ANNUAL REPORT
2017
DOUBLE-DIGIT REVENUE GROWTH
CAGR 13%
CAGR 13%
$140.0
$127.4
$110.2
2015
2016
2017
ANNUAL REVENUE, $MILLIONS
DEAR FELLOW SHAREHOLDERS,
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• We launched att.net(cid:3)(cid:113)(cid:3)(cid:62)(cid:3)(cid:171)(cid:192)(cid:156)(cid:171)(cid:105)(cid:192)(cid:204)(cid:222)(cid:3)(cid:204)(cid:133)(cid:62)(cid:204)(cid:3)(cid:195)(cid:213)(cid:86)(cid:86)(cid:105)(cid:195)(cid:195)(cid:118)(cid:213)(cid:143)(cid:143)(cid:222)(cid:3)
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• We scaled our supply side-focused advertising
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• We added Cloud ID customers (cid:113)(cid:3)(cid:156)(cid:118)(cid:118)(cid:105)(cid:192)(cid:136)(cid:152)(cid:125)(cid:3)(cid:62)(cid:3)
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• We invested in the Zimbra Email and Collaboration
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•• EEnnggaagging millions of consumers every month
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INVESTED IN GROWING EMAIL & COLLABORATION PLATFORM
• Added more than 500 customers taking us to 4,000 enterprise and
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SCALED SUPPLY–SIDE ADVERTISING
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advertising products and monetization
• Hundreds of publishers
OFFICES
COMPANY OFFICES
OFFICES
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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, 2017
OR
(cid:4) 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
(Registrants 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:4) 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:4) 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:4)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
during the preceding 12 months (or for such shorter
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
period that the registrant was required to submit and post such files). Yes ⌧ No (cid:4)
a
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
in Part III of this Form 10-
will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference
K or any amendment to this Form 10-K. (cid:4)
ff
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:4)
(cid:4) (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
⌧
⌧
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:4) No ⌧
The aggregate market value of shares of common stock held by non-affiliates as of June 30, 2017, the last business day of the registrants most recently
completed second fiscal quarter, computed by reference to the closing sale price of $3.65 per share on The Nasdaq Global Market on June 30, 2017, was
approximately $116.2 million. 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
As of March 13, 2018, there were 38,796,722 shares of the registrants common stock issued and outstanding.
purposes.
t
Certain portions of the definitive Proxy Statement to be used in connection with the registrants 2018 Annual Meeting of Stockholders are incorporated
DOCUMENTS INCORPORATED BY REFERENCE
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
December 31, 2017.
t
s fiscal year ended
PART I
TABLE OF CONTENTS
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Managements Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Item 13.
Item 14.
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.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
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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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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,
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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
management.
platforms, and cloud-based identity
a
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.
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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 60% of our revenue for 2017.
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 traffff iff c generated by consumers through search advertising, digital advertising (including video), and
syndicated content on our Managed Portals. As we monetize our customers online traffff iff c 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 40% of our revenue for 2017 and are comprised of our Cloud-based
Identity Management solutions, Email/Collaboration Services, and paid content and premium 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.
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 10 million video assets 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.
Email/Collaboration
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 more than 1,900 channel partners (value-
added resellers, or VARs, and Business Service Providers, or BSPs), and over 4,000 enterprise, government and nonprofit
customers, and it powers approximately 530 million mailboxes.
2
Our Strategy
Our strategy is, with operational and financial discipline, 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.
Increasing value for existing customers by optimizing user experience and monetization
With respect to our Managed Portals and Advertising solutions, 95% of our customers consumers have upgraded to our latest-
generation portal. 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 2017, we expanded our Cloud ID relationships with content providers, service 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 seventh season premiere. Additionally, Apple uses Synacors Authentication services to support
Apple Single Sign-On. The current wave of multichannel video programming distributors, or MVPDs, launched by Apple are almost
all running on Synacors Cloud ID Advanced Authentication platform. Our Authentication services also support three of the top five
OTT players including Sling TV and PlayStation Vue, simplifying the consumer log-in experience.
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&Ts 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 the fourth quarter of 2017, Synacor added more than 150 new Zimbra Email and Collaboration Suite customers around the
world.
Extending our product portfolio into emerging growth areas
We plan to capitalize
a
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 opportunitytt
find new customers for our Managed Portals and Advertising solutions.
to
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 2017 and 2016, we spent
3
$27.4 million and $25.6 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 eight 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 Allen, Texas; Atlanta, Georgia;
Dallas, Texas; Lewis Center, Ohio; Denver, Colorado; Toronto, Canada; Watertown, Massachusetts; and Amsterdam, The
Netherlands. All systems are fully monitored for reporting continuity and faff ult 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, 2017, 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,aa
days per week support. As of December 31, 2017, we had agreements, both directly and indirectly through resellers, with over 120
high-speed internet service providers and over 4,000 enterprise,
government and nonprofit customers.
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For 2017, revenue attributable to two of our customers exceeded 10% of our revenue each, and on a combined basis accounted
for approximately 28% of our revenue, or $39.4 million.
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 traffff iff c, 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, 2017, we had arrangements with over 65 content
providers, such as The Associated Press, CNN, Tribune Content Agency, Gracenote, and Bankrate.
Sales and Marketing
Managed Portals and Advertising Solutions
Our sales and marketing efforts
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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.
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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 customers technology is assessed and, if required, modififf cations 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.
4
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
products and services, as well as tracking
for ongoing customer relationship management, upgrades and enhancements to the availablea
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, 2017, we had arrangements with over 100 advertising partners such as AppNexus, Comcast Spotlight, Criteo,
DoubleClick, NCC Media, Mediavest, and Telaria.
ll
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 1,900 channel partners (VARs and 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.tt
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 Childrens 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.
r
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 new EU General Data Protection Regulation (replacing the current EU Data Protection Directive) entered into force in
May 2016 and will apply beginning in May 2018. The Regulation will introduce new data protection requirements for companies
processing data of European citizens, as well as substantial fines for breaches of the data protection rules. These laws 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.
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. The United States Department of Commerce designed the EU-US Privacy Shield and the Swiss-U.S.
Privacy Shield with the European Commission and the Swiss Federal Data Protection and Information Commissioner, respectively, in
order to facilitate (but do not, alone, constitute) compliance with the applicable data protection requirements. We certified compliance
with the EU-US Privacy Shield in December 2016 and the Swiss-U.S. Privacy Shield in June 2017. Laws such as the Regulation,
CAN-SPAM Act of 2003 or other user privacy or security laws could require us to incur additional expenditures for compliance, result
5
in governmental enforcement actions, significant fines, loss of access to data transfer mechanisms or litigation, 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 make changes to our data and security practices and our services and products, including Managed
Portals.
Intellectual Property
We believe that the protection of our intellectual property is critical to our success. We rely on copyright, trademark and patent
t
restrictions and trade secret, trade dress and domain name laws to protect our brand and other proprietary and
enforcement, contractual
intellectual property rights. We have entered into confidentiality and invention assignment agreements with our employees and
contractors, and nondisclosure agreements and other agreements containing confidentiality protections with certain parties with whom
we conduct business in order to limit access to, and disclosure of, our proprietary information
confidential information, know-how and technical 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. We have three trademark registrations in the United States for SYNACOR (U.S.
Registration Numbers 5108679, 2845578 and 2811272).
and technology, such as trade secrets,
ff
We endeavor to protect our internally-developed systems and maintain our trademarks. 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:
•
•
•
•
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
a
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
ff
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.;
Google; Oath, a division of Verizon; 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
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.
of
a
6
We believe the principal competitive factors in our markets include a companys ability to:
•
•
•
•
•
•
•
•
reinforce the brands of our cable, satellite, telecom and consumer electronics customers;
produce products that are flff exible 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 customers 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.
rr
ll
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 companys ability to:
•
•
•
•
•
•
•
•
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 customers 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 customers
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 customers 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, 2017, we had 320 employees in the United States and 129 based internationally. Of these employees, 446
were full-time employees. None of our employees are represented by a labor union, and we consider current employee relations to be
good.
7
Corporate Information
Synacors 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
p
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:
y
p
g
Synacor, Inc.
Investor Relations Department
40 La Riviere Drive
Suite 300
Buffalo, New York 14202
8
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
together with any other documents we file with the SEC.
contained in thisii Annual Report on Form 10-K,
ff
Risks Related to Our Business
A loss of any significant Managed Portals and Advertising customer could negatively affect our financial performance.
Although we have diversified 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. 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. For 2017, revenue attributable to two customers each exceeded 10% of our total revenue, and on a combined
basis accounted for approximately 28% of our revenue, or $39.4 million.
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, including the customers desire to reprioritize or deemphasize monetization of the portal, 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.
We 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 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
a
customer. Our Google-related search advertising revenue attributable
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
to our customers, which consists of the portion of the payment from the sponsor that Google shares with us, accounted for
approximately 14%, 12%, and 28% of our revenue in 2017, 2016, and 2015 or $20.1 million, $15.9 million, and $31.2 million
respectively. Our agreement with Google was extended in February 2018 for a one-month period and expires on March 28, 2018.
Historically, we and Google and its affiliates have operated under short-term extensions during negotiations of renewals. 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 Googles 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 Googles revenue from search-based advertising were to decrease, if Googles
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 adversely affected. Moreover, consumers
increased use of search tools other than the Google-branded search tool we provide would have similar effects.
9
We have a history of significant pre-tax net losses and may not be profitable in future periods.
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, 2017 our cumulative U.S. federal net
operating loss carryforward was $27 million. We have previously taken cost saving measures, including a reduction in workforce, in
September 2014. However, our expenses have increased and may increase in future periods as we implement initiatives designed to
grow our business including, among other things, the ongoing costs and expenses we must 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 fof
content, expansion of our infraff structure and international expansion. If our revenue does not sufficiently increase to offset these
expected increases in operating expenses, or if we are not able to sufficiently reduce costs in the event our revenue increases fail to
materialize, we may incur significant losses and may not be profitable. For example, although our revenue in 2017 increased as
compared to 2016 and our revenue in 2016 increased as compared to 2015, 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 adversely affect
bbusiness, financial condition, results of operations and impact our ability to utilize our net operating loss carryforwards. As a result
fof
our pre-tax cumulative losses, we have established a full valuation allowance against our net deferred income tax asset, which includes
our net operating loss carryforwards.
rour
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 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 devices 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 no longer have our Managed Portals initially set as their default homepage, and unless they change the defaultaa
our Managed Portals, their usage of our Managed Portals would likely decline and our results of operations could be negatively
impacted.
to
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 reduce our revenue and
harm our business, financial condition and results of operations.
10
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. If our existing
dand
pprospective customers do not perceive that we will deliver committed enhancements to our services and products on schedule, or fif
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 turnr 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 traffff iff c on our Managed Portals and our revenue from our Email/Collaboration offerings,
accounted for approximately 63% in 2017, approximately 63% in 2016 and approximately 82% in 2015. 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 effecff
revenue declines resulting from the loss of customers or their subscribers.
ts of any such renegotiations, and we may not be able to attract new customers to counter any
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.
11
We rely, to a significant degree, on each of our channel partners to select, screen and maintain relationships with its distribution
law and regulatory requirements and our quality
network and to distribute our offerings in a manner that is consistent with applicablea
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.
tt
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
and any
statutory, contractual, or other legal rights to terminate contracts with our channel partners for convenience or due to a default,
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
a
offerings, a reduction of revenue or fines or civil or criminal liability
if the audit uncovers improper or illegal activities.
a
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 affecff
ted.
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 Microsofts 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
invested more than $10 million through June 30, 2017 in start-up expenses, development expenses and capital
our contract with AT&T.
expenditures relating to
a
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
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.
12
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.
dd
To remain competitive, we will need to develop new services and products and adapta
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 adapta
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 an adverse 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
t our ability to
providers. Any failure to enter into or maintain satisfactory arrangements with content providers would adversely affecff
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 modifyff 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, and we received our first
customer orders for maintenance and support services related to the open source solution. However, there can be no assurance that
this initiative will yield a material 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
a
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,
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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 an adverse effecff
t on our business, financial condition and results of operations.
Our agreements with some of our customers, content providers, and service 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 fiff xed
payments to them. The aggregate amount of such fixed payments for the year ending December 31, 2018 is approximately $2.7
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 never 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 (and $38 million for physical loss). Any system failure or disruption and any
resulting losses that are not recoverable under our insurance policies may harm our business, financial condition and results of
operations. To date, we have never experienced any material losses.
