Indicate by check
mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate by check mark
if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No
☒
Indicate by a check
mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒ No
☐
Indicate by check mark
whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant as required to submit and post such files). Yes ☒ No
☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
1
☐
Indicate by check
mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the Registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act
¨
Indicate by
check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
☐ No ☒
The aggregate market
value of the Registrant’s common stock held by non-affiliates of the Registrant (assuming, for the sole purpose of this calculation,
that all directors and executive officers of the Registrant are “affiliates”), based upon the closing price of the
Registrant’s common stock on June 30, 2017 as reported by Nasdaq, was approximately $26 million.
Indicate the number
of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
Part III of this Form
10-K incorporates by reference certain information from the Registrant’s Definitive Proxy Statement for its 2018 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered
by this Report.
PART I
Item 1. Business.
Overview
TheStreet, Inc. is
a
leading financial news and information provider. Our business-to-business and business-to-consumer content and products provide
individual and institutional investors, advisors and dealmakers with actionable information from the worlds of finance and business.
2017 was a significant year for us and
in 2018 our business strategy is centered on accelerating our growth by further developing initiatives which helped us
achieve net profit in 2017.
2017 Highlights
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Achieved net profit in the second, third and fourth quarters
of 2017;
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expanded revenue contribution of the institutional businesses
to more than half of corporate total for first time;
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grew corporate events revenue stream by 60 percent with initiatives identified to leverage
B2B and B2C businesses with live components;
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renewed Jim Cramer's employment agreement for another four
years, ensuring his leadership and participation across our Company as our turnaround gains steam;
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removed the preferred stock overhang on our equity held
for more than a decade by TCV VI, L.P. and TCV Member Fund, L.P., together referred to as TCV, for a payment of $20 million in
cash and six million shares of common stock;
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sold an aggregate of $7.85 million of common stock at $1.10
per share to 180 Degree Capital Corp. in conjunction with the removal of the preferred stock overhang;
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Added Kevin M. Rendino of 180 Degree Capital Corp. to our board of directors as its fifth
independent member; and
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authorized a share buyback of up to five million shares,
something we were not able to do previously under the restrictions tied to the now eliminated preferred stock.
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Our Products and Services
Business-to-Business
Our business-to-business, or B2B, products
provide dealmakers, their advisers, institutional investors and corporate executives with news, data and analysis of mergers and
acquisitions and changes in corporate control, relationship mapping services, and competitive bank rate data. Our B2B business
products, as described in greater detail below, have helped diversify our business from primarily serving retail investors to also
providing an indispensable source of business intelligence for both high net worth individuals and executives in the top firms
in the world.
Our B2B business derives revenue primarily
from subscription products, events/conferences and information services. For the year ended December 31, 2017, our B2B businesses
generated 50% of our total revenue.
The Deal
In September 2012, we acquired The
Deal, L.L.C., or The Deal, which began as a broadsheet newspaper for retail investors and transformed its business into a
digital subscription model that delivers sophisticated coverage primarily to institutional investors on changes in corporate
control, including merges and acquisitions, private equity, corporate activism and restructuring. The Deal is a trusted
information source for organizations seeking to generate deal flow, improve client intelligence and enhance market knowledge.
It provides full access to proprietary commentary, analysis and data produced every day by our editors and journalists and
content feeds can be customized based on each client’s job function, deal focus and workflow. Content can be delivered
via email, mobile, web or existing corporate platform. The Deal is headquartered in New York and has offices in London,
England, San Francisco, California, Washington DC and Chennai, India.
In April 2013, we also acquired
The DealFlow
Report, The Life Settlements Report
and the PrivateRaise database from DealFlow Media, Inc. to further broaden the information
and services available to institutional investors. These newsletters and this database, and the employees providing their content,
have been incorporated into The Deal.
BoardEx
In October 2014, we acquired Management
Diagnostics Limited, the developer of the leading relationship capital management service BoardEx, collectively, BoardEx. BoardEx
expanded our international operations and furthered our transition from primarily serving retail investors to also becoming an
indispensable data and business intelligence source for institutional clients. Founded in 1999, BoardEx is an institutional relationship
capital management database and platform and currently holds in-depth profiles of almost one million of the world’s most important
business leaders. BoardEx’s proprietary software shows the relationships between and among these individuals and a user and
his/her contacts. Clients, including investment banks, consultancies, executive search firms, law firms and universities use BoardEx
to leverage their relationships and facilitate business and corporate development initiatives. BoardEx is headquartered in London,
England and has locations in New York and Chennai, India.
RateWatch
Our third B2B business product, RateWatch,
publishes bank rate market information including competitive deposit, loan and fee rate data, primarily on a subscription basis,
to financial institutions, government agencies, academic researchers, banks, credit unions and other commercial organizations.
RateWatch is headquartered in Wisconsin.
Business-to-Consumer
Our business-to-consumer, or B2C, business
is led by our namesake website,
TheStreet.com
, and includes free content and houses our premium subscription products that
target varying segments of the retail investing public.
Since its inception in 1996, we have distinguished
ourselves as a trusted and reliable source for financial news and information with journalistic excellence, an unbiased approach
and interactive multimedia coverage of the financial markets, economy, industry trends, investment and financial planning.
Our B2C business generates revenue primarily
from premium subscription products and advertising. For the year ended December 31, 2017, our B2C business generated 50% of our
total revenue.
Our most recognizable consumer products
include the following:
TheStreet.com
is a free, advertising-supported
digital platform that provides unbiased business news and market analysis to individual investors.
TheStreet.com
provides
us with an ongoing and efficient source of leads for our premium subscription products and for 20 years,
TheStreet.com
has
been recognized as one of the premier providers of investment commentary, analysis and news.
RealMoney and RealMoney Pro
are
the foundation of our premium subscription product line for consumers.
RealMoney
is aimed at active market participants
and self-directed investors looking for timely, action-oriented market commentary and analysis.
RealMoney
contributors include
dozens of experienced financial analysts, traders, money managers and journalists, including James J. Cramer and Douglas Kass.
Action Alerts PLUS
is our
premium subscription offering that teaches consumers how to manage money for long term growth with former hedge fund manager James
J. Cramer. Members are privy to the day-to-day activity surrounding Mr. Cramer’s personal charitable portfolio including
alerts notifying them when Mr. Cramer is about to make a trade. Surrounding content includes Mr. Cramer’s explanations
regarding what stocks he is buying or selling and, more importantly, why he is taking that position.
Action Alerts Plus
members also have access to live monthly conference calls where Mr. Cramer addresses their questions about the market, specific
stocks in the portfolio and trade ideas. We also host an interactive online forum where members can post questions for the
Action
Alerts Plus
team, share ideas and engage in a dialogue with each other. In addition, subscribers receive a weekly roundup of
analysis of all stocks in the portfolio and have access to
http://www.actionalertsplus.com
for a continuously updated view
of the portfolio and its performance.
Action Alerts PLUS
is aimed at investors looking for exclusive access to specific,
action-oriented investment ideas.
Segments
Our operations consist of three reportable
segments: TheDeal/BoardEx, RateWatch and Business to Consumer. Further information regarding our operating segments may be found
in Note 17 to our Consolidated Financial Statements.
Sales, Marketing and Distribution
We pursue a variety of sales and marketing
initiatives to increase traffic to our sites, license our content, sell advertising, increase subscriptions for our B2B and B2C
products and expose our brands to new audiences. These initiatives include promotion through online, search marketing, email, social,
direct mail and telemarketing channels. We employ marketers and designers who plan and create campaigns for the various business
units which are then implemented by our technical and operations team as well as by third-party service providers. Our business
intelligence group, responsible for reporting and analysis, helps determine the effectiveness of our campaigns and make informed
decisions. In addition to these marketing efforts, we employ a sales force that sells directly to advertisers and their agencies,
as well as to institutional clients as outlined above.
We use content syndication and subscription
distribution to capitalize on the cost efficiencies of digital distribution and to garner additional value from content we have
produced for our own properties. By syndicating our content to other leading digital properties, we expose our brands and top-quality
journalism to millions of potential users/subscribers. For example, we provide digital properties in our vertical, including Yahoo!
Finance, AOL Finance, Marketwatch and MSN Money, with selected content to host along with additional article headlines that these
partners display on their stock quote result pages, in both instances providing links back to our site. This type of content licensing
exposes new audiences to our brands and generates additional traffic to our sites, creating the opportunity for us to increase
our advertising revenue and subscription sales.
To attract additional visitors to our sites,
we utilize search engine optimization tools to increase the visibility of our content on Google, Yahoo, Bing and similar search
engines. We also have a social media team that works across platforms such as Facebook, LinkedIn and Twitter to increase awareness
and drive traffic to our content, events and subscription products.
With digital traffic now almost
evenly split between desktop and mobile platforms and devices, we continually improve our products to be as mobile-friendly
as possible, while developing and distributing mobile and tablet applications to deliver our content to mobile-first
audiences. The Deal and BoardEx both have robust mobile sites and apps and are using mobile alerts to continually engage
with users/subscribers. We maintain a “unified” TheStreet app which will allow users to access our free and paid
content in a single environment. Finally, we continue to focus on increasing the engagement our visitors have with our online
and mobile offerings, measured by visits per visitor, page views per visit and by time spent on site, and we continuously
seek to improve the experience our digital products offer.
We consistently obtain exposure through
other media outlets who cite our journalists and our content or who invite our editorial staff to appear on segments to provide
key market commentary and consumer advice. In 2017, we were mentioned or featured in almost 100 reports by national publications
and national and local broadcast media including
The Wall Street Journal, The New York Times
and CNBC, NBC, ABC, CBS and
Fox, among others.
Competition
We compete with a broad range of content
providers, newsletter publishers, event producers and information services. We face competition primarily from:
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with respect to our B2B business, particularly The Deal, providers of business
intelligence on mergers and acquisitions, restructurings and financings primarily to investment banks, law firms, hedge
funds, private equity firms and corporate institutions, such as Bloomberg, S&P Capital IQ, Dealogic, ThomsonOne and
Acuris/Mergermarket Limited;
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with respect to our B2B business, particularly BoardEx, providers of relationship capital
management services and director, officer and dealmaker data, including Bloomberg, S&P Capital IQ, Dow Jones, The New
York Stock Exchange, LexisNexis, Relationship Science, Equilar and Thomson Reuters;
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with respect to our B2B business, particularly RateWatch, established ratings services, such as Standard & Poor’s, Morningstar and Lipper as well as rate database providers such as Informa and SNL Financial;
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with respect to our B2C business, online content providers focused on business, personal finance or investing content, such as The Wall Street Journal Digital Network, CNN Money, Forbes.com, Reuters.com, Bloomberg.com, Seeking Alpha, Business Insider and CNBC.com, as well as portals such as Yahoo! Finance, AOL Daily Finance and MSN Money; and
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with respect to our B2B and B2C businesses, publishers and distributors of traditional media with a focus on business, finance or investing, such as The Wall Street Journal and the Financial Times, personal finance talk radio programs and business television networks such as Bloomberg, CNBC and the Fox Business Channel as well as investment newsletter publishers, such as The Motley Fool, Stansberry & Associates Investment Research and InvestorPlace Media.
