
over 500 Business Service Providers, or BSPs, and over 3,500 enterprise, government and nonprofit customers, and it
powers approximately 530 million mailboxes.
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Recent Developments
In March 2017 we announced that Windstream, a top-10 U.S.-based service provider, has selected Synacor and our Zimbra
platform, to be Windstream’s hosted email provider. Windstream’s residential high-speed internet customers will use Synacor’s email
offering. We also announced in March 2017 that another regional service provider has selected Synacor’s end-to-end video platform
to deliver their TV Everywhere experience.
Our Strategy
Our strategy is, with operational and financial discipline, to:
•
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•
increase value for existing customers by optimizing consumer experience and monetization;
innovate on Synacor-as-a-platform for advanced services;
win new customers in current and related verticals; and
extend our product portfolio into emerging growth areas.
Increasing value for existing customers by optimizing user experience and monetization
With respect to our Managed Portals and Advertising solutions, 92% of our customers’ consumers have upgraded to our latest-
generation portal, driving a 15% increase in year-over-year engagement. Our portal, with its engaging user experience and responsive
design for desktop and mobile web, and our mobile apps, have video threaded throughout and is designed to optimize consumer
engagement and monetization. We are also decreasing the implementation time for customers to launch our latest-generation portal.
Innovating on Synacor-as-a-platform for advanced services
Our Cloud ID Authentication platform is reported as having some of the highest consumer login success rates in the industry.
In 2016, we extended our Cloud ID relationships to content providers, OTT players, and device manufacturers. We delivered
Authentication services for HBO GO, providing, for example, authentication in connection with the Game of Thrones’ record-
breaking sixth season and finale. Additionally, Apple uses Synacor’s Authentication services to support Apple Single Sign-On. The
current wave of MVPDs launched by Apple are almost all running on Synacor’s Cloud ID Advanced Authentication platform. Our
Authentication services also support Sling TV, PlayStation Vue and others to simplify the consumer log-in experience.
We believe we fill an important role as the number of streaming video consumers increases because we believe that our
customers are looking for a single vendor with whom to work, not a balkanized group of vendors. We created a professional services
team to work with partners to support the delivery of our End-to-End Advanced Video Services. Our acquisition of the assets of
NimbleTV in 2015 also resulted in innovation in our End-to-End Advanced Video Services. Our acquisitions of the Zimbra assets in
2015 and certain assets from Technorati in 2016 resulted in innovations in our email/collaboration and digital advertising capabilities,
respectively.
Winning new customers in current and related verticals
We have an established presence among broadband and pay-TV providers in the U.S. and Canada. Some of these providers use
our complete suite of solutions, and others use only certain components. We view this as a growth opportunity within our existing
customer base.
On May 4, 2016, we announced that AT&T selected Synacor to develop AT&T’s new multiplatform digital experience to
enhance user engagement and experience. The new multiplatform experiences integrate multiple avenues for monetization including a
combination of targeted banner advertising, pre-roll video ads and popular promoted content. We expect that our partnership with
AT&T will create a virtuous cycle that benefits all our current customers, and makes Synacor platforms more attractive for new
customers.
In 2016, we released our iOS and Android video apps for GVTC and Consolidated Communications, which are powered by our
end-to-end video platform. These apps enable consumers to watch TV everywhere, video-on-demand and OTT content in and out of
the home. Further, we believe our apps are helping our customers drive new subscriptions through improved search and discovery
because we enable our customers to transform massive amounts of data into easy-to-access content, and created new ways for
consumers to access new services.
3
Extending our product portfolio into emerging growth areas
We plan to capitalize on opportunities such as international expansion and delivery of business services. Through our
acquisition of the Zimbra assets we have expanded our international customer base, and we believe this represents an opportunity to
find new customers for our Managed Portals and Advertising solutions.
Technology and Operations
Technology Architecture
To route traffic through our network in the most efficient manner, we use load-balancing products. These products spread work among
multiple servers and link controllers that monitor the availability and performance of multiple connections. Our technology is reliable,
fault tolerant and scalable through the addition of more servers as usage grows. In 2016 and 2015, we spent $25.6 million and $20.0
million, respectively (exclusive of depreciation and amortization) on technology and development activities. The cost of these
activities is generally not borne directly by our customers.
Data Center Facilities
We currently operate and maintain six data centers in regionally diverse locations and have a network operations center that is
staffed 24 hours a day, seven days a week. Our primary data centers are located in shared facilities in Atlanta, Georgia; Dallas, Texas;
Lewis Center, Ohio; Denver, Colorado; Toronto, Canada and Amsterdam, The Netherlands. All systems are fully monitored for
reporting continuity and fault isolation. The data centers are each in a physically secure facility using monitoring, environmental
alarms, closed circuit television and redundant power sources. Our network operations center also is located in a secure facility.
Customers
Our Managed Portals and Advertising customers principally consist of high-speed internet service providers, such as AT&T,
Windstream, Mediacom and CenturyLink, as well as consumer electronics manufacturers, such as Toshiba America Information
Systems, Inc. (Toshiba). Contracts with these customers typically have an initial term of two to three years from the deployment of our
Managed Portals and frequently provide for one or more automatic renewal terms of one to two years each. Our Managed Portals and
Advertising customer contracts typically contain service level agreements that call for specific system “up times” and 24 hours per
day, seven days per week support. As of December 31, 2016, we had agreements with over 50 Managed Portals and Advertising
customers.
Our Recurring and Fee-Based customers consist of high-speed internet service providers along with enterprises, government and
nonprofit organizations, either directly or through resellers. Contracts with these customers typically have an initial term of one to
three years and frequently provide for one or more automatic renewal terms of one to two years each. Our Recurring and Fee-Based
customer contracts also typically contain service level agreements that call for specific system “up times” and 24 hours per day, seven
days per week support. As of December 31, 2016, we had agreements, both directly and indirectly through resellers, with over 120
high-speed internet service providers and over 3,500 enterprise, government and nonprofit customers.
Revenue attributable to one customer accounted for 16% of our revenue, or $20.8 million, in the year ended December 31, 2016.
Content and Service Providers
We license the content available in our Managed Portals, including free and paid content offerings and premium services, from
numerous third-party content and service partners. These partners provide a variety of content, including news and information,
entertainment, sports, music, video, games, shopping, travel, autos, careers and finance. Our relationships with content providers give
consumers access to over one hundred thousand short-form video and articles each month. To obtain this content, we enter into a
variety of licensing arrangements with the content providers. These arrangements are typically one to three years in duration with
payment terms that may be based on traffic, advertising revenue share, number of subscribers, flat fee payments over time, or some
combination thereof. In addition to using licensed content to populate our Managed Portals, we also provide premium services and
paid content that subscribers may purchase for additional fees. As of December 31, 2016, we had arrangements with over 65 content
providers, such as The Associated Press, CNN, Tribune Content Agency, Gracenote, and Bankrate.
4
Sales and Marketing
Managed Portals and Advertising Solutions
Our sales and marketing efforts focus on five primary areas: customer acquisitions, client services, account management,
marketing and advertising sales. Our customer acquisition team consists of direct sales personnel who call upon prospective
customers, typically large and mid-sized high-speed internet service providers and consumer electronics manufacturers. A significant
amount of time and effort is devoted to researching and analyzing the requirements and objectives of each prospective customer. Each
bid is specifically customized for the prospective customer, and often requires many months of interaction and negotiation before an
agreement is reached.
Once an agreement is reached, our client services team, working closely with the customer acquisition team, assumes
responsibility for managing the customer relationship during the time of the initial deployment and integration period, which is usually
three to six months. During this period, the customer’s technology is assessed and, if required, modifications are proposed to make it
compatible with our technology. The client services team is responsible for the quality of the client deployment, customer relationship
management during the time of deployment, and integration and project management associated with upgrades and enhancements.
After deployment, our account management team takes over management of the customer relationship, analyzing the ways in
which a customer could further benefit from increased use of our products and services. The account management team is responsible
for ongoing customer relationship management, upgrades and enhancements to the available products and services, as well as tracking
the financial elements and performance of the customer relationship.
Our marketing team works closely with our account management team to deliver marketing programs that support our
customers’ sales efforts as well as their consumers’ interaction with these products and services. We assist our customers in
developing marketing materials and advertising that can be accessed by consumers through different media outlets, including the
internet, print, television and radio. We also assist our customers in training their customer service representatives to introduce and sell
premium services and our paid content offerings to new and existing customers.
Our advertising sales team sells advertising inventory directly to advertisers, frequently through the advertising agencies
representing those advertisers. These advertisers may be small companies with the advertising locally or regionally focused on the
Managed Portals of one customer, or large companies with nationwide advertising on the Managed Portals of many customers. We
have a team of direct advertising sales employees and independent advertising sales representatives focused on this effort and will
continue to develop this team and attempt to grow the amount of advertising revenue generated with our customers. As of
December 31, 2016, we had arrangements with over 100 advertising partners such as AppNexus, Comcast Spotlight, Criteo,
DoubleClick, NCC Media, Mediavest, and Tremor Video.
Email/Collaboration
We market our Email/Collaboration product through both direct and indirect sales channels. Our regional sales and marketing
teams host several events each year with partners and run various campaigns to generate sales leads. Once a lead has been identified,
our internal sales representatives work closely with our regional partners on better identifying the opportunity and gathering customer
requirements.
We sell to internet service providers primarily through a direct sales force consisting of regional account executives. Sales
cycles can be six months or longer. We sell to prospective government, nonprofit and enterprise customers through a two-tier indirect
model via over 1,000 VARs and 500 BSPs. Our VARs sell on-premise licenses to end customers while our BSPs sell a cloud service
to the end customer. Sales cycles can range from thirty days to six months, depending on size and scope.
Government Regulation
We generally are not regulated other than under international, federal, state and local laws applicable to the internet or e-
commerce or to businesses in general. Some regulatory authorities have enacted or proposed specific laws and regulations governing
the internet and online entertainment. These laws and regulations cover issues such as taxation, pricing, content, distribution, quality
and delivery of services and products, electronic contracts, intellectual property rights, user privacy and information security.
Federal laws regarding the internet that could have an impact on our business include the following: the Digital Millennium
Copyright Act of 1998, which is intended to reduce the liability of online service providers of third-party content, including content
that may infringe copyrights or rights of others; the Children’s Online Privacy Protection Act, which imposes additional restrictions on
the ability of online services to collect user information from minors; and the Protection of Children from Sexual Predators Act, which
requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances.
5
Laws and regulations regarding user privacy and information security impact our business because we collect and use personal
information through our technology. We use this information to deliver more relevant content and services and provide consumers
with a personalized online experience. We share this information on an aggregate basis with our customers and content providers and,
subject to confidentiality agreements, to prospective customers and content providers. Laws such as the CAN-SPAM Act of 2003 or
other user privacy or security laws could restrict our and our customers’ ability to market products to their consumers, create
uncertainty in internet usage and reduce the demand for our services and products or require us to redesign our Managed Portals.
Intellectual Property
We believe that the protection of our intellectual property is critical to our success. We rely on copyright, service mark and
patent enforcement, contractual restrictions and trade secret laws to protect our proprietary rights. We have entered into confidentiality
and invention assignment agreements with our employees and contractors, and nondisclosure agreements with certain parties with
whom we conduct business in order to limit access to, and disclosure of, our proprietary information. We have applied for patents to
protect certain of our intellectual property. In addition, we have acquired intellectual property, including patents and trademarks,
through our acquisitions including Zimbra, Technorati, NimbleTV and Teknision. Our registered service mark in the United States is
Synacor ®.
We endeavor to protect our internally-developed systems and maintain our trademarks and service marks. We generally control
access to and use of our proprietary software and other confidential information through the use of internal and external controls,
including contractual protections with employees, contractors, customers and partners, and our software is protected by United States
and international copyright laws.
In addition to legal protections, we believe that factors such as the technological and creative skills of our personnel, new
product developments, frequent product enhancements and reliable product support and services are essential to establishing and
maintaining a technology leadership position.
Competition
The market for internet-based services and products in which we operate is highly competitive and involves rapidly-changing
technologies and customer and consumer requirements, as well as evolving industry standards and frequent product introductions.
While we believe that our technology offers considerable value and flexibility to our customers by helping them to extend their
consumer relationships to a wide variety of internet-based services, we face competition at four levels:
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When one of our prospective or existing customers considers another supplier, including one of our partners, for elements
of the services or products which we provide.
When consumers choose to rely on other vendors for similar products and services.
When content and service providers prefer to establish direct relationships with one or more of our customers.
When one of our customers decides to make the significant headcount and technology investment to develop products and
services in-house similar to those that we provide.
Our technology competes primarily with high-speed internet service providers that have internal information technology staff
capable of developing similar solutions in-house.
Managed Portals and Advertising Solutions
In addition, with respect to our Managed Portals and Advertising solutions, we compete with companies such as Facebook, Inc.;
Yahoo! Inc. or Yahoo!; Google; AOL, a division of Verizon, or AOL; Hulu; Netflix; Amazon; and MSN, a division of Microsoft
Corporation, or Microsoft, which have destination websites of their own or are capable of delivering content, service offerings and
search or advertising models similar to ours.
We also compete with providers of paid content and services over the internet, especially companies with the capability of
bundling paid content and premium services in much the same manner that we do. These companies include WatchESPN, F-Secure
Corporation, Exent Technologies Ltd., Zynga Inc., MLB Advanced Media, Symantec Corporation, McAfee, Inc., Activision Blizzard,
Inc. and Electronic Arts Inc. In some cases we have performed software integrations with these companies on behalf of our customers
or, as in the case of F-Secure Corporation, we have partnered with them in order to offer their services more broadly to all our
customers.
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We believe the principal competitive factors in our markets include a company’s ability to:
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reinforce the brands of our cable, satellite, telecom and consumer electronics customers;
produce products that are flexible and easy to use;
offer competitive fees for Managed Portal development and operation;
generate additional revenue for our customers;
enable our customers to be involved in designing the “look and feel” of their online presence;
offer services and products that meet the changing needs of our customers and their consumers, including emerging
technologies and standards;
provide high-quality product support to assist the customer’s service representatives; and
aggregate content to deliver more compelling bundled packages of paid content.
We believe that we distinguish ourselves from potential competitors in three principal ways. First, we provide a white-label
solution that, unlike the co-branded approach of most of our competitors, creates a consumer experience that reinforces our customers’
and partners’ brands. Second, we give customers control over the sign-on process and billing function for a wide range of internet
services and content by integrating with their internal systems (where applicable) thereby allowing our customers to “own the
consumer.” Finally, our solutions are flexible and neutral, meaning that we allow deliverables that are customized to our customers’
specific needs, as well as advanced video solutions that are either end-to-end or a la carte.
Email/Collaboration
With respect to our Email/Collaboration solutions, we compete primarily with Google and Microsoft in the enterprise and
government markets, and with Open-Xchange and OpenWave in the internet service provider markets.
We believe the principal competitive factors in the email/collaboration market include a company’s ability to:
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provide customers the ability to perform security and compliance audits of our source code;
deliver anti-spam, anti-virus and encryption technologies;
provide products and services at lowest possible total cost of ownership (TCO);
provide local partners the ability to store data within the legal jurisdiction of the country where their consumers do
business;
provide an enterprise-ready solution suitable for large-scale deployments including such enterprise features such as
delegated administration, detailed logging, and performance and availability transparency;
offer access to real-time performance and availability statistics;
afford customers and partners the ability to rebrand their cloud collaboration experience; and
make available to partners both integrations and extensions to the collaboration cloud environment specific to consumers’
needs.
We believe that we distinguish ourselves from potential competitors in several ways. First, we offer our Email/Collaboration
products and services a la carte, enabling consumers to buy only the services they need, providing for a much lower TCO. Second, our
Zimbra Email/Collaboration solution is a complete feature-rich, enterprise-ready solution scalable up to 40 million mailboxes. Finally,
our products are customizable and extendable and designed to meet very high standards of security.
Employees
As of December 31, 2016, we had 322 employees in the United States and 130 based internationally. Of these employees, 449
were full-time employees. None of our employees are represented by a labor union, and we consider current employee relations to be
good.
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Corporate Information
Synacor’s predecessor company was originally formed as a New York corporation, and in November 2002, Synacor re-
incorporated under the laws of the State of Delaware. Our headquarters are located at 40 La Riviere Drive, Buffalo, New York 14202,
and our telephone number is (716) 853-1362.
We have determined that we have a single reporting segment. A summary of our financial information by geographic location is
found in Note 7, Information About Segment and Geographic Areas, in the Notes to Consolidated Financial Statements. Our
international operations and sales subject us to a variety of risks; see Item 1A, “Risk Factors,” for further discussion.
Available Information
Our internet website address is http://www.synacor.com. We provide free access to various reports that we file with or furnish to
the Securities and Exchange Commission, or SEC, through our website, as soon as reasonably practicable after they have been filed or
furnished. These reports include, but are not limited to, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports. Our SEC reports can be accessed through the investor relations section of
our website, or through http://www.sec.gov. Information on our website does not constitute part of this Annual Report on Form 10-K
or any other report we file or furnish with the SEC. Stockholders may request copies of these documents from:
Synacor, Inc.
Investor Relations Department
40 La Riviere Drive
Suite 300
Buffalo, New York 14202
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ITEM 1A. RISK FACTORS
Our business and financial results are subject to numerous risks and uncertainties, including those described below, which
could adversely and materially affect our business, financial condition or results of operations. You should carefully consider these
risks and uncertainties, including the following risk factors and all other information contained in this Annual Report on Form 10-K,
together with any other documents we file with the SEC.
Risks Related to Our Business
A loss of any significant Managed Portals and Advertising customer could negatively affect our financial performance.
Although we continue to diversify our product portfolio and our customer base, we continue to derive a substantial portion of
our revenue from a small number of Managed Portal customers. Revenue attributable to these customers includes the Recurring and
Fee-Based revenue earned directly from them, as well as the search and digital advertising revenue earned through our relationships
with our advertising partners, such as Google, based on traffic generated from our Managed Portals. Revenue attributable to
CenturyLink, Toshiba, and Verizon Corporate Services Group, Inc., or Verizon together accounted for approximately 49% of our
revenue, or $53.5 million for the year ended December 31, 2015. For 2015, revenue attributable to one of these customers accounted
for 20% or more of our revenue, and revenue attributable to each of the other two customers accounted for more than 10% of our
revenue. For 2016, revenue attributable to one customer accounted for approximately 16% of our revenue, or $20.8 million, and no
other customer accounted for 10% or more of our revenue for that period.
Our contracts with our Managed Portals and Advertising customers generally have an initial term of approximately two to three
years from the launch of their Managed Portals and frequently provide for one or more automatic renewal terms of one to two years
each. If a key contract is not renewed or is otherwise terminated, or if revenue from a significant customer declines because of
competitive or other reasons, our revenue would decline and our ability to achieve or sustain profitability would be impaired. In
addition to the loss of Recurring and Fee-Based revenue, we would also lose significant revenue from the related search and digital
advertising services that we provide. In addition to the decline of revenue, we may have to impair our long-lived assets, to the extent
that such assets are used exclusively to support these customers, which would adversely impact our results of operations and financial
position.
If our delivery of our products and services under our contract with AT&T is executed according to our plan, we expect that,
following such delivery, we will derive a substantial portion of our revenue from AT&T, with revenue attributable to AT&T
exceeding the revenue attributable to any of our other customers. If our contract with AT&T is not renewed or is otherwise terminated,
or if revenue from the AT&T relationship were to decline due to competitive or other reasons, our results of operations and financial
position would be adversely affected.
Our search advertising partner, Google, accounts for a significant portion of our revenue, and any loss of, or diminution in,
our business relationship with Google would materially and adversely affect our financial performance.
We rely on traffic on our Managed Portals to generate search and digital advertising revenue, a substantial portion of which is
derived from text-based links to advertisers’ websites as a result of internet searches. We have a revenue-sharing relationship with
Google under which we include a Google-branded search tool on our Managed Portals. When a consumer makes a search request
using this tool, we deliver it to Google, and Google returns search results to us that include advertiser-sponsored links. If the consumer
clicks on a sponsored link, Google receives payment from the sponsor of that link and shares a portion of that payment with us. We
then typically share a portion of that payment with the applicable customer. Our Google-related search advertising revenue attributable
to our customers, which consists of the portion of the payment from the sponsor that Google shares with us, accounted for
approximately 12%, 28%, and 42% of our revenue in 2016, 2015, and 2014 or $15.9 million, $31.2 million, and $45.4 million
respectively. Our agreement with Google was extended in December 2016 for an additional twelve-month period and expires in
February 2018 unless we and Google mutually elect to renew it. Additionally, Google may terminate our agreement if we experience a
change in control, if we enter into an agreement providing for a change in control, if we do not maintain certain search and digital
advertising revenue levels or if we fail to conform to Google’s search policies and advertising policies. Google may from time to time
change its existing, or establish new, methodologies and metrics for valuing the quality of internet traffic. Any changes in these
methodologies, metrics and advertising technology platforms could decrease the advertising rates that we receive and/or the amount of
revenue that we generate from digital advertisements. If advertisers were to discontinue their advertising via internet searches, if
Google’s revenue from search-based advertising were to decrease, if Google’s share of the search revenue were to be increased or if
our agreement with Google were to be terminated for any reason or renewed on less favorable terms, our business, financial condition
and results of operations would be materially and adversely affected. Moreover, consumers’ increased use of search tools other than
the Google-branded search tool we provide would have similar effects.
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We have a history of significant pre-tax net losses and may not be profitable in future periods, which would limit our ability to
use our net operating loss carryforwards.
We have reported pre-tax net income in only three years, 2009, 2011 and 2012, in amounts of $0.3 million, $3.9 million, and
$5.6 million, respectively. In all other years, we have incurred losses, and at December 31, 2016 our cumulative net operating loss
carryforward totals approximately $14 million. We have taken cost saving measures, including a reduction in workforce carried out in
September 2014. However, our expenses may increase in future periods as we implement initiatives designed to grow our business
including, among other things, the start-up and product development expenses we will incur in connection with providing Managed
Portal and Advertising solutions to AT&T, acquisitions of complementary businesses (such as our acquisition of the Zimbra assets and
our acquisition of assets from Technorati), the development and marketing of new services and products, licensing of content,
expansion of our infrastructure and international expansion. If our revenue does not sufficiently increase to offset these expected
increases in operating expenses, we may incur significant losses and may not be profitable. For example, although our revenue in 2016
increased as compared to 2015 and our revenue in 2015 increased as compared to 2014, we have not yet returned to profitability. We
may not be able to return to or maintain profitability in the future. Any failure to achieve or maintain profitability may materially and
adversely affect our business, financial condition, results of operations and impact our ability to utilize our net operating loss
carryforwards. As a result of our pre-tax cumulative losses, we have established a full valuation allowance against our deferred
income tax asset, which includes our net operating loss carryforwards.
Many individuals are using devices other than personal computers and software applications other than internet browsers to
access the internet. If users of these devices and software applications do not widely adopt the applications and other solutions
we develop for them, our business could be adversely affected.
The number of people who access the internet through devices other than PCs, including tablets, smartphones and connected
TVs, has increased dramatically in the past few years and is projected to continue to increase. Similarly, individuals are increasingly
accessing the internet through apps other than internet browsers, such as those available for download through Apple Inc.’s App Store
and the Android Market. Our Managed Portals include our responsive desktop and mobile web products and also our mobile native
iOS and Android apps. If consumers do not use our mobile products at all or use these products less frequently than previously, our
financial results could be negatively affected. Additionally, as new devices and new apps are continually being released, it is difficult
to predict the problems we may encounter in developing new versions of our apps and other solutions for use on these alternative
devices and apps, and we may need to devote significant resources to the creation, support and maintenance of such apps and
solutions. If users of these devices and apps do not widely adopt the apps and other solutions we develop, our business, financial
condition and results of operations could be adversely affected.
Consumer tastes continually change and are unpredictable, and sales of our Managed Portals and Advertising solutions may
decline if we fail to enhance our service and content offerings to achieve continued consumer acceptance.
Our business depends on aggregating and providing services and content that our customers will place on our Managed Portals,
including television programming, news, entertainment, sports and other content that their consumers find engaging, and premium
services and paid content that their consumers will buy. Accordingly, we must continue to invest significant resources in licensing
efforts, research and development and marketing to enhance our service and content offerings, and we must make decisions about
these matters well in advance of product releases to implement them in a timely manner. Our success depends, in part, on
unpredictable and volatile factors beyond our control, including consumer preferences, competing content providers and websites and
the availability of other news, entertainment, sports and other services and content. While we work with our customers to have their
consumers’ homepages set to our Managed Portals, a consumer may easily change that setting, which would likely decrease the use of
our Managed Portals. Similarly, consumers who change their device’s operating system or internet browser may no longer have our
Managed Portals set as their default homepage, and unless they change it back to our Managed Portals, their usage of our Managed
Portals would likely decline and our results of operations could be negatively impacted. Consumers who acquire new consumer
electronics devices will no longer have our Managed Portals initially set as their default homepage, and unless they change the default
to our Managed Portals, their usage of our Managed Portals would likely decline and our results of operations could be negatively
impacted.
If our services are not responsive to the requirements of our customers or the preferences of their consumers, or the services are
not brought to market in a timely and effective manner, our business, financial condition and results of operations would be harmed.
Even if our services and content are successfully introduced and initially adopted, a subsequent shift in the preferences of our
customers or their consumers could cause a decline in the popularity of our services and content that could materially reduce our
revenue and harm our business, financial condition and results of operations.
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Our revenue growth will be adversely affected if we are unable to expand the breadth of our services and products or to
introduce new services and products on a timely basis.
To retain our existing customers, attract new customers and increase revenue, we must continue to develop and introduce new
services and products on a timely basis and continue to develop additional features to our existing product base. For example, under
our relationship with AT&T, we have agreed to deliver a number of additional products and services to AT&T’s consumers. If our
existing and prospective customers do not perceive that we will deliver our services and products on schedule, or if they do not
perceive our services and products to be of sufficient value and quality, we may lose the confidence of our existing customers and fail
to increase sales to these existing customers, existing customers may be able to terminate their agreements with us, and we may not be
able to attract new customers, each of which would adversely affect our operating results.
Our sales cycles and the contracting process with new customers are long and unpredictable and may require us to incur
expenses before executing a customer agreement, which makes it difficult to project when, if at all, we will obtain new
customers and when we will generate additional revenue and cash flows from those customers.
We market our services and products directly to high-speed internet service and communications providers, consumer
electronics manufacturers, and directly and indirectly to enterprises, and governmental and nonprofit organizations. New customer
relationships typically take time to obtain and finalize because of the burdensome cost of migrating from an existing solution to our
platform. Due to operating procedures in many organizations, a significant time period may pass between selection of our services and
products by key decision-makers and the signing of a contract. The length of time between the initial customer sales call and the
realization of significant sales is difficult to predict and can range from several months to several years. As a result, it is difficult to
predict when we will obtain new customers and when we will begin to generate revenue and cash flows from these potential new
customers.