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Not all of our data centers are on full second-site redundancy, only certain customers require this capability. We regularly back-
up our systems and store the system back-ups in Atlanta, Georgia; Watertown, Massachusetts; Dallas and Allen, Texas; Lewis Center,
Ohio; Denver, Colorado; Toronto, Canada; and Amsterdam, the Netherlands. If we were forced to relocate to an alternate site and to
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rely on 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 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.
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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
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.
for which they are looking, and may not use our products and services as often in the future, or at
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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. We faff ce 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.
Through much of our history, our business expansion had 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 acqu
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:
dired
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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 efficff
would be harmed.
iency in our organization as it grows, our business, financial condition and results of operations
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 managements attention or prove not to be
successful.
In February 2016 we acquired substantially all of the assets of, and hired certain personnel from, Technorati; and in 2015 we
acquired the Zimbra assets and hired certain related personnel and we purchased assets from, and hired the personnel of, NimbleTV.
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 managements 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.
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 more than $10 million in 2016 and 2017 in operating
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expenses and capital expenditures preparing to support AT&T as a customer, and an additional $4.6 million in 2017 in the
development of internal-use software and software for sale or license to other customers. If the cash generated from operations and
otherwise available to us is not sufficient to meet our capital
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.
requirements, we will need to seek additional capital, potentially through
a
While we successfully raised approximately $20.0 million in an underwritten public offering of 6,187,846 shares of our
common stock in April and May of 2017, the net proceeds of that offering may not be sufficient to meet our objectives, including
funding our growth plans and potential acquisitions as they may arise.
In addition, while we are in compliance at December 31, 2017 with the financial covenants contained in our credit facility with
Silicon Valley Bank, our future financial performance, including our future capital expenditures, 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
United States. We have not applied for copyright protection in any jurisdiction including in the United States. 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
we may not be able to prevent third parties from
enforce their intellectual property rights than we do. Accordingly, despite our efforts,
infringing upon or misappropriating our intellectual property.
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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
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.
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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 partys rights. We may have to seek a license for the technology, which may not be availablea
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-partytt
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
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,
operating results.
to incur additional costs or experience reduced
and thus harm our business and our
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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 infriff nging 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
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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 EU General Data Protection Regulation, or the Regulation, will be enforced beginning in
May 2018. The Regulation will replace the existing 1995 European Union Data Protection Directive, or the Directive, and will
introduce new and onerous data protection requirements for companies processing data of European citizens, as well as substantial
fines for breaches of the data protection rules. In 2016, to facilitate compliance with the Directive, the European Commission and the
United States Department of Commerce designed a program known as the EU-U.S. Privacy Shield, or the Privacy Shield, which
provides a mechanism for U.S. companies to comply with data protection requirements under the 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. Similarly, in early 2017, the Swiss Federal Data Protection and Information Commissioner and the United States
Department of Commerce designed a program known as the Swiss-U.S. Privacy Shield, which provides a mechanism for U.S.
companies to comply with Swiss data protection requirements when transferring personal information from Switzerland to the United
States. We certified compliance with the EU-U.S. Privacy Shield and the Swiss-U.S. Privacy Shield to the United States Department
of Commerce in December 2016 and June 2017, respectively. Compliance with the EU-U.S. Privacy Shield and Swiss-U.S. Privacy
Shield are not, alone, sufficient to comply with the obligations contained in the Directive or the Regulation.
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, we may fail to comply with such laws, rules and guidelines, and 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
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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
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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, significant fines, loss of access to data transfer mechanisms,
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, all of which could have an adverse effect on our business. Additionally, if third
parties we work with, such as customers, vendors or developers, violate applicablea
subscriber information at risk and could in turn have an adverse effect on our business.
laws or our policies, such violations may also put
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 45%, 46%, and 43% of our revenue for the years
ended December 31, 2017, 2016, and 2015, 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.
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.
If we are unable to implement and maintain effective internal control over financial reporting, investors may lose confidence
in the accuracy and completeness of our financial reports and the market price of our common stock could be adversely
affected.
As a public company, we are required to maintain internal control over financial reporting and to disclose any material
weaknesses in such internal control. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will
not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires
that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on
internal control over financial reporting. The Sarbanes-Oxley Act also requires that our management report on internal control over
financial reporting be attested to by our independent registered public accounting firm.
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During our assessment of internal control over financial reporting as of December 31, 2017, we identified three material
weaknesses in our internal control over financial reporting: (i) an ineffective control environment due to a lack of sufficient qualified
accounting personnel with an appropriate level of knowledge and experience, (ii) ineffective control activities due to the lack of
timeliness in executing business process controls, and (iii) ineffective monitoring controls to ascertain whether the components of
internal control were present and functioning. We are working to remediate these material weaknesses. For more information about
these material weaknesses and our remediation efforts, see Item 9A. Controls and Procedures. Although we plan to complete this
remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our efforts may not be successful
in remediating these material weaknesses. As part of the remediation process, we may incur additional costs in improving our internal
control over financial reporting.
Many of the internal controls we have implemented pursuant to the Sarbanes-Oxley Act are process controls with respect to
which a material weakness may be found whether or not any error has been identified in our reported financial statements. This may
be confusing to investors and result in damage to our reputation, which may harm our business. Additionally, the proper design and
assessment of internal controls over financial reporting are subject to varying interpretations, and as a result, application
in practice
may evolve over time as new guidance is provided by regulatory and governing bodies and as common practices evolve. This could
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result in continuing uncertainty regarding the proper design and assessment of internal controls over financial reporting and higher
costs necessitated by ongoing revisions to internal controls.
We must continue to monitor and assess our internal control over financial reporting. If we are unable to successfully remediate
these material weaknesses or if we identify additional material weaknesses, we may not detect errors on a timely basis and our
financial statements may be materially misstated. This could harm our operating results, cause us to fail to meet our SEC reportirr ng
obligations or Nasdaq listing requirements on a timely basis, adversely affect our reputation, cause our stock price to decline or result
in inaccurate financial reporting or material misstatements in our annual or interim financial statements.
Notwithstanding the material weaknesses identified during our assessment, we have concluded, and our auditors have expressed
an unqualified opinion, that the Consolidated Financial Statements included in this Annual Report on Form 10-K present fairly, in all
material respects, the financial position of the Company at December 31, 2017 and December 31, 2016 and the consolidated results of
operations and cash flows for each of the three fiscal years in the period ended December 31, 2017 in conformity with U.S. generally
accepted accounting principles.
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, 2017, 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 corporations
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 effecff
infrastructure.
t on the internet
a
rr
21
A 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 majority of our revenue from search and digital advertising, including
advertising on our Managed Portals. Such search and digital advertising revenue accounted for approximately 60%, 59% and 71% of
our revenue for the years ended December 31, 2017, 2016 and 2015, or $83.6 million, $74.9 million, and $78.3 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
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
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.
d
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
competitors include: Google; Oath, a division of Verizon; and MSN, a division of Microsoft. Advantages some of our existing and
potential competitors hold over us include the following:
of developing solutions similar to our technology. Other
a
•
•
•
•
•
•
•
•
•
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 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
Childrens Online Privacy Protection Act imposes additional restrictions on the ability of online services to collect user inforff mation
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.
rr
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. The new EU General Data Protection Regulation (replacing the current EU Data Protection
Directive) entered into force in May 2016 and will apply beginning in May 2018. The Regulation will introduce new data protection
requirements in the European Union, as well as substantial fines for breaches of the data protection rules. Complying with new privacy
23
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 employees or users in the EEA.
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 affilff iates, beneficially own or directly or indirectly control (including
by voting proxy), as of March 14, 2018, approximately 19% of our outstanding common stock (including exercisable options). 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
affairs of our company. Accordingly, this concentration of ownership might harm the trading price of our common stock by:
to inflff uence significantly the management and
a
•
•
•
•
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. 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 (and who
now hold shares of our common stock) 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
ff
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 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 numberm
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 corporations 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.
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 earnr ings 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.
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 14, 2018, 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;
25
•
•
•
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 managements 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.
rr
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. In
particular, we have incurred and expect to continue to incur significant expenses and devote substantial management effort toward
ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, including remediating the material weaknesses
described in Item 9A. Controls and Procedures. For example, we have assigned additional personnel within our finance department
to the implementation, administration and evaluation of our internal control over financial reporting, and we engaged an outside public
accounting firm to provide us with the services of accounting support personnel.
Moreover, the rules and regulations applicable to public companies 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 and, following that, a direct
lease that expires November 2021.
We also maintain administrative and product development offices in New York, New York; Ottawa, Ontario, Canada; Westford,
ff
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 and Allen, Texas; Watertown, Massachusetts;
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 REGISTRANTS 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 2017 Quarters Ended:
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
Fiscal Year 2016 Quarters Ended:
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
High
Low
$
$
$
$
$
$
$
$
4.25 $
4.20 $
3.95 $
2.85 $
1.95 $
3.98 $
3.34 $
3.40 $
2.90
3.25
2.30
1.96
1.38
1.33
2.51
2.65
Holders of Record
As of March 14, 2018, there were 103 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 Managements Discussion and Analysis
of Financial Condition and Results of OperationsLiquidity 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 2017 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 Managements
Discussion and Analysis of Financial Condition and Results of Operations and the financial
financial information
ff
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.
included in this Annual Report on Form 10-K. The selected consolidated financial data in this section is not
statements, related notes and other
ff
We derived the selected consolidated financial data for the years ended December 31, 2017, 2016, and 2015 and as of
December 31, 2017 and 2016 from our audited consolidated financial statements and related notes, which are included in this Annualn
Report on Form 10-K. We derived the selected consolidated financial data for the years ended December 31, 2014 and 2013 and as of
December 31, 2015, 2014 and 2013 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.
tt
2017
Year Ended December 31,
2015 (4)
(in thousands except share and per share data)
2014
2016
2013
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 from operations
Gain on sale of investment
Interest expense
Other expense
Loss before income taxes
Provision (benefit) for income taxes
Loss in equity interest
Net loss
Net loss per share:
Basic
Diluted
Weighted average shares used to compute net loss per
share:
Basic
Diluted
Other Financial Data:
Adjusted EBITDA (3)
$
140,027 $
127,373 $
110,245 $
106,579 $
111,807
70,053
27,642
24,941
17,800
9,820
150,256
(10,229)
1,987
(433)
(2)
(8,677)
1,100
(9,777) $
59,146
25,612
22,846
19,695
9,235
136,534
(9,161)
(318)
(42)
(9,521)
1,219
(10,740) $
54,423
20,007
16,272
15,543
6,901
113,146
(2,901)
(245)
(16)
(3,162)
239
(73)
(3,474) $
57,939
26,259
10,807
14,249
5,126
(1,000)
113,380
(6,801)
(218)
(28)
(7,047)
4,821
(1,063)
(12,931) $
59,622
28,458
8,124
11,663
4,650
112,517
(710)
(193)
(37)
(940)
(134)
(561)
(1,367)
(0.27) $
(0.27) $
(0.36) $
(0.36) $
(0.12) $
(0.12) $
(0.47) $
(0.47) $
(0.05)
(0.05)
$
$
$
36,381,299
36,381,299
30,251,685
30,251,685
28,213,838
28,213,838
27,389,793
27,389,793
27,306,882
27,306,882
$
2,337 $
3,179 $
7,593 $
2,180 $
6,501
Notes:
(1)
(2)
Exclusive of depreciation and amortization shown separately.
Includes stock-based compensation as follows:
2017
2016
Technology and development
Sales and marketing
General and administrative
$
$
744
636
1,110
2,490
$
$
29
Year Ended December 31,
2015 (4)
(in thousands)
936
$
942
1,237
3,115
$
$
$
921
784
1,066
2,771
2014
2013
1,621
599
1,375
3,595
$
$
1,184
348
1,029
2,561
(3) We define adjusted EBITDA as net loss plus: provision (benefit) for income taxes, interest expense, other expense, depreciation
and amortization, asset impairments, loss in equity interest, stock-based compensation, losses on disposal of property and
equipment, acquisition costs and certain one-time items, and minus gains on sales of investments. 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
2017
2016
As of December 31,
2015 (4)
(in thousands)
2014
2013
$
$
$
22,476
31,696
20,505
108,780
5,815
54,345
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
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.
d
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,
for new capital expenditure requirements;
and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or
ff
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 principal or interest payments required to service our capital leases or
long-term debt borrowings (if any);
adjd usted 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
Provision (benefit) for income taxes
Interest expense
Other expense
Depreciation and amortization
Capitalized software impairment
Stock-based compensation expense
Gain on sale of investment
Loss in equity interest
Gain on sale of domain
Reduction in workforce severance and related costs
Acquisition costs
Adjusted EBITDA
2017
2016
Year Ended December 31,
2015
(in thousands)
2014
2013
$
$
(9,777) $
1,100
433
2
9,820
256
2,490
(1,987)
2,337
$
(10,740) $
1,219
318
42
9,235
334
2,771
3,179
$
(3,474) $
239
245
16
6,901
3,115
73
478
7,593
$
(12,931) $
4,821
218
28
5,126
3,595
1,063
(1,000)
1,260
2,180
$
(1,367)
(134)
193
37
4,650
2,561
561
6,501
31
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
n
The following discussion of our results of operations and financial condition should be read in conjunction with the informatio
set forth in Selected Financial Data and our financial statements and the notes thereto included in this Annual Report on Formrr 10-
K. This discussion contains forward-looking statementstt 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
Statements.