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Many of these competitors have significantly
greater scale and resources than we do. Additionally, advances in technology have reduced the cost of production and online distribution
of written, audio and video content, which has resulted in the proliferation of small, often self-published providers of free content.
Advertisers and their agencies often look
to independent measurement data such as that provided by comScore, Inc., a leading cross-platform measurement company that measures
audiences and consumer behavior, or comScore, in order to gain a sense of the performance of various sites, in relation to their
peer category, when determining where to allocate advertising dollars.
TheStreet.com
has consistently ranked as one of the
top websites by comScore for users having a portfolio value over $1 million, a household income over $75,000 and those checking
stock quotes.
Our ability to compete successfully depends
on many factors, including the format, quality, originality, timeliness, insightfulness and trustworthiness of our content and
that of our competitors, the reputations of our contributors and our brands, the success of our recommendations and research, our
ability to introduce products and services that keep pace with new technology and distribution methods, investing trends, the experience
we and our competitors offer our users and the effectiveness of our sales and marketing efforts.
Infrastructure, Operations and Technology
B2B
The Deal and BoardEx are based on proprietary
and commercial systems developed for consumption by institutional clients. Both our BoardEx and The Deal systems consist of a mixture
of proprietary and commercial software hosted within the Amazon Web Services environment. The Deal system distributes the
content via an email delivery system or web based platform. The BoardEx system distributes data to multiple client platforms
either hosted within Amazon Web Services or on the clients’ premises via commercial software before redistributing it via
a standard email delivery system, data feed processes, or to a web interface.
RateWatch maintains a constantly-updated
database of deposit, loan and fee rate data from over 100,000 financial institutions using proprietary software and commercial
software both internally and within the Amazon Web Services environment. This historical and real-time rate data is licensed to
financial institutions, government agencies, educational researchers and commercial organizations. Data is provided in formats
ranging from standard rate templates to large raw data files for use with third party analytical tools. The RateWatch product line
also includes banking-related product and fee comparisons, financial strength reporting, educational webinars, mystery shopping
and consumer and financial institution surveys.
B2C
Our main technological infrastructure consists
of proprietary and Drupal-based content management, subscription management and e-commerce systems provided
by third party vendors. We also utilize the services of third-party cloud computing providers, more specifically Amazon Web
Services, as well as content delivery networks such as Fastly, to help us efficiently distribute our content to our customers and
ensure resiliency and scalability of service. Our content-management systems are based on proprietary software, Drupal and Kaltura
Content Management Systems. They allow our stories, videos and data to be prepared for distribution online to a large audience.
These systems enable us to distribute and syndicate our content economically and efficiently to multiple destinations in a variety
of technical formats.
Intellectual Property
To protect our intellectual property, or
IP, we rely on a combination of trademarks, copyrights, patent protection, confidentiality agreements and various other contractual
arrangements with our employees, affiliates, customers, strategic partners, vendors and others. We have many trademark registrations
and copyrights in the United States and internationally, and have pending trademark and patent applications in the United States
and internationally. In addition, our Code of Conduct and Business Ethics, employee handbook, and other internal policies seek
to protect our IP against misappropriation, infringement, and unfair competition. We also utilize various tools to police the Internet
to monitor piracy and unauthorized use of our content. Finally, whether we are contracting out our IP or licensing third-party
content and/or technology, we incorporate contractual provisions to protect our IP and seek indemnification for any third-party
infringement claims.
However, we cannot provide any guarantee
that the foregoing provisions will be adequate to protect us from third-party claims or that these provisions will prevent the
theft of our IP, as we may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our IP rights. Failure
to adequately protect our intellectual property could harm our brand, devalue our proprietary content, and affect our ability to
compete effectively. Further, any infringement claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources on our part, which could materially adversely affect our business, results of operations and
financial condition.
Customers
For the year ended December 31, 2017, no
single customer accounted for 10% or more of our consolidated revenue. As of December 31, 2017, one single customer accounted for
more than 10% of our gross accounts receivable balance.
Employees
As of December 31, 2017, we had 597 full-time
employees with approximately 56% located in Chennai, India. We have never had a work stoppage and none of our employees are represented
under collective bargaining agreements. We consider our relations with our employees to be good.
Government Regulation
We are subject to government regulation
in connection with securities laws and regulations applicable to all publicly-owned companies, as well as laws and regulations
applicable to businesses generally, including privacy regulations and taxes levied adopted at the local, state, national and international
levels. In recent years, consumer protection regulations, particularly in connection with the Internet, has become more aggressive,
and we expect that new laws and regulations will continue to be enacted at the local, state, national and international levels.
Such new legislation, alone or combined with increasingly aggressive enforcement of existing laws, could have a material adverse
effect on our future operating performance and business due to increased compliance costs.
Available Information
We were founded in 1996 as a limited liability
company, and reorganized as a C corporation in 1998. We consummated our initial public offering in 1999 and we file annual, quarterly
and current reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. Our Corporate
Website is located at http://www.t.st. We make available free of charge, on or through our Website, our annual, quarterly and current
reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the
SEC. Information contained on our Website is not part of this Report or any other report filed with the SEC.
You may download the information that we
file with the SEC at
www.sec.gov
.
Item 1A. Risk Factors.
Investing in our Common Stock involves
a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this Report,
before deciding whether to invest in our Common Stock. Our business, prospects, financial condition or operating results could
be materially adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider
immaterial. The trading price of our Common Stock could decline as a result of any of these risks, and you could lose part or all
of your investment in our Common Stock. When deciding whether to invest in our Common Stock, you should also refer to the other
information in this Report, including our consolidated financial statements and related notes and the information contained in
Part II, Item 7 of this Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” Please also refer to the Special Note Regarding Forward-Looking Statements appearing in this Annual Report.
Our quarterly financial results may fluctuate and our
future revenue is difficult to forecast.
Our quarterly operating results may fluctuate
in the future as a result of a variety of factors, many of which are outside our control, including:
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the level of interest and investment in individual stocks versus index funds and exchange-traded funds (ETF) by both individual and institutional investors, which can impact our ability to sell premium subscription products and to sell advertising;
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the overall willingness of potential and existing customers to pay for content distributed over the Internet, where a large quantity of content is available for free;
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demand and pricing for online advertising on
TheStreet.com
, which is affected by advertising budget cycles of our customers, general economic conditions, demand for advertising on the Internet generally, the supply of advertising inventory in the market and actions by our competitors;
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the value to potential and existing customers of the investing ideas we offer in our subscription services and the performance of those ideas relative to appropriate benchmarks;
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new products or services introduced by our competitors;
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cost of content production, specifically video, traffic acquisition costs, and/or other costs;
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for our B2B businesses, the volatility in mergers and acquisitions, restructuring and financing activities, interest rates and bank fees;
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costs or lost revenue associated with system downtime affecting the Internet generally or our Websites in particular;
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general economic and financial market conditions; and
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our ability to attract and retain editorial and managerial talent.
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We reported net income in 2017 for the
first time in almost a decade, however, we had a net loss in each of 2016 and 2015, and have incurred net losses for most
years of our history. Despite reporting net income in 2017, there are no assurances we will be able to generate net income in future periods and we cannot assure you that we will reach profitability in the future
or at any specific time in the future or that, if and when we do become profitable, we will sustain profitability. If we are
ultimately unable to generate sufficient revenue and meet our financial targets and the expectations of public market
analysts and investors, the price of our Common Stock is likely to continue to decline.
Key content contributors, particularly James J. Cramer,
are important to our B2C premium subscription offerings.
Some of our products, particularly our editorial
subscription products, reflect the talents, efforts, personalities, investing skills and portfolio returns, and reputations of
their respective writers. As a result, the services of these key content contributors, including our co-founder and chief markets
commentator, James J. Cramer, form an essential element of our subscription revenue. In addition to his content contributions,
we benefit from Mr. Cramer’s popularity and visibility, which have provided public awareness of our services and introduced
our content to new audiences. For example, Mr. Cramer hosts CNBC’s finance television show,
Mad Money
. If, however,
Mr. Cramer no longer appeared on the show or the program was cancelled for any reason, it could negatively impact his public profile
and visibility, and in turn, our subscription products. Further, the continued value of Mr. Cramer’s contributions could
be materially adversely affected if Mr. Cramer were to otherwise lose popularity with the public. While we believe we greatly benefit
from Mr. Cramer’s contributions and his media exposure for other companies, we can give no assurance that our relationship
with Mr. Cramer will lead to higher revenues from our subscription products or improve our organic growth.
On November 8, 2017, the company and
Mr. Cramer entered into an amended and restated employment agreement with a new four year term, effective January 1, 2018,
through December 31, 2021. The employment agreement may be terminated by Mr. Cramer for specified events provided under
the employment agreement, and if Mr. Cramer does not complete the term of his employment agreement, our business could be
harmed by the loss of his services.
In addition to Mr. Cramer, we seek to compensate
and provide incentives for key content contributors through competitive salaries, stock ownership and bonus plans and/or royalty
arrangements, and we have entered into employment or contributor agreements with certain of them. If we are unable to retain key
content contributors, or, should we lose the services of one or more of our key content contributors to death, disability, loss
of reputation or other reason, or should their popularity diminish or their investing returns and investing ideas fail to meet
or exceed benchmarks and investor expectations, we may fail to attract new content contributors acceptable to readers of our collection
of Websites and editorial subscription products. Thus, the loss of services of one or more of our key content contributors could
have a material adverse effect on our business, results of operations and financial condition.
Our ability to successfully attract
and retain subscribers to our B2B and B2C subscription services may be affected by the perceived quality of our content and products,
and other factors.
Subscription revenue makes up a significant
portion of our overall revenue. For the year ended December 31, 2017, subscription revenue accounted for approximately 78% of our
total revenue.
B2B subscription revenue accounted for approximately
46% of our total revenue and 91% of our total B2B revenue. Our results of operations, particularly related to subscription revenue,
are affected by certain economic factors, including the performance of the securities markets and mergers and acquisitions activity.