As part of our sales cycle for our Managed Portals and Advertising customers, we may incur significant expenses in the form of
compensation and related expenses and equipment acquisition before executing a definitive agreement with a prospective customer so
that we may be ready to launch shortly following execution of a definitive agreement. If conditions in the marketplace generally or
with a specific prospective customer change negatively, it is possible that no definitive agreement will be executed, and we will be
unable to recover any expenses incurred before a definitive agreement is executed, which would in turn have an adverse effect on our
business, financial condition and results of operations.
Many of our customers are high-speed internet service providers, and consolidation within the cable and telecommunications
industries could adversely affect our business, financial condition and results of operations.
Our revenue from high-speed internet service and communications providers, including our search and digital advertising
revenue generated by online consumer traffic on our Managed Portals and our revenue from our Email/Collaboration offerings,
accounted for approximately 63% in 2016, approximately 82% in 2015 and approximately 85% in 2014. The cable and
telecommunications industries have experienced consolidation over the past several years, and we expect that this trend will continue.
As a result of consolidation, some of our customers may be acquired by companies with which we do not have existing relationships
and which may have relationships with one of our competitors or may have the in-house capacity to perform the services we provide.
As a result, such acquisitions could cause us to lose customers and the associated revenue. Under our agreements with some of our
customers, including CenturyLink, they have the right to terminate the agreement if we are acquired by one of their competitors.
Consolidation may also require us to renegotiate our agreements with our customers as a result of enhanced customer leverage.
We may not be able to offset the effects of any such renegotiations, and we may not be able to attract new customers to counter any
revenue declines resulting from the loss of customers or their subscribers.
We rely, to a significant degree, on indirect sales channels for the distribution of our Email/Collaboration products, and
disruption within these channels could adversely affect our business, financial condition, operating results and cash flows.
We use a variety of indirect distribution methods for our offerings, including channel partners, such as cloud service providers,
distributors, and value added resellers. A number of these partners in turn distribute our offerings via their own networks of channel
partners with whom we have no direct relationship. These relationships allow us to offer our technologies to a much larger customer
base than we would otherwise be able through our direct sales and marketing efforts.
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We rely, to a significant degree, on each of our channel partners to select, screen and maintain relationships with its distribution
network and to distribute our offerings in a manner that is consistent with applicable law and regulatory requirements and our quality
standards. If our channel partners or a partner in its distribution network violate applicable law or regulatory requirements or
misrepresent the functionality of our offerings, our reputation could be damaged and we could be subject to potential liability.
Furthermore, our channel partners may offer their own products and services that are competitive with our offerings or may not
distribute and market our offerings effectively. Our existing channel partner relationships do not, and any future channel partner
relationships may not, afford us any exclusive marketing or distribution rights. In addition, if a channel partner is acquired by a
competitor or its business units are reorganized or divested, our revenue derived from that partner may be adversely impacted.
Recruiting and retaining qualified channel partners and training them in the use of our technologies require significant time and
resources. If we fail to devote sufficient resources to support and expand our network of channel partners, our business may be
adversely affected. In addition, because we rely on channel partners for the indirect distribution of our technologies, we may have
little or no contact with the ultimate end-users of our technologies, thereby making it more difficult for us to establish brand
awareness, ensure proper delivery and installation of our software, support ongoing customer requirements, estimate end-user demand,
respond to evolving customer needs and obtain renewals from end-users.
Most of our sales to government entities have been made indirectly through our channel partners. Government entities may have
statutory, contractual, or other legal rights to terminate contracts with our channel partners for convenience or due to a default, and any
such termination may adversely impact our future operating results. Governments routinely investigate and audit government
contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our
offerings, a reduction of revenue or fines or civil or criminal liability if the audit uncovers improper or illegal activities.
If our indirect distribution channel is disrupted, we may be required to devote more resources to distribute our offerings directly
and support our customers, which may not be as effective and could lead to higher costs, reduced revenue and growth that is slower
than expected.
As technology continues to evolve, the use of our products by our current and prospective consumer electronics manufacturer
customers may decrease and our business could be adversely affected.
The consumer electronics industry is subject to rapid change, and our contracts for Managed Portals and Advertising solutions
with our consumer electronics manufacturer customers are not exclusive. As consumer electronics manufacturers continue to develop
new technologies and introduce new models and devices, there can be no assurance that we will be able to develop solutions that will
persuade consumer electronics manufacturers that are our customers at such time to utilize our technology for those new devices. If
our current and prospective consumer electronics manufacturer customers elect not to integrate our solutions into their new products,
our business, financial condition and results of operations could be adversely affected.
Moreover, updates to internet browser technology may adversely affect our business. For example, for our consumer electronics
manufacturer customers that have the Windows 8 operating system pre-installed on some of their devices, the Windows 8 operating
system places our Managed Portal on a second tab when the internet browser is launched, leading to decreased search and digital
advertising revenue. Further, upgrades to the Windows 10 operating system default to Microsoft’s latest Edge browser and displace
users’ previous browser settings including default homepages, which can also lead to decreased search and digital advertising revenue.
Unless consumers change their browser settings back to our Managed Portals, their usage of our Managed Portals would likely decline
and our results of operations could be negatively impacted.
We invest in features and functionality designed to increase consumer engagement with our Managed Portals; however, these
investments may not lead to increased revenue.
Our future growth and profitability will depend in large part on the effectiveness and efficiency of our efforts to provide a
compelling consumer experience that increases consumer engagement with our Managed Portals. We have made and will continue to
make substantial investments in features and functionality for our technology that are designed to drive consumer engagement. We
expect we will have invested a total of approximately $10 million through March 31, 2017 in start-up expenses, development expenses
and capital expenditures relating to our contract with AT&T, including approximately $8.2 million invested in the year ended
December 31, 2016, of which approximately $6.3 million was operating expense and the remaining $1.9 million was capital
expenditure, and we expect to invest an additional $2 million in 2017, of which we expect approximately $0.1 million to be capital
expenditure and the remainder to be operating expense.
Not all of these activities directly generate revenue, and we cannot assure you that we will reap sufficient rewards from these
investments to make them worthwhile. If the expenses that we incur in connection with these activities do not result in increased
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consumer engagement that in turn results in revenue increases that exceed these expenses, our business, financial condition and results
of operations will be adversely affected.
Our services and products may become less competitive or even obsolete if we fail to respond to technological developments.
Our future success will depend, in part, on our ability to modify or enhance our services and products to meet customer and
consumer needs, to add functionality and to address technological advancements that would improve their performance. For example,
if our smartphone and tablet products fail to capture the increased search activity on such devices or if our services and products do
not adapt to the increasing video usage on the internet or to take into account evolving developments in social networking, then they
could begin to appear obsolete. Similarly, if we fail to develop new ways to deliver content and services through apps other than
traditional internet browsers, consumers could seek alternative means of accessing content and services.
To remain competitive, we will need to develop new services and products and adapt our existing ones to address these and
other evolving technologies and standards. However, we may be unsuccessful in identifying new opportunities or in developing or
marketing new services and products in a timely or cost-effective manner. In addition, our product innovations may not achieve the
market penetration or price levels necessary for profitability. If we are unable to develop enhancements to, and new features for, our
existing services and products or if we are unable to develop new services and products that keep pace with rapid technological
developments or changing industry standards, our services and products may become obsolete, less marketable and less competitive,
and our business will be harmed.
We depend on third parties for content that is critical to our business, and our business could suffer if we do not continue to
obtain high-quality content at a reasonable cost.
We license the content that we aggregate on our Managed Portals from numerous third-party content providers, and our future
success is highly dependent upon our ability to maintain and enter into new relationships with these and other content providers. In
some cases, we are required under our contracts, including our contract with AT&T, to provide our customers’ consumers access to
certain types of content. In the future, some of our content providers may not give us access to high-quality content, may fail to adapt
to changes in consumer tastes or may increase the royalties, fees or percentages that they charge us for their content, any of which
could have a material negative effect on our operating results. Our rights to the content that we offer to our customers and their
consumers are not exclusive, and the content providers could license their content to our competitors. Our content providers could
even grant our competitors exclusive licenses. In addition, our customers are not prohibited from entering into content deals directly
with our content providers. Any failure to enter into or maintain satisfactory arrangements with content providers would adversely
affect our ability to provide a variety of attractive services and products to our customers. Our reputation and operating results could
suffer as a result, and it may be more difficult for us to develop new relationships with potential customers.
Our Zimbra Email/Collaboration solution was developed as an open-source software product. As such, it may be relatively
easy for competitors, some of which may have greater resources than we have, to compete with us.
One of the characteristics of open source software is that anyone may modify and redistribute the existing open source software
and use it to compete with us. Such competition can develop without the degree of overhead and lead time required by traditional
proprietary software companies. In addition, some of these competitors may make their open source software available for free
download and use on an ad hoc basis or may position their open source software as a loss leader. We cannot guarantee that we will be
able to compete successfully against current and future competitors or that competitive pressure and/or the availability of open source
software will not result in price reductions, reduced operating margins and loss of market share, any one of which could adversely
affect our business, financial condition, operating results and cash flows.
In 2016, we announced an initiative to promote support for our open source Zimbra Email/Collaboration solution with the
expectation that the initiative would lead to increased maintenance, support and professional service revenue. There can be no
assurance that this initiative will yield an increase in revenue.
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Our revenue and operating results may fluctuate, which makes our results difficult to predict and could cause our results to
fall short of expectations.
As a result of the rapidly changing nature of the markets in which we compete, our quarterly and annual revenue and operating
results are likely to fluctuate from period to period. These fluctuations may be caused by a number of factors, many of which are
beyond our control, including but not limited to the various factors set forth in this “Risk Factors” section, as well as:
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any failure to maintain strong relationships and favorable revenue-sharing arrangements with our Managed Portals and
Advertising partners, in particular Google, including a reduction in the quantity or pricing of sponsored links that
consumers click on or a reduction in the pricing of digital advertisements by advertisers;
the timing of our investment in, or the timing of our monetization of, our products and services, such as our end-to-end
video solutions portfolio or our Zimbra Email/Collaboration product;
any failure of significant customers to renew their agreements with us;
our ability to attract new customers;
our ability to increase sales of premium services and paid content to our existing customers’ consumers;
any development by our significant customers of the in-house capacity to replace the solutions we provide;
the release of new product and service offerings by our competitors or our customers;
variations in the demand for our services and products and the implementation cycles of our services and products by our
customers;
changes to internet browser technology that may render our Managed Portals less competitive;
changes in our pricing policies or those of our competitors;
changes in the prices our customers charge their consumers for email, premium services and paid content;
service outages, other technical difficulties or security breaches;
limitations relating to the capacity of our networks, systems and processes;
our failure to accurately estimate or control costs, including costs related to the implementation of our solutions for new
customers;
maintaining appropriate staffing levels and capabilities relative to projected growth;
the timing of costs related to the development or acquisition of technologies, services or businesses to support our existing
customers and potential growth opportunities; and
general economic, industry and market conditions and those conditions specific to internet usage and online businesses.
For these reasons and because the market for our services and products is relatively new and rapidly changing, it is difficult to
predict our future financial results.
Expansion into international markets, which is an important part of our strategy, but where we have limited experience, will
subject us to risks associated with international operations.
We plan to continue to expand our product offerings internationally, particularly in Asia, Canada, Latin America and Europe.
Although our exposure to and expertise in international markets have increased as a result of our acquisition of the Zimbra assets in
September 2015, we still have limited experience in marketing and operating all of our services and products in international markets,
and we may not be able to successfully develop or grow our business in these markets. Our success in these markets will be directly
linked to the success of our relationships with potential customers, resellers, content partners and other third parties.
As the international markets in which we operate continue to grow, we expect that competition in these markets will intensify.
Local companies may have a substantial competitive advantage because of their greater understanding of, and focus on, the local
markets. Some of our domestic competitors who have substantially greater resources than we do may be able to more quickly and
comprehensively develop and grow in international markets. International expansion may also require significant financial investment
including, among other things, the expense of developing localized products, the costs of acquiring foreign companies and the
integration of such companies with our operations, expenditure of resources in developing customer and content relationships and the
increased costs of supporting remote operations.
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Other risks of doing business in international markets include the increased risks and burdens of complying with different legal
and regulatory standards, difficulties in managing and staffing foreign operations, recruiting and retaining talented direct sales
personnel, limitations on the repatriation of funds and fluctuations of foreign exchange rates, varying levels of internet technology
adoption and infrastructure and our ability to enforce contracts and our intellectual property rights in foreign jurisdictions. In addition,
our success in international expansion could be limited by barriers to international expansion such as tariffs, adverse tax consequences
and technology export controls. If we cannot manage these risks effectively, the costs of doing business in some international markets
may be prohibitive or our costs may increase disproportionately to our revenue. Some of our business partners also have international
operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international
operations, our business may be adversely affected if our business partners are not able to successfully manage these risks.
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse
consequences.
We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in
bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Corruption, extortion,
bribery, pay-offs, theft and other fraudulent practices may occur with respect to our expansion into international markets. Our
employees or other agents may engage in such conduct for which we might be held responsible. If our employees or other agents are
found to have engaged in such practices, we could suffer severe penalties and other consequences, including adverse publicity and
damage to our reputation that may have a material adverse effect on our business, financial condition and results of operations.
Our agreements with some of our customers and content providers require fixed payments, which could adversely affect our
financial performance.
Certain of our agreements with Managed Portals and Advertising customers and content providers require us to make fixed
payments to them. The aggregate amount of such fixed payments for the year ending December 31, 2017 is approximately $1.6
million. We are required to make these fixed payments regardless of the achievement of any revenue objectives or subscriber or usage
levels. If we do not achieve our financial objectives, these contractual commitments would constitute a greater percentage of our
revenue than originally anticipated and would adversely affect our profitability.
Our agreements with some of our customers and content providers contain penalties for non-performance, which could
adversely affect our financial performance.
We have entered into service level agreements with many of our customers. These agreements generally call for specific system
“up times” and 24 hours per day, seven days per week support and include penalties for non-performance. We may be unable to fulfill
these commitments due to circumstances beyond our control, which could subject us to substantial penalties under those agreements,
harm our reputation and result in a reduction of revenue or the loss of customers, which would in turn have an adverse effect on our
business, financial condition and results of operations. To date, we have not incurred any material penalties.
In addition, certain of our agreements with customers contain penalties for certain types of non-performance which, if not timely
rectified, could result in substantial financial penalties to us.
System failures or capacity constraints could harm our business and financial performance.
The provision of our services and products depends on the continuing operation of our information technology and
communications systems. Any damage to or failure of our systems could result in interruptions in our service. Such interruptions
could harm our business, financial condition and results of operations, and our reputation could be damaged if people believe our
systems are unreliable. Our systems are vulnerable to damage or interruption from snow storms, terrorist attacks, floods, fires, power
loss, telecommunications failures, security breaches, computer malware, computer hacking attacks, computer viruses, computer denial
of service attacks or other attempts to, or events that, harm our systems. Our data centers are also subject to break-ins, sabotage and
intentional acts of vandalism and to potential disruptions if the operators of the facilities have financial difficulties. Although we
maintain insurance to cover a variety of risks, the scope and amount of our insurance coverage may not be sufficient to cover our
losses resulting from system failures or other disruptions to our online operations. For example, the limit on our business interruption
insurance is approximately $20 million for cyber loss ($38 million for physical loss). Any system failure or disruption and any
resulting losses that are not recoverable under our insurance policies may materially harm our business, financial condition and results
of operations. To date, we have never experienced any material losses.
Our data centers are not on full second-site redundancy, however we have the capability to do so; only certain customers require
us to. We regularly back-up our systems and store the system back-ups in Atlanta, Georgia; Dallas, Texas; Lewis Center, Ohio;
Denver, Colorado; Toronto, Canada; and Amsterdam, the Netherlands. If we were forced to relocate to an alternate site and to rely on
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our system back-ups to restore the systems, we would experience significant delays in restoring the functionality of our platform and
could experience loss of data, which could materially harm our business and our operating results.
Security breaches, computer viruses and computer hacking attacks could harm our business, financial condition and results of
operations.
Security breaches, computer malware and computer hacking attacks are prevalent in the technology industry. Any security
breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional
malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of
computer viruses could harm our business, financial condition and results of operations. We have previously experienced hacking
attacks on our systems, and may in the future experience hacking attacks. Though it is difficult to determine what harm may directly
result from any specific interruption or breach, any failure to maintain performance, reliability, security and availability of our
technology infrastructure to the satisfaction of our customers and their consumers may harm our reputation and our ability to retain
existing customers and attract new customers.
We may not maintain acceptable website performance for our Managed Portals and Advertising customers, which may
negatively impact our relationships with our customers and harm our business, financial condition and results of operations.
A key element to our continued growth is the ability of our customers’ consumers in all geographies to access our Managed
Portals and other offerings within acceptable load times. We refer to this as website performance. We may in the future experience
platform disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or
software errors, capacity constraints due to an overwhelming number of users accessing our technology simultaneously, and denial of
service or fraud or security attacks.
In some instances, we may not be able to identify the cause or causes of these website performance problems within an
acceptable period of time. It may become increasingly difficult to maintain and improve website performance, especially during peak
usage times, and as our solutions become more complex and our user traffic increases. If our Managed Portals and Advertising
solutions are unavailable when consumers attempt to access them or do not load as quickly as they expect, consumers may seek other
alternatives to obtain the information for which they are looking, and may not use our products and services as often in the future, or at
all. This would negatively impact our relationships with our customers. We expect to continue to make significant investments to
maintain and improve website performance. To the extent that we do not effectively address capacity constraints, upgrade our systems
as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in
technology, our business and operating results may be harmed.
We rely on our management team and need additional personnel to expand our business, and the loss of key officers or an
inability to attract and retain qualified personnel could harm our business, financial condition and results of operations.
We depend on the continued contributions of our senior management and other key personnel, especially Himesh Bhise, our
President and Chief Executive Officer, and William J. Stuart, our Chief Financial Officer. The loss of the services of any of our
executive officers or other key employees could harm our business and our prospects. All of our executive officers and key employees
are at-will employees, which means they may terminate their employment relationship with us at any time.
Our future success also depends on our ability to identify, attract and retain highly skilled technical, managerial, finance,
marketing and creative personnel. Further, we will need to hire personnel outside the United States to continue to pursue an
international expansion strategy, and we will need to hire additional advertising salespeople to sell more advertisements directly. We
face intense competition for qualified individuals from numerous technology, marketing and media companies, and we may incur
significant costs to attract them. We may be unable to attract and retain suitably qualified individuals, or we may be required to pay
increased compensation in order to do so. If we were to be unable to attract and retain the qualified personnel we need to succeed, our
business could suffer.
Volatility or lack of performance in the trading price of our common stock may also affect our ability to attract and retain
qualified personnel. Many of our senior management personnel and other key employees have become, or will become, vested in a
substantial amount of stock or stock options. Employees may be more likely to leave us if the shares they own or the shares underlying
their options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the
options or if the exercise prices of the options that they hold are significantly above the trading price of our common stock. If we are
unable to retain our employees, our business, financial condition and results of operations would be harmed.
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If we fail to manage our growth effectively, our business, financial condition and results of operations may suffer.
Following the merger of our predecessor companies, Chek, Inc., or Chek, and MyPersonal.com, Inc., or MyPersonal, to form
Synacor, much of our business expansion resulted from organic growth. More recently, however, we have sought to, and may continue
to seek to, grow through strategic acquisitions. For example, in the first quarter of 2016, we acquired certain assets from Technorati,
and in 2015, we acquired the Zimbra assets and certain assets of NimbleTV. Our goal of returning to growth may place significant
demands on our management and our operational and financial infrastructure. Our ability to manage our growth effectively and to
integrate new technologies and acquisitions (such as the assets acquired from Technorati, Zimbra, and NimbleTV) into our existing
business will require us to continue to expand our operational, financial and management information systems and to continue to
retain, attract, train, motivate and manage key employees. Growth could strain our ability to:
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develop and improve our operational, financial and management controls;
enhance our reporting systems and procedures;
recruit, train and retain highly skilled personnel;
maintain our quality standards; and
maintain customer and content owner satisfaction.
Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to
achieve the necessary level of efficiency in our organization as it grows, our business, financial condition and results of operations
would be harmed.
We may expand our business through acquisitions of, or investments in, other companies or new technologies, or joint
ventures or other strategic alliances with other companies, which may divert our management’s attention or prove not to be
successful.
In February 2016 we acquired substantially all of the assets of, and hired certain personnel from, Technorati; in 2015 we
acquired the Zimbra assets and hired certain related personnel and we purchased assets from, and hired the personnel of, NimbleTV;
and in March 2013, we entered into a joint venture in China. We may decide to pursue other acquisitions of, investments in, or joint
ventures involving other technologies and businesses in the future. Such transactions could divert our management’s time and focus
from operating our business.
Our ability as an organization to integrate acquisitions is relatively unproven. Integrating an acquired company, business or
technology is risky and may result in unforeseen operating difficulties and expenditures, including, among other things, with respect
to:
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incorporating new technologies into our existing business infrastructure;
consolidating corporate and administrative functions;
coordinating our sales and marketing functions to incorporate the new business or technology;
maintaining morale, retaining and integrating key employees to support the new business or technology and managing our
expansion in capacity; and
maintaining standards, controls, procedures and policies (including effective internal control over financial reporting and
disclosure controls and procedures).
In addition, a significant portion of the purchase price of companies we may acquire may be allocated to acquired goodwill and
other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected
returns, we may be required to take charges to our earnings based on this impairment assessment process, which could harm our
operating results.
Future acquisitions could result in potentially dilutive issuances of our equity securities, including our common stock, or the
incurrence of debt, contingent liabilities, amortization expenses or acquired in-process research and development expenses, any of
which could harm our business, financial condition and results of operations. Future acquisitions may also require us to obtain
additional financing, which may not be available on favorable terms or at all.
Finally, our skill at investing our funds in illiquid securities issued by other companies, such as our investment in a privately
held Delaware corporation called Blazer and Flip Flops, Inc., or B&FF (doing business as The Experience Engine), is untested.
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Although we review the results and prospects of such investments carefully, it is possible that our investments could result in a total
loss. Additionally, we will typically have little or no control in the companies in which we invest, and we will be forced to rely on the
management of companies in which we invest to make reasonable and sound business decisions. If the companies in which we invest
are not successfully able to manage the risks facing them, such companies could suffer, and our own business, financial condition and
results of operations could be harmed.
We may require additional capital to grow our business, and this capital may not be available on acceptable terms or at all.
The operation of our business and our growth strategy may require significant additional capital, especially if we were to
accelerate our expansion and acquisition plans. For example, we invested approximately $8.2 million in 2016 in preparing to support
AT&T as a customer, and we expect to invest an additional $2 million in 2017 in support of that goal. If the cash generated from
operations and otherwise available to us is not sufficient to meet our capital requirements, we will need to seek additional capital,
potentially through debt or equity financings, to fund our growth. We may not be able to raise needed capital on terms acceptable to us
or at all. Financings, if available, may be on terms that are dilutive or potentially dilutive to our stockholders, and the prices at which
new investors would be willing to purchase our securities may cause our existing stockholders to suffer substantial dilution. The
holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of our common
stock. As with our credit facility with Silicon Valley Bank, any debt financing obtained by us in the future could contain financial or
other covenants that may potentially restrict our operations, and if we do not effectively manage our business to comply with those
covenants, our business, financial condition and results of operations could be adversely affected.
In addition, while we are in compliance at December 31, 2016 with the financial covenants contained in our credit facility with
Silicon Valley Bank, our future financial performance, including our expected investments in start-up expenses, development
expenses and capital expenditures associated with our contract with AT&T, may potentially cause us to become not in compliance
with those covenants, possibly restricting our ability to continue to borrow under our credit facility.
If new or existing sources of financing are required but are insufficient or unavailable, we could be required to delay, abandon
or otherwise modify our growth and operating plans to the extent of available funding, which would harm our ability to grow our
business.
Our business depends, in part, on our ability to protect and enforce our intellectual property rights.
The protection of our intellectual property is critical to our success. We rely on copyright and service mark enforcement,
contractual restrictions and trade secret laws to protect our proprietary rights. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure agreements with certain parties with whom we conduct
business to limit access to and disclosure and distribution of our proprietary information. Additionally, we have applied for patents to
protect certain of our intellectual property. We have registered several marks and filed many other trademark applications in the U.S.
We have not applied for copyright protection in any jurisdiction including in the U.S. However, if we are unable to adequately protect
our intellectual property, it may be possible for a third party to copy or otherwise obtain and use our intellectual property without
authorization, and, our business may suffer from the piracy of our technology and the associated loss in revenue.
Protecting against the unauthorized use of our intellectual property and other proprietary rights is expensive, difficult and, in
some cases, impossible. The steps we take may not prevent misappropriation or infringement of our property rights. Litigation may be
necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could be costly and divert management resources, either of which could harm
our business. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to
enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from
infringing upon or misappropriating our intellectual property.
We are not currently involved in any legal proceedings with respect to protecting our intellectual property; however, we may
from time to time become a party to various legal proceedings with respect to protecting our intellectual property arising in the
ordinary course of our business.
Any claims from a third party that we are infringing upon its intellectual property, whether valid or not, could subject us to
costly and time-consuming litigation or expensive licenses or force us to curtail some services or products.
Companies in the internet and technology industries tend to own large numbers of patents, copyrights, trademarks and trade
secrets, and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. We
have been subject to claims that the presentation of certain licensed content on our Managed Portals infringes certain patents of a third
party, none of which have resulted in material direct settlement or payments by us or any determination of infringement by us, and as
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we face increasing competition, the possibility of further intellectual property rights claims against us grows. Our technologies may
not be able to withstand any third party claims or rights against their use. Any intellectual property claims, with or without merit,
could be time-consuming, expensive to litigate or settle and could divert management resources and attention. An adverse
determination also could prevent us from offering our services and products to others and may require that we procure substitute
products or services for our customers.
In the case of any intellectual property rights claim, we may have to pay damages or stop using technology found to be in
violation of a third party’s rights. We may have to seek a license for the technology, which may not be available to us on reasonable
terms and may significantly increase our operating expenses. The technology also may not be available for license to us at all. As a
result, we may also be required to develop alternative non-infringing technology, which could require significant effort and expense. If
we cannot license or develop technology for the infringing aspects of our business, we may be forced to limit our service and product
offerings and may be unable to compete effectively. Any of these consequences could harm our operating results.
In addition, we typically have contractual obligations to our customers to indemnify and defend them with respect to third-party
intellectual property infringement claims that arise from our customers’ use of our products or services. Such claims, whether valid or
not, could harm our relationships with our customers, have resulted and could result in the future in us or our customers having to
enter into licenses with the claimants and have caused and could cause us in the future to incur additional costs or experience reduced
revenue. To date, neither the increase in our costs nor any reductions in our revenue resulting from such claims have been material.