Factors and Special Note Regarding Forward-Looking
ff
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 2017, Managed Portals and Advertising revenue was $83.6 million, an increase of 12% compared to $74.9 million in
2016. Search revenue increased by $4.3 million, or 27%, in 2017 compared to 2016. We believe the increase was due to higher search
activity associated with the AT&T portal, which was fully implemented by the end of the second quarter of 2017, offset in part by 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 continued 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 Microsofts 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 2018 when we report a full year of revenue associated
with our AT&T portal services contract. 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 $4.4 million, or 8%, to $63.4 million in 2017 from $59.0 million in 2016. This
increase was due primarily to increased advertising revenue associated with the new AT&T portal, which was fully implemented at
June 30, 2017, and increased syndicated advertising activity, particularly as a result of our acquisition of Technorati in February
rr
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 and our mobile product initiatives may help add new search and digital advertising revenuen
future years.
in
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 products, professional services, and products such as Cloud
ID, security, 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 2017, Recurring and Fee-Based revenue was $56.5 million, an increase of
8% from $52.5 million in 2016. This increase was primarily driven in approximately even parts by growth in Cloud ID revenue,
increased professional services revenue, and increased perpetual license revenue relating to our Zimbra Email/Collaboration product.
We believe there are opportunities to generate new sources of Recurring and Fee-Based revenue, such as by cross-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 2017, revenue attributable to two customers accounted for approximately 18% and 10% of our
revenue, respectively, totaling $39.4 million. In 2017 search advertising through our relationship with Google generated
approximately 14% of our revenue, or $20.1 million (all of which was attributable to our customers). In 2016 revenue attributablea
one customer accounted for approximately 16% of our revenue, or $20.8 million.
t
to
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 rates 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,
to deliver
including television programming. To remain competitive, our customers and potential customers must have the capability
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.
a
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, the launch of the AT&T portal
has resulted 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
a
results of operations will benefit from the growth in the number of mobile internet users as our customers adopt our mobile and tablet
offerings.
rr
We continue to be impacted by consumer electronics customers that have the Windows 8 and Windows 10 operating systems
a
or desktop computers; our Managed Portals are placed on a second tab when the Windows 8 internet
pre-installed on their laptop
browser is launched, and in certain instances, without our Google search bar. Further, upgrades to the Windows 10 operating system
default to Microsofts 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 Metric
In addition to the line items in our financial statements, we review the number of Multiplatform Unique Visitors to evaluate our
business, determine the allocation of resources and make decisions regarding business strategies. Following the acquisition of the
Technorati media solutions platform in 2016 this metric has included visitors through our advertising network. We believe disclosing
this metric 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, 2017, 2016 and 2015:
Year Ended December 31,
2017
2016
2015
Multiplatform Unique Visitors
223,688,767
208,411,347
20,902,492
We define Multiplatform Unique Visitors as consumers who have visited one of our Managed Portals, from either mobile or
desktop sources at least once, or have viewed one of our advertisements through our advertising network, computed on an average
monthly basis during a particular time period. As the number of Multiplatform Unique Visitors 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.
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 2017, 2016 and 2015.
Revenue:
Search and digital advertising
Recurring and fee-based
Total revenue
Percentage of revenue:
Search and digital advertising
Recurring and fee-based
Total revenue
2017
Year Ended December 31,
2016
(in thousands)
2015
$
$
83,556
56,471
140,027
$
$
74,889
52,484
127,373
$
$
78,316
31,929
110,245
60%
40
100%
59%
41
100%
71%
29
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, or in the case
of syndicated advertising, delivered on ad space from other publishers. 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 earnr ed as subscription fees and maintenance and support
fees is recognized from customers as the service is delivered.
u
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. Revenue from subscription licenses and support services are recognized over the term of the subscription or support services
arrangement. Effecff
tive January 1, 2018, the accounting for revenue recognition of subscription licenses has changed, as more fully
described in Note 1, The Company and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial
Statements.
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 third parties for the license of their
applications or technology sold with or embedded in our email software. 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.
35
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.
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.
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.
Gain on Sale of Investment
We sold our $1.0 million investment in the preferred stock of Blazer & Flip Flops, Inc. during 2017, recognizing a gain of $2.0
million on the sale.
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 Accountingii
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 companys critical accounting policies as the
ones that are most important to the portrayal of the companys 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
dd
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 availablea
judgments or conditions.
at the time. Actual results may differ significantly from these estimates under different assumptions,
36
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 collectabia lity 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-
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.
We have adopted the provisions of Accounting Standards Update, or ASU 2014-09, Revenue from Contracts with Customers
606), which requires an entity to recognize the amount of revenue to which it expects
(Accounting Standards Codification, or ASC
to be entitled for the transfer of promised goods or services to customers. Companies are permitted to adopt ASC 606 using a full
retrospective or modififf ed retrospective method. We adopted the standard on January 1, 2018 using a modified retrospective method.
While we continue to assess all potential impacts of the standard, it is currently anticipated that the standard will not have a
material impact on our Consolidated Statements of Operations and Consolidated Statements of Cash Flows. However, we anticipate
that the standard will have a material impact on our Consolidated Balance Sheets, with the primary impact being a reduction in
deferred revenue relating to subscription license revenue from our Email/Collaboration contracts, which is included within Recurring
and Fee-Based revenue. We currently recognize subscription license revenue from these contracts over the subscription term of the
contracts (which are typically six months or longer). We have concluded, because its obligations under the contracts have been
satisfied in full upon delivery of the license, that revenue for such contracts will be recognized upon delivery rather than ratably over
the term of the subscription. We project that approximately $2.5 million of deferred revenue from subscription license contracts will
be credited to accumulated deficit as of January 1, 2018, and following that date, revenue for such contracts will be recognized in full
upon delivery of the license. Maintenance and support revenue will continue to be deferred and recognized over the term of the
subscription.
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 traffff iff c supplied by the applicable customer.
37
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 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 faff ir
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-freeff
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.
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, enabling us to give greater weight to our own experience, 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
expected term of the options for each option group.
t
similar to the
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 Managements Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources. Accordingly, we used an expected dividend yield of zero.
a
Income Taxes
We record income taxes using the asset and liabili
a
ty method, which requires the recognition of deferred tax assets and liabilit
a
ies
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. The recorded
balances of deferred tax assets and liabilities are adjusted for changes in tax rates (such as those enacted by the United States federal
government in December 2017) upon enactment of the changes.
We provide reserves as necessary for any 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.
38
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
character (forff
the existence of sufficient taxable income of the appropriate
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.
example, ordinary income or capital gain) within the
a
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.
Year Ended December 31,
2016
(in thousands)
127,373
$
$
2017
140,027
70,053
27,642
24,941
17,800
9,820
150,256
(10,229)
1,987
(433)
(2)
(8,677)
1,100
(9,777) $
59,146
25,612
22,846
19,695
9,235
136,534
(9,161)
(318)
(42)
(9,521)
1,219
(10,740) $
2017
Year Ended December 31,
2016
(in thousands)
921
$
784
1,066
2,771
$
$
$
744
636
1,110
2,490
2015
110,245
54,423
20,007
16,272
15,543
6,901
113,146
(2,901)
(245)
(16)
(3,162)
239
(73)
(3,474)
2015
936
942
1,237
3,115
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
Total costs and operating expenses
Loss from operations
Gain on sale of investment
Interest expense
Other 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
$
$
$
$
39
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
Loss from operations
Gain on sale of investment
Interest expense
Other expense
Loss before income taxes
Provision for income taxes
Loss in equity interest
Net loss
Note:
(1)
Exclusive of depreciation and amortization shown separately.
Comparison of Years Ended December 31, 2017, 2016 and 2015
Revenue
Year Ended December 31,
2016
2015
2017
100%
100%
100%
50
19
18
13
7
107
(7)
1
(6)
1
(7)%
46
20
18
16
7
107
(7)
(7)
1
(8)%
49
18
15
14
6
103
(3)
(3)
(3)%
Revenue:
Search and digital advertising
Recurring and fee-based
Total revenue
Percentage of revenue:
Search and digital advertising
Recurring and fee-based
Total revenue
2017
Year Ended December 31,
2016
(in thousands)
2015
2016 to 2017
% Change
2015 to 2016
% Change
83,556
$
$
56,471
$ 140,027
$
74,889
52,484
$ 127,373
$
78,316
31,929
$ 110,245
12%
8%
10%
(4)%
64%
16%
60%
40
100%
59%
41
100%
71%
29
100%
In 2017, our revenue increased by $12.7 million, or 10%, compared to 2016. Search and digital advertising revenue increased by
t
$8.7 million, driven by increases in both search revenue and digital advertising revenue, while Recurring and Fee-Based Revenue
increased by $4.0 million, or 8% over the prior year. Search revenue increased by $4.3 million, or 27%, while digital advertising
revenue increased by $4.4 million, or 7%, compared to 2016. The increases in both search and digital advertising were largely the
result of revenue attributable to our AT&T Portal which was deployed during the second quarter of 2017 and was fully deployed (i.e.
on personal computers, smartphones
and tablets) at June 30, 2017. Also contributing to the increase in digital advertising revenue was
a $12.3 million increase in syndicated advertising revenue. Partially offsetting the increase in search revenue resulting from the
deployment of the AT&T portal were continued effects of 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 continued residual effect of the placement of our Managed Portals on the second tab of the default
Windows internet browsers. Partially offsetting the increase in digital advertising revenue from AT&T and syndicated advertising
were revenue decreases from decreased advertising revenue attributable to other portal clients and the effects of lower digital
advertising CPMs. The $4.0 million increase in Recurring and Fee-Based Revenue was the result of increased CloudID services
revenue, professional services revenue and revenue from perpetual licenses of our Email/Collaboration products.
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
40
t
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,
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).
generally across the consumer base. In addition, we believe a portion of the decrease was due to the residual
Cost of Revenue
2017
Cost of revenue
Percentage of revenue
$
Year Ended December 31,
2016
(in thousands)
59,146
$
$
50%
46%
70,053
2016 to 2017
g
% Change
2015 to 2016
g
% Change
18%
9%
2015
54,423
49%
In 2017, our cost of revenue increased by $10.9 million, or 18%, compared to 2016, and our cost of revenue increased as a
percentage of revenue from 46% in 2016 to 50% in 2017. The increase in our cost of revenue, as well as the increase in our cost of
revenue as a percentage of revenue, were both driven primarily by increased revenue share costs attributable to the AT&T Portal and
increased syndicated advertising costs.
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.
Technology and Development Expenses
2017
Technology and development
Percentage of revenue
$
Year Ended December 31,
2016
(in thousands)
25,612
$
$
19%
20%
27,642
2016 to 2017
% Change
2015 to 2016
% Change
8%
28%
2015
20,007
18%
In 2017, technology and development expenses increased by $1.8 million, or 7%, compared to 2016. The increase was primarily
due to additional headcount and spending in technology and development activities in association with our AT&T portal services
product launch, as well as increased spending on new product design.
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.
rr
41
Sales and Marketing Expenses
2017
Sales and marketing
Percentage of revenue
$
Year Ended December 31,
2016
(in thousands)
22,846
$
$
18%
18%
24,941
2016 to 2017
% Change
2015 to 2016
% Change
9%
40%
2015
16,272
15%
In 2017, sales and marketing expenses increased by $2.1 million, or 9%, compared to 2016. The increase was primarily due to
increased sales commissions and marketing expenses incurred in connection with the AT&T portal launch.
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.