While we believe investors and dealmakers are seeking more information related to the financial markets and mergers and acquisitions
from trusted sources, the existence of adverse or stagnant securities markets conditions and lack of investor confidence could
result in investors decreasing their interest in investor-related and deal-related publications, which could adversely affect the
subscription revenue we derive from our B2B businesses.
B2C subscription revenue accounted for approximately
32% of our total revenue and 64% of our total B2C revenue. Our ability to successfully attract and retain subscribers to our B2C
subscription products depends on the quality of the content, including the performance of any investment ideas published. To the
extent the returns on such portfolios fail to meet or exceed the expectations of our subscribers or the performance of relevant
benchmarks, our ability to attract new subscribers or retain existing subscribers to such services will be adversely affected.
Additionally, factors such as the expiration of temporary product promotions, changes in our renewal policies or practices for
subscribers, or changes in the degree of credit card failures could have a material impact on customer retention.
We may have difficulty maintaining or increasing our advertising
revenue, a significant portion of which is concentrated among our top advertisers and subject to industry and other factors.
Although our reliance on advertising has
decreased as an overall component of our revenues, it remains important to our growth. Our ability to maintain or increase our
advertising revenue may be adversely affected by a variety of factors. Such factors include general market conditions, seasonal
fluctuations in financial news consumption and overall online usage, our ability to maintain or increase our unique visitors, page
view inventory and user engagement, our ability to attract audiences possessing demographic characteristics most desired by our
advertisers, and our ability to retain existing advertisers and win new advertisers in a number of advertising categories from
other Websites, television, newspapers, magazines, newsletters or other new media.
As a general matter, the continued fragmentation
of digital media has intensified competition for advertising revenues. Advertising revenue could decline if the relationships we
have with high-traffic Websites are adversely affected. In addition, our advertising revenue may decline as a result of demand
for our products and services, pricing pressures on Internet advertising rates due to industry developments, changes in consumer
interest in the financial media and other factors in and outside of our control, including in particular as a result of any significant
or prolonged downturn in, or periods of extreme volatility of, the financial markets. Also, our advertising revenue would be adversely
affected if advertisers sought to use third-party networks to attempt to reach our audience while they visit third-party sites
instead of purchasing advertising from us to reach our audience on our own sites. Further, any advertising revenue that is performance-based
may be adversely impacted by the foregoing and other factors. If our advertising revenue significantly decreases, our business,
results of operations and financial condition could be materially adversely affected.
In addition to the headwinds facing digital
media advertising, technologies have been developed, and will likely continue to be developed, that can block the display of our
ads, particularly advertising displayed on personal computers. We generate a portion of our revenue from advertising, including
revenue resulting from the display of ads on personal computers. These technologies may have had an adverse effect on our financial
results and, if such technologies continue to proliferate, in particular with respect to mobile platforms, our ability to generate
advertising revenue may be harmed.
Advertising revenue, of which our top five
advertisers accounted for approximately 58%, generated 15% of our total revenue in 2017. Although we have advertisers from outside
the financial services industry, such as travel, automotive and technology, a large proportion of our top advertisers are concentrated
in financial services, particularly in the online brokerage business. Recent consolidation of financial institutions and other
factors could cause us to lose a number of our top advertisers, which could have a material adverse effect on our business, results
of operations and financial condition. As is typical in the advertising industry, generally, our advertising contracts have short
notice cancellation provisions.
Technology in the media industry continues to evolve rapidly.
Technology in the media industry continues
to evolve rapidly. Advances in technology have led to an increasing number of methods for delivery of content and have resulted
in a wide variety of consumer demands and expectations, which are also rapidly evolving. If we are unable to exploit new and existing
technologies to distinguish our products and services from those of our competitors or adapt to new distribution methods that provide
optimal user experiences, our business and financial results may be adversely affected.
The increasing number of digital media options
available on the Internet, through social networking tools and through mobile and other devices distributing content is expanding
consumer choice significantly. Faced with a multitude of media choices and a dramatic increase in accessible information, consumers
may place greater value on when, where, how and at what price they consume digital content.
In addition, the expenditures necessary
to implement these new technologies could be substantial and other companies employing such technologies before we are able to
do so could aggressively compete with our business.
Many individuals are increasingly using mobile devices
rather than personal computers to access news and other online services. If we are unable to effectively provide our content and
subscription products to users of these devices, our business could be adversely affected.
The number of people who access news and
other online services through mobile devices continues to increase at a rapid rate. As the use of mobile accelerates as the “go-to”
method of consuming digital content, our ability to monetize mobile content, for which CPMs (cost per thousand impressions) are
lower but on the rise, is increasingly important. We may not be able to generate revenue from advertising or content delivered
to mobile devices as effectively as we have for advertising or content delivered to personal computers. As our members increasingly
use mobile devices to access our digital products if we are unable to successfully implement monetization strategies for our content
on mobile devices, if these strategies are not as successful as our offerings for personal computers, or if we incur excessive
expenses in this effort, our financial performance and ability to grow revenue would be negatively affected. Additionally, as
new devices, such as wearables, and innovative platforms are continually being released, it is difficult to predict the problems
we may encounter in developing versions of our solutions for use on these alternative devices, and we may need to devote significant
resources to the creation, support, and maintenance of such new services and products.
We face significant competition. Many of our competitors
and potential competitors have larger customer bases, more established brand recognition and greater financial, marketing, technological
and personnel resources than we do, which could put us at a competitive disadvantage. Additionally, some of our competitors and
many potential competitors are better capitalized than we are and able to obtain capital more easily, which could put us at a competitive
disadvantage.
Many of our competitors have larger customer
bases, more established name recognition, a greater market share and greater financial, marketing, technological and personnel
resources than we do. Increased competition could result in price reductions, reduced margins or loss of market share, any of which
could materially adversely affect our business, results of operations and financial condition. Accordingly, we cannot guarantee
that we will be able to compete effectively with our current or future competitors or that this competition will not significantly
harm our business.
Our services face intense competition from
other providers of business, personal finance, investing and ratings content, including:
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with respect to our B2B business, particularly The Deal, providers of business intelligence on mergers and acquisitions, restructurings and financings primarily to investment banks, law firms, hedge funds, private equity firms and corporate institutions, such as Bloomberg, S&P Capital IQ, Dealogic, ThomsonOne and Acuris/Mergermarket Limited;
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with respect to our B2B business, particularly BoardEx, providers of relationship capital
management services and director, officer and dealmaker data, including Bloomberg, S&P Capital IQ, Dow Jones, The New
York Stock Exchange, LexisNexis, Relationship Science, Equilar and Thomson Reuters;
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with respect to our B2B business, particularly RateWatch, established ratings services, such as Standard & Poor’s, Morningstar and Lipper as well as rate database providers such as Informa and SNL Financial;
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with respect to our B2C business, online content providers focused on business, personal finance or investing content, such as The Wall Street Journal Digital Network, CNN Money, Forbes.com, Reuters.com, Bloomberg.com, Seeking Alpha, Business Insider and CNBC.com, as well as portals such as Yahoo! Finance, AOL Daily Finance and MSN Money; and
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with respect to our B2B and B2C businesses, publishers and distributors of traditional media with a focus on business, finance or investing, such as The Wall Street Journal and the Financial Times, personal finance talk radio programs and business television networks such as Bloomberg, CNBC and the Fox Business Channel as well as investment newsletter publishers, such as The Motley Fool, Stansberry & Associates Investment Research and InvestorPlace Media.
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Additionally, advances in technology have
reduced the cost of production and online distribution of print, audio and video content, which has resulted in the proliferation
of providers of free content. We compete with these other publications and services for customers, including subscribers, readers
and viewers of our video content, for advertising revenue, and for employees and contributors to our services. Our ability to compete
successfully depends on many factors, including the quality, originality, timeliness, insightfulness and trustworthiness of our
content and that of our competitors, the popularity and performance of our contributors, the success of our recommendations and
research, our ability to introduce products and services that keep pace with new investing trends, our ability to adopt and deploy
new technologies for running our business, the ease of use of services developed either by us or our competitors and the effectiveness
of our sales and marketing efforts. In addition, media technologies and platforms are rapidly evolving and the rate of consumption
of media on various platforms may shift rapidly. If we fail to offer our content through the platforms in which our audience desires
to consume it, or if we do not have offerings on such platforms that are as compelling as those of our competitors, our business,
results of operations and financial condition may be materially adversely affected. In addition, the economics of distributing
content through new platforms may be materially different from the economics of distributing content through our current platforms
and any such difference may have a material adverse effect on our business, results of operations and financial condition.
Our business depends on attracting and retaining capable
management and operating personnel.
Our ability to execute our
business plan and improve our chances for success in 2018 and beyond depend in large part upon the continued service of our
executive officers as well as other key employees. In addition, our ability to compete in the marketplace depends upon our
ability to recruit and retain other key employees, including executives to operate our business, technology personnel to run
our publishing, commerce, communications, video and other systems, direct marketers to sell subscriptions to our premium
services and salespersons to sell our advertising inventory and subscriptions.
Several, but not all, of our key employees
are bound by agreements containing non-competition provisions. There can be no assurances that these arrangements with key employees
will provide adequate protections to us or will not result in further management changes that would have material adverse impact
on us. In addition, we may incur increased costs to continue to compensate our key executives, as well as other employees, through
competitive salaries, stock ownership and bonus plans. Nevertheless, we can make no assurances that these programs will allow us
to retain our management or key employees or hire new employees. The loss of one or more of our key employees, or our inability
to attract experienced and qualified replacements, could materially adversely affect our business, results of operations and financial
condition.
If the Company
is unable to execute its turnaround, it may not be able to implement its growth strategy successfully.
In
2016, we brought in a new management team, and in 2017, we implemented a business strategy with a focus on increasing revenue and
decreasing expenses for our B2C and B2B businesses. The Company continues to evolve into a diverse financial news, data and information
company and the success of this depends on the effective execution of our turnaround strategy. The Company's Board of Directors
has been undertaking a strategic review of the Company's businesses in order to enhance shareholder value and, in doing so, it
may decide to prioritize investments in certain lines of our business as compared to others. There is no assurance that the Company's
growth strategy will be successfully implemented. If we are delayed or unsuccessful in executing our strategies, or if our strategies
do not yield the desired results, our business, financial condition and results of operations may suffer.
Acquisitions pose inherent financial and other risks and
challenges.