Such claims could also subject us to costly and time-consuming litigation as well as diverting management attention and resources.
Satisfying our contractual indemnification obligations could also give rise to significant liability, and thus harm our business and our
operating results.
We are not currently subject to any material legal proceedings with respect to third party claims that we or our customers’ use of
our products and services are infringing upon their intellectual property; however, we may from time to time become a party to
various legal proceedings with respect to such claims arising in the ordinary course of our business.
Any unauthorized disclosure or theft of personal information we gather could harm our reputation and subject us to claims or
litigation.
We collect, and have access to, personal information of subscribers, including names, addresses, account numbers, credit card
numbers and email addresses. Unauthorized disclosure of such personal information, whether through breach of our systems by an
unauthorized party, employee theft or misuse, or otherwise, could harm our business. If there were an inadvertent disclosure of
personal information, or if a third party were to gain unauthorized access to the personal information we possess, our operations could
be seriously disrupted and we could be subject to claims or litigation arising from damages suffered by subscribers or our customers.
In addition, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding the
unauthorized disclosure of personal information. Finally, any perceived or actual unauthorized disclosure of the information we collect
could harm our reputation, substantially impair our ability to attract and retain customers and have an adverse impact on our business.
We collect and may access personal information and other data, which subjects us to governmental regulation and other legal
obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business.
We collect, and have access to, personal information of subscribers, including names, addresses, account numbers, credit card
numbers and email addresses. There are numerous federal, state and local laws, rules and guidelines around the world regarding
privacy and the collection, storing, sharing, use, processing, disclosure, destruction and security of personal information and other
subscriber data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or
conflict with other rules. For example, the European Commission and the United States Department of Commerce recently designed a
new program known as the EU-US Privacy Shield, or the Privacy Shield, which provides a mechanism for U.S. companies to comply
with data protection requirements under the 1995 European Union Data Protection Directive when transferring personal information
from the European Economic Area, or the EEA, to the United States. The Privacy Shield includes more stringent operational and legal
requirements for parties processing EEA personal information and imposes significant penalties for non-compliance. We generally
comply with industry standards and are subject to the terms of our privacy policies and privacy-related obligations to third parties
(including voluntary third-party certification bodies such as TRUSTe). We strive to comply with all applicable laws, policies, legal
obligations and industry codes of conduct relating to privacy and data protection to the extent possible. However, it is possible that
these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict
with other rules or our practices. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related
obligations to users or other third parties, or our privacy-related legal obligations (including obligations in agreements with our
customers), or any compromise of security that results in the unauthorized release or transfer of personal information or other
subscriber data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy
groups or others and could cause our customers to lose trust in us, or, in some situations, terminate their agreements with us, which
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could have an adverse effect on our business. Additionally, if third parties we work with, such as customers, vendors or developers,
violate applicable laws or our policies, such violations may also put subscriber information at risk and could in turn have an adverse
effect on our business.
Any failure to convince advertisers of the benefits of advertising with us would harm our business, financial condition and
results of operations.
We have derived and expect to continue to derive a substantial portion of our revenue from digital advertising, including
advertising on our Managed Portals. Such advertising accounted for approximately 46%, 43%, and 36% of our revenue for the years
ended December 31, 2016, 2015, and 2014, respectively. Our ability to attract and retain advertisers and, ultimately, to generate
advertising revenue depends on a number of factors, including:
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increasing the numbers of consumers using our Managed Portals;
maintaining consumer engagement on those Managed Portals;
competing effectively for advertising spending with other online and offline advertising providers; and
continuing to grow our direct advertising sales force and develop and diversify our advertising capabilities.
If we are unable to provide high-quality advertising opportunities and convince advertisers and agencies of our value
proposition, we may not be able to retain existing advertisers or attract new ones, which would harm our business, financial condition
and results of operations.
Migration of high-speed internet service providers’ consumers from one high-speed internet service provider to another could
adversely affect our business, financial condition and results of operations.
Consumers may become dissatisfied with their current high-speed internet service provider and may switch to another provider.
In the event that there is substantial subscriber migration from our existing customers to service providers with which we do not have
relationships, the fees that we receive on a per-subscriber basis, and the related revenue, including search and digital advertising
revenue, could decline.
Our business and the trading price of our common stock may be adversely affected if our internal controls over financial
reporting are found by management or by our independent registered public accounting firm not to be adequate.
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of
the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires our management to evaluate and report on our internal control
over financial reporting. This report contains, among other matters, an assessment of the effectiveness of our internal control over
financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial
reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial
reporting identified by management. In addition, our independent registered public accounting firm may be required to formally attest
to the effectiveness of our internal control over financial reporting beginning with the Annual Report on Form 10-K for the year in
which we are no longer an “emerging growth company.” At such time, our independent registered public accounting firm may issue a
report that is adverse in the event it is not satisfied with the level at which our controls are designed or operating.
While we have determined that our internal control over financial reporting was effective as of December 31, 2016, as indicated
in our Management Report on Internal Control over Financial Reporting included in this Annual Report on Form 10-K, we must
continue to monitor and assess our internal control over financial reporting. If our management identifies one or more material
weaknesses in our internal control over financial reporting and such weakness remains uncorrected at fiscal year-end, we will be
unable to assert such internal control is effective at fiscal year-end. If we are unable to assert that our internal control over financial
reporting is effective at fiscal year-end, or if our independent registered public accounting firm, when required, is unable to express an
opinion on the effectiveness of our internal controls or concludes that we have a material weakness in our internal controls, we could
lose investor confidence in the accuracy and completeness of our financial reports, which would likely have an adverse effect on our
business and stock price.
Even if we conclude our internal control over financial reporting provides reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted
Accounting Principles, or GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or
detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
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After the end of 2017, we will no longer be an “emerging growth company” as defined in the Jumpstart Our Business Startups
(“JOBS”) Act. If, at that time, we are also no longer a “smaller reporting company,” then we will be required to comply with the
auditor attestation requirements contained in Section 404, Any delay in compliance with the auditor attestation provisions of
Section 404, when applicable to us, could subject us to a variety of administrative sanctions, including ineligibility for short-form
resale registration, action by the SEC, the suspension or delisting of our common stock and the inability of registered broker-dealers to
make a market in our common stock, which would further reduce the trading price of our common stock and could harm our business.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited as a result of future
transactions in our stock which may be outside our control.
As of December 31, 2016, we had substantial federal and state net operating loss carryforwards. Under Sections 382 and 383 of
the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s
ability to use its pre-change net operating loss carryforwards to offset its post-change income and taxes may be limited. In general, an
“ownership change” generally occurs if there is a cumulative change in our ownership by “five-percent stockholders” that exceeds 50
percentage points over a rolling three-year period. For these purposes, a five-percent stockholder is generally any person or group of
persons that at any time during the applicable testing period has owned 5% or more of our outstanding stock. In addition, persons who
own less than 5% of the outstanding stock are grouped together as one or more “public groups,” which are also treated as five-percent
stockholders. Similar rules may apply under state tax laws. We may experience ownership changes in the future as a result of future
transactions in our stock, some of which may be outside our control. As a result, our ability to use our pre-change net operating loss
carryforwards to offset United States federal and state taxable income and taxes may be subject to limitations.
Risks Related to Our Industry
The growth of the market for our services and products depends on the continued growth of the internet as a medium for
content, advertising, commerce and communications.
Expansion in the sales of our services and products depends on the continued acceptance of the internet as a platform for
content, advertising, commerce and communications. The acceptance of the internet as a medium for such uses could be adversely
impacted by delays in the development or adoption of new standards and protocols to handle increased demands of internet activity,
security, privacy protection, reliability, cost, ease of use, accessibility and quality of service. The performance of the internet and its
acceptance as such a medium has been harmed by viruses, worms, and similar malicious programs, and the internet has experienced a
variety of outages and other delays as a result of damage to portions of its infrastructure. If for any reason the internet does not remain
a medium for widespread content, advertising, commerce and communications, the demand for our services and products would be
significantly reduced, which would harm our business.
The growth of the market for our services and products depends on the development and maintenance of the internet
infrastructure.
Our business strategy depends on continued internet and high-speed internet access growth. Any downturn in the use or growth
rate of the internet or high-speed internet access would be detrimental to our business. If the internet continues to experience
significant growth in number of users, frequency of use and amount of data transmitted, the internet infrastructure might not be able to
support the demands placed on it and the performance or reliability of the internet may be adversely affected. The success of our
business therefore depends on the development and maintenance of a sound internet infrastructure. This includes maintenance of a
reliable network backbone with the necessary speed, data capacity and security, as well as timely development of complementary
products, such as routers, for providing reliable internet access and services. Consequently, as internet usage increases, the growth of
the market for our products depends upon improvements made to the internet as well as to individual customers’ networking
infrastructures to alleviate overloading and congestion. In addition, any delays in the adoption of new standards and protocols required
to govern increased levels of internet activity or increased governmental regulation may have a detrimental effect on the internet
infrastructure.
A substantial majority of our revenue is derived from our Managed Portals and Advertising solutions; our revenue would
decline if advertisers do not continue their usage of the internet as an advertising medium.
We have derived and expect to continue to derive a substantial majority of our revenue from search and digital advertising,
including advertising on our Managed Portals. Such search and digital advertising revenue accounted for approximately 59%, 71%
and 79% of our revenue for the years ended December 31, 2016, 2015 and 2014, or $74.9 million, $78.3 million, and $83.9 million
respectively. However, the prospects for continued demand and market acceptance for internet advertising are uncertain. If advertisers
do not continue to increase their usage of the internet as an advertising medium, our revenue would decline. Advertisers that have
traditionally relied on other advertising media may not advertise on the internet. As the internet evolves, advertisers may find online
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advertising to be a less attractive or less effective means of promoting their services and products than traditional methods of
advertising and may not continue to allocate funds for internet advertising. Many historical predictions by industry analysts and others
concerning the growth of the internet as a commercial medium have overstated the growth of the internet and you should not rely upon
them. This growth may not occur or may occur more slowly than estimated.
Most of our search revenue is based on the number of paid “clicks” on sponsored links that are included in search results
generated from our Managed Portals. Generally, each time a consumer clicks on a sponsored link, the search provider that provided
the commercial search result receives a fee from the advertiser who paid for such sponsored link and the search provider pays us a
portion of that fee. We, in turn, typically share a portion of the fee we receive with our customer. If an advertiser receives what it
perceives to be a large number of clicks for which it needs to pay, but that do not result in a desired activity or an increase in sales, the
advertiser may reduce or eliminate its advertisements through the search provider that provided the commercial search result to us.
This reaction would lead to a loss of revenue to our search providers and consequently to lesser fees paid to us, which would have a
material negative effect on our financial results.
Market prices for online advertising may decrease due to competitive or other factors. In addition, if a large number of internet
users use filtering software that limits or removes advertising from the users’ view, advertisers may perceive that internet advertising
is not effective and may choose not to advertise on the internet.
The market for internet-based services and products in which we operate is highly competitive, and if we cannot compete
effectively, our sales may decline and our business may be harmed.
Competition in the market for internet-based services and products in which we operate is intense and involves rapidly changing
technologies and customer and subscriber requirements, as well as evolving industry standards and frequent product introductions.
Our competitors may develop solutions that are similar or superior to our technology. Our primary competitors include high-speed
internet service providers with internal information technology staff capable of developing solutions similar to our technology. Other
competitors include: Yahoo!; Google; AOL, a division of Verizon; and MSN, a division of Microsoft. Advantages some of our
existing and potential competitors hold over us include the following:
•
•
•
•
•
•
•
•
•
significantly greater revenue and financial resources;
stronger brand and consumer recognition;
the capacity to leverage their marketing expenditures across a broader portfolio of services and products;
ability to offer their products at significantly lower prices or at no cost;
more extensive proprietary intellectual property from which they can develop or aggregate content without having to pay
fees or paying significantly lower fees than we do;
pre-existing relationships with content providers that afford them access to content while blocking the access of
competitors to that same content;
pre-existing relationships with high-speed internet service providers that afford them the opportunity to convert such
providers to competing services and products;
lower labor and development costs; and
broader global distribution and presence.
If we are unable to compete effectively or we are not as successful as our competitors in our target markets, our sales could
decline, our margins could decline and we could lose market share, any of which would materially harm our business, financial
condition and results of operations.
22
Government regulation of the internet continues to evolve, and new laws and regulations could significantly harm our
financial performance.
Over time, we expect state, federal and international legislative bodies to continue to enact more stringent laws and regulations
relating to the internet. The adoption or modification of laws related to the internet could harm our business, financial condition and
results of operations by, among other things, increasing our costs and administrative burdens. Due to the increasing popularity and use
of the internet, many laws and regulations relating to the internet are being debated at the international, federal and state levels, which
are likely to address a variety of issues such as:
•
•
•
•
•
•
•
•
•
•
•
•
user privacy and expression;
ability to collect and/or share necessary information that allows us to conduct business on the internet;
export compliance;
pricing and taxation;
fraud;
advertising;
intellectual property rights;
consumer protection;
protection of minors;
content regulation;
information security; and
quality of services and products.
Several federal laws that could have an impact on our business have been adopted. For example, the Digital Millennium
Copyright Act of 1998 reduces the liability of online service providers of third-party content, including content that may infringe
copyrights or rights of others, but requires strict compliance with certain provisions to qualify for the safe harbor provisions; the
Children’s Online Privacy Protection Act imposes additional restrictions on the ability of online services to collect user information
from minors under the age of 13; and the Protection of Children from Sexual Predators Act requires online service providers to report
evidence of violations of federal child pornography laws under certain circumstances.
It could be costly for us to comply with existing and potential laws and regulations, and they could harm our marketing efforts
and our attractiveness to advertisers by, among other things, restricting our ability to collect demographic and personal information
from consumers or to use or disclose that information in certain ways. If we were to violate these laws or regulations, or if it were
alleged that we had, we could face private lawsuits, fines, penalties and injunctions and our business could be harmed.
Finally, the applicability to the internet and other online services of existing laws in various jurisdictions governing issues such
as property ownership, sales and other taxes, libel and personal privacy is uncertain. Any new legislation or regulation, the application
of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and
regulations to the internet and other online services could also increase our costs of doing business, discourage internet
communications, reduce demand for our services and expose us to substantial liability.
Increased regulation and industry standards related to internet privacy issues may prevent us from providing our current
products and solutions to our customers, thereby harming our business.
The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future.
Practices regarding the collection, use, storage, sharing, processing, disclosure, destruction and security of personal information by
companies operating over the internet have come under increased public scrutiny and, as a result, there are an increasing number of
regulations and industry standards that affect our business. Regulators, including the Federal Trade Commission and regulators in the
EEA, have restricted and continue to restrict our ability to use personal information and therefore may limit or inhibit our ability to
operate our business. In addition, many nations and economic regions have privacy protections that are more stringent or otherwise at
odds with those in the United States. For example, the EEA traditionally has imposed stricter obligations and provided for more
onerous penalties than the United States. Complying with new privacy and security requirements, whether imposed by regulation,
contract or industry standard, will require additional expenditures and may result in a greater compliance burden for companies with
users from the EEA.
23
We may incur expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry
standards or contractual obligations. Our business, including our ability to operate and expand internationally, could be adversely
affected if legislation or regulations are adopted, interpreted or implemented in a manner that is inconsistent with our current business
practices and that require changes to these practices, our services or our privacy policies.
Risks Related to Ownership of Our Common Stock
Concentration of ownership among our directors and officers and their respective affiliates could limit our other stockholders’
ability to influence the outcome of key corporate decisions, such as an acquisition of our company.
Our directors and executive officers and their respective affiliates, beneficially own or directly or indirectly control (including
by voting proxy), as of March 16, 2017, approximately 28% of our outstanding common stock (including exercisable options).
Additionally, shares beneficially owned by TZ Holdings as of March 16, 2017, representing approximately 11% of our outstanding
common stock , are subject to a voting agreement pursuant to which all shares held by TZ Holdings shall be voted in the manner
recommended by our Board of Directors. As a result, these stockholders, if they were to act together, would have the ability to
influence significantly the outcome of matters submitted to our stockholders for approval, including the election of directors and any
merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, if they act together, would have
the ability to influence significantly the management and affairs of our company. Accordingly, this concentration of ownership might
harm the trading price of our common stock by:
•
•
•
•
delaying, deferring or preventing a change in our control;
impeding a merger, consolidation, takeover or other business combination involving us;
preventing the election of directors who are nominated by our stockholders; or
discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
Our business could be negatively affected as a result of actions of stockholders or others.
In June and July 2014, entities associated with JEC Capital Partners and Ratio Capital Partners indicated, through filings with
the Securities and Exchange Commission, that they each beneficially owned 4.9% of our outstanding shares of common stock. There
can be no assurance that JEC Capital Partners, Ratio Capital Partners or another third party will not make an unsolicited takeover
proposal in the future or take other action to acquire control of us or to otherwise influence our management and policies. If these
entities or another entity do take control of 10% of our common stock, our stockholder rights plan could be triggered. Considering and
responding to any future proposal is likely to result in significant additional costs to us, and future acquisition proposals, other
stockholder actions to acquire control and the litigation that often accompanies them, if any, are likely to be costly and time-
consuming and may disrupt our operations and divert the attention of management and our employees from executing our strategic
plan.
Additionally, perceived uncertainties as to our future direction as a result of stockholder activism or actual or potential changes
to the composition of our board of directors, may lead to the perception of a change in the direction of our business or other instability,
which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract
and retain qualified personnel. If customers choose to delay, defer or reduce their reliance on, the services we provide or do business
with our competitors instead of us because of any such issues, then our business, operating results and financial condition would be
adversely affected.
Future sales of our common stock may cause the trading price of our common stock to decline.
Certain of our stockholders who held shares of our preferred stock before the consummation of our public offering may be able
to sell these shares in the public market without registration under Rule 144.
In addition, the shares that are either subject to outstanding options or warrants or that may be granted in the future under our
equity plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements.
If a substantial number of any of these additional shares described are sold, or if it is perceived that a substantial number of such
shares will be sold, in the public market, the trading price of our common stock could decline.
24
Some provisions of our certificate of incorporation, bylaws and Delaware law and our stockholder rights plan may discourage,
delay or prevent a merger or acquisition or prevent the removal of our current board of directors and management.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may discourage,
delay or prevent a merger or acquisition or prevent the removal of our current board of directors and management. We have a number
of anti-takeover devices in place that will hinder takeover attempts, including:
•
•
•
•
•
•
•
our board of directors is classified into three classes of directors with staggered three-year terms;
our directors may only be removed for cause, and only with the affirmative vote of a majority of the voting interest of
stockholders entitled to vote;
only our board of directors and not our stockholders will be able to fill vacancies on our board of directors;
only our chairman of the board, our chief executive officer or a majority of our board of directors, and not our
stockholders, are authorized to call a special meeting of stockholders;
our stockholders will be able to take action only at a meeting of stockholders and not by written consent;
our amended and restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be
established and shares of which may be issued without stockholder approval; and
advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters
before an annual meeting of stockholders.
These provisions and other provisions in our charter documents could discourage, delay or prevent a transaction involving a
change in our control. Any delay or prevention of a change in control transaction could cause stockholders to lose a substantial
premium over the then-current trading price of their shares. These provisions could also discourage proxy contests and could make it
more difficult for our stockholders to elect directors of their choosing or to cause us to take other corporate actions such stockholders
desire.
In addition, we are subject to Section 203 of the Delaware General Corporation Law, which, subject to some exceptions,
prohibits “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a
stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock, for a three-year period
following the date that the stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or
preventing a change in control that our stockholders might consider to be in their best interests.
Finally, on July 14, 2014 we implemented a stockholder rights plan, also called a poison pill, which may have the effect of
discouraging or preventing a change of control of us by, among other things, making it uneconomical for a third-party to acquire us on
a hostile basis. We expect this plan will expire on July 14, 2017 in accordance with its terms.
We have not paid cash dividends on our capital stock, and we do not expect to do so in the foreseeable future.
We have not historically paid cash dividends on our capital stock, and we have agreed not to pay any dividends or make any
other distributions in our loan agreement with Silicon Valley Bank. We anticipate that we will retain all future earnings and cash
resources for the future operation and development of our business, and as a result, we do not anticipate paying any cash dividends to
holders of our capital stock for the foreseeable future. Any future determination regarding the payment of any dividends will be made
at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements,
general business conditions, bank covenants and other factors that our board may deem relevant. Consequently, investors must rely on
sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their
investment.
25
The trading price and volume of our common stock has been and will likely continue to be volatile, and the value of an
investment in our common stock may decline.
The trading price of our common stock has been, and is likely to continue to be, volatile and could decline substantially within a
short period of time. For example, since shares of our common stock were sold in our initial public offering in February 2012 at a
price of $5.00 per share through the close of business on March 16, 2017, our trading price has ranged from $1.03 to $18.00. The
trading price of our common stock may be subject to wide fluctuations in response to various factors, some of which are beyond our
control, including but not limited to the various factors set forth in this “Risk Factors” section, as well as:
•
•
•
•
•
variations in our financial performance;
announcements of technological innovations, new services and products, strategic alliances, asset acquisitions, or
significant agreements by us or by our competitors, including, for example, the agreement we entered into with AT&T in
May 2016 to provide desktop and mobile portal solutions;
changes in the estimates of our operating results or changes in recommendations or withdrawal of research coverage by
securities analysts;
market conditions in our industry, the industries of our customers and the economy as a whole; and
adoption or modification of laws, regulations, policies, procedures or programs applicable to our business or
announcements relating to these matters.
In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the
trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. The
trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these
events do not directly affect us. Some companies that have had volatile market prices for their securities have had securities class
actions filed against them. Such a suit filed against us, regardless of its merits or outcome, could cause us to incur substantial costs and
could divert management’s attention.
If securities or industry analysts do not publish research or reports about our company, our stock price and trading volume
could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish
about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable
research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or
fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to
decline.
The requirements of being a public company, including increased costs and demands upon management as a result of
complying with federal securities laws and regulations applicable to public companies, may adversely affect our financial
performance and our ability to attract and retain directors.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act,
and the rules and regulations of The Nasdaq Global Market. The Sarbanes-Oxley Act, as well as rules subsequently implemented by
the SEC and Nasdaq, impose additional requirements on public companies, including enhanced corporate governance practices. For
example, the Nasdaq listing requirements require that listed companies satisfy certain corporate governance requirements relating to
independent directors, audit committees, distribution of annual and interim reports, stockholder meetings, stockholder approvals,
solicitation of proxies, conflicts of interest, stockholder voting rights and codes of business conduct. Our management team has
limited experience managing a publicly-traded company or complying with the increasingly complex laws pertaining to public
companies. In addition, most of our current directors have limited experience serving on the boards of public companies.
The requirements of these rules and regulations have increased and will continue to increase our legal, accounting and financial
compliance costs, make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel,
systems and resources. Our management and other personnel must devote a substantial amount of time to these requirements. These
rules and regulations will also make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance,
and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to
maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, especially those directors who
may be considered independent for purposes of Nasdaq rules, and officers may be significantly curtailed.
26
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our corporate headquarters are located at 40 La Riviere Drive, Buffalo, New York 14202. We lease approximately 31,000
square feet of office space at this address pursuant to a sublease agreement that expires in November 2018.
We also maintain administrative and product development offices in New York, New York; Toronto and Ottawa, Ontario,
Canada; Westford, Massachusetts; Frisco, Texas; Los Angeles and San Francisco, California; Pune, India; London, United Kingdom;
Tokyo, Japan; Paris, France; and Singapore. Our data centers are located in Atlanta, Georgia; Dallas, Texas; Lewis Center, Ohio;
Denver, Colorado, Toronto, Canada and Amsterdam, The Netherlands.
We believe that our facilities are adequate to meet our current needs and that suitable additional or substitute space will be
available as needed.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not
presently involved in any legal proceedings, the outcome of which, if determined adversely to us, would be expected to have a
material adverse effect on our business, results of operations or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
27
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has been listed on The Nasdaq Global Market, or Nasdaq, under the symbol “SYNC” since February 10,
2012.
The following table sets forth, for the indicated periods, the high and low sales prices per share by quarter for our common stock
as reported by Nasdaq.
Fiscal Year 2016 Quarters Ended:
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
Fiscal Year 2015 Quarters Ended:
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
High
Low
$
$
$
$
$
$
$
$
1.95 $
3.98 $
3.34 $
3.40 $
2.83 $
2.64 $
1.88 $
1.88 $
1.38
1.33
2.51
2.65
1.95
1.58
1.03
1.29
Holders of Record
As of March 16, 2017, there were 159 holders of record of our common stock. The number of holders of record of our common
stock does not reflect the number of beneficial holders whose shares are held by depositors, brokers or other nominees.
Dividend Policy
We have never declared or paid cash dividends on our common stock. It is our policy to retain earnings to finance the growth
and development of our business and, therefore, we do not anticipate paying any dividends in the foreseeable future. Any future
determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend
on the existing conditions, including our financial condition, operating results, applicable Delaware law, contractual restrictions,
capital requirements, business prospects and other factors our board of directors may deem relevant. For example, our loan and
security agreement with Silicon Valley Bank restricts our ability to pay any dividends. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Securities Authorized for Issuance under Equity Compensation Plans
The information required to be disclosed by Item 201(d) of Regulation S-K regarding our equity securities authorized for
issuance under our equity incentive plans is incorporated herein by reference to the section entitled “Securities Authorized for
Issuance Under Equity Compensation Plans” in our definitive Proxy Statement for our Annual Meeting of Stockholders to be filed
with the Commission within 120 days after the end of fiscal year 2016 pursuant to Regulation 14A.
Recent Sales of Unregistered Securities
None.
Use of Proceeds
Not applicable.
Issuer Purchases of Equity Securities
None.
28
ITEM 6.
SELECTED FINANCIAL DATA
You should read the following selected consolidated historical financial data below in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, related notes and other
financial information included in this Annual Report on Form 10-K. The selected consolidated financial data in this section is not
intended to replace the financial statements and is qualified in its entirety by the financial statements and related notes included in this
Annual Report on Form 10-K.
We derived the selected consolidated financial data for the years ended December 31, 2016, 2015, and 2014 and as of
December 31, 2016 and 2015 from our audited consolidated financial statements and related notes, which are included in this Annual
Report on Form 10-K. We derived the selected consolidated financial data for the years ended December 31, 2013 and 2012 and as of
December 31, 2014, 2013 and 2012 from our audited consolidated financial statements and related notes, which are not included in
this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected in the future.