General and Administrative Expenses
2017
General and administrative
Percentage of revenue
$
17,800
Year Ended December 31,
2016
(in thousands)
19,695
$
$
13%
15%
2016 to 2017
% Change
2015 to 2016
% Change
(10)%
27%
2015
15,543
14%
In 2017, general and administrative expenses decreased by $1.6 million, or 8%, compared to 2016. The decrease is due
principally to lower recruiting costs and lower incentive compensation expense in 2017 as compared to 2016, offset partially by
increased professional fees.
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.
Depreciation and amortization
2017
Depreciation and amortization
Percentage of revenue
$
Year Ended December 31,
2016
(in thousands)
9,235
$
$
7%
7%
9,820
2016 to 2017
g
% Change
2015 to 2016
g
% Change
6%
34%
2015
6,901
6%
In 2017, depreciation and amortization increased by $0.6 million, or 6%, compared to 2016, primarily attributable to the
increased depreciation associated with capital expenditures for new data centers and internally developed software, the most
significant of which was the AT&T portal. The capitalized costs of developing the AT&T portal, placed in service during 2017,
totaled $3.0 million, of which $1.1 million was incurred in 2016.
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.
42
Gain on Sale of Investment
2017
Gain on sale of investment
Percentage of revenue
$
1,987
1%
Year Ended December 31,
2016
(in thousands)
$
$
2016 to 2017
% Change
2015 to 2016
% Change
NM
NM
2015
We realized a gain of $2.0 million on the sale of our $1.0 million investment in the preferred stock of Blazer & Flip Flops, Inc.,
or B&FF, a strategic investment we had made in 2013. During 2017, B&FF was acquired by accesso Technology Group, plc, a
U.K. public company, and we received, in connection with this transaction, cash consideration of $2.2 million and stock in the
acquiring company valued at approximately $0.4 million. This stock was sold in September 2017 for $0.5 million. In addition, we
may receive contingent consideration of cash and stock totaling approximately $0.5 million, which was held back to secure B&FFs
indemnification obligations under the purchase and sale agreement. These amounts have been valued at approximately $0.3 million,
and may be received after the 18-month indemnification period expires. The sale was unique to 2017 and no such transactions
occurred in the comparative periods.
Other Expense
Other expense
2017
$
Year Ended December 31,
2016
(in thousands)
(2) $
(42) $
2015
(16)
For each of 2017, 2016 and 2015, other expense consisted primarily of foreign currency transaction losses related to our foreign
operations.
Interest Expense
Interest expense
2017
Year Ended December 31,
2016
(in thousands)
2015
$
(433) $
(318) $
(245)
Interest expense during 2017, 2016 and 2015 primarily relates to interest on capital leases and long-term debt. The increase in
interest expense in 2017 over the prior year was a result of higher capital lease balances and higher interest rates, offset partially by the
effect of having paid off our line of credit in the second quarter of 2017.
Provision for Income Taxes
2017
Provision for income taxes
$
1,100
Year Ended December 31,
2016
(in thousands)
1,219
$
$
2015
239
Our 2017 income tax provision includes $0.7 million of foreign withholding taxes, $0.3 million of current tax relating to our
foreign subsidiaries earnings, a $0.3 increase in our net deferred income tax liability, and a tax benefit amounting to $0.2 million
from the change in United States corporate tax rates from 35% to 21% with the December 2017 enactment of the Tax Cuts and Jobs
Act of 2017. 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 availablea
full valuation allowance against our U.S. net operating loss and credit carryforwards, such withholdings are recognized in deferred
income tax expense.
to defray future U.S. income taxes; however because we have recorded a
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
43
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.
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, 2017. This unaudited quarterly information
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.
has been prepared on the same basis as our audited consolidated financial
ff
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
(Loss) income from operations
Net (loss) income
Net (loss) income per share:
March 31,
2016
June 30,
2016
September 30,
2016
For the Three Months Ended
December 31,
2016
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
(in thousands, except per-share data)
$ 30,260 $30,476 $
31,721 $
34,916 $ 26,540 $31,216 $
36,269 $
46,002
12,972
5,873
5,650
5,022
2,098
13,516
6,591
5,620
5,134
2,270
14,611
6,791
5,907
4,871
2,414
18,047
6,357
5,669
4,668
2,453
12,562
7,298
6,661
3,964
2,184
14,462
6,904
6,185
4,361
2,224
31,615
33,131
$ (1,355) $ (2,655) $
$ (1,565) $ (2,757) $
34,594
(2,873) $
(3,365) $
32,669
37,194
(2,278) $ (6,129) $ (2,920) $
(3,053) $ (6,656) $ (3,276) $
34,136
17,620
6,748
6,179
4,495
2,596
25,409
6,692
5,916
4,980
2,816
37,638
(1,369) $
261 $
45,813
189
(106)
Basic
Diluted
$ (0.05) $ (0.09) $
$ (0.05) $ (0.09) $
(0.11) $
(0.11) $
(0.10) $ (0.21) $ (0.09) $
(0.10) $ (0.21) $ (0.09) $
0.01 $
0.01 $
(0.00)
(0.00)
Note:
(1)
Exclusive of depreciation and amortization shown separately.
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 April 2017, we completed an underwritten public offering (the Offering) of our common stock in which we sold 5,715,000
shares at a public offering price of $3.50 per share. Subsequently, in May 2017, and as part of the Offering, we completed the sale of
472,846 additional shares of our common stock at the same price upon the exercise of the underwriters over-allotment option, for a
total of 6,187,846 shares. The Offering resulted in total net proceeds of approximately $20.0 million after deducting underwriters
discounts and commissions and offering expenses. The net proceeds will be used for general corporate purposes and additional
working capital, and, in part, were used to fully repay our bank debt. We believe the net proceeds have strengthened our balance sheet
and allow us to acquire, or finance on more attractive terms, equipment and make other capital investments necessary to support
additional customers and the delivery of additional services to our existing customers. In addition, we may also use a portion of the net
proceeds to acquire or invest in businesses, products or technologies that we believe are complementary to our own, as such
opportunities may arise.
To the extent that existing cash and cash equivalents, cash from operations, cash from short-term borrowings, and cash from the
our future activities, we may need to raise additional funds through public or private
exercise of stock options are insufficient to fund
equity offerings or debt financings.
ff
In September 2013, we entered into a Loan and Security Agreement with Silicon Valley Bank, or the Lender, which was most
recently amended in June 2017. We refer to the agreement, as amended, as the Loan Agreement. The Loan Agreement provides for
44
a $12.0 million secured revolving line of credit with a stated maturity of September 27, 2018. The credit faff cility is available for cash
borrowings, subject to a formula based upon eligible accounts receivable. As of December 31, 2017, we had no outstanding borrowing
under the Loan Agreement; subject to the operation of the borrowing formula, the full $12.0 million was available for draw under the
Loan Agreement at December 31, 2017.
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 securitytt
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, 2017, we were in compliance
interest in all our assets, including our intellectual
the covenants and anticipate continuing to be so.
witht
m
a
ff
tt
As of December 31, 2017, we had approximately $22.5 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.
Cash Flows
Statements of Cash Flows Data:
Cash flows (used in) provided by operating activities
Cash flows used in investing activities
Cash flows provided by (used in) financing activities
2017
Year Ended December 31,
2016
(in thousands)
2015
$
$
$
(263) $
(5,231) $
$
13,695
$
8,249
(8,439) $
(1,187) $
7,650
(20,496)
2,943
Cash Provided (Used) by Operating Activities
Operating activities used $0.3 million of cash in 2017. Cash flow from operating activities resulted from our net loss, adjusted for
a
a
in our operating assets and liabilities.
We had a net loss of $9.8 million, which included non-cash
non-cash items, and changes
depreciation and amortization of $9.8 million, non-cash stock-based compensation of $2.5 million, gain on sale of our investmentnn of $2.0
million, a loss of the disposal of property and equipment of $0.2 million, an impairment of capitalized software of $0.3 million, and non-
cash deferred income tax benefit of $0.1 million. Changes in our operating assets and liabilities used $1.3 million of cash, primarily due to
an increase in our accounts receivable of $4.1 million, offset partially by increases in accounts payable, accrued expenses and other
current liabilities totaling $3.3 million and a decrease in deferred revenue totaling $0.8 million. The increase in our accountsnn receivable
was primarily attributable
accrued expenses was primarily the result of increased payables for revenue share cost of revenue and syndicated advertising costs and
the timing of such payments.
aa
rr
contract to a perpetual
The decrease in deferred revenue was principally the result of the conversion of a subscription and support
to the increase in revenue in 2017 as compared to the prior year. The increase in our accounts payable and
license, offset in part by cash advances from other customers.
tt
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 $10.7 million, which
included non-cash depreciation and amortization
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
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 attrtt ibutable to the increase in revenue in 2016 as compared
year. The increase in our accounts payablea
and accrued expenses of $9.1 million was primarily the result of increased payables for
of $9.2 million, non-cash stock-based compensation of $2.8 million, and non-cash
totaling $9.1million and an increase in deferred revenue totaling $1.5
to the prior
m
a
rr
45
syndicated advertising costs and timing of such payments.
result of required prepayments
aa
aa
of development costs and salable enhana cements relating to our Zimbram Email/Collaboration product.
The increase in prepaid expenses and other current assets was principally the
Operating activities provided $7.7 million of cash in 2015. The cash flow from operating activities primarily resulted from our
m
collections from our accounts receivable. Net loss was $3.5 million, which included non-cash depreciation
reduced net loss and improved
and amortization of $6.9 million and non-cash stock-based compensation
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.
of $3.1 million. Changes in our operating assets and liabilities
m
uu
a
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 in 2018 and thereafter.
Cash used by investing activities totaled $5.2 million in 2017. Cash expenditures for purchases of property and equipment,
primarily related to the build-out of our data centers and the development of both internal use software and software for sale or
license, totaled $7.9 million. We received total cash proceeds of $2.6 million for the sale of B&FF.
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) Provided by Financing Activities
Net cash provided by financing activities totaled $13.7 million in 2017. We received net proceeds totaling $20.0 million from
our public stock offering, and $2.2 million from the exercise of common stock options. We fully repaid our $5.0 million bank
financing balance, and made payments totaling $1.9 million on our capital lease obligations. In addition, we paid $1.3 million of
contingent consideration payments relating to our 2015 acquisition of Zimbra and our 2016 acquisition of assets from Technorati.
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.
Off-Balance Sheet Arrangements
At December 31, 2017, 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.
46
The following table sets forth our future contractual obligations as of December 31, 2017:
Operating lease obligations
Capital lease obligations
Contract commitments
Total
2018
2019
$
5,643
2,712
2,672
$ 11,027
$
$
4,380
2,350
2,553
9,283
$
$
Payments Due by Period
y
y
2020
2021
2022
2,761
1,152
603
4,516
$
$
1,368
1,368
$
$
715
715
Total
14,867
6,214
5,828
26,909
$
$
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, The Company and Summary of Significant Accounting Policies, of the Notes to the
about these recently issued accounting standards
Consolidated Financial Statements in Item 8 of this report for additional information
and their potential impact on our consolidated results of operations.
ff
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. 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.
We have a bank line of credit for $12 million with no outstanding borrowings at December 31, 2017. Any borrowings under the
line of credit bear 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, if we were to
have borrowings under the line of credit, would subject us to interest rate risk. Refer to Note 5, Long-Term Debt of the Notes to the
Consolidated Financial Statements in Item 8 of this report for additional information
about our outstanding debt.
d
ff
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
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
continue to evaluate our foreign currency rate exposures and may take steps to mitigate these exposures.
Dollar. In addition, certain of our accounts receivable are denominated in currencies other than
a
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements are submitted on pages F-1 through F-26 of this Annual Report on Form 10-K.
47
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND 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, 2017. 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 (the Exchange Act) means controls and
other procedures of a company that are designed to ensure that information
ff
files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
SECs 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 companys management, including its principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure.
required to be disclosed by a company in the reports that it
During our evaluation of our disclosure controls and procedures as of December 31, 2017, we identified three material
weaknesses in our internal control over financial reporting, as further described below. As a result, we concluded that, as of such date,
our disclosure controls and procedures are not effective. Notwithstanding these material weaknesses, we have concluded that the
Consolidated Financial Statements included in this Annual Report on Form 10-K present fairly, in all material respects, the financial
position of the Company at December 31, 2017 and December 31, 2016 and the consolidated results of operations and cash flows for
each of the three fiscal years in the period ended December 31, 2017 in conformity with U.S. generally accepted accounting
principles.
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-benefitff
relationship of possible controls and procedures.