As a part of our strategic plan, we have
acquired businesses and may look to acquire businesses in the future. These acquisitions can involve a number of risks and challenges,
any of which could cause significant operating inefficiencies and adversely affect our growth and profitability. Such risks and
challenges include underperformance relative to our expectations and the price paid for the acquisition; unanticipated demands
on our management and operational resources; difficulty in integrating personnel, operations, and systems; retention of customers
of the combined businesses; assumption of contingent liabilities; and acquisition-related earnings charges. The benefits of an
acquisition or an investment may take considerable time to develop and certain acquisitions may not advance our business strategy
and may fall short of expected return on investment targets. If our acquisitions are not successful, we may record impairment
charges. Our ability to continue to make acquisitions will depend upon our success at identifying suitable targets, which requires
substantial judgment in assessing their values, strengths, weaknesses, liabilities, and potential profitability, as well as the
availability of capital.
In October 2014 we acquired BoardEx, a relationship
capital management company headquartered in the U.K. with locations in New York, New York and Chennai, India. This acquisition
has helped us expand internationally and is helping to accelerate our transition into B2B, becoming an indispensable data, news
and information source for institutional clients. However, we can provide no assurances that our long term strategic objectives
will be attained or that such acquisition will meet or exceed our expected return.
Our foreign operations subject us
to a number of operating, economic, political and regulatory risks that may have a material adverse impact on our financial condition
and results of operations.
Our acquisition of BoardEx in October 2014
significantly increased the importance of foreign markets to our future operations and growth and also exposes us to a number of
additional risks. Operations outside of the United States may be affected by changes in trade protection laws, policies and measures
and other regulatory requirements affecting trade and investment; unexpected regulatory, social, political, or economic changes
in a specific country or region; changes in intellectual property, privacy and data protection; import/export regulations in both
the United States and foreign countries and difficulties in staffing and managing foreign operations. Political changes, labor
strikes, acts of war or terrorism and natural disasters, some of which may be disruptive, can interfere with our data collection,
our customers and all of our activities in a particular location. We may also be affected by potentially adverse tax consequences
and difficulties associated with repatriating cash generated or held abroad. Since approximately half of BoardEx’s revenues
are generated outside of the United States, we are exposed to these risks.
We are subject to the European Union, or
EU, regulations relating to privacy, including the EU Directive on Data Protection, which imposes significant restrictions on the
collection and use of personal data that are more stringent and impose greater burdens on businesses than current privacy standards
in the United States. One such burden is a prohibition on the transfer of personal information from the EU to other countries whose
laws do not protect personal data to an adequate level of privacy or security. The United States is one such country and
this prohibition and the fact we are subject to the EU regulations may impact on our ability to carry out certain aspects of our
business in the United States. The EU has recently passed the General Data Protection Regulation, which will result in greater
compliance burdens for companies with users and operations in Europe over the next two years. The costs of compliance with,
and other burdens imposed by, these laws, regulations and policies that are applicable to us may limit the use and adoption of
our products and solutions and could have a material adverse impact on our results of operations.
Foreign operations are also subject to risks
of violations of laws prohibiting improper payments and bribery, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery
Act and similar regulations in foreign jurisdictions. The U.K. Bribery Act, for example, prohibits both domestic and international
bribery, as well as bribery across both private and public sectors. An organization that fails to prevent bribery committed by
anyone associated with the organization can be charged under the U.K. Bribery Act unless the organization can establish the defense
of having implemented adequate procedures to prevent bribery. Failure to comply with these laws could subject us to civil and criminal
penalties that could have a material adverse impact on our financial condition and results of operations.
Fluctuations in foreign exchange rates could adversely
affect our consolidated operating results
We operate in foreign jurisdictions, in
particular the United Kingdom, where we are exposed to market risks from changes in interest rates and foreign currency exchange
rates that may adversely affect our results of operations and financial condition. For example, the announcement of the exit of
the United Kingdom from the European Union (referred to as Brexit) caused significant volatility in global stock markets and currency
exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies. The majority of our
business transactions are denominated in U.S. dollars, however, for operations outside the United States, we translate sales and
other results denominated in foreign currency into U.S. dollars for our financial statements. In 2016, the strengthening of the
U.S. dollar relative to other currencies adversely affected our results of operations because foreign currencies translated into
fewer U.S. dollars. In addition, we will be exposed to the risk of changes in social, political and economic conditions in the
countries where we engage in business. Political and economic instability in these countries could adversely affect our business
activities and operations. Unexpected changes in local regulatory requirements, tariffs and other trade barriers and price or exchange
controls could limit operations and make the repatriation of profits difficult. In addition, the uncertainty of differing legal
environments could limit our ability to effectively enforce our rights in some markets. We do not engage in currency hedging or
have any positions in derivative instruments to hedge our currency risk.
If our goodwill and other intangibles become
impaired, we may be required to record further reductions which would negatively impact our financial results.
While
we did not record an impairment of goodwill in 2017, we did record a significant impairment of goodwill in 2016 as a result
of a number of factors including the decline in our stock price and the performance of past acquisitions. Goodwill and
intangible asset impairment analysis and measurement is a process that requires significant judgment. Under the provisions of
ASC 350, goodwill and indefinite lived intangible assets are required to be tested for impairment on an annual basis and
between annual tests whenever circumstances arise that indicate a possible impairment might exist. We perform our annual
impairment tests of goodwill and indefinite lived intangible assets as of October 1 each year. Impairment exists when the
carrying amount of goodwill and indefinite lived intangible assets exceed their implied fair value, resulting in an
impairment charge for this excess. Although we currently do not anticipate any goodwill impairment, we may have to record
impairments in the future which may materially adversely affect our results of operations and financial condition.
System failure or interruption may result in reduced traffic,
reduced revenue and harm to our reputation.
Our ability to provide timely, updated information
depends on the efficient and uninterrupted operation of our computer and communications hardware and software systems. Similarly,
our ability to track, measure and report the delivery of advertisements on our Websites depends on the efficient and uninterrupted
operation of third-party systems. Our operations depend in part on the protection of our data systems and those of our third-party
providers against damage from human error, natural disasters, fire, power loss, water damage, telecommunications failure, computer
viruses, terrorist acts, vandalism, sabotage, and other adverse events. Although we utilize the services of third-party cloud computing
providers, specifically Amazon Web Services with procedural security systems and have put in place certain other disaster recovery
measures, including offsite storage of backup data, these disaster recovery measures currently may not be comprehensive enough
and there is no guarantee that our Internet access and other data operations will be uninterrupted, error-free or secure. Any system
failure, including network, software or hardware failure, that causes an interruption in our service or a decrease in responsiveness
of our Websites could result in reduced traffic, reduced revenue and harm to our reputation, brand and relations with our advertisers
and strategic partners. Our insurance policies may not adequately compensate us for such losses. In such event, our business, results
of operations and financial condition could be materially adversely affected.
Our Ratings models, purchased from a third
party, were written in legacy technologies that do not have robust backup or recovery provisions. The ongoing production of valid
ratings data is based upon the successful continued migration of these legacy systems to more robust and current systems. The hardware
platforms upon which these applications run have been migrated to more modern equipment within our multi-redundant hosting facilities;
however, many of the core application code remains in production. Migration of such complex applications is time consuming, resource
intensive and can pose considerable risk.
Disruptions to our third-party technology providers and
management systems could harm our business and lead to loss of customers and advertisers.
We depend on third-party technology providers
and management systems to distribute our content and process transactions. For example, we use Fastly and Amazon Web Services to
help us efficiently distribute our content to customers. We also use a third party vendor to process credit cards for our subscriptions.
We exercise no control over our third-party vendors, which makes us vulnerable to any errors, interruptions, or delays in their
operations. Any disruption in the services provided by these vendors could have significant adverse impacts on our business reputation,
advertiser and customer relations and operating results. Upon expiration or termination of any of our agreements with third-party
vendors, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service
levels and cost, that are favorable to us, and a transition from one vendor to another vendor could subject us to operational delays
and inefficiencies until the transition is complete.
We may face liability for, or incur costs to defend, information
published in our services.
From time to time we are subject to claims
for defamation, libel, copyright or trademark infringement, fraud or negligence, or other theories of liability, in each case relating
to the articles, commentary, investment recommendations, ratings, or other information we provide through our services. We maintain
insurance to provide coverage with respect to such claims, but our insurance may not adequately protect us against these claims.
For example, from time to time, actions filed against us include claims for punitive damages, which are excluded from coverage
under our insurance policies.
Failure to establish and maintain successful strategic
relationships with other companies could decrease our subscriber and user base.
We rely in part on establishing and maintaining
successful strategic relationships with other companies to attract and retain a portion of our current subscriber and reader base
and to enhance public awareness of our brands. In particular, our relationships with Yahoo! Finance, MSN Money and CNN Money, which
index our headlines and/or host our content including our video offerings, have been important components of our effort to enhance
public awareness of our brands, which awareness we believe also is enhanced by the public appearances of James J. Cramer, in particular
on his “Mad Money” television program and on “Squawk on the Street”, both of which are telecast by CNBC.
If we do not successfully establish and maintain our strategic relationships on commercially reasonable terms or if these relationships
do not attract significant revenue, our business, results of operations and financial condition could be materially adversely affected.
Failure to maintain our reputation for trustworthiness
may harm our business.
Our brand is based upon the integrity of
our editorial content. We are proud of the trust and reputation for quality we have developed over the course of 20 years and we
seek to renew and deepen that trust continually. We require all of our content contributors, whether employees or outside contributors,
to adhere to strict standards of integrity, including standards that are designed to prevent any actual or potential conflict of
interest, and to comply with all applicable laws, including securities laws. The occurrence of events such as our misreporting
a news story, the non-disclosure of a stock ownership position by one or more of our content contributors, the manipulation of
a security by one or more of our content contributors, or any other breach of our compliance policies, could harm our reputation
for trustworthiness and reduce readership. In addition, in the event the reputation of any of our directors, officers, key contributors,
writers or editorial staff were harmed for any other reason, we could suffer as result of our association with the individual,
and also could suffer if the quantity or value of future services we received from the individual was diminished. These events
could materially adversely affect our business, results of operations and financial condition.
We may not adequately protect our own intellectual property
and may incur costs to defend against, or face liability for, intellectual property infringement claims of others.
To protect our intellectual property (“IP”),
we rely on a combination of trademarks, copyrights, patent protection, confidentiality agreements and various other contractual
arrangements with our employees, affiliates, customers, strategic partners and others. We own several trademark registrations and
copyrights, and have pending trademark and patent applications, in the United States. In addition, our Code of Conduct and Business
Ethics, employee handbook, and other internal policies seek to protect our IP against misappropriation, infringement, and unfair
competition. We also utilize various tools to police the Internet to monitor piracy and unauthorized use of our content. Finally,
whether we are contracting out our IP or licensing third-party content and/or technology, we incorporate contractual provisions
to protect our IP and seek indemnification for any third-party infringement claims.