2016
Year Ended December 31,
2014
(in thousands except share and per share data)
2015 (4)
2013
2012
Consolidated Statements of Operations Data:
Revenue
Costs and operating expenses:
Cost of revenue (1)
Technology and development (1)(2)
Sales and marketing (2)
General and administrative (1)(2)
Depreciation and amortization
Gain on sale of domain
Total costs and operating expenses
(Loss) income from operations
Other (expense) income
Interest expense
(Loss) income before income taxes
Provision (benefit) for income taxes
Loss in equity interest
Net (loss) income
Net (loss) income per share:
Basic
Diluted
Weighted average shares used to compute net (loss)
income per share:
Basic
Diluted
Other Financial Data:
Adjusted EBITDA (3)
$
127,373 $
110,245 $
106,579 $
111,807 $
121,981
59,146
25,612
22,846
19,695
9,235
—
136,534
(9,161)
(42)
(318)
(9,521)
1,219
—
(10,740) $
54,423
20,007
16,272
15,543
6,901
—
113,146
(2,901)
(16)
(245)
(3,162)
239
(73)
(3,474) $
57,939
26,259
10,807
14,249
5,126
(1,000)
113,380
(6,801)
(28)
(218)
(7,047)
4,821
(1,063)
(12,931) $
59,622
28,458
8,124
11,663
4,650
—
112,517
(710)
(37)
(193)
(940)
(134)
(561)
(1,367) $
66,620
25,603
9,120
11,011
3,779
—
116,133
5,848
1
(270)
5,579
1,764
—
3,815
(0.36) $
(0.36) $
(0.12) $
(0.12) $
(0.47) $
(0.47) $
(0.05) $
(0.05) $
0.16
0.14
$
$
$
30,251,685 28,213,838 27,389,793 27,306,882 24,411,194
30,251,685 28,213,838 27,389,793 27,306,882 28,097,313
$
3,179 $
7,593 $
2,180 $
6,501 $
11,626
Notes:
(1)
(2)
Exclusive of depreciation and amortization shown separately.
Includes stock-based compensation as follows:
Technology and development
Sales and marketing
General and administrative
2016
2015
Year Ended December 31,
2014
(in thousands)
2013
2012
$
$
921 $
784
1,066
2,771 $
936 $
942
1,237
3,115 $
1,621 $
599
1,375
3,595 $
1,184 $
348
1,029
2,561 $
523
404
1,072
1,999
29
(3) We define adjusted EBITDA as net (loss) income plus: provision (benefit) for income taxes, interest expense, other (income)
expense, depreciation, asset impairments, loss in equity interest, stock-based compensation, acquisition costs and certain one-
time items. Please see “Adjusted EBITDA” below for more information and for a reconciliation of adjusted EBITDA to net
(loss) income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
(4) Results for 2015 include the results of operations relating to the acquired Zimbra assets since the closing of the acquisition in
September 2015.
Consolidated Balance Sheet Data:
Cash and cash equivalents
Accounts receivable, net
Property and equipment, net
Total assets
Long-term debt and capital lease obligations
Total stockholders’ equity
Adjusted EBITDA
2016
2015
As of December 31,
2014
(in thousands)
2013
2012
$
14,315 $
27,386
14,406
93,399
6,996
39,649
15,697 $
24,341
14,377
89,026
7,581
46,104
25,600 $
20,479
15,128
66,238
1,383
42,482
36,397 $
14,569
14,085
74,789
885
52,231
41,944
15,624
11,043
76,330
1,712
50,811
To provide investors with additional information regarding our financial results, we have disclosed within this Annual Report on
Form 10-K adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below of adjusted EBITDA to net
income (loss), the most directly comparable GAAP financial measure.
We have included adjusted EBITDA in this Annual Report on Form 10-K because it is a key measure used by our management
and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual
budget and to develop short and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted
EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key
financial measure used by the compensation committee of our board of directors in connection with the payment of bonuses to our
executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in
understanding and evaluating our operating results in the same manner as our management and board of directors.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute
for analysis of our results as reported under GAAP. Some of these limitations are:
•
•
•
•
•
•
•
although depreciation and asset impairments are non-cash charges, the assets being depreciated or impaired may have to
be replaced in the future, and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or
for new capital expenditure requirements;
adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;
adjusted EBITDA does not reflect the impact of tax payments that may represent a reduction in cash available to us;
adjusted EBITDA does not reflect the impact of the cost of business acquisitions on the cash available to us;
adjusted EBITDA does not reflect the impact of non-recurring items, such as the costs associated with reductions in
workforce, on the cash available to us: and
other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its
usefulness as a comparative measure.
30
Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including
various cash flow metrics, net (loss) income and our other GAAP results. The following table presents a reconciliation of adjusted
EBITDA to net (loss) income for each of the periods indicated:
Reconciliation of Adjusted EBITDA:
Net (loss) income
Provision (benefit) for income taxes
Interest expense
Other expense (income) (1)
Depreciation and amortization
Capitalized software impairment
Loss in equity interest
Stock-based compensation expense
Gain on sale of domain
Reduction in workforce severance and related costs
Acquisition costs
Adjusted EBITDA
2016
2015
Year Ended December 31,
2014
(in thousands)
2013
2012
$
$
(10,740) $
1,219
318
42
9,235
334
—
2,771
—
—
—
3,179 $
(3,474) $
239
245
16
6,901
—
73
3,115
—
—
478
7,593 $
(12,931) $
4,821
218
28
5,126
—
1,063
3,595
(1,000)
1,260
—
2,180 $
(1,367) $
(134)
193
37
4,650
—
561
2,561
—
—
—
6,501 $
3,815
1,764
270
(1)
3,779
—
—
1,999
—
—
—
11,626
Note:
(1) Other expense (income) consists primarily of interest income earned and foreign exchange gains and losses.
31
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of our results of operations and financial condition should be read in conjunction with the information
set forth in “Selected Financial Data” and our financial statements and the notes thereto included in this Annual Report on Form 10-
K. This discussion contains forward-looking statements based upon our current expectations, estimates and projections that involve
risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements due to,
among other considerations, the matters discussed under “Risk Factors” and “Special Note Regarding Forward-Looking
Statements.”
Overview
We enable our customers to better engage with their consumers. Our customers include video, internet and communications
providers, device manufacturers, governments and enterprises. We are their trusted technology development, multiplatform services
and revenue partner. Our customers use our technology platforms and services to deepen their subscriber relationships.
We generate revenue from consumer traffic on our Managed Portals, which we collect from our search partner, Google Inc., or
Google, our advertising network providers and directly from advertisers. We typically share a portion of this search and digital
advertising revenue with our customers. We also generate Recurring and Fee-Based revenue for the use of our technology,
email/collaboration, premium services and paid content. Growth in our business is dependent on expansion of relationships with our
existing customers and new customers adopting our solutions and their respective consumers’ use of our Managed Portals ramping up
as described below. Since our acquisition of the Zimbra assets in September 2015, we generate revenue from the licensing and
distribution of our Email/Collaboration products and services, including perpetual licenses, and we generate recurring revenue in the
form of maintenance and support fees as well. As we expand our Cloud ID, syndicated content and Email/Collaboration offerings, we
expect to generate increased Recurring and Fee-Based revenue from our customers.
During 2016, Managed Portals and Advertising revenue was $74.9 million, a decrease of 4% compared to $78.3 million in 2015.
Search revenue decreased by $15.4 million, or 49%, in 2016 compared to 2015. We believe the decrease was due to lower search
activity associated with the increased usage of competitor search tools on other devices, such as tablets and smartphones, generally
across the consumer base. In addition, a portion of the decrease was due to the residual effect of the placement of our Managed Portals
on the second tab of the default Windows 8 internet browser by our consumer electronics customers. Further, upgrades to the
Windows 10 operating system default to Microsoft’s latest Edge browser and displace users’ previous browser settings including
default homepages, which can also lead to decreased search and digital advertising revenue.
We anticipate that search activity and our search revenue will increase in 2017 when our AT&T portal services are deployed. In
addition, we anticipate search activity will increase on smartphones and tablets in the future and we believe our continuing investment
in our next-generation Managed Portals and Advertising solutions will allow us to compete more effectively for search activity on
smartphones and tablets.
Digital advertising revenue increased by $12.0 million, or 26%, in 2016 compared to 2015. We believe this increase was due
primarily to increased syndicated advertising activity, particularly as a result of our acquisition of Technorati in February 2016.
We anticipate video advertising will continue to become an increasing percentage of our advertising revenue which may also
serve to increase our advertising cost-per-thousand impressions (referred to as cost per mille, or CPMs). We also anticipate that the
signing and launching of new customers, particularly our pending launch of the AT&T portal, and our mobile product initiatives may
help add new search and digital advertising revenue in future years.
Our Recurring and Fee-Based revenue consists of fees charged for the use of our proprietary technology and for the use of, or
access to, services, which consisted primarily of our Email/Collaboration and professional services products such as security, Cloud
ID, online games, music and other premium services and paid content. In addition, we also generate revenue from the licensing and
distribution of our Email/Collaboration products and services, including perpetual licenses and recurring revenue in the form of
subscriber maintenance and support fees. During 2016, Recurring and Fee-Based revenue was $52.4 million, an increase of 64% from
$31.9 million in 2015. This increase was primarily driven by growth in the hosting and management of our email product, sales of the
Zimbra Email/Collaboration product and services, and increasing adoption of our Cloud ID services by our customers. Our 2016
results include a full year of revenue and expenses relating to the Zimbra Email/Collaboration product and services, as compared with
2015 which included only 3-1/2 months of revenue and expenses. We believe there are opportunities to generate new sources of
Recurring and Fee-Based revenue, such as by selling solutions that generate Recurring and Fee-Based revenue into the customer base
we obtained as part of the acquisition of the Zimbra assets.
32
As we obtain new customers and those new customers introduce our Managed Portals and Advertising solutions to their
consumers, we expect usage of our solutions and revenue from our Managed Portals and Advertising solutions to increase over time.
There are a variety of reasons for this ramp-up process. For example, a new customer may migrate its consumers from its existing
technology to our technology over a period of time. Moreover, a new customer may initially launch a selection of our services and
products, rather than our entire suite of offerings and subsequently broaden their service and product offerings over time. When a
customer launches a new service or product, marketing and promotional activities may be required to generate awareness and interest
among consumers.
Revenue attributable to our customers includes the Recurring and Fee-Based revenue earned directly from them, as well as the
search and digital advertising revenue generated through our relationships with our search and digital advertising partners (such as
Google for search advertising and advertising networks, advertising agencies and advertisers for digital advertising). This revenue is
attributable to our customers because it is produced from the traffic on our Managed Portals. These search and advertising partners
provide us with advertisements that we then deliver with search results and other content on our Managed Portals. Since our search
advertising partner, Google, and our advertising network partners generate their revenue by selling those advertisements, we create a
revenue stream for these partners. In 2016, revenue attributable to one customer accounted for approximately 16% of our revenue, or
$20.8 million. In 2016 search advertising through our relationship with Google generated approximately 12% of our revenue, or $15.9
million (all of which was attributable to our customers).
The initiatives described below under “Key Initiatives” are expected to contribute to our ability to maintain and grow revenue
and return to profitability via increases in advertising revenue, increases in customers and our consumer reach, and increases in
availability of products across more devices. We expect the period in which we experience a return on future investments in each of
these initiatives to differ. For example, more direct advertising at higher CPMs would be expected to have an immediate and direct
impact on profitability while expansion into international markets may require an investment that involves a longer term return.
Trends Affecting Our Business
Our customers, predominantly high-speed internet service providers that also offer television services, are facing increasing
competition from companies that deliver video content over the internet, more commonly referred to as “over-the-top,” or OTT. These
new competitors include a number of large and growing companies, such as Google, Netflix, Inc., or Netflix, Hulu, LLC, or Hulu, and
Amazon.com Inc., or Amazon. With the increased availability of high-speed internet access and over-the-top programming,
consumers’ video content consumption preferences may shift away from current viewing habits.
As a result, many of our customers and potential customers are compelled to find new ways to deliver services and content to
their consumers via the internet. We expect this pressure to become even greater as more video content becomes available online. We
expect to continue to benefit from this trend as customers adopt our solutions to package and deliver video programming and other
related authentication services on our Managed Portals.
Another trend affecting our customers and our business is the proliferation of internet-connected devices, especially mobile
devices. Smartphones, tablets and connected TVs have made it more convenient for consumers to access services and content online,
including television programming. To remain competitive, our customers and potential customers must have the capability to deliver
their services and products to consumers on these new devices. Our technology enables them to extend their presence beyond
traditional personal computers, and we expect that some portion of our revenue growth will come from traffic on these devices.
Our business is also affected by growth in advertising on the internet, for which the proliferation of high-speed internet access
and internet-connected devices will be the principal drivers. We believe we have experienced a decline in search advertising revenue
based on consumers’ internet searching habits increasingly transitioning to mobile devices. However, we expect that the launch of the
AT&T portal will result in an increase in search advertising revenue. In addition, we believe there continue to be growth opportunities
for advertising related to the video, images and text on our Managed Portals and hosted email/collaboration products. We expect our
results of operations will benefit from the growth in the number of mobile internet users as our customers adopt our mobile and tablet
offerings.
We continue to be impacted by consumer electronics customers that have the Windows 8 and Windows 10 operating systems
pre-installed on their laptop or desktop computers; our Managed Portals are placed on a second tab when the Windows 8 internet
browser is launched, and in certain instances, without our Google search bar. Further, upgrades to the Windows 10 operating system
default to Microsoft’s latest Edge browser and displace users’ previous browser settings including default homepages, which can also
lead to decreased search and digital advertising revenue. Unless consumers change their browser settings back to our Managed Portals,
their usage of our Managed Portals would likely decline and our results of operations could be negatively impacted. These Windows
updates have caused us to reduce our revenue expectations from our consumer electronics customers.
33
Key Initiatives
Our strategy is supported by four key pillars to drive our business, with operational discipline and sound financial footing as its
base. We plan to:
•
•
•
•
increase value for existing customers by optimizing consumer experience and monetization;
innovate on Synacor-as-a-platform for advanced services;
win new customers in current and related verticals; and
extend our product portfolio into emerging growth areas.
Key Business Metrics
In addition to the line items in our financial statements, we review the number of Multiplatform Unique Visitors – Managed
Portal and Multiplatform Unique Visitors – Ad Network to evaluate our business, determine the allocation of resources and make
decisions regarding business strategies. We believe disclosing these metrics is useful for investors and analysts to understand the
underlying trends in our business. The following table reflects the number of multiplatform unique visitors for the years ended
December 31, 2016, 2015 and 2014:
Multiplatform Unique Visitors:
Managed Portal
Ad network
Total
2016
Year Ended December 31,
2015
2014
19,552,939
188,858,408
208,411,347
20,902,492
-
20,902,492
20,868,428
-
20,868,428
We define Multiplatform Unique Visitors – Managed Portal as consumers who have visited one of our Managed Portals from
either mobile or desktop sources at least once, computed on an average monthly basis during a particular time period. As the number
of Multiplatform Unique Visitors – Managed Portal increases, we expect that we will generate additional revenue from our Managed
Portals and Advertising solutions. We rely on comScore to provide this data. comScore estimates this data based on the U.S. portion
of the internet activity of its worldwide panel of consumers and its proprietary data collection method. In addition, following the
acquisition of the Technorati media solutions platform in 2016 we have begun tracking Multiplatform Unique Visitors – Ad Network,
which reflects the number of multiplatform unique visitors through our advertising network as a key business metric. We define
Multiplatform Unique Visitors – Ad Network as the number of consumers who have viewed an advertisement through our advertising
network, computed on an average monthly basis during a particular time period. As the number of Multiplatform Unique Visitors –
Ad Network increases, we expect that we will generate additional digital advertising revenue.
Components of our Results of Operations
Revenue
We derive our revenue from two categories: revenue generated from search and digital advertising activities and Recurring and
Fee-Based revenue, each of which is described below. The following table shows the revenue in each category, both in amount and as
a percentage of revenue, for 2016, 2015 and 2014.
Revenue:
Search and digital advertising
Recurring and fee-based
Total revenue
Percentage of revenue:
Search and digital advertising
Recurring and fee-based
Total revenue
2016
Year Ended December 31,
2015
(in thousands)
2014
$
$
74,889
52,484
127,373
$
$
78,316
31,929
110,245
$
$
83,906
22,673
106,579
59%
41
100%
71%
29
100%
79%
21
100%
34
Search and Digital Advertising Revenue
We use internet advertising to generate revenue from the traffic on our Managed Portals and Advertising solutions, categorized
as search advertising and digital advertising.
•
•
In the case of search advertising, we have a revenue-sharing relationship with Google, pursuant to which we include a
Google-branded search tool on our Managed Portals. When a consumer makes a search query using this tool, we deliver
the query to Google and they return search results to consumers that include advertiser-sponsored links. If the consumer
clicks on a sponsored link, Google receives payment from the sponsor of that link and shares a portion of that payment
with us. The net payment we receive from Google is recognized as revenue.
Digital advertising includes video, image and text advertisements delivered on one of our Managed Portals. Advertising
inventory is filled with advertisements sourced by our direct sales force, independent advertising sales representatives and
advertising network partners. Revenue is generated for us when an advertisement displays, otherwise known as an
impression, or when consumers view or click an advertisement, otherwise known as an action. Digital advertising revenue
is calculated on a cost per impression or cost per action basis. Revenue is recognized based on amounts received from
advertising customers as the impressions are delivered or the actions occur, according to contractually-determined rates.
Recurring and Fee-Based Revenue
Recurring and Fee-Based revenue includes subscription fees and other fees that we receive from customers for the use of our
proprietary technology, including the use of, or access to, email, Cloud ID, security services, games and other premium services and
paid content. Monthly subscriber levels typically form the basis for calculating and generating Recurring and Fee-Based revenue.
They are generally determined by multiplying a per-subscriber per-month fee by the number of subscribers using the particular
services being offered or consumed. In other cases, the fee is fixed. Revenue earned as subscription fees and maintenance and support
fees is recognized from customers as the service is delivered.
Revenue is also recognized from the licensing and distribution of our Email/Collaboration products and services, including
perpetual licenses. Revenue from perpetual licenses is recognized upon execution of the contract, and when all other criteria have been
met.
Costs and Expenses
Cost of Revenue
Cost of revenue consists primarily of revenue sharing, content acquisition costs, co-location facility costs, royalty costs, and
product support costs. Revenue sharing consists of amounts accrued and paid to customers for the internet traffic on Managed Portals
we operate on our customers’ behalf and where we are the primary obligor, resulting in the generation of search and digital advertising
revenue. The revenue-sharing agreements with customers are primarily variable payments based on a percentage of the search and
digital advertising revenue. Content-acquisition agreements may be based on a fixed payment schedule, on the number of subscribers
per month, or a combination of both. Fixed-payment agreements are expensed on a straight-line basis over the term defined in the
agreement. Agreements based on the number of subscribers are expensed on a monthly basis. Co-location facility costs consist of rent
and operating costs for our data center facilities. Royalty costs consist of amounts due to other parties for license of email software
with third party technology enabled. Product support costs consist of employee and operating costs directly related to our maintenance
and professional services support.
Technology and Development
Technology and development expenses consist primarily of compensation-related expenses incurred for the research and
development of, enhancements to, and maintenance and operation of our products, equipment and related infrastructure. Technology
and development expenses also include certain costs of operating data centers domestically and internationally.
Sales and Marketing
Sales and marketing expenses consist primarily of compensation-related expenses to our direct sales and marketing personnel,
as well as costs related to advertising, industry conferences, promotional materials and other sales and marketing programs.
Advertising cost is expensed as incurred.
35
General and Administrative
General and administrative expenses consist primarily of compensation-related expenses for executive management, finance,
accounting, human resources, professional fees and other administrative functions.
Depreciation and Amortization
Depreciation and amortization includes depreciation and amortization of our computer hardware and software, including our
capitalized internally-developed software, furniture and fixtures, intangible assets, leasehold improvements and other property, as well
as depreciation on capital leased assets.
Gain on Sale of Domain
Gain on sale of domain was unique to 2014. The proceeds collected from the sale of an internet domain were recognized as a
gain in their entirety.
Other Expense
Other expense consists primarily of foreign exchange gains and losses, net of interest income earned.
Interest Expense
Interest expense primarily consists of interest on bank debt and capital leases.
Provision for Income Taxes
Income tax provision consists of federal and state income taxes in the United States and taxes in certain foreign jurisdictions, as
well as any changes to deferred tax assets or liabilities, and deferred tax valuation allowances. Our income tax provision includes
amounts withheld for payment of income taxes upon payment of our invoices by our customers in certain foreign jurisdictions. Those
amounts increase the amount of our foreign tax credit which would defray our U.S. tax liability if we were presently a U.S. taxpayer.
However, because the deferred income tax assets relating to our federal tax attributes, including our foreign tax credits, are fully
reserved, any such foreign tax withholdings are charged to our income tax provision.
Loss in Equity Interest
Loss in equity interest represents our percentage share of losses in investments in entities in which we can exercise significant
influence, but do not own a majority equity interest or otherwise control.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with U.S. GAAP requires estimates and assumptions that
affect the reported amounts and classifications of assets and liabilities, revenue and expenses, and the related disclosures of contingent
liabilities in the financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the
ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the
company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, we have identified the following critical accounting policies and estimates addressed
below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are
significant to understanding our results. See Note 1, The Company and Summary of Significant Accounting Policies, of the Notes to
the Consolidated Financial Statements. Although we believe that our estimates, assumptions, and judgments are reasonable, they are
based upon information available at the time. Actual results may differ significantly from these estimates under different assumptions,
judgments or conditions.
Revenue Recognition
We recognize revenue when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred;
the selling price is fixed or determinable; and collectability is reasonably assured.
The terms of our arrangements with our customers, Google and our advertising network partners are specified in written
agreements. These written agreements constitute the persuasive evidence of the arrangements with our customers that are a pre-
36
condition to the recognition of revenue. The evidence used to document that delivery or performance has occurred generally consists
of communication of either numbers of subscribers or the revenue generated in a reporting period from customers, advertising
partners, vendors and our own internally-generated reports. Occasionally, a customer will notify us of subsequent adjustments to
previously reported subscriber data. These adjustments, once accepted by us, will result in adjustments to revenue and cost of revenue.
The historical occurrences of such adjustments, and the amounts involved, have not been significant.
Although prices used in our revenue recognition formulas are generally fixed pursuant to the written arrangements with our
customers, Google and our advertising network partners, the number of subscribers or the amount of search and digital advertising
revenue that are subject to our pricing arrangements are not known until the reporting period has ended. Although this data is, in most
cases, available prior to the completion of our periodic financial statements, this data may need to be estimated. When made, these
estimates are based upon our historical experience with the relevant party. Adjustments to these estimates have historically not been
significant. The receipt of this volume data also serves to verify that we have appropriately satisfied our obligation to our customers
for that reporting period. Adjustments are recorded in the period in which the data is received.
Certain Recurring and Fee-Based revenue is derived from the sale of software licenses on a perpetual or subscription basis, for
which revenue is recognized upon receipt of an external agreement and delivery of the software, provided the fees are fixed and
determinable, and collection is probable. For agreements that include one or more elements to be delivered at a future date, revenue is
recognized using the residual method, under which the vendor-specific objective evidence (“VSOE”) of fair value of the undelivered
elements is deferred, and the remaining portion of the agreement fee is recognized as license revenue. If VSOE of fair value has not
been established for certain undelivered elements, revenue is deferred until those elements have been delivered or their fair values
have been determined.
We undertake an evaluation of the creditworthiness of both new and, on a periodic basis, existing customers. Based on these
reviews we determine whether collection of our prospective revenue is probable.
Revenue Sharing
We pay our Managed Portals and Advertising customers a portion of the revenue generated from search and digital advertising.
The portion paid to our customers depends on, among other things, the consumer base of the customer and their expected ability to
drive consumer traffic to our Managed Portals. This revenue consists of the consideration we receive from Google and our digital
advertising partners in connection with traffic supplied by the applicable customer.
Gross Versus Net Presentation of Revenue for Revenue Sharing
We evaluate our relationship between our search and digital advertising partners and our Managed Portals and Advertising
customers in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 605-45,
Principal Agent Considerations. We have determined that the revenue derived from traffic supplied by our customers is reported on a
gross basis because we are the primary obligor (we are responsible to our customers for fulfilling search and digital advertising
services and premium and other services), are involved in the service specifications, perform part of the service, have discretion in
supplier selection, have latitude in establishing price and bear credit risk.
Stock-Based Compensation
We account for stock-based compensation in accordance with the authoritative guidance on stock compensation. Under the fair
value recognition provisions of this guidance, stock-based compensation is measured at the grant date based on the fair value of the
award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting
period of the respective award. As a result, we are required to estimate the amount of stock-based compensation we expect to be
forfeited based on our historical experience. If actual forfeitures differ significantly from our estimates, stock-based compensation
expense and our results of operations could be materially impacted. Determining the fair value of stock-based awards at the grant date
requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of
the grant date fair value of options using an option-pricing model is affected by our common stock fair value as well as assumptions
regarding a number of other complex and subjective variables. These variables include the fair value of our common stock, our
expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free
interest rates, and expected dividends, which are estimated as follows:
Expected Term - The expected term was estimated using the simplified method allowed under SEC guidance. As we develop
more experience, our estimate of the life of awards may change.
37
Volatility - Expected stock price volatility for our common stock was estimated by blending our average historic price volatility
with that of our industry peers based on daily price observations over a period equivalent to the expected term of the stock
option grants. Industry peers consist of several public companies in the technology industry, some larger and some similar in
size, stage of life cycle and financial leverage. We did not rely on implied volatilities of traded options in our industry peers’
common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using
the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own
common stock share price becomes available, or unless circumstances change such that the identified companies are no longer
similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the
calculation.
Risk-free Rate - The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the
expected term of the options for each option group.
Dividend Yield - We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the
foreseeable future. Additionally, our loan and security agreement with Silicon Valley Bank restricts our ability to pay any
dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources.” Accordingly, we used an expected dividend yield of zero.
Income Taxes
We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating
future tax consequences, generally all expected future events other than enactments or changes in the tax law or rates are considered.
Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.
We also provide reserves as necessary for uncertain tax positions taken on our tax filings. First, we determine if a tax position is
more likely than not to be sustained upon audit solely based on technical merits, including resolution of related appeals or litigation
processes, if any. Second, based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement
we recognize any such differences as a liability. In the event that any unrecognized tax benefits are recognized, the effective tax rate
will be affected. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these
matters will be the same as these estimates. These estimates are updated quarterly based on factors such as changes in facts or
circumstances, changes in tax law, new audit activity, and effectively settled issues.
We follow specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the
balance sheet and provide necessary valuation allowances as required. Future realization of deferred tax assets ultimately depends on
the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the
carryback or carryforward periods available under the tax law. We regularly review our deferred tax assets for recoverability based on
historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and
tax planning strategies. Our judgments regarding future profitability may change due to many factors, including future market
conditions and our ability to successfully execute our business plans and/or tax planning strategies. Should there be a change in our
ability to recover our deferred tax assets, our tax provision would increase or decrease in the period in which the assessment is
changed.