Managements 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 effff eff ctiveness of our internal control over financial reporting
as of December 31, 2017 based upon the framework in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that evaluation, management concluded that,
while there are no misstatements identified in the consolidated financial statements included in this Annual Report on Form 10-K, our
internal control over financial reporting was not effective as of December 31, 2017 as a result of the material weaknesses described
below.
A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on
a timely basis.
We have identified three material weaknesses: (i) an ineffective control environment due to a lack of sufficient qualified
accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles, (ii)
ineffective control activities due to the lack of timeliness in executing business process controls, and (iii) ineffective monitoring
controls to ascertain whether the components of internal control were present and functioning.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their report included in this Annual Report on Form 10-K.
This report, which appears in Part II, Item 8 of this Annual Report on Form 10-K, contains an adverse opinion on the effectiveness of
our internal control over financial reporting.
Remediation Efforts to Address the Material Weaknesses
We take these material weaknesses seriously. We have already taken steps to remediate them and will continue to take further
steps until their remediation is complete. For example, we have assigned additional personnel within our finance department to the
implementation, administration and evaluation of our internal control over financial reporting. These additional personnel include
certified public accountants and persons with experience in financial and accounting project management, to augment the experience
48
and expertise of our accounting team. In addition, we hired a finff ance manager in 2018, who is a certified public accountant. We have
also engaged an outside public accounting firm to provide us with the services of accounting support personnel and will continue to
use their services on an as-needed basis.
Additionally, with the assistance of the outside public accounting firm, we are expanding and enhancing the written
documentation of our internal controls, including assigning more specific responsibilities to particular personnel and imposing shorter
timelines for executing their control-related tasks. The senior members of our finance department will be responsible for holding other
members of the department accountable for meeting such timelines. We believe that this additional oversight, coupled with the
additional personnel devoted to internal control over financial reporting, will allow us to execute business process controls more
quickly and ensure a greater level of monitoring whether controls are present and functioning.
Changes in Internal Control over Financial Reporting
There were no other changes in our internal control over financial reporting identified in managements evaluation pursuant to
Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 31, 2017 that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Synacor, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Synacor, Inc. and subsidiaries (the Company) as of December 31,
2017, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). In our opinion, because of the effff eff ct of the material weaknesses identified
below on the achievement of the objectives of the control criteria, the Company has not maintained effecff
financial reporting as of December 31, 2017, based on criteria established in Internal Control Integrated Framework (2013) issued
by COSO.
tive internal control over
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017 of the Company and our report dated
March 16, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Managements Annual Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicablea
and Exchange Commission and the PCAOB.
rules and regulations of the Securities
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
49
Definition and Limitations of Internal Control over Financial Reporting
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the companys annual or interim financial statements will not be prevented or
detected on a timely basis. The following material weaknesses have been identified and included in management's assessment: (i)
ineffective control environment due to a lack of sufficient qualified personnel with an appropriate level of knowledge and experience
with generally accepted accounting principles, (ii) ineffective control activities due to the lack of timeliness in executing business
process controls, and (iii) ineffff eff ctive monitoring controls to ascertain whether the components of internal control were present and
functioning. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our
audit of the consolidated financial statements as of and for the year ended December 31, 2017, of the Company, and this report does
not affect our report on such financial statements.
/s/ Deloitte & Touche LLP
Williamsville, New York
March 16, 2018
ITEM 9B. OTHER INFORMATION
None.
50
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 2018
Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2017.
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 InvestorsCorporate 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 2018
Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2017.
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 2018
Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2017.
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 2018
Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2017.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
RR
The information required by this item is incorporated by reference to the information in our proxy statement for our 2018
Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2017.
51
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 preceding the signature page of this Annual Report on Form 10-K.
ITEM 16.
FORM 10-K SUMMARY
Not applicable.
The following exhibits are incorporated by reference herein or filed here within:
EXHIBITS
Exhibit No.
Description
Fifth Amended and Restated Certificate of
Incorporation
Form
S-1/A
Incorporated by Reference
File No.
Date of
Filing
Exhibit
Number
Filed
Herewith
333-178049
1/30/2012
Amended and Restated Bylaws
S-1/A
333-178049
1/30/2012
3.2
3.4
3.1
3.1
3.2
3.3
10.1
Certificate of Designations of Series A Junior
Participating Preferred Stock
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*
Form of Stock Option Agreement under 2006
Stock Plan with Jordan Levy
Form of Director Stock Option Agreement under
2006 Stock Plan
Form of Director Stock Option Agreement under
2006 Stock Plan
8-K
S-1
S-1
S-1
S-1
S-1
S-1
S-1
S-1
001-33843
7/15/2014
333-178049
11/18/2011
10.1
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
10.3.14
S-1/A
333-178049
1/30/2012
10.3.15
10.2.12 * Form of Stock Option Agreement with Himesh
10-K
001-33843
3/22/2017
10.2.13
Bhise under 2006 Stock Plan
10.3.1*
Amended and Restated 2012 Equity Incentive Plan Schedule 14A
001-33843
4/7/2017
App A
52
Exhibit No.
Description
10.3.2*
10.3.3*
10.3.4*
10.3.5*
10.3.6*
10.3.7*
10.4.1*
10.4.2*
10.4.3*
10.5*
10.6
10.7.1
10.7.2
10.7.3
10.7.4
10.7.5
10.7.6
10.7.7
10.7.8
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 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
Letter Agreement dated August 3, 2011 with
William J. Stuart
Severance Agreement with William J. Stuart
Letter Agreement dated August 26, 2013 with
William J. Stuart
2007 Management Cash Incentive Plan
Second Amended and Restated Master Services
Agreement between Qwest Corporation and
Synacor, Inc. dated June 1, 2017
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
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
10.4.7
10-K
001-33843
3/22/2017
10.3.7
10-K
001-33843
3/22/2017
10.3.8
S-1
333-178049
11/18/2011
10.8
10-K
10-K
10-Q
10-Q
001-33843
3/26/2014
001-33843
3/26/2014
001-33843
5/15/2012
001-33843
5/15/2017
10.8.2
10.8.3
10.1
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
53
Exhibit No.
Description
10.7.9
Extension Notice Letter from Google Inc. dated
December 16, 2016
Incorporated by Reference
File No.
Date of
Filing
Exhibit
Number
001-33843
3/22/2017
10.9.9
Form
10-K
Filed
Herewith
10.7.10 Amendment Number Eight to Google Services
10-Q
001-33843
5/15/2017
10.1
Agreement between Google Inc. and Synacor, Inc.
effective as of January 1, 2017
10.7.11 Amendment Number Nine to Google Services
10-Q
001-33843
8/14/2017
10.1
Agreement between Google Inc. and Synacor, Inc.
effective as of May 1, 2017
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
Fourth Amendment to Sublease dated May 21,
2013
10.8.1
10.8.2
10.8.3
10.8.4
10.8.5
10.8.6
Fifth Amendment to Sublease dated July 10, 2013
10.8.7
10.8.8
10.8.9
10.8.10
10.9.1*
10.9.2*
Sixth Amendment to Sublease dated February 8,
2016
Seventh Amendment to Sublease dated February
17, 2017
Eighth Amendment to Sublease dated August 29,
2017
Ninth Amendment to Sublease dated October 3,
2017
Letter Agreement dated March 1, 2008 with
Jordan Levy
Letter Agreement dated June 23, 2009 with
Jordan Levy
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
10-K
001-33843
3/22/2016
10.11.5
10-K
10-K
001-33843
3/22/2016
10.11.6
001-33843
3/22/2016
10.11.7
X
X
X
S-1/A
333-178049
1/30/2012
10.15.1
S-1/A
333-178049
1/30/2012
10.15.2
10.10*
Form of Common Stock Repurchase Agreement
S-1/A
333-178049
1/30/2012
10.16
10.11.1*
Special Purpose Recruitment Plan
Schedule 14A
001-33843
4/5/2013
App. A
10.11.2*
10.12.1
10.12.2
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
10-Q
001-33843
11/14/2013
10.1
10-K
001-33843
3/12/2015
10.20.2
54
Exhibit No.
Description
Incorporated by Reference
Filed
Herewith
10.12.3
10.12.4
10.12.5
10.12.6
10.12.7
10.12.8
10.12.9
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
g
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
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
Consent and Sixth Amendment to Loan and
Security Agreement among Silicon Valley Bank,
Synacor, Inc., NTV Internet Holdings, LLC and
SYNC H
oldings, LLC dated March 30, 2017
g
10.12.10
Seventh Amendment to Loan and Security
Agreement among Silicon Valley Bank, Synacor,
Inc., NTV Internet Holdings, LLC and SYNC
Holdings, LLC dated June 30, 2017
10.13.1*
10.13.2*
10.14.1
10.14.2
10.14.3
Employment Letter Agreement with Himesh Bhise
dated July 31, 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.
Second Amendment to Portal and Advertising
Services Agreement between Synacor, Inc. and
AT&T Services, Inc. effective as of December 7,
2016.
Form
10-K
File No.
001-33843
Date of
Filing
3/22/2016
Exhibit
Number
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
10-Q
001-33843
11/14/2016
10.2
10-Q
001-33843
5/15/2017
10.4
10-Q
001-33843
8/14/2017
10.2
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
10-K/A
001-33843
6/5/2017
10.16.3
55
Exhibit No.
Description
Incorporated by Reference
Filed
Herewith
Form
10-Q
File No.
001-33843
Date of
Filing
5/15/2017
Exhibit
Number
10.2
10-Q
001-33843
11/14/2017
10.1
10-Q
001-33843
11/14/2017
10.2
10.14.4
Third Amendment to Portal and Advertising
Services Agreement between Synacor, Inc. and
AT&T Services, Inc. effective as of March 10,
2017
10.14.5
Fourth Amendment to Portal and Advertising
Services Agreement between Synacor, Inc. and
AT&T Services, Inc. effective as of July 10, 2017
10.14.6
10.14.7#
10.14.8#
Statement of Work #1 to Portal and Advertising
Services Agreement between Synacor, Inc. and
AT&T Services, Inc. effective as of July 10, 2017
Fifth Amendment to Portal and Advertising
Services Agreement between Synacor, Inc. and
AT&T Services, Inc. effective as of November 20,
2017
Sixth Amendment to Portal and Advertising
Services Agreement between Synacor, Inc. and
AT&T Services, Inc. effective as of December 8,
2017
10.15
Lease dated August 31, 2017 between D&S
Capital Real Estate III, LLC and Synacor, Inc.
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
pageppage of this Annual Report on Form 10-K)
Certification of the Chief Executive Officer
ppursuant to Section 302 of the Sarbanes-O
of 2002
r
xley Act
Certification of the Chief Financial Officer
ppursuant to Section 302 of the Sarbanes-O
of 2002
r
xley Act
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
Notes:
*
Indicates management contract or compensatory plan or arrangement.
56
X
X
X
X
X
X
X
X
X
X
X
X
X
X
#
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.
u
57
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 16, 2018
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
President, Chief Executive Officer and
Director (Principal Executive Officer)
Title
Date
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
March 16, 2018
/s/ WILLIAM J. STUART
William J. Stuart
Chief Financial Officer (Principal Financial and
Accounting Officer)
ff
/s/ ELISABETH B. DONOHUE
Elisabeth B. Donohue
/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
Scott Murphy
Director
Director
Director
Director
Director
Director
Director
58
INDEX TO THE FINANCIAL STATEMENTS
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to the Consolidated Financial Statements
g
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Synacor, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Synacor, Inc. and subsidiaries (the "Company") as of December 31,
2017 and 2016, 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, 2017, and the related notes (collectively referred to as the "financial statements").
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 16, 2018, expressed an adverse opinion on the Company's internal control over financial reporting because of
material weaknesses.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicablea
regulations of the Securities and Exchange Commission and the PCAOB.
rules and
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Williamsville, New York
March 16, 2018
We have served as the Companys auditor since 2006.