However, we cannot provide any guarantee
that the foregoing provisions will be adequate to protect us from third-party claims or that these provisions will prevent the
theft of our IP, as we may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our IP rights. Failure
to adequately protect our intellectual property could harm our brand, devalue our proprietary content, and affect our ability to
compete effectively. Further, any infringement claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources on our part, which could materially adversely affect our business, results of operations and
financial condition.
We face government regulation and legal uncertainties.
We are subject to government regulation
in connection with securities laws and regulations applicable to all publicly-owned companies, as well as laws and regulations
applicable to businesses generally, including privacy regulations and taxes levied adopted at the local, state, national and international
levels. In recent years, consumer protection regulations, particularly in connection with the Internet, have become more aggressive,
and we expect that new laws and regulations will continue to be enacted at the local, state, national and international levels.
Such new legislation, alone or combined with increasingly aggressive enforcement of existing laws, could have a material adverse
effect on our future operating performance and business due to increased compliance costs.
Any failure of our internal security measures or breach
of our privacy protections could cause us to lose users and subject us to liability.
Users who subscribe to our paid subscription
services are required to furnish certain personal information (including name, mailing address, phone number, email address and
credit card information), which we use to administer our services. We also require users of some of our free services and features
to provide us with some personal information during the membership registration process. Additionally, we rely on security and
authentication technology licensed from third parties to perform real-time credit card authorization and verification, and at times
rely on third parties, including technology consulting firms, to help protect our infrastructure from security threats. We may
have to continue to expend capital and other resources on the hardware and software infrastructure that provides security for our
processing, storage and transmission of personal information.
In this regard, our users depend on us to
keep their personal information safe and private and not to disclose it to third parties or permit our security to be breached.
However, advances in computer capabilities, new discoveries in the field of cryptography or other events or developments, including
improper acts by third parties, may result in a compromise or breach of the security measures we use to protect the personal information
of our users. If a party were to compromise or breach our information security measures or those of our agents, such party could
misappropriate the personal information of our users, cause interruptions in our operations, expose us to significant liabilities
and reporting obligations, damage our reputation and discourage potential users from registering to use our Websites or other services,
any of which could have a material adverse effect on our business, results of operations and financial condition.
We utilize various third parties to assist
with various aspects of our business. Some of these partnerships require the exchange of user information. This is required because
some features of our Websites may be hosted by these third parties. While we take significant measures to guarantee the security
of our customer data and require such third parties to comply with our privacy and security policies as well as generally be contractually
bound to defend, indemnify and hold us harmless with respect to any claims related to any breach of relevant privacy laws related
to the service provider, we are still at risk if any of these third-party systems are breached or compromised and may in such event
suffer a material adverse effect to business, results of operations and financial condition.
Our charter documents and Delaware law could prevent a
takeover that stockholders consider favorable and could also reduce the market price of our common stock.
Our certificate of incorporation and our
bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more
difficult for stockholders to elect directors and take other corporate actions. These provisions include:
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not providing for cumulative voting in the election of directors;
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permitting an amendment of our certificate of incorporation only through a super-majority vote of the stockholders;
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prohibiting stockholder action by written consent;
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requiring that, to the fullest extent permitted by law and unless we consent to an alternate forum, certain proceedings against or involving us or our directors, officers, or employees be brought exclusively in the Court of Chancery in the State of Delaware;
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limiting the persons who may call special meetings of stockholders; and
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requiring advance notification for stockholder director nominations and other proposals.
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These and other provisions in our certificate
of incorporation, our bylaws, and under Delaware law could discourage potential takeover attempts, reduce the price that investors
might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be
without these provisions.
If we fail to meet the requirements for continued listing
on the NASDAQ Capital Market, our common stock would be subject to delisting. The liquidity of our common stock could be adversely
affected if our common stock is delisted and could cause our trading price to decline.
Our common stock
is listed on the Nasdaq Capital Market under the symbol “TST.”
We are required to
meet continued listing standards in order to maintain our listing on NASDAQ, such as the requirement that the minimum bid price
of a listed company’s stock be at or above $1.00. If we fail to satisfy NASDAQ’s continued listing requirements, our
common stock would likely be delisted from NASDAQ. If our common stock is delisted, market liquidity for our common stock could
be severely affected and our stockholders’ ability to sell their shares of our common stock could be limited. In addition,
our Common Stock could be subject to “penny stock” rules which impose additional disclosure requirements on broker-dealers
and could further negatively impact our market liquidity for our common stock and our stockholders’ ability to sell their
shares of our common stock. Accordingly, a delisting of our common stock from NASDAQ would negatively affect the value of our common
stock. Delisting could also have other negative results, including, but not limited to, the loss of institutional investor interest.
Future sales of our common stock in the public market
could reduce our stock price and any additional capital raised by us through the sale of equity or convertible securities may dilute your
ownership in us.
Because we may need to raise additional
capital in the future to expand our business, we may conduct additional equity offerings. If we or our stockholders sell substantial
amounts of our common stock (including shares issued upon the exercise of equity awards) in the public market, the market price
of our common stock could fall. For example, in November 2017, we issued 13,136,363 shares of our common stock in private transactions,
which were registered for resale with the Securities and Exchange Commission on February 5, 2018. These sales, and any additional
sales of shares of our common stock by us or the selling stockholders, could reduce our stock price and will dilute your
ownership in us.
We cannot predict the size of future issuances
of our common stock or securities convertible into common stock or the effect, if any, that future issuances and sales of shares
of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including
shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing
market prices of our common stock.
Concentrated ownership of our stock can influence stockholder decisions,
may discourage a change in control, and may have an adverse effect on share price of our stock.
Investors who purchase
our common stock may be subject to certain risks due to the concentrated ownership of our common stock. Our
directors, executive officers, and our five percent or greater stockholders as a group, own or control approximately 51% of
our common stock. This ownership concentration may have the effect of discouraging, delaying or preventing a change
in control, and may also have an adverse effect on the market price of our shares. Also as a result of their ownership,
our directors, executive officers, and our five percent or greater stockholders as a group, may have the ability to influence
the outcome of any matter submitted to our stockholders for approval, including the election of directors.
This concentration of ownership could
limit the price that some investors might be willing to pay for our common stock, and could discourage or delay a change of control,
which other stockholders may favor. The interests of our directors, executive officers and our five percent or greater stockholders
may conflict with the interests of other holders of our common stock, and they may take actions affecting us with which other stockholders
disagree.
If our ability to use our tax operating loss carryforwards
and other tax attributes is limited, we may not receive the benefit of those assets.
We have net operating loss carryforwards
of approximately $173 million as of December 31, 2017, available to offset future taxable income through 2035. These net operating
losses date back to December 1999 and will begin expiring in 2019. Our ability to fully utilize these net operating loss carryforwards
is dependent upon the generation of future taxable income before the expiration of the carryforward period attributable to these
net operating losses. Furthermore, as a result of prior ownership changes under section 382 of the Internal Revenue Code of 1986,
as amended, a portion of these net operating losses will be subject to certain limitations.
If we fail to maintain proper and effective internal controls,
our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.
As a public company, we are required to
maintain internal control over financial reporting and to report any material weaknesses in such internal controls. We have evaluated
and tested our internal controls in order to allow management to report on our internal controls, as required by Section 404 of
the Sarbanes-Oxley Act of 2002. If we are not able to meet the requirements of Section 404 in a timely manner or with adequate
compliance, we would be required to disclose material weaknesses if they develop or are uncovered and we may be subject to sanctions
or investigation by regulatory authorities, such as the Securities and Exchange Commission. Any such action could negatively impact
the perception of us in the financial market and our business.
In addition, our internal controls may not
prevent or detect all errors and fraud. A control system, no matter how well designed and operated, is based upon certain assumptions
and can provide only reasonable assurance that the objectives of the control system will be met. As a smaller reporting company,
we were not required to have our independent auditors report on our internal controls for the year ended December 31, 2017.
If securities or industry analysts do not publish research
or reports about our business, or if they publish negative reports about our business, our stock price and trading volume could
decline.
The trading market for our common stock
may be influenced by the research and reports that securities or industry analysts publish about us or our business. We do not
have control over these analysts. If one or more of the analysts who cover us downgrade our stock or change their opinion of our
shares 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, we could lose visibility in the financial
markets, which could cause our stock price or trading volume to decline.
We do not expect to declare any dividends in the foreseeable
future.
We do not anticipate declaring any cash
dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to 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.
Investors seeking cash dividends should not purchase our common stock.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our company headquarters is located at 14
Wall Street, 15th Floor, New York, NY 10005, with other U.S. offices in Fort Atkinson, Wisconsin, for our RateWatch business,
and San Francisco, California and Washington D.C., where The Deal has offices. Outside the U.S., we have offices in London, England
and Chennai, India where our BoardEx business operates. We lease each of these facilities and do not own any real property. We
believe these facilities are adequate for their intended use.
Item 3. Legal Proceedings.
The Company is party to legal proceedings
arising in the ordinary course of business or otherwise, none of which is deemed material.
Item 4. Mine Safety Disclosures.
Not applicable.
The accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements
The accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements
The accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements
The accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements
The accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(1) Organization, Nature of
Business and Summary of Operations and Significant Accounting Policies
Organization and Nature of Business
TheStreet, Inc. is
a
leading financial news and information provider. Our business-to-business (B2B) and business-to-consumer (B2C) content and products
provide individual and institutional investors, advisors and dealmakers with actionable information from the worlds of finance
and business.
Our B2B business products
have helped diversify our business from primarily serving retail investors to also providing an indispensable source of business
intelligence for both high net worth individuals and executives in the top firms in the world. The Deal delivers sophisticated
news and analysis on changes in corporate control including mergers and acquisitions, private equity, corporate activism and restructuring.
BoardEx is an institutional relationship capital management database and platform which holds in-depth profiles of over 1 million
of the world’s most important business leaders. Our third B2B business product, RateWatch, publishes bank rate market information
including competitive deposit, loan and fee rate data. Our B2B business derives revenue primarily from subscription products, events/conferences
and information services.
Our B2C business is led
by our namesake website, TheStreet.com, and includes free content and houses our premium subscription products, such as RealMoney,
RealMoney Pro and Actions Alerts PLUS, that target varying segments of the retail investing public. Our B2C business primarily
generates revenue from subscription products and advertising revenue.