38
Results of Operations
The following tables set forth our results of operations for the periods presented in amount and as a percentage of revenue for
those periods. The period to period comparison of financial results is not necessarily indicative of future results.
Revenue
Costs and operating expenses:
Cost of revenue (1)
Technology and development (1)(2)
Sales and marketing (2)
General and administrative (1)(2)
Depreciation and amortization
Gain on sale of domain
Total costs and operating expenses
Loss from operations
Other expense
Interest expense
Loss before income taxes
Provision for income taxes
Loss in equity interest
Net loss
Notes:
(1)
(2)
Exclusive of depreciation and amortization shown separately.
Includes stock-based compensation as follows:
Technology and development
Sales and marketing
General and administrative
Revenue
Costs and operating expenses:
Cost of revenue (1)
Technology and development (1)
Sales and marketing
General and administrative (1)
Depreciation and amortization
Gain on sale of domain
Total costs and operating expenses
Loss from operations
Other expense
Interest expense
Loss before income taxes
Provision for income taxes
Loss in equity interest
Net loss
Note:
(1)
Exclusive of depreciation and amortization shown separately.
39
2016
Year Ended December 31,
2015
(in thousands)
2014
$
127,373 $
110,245 $
106,579
$
$
$
59,146
25,612
22,846
19,695
9,235
—
136,534
(9,161)
(42)
(318)
(9,521)
1,219
—
(10,740) $
54,423
20,007
16,272
15,543
6,901
—
113,146
(2,901)
(16)
(245)
(3,162)
239
(73)
(3,474) $
57,939
26,259
10,807
14,249
5,126
(1,000)
113,380
(6,801)
(28)
(218)
(7,047)
4,821
(1,063)
(12,931)
2016
Year Ended December 31,
2015
(in thousands)
2014
921 $
784
1,066
2,771 $
936 $
942
1,237
3,115 $
1,621
599
1,375
3,595
Year Ended December 31,
2015
2014
2016
100%
100%
100%
46
20
18
16
7
-
107
(7)
—
—
(7)
1
—
(8)%
49
18
15
14
6
—
103
(3)
—
—
(3)
—
—
(3)%
54
25
10
13
5
(1)
106
(6)
—
—
(7)
5
(1)
(12)%
Comparison of Years Ended December 31, 2016, 2015 and 2014
Revenue
Revenue:
Search and digital advertising
Recurring and fee-based
Total revenue
Percentage of revenue:
Search and digital advertising
Recurring and fee-based
Total revenue
2016
Year Ended December 31,
2015
(in thousands)
2014
2015 to 2016
% Change
2014 to 2015
% Change
$
74,889
52,484
$ 127,373
$
78,316
31,929
$ 110,245
$
83,906
22,673
$ 106,579
(4)%
64%
16%
(7)%
41%
3%
59%
41
100%
71%
29
100%
79%
21
100%
In 2016, our revenue increased by $17.1 million, or 16%, compared to 2015. Search and digital advertising revenue decreased
by $3.4 million, driven by a $15.4 million decrease in search revenue, or 49%, compared to 2015, and offset partially by a $12.0
million increase in digital advertising revenue, or 26%, as compared to 2015. The increase in digital advertising was driven by a
combination of an increase syndicated advertising and an increase in video advertising and higher contractual rates for such
advertisements. Video advertising yields higher CPMs than traditional image or text advertising. We believe the decrease in search
revenue was due to lower search activity associated with the increased usage of competitor search tools on other devices, such as
tablets and smartphones, generally across the consumer base. In addition, we believe a portion of the decrease was due to the residual
effect of the placement of our Managed Portals on the second tab of the default Windows 8 internet browser by our consumer
electronics customers. Recurring and Fee-Based Revenue increased $20.6 million, or 64% primarily due to increases in usage of our
Email/Collaboration, Cloud ID and video solutions by our customers. Our 2016 results include a full year of revenue and related costs
and expenses relating to our Zimbra Email/Collaboration products and services, while 2015 included results only from the date of
acquisition (September 2015).
In 2015, our revenue increased by $3.7 million, or 3%, compared to 2014. Digital advertising revenue increased by $8.5 million,
or 22%. The increase in digital advertising was driven by a combination of an increase in video advertising and higher contractual
rates for advertisements. Search advertising revenue decreased by $14.1 million, or 31%, compared to 2014. We believe the decrease
was due to lower search activity associated with the increased usage of competitor search tools on other devices, such as tablets and
smartphones, generally across the consumer base. In addition, a portion of the decrease was due to the residual effect of the placement
of our Managed Portals on the second tab of the default Windows 8 internet browser by our consumer electronics customers.
Recurring and Fee-Based Revenue increased $9.3 million, or 41%, primarily due to increased usage of our Zimbra
Email/Collaboration solutions (driven by the acquisition of the Zimbra assets in September 2015), various other services by our
customers, and to a lesser extent, Cloud ID and video solutions by our customers
Cost of Revenue
2016
Cost of revenue
Percentage of revenue
$
Year Ended December 31,
2015
(in thousands)
54,423
$
46%
$
49%
59,146
2015 to 2016
% Change
2014 to 2015
% Change
2014
57,939
54%
9%
(6)%
In 2016, our cost of revenue increased by $4.7 million, or 9%, compared to 2015. However, our cost of revenue decreased as a
percentage of revenue from 49% in 2015 to 46% in 2016. The increase in our cost of revenue was driven primarily by increased
syndicated advertising costs. The decrease in our cost of revenue as a percentage of revenue resulted from a shift in mix, as higher-
margin Email/Collaboration revenue increased in 2016 as compared to 2015, offset partially by the effect of increased lower-margin
syndicated advertising revenue in 2016 as compared to the prior year.
In 2015, our cost of revenue decreased by $3.5 million, or 6%, compared to 2014. The decrease in our cost of revenue was
driven by decreased revenue sharing costs due to declining search revenue, offset by an increase in revenue-sharing costs from digital
advertising due to increase placement of video-based advertising. Cost of revenue as a percentage of revenue decreased, from 54% to
40
49%, because of changes in the mix of revenue, mix of customers, related revenue-sharing arrangements, and the increase in
Recurring and Fee-Based revenue from our Email/Collaboration products.
Technology and Development Expenses
2016
Technology and development
Percentage of revenue
$
Year Ended December 31,
2015
(in thousands)
$
20,007
20%
$
18%
25,612
2015 to 2016
% Change
2014 to 2015
% Change
2014
26,259
25%
28%
(24)%
In 2016, technology and development expenses increased by $5.6 million, or 28%, compared to 2015. The increase was
primarily due to increased headcount and spending in technology and development activities in preparation for our 2017 AT&T portal
services product launch. We added or redeployed 52 positions specifically devoted to the development of the AT&T portal. We
anticipated that total expenditures for the AT&T portal would be approximately $10 million, consisting of $8 million of operating
expense and $2 million of capital expenditures. Of this amount, approximately $6.3 million of operating expense and $1.9 million of
capital expenditures were incurred during 2016, primarily in technology and development. Also contributing to the increase in
technology and development expenses in 2016 over 2015 were the costs associated with the addition of the former Zimbra
development group.
In 2015, technology and development expenses decreased by $6.3 million, or 24%, compared to 2014. Approximately $4.3
million of the decrease was due to reduced salaries expense and related costs due to the implementation of our cost reduction plan in
October 2014. Additionally, $2.3 million of the decrease is due to a shift in activities of certain personnel responsible for products to
be marketed, from technology and development to sales and marketing. This change in activities took effect on October 1, 2014.
Sales and Marketing Expenses
2016
Sales and marketing
Percentage of revenue
$
Year Ended December 31,
2015
(in thousands)
$
16,272
18%
$
15%
22,846
2015 to 2016
% Change
2014 to 2015
% Change
2014
10,807
10%
40%
50%
In 2016, sales and marketing expenses increased by $6.6 million, or 40%, compared to 2015. The increase was primarily due to
a full year of personnel and other expenses relating to sales and marketing of the Zimbra Email/Collaboration product and services in
2016, as compared to four months in 2015. With the acquisition of the Zimbra assets in September 2015, we acquired sales and
marketing teams in Europe, Japan, Singapore, India and Latin America.
In 2015, sales and marketing expenses increased by $5.5 million, or 50%, compared to 2014. The increase was primarily due to
a shift in activities of certain personnel from technology and development to sales and marketing, resulting in additional sales and
marketing expense, as discussed above. Additionally, the incremental expenses of sales and marketing activities related to the Zimbra
assets from the date of the acquisition to December 31, 2015 contributed to the increase. This was partially offset by a reduction in
salaries expense and related costs due to our cost reduction plan implemented in 2014, resulting in a decrease in 2015.
General and Administrative Expenses
2016
General and administrative
Percentage of revenue
$
Year Ended December 31,
2015
(in thousands)
$
15,543
15%
$
14%
19,695
2015 to 2016
% Change
2014 to 2015
% Change
2014
14,249
13%
27%
9%
In 2016, general and administrative expenses increased by $4.2 million, or 27%, compared to 2015. The increase is due
principally to increased facility costs and administrative personnel relating to our two new or acquired offices in the United States and
four international offices acquired with the Zimbra assets, plus increased professional fees year over year.
41
In 2015, general and administrative expenses increased by $1.3 million, or 9% compared 2014. The increase is principally due
to additional expenses following our acquisition of the Zimbra assets as well as the direct expenses associated with the assets acquired.
Depreciation and amortization
2016
Depreciation and amortization
Percentage of revenue
$
Year Ended December 31,
2015
(in thousands)
$
6,901
7%
$
6%
9,235
2015 to 2016
% Change
2014 to 2015
% Change
2015
5,126
5%
34%
35%
In 2016, depreciation and amortization increased by $2.3 million or 34%, compared to 2015, primarily attributable to a $1.6
million increase in amortization of acquired Zimbra-related intangible assets, and additional depreciation expense relating to our
acquired and internally-developed fixed assets.
In 2015, depreciation and amortization increased $1.8 million, or 35%, compared to 2014. This increase was due to placing
certain software development projects into service during the fourth quarter of 2014 and throughout 2015, as well as depreciation and
amortization on property and equipment and intangible assets acquired in the Zimbra transaction.
Gain on Sale of Domain
2016
Year Ended December 31,
2015
(in thousands)
2014
2015 to 2016
% Change
2014 to 2015
% Change
Gain on sale of domain
Percentage of revenue
$
— $
—
— $
—
1,000
1%
NM
NM
The gain on sale of a domain amounted to $1.0 million during 2014, which was equal to the sale price. The sale was unique to
2014 and no such transactions occurred in the comparative periods.
Other Expense
Other expense
2016
Year Ended December 31,
2015
(in thousands)
2014
$
(42) $
(16) $
(28)
For each of 2016, 2015 and 2014, other expense consisted primarily of interest income coupled with foreign currency
transaction losses related to our foreign operations.
Interest Expense
Interest expense
2016
Year Ended December 31,
2015
(in thousands)
2014
$
(318) $
(245) $
(218)
Interest expense during 2016, 2015 and 2014 primarily relates to interest on capital leases and long-term debt.
Provision for Income Taxes
Provision for income taxes
$
1,219 $
239 $
4,821
2016
Year Ended December 31,
2015
(in thousands)
2014
42
Our 2016 income tax provision includes $0.8 million of foreign withholding taxes, $0.2 million of current tax relating to our
foreign subsidiaries’ earnings, and $0.1 million of deferred income tax expense. Certain foreign governments require tax withholdings
on remittances relating to our sales in those countries. Such withholdings add to our foreign tax credit which is available to defray
future U.S. income taxes; however because we have recorded a full valuation allowance against our U.S. net operating loss and credit
carryforwards, such withholdings are recognized in deferred income tax expense.
Our 2015 tax provision consists of U.S. state minimum tax expense and $0.2 million of foreign withholding taxes.
During 2014, we recognized additional income tax benefit related to our net operating loss, or NOL, of approximately $2.8
million. In the fourth quarter of 2014, as a result of weighing the positive and negative evidence and guidance for accounting for
income taxes, which includes an evaluation of recent cumulative pre-tax results, we determined it was appropriate to record a
valuation allowance against our net deferred income tax assets because it was determined that it was no longer “more likely than not”
that such NOLs will be utilized. As a result, we recognized a $7.5 million income tax provision expense associated with our deferred
tax asset valuation allowance.
Unaudited Quarterly Results of Operations and Other Data
The following tables present our unaudited quarterly results of operations and other data for the eight quarters ended
December 31, 2016. This unaudited quarterly information has been prepared on the same basis as our audited consolidated financial
statements and, in the opinion of management, the statement of operations data includes all adjustments, consisting of normal
recurring adjustments, necessary for the fair presentation of the results of operations for these periods. This table should be read in
conjunction with our consolidated financial statements and related notes located elsewhere in this Annual Report on Form 10-K. The
results of operations for any quarter are not necessarily indicative of the results of operations for any future periods.
March 31,
2015 (2)
June 30,
2015 (2)
September 30,
2015 (3)
For the Three Months Ended
December 31,
2015
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
(in thousands, except per-share data)
$ 26,730 $ 24,716 $
26,351 $
32,448 $ 30,260 $ 30,476 $
31,721 $
34,916
14,403
12,504
13,298
14,218
12,972
13,516
14,611
18,047
4,866
3,562
4,561
3,639
4,361
4,274
6,219
4,797
5,873
5,650
6,591
5,620
6,791
5,907
6,357
5,669
3,374
3,351
3,712
5,106
5,022
5,134
4,871
4,668
1,496
1,660
1,560
2,185
2,098
2,270
2,414
2,453
27,701
25,715
27,205
32,525
31,615
33,131
34,594
37,194
(971) $
(1,073) $
(999) $
(1,082) $
(854) $
(931) $
(77) $
(388) $
(1,355) $
(1,565) $
(2,655) $
(2,757) $
(2,873) $
(3,365) $
(2,278)
(3,053)
(0.04) $
(0.04) $
(0.04) $
(0.04) $
(0.03) $
(0.03) $
(0.01) $
(0.01) $
(0.05) $
(0.05) $
(0.09) $
(0.09) $
(0.11) $
(0.11) $
(0.10)
(0.10)
Statements of Operations
Data:
Revenue
Costs and operating
expenses:
Cost of revenue (1)
Technology and
development (1)
Sales and marketing
General and
administrative (1)
Depreciation and
amortization
Total costs and
operating
expenses
Income (loss) from
operations
Net loss
Net loss per share:
Basic
Diluted
$
$
$
$
Note:
(1)
(2) Results for the quarters ended March 31 and June 30, 2015 do not include the results of operations relating to the acquired
Exclusive of depreciation and amortization shown separately.
Zimbra assets, prior to the acquisition (September 14, 2015).
(3) Results for the quarter ended September 30, 2015 include the results of operations relating to the acquired Zimbra assets from
the date of acquisition (September 14, 2015) to September 30, 2015.
43
Liquidity and Capital Resources
Our primary liquidity and capital resource requirements are for financing working capital, investing in capital expenditures such
as computer hardware and software, supporting research and development efforts, introducing new technology, enhancing existing
technology, and marketing our services and products to new and existing customers. In addition, we expect to incur a total of
approximately $10.0 million in start-up expenses, development expenses and capital expenditures through the first quarter of 2017
specifically relating to our contract to provide desktop and mobile portal services to AT&T. Of this total, we have incurred
approximately $8.2 million during 2016, including $6.3 million in operating expenses and $1.9 million in capital expenditures.
To the extent that existing cash and cash equivalents, cash from operations, cash from short-term borrowings, and cash from the
exercise of stock options are insufficient to fund our future activities, we may need to raise additional funds through public or private
equity offerings or debt financings.
In September 2013, we entered into a Loan and Security Agreement with Silicon Valley Bank, or the Lender, which was most
recently amended in November 2016. We refer to the agreement, as amended, as the “Loan Agreement.” The Loan Agreement
provides for a $12.0 million secured revolving line of credit with a stated maturity of September 27, 2018. The credit facility is
available for cash borrowings, subject to a formula based upon eligible accounts receivable. As of December 31, 2016, we had $5.0
million in outstanding borrowing under the Loan Agreement; subject to the operation of the borrowing formula, an additional $7.0
million was available for draw under the Loan Agreement.
Borrowings under the Loan Agreement bear interest, at our election, at an annual rate based on either the “prime rate” as
published in The Wall Street Journal or LIBOR for the relevant period. If our liquidity coverage ratio (the ratio of cash plus eligible
accounts receivable to borrowings under the Agreement) exceeds 2.75 to 1, LIBOR-based advances bear interest at LIBOR plus 3.5%
and prime rate advances bear interest at the prime rate plus 1.0%. If our liquidity coverage ratio falls below 2.75 to 1, LIBOR-based
advances bear interest at LIBOR plus 4.0% and prime rate advances bear interest at the prime rate plus 1.5%. For LIBOR advances,
interest is payable (i) on the last day of a LIBOR interest period or (ii) on the last day of each calendar quarter. For prime rate
advances, interest is payable (a) on the first day of each month and (b) on each date a prime rate advance is converted into a LIBOR
advance.
Our obligations to the Lender are secured by a first priority security interest in all our assets, including our intellectual
property. The Loan Agreement contains customary events of default, including non-payment of principal or interest, violations of
covenants, material adverse changes, cross-default, bankruptcy and material judgments. Upon the occurrence of an event of default, the
Lender may accelerate repayment of any outstanding balance. The Loan Agreement also contains certain financial covenants and other
agreements that are customary in loan agreements of this type, including restrictions on paying dividends and making distributions to our
stockholders. As of December 31, 2016, we were in compliance with the covenants and anticipate continuing to be so.
As of December 31, 2016, we had approximately $14.3 million of cash and cash equivalents. We believe that our existing cash
and cash equivalents, along with cash flows from operations and availability under our revolving credit line, will be sufficient to meet
our anticipated working capital, interest payments, capital lease payment obligations and capital expenditure requirements for at least
the next 12 months.
In November 2016, we filed a shelf registration statement with the Securities and Exchange Commission, under which we may
offer and sell shares of common stock totaling up to $40.0 million. We may endeavor to sell shares under that registration statement
during 2017, to raise funds for general corporate activities.
Cash Flows
Statements of Cash Flows Data:
Cash flows provided (used) by operating activities
Cash flows used by investing activities
Cash flows (used) provided by financing activities
2016
Year Ended December 31,
2015
(in thousands)
2014
$
$
$
8,249 $
(8,439) $
(1,187) $
7,650 $
(20,496) $
2,943 $
(3,309)
(4,754)
(2,752)
44
Cash Provided (Used) by Operating Activities
Operating activities provided $8.2 million of cash in 2016. The positive cash flow from operating activities primarily resulted from
our net loss, adjusted for non-cash items, and changes in our operating assets and liabilities. We had a net loss of $10.5 million, which
included non-cash depreciation and amortization of $9.2 million, non-cash stock-based compensation of $2.8 million, and non-cash
deferred income tax provision of $0.1 million. Changes in our operating assets and liabilities provided $6.3 million of cash, primarily due
to an increase in our accounts payable and other current liabilities totaling $9.1million and an increase in deferred revenue totaling $1.5
million, offset partially by increases in our accounts receivable of $2.2 million and prepaid expenses and other current assets of $2.0
million. The increase in our accounts receivable was primarily attributable to the increase in revenue in 2016 as compared to the prior
year. The increase in our accounts payable and accrued expenses of $9.1 million was primarily the result of increased payables for
syndicated advertising costs and timing of such payments. The increase in prepaid expenses and other current assets was principally the
result of required prepayments of development costs and salable enhancements relating to our Zimbra Email/Collaboration product.
Operating activities provided $7.7 million of cash in 2015. The cash flow from operating activities primarily resulted from our
reduced net loss and improved collections from our accounts receivable. Net loss was $3.5 million, which included non-cash depreciation
and amortization of $6.9 million and non-cash stock-based compensation of $3.1 million. Changes in our operating assets and liabilities
provided $1.0 million of cash, primarily due to increases in deferred revenue of $3.5 million and accrued expenses and other current
liabilities of $2.1 million, combined with a decrease of our accounts payable of $3.6 million. The decrease in our accounts payable was
primarily driven by the timing of payment of invoices to our vendors. The increase in our prepaid and other current assets was primarily
due to the increase of prepayments to vendors for components of our cost of revenue and insurance coverages.
Operating activities used $3.3 million of cash in 2014. The cash flow from operating activities primarily resulted from our net
loss, adjusted for non-cash items and changes in our operating assets and liabilities. The use of cash by operating activities primarily
relates to the change in working capital assets and liabilities. Our net loss was $12.9 million, which included non-cash depreciation of
$5.1 million, non-cash stock-based compensation of $3.6 million, non-cash change in the provision for income taxes of $4.8 and a loss
in an equity interest of $1.0 million, offset by gain on the sale of domain of $1.0 million, resulting in cash provided by components of
net loss of $0.6 million. Changes in our operating assets and liabilities used $3.9 million of cash, primarily due to an increase in
accounts receivable of $5.9 million and offset by an increase in accrued expenses and other current liabilities of $2.7 million. The
increase in accounts receivable is partially due to our improved revenue performance late in the fourth quarter combined with a change
in the mix of our receivables from Google search advertising receivable to digital advertising receivables, while the increase in
accrued expenses and other current liabilities primarily relates to an increase in accrued compensation of $1.3 million associated with
accrued severance, bonus and commissions and an increase in accrued content fees of $1.2 million due to timing of payments. Other
working capital accounts had less significant fluctuations.
Cash Used by Investing Activities
Our primary investing activities have consisted of purchases of property and equipment, and payments for acquisitions.
Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and
internal-use software development. We expect to continue to make significant investments in property and equipment and
development of software for the remainder of 2017 and thereafter.
Cash used by investing activities in 2016 was $8.4 million, of which $5.9 million was expended for purchases of property and
equipment (primarily related to the build-out of our data centers and internal-use software development), of which $1.9 million relates
specifically to preparation for the early 2017 deployment under our portal services contract with AT&T. Cash used in investing
activities also included the cash outlay for the acquisition of Technorati, which totaled $2.5 million in 2016.
Cash used by investing activities in 2015 was $20.5 million, consisting of $17.3 million of cash used for the acquisition of the
Zimbra assets, net of cash acquired, and $3.2 million for purchases of property and equipment (specifically related to the build-out of
our data centers and internal-use software development).
Cash used by investing activities in 2014 was $4.8 million, consisting of $5.0 million used for purchases of property and
equipment, which primarily relates to software development of our product portfolio, including the payment of $0.7 million of
software development costs recorded to accounts payable at December 31, 2013, and $0.8 million for an investment in an equity
interest in our joint venture in China. These uses of cash were offset by $1.0 million proceeds from the sale of a domain.
45
Cash (Used) Provided by Financing Activities
Net cash used by financing activities totaled $1.2 million in 2016. We received $1.6 million from the exercise of stock options,
and we repaid $1.7 million of our capital lease obligations. In addition, we paid $0.9 million of contingent consideration relating to
our 2015 acquisition of Zimbra.
In 2015, net cash provided by financing activities was $2.9 million consisting primarily of $5.0 million drawn under our credit
facility with Silicon Valley Bank. This was offset by repayment of $1.4 million on our capital lease obligations, and $0.5 million for a
deferred acquisition payment.
In 2014, net cash used by financing activities was $2.8 million primarily for repayment of $2.3 million on our capital lease
obligations and purchase of treasury stock in the amount of $0.6 million. We received $0.1 million from the exercise of common stock
options.
Off-Balance Sheet Arrangements
At December 31, 2016, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K
promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our
financial condition, revenue, or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to
investors.
Contractual Obligations
We lease office space and data center space under operating lease agreements and certain equipment under capital lease
agreements. We are also obligated to make fixed payments under various contracts with vendors and customers, principally for
revenue-sharing and content arrangements. These fixed payments are reflected in the table below as “contract commitments.”
Reflected in “contingent consideration” are contingent payments in connection with our acquisition of the Zimbra assets and
Technorati.
The following table sets forth our future contractual obligations as of December 31, 2016:
Operating lease obligations
Capital lease obligations
Contract commitments
Long-term debt obligations
Contingent consideration
Total
Payments Due by Period
2017
2018
2019
2020
2021
Total
$
$
2,378 $
1,056
1,560
—
1,193
6,187 $
1,727 $
680
—
5,000
—
7,407 $
766 $
403
—
—
—
1,169 $
492 $
9
—
—
—
501 $
368 $
—
—
—
—
368 $
5,731
2,148
1,560
5,000
1,193
15,632
Impact of Applicable Recent Accounting Pronouncements
In the normal course of business, we evaluate pronouncements issued by the Financial Accounting Standards Board (“FASB”),
Securities and Exchange Commission (“SEC”), or other authoritative bodies to determine the potential impact they may have on our
consolidated financial statements. Refer to Note 1 to the consolidated financial statements in Item 8 of this report for additional
information about these recently issued accounting standards and their potential impact on our consolidated results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course
of our business. These primarily include interest rate, inflation and foreign currency exchange risk.
Interest Rate Risk
Our cash and cash equivalents primarily consist of cash and money market funds. Other than our $1.0 million investment in
B&FF, we currently have no investments of any type. Our exposure to market risk for changes in interest rates is limited because
nearly all of our cash and cash equivalents have a short-term maturity and are used primarily for working capital purposes.
46
We have bank debt with an outstanding balance of $5.0 million at December 31, 2016, which bears interest at a variable annual
rate, at our election, based on either the “prime rate” as published in The Wall Street Journal or LIBOR for the relevant period. If our
liquidity coverage ratio (the ratio of cash plus eligible accounts receivable to bank borrowings under the related loan agreement)
exceeds 2.75 to 1, LIBOR-based advances bear interest at LIBOR plus 3.5% and prime rate advances bear interest at the prime rate
plus 1.0%. If our liquidity coverage ratio falls below 2.75 to 1, LIBOR-based advances bear interest at LIBOR plus 4.0% and prime
rate advances bear interest at the prime rate plus 1.5%. This arrangement subjects us to interest rate risk. A 10% increase or decrease
in these interest rates would not have a significant impact on our interest expense. Although not significant, we are currently
evaluating actions we may take to mitigate this exposure. Refer to Note 6, Long-Term Debt of the Notes to the Consolidated Financial
Statements in Item 8 of this report for additional information about our outstanding debt.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our
costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price
increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Foreign Currency Exchange Risk
We are also subject to foreign currency exchange risk relating to our operations in Canada, Europe, India, Japan and
Singapore. Our expenses at these locations are denominated in the local currencies and our results of operations are influenced by
changes in the exchange rates between the U.S. Dollar and these local currencies, principally the Canadian Dollar, Euro, British Pound
Sterling, Yen, Rupee and Singapore Dollar. In addition, certain of our accounts receivable are denominated in currencies other than
the U.S. Dollar, principally the Euro, British Pound Sterling, and Japanese Yen. A 10% increase or decrease in the applicable currency
exchange rates could result in an increase or decrease in our currency exchange (loss) gain of approximately $0.2 million. We are
currently evaluating our foreign currency rate exposures and may take steps to mitigate these exposures.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements are submitted on pages F-1 through F-24 of this Annual Report on Form 10-K.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure and Control Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures as of December 31, 2016. The term “disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and
other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Based upon the evaluation as of December 31, 2016, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable
assurance level. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
47
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting
based upon the framework in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework). Based on that evaluation, management concluded that our internal control over financial
reporting was effective as of December 31, 2016. This Annual Report on Form 10-K does not include an attestation report of our
independent registered public accounting firm due to a transition period established by the Jumpstart Our Business Startups Act, or
JOBS Act, for emerging growth companies.