F-2
SYNACOR, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2017 AND 2016
(In thousands except for share and per share data)
2017
2016
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivablenet of allowance of $99 and $263
Prepaid expenses and other current assets
Total current assets
ASSETS
$
PROPERTY AND EQUIPMENTNet
GOODWILL
INTANGIBLE ASSETS
OTHER 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
DEFERRED REVENUE
DEFERRED INCOME TAXES
OTHER LONG-TERM LIABILITIES
LONG-TERM DEBT
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS EQUITY:
Preferred stock, $0.01 par value10,000,000 shares authorized, no shares issued and
outstanding at December 31, 2017 and 2016
Common stock, $0.01 par value100,000,000 shares authorized; 39,625,980 shares
issued and 38,783,760 shares outstanding at December 31, 2017; 31,626,635 shares
issued and 30,881,148 shares outstanding at December 31, 2016
Treasury stockkk at cost, 842,220 shares at December 31, 2017 and 745,487 shares at
December 31, 2016
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders equity
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
$
$
$
$
22,476
31,696
4,516
58,688
20,505
15,955
12,695
937
108,780
25,931
7,075
11,605
2,444
47,055
3,371
3,682
264
63
54,435
396
(1,881)
142,486
(86,627)
(29)
54,345
108,780
$
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
3,917
127
108
5,000
53,750
316
(1,547)
117,747
(76,850)
(17)
39,649
93,399
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, 2017, 2016 AND 2015
(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
Total costs and operating expenses
LOSS FROM OPERATIONS
GAIN ON SALE OF INVESTMENT
INTEREST EXPENSE
OTHER EXPENSE, net
LOSS BEFORE INCOME TAXES AND EQUITY INTEREST
PROVISION FOR INCOME TAXES
LOSS IN EQUITY INTEREST
NET LOSS
NET LOSS PER SHARE:
Basic
Diluted
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET LOSS PER
SHARE:
Basic
Diluted
2017
2016
2015
$
140,027
$
127,373
$
110,245
70,053
27,642
24,941
17,800
9,820
150,256
(10,229)
1,987
(433)
(2)
(8,677)
1,100
(9,777) $
59,146
25,612
22,846
19,695
9,235
136,534
(9,161)
(318)
(42)
(9,521)
1,219
(10,740) $
(0.27) $
(0.27) $
(0.36) $
(0.36) $
54,423
20,007
16,272
15,543
6,901
113,146
(2,901)
(245)
(16)
(3,162)
239
(73)
(3,474)
(0.12)
(0.12)
$
$
$
36,381,299
36,381,299
30,251,685
30,251,685
28,213,838
28,213,838
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, 2017, 2016 AND 2015
(In thousands)
Net loss
Other comprehensive loss:
Change in foreign currency translation adjustment, net of tax
Comprehensive loss
2017
2016
2015
(9,777) $
(10,740) $
(3,474)
(12)
(9,789) $
(19)
(10,759) $
(18)
(3,492)
$
$
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, 2017, 2016 AND 2015
(In thousands except for share data)
Common Stock
Treasury Stock
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
27,944,853
$
279
(553,144) $
(1,142) $
105,961
$
(62,636) $
36,135
2,400,000
255,339
24
3
(99,904)
(190)
70
3,936
3,271
(3,474)
30,636,327
306
(653,048)
(1,332)
113,238
(66,110)
751,481
238,827
8
2
(92,439)
(215)
1,552
2,957
(10,740)
31,626,635
316
(745,487)
(1,547)
117,747
(76,850)
6,187,846
969,223
242,276
600,000
62
9
3
6
(96,733)
(334)
19,984
2,140
2,624
(3)
(6)
(9,777)
20
(18)
2
(19)
(17)
(12)
Total
$
42,482
70
3,960
3,271
3
(190)
(3,474)
(18)
46,104
1,560
2,957
2
(215)
(10,740)
(19)
39,649
20,046
2,149
2,624
(334)
(9,777)
(12)
39,625,980
$
396
(842,220) $
(1,881) $
142,486
$
(86,627) $
(29) $
54,345
The accompanying notes are an integral part of these consolidated financial statements.
BALANCEJanuary 1,
2015
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
BALANCEDecember 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
BALANCEDecember 31,
2016
Issuance of common stock
upon stock offering, net of
offering costs
Exercise of common stock
options
Stock-based compensation
cost
Vesting of restricted stock
units
Release of stock holdback
(Note 2)
Treasury stock withheld to
cover tax liability
Net loss
Other comprehensive loss
BALANCEDecember 31,
2017
F-6
SYNACOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash and cash equivalents
(used in) provided by operating activities:
Depreciation and amortization
Loss on disposal of property and equipment
Capitalized software impairment
Stock-based compensation expense
Gain on sale of investment
Provision for deferred income taxes
Change in allowance for doubtful accounts
Increase in estimated value of contingent consideration
Loss in equity interest
Change in operating assets and liabilities, net of effects of
acquisitions:
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 (used in) provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceed from the sale of investment
Purchases of property and equipment
Acquisition net of cash acquired
Net cash used in investing activities
CASH FLOWS FROM FINANCING
AA
ACTIVITIES:
Proceeds from offering of common stock, net of underwriting costs
Payments of public offering issuance costs
(Repayments of) 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 payments
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
2017
2016
2015
$
(9,777) $
(10,740) $
(3,474)
9,820
203
256
2,490
(1,987)
137
(164)
107
(4,146)
346
15
3,261
(779)
(45)
(263)
2,645
(7,876)
(5,231)
20,258
(212)
(5,000)
(1,866)
2,149
(334)
(1,300)
13,695
(40)
9,235
334
2,771
143
(2,080)
(1,572)
(314)
9,286
1,546
(360)
8,249
(5,939)
(2,500)
(8,439)
(1,672)
1,560
(215)
(860)
(1,187)
(5)
6,901
3,115
73
(362)
(547)
(167)
(1,489)
3,478
122
7,650
(3,236)
(17,260)
(20,496)
5,000
(1,442)
70
(190)
(495)
2,943
F-7
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTSBeginning of year
CASH AND CASH EQUIVALENTSEnd 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
Liability for estimated additional contingent consideration
Fair value of common stock and warrants in acquisition
Accrued property and equipment expenditures
Stock-based compensation capitalized to property and equipment
$
$
$
$
$
$
$
$
8,161
14,315
22,476
416
908
$
$
$
(1,382)
15,697
14,315
318
737
$
$
$
5,832
$
$
$
$
$
529
134
$
982
$
567
$
$
$
227
186
(9,903)
25,600
15,697
212
210
1,173
1,600
3,960
21
159
The accompanying notes are an integral part of these consolidated financial statements.
F-8
SYNACOR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2017 AND 2016, AND
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
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
310 years
5 years
3 years
7 years
35 years
Computer hardware and software under capital leases and 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 impaired, the impairment is measured and recognized 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-9
The components and original estimated economic lives of our amortizable intangible assets were as follows as of December 31,
2017 and 2016:
Original
Estimated
Economic Life
10 years $
5 years
5 years
Gross amortizable intangible assets:
Customer relationships
Trademark
Developed technology
Total gross amortizable intangible assets
Accumulated amortization:
Customer relationships
Trademark
Developed technology
Total accumulated amortization
Amortizable intangible assets, net
$
2017
2016
(Dollars in thousands)
14,780
300
2,330
17,410
(3,577)
(137)
(1,001)
(4,715)
12,695
$
$
14,780
300
2,330
17,410
(1,961)
(78)
(534)
(2,573)
14,837
Future amortization expense of amortizable intangible assets will be as follows (in thousands): $2,142 in each of years
ending December 31, 2018 and 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. 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, a goodwill impairment charge is required. This charge would be
recognized in the amount by which the carrying value of the reporting unit exceeds the estimated fair value of the reporting unit. The
Company conducts its annual goodwill impairment test as of October 1st. For the years ended December 31, 2017, 2016 and 2015, the
Company determined goodwill was not impaired.
value of the reporting unit exceeds its estimated fair
rr
The change in goodwill is as follows for the years ended December 31, 2017 and 2016 (in thousands):
Balance, beginning of year
Technorati acquisition related goodwill (Note 2)
Foreign currency revaluation
Balance, end of year
Years Ended December 31,
2017
2016
$
$
15,943 $
-
12
15,955 $
15,187
751
5
15,943
Revenue Recognition The Company derives revenue from two categories: 1) Managed Portals and Advertising activities,
and 2) Recurring and Fee-Based. Revenue is 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, 2017, 2016 and 2015 (in thousands):
Search and digital advertising
Recurring and fee-based
Total revenue
Year Ended December 31,
2016
2017
$
$
83,556
56,471
140,027
$
$
74,889
52,484
127,373
$
$
2015
78,316
31,929
110,245
F-10
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 Companys Managed Portals, or
through its advertising network. Advertising inventory is filled with advertisements sourced by the Companys 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.
Effective January 1, 2018, the Company has adopted FASB ASC 606, Revenue from Contracts with Customers (ASC 606). See
Applicable Recent Accounting Pronouncements below.
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 Companys data center facilities. Royalty costs consist of amounts due to third parties for the license of their
applications or technology sold with or embedded in our email software. Product support costs consist of employee and operating
costs directly related to the Companys maintenance and professional services support.
F-11
Concentrations of Risk As of December 31, 2017 and 2016, the Company had concentrations equal to or exceeding 10% of
the Companys accounts receivable as follows:
Google advertising affiliate
Google search
Advertising customer
* - Less than 10%
Accounts Receivable
December 31,
2017
December 31,
2016
16%
7%
12%
*
*
*
For the years ended December 31, 2017, 2016 and 2015 the Company had concentrations equal to or exceeding 10% of the
Companys revenue as follows:
Google advertising affiliate
Google search
* - Less than 10%
2017
21%
15%
Revenue
2016
12%
12%
2015
*
28%
For the years ended December 31, 2017, 2016 and 2015, the following customers received revenue-share payments equal to or
exceeding 10% of the Companys cost of revenue.
Customer A
Customer B
Customer C
* - Less than 10%
2017
Cost of Revenue
2016
2015
20%
12%
*
*
22%
*
*
26%
10%
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,
balances that exceed the federally insured limit, it has not experienced any losses related to these balances and believes credit risk to
be minimal.
which, at times, have exceeded federally insured limits of $0.25 million. Although the Company maintains
t
Software Development Costs The Company capitalizes certain costs incurred for the development of internal use software,
as well as the costs of developing software for sale or license to customers. Internal use software includes the Companys proprietary
portal software and related applications, CloudID authentication software, and various applications used in the management of the
Companys portals. Software for sale or license to customers includes the Companys proprietary Email/Collaboration offerings. 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 (subsequent to the achievement of technological feasibility on software to be sold
or licensed) of new software development as well as for upgrades and enhancements for software programs that result in additional
functionality are capitalized. Software development costs capitalized for sale or license to customers are amortized over the estimated
useful life of the applicablea
incurred a total of $6.5 million, $4.5 million and $2.8 million of combined internal and external costs related to the application
development stage. Of this amount, $2.8 millio, $0.8 million and $0 were incurred for the development of software for sale or license
in 2017, 2016 and 2015, respectively. Internal and external training and maintenance costs are expensed as incurred.
software and such amortization is included in cost of revenue. In 2017, 2016 and 2015, the Company
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 Companys products, equipment
and related infraff structure.
Sales and Marketing Sales and marketing expenses consist primarily of compensation-related expenses to the Companys
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, $0.4 million and
$0.1 million in 2017, 2016 and 2015, respectively.
F-12
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.
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
Compensation. Under the fair value recognition provisions of ASC 718, the Company
FASB ASC 718, CompensationStock
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 faff ir 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.
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 faff ir
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 faff ir value judgments related to acquired intangible
assets and assumed liabilities:
•
•
•
Technology and Trademark intangible assetsvalued
method (a form of an income approach)
based on discounted cash flows using the relief from royalty
Customer Relationshipvalued
based on a multi-period excess earnings method (a form of an income approach)
Deferred Revenuevalued
continuing legal obligation associated with acquired contracts plus a reasonable profit margin.
based on a cost approach using estimated costs to be incurred in connection with the
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 faff ir value through other expense in the consolidated statement of operations.
Increases or decreases in the faff ir 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.
a
Income Taxes On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as
the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code which may impact the
Company, positively or negatively, for taxablea
years ended December 31, 2017 and thereafter. The impact of many provisions of the
Tax Act are unclear and subject to interpretation pending further guidance from the Internal Revenue Service. The ultimate impact of
the Tax Act on the Company is dependent on ongoing review and analysis.
Among other important changes in the Tax Act, the tax rate on corporations was reduced from 35% to 21%; a limitation on the
deduction of interest expense was enacted; certain tangible property acquired after September 27, 2017 will qualify for 100%
expensing; gain from the sale of a partnership interest by a foreign person will be subject to U.S. tax to the extent that the partnership
is engaged in a trade or business; a special deduction for qualified business income from pass-through entities was added; U.S. federal
income taxes on foreign earnings was eliminated (subject to several important exceptions), and new provisions designed to tax
currently global intangible low-taxed income and a new base erosion anti-abuse tax were added.