Use of Estimates
The preparation of financial statements
in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could
differ from those estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in
the consolidated financial statements in the period they are deemed to be necessary. Significant estimates made in the accompanying
consolidated financial statements include, but are not limited to, the following:
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useful lives of intangible assets,
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useful lives of property and equipment,
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the carrying value of goodwill, intangible assets and marketable securities,
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allowances for doubtful accounts and deferred tax assets,
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accrued expense estimates,
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reserves for deferred tax assets,
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certain estimates and assumptions used in the calculation of the fair value of equity compensation issued to employees,
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restructuring charges, and
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the calculation of a contingent earn-out payment from the acquisition of Management Diagnostics Limited.
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Consolidation
The consolidated financial statements have
been prepared in accordance with GAAP and include the accounts of TheStreet, Inc. and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition
We report revenue in two categories: business
to business and business to consumer. Business to business revenue is primarily comprised of subscriptions that provide access
to director and officer profiles, relationship capital management services, bank rate data and transactional information pertaining
to the mergers and acquisitions environment as well as events/conferences, information services and other miscellaneous revenue.
Business to consumer revenue is primarily comprised of subscriptions that provide access to securities investment information and
stock market commentary, advertising and sponsorships and other miscellaneous revenue.
Subscriptions are charged to customers’
credit cards or are directly billed to corporate subscribers, and are generally billed in advance on a monthly, quarterly or annual
basis. The Company calculates net subscription revenue by deducting from gross revenue an estimate of potential refunds from cancelled
subscriptions as well as chargebacks of disputed credit card charges. Net subscription revenue is recognized ratably over the subscription
periods. Deferred revenue relates to payments for subscription fees for which revenue has not been recognized because services
have not yet been provided.
Subscription revenue is subject to estimation
and variability due to the fact that, in the normal course of business, subscribers may for various reasons contact us or their
credit card companies to request a refund or other adjustment for a previously purchased subscription. With respect to many of
our business to consumer products, we offer the ability to receive a refund during the first 30 days but none thereafter. Accordingly,
we maintain a provision for estimated future revenue reductions resulting from expected refunds and chargebacks related to subscriptions
for which revenue was recognized in a prior period. The calculation of this provision is based upon historical trends and is reevaluated
each quarter. The provision was not material for the years ended December 31, 2017 and 2016.
Advertising revenue is comprised of fees
charged for the placement of advertising and sponsorships, primarily within
TheStreet.com
, for which revenue is recognized
as the advertising or sponsorship is displayed, provided that collection of the resulting receivable is reasonably assured.
Cash, Cash Equivalents and Restricted Cash
The Company considers all short-term investment-grade
securities with original maturities of three months or less from the date of purchase to be cash equivalents. As of December 31,
2017, the Company has a total of $500 thousand of cash that serves as collateral for an outstanding letter of credit, which cash
is classified as restricted. The letter of credit serves as a security deposit for the Company’s office space in New York
City.
Property and Equipment
Property and equipment are stated at cost,
net of accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over the estimated
useful lives of the assets. The estimated useful life of computer equipment, computer software and telephone equipment is three
years and of furniture and fixtures is five years. Leasehold improvements are amortized on a straight-line basis over the shorter
of the respective lease term or the estimated useful life of the asset. If the useful lives of the assets differ materially from
the estimates contained herein, additional costs could be incurred, which could have an adverse impact on the Company’s expenses.
Capitalized Software and Website Development Costs
The Company expenses all costs incurred
in the preliminary project stage for software developed for internal use and capitalizes all external direct costs of materials
and services consumed in developing or obtaining internal-use computer software in accordance with Accounting Standards Codification
(“ASC”) 350,
Intangibles – Goodwill and Other
(“ASC 350”)
.
In addition, for employees
who are directly associated with and who devote time to internal-use computer software projects, to the extent of the time spent
directly on the project, the Company capitalizes payroll and payroll-related costs of such employees incurred once the development
has reached the applications development stage. For the years ended December 31, 2017 and 2016, the Company capitalized software
development costs totaling approximately $1.5 million and $613 thousand, respectively. All costs incurred for upgrades, maintenance
and enhancements that do not result in additional functionality are expensed.
The Company also accounts for its Website
development costs under ASC 350
,
which provides guidance on the accounting for the costs of development of company Websites,
dividing the Website development costs into five stages: (1) the planning stage, during which the business and/or project plan
is formulated and functionalities, necessary hardware and technology are determined, (2) the Website application and infrastructure
development stage, which involves acquiring or developing hardware and software to operate the Website, (3) the graphics development
stage, during which the initial graphics and layout of each page are designed and coded, (4) the content development stage, during
which the information to be presented on the Website, which may be either textual or graphical in nature, is developed, and (5)
the operating stage, during which training, administration, maintenance and other costs to operate the existing Website are incurred.
The costs incurred in the Website application and infrastructure stage, the graphics development stage and the content development
stage are capitalized; all other costs are expensed as incurred. Amortization of capitalized costs will not commence until the
project is completed and placed into service. For the years ended December 31, 2017 and 2016, the Company capitalized Website development
costs totaling approximately $731 thousand and $1.2 million, respectively.
Capitalized software and Website development
costs are amortized using the straight-line method over the estimated useful life of the software or Website, which varies based
upon the project. For the years ended December 31, 2017 and 2016, amortization expense was approximately $2.3 million and $2.0
million, respectively.
Goodwill and Indefinite Lived Intangible Assets
Goodwill represents the excess of purchase
price over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Under the
provisions of ASC 350, goodwill and indefinite lived intangible assets are required to be tested for impairment on an annual basis
and between annual tests whenever circumstances arise that indicate a possible impairment might exist. The Company performs
its annual impairment tests as of October 1 each year. Impairment exists when the carrying amount of goodwill or indefinite lived
intangible assets of a reporting unit exceed their implied fair value, resulting in an impairment charge for this excess.
During the year ended December 31, 2015,
the business was managed as a single segment and single reporting unit where subscription and advertising products were sold throughout
the Company, financial results were reviewed on a consolidated basis and separate and discrete financial information was not available.
During 2016, the Company reassessed the identification of operating segments due to changes in key personnel, including the Chief
Operating Decision Maker, and during the fourth quarter of 2016 began to provide separate and discrete segment financial information.
The Company operates in three distinct operating segments: The Deal / BoardEx, RateWatch and Business to Consumer. These operating
segments also represent the Company’s reporting units.
The Company tests goodwill using
a quantitative analysis consisting of a two-step approach. The first step in the quantitative analysis consists of a
comparison of the carrying value of each of our reporting units, including goodwill, to the estimated fair value of each of
our reporting units using both a market approach and an income approach. The market approach was performed for the valuation
of the Company’s Common Stock based upon actual prices of the Company’s common stock. As the Company’s
Preferred Shares were retired in November 2017, the retirement value was used. The Company also performed an income approach
to confirm the reasonableness of these results using the discounted cash flow methodology. If step one resulted
in the carrying value of the reporting unit exceeding the fair value of such reporting unit, we would then proceed to step
two which would require us to calculate the amount of impairment loss, if any, that we would record for such
reporting unit. The calculation of the impairment loss in step two would be equivalent to the reporting
unit’s carrying value of goodwill less the implied fair value of such goodwill.
As discussed below, we also used a discounted cash flow methodology,
or DCF. Our use of a DCF methodology includes estimates of future revenue based upon budget projections and growth rates which
take into account estimated inflation rates. We also develop estimates for future levels of gross and operating profits
and projected capital expenditures. Our methodology also includes the use of estimated discount rates based upon industry
and competitor analysis as well as other factors. The estimates that we use in our DCF methodology involve many assumptions by
management that are based upon future growth projections.
Based upon the annual impairment test performed
as of October 1, 2017, the Company concluded that The Deal / BoardEx, RateWatch and Business to Consumer reporting units’
estimated fair values exceeded carrying value by approximately 93%, 34% and 35%, respectively.
In conducting its 2017 annual indefinite
lived intangible asset impairment test with the assistance of an independent appraisal firm, the Company determined its fair value
using the relief-from-royalty method. The application of the relief-from-royalty method requires the estimation of future income
and the conversion of that income into an estimate of value. Future income related to a trade name is measured in terms of the
savings that a company realizes by owning the indefinite lived trade name, thereby avoiding royalty payments to use the trade name
in the absence of ownership. To calculate the royalty savings, the Company estimates (i) future revenue attributable to the RateWatch
trade name; (ii) a royalty rate that a hypothetical licensee would be willing to pay for its use; and (iii) a discount rate to
reduce future after-tax royalty savings to present value. The Company selected an appropriate royalty rate by searching various
transaction databases for publicly disclosed transactions to license similar assets between service businesses, with a focus on
companies that operate in industries similar to RateWatch. Based upon the analysis, the Company concluded that the book value of
the indefinite lived trade name was not impaired as of the October 1, 2017 valuation date by approximately 32%.
Additionally, the Company evaluates the
remaining useful lives of intangible assets each year to determine whether events or circumstances continue to support their useful
life. There have been no changes in useful lives of intangible assets for each period presented.
Long-Lived Assets
The Company evaluates long-lived assets,
including amortizable identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets is measured by comparing
the carrying amount of an asset to forecasted undiscounted net cash flows expected to be generated by the asset. If
the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
Management does not believe that there was
any impairment of long-lived assets as of December 31, 2017 and 2016.
Income Taxes
The Company accounts for its
income taxes in accordance with ASC 740-10,
Income Taxes
(“ASC 740-10”). Under ASC 740-10, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax bases. ASC 740-10 also requires that deferred tax
assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not
be realized based on all available positive and negative evidence. The Company released its U.K. valuation allowance as this
entity has cumulative income over the last three years and Management believes it is more likely than not that the deferred
tax asset will be utilized. As of December 31, 2017 and 2016, the Company maintains a full valuation allowance against its
U.S. deferred tax assets due to its history of pre-tax losses and uncertainty about the timing of and ability to generate
taxable income in the future and its assessment that the realization of the deferred tax assets did not meet the “more
likely than not” criterion under ASC 740-10. The Company expects to continue to maintain a full valuation allowance
until, or unless, it can sustain a level of profitability that demonstrates its ability to utilize these assets.
ASC 740-10 also prescribes a recognition
threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected
to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained
upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and
the benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.”
A liability is recognized for an unrecognized tax benefit because it represents an enterprise’s potential future obligation
to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740-10. As of
December 31, 2017 and 2016, no liability for unrecognized tax benefits was required to be recorded. Interest costs related to unrecognized
tax benefits would be classified within “Net interest expense” in the consolidated statements of operations. Penalties
would be recognized as a component of “General and administrative” expense. There is no interest expense or penalty
related to tax uncertainties reported in the consolidated statements of operations for the years ended December 31, 2017 or 2016.