Changes in Internal Control over Financial Reporting
We implemented a new Enterprise Resource Planning (“ERP”) system in 2016. This implementation has resulted in certain
improvements to business processes and internal controls impacting financial reporting. We believe that the new ERP system and
related changes to internal controls will enhance our internal controls over financial reporting. We have taken the necessary steps to
monitor and maintain appropriate internal control over financial reporting during this period of system change and will continue to
evaluate the operating effectiveness of related controls during subsequent periods.
Other than the implementation of our new ERP system, there were no changes in our internal control over financial reporting
identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended
December 31, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
48
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the information in our proxy statement for our 2017
Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2016.
Our board of directors has adopted a Code of Business Conduct and a Code of Ethics applicable to all officers, directors and
employees, which is available on our website ( http://www.synacor.com ) under “Investors—Corporate Governance.” We will provide
a copy of these documents to any person, without charge, upon request, by writing to us at Synacor, Inc., Investor Relations
Department, 40 La Riviere Drive, Suite 300, Buffalo, New York 14202. We intend to satisfy the disclosure requirement under
Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Business Conduct or Code of Ethics by
posting such information on our website at the address and the location specified above.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information in our proxy statement for our 2017
Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2016.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the information in our proxy statement for our 2017
Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2016.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the information in our proxy statement for our 2017
Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2016.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to the information in our proxy statement for our 2017
Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2016.
49
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
1. Financial Statements: See Financial Statements and Supplementary Data, Part II, Item 8.
2. Financial Statement Schedules: Financial Statement Schedules have been omitted either because they are not required or
because the information required is included in the notes to the financial statements.
3. Exhibits: See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
50
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
SYNACOR, INC.
/s/ HIMESH BHISE
Himesh Bhise
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 22, 2017
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Himesh Bhise and William J. Stuart, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for
him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
/s/ HIMESH BHISE
Himesh Bhise
/s/ WILLIAM J. STUART
William J. Stuart
/s/ MARWAN FAWAZ
Marwan Fawaz
/s/ GARY L. GINSBERG
Gary L. Ginsberg
/s/ ANDREW KAU
Andrew Kau
/s/ JORDAN LEVY
Jordan Levy
/s/ MICHAEL J. MONTGOMERY
Michael J. Montgomery
/s/ SCOTT MURPHY
Scott Murphy
Title
Date
March 22, 2017
March 22, 2017
March 22, 2017
March 22, 2017
March 22, 2017
March 22, 2017
March 22, 2017
March 22, 2017
President, Chief Executive Officer and
Director (Principal Executive Officer)
Chief Financial Officer (Principal Financial and
Accounting Officer)
Director
Director
Director
Director
Director
Director
51
EXHIBITS
The following exhibits are incorporated by reference herein or filed here within:
Exhibit No.
Description
Incorporated by Reference
Form
File No.
Date of
Filing
Exhibit
Number
2.1§
3.1
3.2
3.3
4.1
4.2
10.1
Asset Purchase Agreement dated February 19,
2016 by and among Synacor, Inc.; Technorati,
Inc.; and Shareholder Representative Services
LLC, solely in its capacity as the representative of
Technorati and Technorati’s securityholders
Fifth Amended and Restated Certificate of
Incorporation
Amended and Restated Bylaws
Certificate of Designations of Series A Junior
Participating Preferred Stock
Rights Agreement between Synacor, Inc. and
American Stock Transfer & Trust Company, LLC
dated July 14, 2014
First Amendment to Rights Agreement dated
August 18, 2015 between Synacor, Inc. and
American Stock Transfer & Trust Company, LLC
as rights agent
Form of Indemnification Agreement between
Synacor, Inc. and each of its directors and
executive officers and certain key employees
10.2.1*
2006 Stock Plan
10.2.2*
Amendment No. 1 to 2006 Stock Plan
10.2.3*
Amendment No. 2 to 2006 Stock Plan
10.2.4*
Amendment No. 3 to 2006 Stock Plan
10.2.5*
Amendment No. 4 to 2006 Stock Plan
10.2.6*
Amendment No. 5 to 2006 Stock Plan
10.2.7*
Amendment No. 6 to 2006 Stock Plan
10.2.8*
Amendment No. 7 to 2006 Stock Plan
10.2.9*
10.2.10*
10.2.11*
10.2.12*
Form of Stock Option Agreement under 2006
Stock Plan with Jordan Levy
Form of Stock Option Agreement with George G.
Chamoun under 2006 Stock Plan
Form of Director Stock Option Agreement under
2006 Stock Plan
Form of Director Stock Option Agreement under
2006 Stock Plan
10.2.13 * Form of Stock Option Agreement with Himesh
Bhise under 2006 Stock Plan
S-1/A
333-178049
1/30/2012
S-1/A
8-K
333-178049
1/30/2012
001-33843
7/15/2014
8-K
001-33843
7/15/2014
3.2
3.4
3.1
4.1
8-K
001-33843
8/18/2015
4.1
S-1
333-178049
11/18/2011
10.1
S-1
S-1
S-1
S-1
S-1
S-1
S-1
333-178049
11/18/2011
10.3.1
333-178049
11/18/2011
10.3.2
333-178049
11/18/2011
10.3.3
333-178049
11/18/2011
10.3.4
333-178049
11/18/2011
10.3.5
333-178049
11/18/2011
10.3.6
333-178049
11/18/2011
10.3.7
S-1/A
S-1/A
333-178049
1/18/2012
333-178049
1/30/2012
10.3.8
10.3.9
S-1/A
333-178049
1/30/2012
10.3.12
S-1/A
333-178049
1/30/2012
10.3.14
S-1/A
333-178049
1/30/2012
10.3.15
10.3.1*
2012 Equity Incentive Plan
S-1/A
333-178049
1/18/2012
10.4
52
Filed
Herewith
X
X
Exhibit No.
Description
10.3.2*
10.3.3*
10.3.4*
10.3.5*
10.3.6*
10.3.7*
10.3.8*
10.4.1*
Form of Stock Option Agreement under 2012
Equity Incentive Plan
Form of Stock Unit Agreement under 2012 Equity
Incentive Plan
Form of Early Exercise Stock Option Agreement
under 2012 Equity Incentive Plan
Form of Stock Option Agreement with George G.
Chamoun under 2012 Equity Incentive Plan
Form of Stock Option Agreement with William J.
Stuart under 2012 Equity Incentive Plan
Form of Stock Option Agreement with Himesh
Bhise under 2012 Equity Incentive Plan
Form of Stock Option Agreement with William J.
Stuart under 2012 Equity Incentive Plan
Employment and Noncompetition Agreement
dated December 22, 2000 between George G.
Chamoun and CKMP, Inc.
10.4.2*
Severance Agreement with George G. Chamoun
10.4.3*
10.4.4*
10.5.1*
Letter Agreement dated March 26, 2014 with
George G. Chamoun
Amendment to Severance Agreement dated
March 26, 2014 with George G. Chamoun
Letter Agreement dated August 3, 2011 with
William J. Stuart
10.5.2*
Severance Agreement with William J. Stuart
10.5.3*
10.6.1 †
10.6.2 †
10.6.3 †
10.6.4 †
10.6.5 †
Letter Agreement dated August 26, 2013 with
William J. Stuart
Amended and Restated Master Services
Agreement between Qwest Corporation and
Synacor, Inc. dated January 1, 2012
Amendment #1 to Amended and Restated Master
Services Agreement between Qwest Corporation
and Synacor, Inc. dated July 1, 2012
Amendment #2 to Master Services Agreement
between Qwest Corporation and Synacor, Inc.
dated August 23, 2012
Amendment #3 to Amended and Restated Master
Services Agreement between Qwest Corporation
and Synacor, Inc. dated December 7, 2012
Fifth Amendment to Amended and Restated
Master Services Agreement between Qwest
Corporation and Synacor, Inc. dated January 29,
2013
Incorporated by Reference
File No.
Date of
Filing
Exhibit
Number
333-178049
1/30/2012
10.4.2
Form
S-1/A
Filed
Herewith
S-1/A
333-178049
1/30/2012
10.4.3
10-K
001-33843
3/26/2013
10.4.5
10-K
001-33843
3/26/2013
10.4.6
10-K
001-33843
3/26/2013
10.4.7
X
X
S-1
333-178049
11/18/2011
10.7.1
S-1/A
10-K
333-178049
12/23/2011
10.7.2
001-33843
3/26/2014
10.7.3
10-K
001-33843
3/26/2014
10.7.4
S-1
333-178049
11/18/2011
10.8
10-K
10-K
001-33843
3/26/2014
001-33843
3/26/2014
10.8.2
10.8.3
10-Q
001-33843
11/14/2012
10.1.1
10-Q
001-33843
11/14/2012
10.1.2
10-Q
001-33843
11/14/2012
10.1.3
10-Q
001-33843
5/15/2014
10.2.1
10-Q
001-33843
5/15/2014
10.2.2
53
Exhibit No.
Description
10.6.6 †
10.6.7
10.6.8 †
10.6.9 #
Sixth Amendment to Amended and Restated
Master Services Agreement between Qwest
Corporation and Synacor, Inc. dated November 1,
2013
Seventh Amendment to Amended and Restated
Master Services Agreement between Qwest
Corporation and Synacor, Inc. dated October 12,
2014
Eighth Amendment to Amended and Restated
Master Services Agreement between Qwest
Corporation and Synacor, Inc. dated December 18,
2015
Ninth Amendment to Amended and Restated
Master Services Agreement between Qwest
Corporation and Synacor, Inc. dated December 30,
2016
10.7*
2007 Management Cash Incentive Plan
10.8.1 †
10.8.2 †
10.8.3 †
10.8.4 †
10.8.5
10.8.6 †
10.8.7
10.8.8 †
Master Services and Linking Agreement between
Toshiba America Information Systems, Inc. and
Synacor, Inc. dated July 1, 2010
Amendment #1 to Master Services and Linking
Agreement between Toshiba America Information
Systems, Inc. and Synacor, Inc. dated December 1,
2011
Amendment #2 to Master Services and Linking
Agreement between Toshiba America Information
Systems, Inc. and Synacor, Inc. dated September
4, 2013
Amendment #3 to Master Services and Linking
Agreement between Toshiba America Information
Systems, Inc. and Synacor, Inc. dated
September 4, 2013
Amendment #4 to Master Services and Linking
Agreement between Toshiba America Information
Systems, Inc. and Synacor, Inc. dated September
4, 2013
Statement of Work #1 governed by Master
Services and Linking Agreement between Toshiba
America Information Systems, Inc. and Synacor,
Inc. dated September 24, 2013
Amendment #5 to Master Services and Linking
Agreement between Toshiba America Information
Systems, Inc. and Synacor, Inc. dated
September 25, 2014
Amendment #6 to Master Services and Linking
Agreement between Toshiba America Information
System, Inc. and Synacor, Inc. dated August 5,
2014
Incorporated by Reference
File No.
Date of
Filing
Exhibit
Number
001-33843
5/15/2014
10.2.3
Form
10-Q
Filed
Herewith
10-K/A
001-33843
3/13/2015
10.10.7
10-K
001-33843
3/22/2016
10.7.8
X
10-Q
S-1/A
001-33843
5/15/2012
333-178049
2/1/2012
10.1
10.12
10-Q
001-33843
11/14/2013
10.2.1
10-Q
001-33843
11/14/2013
10.2.2
10-Q
001-33843
11/14/2013
10.2.3
10-Q
001-33843
11/14/2013
10.2.4
10-Q
001-33843
11/14/2013
10.2.5
10-Q
001-33843
11/14/2014
10.2
10-K/A
001-33843
3/13/2015
10.12.8
54
Exhibit No.
Description
Incorporated by Reference
Filed
Herewith
10.8.9 †
10.8.10 †
10.8.11
10.9.1 †
10.9.2 †
10.9.3 †
10.9.4 †
10.9.5 †
10.9.6 †
10.9.7 †
10.9.8 †
10.9.9
10.10.1
10.10.2
10.10.3
10.10.4
Marketing Services Statement of Work governed
by Master Services and Linking Agreement
between Toshiba America Information Systems,
Inc. and Synacor, Inc. dated December 22, 2014
Amendment #7 to Master Services and Linking
Agreement between Toshiba America Information
Systems, Inc. and Synacor, Inc., effective
September 15, 2015
Amendment #8 to Master Services and Linking
Agreement between Toshiba America Information
Systems, Inc., and Synacor, Inc. effective April 1,
2016
Google Services Agreement between Google Inc.
and Synacor, Inc. dated March 1, 2011
Amendment Number One to Google Services
Agreement between Google Inc. and Synacor, Inc.
dated July 1, 2011
Amendment Number Two to Google Services
Agreement between Google Inc. and Synacor, Inc.
dated May 1, 2012
Amendment Number Three to Google Services
Agreement between Google Inc. and Synacor, Inc.
dated May 1, 2013
Amendment Number Four to Google Services
Agreement between Google Inc. and Synacor, Inc.
dated March 1, 2014
Amendment Number Five to Google Services
Agreement between Google Inc. and Synacor, Inc.
dated August 1, 2014
Amendment Number Six to Google Services
Agreement between Google Inc. and Synacor, Inc.
dated January 1, 2015
Amendment Number Seven to Google Services
Agreement between Google Inc. and Synacor, Inc.
dated March 1, 2016
Extension Notice Letter from Google Inc. dated
December 16, 2016
Sublease dated March 3, 2006 between Ludlow
Technical Products Corporation and Synacor, Inc.
First Amendment to Sublease dated September 25,
2006
Second Amendment to Sublease dated
February 27, 2007
Third Amendment to Sublease dated June 30,
2010
Form
File No.
Date of
Filing
Exhibit
Number
10-K/A
001-33843
3/13/2015
10.12.9
10-Q
001-33843
11/17/2015
10.2
10-Q
001-33843
8/15/2016
10.3
S-1/A
333-178049
2/1/2012
10.13.1
S-1/A
333-178049
12/29/2011
10.13.2
10-Q
001-33843
8/13/2013
10.1.1
10-Q
001-33843
8/13/2013
10.1.2
10-Q
001-33843
5/15/2014
10.1
10-K/A
001-33843
3/13/2015
10.13.6
10-Q
001-33843
5/14/2015
10.1
10-Q
001-33843
5/16/2016
10.3
X
S-1
S-1
S-1
333-178049
11/18/2011
10.14.1
333-178049
11/18/2011
10.14.2
333-178049
11/18/2011
10.14.3
10-K
001-33843
3/22/2016
10.11.4
55
Filed
Herewith
Exhibit No.
Description
10.10.5
Fourth Amendment to Sublease dated May 21,
2013
10.10.6
Fifth Amendment to Sublease dated July 10, 2013
10.10.7
10.11.1*
10.11.2*
10.11.3*
10.11.4*
Sixth Amendment to Sublease dated February 8,
2016
Letter Agreement dated March 1, 2008 with
Jordan Levy
Letter Agreement dated June 23, 2009 with
Jordan Levy
Letter Agreement dated March 1, 2008 with
George G. Chamoun
Letter Agreement dated June 23, 2009 with
George G. Chamoun
Incorporated by Reference
File No.
Date of
Filing
Exhibit
Number
001-33843
3/22/2016
10.11.5
001-33843
3/22/2016
10.11.6
001-33843
3/22/2016
10.11.7
Form
10-K
10-K
10-K
S-1/A
333-178049
1/30/2012
10.15.1
S-1/A
333-178049
1/30/2012
10.15.2
S-1/A
333-178049
1/30/2012
10.15.5
S-1/A
333-178049
1/30/2012
10.15.6
10.12*
Form of Common Stock Repurchase Agreement
S-1/A
333-178049
1/30/2012
10.16
10.13.1*
Special Purpose Recruitment Plan
Schedule 14A
001-33843
4/5/2013
App. A
10.13.2*
10.14.1
10.14.2
10.14.3
10.14.4
10.14.5
10.14.6
10.14.7
Form of Stock Option Agreement (Early Exercise)
under Special Purpose Recruitment Plan
10-Q
001-33843
8/13/2013
10.5
Loan and Security Agreement between Silicon
Valley Bank and Synacor, Inc. dated
September 27, 2013
First Amendment to the Loan and Security
Agreement between Silicon Valley Bank and
Synacor, Inc. dated October 28, 2014
Joinder to Loan and Security Agreement among
Silicon Valley Bank, Synacor, Inc., and NTV
Internet Holdings, LLC dated April 13, 2015
Second Amendment to Loan and Security
Agreement among Silicon Valley Bank, Synacor,
Inc., NTV Internet Holdings, LLC and SYNC
Holdings, LLC dated September 25, 2015
Joinder to Loan and Security Agreement among
Silicon Valley Bank, Synacor, Inc., NTV Internet
Holdings, LLC and SYNC Holdings, LLC dated
September 25, 2015
Third Amendment to Loan and Security
Agreement among Silicon Valley Bank, Synacor,
Inc., NTV Internet Holdings, LLC and SYNC
Holdings, LLC dated October 28, 2015
Consent and Fourth Amendment to Loan and
Security Agreement among Silicon Valley Bank,
Synacor, Inc., NTV Internet Holdings, LLC and
SYNC Holdings, LLC dated February 25, 2016
10-Q
001-33843
11/14/2013
10.1
10-K
001-33843
3/12/2015
10.20.2
10-K
001-33843
3/22/2016
10.16.3
10-Q
001-33843
11/17/2015
10.3
10-K
001-33843
3/22/2016
10.16.5
10-K
001-33843
3/22/2016
10.16.6
10-Q
001-33843
5/16/2016
10.2
56
Exhibit No.
Description
10.14.8
10.15.1*
10.15.2*
10.16.1†
10.16.2†
Consent and Fifth Amendment to Loan and
Security Agreement among Silicon Valley Bank,
Synacor, Inc., NTV Internet Holdings, LLC and
SYNC Holdings, LLC dated November 8, 2016
Employment Letter Agreement with Himesh Bhise
dated August 4, 2014
Stock Option Agreement with Himesh Bhise
granted on August 4, 2014
Portal and Advertising Services Agreement
between Synacor, Inc. and AT&T Services, Inc.
made as of April 1, 2016
First Amendment to Portal and Advertising
Services Agreement between Synacor, Inc. and
AT&T Services, Inc. effective as of May 4, 2016.
10.16.3 # Second Amendment to Portal and Advertising
Services Agreement between Synacor, Inc. and
AT&T Services, Inc. effective as of December 7,
2016.
21.1
23.1
24.1
31.1
31.2
32.1 ‡
List of subsidiaries
Consent of Deloitte & Touche LLP
Power of Attorney (contained in the signature
page of this Annual Report on Form 10-K)
Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Certifications of the Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation
Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
Incorporated by Reference
File No.
Date of
Filing
Exhibit
Number
001-33843
11/14/2016
10.2
Form
10-Q
Filed
Herewith
10-Q
001-33843
11/14/2014
10.1.1
10-Q
001-33843
11/14/2014
10.1.2
10-Q
001-33843
8/15/2016
10.1
10-Q
001-33843
8/15/2016
10.2
X
X
X
X
X
X
X
X
X
X
X
X
Notes:
§
*
Refiled to include certain information that was previously redacted pursuant to a confidential treatment request. This agreement
supersedes in its entirety Exhibit 2.1 to the current report on Form 8-K (File No. 001-33843) filed on February 29, 2016.
Indicates management contract or compensatory plan or arrangement.
57
#
†
‡
Confidential treatment has been requested for portions of this document. The omitted portions have been filed with the
Securities and Exchange Commission
Confidential treatment has been granted for portions of this document. The omitted portions have been filed with the Securities
and Exchange Commission.
This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the
liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities
Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Synacor, Inc. specifically incorporates it by
reference.
58
INDEX TO THE FINANCIAL STATEMENTS
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to the Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Synacor, Inc.
Buffalo, New York
We have audited the accompanying consolidated balance sheets of Synacor, Inc. and subsidiaries (the “Company”) as of
December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Synacor,
Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
Williamsville, New York
March 21, 2017
F-2
SYNACOR, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2016 AND 2015
(In thousands except for share and per share data)
2016
2015
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable—net of allowance of $263 and $372
Prepaid expenses and other current assets
Total current assets
PROPERTY AND EQUIPMENT—Net
GOODWILL
INTANGIBLE ASSETS
OTHER LONG-TERM ASSETS
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued expenses and other current liabilities
Current portion of deferred revenue
Current portion of capital lease obligations
Total current liabilities
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS
LONG-TERM DEBT
DEFERRED REVENUE
OTHER LONG-TERM LIABILITIES
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS’ EQUITY:
$
$
$
Preferred stock, $0.01 par value—10,000,000 shares authorized, no shares issued
and outstanding at December 31, 2016 and 2015
Common stock, $0.01 par value—100,000,000 shares authorized; 31,626,635 shares
issued and 30,881,148 shares outstanding at December 31, 2016; 30,636,327
shares issued and 29,983,279 shares outstanding at December 31, 2015
Treasury stock—at cost, 745,487 shares at December 31, 2016 and 653,048 shares
at December 31, 2015
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive (loss) income
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
14,315 $
27,386
4,862
46,563
14,406
15,943
14,837
1,650
93,399 $
18,769 $
11,684
12,149
982
43,584
1,014
5,000
3,917
235
53,750
—
316
(1,547)
117,747
(76,850)
(17)
39,649
93,399 $
15,697
24,341
3,290
43,328
14,377
15,187
14,798
1,336
89,026
9,004
9,765
11,295
1,574
31,638
1,007
5,000
3,225
2,052
42,922
—
306
(1,332)
113,238
(66,110)
2
46,104
89,026
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SYNACOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(In thousands except for share and per share data)
REVENUE
COSTS AND OPERATING EXPENSES:
Cost of revenue (exclusive of depreciation and amortization
shown separately below)
Technology and development (exclusive of depreciation and
amortization shown separately below)
Sales and marketing
General and administrative (exclusive of depreciation and
amortization shown separately below)
Depreciation and amortization
Gain on sale of domain
Total costs and operating expenses
LOSS FROM OPERATIONS
OTHER EXPENSE
INTEREST EXPENSE
LOSS BEFORE INCOME TAXES AND EQUITY INTEREST
PROVISION FOR INCOME TAXES
LOSS IN EQUITY INTEREST
NET LOSS
NET LOSS PER SHARE:
Basic
Diluted
2016
2015
2014
$
127,373 $
110,245 $
106,579
59,146
54,423
57,939
25,612
22,846
20,007
16,272
19,695
9,235
—
136,534
(9,161)
(42)
(318)
(9,521)
1,219
-
(10,740) $
15,543
6,901
—
113,146
(2,901)
(16)
(245)
(3,162)
239
(73)
(3,474) $
(0.36) $
(0.36) $
(0.12) $
(0.12) $
26,259
10,807
14,249
5,126
(1,000)
113,380
(6,801)
(28)
(218)
(7,047)
4,821
(1,063)
(12,931)
(0.47)
(0.47)
$
$
$
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET LOSS
PER SHARE:
Basic
Diluted
30,251,685
30,251,685
28,213,838
28,213,838
27,389,793
27,389,793
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SYNACOR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(In thousands)
Net loss
Other comprehensive loss:
2016
2015
2014
$
(10,740) $
(3,474) $
(12,931)
Change in foreign currency translation adjustment, net of tax
Comprehensive loss
$
(19)
(10,759) $
(18)
(3,492) $
18
(12,913)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SYNACOR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(In thousands except for share data)
Treasury Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Amount
(569) $ 102,226 $ (49,705) $
—
66
—
3,669
—
—
—
—
—
2 $
—
—
—
52,231
68
3,669
—
Common Stock
Shares
Amount
BALANCE—January 1, 2014
Exercise of common stock options
Stock-based compensation cost
Vesting of restricted stock units
Treasury stock withheld to cover tax
liability
Purchase of treasury stock
Net loss
Other comprehensive income
BALANCE—December 31, 2014
Exercise of common stock options
Stock and warrants issued in
acquisition
Stock-based compensation cost
Vesting of restricted stock units
Treasury stock withheld to cover tax
liability
Net loss
Other comprehensive loss
BALANCE—December 31, 2015
Exercise of common stock options
Stock-based compensation cost
Vesting of restricted stock units
Treasury stock withheld to cover tax
liability
Net loss
Other comprehensive loss
BALANCE—December 31, 2016
27,684,598 $
246,880
—
13,375
—
—
—
—
27,944,853
36,135
2,400,000
—
255,339
—
—
—
30,636,327
751,481
—
238,827
—
—
—
31,626,635 $
277
2
—
—
—
—
—
—
279
—
24
—
3
—
—
—
306
8
—
2
—
—
—
316
Shares
(319,500) $
—
—
—
(4,594)
(229,050)
—
—
(553,144)
—
(11)
(562)
—
—
—
—
—
—
(1,142) 105,961
70
—
—
—
(12,931)
—
(62,636)
—
—
—
—
—
—
—
3,936
3,271
—
—
—
—
(99,904)
—
—
(653,048)
—
—
—
(92,439)
—
—
(745,487) $
(190)
—
—
—
—
—
(1,332) 113,238
1,552
2,957
—
—
—
—
—
(3,474)
—
(66,110)
—
—
—
(215)
—
—
—
(10,740)
—
(1,547) $ 117,747 $ (76,850) $
—
—
—
—
—
—
18
20
—
—
—
—
—
—
(18)
2
—
—
—
(11)
(562)
(12,931)
18
42,482
70
3,960
3,271
3
(190)
(3,474)
(18)
46,104
1,560
2,957
2
—
—
(19)
(17) $
(215)
(10,740)
(19)
39,649
The accompanying notes are an integral part of these consolidated financial statements.