The Company has made a reasonable estimate of the effecff
ts of the Tax Act on its existing deferred tax balances and the one-
time transition tax. The Company has substantially completed its accounting for the revaluation of its net U.S. federal deferred tax
F-13
liabilities and has recorded a tax benefit of approximately $0.2 million in the fourth quarter of 2017. The one-time transition tax under
the Tax Act is based on earnr ings and profits ("E&P) of the Companys foreign subsidiaries that were previously deferred from U.S.
income taxes. For the year ended December 31, 2017, the provision for income taxes includes provisional tax expense of $0.1 million
related to the one-time transition tax liability of our foreign subsidiaries, and this amount is fully offset by a usage of our net operating
loss.
On December 22, 2017, the SEC issued SAB 118, which expresses views of the SEC regarding ASC 740 in the reporting period
that includes the enactment date of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year
from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company
must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent
that a companys accounting for certain income tax effff eff cts of the Tax Act is incomplete but it is able to determine a reasonable
estimate, it must record and provisional estimate in the financial statements. The Company has not completed the calculation of the
total E&P for these foreign subsidiaries and expects to refine its calculations as additional analysis is completed. In addition, the
Company's estimates may be affected as additional regulatory guidance is issued with respect to the Tax Act. The Company is
currently analyzing its global working capital and cash requirements and the potential tax liabilities attributable to a repatriation,
including calculating any excess of the amount for financial reporting over the tax basis in our foreign subsidiaries, but has yet to
determine whether it plans to change its prior assertion and repatriate. Accordingly, the Company has not recorded any deferred taxes
attributable to its investments in its foreign subsidiaries. The Company will record the tax effects of any change in its prior assertion in
the period that it completes its analysis and is able to make a reasonable estimate, and disclose any unrecognized deferred tax liability
for temporary differences related to its foreign investments, if practicable, in the period that it is first able to make a reasonable
estimate, no later than December 2018.
a
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it also includes two new U.S. tax base
erosion provisions - the global intangible low-taxed income (GILTI) provisions and the base-erosion and anti-abuse
provisions.
a
tax (BEAT)
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an
allowable return on the foreign subsidiarys tangible assets. The Company expects that it will be subject to incremental U.S. tax on
GILTI income beginning in 2018. Because of the complexity of the new GILTI tax rules, the Company continues to evaluate this
provision of the Tax Reform Act and the application of ASC 740, Income Taxes. Under GAAP, the Company is allowed to make an
accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxablea
period expense when incurred (the period cost method) or (2) factoring such amounts into the Company's measurement of its
deferred taxes (the deferred method). The Company's selection of an accounting policy with respect to the new GILTI tax rules will
depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income
related to GILTI and, if so, what the impact is expected to be. The Company is currently in the process of analyzing its structurett
as a result, is not yet able to reasonably estimate the effect of this provision of the Tax Reform Act. Therefore,
made any adjustments related to potential GILTI tax in its consolidated financial statements and has not made a policy decision
regarding whether to record deferred tax on GILTI.
and,
the Company has not
income related to GILTI as a current
rr
-
ff
The BEAT provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related foreign
corporations, and impose a minimum tax if greater than regular tax. The Company does not expect to be materially impacted by this
tax, however, it is still in the process of analyzing the effect of this provision of the Tax Reform Act. The Company has not included
any tax impact of BEAT in its consolidated financial statements for the year ended December 31, 2017.
Deferred income tax assets and liabilities are determined based on temporary differences between the financial statement and
using enacted income tax rates in
income tax bases of assets and liabilities and net operating loss (NOL) and credit carryforwards
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.
rr
The Company accounts for uncertain tax positions using a more-likely-than-not recognition threshold based on thet
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
ultimate settlement in the
of tax benefits, determined on a cumulative
probability basis, which is more likely than not to be realized uponuu
financial statements. It is the Companys policy to recognize interest and penalties related to income tax matters
in income taxaa expense.
As of December 31, 2017 and 2016, accrued interest or penalties related to uncertain tax positions was insignificant.
m
t
Accounting Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates, judgments and assumptions that affeff ct 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,
a
F-14
the results of which form the basis for making judgments about the carrying values of assets and liabilities. 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). In March 2015, the note was converted into
preferred stock of B&FF and was accounted for as a cost method investment. This investment was sold during 2017 (See Note 12).
Fair Value Measurements Fair value measurement standards apply to certain financial assets and liabilities
a
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
The
carrying amounts of the Companys capital leases approximate fair value of these obligations based upon managements best
estimates of interest rates that would be available for similar debt obligations at December 31, 2017 and 2016. The carrying
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.
value due to their short-term nature.u
value of
rr
rr
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 Companys 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 Companys own data.
Applicable Recent Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update (ASU)
2014-09, Revenue fromff
Contracts with Customers (ASC 606), which was subsequently updated by ASU 2015-14, 2016-08, 2016-10
and 2016-12, and requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised
goods or services to customers. Companies are permitted to adopt ASC 606 using a full retrospective or modified retrospective
method. The Company adopted the standard on January 1, 2018 using a modified retrospective method.
While the Company continues to assess all potential impacts of the standard, it is currently anticipated that the standard will not
have a material impact on its consolidated statements of operations and consolidated statements of cash flows. However, the Companym
anticipates that the standard will have a material impact on the consolidated balance sheets with the primary impact being a reduction
in deferred revenue relating to subscription licenses from its Email/Collaboration contracts. The Company currently recognizes
subscription license revenue from these contracts over the subscription term of the contracts (which are typically six months or
longer). The Company has concluded that, because its performance obligations have been satisfied in full upon delivery of the
license, that revenue allocated to the license performance obligation in such contracts will be recognized upon delivery rather than
ratably over the term of the subscription. The Company projects that approximately $2.5 million of deferred revenue from subscription
license contracts will be recorded as a reduction of the Companys accumulated deficit as of January 1, 2018, and following that date,
revenue for such performance obligations will be recognized upon delivery of the license.
Although it is expected that the annual revenue impacts on the consolidated statements of operations will not be material, the
timing of a portion of revenue may shift between periods due primarily to the accounting for software term licenses, which will be
recognized predominantly at the time of delivery rather than ratably over the contract period. Accounting for the majority of the
Companys revenue, which is related to search and advertising, software perpetual licenses, hosted email, CloudID, professional
services and maintenance and support activities, will remain substantially unchanged. Additionally, incremental costs to obtain
customer contracts will be capitalized
and amortized over a benefit period, which is the shorter of customer or product life. The
Company will elect a practical expedient to exclude contracts with a benefit period of a year or less from this deferral requirement.
The annual cost impact of the deferral and amortization on the consolidated statements of operations is not expected to be material.
a
As ASC 606 is principle-based, interpretation of those principles may vary from company to company based upon their unique
circumstances. New information may arise that could change the Companys current understanding and interpretation of the standard
F-15
and its impact on the Company. The Company will continue to monitor industry activities and additional guidance provided by
regulators and standard setters and will recognize the implementation of such guidance accordingly, if applicable.
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 amounts reported prior to adoption. The Company
will adopt the standard on the required effecff
tive date, which for the Company will be January 1, 2019.
dand
In August 2016, the FASB ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
Cash Payments, 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 will adopt ASU 2016-15 in the first quarter of fiscal 2018 and is
currently completing its evaluation of the impact of the pending adoption on its consolidated financial statements.
ff
RRecently
Adopted
d
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation
m
(Topic 718): Improvements to Employee
Share-Based Payment Accounting, which changes how companies account for certain aspects of stock-based awards to employees,
including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification in the
statement of cash flows. Effective January 1, 2017, the Company adopted ASU 2016-09. The standard eliminated the requirement to
defer recognition of excess tax benefits related to employee share-based awards until they are realized through a reduction to income
taxes payable. The Company applied the modified retrospective method, and there was no net cumulative-effect adjustment to
retained earnings on January 1, 2017 as the increase of $0.7 million in deferred income tax assets for previously unrecognized excess
tax benefits was fully offset by a valuation allowance. As permitted by the ASU, the Company will continue to use an esti
forfeiture rate in determining stock-based compensation expense.
dmated
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), to simplify the
accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. A goodwill impairment is now
measured as the amount by which a reporting units carrying value exceeds its fair value, limited to the amount of goodwill allocated
to that reporting unit. ASU 2017-04 is effective for interim and annual periods beginning after December 15, 2019, with early
adoption permitted for any impairment tests performed after January 1, 2017. The Company adopted the new guidance on a
prospective basis during the first quarter of 2017. The adoption of this ASU did not have a significant impact on the Companys
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 Companys 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 Technoratis publisher network, proprietary SmartWrapper solution and other advertising technology with its
existing network of Managed Portals and Advertising solutions.
The assets acquired include Technoratis 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
Technoratis employees commenced employment with Synacor.
F-16
The Company paid $2.5 million of the Purchase Price at the Closing and withheld $0.5 million of the Purchase Price to secure
Technoratis 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 was obligated to 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
rr
for 12 months following the Closing, with longer survival periods for certain fundamental representations and warranties. There were
no claims for such breaches.
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 faff ir 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
a
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 Companys estimates are based on assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable. This analysis required the use of managements 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 adjusd
tment
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 accruedr
expenses
Net assets acquired
$
$
$
$
2,500
500
67
3,067
965
96
1,380
730
751
3,922
855
3,067
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 adjustments totaled $0.6 million, were accrued in accrued
expenses and other current liabilities at December 31, 2016, and were paid to the seller in 2017.
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
acquired by the Company pursuant to the Asset Purchase Agreement is referred to herein as Zimbra or the Purchased Business.
F-17
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).
rr
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
and contingent upon any reduction
Purchase Agreement. The fair value of this contingent consideration was determined to be $1.6 million and was included in
consideration paid as of the acquisition date. Of this amount, $0.9 million was paid in 2016, and the remaining $0.7 million was paid
in 2017. This Companys liability for estimated unpaid Earn Out Consideration was included in accruedr
liabilities at December 31, 2016.
to satisfy indemnification claims (including pending claims), as further described in the Asset
expenses and other current
d
u
to
Holdback In addition to the Earn Out Consideration, the Company 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) were to 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.
Both the Holdback Stock and the Warrants were released to TZ Holdings in 2017.
Additionally, the Company assumed certain obligations of TZ Holdings, including the performance of TZ Holdings post-
closing obligations under contracts assigned to the Company.
Consideration:
Cash consideration
Fair value of 2,400,000 shares of common stock issued on
$
17,310
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 were to begin to
lapse with respect to 1/6th of the Stock Consideration, and upon the completion of each of the five months thereafter, the restrictions
were to lapse with respect to an additional 1/6th of the Stock Consideration. Following the lapse
transfer the Stock Consideration solely to its stockholders.
of such restrictions, TZ Holdings may
a
t
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-18
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
estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These
valuations require the use of managements assumptions, which would not reflect unanticipated events and circumstances that occur.
assumed. The Companys
a
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 Zimbras 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 are the unaudited pro forma consolidated results of operations of the Company and Zimbra for the year ended
December 31, 2015, presented as if the Acquisition had occurred as of January 1, 2015, the beginning of the earliest year presented (in
thousands, except per share amounts):
Revenue
Operating loss
Net loss
Net loss per share:
Basic
Diluted
$
$
$
$
$
130,077
(2,944)
(4,608)
(0.16)
(0.16)
F-19
3. PROPERTY AND EQUIPMENTNET
As of December 31, 2017 and 2016, 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 equipmenttt net
2017
2016
28,845
23,690
1,497
1,215
3,758
159
59,164
(38,659)
20,505
$
$
23,438
15,198
2,062
1,463
4,572
249
46,982
(32,576)
14,406
$
$
Property and equipment includes computer equipment and software held under capital leases of $11.1 million and $5.2 million
as of December 31, 2017 and 2016, respectively. Accumulated depreciation of computer equipment and software held under capital
leases amounted to $5.4 million and $3.4 million as of December 31, 2017 and 2016, respectively.
Depreciation expense was $7.6 million, $7.2 million, and $6.4 million for the years ended December 31, 2017, 2016, and 2015,
respectively. Impairments of internally-developed software totaling $0.3 million were recorded in each of 2017 and 2016 and charged
to general and administrative expense.
4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, 2017 and 2016, accrued expenses and other current liabilities consisted of the following (in thousands):
Accrued compensation
Accrued content fees and other cost of revenue
Accrued taxes
Accrued business acquisition consideration
Other
Total
2017
2016
4,361 $
655
426
1,633
7,075 $
6,860
1,788
1,193
1,843
11,684
$
$
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 June 2017 (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, 2017, there were no borrowings outstanding under the Loan
Agreement, and subject to the operation of the borrowing formula, $12.0 million was available for draw under the Loan Agreement.