F-6
SYNACOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash and cash equivalents
provided (used) by operating activities:
2016
2015
2014
$
(10,740) $
(3,474) $
(12,931)
Depreciation and amortization
Stock-based compensation expense
Capitalized software impairment
Provision for deferred income taxes
Loss in equity interest
Gain on sale of domain
Change in assets and liabilities:
Accounts receivable, net
Prepaid expenses and other current assets
Other long-term assets
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Other long-term liabilities
Net cash provided (used) by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
Acquisition net of cash acquired
Proceeds from sale of domain
Investment in equity interest
Net cash used by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank financing
Repayments on capital lease obligations
Proceeds from exercise of common stock options
Purchase of treasury stock and shares received to satisfy minimum
tax withholdings
Deferred acquisition payment
Net cash (used) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of year
CASH AND CASH EQUIVALENTS—End of year
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest
Cash paid for income taxes
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING TRANSACTIONS:
Property, equipment and service contracts financed under capital
lease obligations
Contingent consideration
Fair value of common stock and warrants in acquisition
Accrued property and equipment expenditures
Stock-based compensation capitalized to property and equipment
$
$
$
$
$
$
$
$
9,235
2,771
334
143
—
—
(2,080)
(1,572)
(314)
8,706
580
1,546
(360)
8,249
(5,939)
(2,500)
—
—
(8,439)
—
(1,672)
1,560
(215)
(860)
(1,187)
(5)
(1,382)
15,697
14,315 $
6,901
3,115
—
—
73
—
(362)
(547)
(167)
(3,579)
2,090
3,478
122
7,650
(3,236)
(17,260)
—
—
(20,496)
5,000
(1,442)
70
(190)
(495)
2,943
—
(9,903)
25,600
15,697 $
318 $
737 $
212 $
210 $
982 $
567 $
— $
227 $
186 $
1,173 $
1,600 $
3,960 $
21 $
159 $
5,126
3,595
—
4,769
1,063
(1,000)
(5,910)
(367)
247
(359)
2,665
—
(207)
(3,309)
(4,982)
—
1,000
(772)
(4,754)
—
(2,258)
68
(562)
—
(2,752)
18
(10,797)
36,397
25,600
219
112
1,961
—
—
117
74
The accompanying notes are an integral part of these consolidated financial statements.
F-7
SYNACOR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2016 AND 2015, AND
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Synacor, Inc., together with its consolidated subsidiaries (collectively, the “Company” or “Synacor”), is the trusted technology
development, multiplatform services and revenue partner for video, internet and communications providers, device manufacturers,
governments and enterprises. Synacor enables its customers to provide their consumers engaging, multiscreen experiences and
advertising to their consumers that require scale, actionable data and sophisticated implementation.
Basis of Presentation —The consolidated financial statements and accompanying notes have been prepared in accordance with
United States generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its wholly-
owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Accounts Receivable —The Company records accounts receivable at the invoiced amount and does not charge interest on past
due invoices. An allowance for doubtful accounts is maintained to reserve for potentially uncollectible accounts receivable. The
Company reviews its accounts receivable from customers that are past due to identify specific accounts with known disputes or
collectability issues. In determining the amount of the reserve, the Company makes judgments about the creditworthiness of customers
based on ongoing credit evaluations.
Property and Equipment —Property and equipment are stated at cost, less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the assets as follows:
Leasehold improvements
Computer hardware
Computer software
Furniture and fixtures
Other
3–10 years
5 years
3 years
7 years
3–5 years
Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the assets.
Long-Lived Assets —The Company reviews the carrying value of its long-lived assets, exclusive of goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. For purposes of
evaluating and measuring impairment, the Company groups a long-lived asset or assets with other assets and liabilities at the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount
by which the carrying amount of the assets exceeds the fair value of the assets. There have been no material impairments to long-lived
assets in any of the years presented.
F-8
The components and estimated economic lives of our amortizable intangible assets were as follows as of December 31, 2016
and 2015:
Estimated
Economic Life
2016
2015
(Dollars in thousands)
Gross amortizable intangible assets:
Customer relationships
Trademark
Developed technology
Total gross amortizable intangible assets
Accumulated amortization:
Customer relationships
Trademark
Developed technology
10 years $
5 years
5 years
Total accumulated amortization
Amortizable intangible assets, net
$
14,780 $
300
2,330
17,410
(1,961)
(78)
(534)
(2,573)
14,837 $
13,400
300
1,600
15,300
(391)
(18)
(93)
(502)
14,798
Future amortization expense of amortizable intangible assets will be as follows (in thousands): $2,142 in each of years ending
December 31, 2017 through 2019, $2,031 in the year ending December 31, 2020, $1,411 in the year ending December 31, 2021, and
$4,969 thereafter.
Goodwill —Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets
acquired in a business combination. Goodwill is not amortized, but is tested for impairment on an annual basis and more frequently if
impairment indicators are present. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its estimated fair
value. The Company has determined it is a single reporting unit, and estimates its fair value using a market approach. If the carrying
value of the reporting unit were to exceed its estimated fair value, the second step of the goodwill impairment test is performed by
comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge would then be
recognized for the excess of the carrying value of goodwill over its implied estimated fair value. The Company conducts its annual
goodwill impairment test as of October 1st. For the years ended December 31, 2016, 2015 and 2014, the Company determined
goodwill was not impaired.
The change in goodwill is as follows for the years ended December 31, 2016 and 2015 (in thousands):
Balance, beginning of year
Technorati acquisition related goodwill (Note 2)
Zimbra acquisition related goodwill (Note 2)
Foreign currency revaluation
Balance, end of year
Years Ended December 31,
2016
2015
$
$
$
15,187 $
751
—
5
15,943 $
1,565
—
13,622
—
15,187
Revenue Recognition —The Company derives revenue from two categories: revenue generated from its Managed Portals and
Advertising activities and Recurring and Fee-Based revenue, each of which is described below. Advertising and Recurring and Fee-
Based revenue are recognized when the following criteria are met: persuasive evidence of an arrangement exists; delivery has
occurred; the selling price is fixed or determinable; and collectability is reasonably assured. The following table shows the revenue in
each category for the years ended December 31, 2016, 2015 and 2014 (in thousands):
Search and digital advertising
Recurring and fee-based
Total revenue
Year Ended December 31,
2015
2016
2014
$
$
74,889 $
52,484
127,373 $
78,316 $
31,929
110,245 $
83,906
22,673
106,579
F-9
The Company uses internet advertising to generate revenue from the traffic on its Managed Portals categorized as search
advertising and digital advertising.
•
•
In the case of search advertising, the Company has a revenue-sharing relationship with Google, pursuant to which it
includes a Google-branded search tool on its Managed Portals. When a consumer makes a search query using this tool, the
Company delivers the query to Google and they return search results to consumers that include advertiser-sponsored links.
If the consumer clicks on a sponsored link, Google receives payment from the sponsor of that link and shares a portion of
that payment with the Company, which is recognized as revenue.
Digital advertising includes video, image and text advertisements delivered on one of the Company’s Managed Portals.
Advertising inventory is filled with advertisements sourced by the Company’s direct sales force, independent advertising
sales representatives, and also advertising network partners. Revenue is generated for the Company when an
advertisement displays, otherwise known as an impression, or when consumers view or click an advertisement, otherwise
known as an action. Digital advertising revenue is calculated on a per-impression or per-action basis. Revenue is
recognized as the impressions are delivered or the actions occur, according to contractual rates.
Recurring and Fee-Based revenue represents subscription fees and other fees that the Company receives from customers for the
use of its proprietary technology, including the use of, or access to, email, video solutions, Cloud ID, security services, games and
other premium services and paid content. Monthly subscriber levels typically form the basis for calculating and generating Recurring
and Fee-Based revenue. They are generally determined by multiplying a per-subscriber per-month fee by the number of subscribers
using the particular services being offered or consumed. In other cases, the fee is fixed. Revenue is recognized from customers as the
services are delivered.
The Company evaluates its relationship between search and digital advertising revenue and its Managed Portal customers in
accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-45, Principal
Agent Considerations. The Company has determined that the search and digital advertising revenue derived from the internet traffic
on Managed Portals is reported on a gross basis because the Company is the primary obligor (Synacor is responsible to its customers
for fulfilling search and digital advertising services and premium and other services), is involved in the service specifications,
performs part of the service, has discretion in supplier selection, has latitude in establishing price and bears credit risk.
Certain Recurring and Fee-Based revenue is derived from the sale of software licenses on a perpetual or subscription basis, for
which revenue is recognized upon receipt of an external agreement and delivery of the software, provided the fees are fixed and
determinable, and collection is probable. For agreements that include one or more elements to be delivered at a future date, revenue is
recognized using the residual method, under which the vendor-specific objective evidence (“VSOE”) of fair value of the undelivered
elements is deferred, and the remaining portion of the agreement fee is recognized as license revenue. If VSOE of fair value has not
been established for certain undelivered elements, revenue is deferred until those elements have been delivered or their fair values
have been determined.
Cost of Revenue —Cost of revenue consists primarily of revenue sharing, content acquisition costs, co-location facility costs,
royalty costs and product support costs. Revenue sharing consists of amounts accrued and paid to customers for the internet traffic on
Managed Portals where the Company is the primary obligor, resulting in the generation of search and digital advertising revenue. The
revenue-sharing agreements with customers are primarily variable payments based on a percentage of the search and digital
advertising revenue.
Content-acquisition agreements may be based on a fixed payment schedule, on the number of subscribers per month, or a
combination of both. Fixed-payment agreements are expensed on a straight-line basis over the term defined in the agreement.
Agreements based on the number of subscribers are expensed on a monthly basis. Co-location facility costs consist of rent and
operating costs for the Company’s data center facilities. Royalty costs consist of amounts due to other parties for sale of mailboxes
with third party technology enabled. Product support costs consist of employee and operating costs directly related to the Company’s
maintenance and professional services support.
Concentrations of Risk —As of December 31, 2016, the Company had no customers whose outstanding balance due the
Company equaled or exceeded 10% of the Company’s total accounts receivable. As of December 31, 2015, the Company had one
customer, Google, whose balance represented approximately 14% of the Company’s accounts receivable balance. For the years ended
December 31, 2016, 2015 and 2014 the Company had concentrations equal to or exceeding 10% of the Company’s revenue as
follows:
Google
2016
Revenue
2015
2014
12%
28%
42%
F-10
For the years ended December 31, 2016, 2015 and 2014, the following customers received revenue-share payments equal to or
exceeding 10% of the Company’s cost of revenue.
Customer A
Customer B
Customer C
Customer D
* less than 10%
2016
Cost of Revenue
2015
2014
22%
*
*
*
26%
10%
*
*
22%
12%
10%
12%
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash
and cash equivalents. The Company places its cash primarily in checking and money market accounts with high credit quality
financial institutions, which, at times, have exceeded federally insured limits of $0.25 million. Although the Company maintains
balances that exceed the federally insured limit, it has not experienced any losses related to these balances and believes credit risk to
be minimal.
Software Development Costs —Costs incurred during the preliminary project stage for internal software programs are
expensed as incurred. External and internal costs incurred during the application development stage of new software development as
well as for upgrades and enhancements for software programs that result in additional functionality are capitalized. In 2016, 2015 and
2014, the Company incurred $4.5 million, $2.8 million and $3.4 million of combined internal and external costs related to the
application development stage. Internal and external training and maintenance costs are expensed as incurred.
Technology and Development —Technology and development expenses consist primarily of compensation-related expenses
incurred for the research and development of, enhancements to, and maintenance and operation of the Company’s products, equipment
and related infrastructure.
Sales and Marketing —Sales and marketing expenses consist primarily of compensation-related expenses to the Company’s
direct sales and marketing personnel, as well as costs related to advertising, industry conferences, promotional materials, and other
sales and marketing programs. Advertising costs are expensed as incurred. Advertising costs totaled $0.4 million, $0.1 million and
$0.0 in 2016, 2015 and 2014, respectively.
General and Administrative —General and administrative expenses consist primarily of compensation related expenses for
executive management, finance, accounting, human resources, professional fees and other administrative functions.
Sale of Domain —In June 2014, the Company executed a transaction to sell a domain name of its legacy business. The sale
amounted to $1.0 million and the entire amount was recorded as a gain on the sale in the accompanying consolidated statement of
operations for the year ended December 31, 2014. The sale was unique to 2014 and no such transactions occurred in the comparative
periods.
Earnings (Loss) Per Share —Basic earnings (loss) per share (“EPS”) is calculated in accordance with FASB ASC 260,
Earnings per Share, using the weighted average number of common shares outstanding during each period. Diluted EPS assumes the
conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income
per share. For purposes of this calculation, stock options, warrants and restricted stock units (“RSUs”) are considered to be potential
common shares and are only included in the calculation of diluted earnings (loss) per share when their effect is dilutive.
Stock-Based Compensation —The Company records compensation costs related to stock-based awards in accordance with
FASB ASC 718, Compensation—Stock Compensation. Under the fair value recognition provisions of ASC 718, the Company
measures stock-based compensation cost at the grant date based on the estimated fair value of the award. Compensation cost is
recognized ratably over the requisite service period of the award. The Company utilizes the Black-Scholes option-pricing model to
estimate the fair value of stock options granted. The amount of stock-based compensation expense recognized during a period is based
on the portion of the awards that are ultimately expected to vest. The Company estimates pre-vesting forfeitures at the time of grant by
analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The total
expense recognized over the vesting period will only be for those awards that ultimately vest.
Rights Plan —On July 14, 2014 the board of directors declared a dividend of one preferred share purchase right (a “Right”) for
each outstanding share of the Company’s common stock and adopted a stockholder rights plan (the “Rights Plan”). The Rights were
F-11
issued on July 14, 2014 to the stockholders of record at the close of business on that date. Each Right allows its holder to purchase
from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock (a “ Series A Junior Preferred
Share”) for $10.00 per share (the “Exercise Price”), if the Rights become exercisable. This portion of a Series A Junior Preferred
Share will give the stockholder approximately the same dividend, voting, and liquidation rights as would one share of common stock.
Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights. On July 14, 2014, in conjunction with
the adoption of the Rights Plan, the Company designated 2,000,000 shares of its Preferred Stock as Series A Junior Participating
Preferred Stock.
The Rights will not be exercisable until 10 days after the public announcement that a person or group has become an “Acquiring
Person” by obtaining beneficial ownership of 10% or more of the Company’s outstanding common stock (the “Distribution Date”). If
a person or group becomes an Acquiring Person, each Right will entitle its holder (other than such Acquiring Person) to purchase for
$10.00 per share, a number of shares of the Company’s common stock having a market value of twice such price based on the market
price of the common stock prior to such acquisition. Additionally, if the Company is acquired in a merger or similar transaction after
the Distribution Date, each Right will entitle its holder (other than such Acquiring Person) to purchase for $10.00 per share, a number
of shares of the acquiring corporation with a market value of $20.00 per share based on the market price of the acquiring corporation’s
stock, prior to such merger. In addition, at any time after a person or group becomes an Acquiring Person, but before such Acquiring
Person or group owns 50% or more of the Company’s common stock, the board of directors may exchange one share of the
Company’s common stock for each outstanding Right (other than Rights owned by such Acquiring Person, which would have become
void). An Acquiring Person will not be entitled to exercise the Rights.
On April 20, 2015, the Company’s stockholders ratified the Rights Plan. The Company expects that the Rights Plan will expire
on July 14, 2017 in accordance with its terms.
On August 18, 2015, the Company amended the definition of “Acquiring Person” to provide that (i) issuances of securities
under plans, contracts or arrangements approved by the board of directors or its compensation committee as compensation for service
as a director, employee or consultant of Synacor or any of its subsidiaries will not trigger the exercisability of the Rights and
(ii) issuances of securities in consideration for the acquisition of assets or a business in a transaction approved by the board of
directors will not trigger the exercisability of the Rights.
Business Combinations —The Company records its business combinations under the acquisition method of accounting. Under
this method, the Company allocates the purchase price of each acquisition to the tangible and identifiable intangible assets acquired
and liabilities assumed based on their respective fair values at the date of acquisition. The fair value of identifiable intangible assets is
based upon detailed valuations that use various assumptions made by management. Any excess of the purchase price over the fair
value of net tangible and identifiable intangible assets acquired is allocated to goodwill. All direct acquisition-related costs are
expensed as incurred.
The following methodology and assumptions are considered relevant to the fair value judgments related to acquired intangible
assets and assumed liabilities:
•
•
•
Technology and Trademark intangible assets—valued based on discounted cash flows using the relief from royalty
method (a form of an income approach)
Customer Relationship—valued based on a multi-period excess earnings method (a form of an income approach)
Deferred Revenue—valued based on a cost approach using estimated costs to be incurred in connection with the
continuing legal obligation associated with acquired contracts plus a reasonable profit margin.
Business assumptions, such as projections of revenue, costs to fulfill acquired contracts, applicable royalty rates, and future
profitability are key assumptions included in the methods described above.
In circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability
equal to the fair value of the contingent payments it expects to make as of the acquisition date. The Company remeasures this liability
each reporting period and records changes in the fair value through other expense in the consolidated statement of operations.
Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates,
as well as changes in the timing, amount of, or the likelihood of achieving the applicable contingent consideration.
Income Taxes —Deferred income tax assets and liabilities are determined based on temporary differences between the financial
statement and income tax bases of assets and liabilities and net operating loss (“NOL”) and credit carryforwards using enacted income
tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established to the extent
necessary to reduce deferred income tax assets to amounts that more likely than not will be realized.
F-12
The Company accounts for uncertain tax positions using a more-likely-than-not recognition threshold based on the technical merits
of the tax position taken. Tax benefits that meet the more-likely-than-not recognition threshold should be measured as the largest amount
of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the
financial statements. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense.
As of December 31, 2016 and 2015, accrued interest or penalties related to uncertain tax positions was insignificant.
Reduction In Workforce —On September 28, 2014, the Company’s board of directors approved a cost reduction plan. The
plan involved a reduction in the Company’s workforce by approximately 70 employees. The pre-tax severance charge and
outplacement services resulting from the reduction in workforce, combined with the Company’s separation from its former Chief
Operating Officer, amounted to $1.3 million. Of the $1.3 million in costs, $0.5 million was recorded to technology and development,
$0.2 million was recorded to sales and marketing and $0.6 million was recorded to general and administrative in the accompanying
consolidated statement of operations for the year ended December 31, 2014.
Accounting Estimates —The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying
notes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable,
the results of which form the basis for making judgments about the carrying values of assets and liabilities. Such estimates primarily
relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from
estimated amounts.
Investment — In July 2013, the Company made a $1.0 million investment (in the form of a convertible promissory note) in a
privately held Delaware corporation called Blazer and Flip Flops, Inc. (“B&FF” doing business as The Experience Engine). In March
2015, the note was converted into preferred stock of B&FF and is accounted for as a cost method investment. B&FF is a professional
services company whose principals have experience integrating its customers’ systems with their customers’ devices, including
smartphones and tablets.
Fair Value Measurements —Fair value measurement standards apply to certain financial assets and liabilities that are
measured at fair value on a recurring basis at each reporting period. The fair value of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses and other current liabilities approximates their carrying value due to their short-term nature. The
carrying amounts of the Company’s capital leases approximate fair value of these obligations based upon management’s best
estimates of interest rates that would be available for similar debt obligations at December 31, 2016 and 2015. The carrying value of
our long-term debt approximates its fair value due to its variable interest rate. The fair value of accrued contingent consideration
recorded by the Company represents the estimated fair value of the contingent consideration the Company expects to pay.
The provisions of FASB ASC 820, Fair Value Measurements and Disclosures , establishes a framework for measuring the fair
value in accounting principles generally accepted in the U.S. and establishes a hierarchy that categorizes and prioritizes the sources to
be used to estimate fair value as follows:
Level 1 —Level 1 inputs are defined as observable inputs such as quoted prices in active markets.
Level 2 —Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability
(interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation
or other means (market corroborated inputs).
Level 3 —Level 3 inputs are unobservable inputs that reflect the Company’s determination of assumptions that market
participants would use in pricing the asset or liability. These inputs are developed based on the best information available, including
the Company’s own data.
Applicable Recent Accounting Pronouncements —In May 2014, the FASB issued Accounting Standards Update (“ASU”)
2014-09 (ASU 2014-09) Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in
“Revenue Recognition (Topic 605)” and requires an entity to recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or
services. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers: Deferral of the Effective Date,
which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier
application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-
08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net), to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU 2016-10, Revenue from
F-13
Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, providing additional guidance relating to
identifying performance obligations under ASU 2014-09 as well as licensing.
The Company is currently in the process of assessing the financial impact of adopting these ASUs and the methods of adoption.
The Company currently recognizes subscription revenue from its Email/Collaboration contracts, which is included within recurring
and fee-based revenue, over the life of the contracts (which are typically six months or longer). The Company has tentatively
concluded that it is likely that this new guidance will require it to recognize a portion of the revenue from those contracts upon
delivery, at the inception of the contracts, which would have the effect of accelerating recognition of revenue on such contracts, and
may have a material impact on the Company’s consolidated financial statements. The standard will be effective for the Company
beginning January 1, 2018, and adoption as of the original effective date of January 1, 2017 is permitted. The Company anticipates
adopting the standard as of its effective date of January 1, 2018. The guidance permits two methods of adoption: retrospectively to
each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the
guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company has not yet
determined which transition method it will use.
In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) which amends lease accounting by lessors and lessees.
This new standard will require, among other things, that lessees recognize a right-to-use asset and related lease liability for all
significant financing and operating leases, and specifies where in the statement of cash flows the related lease payments are to be
presented. The standard is effective for years beginning after December 15, 2018, including interim periods within those years
(beginning in calendar year 2019 for the Company), and early adoption is permitted. Adoption of ASU 2016-02 is required to be
applied on a modified retrospective basis. The Company is currently in the process of evaluating the impact the adoption of ASU
2016-02 will have on its consolidated financial statements, but currently expects that most of its operating lease commitments will be
subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon the adoption of ASU 2016-02,
which will increase the total assets and total liabilities that it reports as compared to reported prior to adoption. The Company has not
yet determined whether it will adopt the standard in advance of the required effective date.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of stock-based
awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as
classification in the statement of cash flows. ASU 2016-09 is effective for the Company in the first quarter of 2017. The guidance will
be applied either prospectively, retrospectively, or using a modified retrospective transition method, depending on the area covered in
this update. The Company will adopt ASU 2016-09 in the first quarter of 2017. The adoption of this ASU is not expected to have a
significant impact to our consolidated financial statements.
In August 2016, the FASB ASU 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments (ASU 2016-15), which provides guidance related to cash flows presentation and is effective for annual reporting
periods beginning after December 15, 2017, subject to early adoption, which is permitted using a retrospective transition approach.
ASU 2016-15 is intended to standardize the classification of certain cash receipts and cash payments in the Statement of Cash Flows,
and is effective for the Company in its first quarter of fiscal 2018. The Company expects that it will adopt ASU 2016-15 in the first
quarter of fiscal 2018 and is currently evaluating the impact of the pending adoption on its consolidated financial statements.
2. ACQUISITIONS
Technorati –
On February 19, 2016, the Company entered into an Asset Purchase Agreement to acquire substantially all of the assets of
Technorati, Inc. (“Technorati”), an advertising technology company, for $3.0 million in cash (the “Purchase Price”). The Company
completed the acquisition on February 26, 2016 (the “Closing”).
The Company’s motivations for completing the acquisition included the expectation that the acquisition would drive additional
advertising demand, accelerate its content and advertising syndication strategy by giving the Company access to over 1,000 new
publishers, and adding new tools for publishers to its existing platform. The Company also anticipated synergies and economies of
scale by combining Technorati’s publisher network, proprietary SmartWrapper solution and other advertising technology with its
existing network of Managed Portals and Advertising solutions.
The assets acquired include Technorati’s intellectual property and advertising technology platforms, customer and publisher
relationships, accounts receivable and equipment. The Company also assumed certain obligations of Technorati, including post-
Closing obligations under contracts assigned to the Company and the payment of outstanding liabilities to its publishers. Ten of
Technorati’s employees commenced employment with Synacor.
F-14
The Company paid $2.5 million of the Purchase Price at the Closing and withheld $0.5 million of the Purchase Price to secure
Technorati’s indemnification obligations under the Asset Purchase Agreement. As of December 31, 2016, the Company owed
Technorati approximately $0.1 million in post-closing working capital adjustments. Pursuant to the terms of the Asset Purchase
Agreement, Technorati shall indemnify the Company for breaches of its representations and warranties, breaches of covenants and
certain other matters. The representations and warranties set forth in the Asset Purchase Agreement generally survived for 12 months
following the Closing, with longer survival periods for certain fundamental representations and warranties. There have been no claims
for such breaches to date.
Consideration and Allocation of Purchase Price –
The transaction was accounted for as a purchase of a business in accordance with FASB ASC Topic 805, Business
Combinations. Under this guidance, the fair value of the consideration was determined and the assets acquired and liabilities assumed
have been recorded at their estimated fair values as of the date of acquisition. The excess of the consideration over the estimated fair
values has been recorded as goodwill.
The transaction consideration, as well as the allocation of the purchase price to the assets acquired and liabilities assumed as of
the date of the acquisition are presented in the table below. Management is responsible for determining, as of the Closing, the fair
value of tangible and identifiable intangible assets acquired and liabilities assumed, and the estimated useful lives for any depreciable
and amortizable assets. Management considered a number of factors, including reference to a valuation analysis performed solely for
the purpose of this allocation in accordance with ASC Topic 805. The Company’s estimates are based on assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable. This analysis required the use of management’s assumptions, which
would not reflect unanticipated events and circumstances that may occur.
Consideration (in thousands):
Cash consideration
Fair value of indemnification holdback
Fair value of post-closing working capital adjustment
Total consideration
Purchase price allocation (in thousands):
Assets acquired:
Accounts receivable
Property and equipment
Customer and publisher relationships
Technology
Goodwill
Total assets acquired
Liabilities assumed:
Accounts payable and accrued expenses
Net assets acquired
$
$
$
$
2,500
500
67
3,067
965
96
1,380
730
751
3,922
855
3,067
The Company has used its best estimates and assumptions to value the assets acquired and liabilities assumed, and the purchase
price allocation is not expected to materially change. It is expected that acquired goodwill will be deductible for United States tax
purposes. The Company is amortizing technology and customer and publisher relationships over estimated useful lives of five years.
The indemnification holdback and post-closing working capital adjustment were accrued in Accrued Expenses and Other
Current Liabilities at December 31, 2016 and were paid to the seller subsequent to that date.
The Company is not able to determine the amount of revenue and earnings recognized in the post-acquisition period as a result
of integration activities.
Zimbra –
On August 18, 2015 the Company and Sync Holdings, LLC, its wholly-owned subsidiary, entered into an Asset Purchase
Agreement (the “Asset Purchase Agreement”) with Zimbra, Inc. (now known as TZ Holdings) to acquire certain assets related to TZ
Holdings’ email/collaboration products and services business, including certain of its wholly-owned foreign subsidiaries. The business
F-15
acquired by the Company pursuant to the Asset Purchase Agreement is referred to herein as “Zimbra” or the “Purchased Business.”
The Purchased Business includes software for email/collaboration, calendaring, file sharing, activity streams and social networks,
among other things. The Zimbra software is used globally by service providers, governments and companies. The Company
completed the acquisition (the “Acquisition”) on September 14, 2015 (the “Closing”).