Borrowings under the Loan Agreement bear interest, at the Companys 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 Companys 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 Companys 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 fiff rst day of each month and (b) on each date a prime rate advance is
converted into a LIBOR advance.
The Companys 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, 2017, the Company was in compliance with the financial covenants.
F-20
6. INCOME TAXES
Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income rate from 35%
to 21% under the Tax Act, the Company revalued its deferred income tax assets and liabilities at December 31, 2017, recording a net
reduction of both the Companys deferred income tax liability at December 31, 2017 and income tax provision for the year ended
December 31, 2017 in the amount of $0.2 million. The one-time transition tax liability of foreign subsidiaries, calculated based on
earning and profits (E&P) that were previously deferred from U. S. income taxes, was $0. The Company has not fully completed
the calculation of the E&P and expects it may refine its calculations as additional analysis is completed.
Loss from continuing operations before income taxes included loss from domestic operations of $(9.6) million, $(10.2) million
and $(2.9) million for the years ended December 31, 2017, 2016 and 2015, and income (loss) from foreign operations of $0.9 million,
$0.7 million $(0.3) million for the same years.
The provision for income taxes for the years ended December 31, 2017, 2016 and 2015, was comprised of the following (in
thousands):
Current:
United States Federal
State
Foreign
Total current provision for income taxes
Deferred:
United States Federal
State
Net deferred provision for income taxes
Total provision for income taxes
2017
2016
2015
$
$
$
30
933
963
74
63
137
1,100
$
$
40
1,036
1,076
95
48
143
1,219
$
(1)
45
195
239
239
The income tax effff eff cts of significant temporary differences and carryforwards that give rise to deferred income tax assets and
liabilities as of December 31, 2017 and 2016 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 liabilities
$
2017
2016
3,345 $
7,059
1,676
1,151
570
408
14,209
(13,301)
908
(16)
(529)
(545)
363
(627)
(264) $
4,576
5,907
1,676
1,151
246
557
838
14,951
(14,030)
921
(29)
(392)
(421)
500
(627)
(127)
F-21
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balancebegi nning of year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Balanceend of year
2017
2016
2015
$
$
627
627
$
$
627
627
$
$
627
627
The unrecognized tax benefits at the end of 2017, 2016 and 2015 were primarily related to research and development
carryforwards.
If the $0.6 million of unrecognized tax benefits as of December 31, 2017 were recognized, approximately
a
$0.6 million would
decrease the effecff
tive 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,
2017 and 2016, 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 2017 remain open to examination by the majora
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 Companys 2016 U.S. Federal income
tax return is currently under examination; the Company is not currently under examination in any other major taxing jurisdictions.
jurisdictions in which the Company is subject to tax. Fiscal years
Income tax expense for the years ended December 31, 2017, 2016 and 2015 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 taxesnet of federal benefit
Foreign taxes
Impact of United States federal tax rate change
Impact of United States federal tax rate change -
valuation allowance
Valuation allowance
Permanent differences
Other
Total
$
2017
(2,950)
64
466
4,965
(5,205)
3,596
(103)
267
1,100
34% $
(1)
(6)
(57)
60
(41)
1
(3)
(13)% $
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)%
At December 31, 2017, the Company has federal and state NOL carryforwards of approximately $26.8 million and $25.1
million, respectively, including approximately $2.2 million of NOL carryforwards created by windfall tax benefits relating to stock
compensation expense. 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, 2017 and 2016.
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 Companys 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.
F-22
The following table sets forth revenue and long-lived tangible assets by geographic area (in thousands):
Revenue:
United States
International
Total revenue
Long-lived tangible assets:
United States
International
Total long-lived tangible assets
Years Ended December 31,
2016
2015
2017
$
$
118,764
21,263
140,027
$
$
110,071
17,302
127,373
$
$
105,228
5,017
110,245
As of December 31,
2017
2016
$
$
19,775 $
730
20,505 $
13,519
887
14,406
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 $3.5 million, $3.1 million and $2.6 million for 2017, 2016 and 2015,
respectively.
Lease commitments over the next five years as of December 31, 2017 can be summarized as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
2022
2023 and thereafter
Total lease commitments
Years Ending December 31,
2018
2019
2020
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
$
$
5,643
4,380
2,761
1,368
715
195
15,062
Capital Lease
Commitments
2,712
$
2,350
1,152
6,214
399
5,815
2,444
3,371
$
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, 2017 can be summarized as
follows (in thousands):
Years Ending December 31,
2018
2019
2020
Total contract commitments
F-23
Contract
Commitments
2,672
$
2,553
603
5,828
$
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.
9. EQUITY
Stock Offering In April 2017, the Company completed an underwritten public offering (the Offering) of its common stock
in which it sold 5,715,000 shares at a price of $3.50 per share. Subsequently, in May 2017, and as part of the Offering, the Company
completed the sale of 472,846 additional shares of its common stock at the same price upon the exercise of the underwriters over-
allotment option, for a total of 6,187,846 shares. The Offering resulted in total net proceeds of $20.0 million, after deducting
underwriting discounts and commissions totaling $1.4 million and other offering expenses totaling $0.2 million.
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 Companys outstanding common stock. The Stock Repurchase Program has no
expiration date, and may be suspended or discontinued at any time without notice. There were no repurchases under this program in
2017, 2016 or 2015. The Company repurchased $0.6 million of its outstanding stock under this authorization.
Withhold to Cover During the years ended December 31, 2017, 2016 and 2015, 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 Companys
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 Companys common
stock withheld to cover minimum statutory tax withholding requirements during the years ended December 31, 2017, 2016 and 2015
were as follows:
Shares withheld
Cost (in thousands)
Years Ended December 31,
2016
2015
2017
96,733
334
$
92,439
215
$
99,904
190
$
Warrants Warrants to purchase 600,000 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, have a three-year life,ff
expire in August 2018.
and
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.
stock-based compensation expense requires the Company to make assumptions and judgments about the
This valuation model forff
variables used in the calculation, including the fair value of the Companys common stock, the expected term (the period of time that
the options granted are expected to be outstanding), the volatility of the Companys 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 SECs Staffff
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 Companys historical
experience.
d
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,
2016
2015
2017
49%
%
2.0%
6.25
49%
%
1.4%
6.25
52%
%
1.7%
6.25
F-24
The Company recorded $2.5 million, $2.8 million, and $3.1 million of stock-based compensation expense for the years ended
December 31, 2017, 2016, and 2015, 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 income tax
asset.
Total stock-based compensation expense included in the accompanying consolidated statements of operations for the years
ended December 31, 2017, 2016 and 2015, is as follows (in thousands):
Technology and development
Sales and marketing
General and administrative
Total stock-based compensation expense
Years Ended December 31,
2016
2015
2017
$
$
744
636
1,110
2,490
$
921
784
1,066
2,771
$
$
936
942
1,237
3,115
Equity Incentive Plans The Company has two stock option plans (the 2006 Stock Plan and the Amended and Restated 2012
Equity Incentive Plan), which, as of December 31, 2017, authorize the Company to grant up to 10,615,572 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 Companys 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, 2017 is as follows:
Number of
Stock Options
Weighted Average
Exercise Price
Aggregate
Intrinsic Value
(in thousands)
Weighted Average
Remaining
Contractual
Term (in years)
OutstandingJanuary 1, 2017
Granted
Exercised
Forfeited
Expired
OutstandingDecember 31, 2017
Expected to vesttt December 31, 2017
Vested and exercisableDecember 31, 2017
8,756,174 $
1,559,000
(969,223)
(464,815)
(402,923)
8,478,213 $
8,211,433 $
5,165,238 $
2.53
3.17
2.22
2.31
4.64
2.60 $
2.59 $
2.59 $
1,222
1,181
636
6.99
6.93
6.09
Aggregate intrinsic value represents the difference between the closing stock price of the Companys common stock and the
exercise price of outstanding, in-the-money options. The Companys closing stock price as reported on the Nasdaq as of December 31,
2017 was $2.30. The total intrinsic value of options exercised was $1.1 million, $0.7 million, and less than $0.1 million for the years
ended December 31, 2017, 2016 and 2015, respectively. The weighted-average grant date fair value of options granted was $1.56 per
share, $1.13 per share, and $0.95 per share for the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2017, total unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested stock
options was approximately $3.9 million, which is expected to be recognized over a weighted-average period of 2.5 years.
F-25
RSU Activity A summary of RSU activity for the year ended December 31, 2017 is as follows:
January 1, 2017
Unvesteddd
Granted
Released
Forfeited
Unvesteddd December 31, 2017
Unvested expected to vest December 31, 2017
Number of
RSUs
319,889 $
(242,276) $
(25,930) $
51,683 $
51,683 $
Weighted Average
Fair Value
2.71
2.47
3.15
3.62
3.62
As of December 31, 2017, total unrecognized compensation cost, adjusted for estimated forfeitures, related to RSUs was $0.2
million, which is expected to be recognized over the next 1.35 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 Companys 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.
ff
The following table presents the calculation of basic and diluted net loss per share for the years ended December 31, 2017, 2016
and 2015 (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:
Year Ended December 31,
2016
2015
2017
$
$
$
(9,777) $
(10,740) $
(3,474)
36,381,299
30,251,685
(0.27) $
(0.36) $
28,213,838
(0.12)
(9,777) $
(10,740) $
(3,474)
Number of shares used in the basic computation
Add weighted-average effecff
t of dilutive securities:
Stock options, RSUs and warrants
Number of shares used in diluted calculation
Dilutive net loss per share
36,381,299
30,251,685
28,213,838
36,381,299
30,251,685
$
(0.27) $
(0.36) $
28,213,838
(0.12)
Stock options, warrants and RSUs are not included in the calculation of diluted net loss per share for the years ended
December 31, 2017, 2016 and 2015 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 net 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:
Antidilutive Equity Awards:
Stock options and RSUs
Warrants
Year Ended December 31,
2016
2015
2017
8,529,896
480,000
9,076,063
480,000
9,133,513
480,000
F-26
12. SALE OF INVESTMENT
In July 2013, the Company made a $1.0 million strategic investment in the form of a convertible promissory note (the note)
in Blazer and Flip Flops, Inc. (B&FF), doing business as The Experience Engine, a privately-held Delaware corporation. The
Company desired to gain access to the expertise of B&FFs principals in integrating its customers systems with their customers
devices, including smartphones and tablets. In March 2015, the note was converted into preferred stock of B&FF and was
subsequently accounted for as a cost method investment.
In August 2017, B&FF was acquired by accesso Technology Group, plc, a U.K. public company, and the Company received, in
connection with the sale of its investment in B&FF, cash consideration of $2.2 million and stock in the acquiring company valued at
approximately $0.4 million. This stock was sold in September 2017 for $0.5 million. In addition, the Company stands to receive
contingent consideration of cash and stock totaling $0.5 million, which was held back to secure B&FFs indemnification obligations
under the purchase and sale agreement. These amounts have been valued at $0.3 million, and may be received after the 18-month
indemnification period expires. The Company recorded a gain on sale of investment of $2.0 million in the year ended December 31,
2017.
13. 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, and contributed $0.3 million in matching funds during
the year ended December 31, 2017. No matching contributions were made during the years ended December 31, 2016 or 2015.
******
F-27
[THIS PAGE INTENTIONALLY LEFT BLANK]
CORPORATE INFORMATION AND
SAFE HARBOR STATEMENT
BOARD OF DIRECTORS
JORDAN LEVY
(cid:10)(cid:133)(cid:62)(cid:136)(cid:192)(cid:147)(cid:62)(cid:152)(cid:3)(cid:156)(cid:118)(cid:3)(cid:204)(cid:133)(cid:105)(cid:3)(cid:9)(cid:156)(cid:62)(cid:192)(cid:96)(cid:3)
HIMESH BHISE
(cid:10)(cid:133)(cid:136)(cid:105)(cid:118)(cid:3)(cid:13)(cid:221)(cid:105)(cid:86)(cid:213)(cid:204)(cid:136)(cid:219)(cid:105)(cid:3)(cid:34)(cid:118)(cid:119)(cid:86)(cid:105)(cid:192)
LISA DONOHUE
ANDREW KAU
MARWAN FAWAZ
MICHAEL MONTGOMERY
GARY GINSBERG
SCOTT MURPHY
CORPORATE INFORMATION
TRANSFER AGENT
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CORPORATE COUNSEL
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STOCK LISTING
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REGISTERED PUBLIC
ACCOUNTING FIRM
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INVESTOR RELATIONS
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SAFE HARBOR STATEMENT
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