Purchase Price —The total purchase price paid (including the fair value of the contingent consideration described below) for
the Purchased Business was approximately $22.9 million. At the Closing, in consideration for the Purchased Business, the Company
paid TZ Holdings $17.3 million in cash and issued to TZ Holdings 2.4 million shares of its common stock (such shares, the “Closing
Stock Consideration”), valued at $3.1 million, and warrants to purchase 480,000 shares of common stock (the “Closing Warrants”).
Additionally, TZ Holdings was eligible to receive additional consideration, estimated at $2.5 million, consisting of contingent cash
consideration, warrants and additional shares of common stock, as described below.
Contingent Consideration — TZ Holdings was eligible to receive up to an additional $2.0 million (the “Earn Out
Consideration”) in cash upon the satisfaction of certain business performance milestones related to Zimbra after the Closing, subject to
and contingent upon any reduction to satisfy indemnification claims (including pending claims), as further described in the Asset
Purchase Agreement. The fair value of this contingent consideration was determined to be $1.6 million and was included in
consideration paid. Of this amount, $0.9 million was paid during the year ended December 31, 2016, and the Company has a liability
for estimated additional Earn Out Consideration in the amount of $0.6 million at December 31, 2016, to be paid during the second
quarter of 2017. This liability is included in accrued expenses and other current liabilities.
Holdback —In addition to the Earn Out Consideration, the Company has held back an additional 600,000 shares of common
stock (the “Holdback Stock” and together with the Closing Stock Consideration, the “Stock Consideration”) and warrants to purchase
an additional 120,000 shares of common stock (the “Holdback Warrants” and together with the Closing Warrants, the “Warrants”) to
secure TZ Holdings’ indemnification obligations under the Asset Purchase Agreement. Any Holdback Shares and Holdback Warrants
not used to satisfy indemnification claims (including pending claims) will be released to TZ Holdings eighteen months following the
Closing. The Company recorded the Holdback Stock and the Holdback Warrants based on its estimated fair value at the Closing.
Additionally, the Company has assumed certain obligations of TZ Holdings, including the performance of TZ Holdings’ post-
closing obligations under contracts assigned to the Company.
Consideration:
$
17,310
Cash consideration
Fair value of 2,400,000 shares of common stock issued on
September 14, 2015
Fair value of Closing and Holdback Warrants (warrants to
purchase an aggregate of 600,000 shares of common stock)
Fair value of the Holdback Stock (600,000 shares of common
stock) on September 14, 2015
Fair value of contingent consideration
Total purchase price
$
3,132
45
783
1,600
22,870
In connection with the Acquisition, TZ Holdings agreed not to sell, transfer or otherwise dispose of any portion of the Stock
Consideration until the first anniversary of the Closing. Upon the first anniversary of the Closing, the restrictions will lapse with
respect to 1/6th of the Stock Consideration, and upon the completion of each of the five months thereafter, the restrictions will lapse
with respect to an additional 1/6th of the Stock Consideration. Following the lapse of such restrictions, TZ Holdings may transfer the
Stock Consideration solely to its stockholders.
Allocation of Purchase Price —The purchase price allocation was determined in accordance with the accounting treatment of a
business combination in accordance with the FASB ASC Topic 805, Business Combinations. Under the guidance, the fair value of the
consideration was determined and the assets acquired and liabilities assumed have been recorded at their fair values at the date of
acquisition. The excess of the purchase price over the estimated fair values has been recorded as goodwill.
F-16
The allocation of purchase price to the assets acquired and liabilities assumed as the date of the acquisition is presented in the
table below. Management is responsible for determining the fair value of the tangible and identifiable intangible assets acquired and
liabilities assumed as of the Closing. Management considered a number of factors, including reference to an analysis under FASB
ASC Topic 805 solely for the purpose of allocating the purchase price to the assets acquired and liabilities assumed. The Company’s
estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These
valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that occur.
Assets acquired:
Cash and cash equivalents
Accounts receivable
Prepaid expenses and other current assets
Property and equipment
Other long-term assets
Goodwill
Intangible assets
Total assets acquired
Liabilities assumed:
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Capital lease obligations
Other long-term liabilities
Total liabilities assumed
Net assets acquired
$
$
50
3,500
451
1,194
68
13,622
15,300
34,185
134
409
10,400
317
55
11,315
22,870
During the fiscal year 2015, acquisition costs of $0.5 million were recorded in general and administrative expenses in the
consolidated statement of operations.
Pro Forma Results —The following unaudited pro forma information presents the combined results of operations as if the
acquisition of Zimbra had been completed on January 1, 2014, the beginning of the comparable prior annual reporting periods. The
unaudited pro forma results include adjustments to reflect: (i) the carve-out of revenue and expenses relating to the portion of the
Zimbra business not acquired; (ii) the elimination of depreciation and amortization from Zimbra’s historical financial statements and
the inclusion of depreciation and amortization based on the fair values of acquired property, plant and equipment and intangible assets;
(iii) the fair value of deferred revenue liabilities assumed; (iv) recognition of the post-acquisition share-based compensation expense
related to stock options that were granted to Zimbra employees who accepted employment with Synacor; (v) the elimination of
intercompany revenue and expenses between Zimbra and Synacor; and (iv) the elimination of acquisition-related expenses.
The unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies or the effect of the
incremental costs incurred in integrating the two companies. Accordingly, these unaudited pro forma results are presented for
informational purpose only and are not necessarily indicative of what the actual results of operations of the combined company would
have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of
operations
Set forth below is the unaudited pro forma consolidated results of operations of the Company and Zimbra as if the Acquisition
occurred as of January 1, 2014, the beginning of the earliest year presented (in thousands, except per share amounts):
Revenue
Operating loss
Net loss
Net loss per share:
Basic
Diluted
Years Ended December 31,
2015
130,077 $
(2,944) $
(4,608) $
2014
134,207
(9,485)
(16,017)
(0.16) $
(0.16) $
(0.54)
(0.54)
$
$
$
$
$
F-17
3. PROPERTY AND EQUIPMENT—NET
As of December 31, 2016 and 2015, property and equipment-net consisted of the following (in thousands):
Computer equipment
Computer software
Furniture and fixtures
Leasehold improvements
Work in process
Other
Less accumulated depreciation
Total property and equipment—net
2016
2015
23,438 $
15,198
2,062
1,463
4,572
249
46,982
(32,576)
14,406 $
23,324
12,748
1,945
1,532
2,065
252
41,866
(27,489)
14,377
$
$
Property and equipment includes computer equipment and software held under capital leases of approximately $5.2 million and
$4.1 million as of December 31, 2016 and 2015, respectively. Accumulated depreciation of computer equipment and software held
under capital leases amounted to $3.4 million and $1.8 million as of December 31, 2016 and 2015, respectively.
Depreciation expense was $7.2 million, $6.4 million, and $5.1 million for the years ended December 31, 2016, 2015, and 2014,
respectively. An impairment of internally-developed software totaling $0.3 million was recorded in 2016 and charged to general and
administrative expense.
4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, 2016 and 2015, accrued expenses and other current liabilities consisted of the following (in thousands):
Accrued compensation
Accrued content fees
Accrued business acquisition consideration
Other
Total
2016
2015
$
$
6,860 $
1,788
1,193
1,843
11,684 $
6,112
1,964
—
1,689
9,765
5. LONG-TERM DEBT
In September 2013, the Company entered into a Loan and Security Agreement, with Silicon Valley Bank (“SVB”), which was
most recently amended in November 2016 (as amended, the “Loan Agreement”). The Loan Agreement provides for a $12.0 million
secured revolving line of credit with a stated maturity of September 2018. The credit facility is available for cash borrowings, subject
to a formula based upon eligible accounts receivable. As of December 31, 2016, $5.0 million was outstanding under the Loan
Agreement; and subject to the operation of the borrowing formula, an additional $7.0 million was available for draw under the Loan
Agreement.
Borrowings under the Loan Agreement bear interest, at the Company’s election, at an annual rate based on either the “prime
rate” as published in The Wall Street Journal or LIBOR for the relevant period. If the Company’s liquidity coverage ratio (the ratio of
cash plus eligible accounts receivable to borrowings under the Agreement) exceeds 2.75 to 1, LIBOR-based advances bear interest at
LIBOR plus 3.5% and prime rate advances bear interest at the prime rate plus 1.0%. If the Company’s liquidity coverage ratio falls
below 2.75 to 1, LIBOR-based advances bear interest at LIBOR plus 4.0% and prime rate advances bear interest at the prime rate plus
1.5%. For LIBOR advances, interest is payable (i) on the last day of a LIBOR interest period or (ii) on the last day of each calendar
quarter. For prime rate advances, interest is payable (a) on the first day of each month and (b) on each date a prime rate advance is
converted into a LIBOR advance.
The Company’s obligations to SVB are secured by a first priority security interest in all our assets, including our intellectual
property. The Loan Agreement contains customary events of default, including non-payment of principal or interest, violations of
covenants, material adverse changes, cross-default, bankruptcy and material judgments. Upon the occurrence of an event of default,
SVB may accelerate repayment of any outstanding balance. The Loan Agreement also contains certain financial covenants and other
agreements that are customary in loan agreements of this type, including restrictions on paying dividends and making distributions to
our stockholders. As of December 31, 2016, the Company was in compliance with the covenants.
F-18
6. INCOME TAXES
Loss from continuing operations before income taxes included income from domestic operations of $(10.2) million, $(2.9)
million and $(7.1) million for the years ended December 31, 2016, 2015 and 2014, and income (loss) from foreign operations of $0.7
million, $(0.3) million $0.1 million for the same years.
The provision for income taxes for the years ended December 31, 2016, 2015 and 2014, was comprised of the following (in
thousands):
Current:
United States Federal
State
Foreign
Total current provision for income taxes
Deferred:
United States Federal
State
Foreign
Net deferred provision for income taxes
Total provision for income taxes
2016
2015
2014
$
$
- $
40
1,036
1,076
95
48
-
143
1,219 $
(1) $
45
195
239
—
—
—
—
239 $
21
24
7
52
4,135
634
—
4,769
4,821
The income tax effects of significant temporary differences and carryforwards that give rise to deferred income tax assets and
liabilities as of December 31, 2016 and 2015 are as follows (in thousands):
Deferred income tax assets:
Stock and other compensation expense
Net operating losses
Research and development credits
Other federal, state and foreign carryforwards
Fixed assets
Intangible assets
Other
Gross deferred tax assets
Valuation allowances
Deferred income tax liabilities:
Fixed assets
Intangible assets and other
Gross deferred tax liabilities
Subtotal
Less unrecognized tax benefit liability related to deferred
items
Net deferred tax liability (included in other long-term
liabilities)
$
2016
2015
4,576 $
5,907
1,676
1,151
246
557
838
14,951
(14,030)
921
(29)
(392)
(421)
500
(627)
3,997
3,212
1,676
618
-
341
9,844
(8,846)
998
(290)
(81)
(371)
627
(627)
$
(127) $
—
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance—beginning of year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Balance—end of year
2016
2015
2014
$
$
627 $
—
—
627 $
627 $
—
—
627 $
627
—
—
627
F-19
The unrecognized tax benefits at the end of 2016, 2015 and 2014 were primarily related to research and development
carryforwards.
If the $0.6 million of unrecognized tax benefits as of December 31, 2016 were recognized, approximately $0.6 million would
decrease the effective tax rate in the period in which each of the benefits is recognized. The remaining amount would be offset by the
reversal of related deferred income tax assets on which an unrecognized tax benefit liability is placed. The Company does not expect
any material changes to its unrecognized tax benefits within the next twelve months.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31,
2016 and 2015, penalties and interest were insignificant.
The Company files income tax returns in the U.S. federal jurisdiction as well as many U.S. states and foreign jurisdictions. The
tax years 2004 to 2016 remain open to examination by the major jurisdictions in which the Company is subject to tax. Fiscal years
outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years
which have been carried forward and may be audited in subsequent years when utilized. The Company is currently not under
examination in any major taxing jurisdictions.
Income tax expense for the years ended December 31, 2016, 2015 and 2014 differs from the expected income tax benefit
calculated using the statutory U.S. Federal income tax rate as follows (dollars in thousands):
Federal income tax (benefit) expense at statutory rate $
State and local taxes—net of federal benefit
Foreign taxes
Valuation allowance
Permanent differences
Other
Total
$
2016
(3,237)
75
1,036
3,299
3
43
1,219
34% $
(1)
(11)
(34)
—
(1)
(13)% $
2015
(1,075)
30
195
928
144
17
239
34% $
(1)
(6)
(29)
(5)
(1)
(8)% $
2014
(2,390)
(410)
(1)
7,504
262
(144)
4,821
34%
6
—
(107)
(4)
2
(69)%
The Company had federal and state NOL carryforwards of approximately $14.4 million and $13.9 million, respectively, at
December 31, 2016. In addition, the Company has approximately $2.2 million of NOL carryforwards created by windfall tax benefits
relating to stock compensation for which no deferred income tax assets have been recorded in accordance with the rules under FASB
ASC 718. The NOLs will begin to expire in 2027. The Company has weighed the positive and negative evidence, including
cumulative pre-tax losses, and determined that it is more likely than not that the deferred income tax assets, primarily related to the
NOLs, will not be realized and, therefore, a full valuation allowance has been recorded against the net deferred income tax assets as of
December 31, 2016 and 2015.
7. INFORMATION ABOUT SEGMENT AND GEOGRAPHIC AREAS
Operating segments are components of the Company in which separate financial information is available that is evaluated
regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The
chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews operating results
and financial information presented on a total Company basis, accompanied by information about revenue by major service line for
purposes of allocating resources and evaluating financial performance. Accordingly, the Company has determined that it has a single
reporting segment and operating unit structure.
The following table sets forth revenue and long-lived tangible assets by geographic area (in thousands):
Revenue:
United States
International
Total revenue
Years Ended December 31,
2015
2016
2014
$
$
110,071 $
17,302
127,373 $
105,228 $
5,017
110,245 $
105,872
707
106,579
F-20
Long-lived tangible assets:
United States
Canada
International
Total long-lived tangible assets
As of December 31,
2016
2015
$
$
13,519 $
573
314
14,406 $
12,909
726
742
14,377
8. COMMITMENTS AND CONTINGENCIES
Lease Commitments —The Company leases office space and data center space under operating lease agreements and certain
equipment under capital lease agreements with interest rates ranging from 3% to 7%.
Rent expense for operating leases was approximately $3.1 million, $2.6 million and $2.5 million for 2016, 2015 and 2014,
respectively.
Lease commitments over the next five years as of December 31, 2016 can be summarized as follows (in thousands):
Years Ending December 31,
2017
2018
2019
2020
2021 and thereafter
Total lease commitments
Years Ending December 31,
2017
2018
2019
2020 and thereafter
Total minimum capital lease commitments
Less-amount representing interest
Total capital lease obligations
Less-current portion of capital lease obligations
Long-term portion of capital lease obligations
$
Operating Lease
Commitments
2,378
1,727
766
492
368
5,731
$
Capital Lease
Commitments
1,056
680
403
9
2,148
152
1,996
982
1,014
$
$
Contract Commitments —The Company is obligated to make payments under various contracts with vendors and other
business partners, principally for revenue-share arrangements. Contract commitments as of December 31, 2016 can be summarized as
follows (in thousands):
Years Ending December 31,
2017
Total contract commitments
Contract
Commitments
1,560
1,560
$
$
Litigation —From time to time, the Company is a party to legal actions. In the opinion of management, the outcome of these
matters is not expected to have a material impact on the consolidated financial statements of the Company.
F-21
9. EQUITY
Stock Repurchases —In February 2014, the board of directors approved a Stock Repurchase Program, which authorizes a
repurchase of up to $5.0 million worth of the Company’s outstanding common stock. The Stock Repurchase Program has no
expiration date, and may be suspended or discontinued at any time without notice.
The following table sets forth the shares of common stock repurchased through the program:
Shares of common stock repurchased
Value of common stock repurchased (in thousands)
Years Ended December 31,
2015
2016
$
—
— $
—
— $
2014
229,050
562
Withhold to Cover —During the years ended December 31, 2016, 2015 and 2014, certain employees, in lieu of paying
withholding taxes on the vesting of certain shares of restricted stock awards, authorized the withholding of shares of the Company’s
common stock to satisfy their minimum statutory tax withholding requirements related to such vesting. These shares were recorded as
treasury stock using the cost method at the per share closing price on the date of vesting. Shares and cost of the Company’s common
stock withheld to cover minimum statutory tax withholding requirements during the years ended December 31, 2016, 2015 and 2014
were as follows:
Shares withheld
Cost (in thousands)
Years Ended December 31,
2015
2014
2016
92,439
215 $
99,904
190 $
4,594
11
$
Warrants —Warrants to purchase 480,000 shares of common stock were issued as a component of the consideration transferred
for the acquisition of the Zimbra assets (see Note 2). These warrants are exercisable at $3.00 per share and have a three-year life.
10. STOCK-BASED COMPENSATION
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model.
This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the
variables used in the calculation, including the fair value of the Company’s common stock, the expected term (the period of time that
the options granted are expected to be outstanding), the volatility of the Company’s common stock, a risk-free interest rate and
expected dividends. The Company also estimates forfeitures of unvested stock options. To the extent actual forfeitures differ from the
estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is
recorded for options that do not vest. The Company uses the simplified calculation of expected life described in the SEC’s Staff
Accounting Bulletin No. 107, Share-Based Payment, and volatility is based on the blended average historic price volatility for
Synacor Inc. and its industry peers based on daily price observations over a period equivalent to the expected term of the stock option
grants. Industry peers consist of several public companies in the technology industry, some larger and some similar in size, at a similar
stage of life cycle and having similar financial leverage. The risk-free rate is based on the U.S. Treasury yield curve in effect at the
time of grant for periods corresponding with the expected life of the option. The Company uses an expected dividend yield of zero, as
it does not anticipate paying any dividends in the foreseeable future. Expected forfeitures are based on the Company’s historical
experience.
The following table presents the weighted-average assumptions used to estimate the fair value of options granted (excluding
replacement options in conjunction with modifications described below) during the periods presented:
Volatility
Expected dividend yield
Risk-free rate
Expected term (in years)
Years Ended December 31,
2015
2014
2016
49%
—%
1.4%
6.25
52%
—%
1.7%
6.25
58%
—%
1.9%
6.25
F-22
The Company recorded $2.8 million, $3.1 million, and $3.6 million of stock-based compensation expense for the years ended
December 31, 2016, 2015, and 2014, respectively. No income tax deduction is allowed for incentive stock options (“ISOs”).
Accordingly, no deferred income tax asset is recorded for the potential tax deduction related to these options. Expense related to stock
option grants of non-qualified stock options (“NSOs”) results in a temporary difference, which gives rise to a deferred tax asset.
Total stock-based compensation expense included in the accompanying consolidated statements of operations for the years
ended December 31, 2016, 2015 and 2014, is as follows (in thousands):
Technology and development
Sales and marketing
General and administrative
Total stock-based compensation expense
Years Ended December 31,
2015
2014
2016
$
$
921 $
784
1,066
2,771 $
936 $
942
1,237
3,115 $
1,621
599
1,375
3,595
Equity Incentive Plans —The Company has four stock option plans (the 2000 Stock Plan, the 2006 Stock Plan, the 2012
Equity Incentive Plan and the Special Purpose Recruitment Plan), which, as of December 31, 2016, authorize the Company to grant up
to 10,094,180 stock options (ISOs and NSOs), stock appreciation rights, restricted stock, RSUs and performance cash awards. The
ISOs and NSOs will be granted at a price per share not less than the fair value of the Company’s common stock at the date of grant.
Options granted to date generally vest over a four-year period with 25 % vesting at the end of one year and the remaining 75% vesting
monthly thereafter. Options granted generally are exercisable up to 10 years. RSUs generally vest over a three year period with one-
sixth vesting at the end of each six month period.
Special Purpose Recruitment Plan —During 2013, our shareholders approved the Special Purpose Recruitment Plan from
which equity compensation awards are granted to newly-hired employees. One million shares of common stock were reserved for
issuance and have all been granted under this plan.
Stock Option Activity —A summary of stock option activity for the year ended December 31, 2016 is as follows:
Outstanding—January 1, 2016
Granted
Exercised
Forfeited
Outstanding—December 31, 2016
Expected to vest—December 31, 2016
Vested and exercisable—December 31, 2016
Number of
Stock Options
8,695,918 $
1,695,500 $
(751,481) $
(883,763) $
8,756,174 $
8,405,565 $
4,825,433 $
Weighted Average
Exercise Price
Aggregate
Intrinsic Value
(in thousands)
Weighted Average
Remaining
Contractual
Term (in years)
2.57
2.30
2.08
2.81
2.53 $
2.55 $
2.82 $
6,825
6,510
3,183
6.83
6.75
5.42
Aggregate intrinsic value represents the difference between the closing stock price of the Company’s common stock and the
exercise price of outstanding, in-the-money options. The Company’s closing stock price as reported on the Nasdaq as of December 31,
2016 was $3.10. The total intrinsic value of options exercised was approximately $0.7 million, less than $0.1 million, and $0.5 million
for the years ended December 31, 2016, 2015 and 2014, respectively. The weighted-average grant date fair value of options granted
was $1.13 per share, $0.95 per share, and $1.31 per share for the years ended December 31, 2016, 2015 and 2014, respectively.
As of December 31, 2016, total unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested stock
options was approximately $4.2 million, which is expected to be recognized over a weighted-average period of 2.51 years.
F-23
RSU Activity —A summary of RSU activity for the year ended December 31, 2016 is as follows:
Unvested—January 1, 2016
Granted
Released
Forfeited
Unvested—December 31, 2016
Unvested expected to vest —December 31, 2016
Number of
Stock Options
Weighted Average
Fair Value
437,595 $
139,500 $
(238,827) $
(18,379) $
319,889 $
312,951 $
2.31
3.63
2.52
2.69
2.71
2.77
As of December 31, 2016, total unrecognized compensation cost, adjusted for estimated forfeitures, related to RSUs was
approximately $0.9 million, which is expected to be recognized over the next 1.61 years.
11. NET LOSS PER COMMON SHARE DATA
Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period.
Diluted net loss per share is computed using the weighted-average number of common shares and, if dilutive, potential common
shares outstanding during the period. The Company’s potential common shares consist of the incremental common shares issuable
upon the exercise of stock options, warrants, and to a lesser extent, shares issuable upon the release of RSUs. The dilutive effect of
these potential common shares is reflected in diluted earnings per share by application of the treasury stock method.
The following table presents the calculation of basic and diluted net loss per share for the years ended December 31, 2016, 2015
and 2014 (in thousands, except share and per share amounts):
Basic net loss per share:
Numerator:
Net loss
Denominator:
Weighted-average common shares outstanding
Basic net loss per share
Diluted net loss per share:
Numerator:
Net loss
Denominator:
Number of shares used in the basic computation
Add weighted-average effect of dilutive securities:
Stock options, RSUs and warrants
Number of shares used in diluted calculation
Dilutive net loss per share
Year Ended December 31,
2015
2014
2016
$
(10,740) $
(3,474) $
(12,931)
30,251,685 28,213,838 27,389,793
(0.47)
$
(0.12) $
(0.36) $
$
(10,740) $
(3,474) $
(12,931)
30,251,685 28,213,838 27,389,793
—
—
30,251,685 28,213,838 27,389,793
(0.47)
$
(0.12) $
(0.36) $
—
Stock options, warrants and RSUs are not included in the calculation of diluted net loss per share for the years ended
December 31, 2016, 2015 and 2014 because the Company had a net loss for those years. The inclusion of these equity awards would
have had an antidilutive effect on the calculation of diluted loss per share.
The following equivalent shares were excluded from the calculation of diluted net loss per share because their effect would have
been antidilutive for the periods presented:
Year Ended December 31,
2015
2014
2016
Antidilutive Equity Awards:
Stock options and RSUs
Warrants
F-24
9,076,063 9,133,513 7,589,578
—
480,000
480,000
12. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) profit sharing plan that covers substantially all employees. Under the plan, eligible employees
are permitted to contribute a portion of gross compensation not to exceed standard limitations provided by the Internal Revenue
Service. The Company maintains the right to match employee contributions; however, no matching contributions were made during
the years ended December 31, 2016, 2015 or 2014.
******
F-25
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CORPORATE INFORMATION AND
SAFE HARBOR STATEMENT
BOARD OF DIRECTORS
HIMESH BHISE
Chief Executive Officer
JORDAN LEVY
Chairman of the Board
CORPORATE INFORMATION
TRANSFER AGENT:
American Stock Transfer
& Trust Company
6201 15th Avenue
Brooklyn, NY 11219
www.amstock.com
MARWAN FAWAZ
MICHAEL MONTGOMERY
GARY GINSBERG
SCOTT MURPHY
ANDREW KAU
CORPORATE COUNSEL
INVESTOR RELATIONS
Gunderson Dettmer Stough
For further information on the
Villeneuve Franklin &
Hachigian, LLP
220 West 42nd Street, 17th Floor
New York, NY 10036
Company, please visit
investor.synacor.com
STOCK LISTING
REGISTERED PUBLIC
The Company’s Common Stock is
ACCOUNTING FIRM
traded on the Nasdaq Global
Deloitte & Touche, LLP
Market under the symbol “SYNC”
Williamsville, NY
SAFE HARBOR STATEMENT
“Safe Harbor” statement under the Private Securities Litigation
Reform Act of 1995: This annual report contains forward-
looking statements concerning Synacor’s expected financial
performance, as well as Synacor’s strategic and operational
plans. The achievement or success of the matters covered by
such forward-looking statements involves risks, uncertainties
and assumptions. If any such risks or uncertainties materialize or
if any of the assumptions prove incorrect, the company’s results
could differ materially from the results expressed or implied by
the forward-looking statements the company makes.
The risks and uncertainties referred to above include - but are
not limited to - risks associated with: execution of our plans
and strategies, including execution against our agreement with
AT&T; the loss of a significant customer; our ability to obtain
new customers; our ability to integrate the assets and personnel
from acquisitions; expectations regarding consumer taste and
user adoption of applications and solutions; developments in
internet browser software and search advertising technologies;
general economic conditions; expectations regarding the
company's ability to timely expand the breadth of services
and products or introduction of new services and products;
consolidation within the cable and telecommunications industries;
changes in the competitive dynamics in the market for online
search and digital advertising; the risk that security measures
could be breached and unauthorized access to subscriber data
could be obtained; potential third party intellectual property
infringement claims or other legal claims against Synacor; and the
price volatility of our common stock.
Further information on these and other factors that could affect
Synacor’s financial results is included in filings it makes with the
Securities and Exchange Commission from time to time, including
the section entitled “Risk Factors” in this annual report. Synacor’s
SEC filings are available on the SEC Filings section of the Investor
Information section of Synacor’s website at http://investor.synacor.com/.
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