As a result of ASU 2016-09, the Company recorded $15.7 million of net operating losses previously off balance
sheet related to prior windfall tax benefits. The recording of this deferred tax asset has no effect on net income as a full valuation
allowance was recorded to offset this benefit. This was all recorded to the balance sheet.
The Company files income tax returns in
the United States (federal), and in various state and local jurisdictions, as well as in the United Kingdom and India. In
most instances, the Company is no longer subject to federal, state and local income tax examinations by tax authorities for years
prior to 2014, and is not currently under examination by any federal, state or local jurisdiction. It is not anticipated
that unrecognized tax benefits will significantly change in the next twelve months.
Fair Value of Financial Instruments
The carrying amounts of accounts and other
receivables, accounts payable, accrued expenses and deferred revenue approximate fair value due to the short-term maturities of
these instruments.
Business Concentrations and Credit Risk
Financial instruments that subject the Company
to concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains all of
its cash, cash equivalents and restricted cash in federally insured financial institutions, and performs periodic evaluations of
the relative credit standing of these institutions. As of December 31, 2017, the Company’s cash, cash equivalents and restricted
cash primarily consisted of checking accounts and money market funds.
For the years ended December 31, 2017 and
2016, no single customer accounted for 10% or more of consolidated revenue. As of December 31, 2017, one customer accounted for
more than 10% of consolidated accounts receivable. As of December 31, 2016, no single customer accounted for more than 10% of consolidated
accounts receivable.
The Company’s customers are primarily
concentrated in the United States and Europe, and it carries accounts receivable balances. The Company performs ongoing credit
evaluations, generally does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of customers, historical trends and other information. To date, actual losses have been within management’s
expectations.
Other Comprehensive Loss
Comprehensive loss is a measure which includes
both net loss and other comprehensive loss. Other comprehensive loss results from items deferred from recognition into
the statement of operations. Accumulated other comprehensive loss is separately presented on the consolidated statement
of comprehensive loss and on both the Company’s consolidated balance sheet and as part of the consolidated statement of stockholders’
equity. Other comprehensive loss consists of unrealized gains and losses on marketable securities classified as available for sale
as well as foreign currency translation adjustments from subsidiaries where the local currency is the functional currency.
Foreign Currency
The functional currency of the Company’s
international subsidiaries is the local currency. The financial statements of these subsidiaries are translated into U.S. dollars
using period-end rates of exchange for assets and liabilities, historical rates of exchange for equity, and monthly average rates
of exchange for the period for revenue and expense. Translation gains (losses) are recorded in accumulated other comprehensive
loss as a component of stockholders’ equity. Gains and losses resulting from currency transactions are included in earnings.
Net Income (Loss) Per Share of Common Stock
Basic net income (loss) per share
is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per
share is computed using the weighted average number of common shares and potential common shares outstanding during the
period, so long as the inclusion of potential common shares does not result in a lower net income (loss) per share. Potential
common shares consist of restricted stock units (using the treasury stock method) and the incremental common shares issuable
upon the exercise of stock options (using the treasury stock method). For 2017, approximately 218 thousand of unvested
restricted stock units and vested and unvested options to purchase Common Stock were included in the calculation of the
earnings attributable to the common stockholders. For the year ended December 31, 2016, approximately 708 thousand
of unvested restricted stock units and vested and unvested options to purchase Common Stock, were excluded from the
calculation, as their effect would result in a lower net loss per share.
Advertising Costs
Advertising costs are expensed as incurred.
For the years ended December 31, 2017 and 2016, advertising expense totaled approximately $1.8 million and $2.5 million, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation
in accordance with ASC 718-10,
Share Based Payment Transactions
(“ASC 718-10”). This requires that the cost
resulting from all share-based payment transactions be recognized in the financial statements based upon estimated fair values.
Stock-based compensation expense recognized
for the years ended December 31, 2017 and 2016 was approximately $1.6 million and $1.6 million (inclusive of $105 thousand of noncash
compensation expense charged to restructuring and other charges), respectively. As of December 31, 2017, there was approximately
$780 thousand of unrecognized stock-based compensation expense remaining to be recognized over a weighted-average period of 1.2
years.
Stock-based compensation expense recognized
in the Company’s consolidated statements of operations for the years ended December 31, 2017 and 2016 includes compensation
expense for all share-based payment awards based upon the estimated grant date fair value. The Company recognizes compensation
expense for share-based payment awards on a straight-line basis over the requisite service period of the award. As stock-based
compensation expense recognized in the years ended December 31, 2017 and 2016 is based upon awards ultimately expected to vest,
it has been reduced for estimated forfeitures. The Company estimates forfeitures at the time of grant which are revised, if necessary,
in subsequent periods if actual forfeitures differ from those estimates.
The Company estimates the value of stock
option awards on the date of grant using the Black-Scholes option-pricing model. This determination is affected by the Company’s
stock price as well as assumptions regarding expected volatility, risk-free interest rate, and expected dividends. Because option-pricing
models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options.
The assumptions presented in the table below represent the weighted-average value of the applicable assumption used to value stock
option awards at their grant date. In determining the volatility assumption, the Company used a historical analysis of the volatility
of the Company’s share price for the preceding period equal to the expected option lives. The expected option lives, which
represent the period of time that options granted are expected to be outstanding, were estimated based upon the “simplified”
method for “plain-vanilla” options. The risk-free interest rate assumption was based upon observed interest rates appropriate
for the term of the Company’s stock option awards. The dividend yield assumption was based on the history and expectation
of future dividend payouts. The value of the portion of the award that is ultimately expected to vest is recognized as expense
over the requisite service periods. The Company’s estimate of pre-vesting forfeitures is primarily based on historical experience
and is adjusted to reflect actual forfeitures as the options vest. The weighted-average grant date fair value per share of stock
option awards granted during the years ended December 31, 2017 and 2016 was $0.28 and $0.37, respectively, using the Black-Scholes
model with the following weighted-average assumptions:
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For the Years Ended December 31,
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2017
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2016
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Expected option lives
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4.2 years
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4.5 years
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Expected volatility
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37.58
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%
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34.87
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%
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Risk-free interest rate
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1.69
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%
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1.12
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%
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Expected dividends
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0.00
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%
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0.00
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%
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The value of each restricted stock unit
awarded is equal to the closing price per share of the Company’s Common Stock on the date of grant. The value of the portion
of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. The weighted-average
grant date fair value per share of restricted stock units granted during the years ended December 31, 2017 and 2016 was $0.90 and
$1.30, respectively.
2007 Performance Incentive Plan
In 2007, the Company adopted the 2007 Plan,
whereby executive officers, directors, employees and consultants may be eligible to receive cash or equity-based performance awards
based on set performance criteria.
In 2017 and 2016, the Compensation Committee
granted short-term cash performance awards, payable to certain officers, upon the Company’s achievement of specified performance
goals for such year as defined by the Compensation Committee. The target short-term cash bonus opportunities for officers reflected
a percentage of the officer’s base salary. Potential payout was zero if a threshold percentage of the target was not achieved
and a sliding scale thereafter, subject to a cap, starting at a figure less than 100% if the threshold was achieved but the target
was not met and ending at a figure above 100% if the target was exceeded. Short-term incentives of approximately $799 thousand
and $486 thousand were deemed earned with respect to the years ended December 31, 2017 and 2016, respectively.
Preferred Stock
The Company applied the guidance in ASC 480,
Distinguishing Liabilities from Equity
(“ASC 480”) when determining the classification and measurement of its
convertible preferred shares. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments
and are measured at fair value. The Company classifies conditionally redeemable preferred shares (if any), which includes preferred
shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence
of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies
its preferred shares as a component of stockholders’ equity.
The Company’s Series B Convertible
Preferred Stock (the “Preferred Stock”) did not feature any redemption rights within the holders’ control or
conditional redemption features not solely within the Company’s control as of December 31, 2016. Accordingly, the Preferred
Stock was presented as a component of stockholders’ equity. On November 10, 2017, the Company exchanged all of its Preferred
Stock for 6 million shares of the Company’s Common Stock and $20 million of cash. (Note 9)
New Accounting Pronouncements
Accounting Pronouncements Adopted
In January 2017, the FASB issued ASU No.
2017-04,
Intangibles — Goodwill and Other Simplifying the Test for goodwill Impairment
(“ASU 2017-04”).
ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing
the implied fair value of goodwill under step 2, an entity had to perform procedures to determine the fair value at the impairment
testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be
required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under ASU
2017-04, an entity would perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying
amount. An entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s
fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This
guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 31, 2019, with early
adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We adopted ASU 2017-04 upon
the preparation of our annual goodwill impairment test in the fourth quarter of 2017. The adoption of this standard did not have
a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Classification
of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). ASU 2016-15 is intended to add or clarify guidance
on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice
related to such classifications. The guidance in ASU 2016-15 is required for annual reporting periods beginning after December
31, 2017, with early adoption permitted. The Company adopted ASU 2016-15 as of December 31, 2017. The adoption of this standard
did not have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No.
2016-18,
Restricted Cash
(ASU 2016-18). ASU 2016-18 addresses the diversity in practice as to how changes in restricted
cash are presented and classified in the statement of cash flows. The guidance requires that a statement of cash flows explain
the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement
of cash flows. The guidance is effective prospectively for fiscal years beginning after December 15, 2017 and interim periods within
those fiscal years. The Company currently presents changes in its restricted cash separately on its condensed consolidated statements
of cash flows. The Company adopted ASU 2016-18 as of December 31, 2017. The adoption of this standard did not have a material impact
on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation – Stock Compensation
(“ASU 2017-09”). ASU 2017-09 provides an accounting framework applicable
to modifications of share-based payments, and defines a modification as “a change in any of the terms or conditions of a
share-based payment award.” The guidance in ASU 2017-09 is required for annual or interim reporting periods beginning after
December 31, 2017, with early adoption permitted. The Company adopted ASU 2017-09 as of December 31, 2017. The adoption of this
standard did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Standards
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue
from Contracts with Customers”
(“ASU 2014-09”), which supersedes nearly all existing revenue recognition
guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred
to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.
ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required
within the revenue recognition process than are required under existing GAAP. In addition, this guidance requires new or expanded
disclosures related to the judgments made by companies when following this framework and additional quantitative disclosures regarding
contract balances and remaining performance obligations. ASU No. 2014-09 may be applied using either a full retrospective approach,
under which all years included in the financial statements will be presented under the revised guidance, or a modified retrospective
approach, under which financial statements will be prepared under the revised guidance for the year of adoption, but not for prior
years. Under the latter method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings
at the effective date for contracts that still require performance by the entity.
ASU No. 2014-09 is
effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual
reporting periods. The Company developed an implementation plan to adopt this new guidance, which included an assessment of
the impact of the new guidance on our financial position and results of operations. The Company has substantially completed
its assessment and has determined that this standard will have no impact on its financial position or results of
operations, except enhanced disclosure regarding revenue recognition, including disclosures of revenue streams, performance
obligations, variable consideration and the related judgments and estimates necessary to apply the new standard. On January
1, 2018, the Company adopted the new accounting standard ASC 606,
Revenue from Contracts with Customers
and for all
open contracts and related amendments as of January 1, 2018 using the modified retrospective method. Results for reporting
periods beginning after January 1, 2018 will be presented under ASC 606, while the comparative information will not be
restated and will continue to be reported under the accounting standards in effect for those periods.
In February 2016, the FASB issued ASU No.
2016-02,
Leases
(“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (ROU) model that requires a lessee to
record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified
as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new
standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients
available. The Company is in the process of evaluating the effect the standard will have on its financial statements, however the
Company does not lease any office equipment and our office space leases are the only leases with a term longer than 12 months.
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
” (“ASU
2016-13”). ASU 2016-13 requires the measurement and recognition of expected credit losses for financial assets held at amortized
cost. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption
permitted for interim and annual reporting periods beginning after December 15, 2018. ASU 2016-13 is required to be adopted
using the modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the first
reporting period in which the guidance is effective. Based upon the level and makeup of the Company’s financial receivables,
past loss activity and current known activity regarding our outstanding receivables, the Company does not expect that the adoption
of this new standard will have a material impact on its consolidated financial statements.
(2) Net Income (Loss) Per Share
Basic net income (loss) per share is
computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss)
per share is computed using the weighted average number of common shares and potential common shares outstanding during
the period, so long as the inclusion of potential common shares does not result in a lower net income (loss) per share.
Potential common shares consist of restricted stock units (using the treasury stock method) and the incremental common shares
issuable upon the exercise of stock options (using the treasury stock method). For the year ended December 31, 2016,
approximately 708 thousand unvested restricted stock units and vested and unvested stock options, respectively, were
excluded from the calculation, as their effect would result in a lower net income (loss) per share.
The following table reconciles the numerator
and denominator for the calculation.
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For
the Years Ended December 31,
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2017
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2016
|
|
Basic and diluted net income (loss) per share
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
2,626,837
|
|
|
$
|
(17,514,715
|
)
|
Capital
contribution attributable to preferred shareholders
|
|
|
22,367,520
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted earnings per share - Net income (loss) attributable to common stockholders
|
|
$
|
24,994,357
|
|
|
$
|
(17,514,715
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
|
37,624,103
|
|
|
|
35,236,113
|
|
Weighted
average diluted shares outstanding
|
|
|
37,842,479
|
|
|
|
35,236,113
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net
loss per share:
|
|
|
|
|
|
|
|
|
Basic
net income (loss) attributable to common stockholders
|
|
$
|
0.66
|
|
|
$
|
(0.50
|
)
|
Diluted
net income (loss) attributable to common stockholders
|
|
$
|
0.66
|
|
|
$
|
(0.50
|
)
|
(3) Cash and Cash Equivalents, Marketable Securities and
Restricted Cash
The Company’s cash and cash equivalents
and restricted cash primarily consist of checking accounts and money market funds. As of December 31, 2017 and 2016, marketable
securities consist of two municipal auction rate securities (“ARS”) issued by the District of Columbia with a cost
basis of approximately $1.9 million and a fair value of approximately $1.7 million and $1.6 million, respectively. With the exception
of the ARS, Company policy limits the maximum maturity for any investment to three years. The ARS mature in the year 2038. The
Company accounts for its marketable securities in accordance with the provisions of ASC 320-10. The Company classifies these securities
as available for sale and the securities are reported at fair value. Unrealized gains and losses are recorded as a component of
accumulated other comprehensive loss and excluded from net income or loss as they are deemed temporary. Additionally, as of both
December 31, 2017 and 2016, the Company has a total of approximately $500 thousand of cash that serves as collateral for outstanding
letters of credit, and which cash is therefore restricted. The letters of credit serve as security deposits for the Company’s
office space in New York City.
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash and cash equivalents
|
|
$
|
11,684,817
|
|
|
$
|
21,371,122
|
|
Marketable securities
|
|
|
1,680,000
|
|
|
|
1,550,000
|
|
Restricted cash
|
|
|
500,000
|
|
|
|
500,000
|
|
Total cash and cash equivalents, marketable securities and restricted cash
|
|
$
|
13,864,817
|
|
|
$
|
23,421,122
|
|
(4) Fair Value Measurements
The Company measures the fair value of its
financial instruments in accordance with ASC 820-10, which refines the definition of fair value, provides a framework for measuring
fair value and expands disclosures about fair value measurements. ASC 820-10 defines fair value as the price that would be received
to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting
date. The statement establishes consistency and comparability by providing a fair value hierarchy that prioritizes the inputs to
valuation techniques into three broad levels, which are described below:
●
|
Level 1: Inputs are quoted market prices in active markets for identical assets or liabilities (these are observable market inputs).
|
●
|
Level 2: Inputs other than quoted market prices included within Level 1 that are observable for the asset or liability (includes quoted market prices for similar assets or identical or similar assets in markets in which there are few transactions, prices that are not current or vary substantially).
|
●
|
Level 3: Inputs are unobservable inputs that reflect the entity’s own assumptions in pricing the asset or liability (used when little or no market data is available).
|
Financial assets and liabilities included in the Company’s
financial statements and measured at fair value are classified based on the valuation technique level in the table below:
|
|
As of December 31, 2017
|
|
Description:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents (1)
|
|
$
|
11,684,817
|
|
|
$
|
11,684,817
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash (1)
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
Marketable securities (2)
|
|
|
1,680,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,680,000
|
|
Contingent earn-out (3)
|
|
|
951,867
|
|
|
|
—
|
|
|
|
—
|
|
|
|
951,867
|
|
Total at fair value
|
|
$
|
14,816,684
|
|
|
$
|
12,184,817
|
|
|
$
|
—
|
|
|
$
|
2,631,867
|
|
|
|
As of December 31, 2016
|
|
Description:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents (1)
|
|
$
|
21,371,122
|
|
|
$
|
21,371,122
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash (1)
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
Marketable securities (2)
|
|
|
1,550,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,550,000
|
|
Contingent earn-out (3)
|
|
|
907,657
|
|
|
|
—
|
|
|
|
—
|
|
|
|
907,657
|
|
Total at fair value
|
|
$
|
24,328,779
|
|
|
$
|
21,871,122
|
|
|
$
|
—
|
|
|
$
|
2,457,657
|
|
(1) Cash
and cash equivalents and restricted cash, totaling approximately $12.2 million and $21.9 million as of December 31, 2017 and 2016,
respectively, consist primarily of checking accounts and money market funds for which we determine fair value through quoted market
prices.
(2) Marketable
securities include two municipal ARS issued by the District of Columbia having a fair value totaling approximately $1.7 million
and $1.6 million as of December 31, 2017 and 2016, respectively. Historically, the fair value of ARS investments approximated par
value due to the frequent resets through the auction process. Due to events in credit markets, the auction events, which historically
have provided liquidity for these securities, have been unsuccessful. The result of a failed auction is that these ARS holdings
will continue to pay interest in accordance with their terms at each respective auction date; however, liquidity of the securities
will be limited until there is a successful auction, the issuer redeems the securities, the securities mature or until such time
as other markets for these ARS holdings develop. For each of our ARS, we evaluate the risks related to the structure, collateral
and liquidity of the investment, and forecast the probability of issuer default, auction failure and a successful auction at par,
or a redemption at par, for each future auction period. Temporary impairment charges are recorded in accumulated other comprehensive
loss, whereas other-than-temporary impairment charges are recorded in our consolidated statement of operations. As of December
31, 2017, the Company determined there was a decline in the fair value of its ARS investments of $170 thousand from its cost basis,
which was deemed temporary and was included within accumulated other comprehensive loss. The Company used a discounted cash flow
and market approach model to determine the estimated fair value of its investment in ARS. The assumptions used in preparing the
discounted cash flow model include estimates for interest rate, timing and amount of cash flows and expected holding period of
ARS.
(3) Contingent
earn-out represents additional purchase consideration payable to the former shareholders of Management Diagnostics Limited based
upon the achievement of specific 2017 audited revenue benchmarks.
The following table provides a reconciliation
of the beginning and ending balance for the Company’s assets and liabilities measured at fair value using significant unobservable
inputs (Level 3):
|
|
Marketable
Securities
|
|
Balance December 31, 2015
|
|
$
|
1,590,000
|
|
Change in fair value of investment
|
|
|
(40,000
|
)
|
Balance December 31, 2016
|
|
|
1,550,000
|
|
Change in fair value of investment
|
|
|
130,000
|
|
Balance December 31, 2017
|
|
$
|
1,680,000
|
|
|
|
Contingent
Earn-Out
|
|
Balance December 31, 2015
|
|
$
|
2,590,339
|
|
Reduction to estimated earn-out
|
|
|
(1,807,945
|
)
|
Accretion of net present value
|
|
|
125,263
|
|
Balance December 31, 2016
|
|
|
907,657
|
|
Accretion of net present value
|
|
|
44,210
|
|
Balance December 31, 2017
|
|
$
|
951,867
|
|
(5) Property and Equipment
Property and equipment are stated at cost,
net of accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over the estimated
useful lives of the assets. The estimated useful life of computer equipment, computer software and telephone equipment is three
years and of furniture and fixtures is five years. Leasehold improvements are amortized on a straight-line basis over the shorter
of the respective lease term or the estimated useful life of the asset. If the useful lives of the assets differ materially from
the estimates contained herein, additional costs could be incurred, which could have an adverse impact on the Company’s expenses.
Property and equipment as of December 31, 2017 and 2016 consists
of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Computer equipment and software
|
|
$
|
2,005,226
|
|
|
$
|
2,516,189
|
|
Furniture and fixtures and telephone equipment
|
|
|
1,916,158
|
|
|
|
2,080,658
|
|
Leasehold improvements
|
|
|
4,520,693
|
|
|
|
4,635,446
|
|
|
|
|
8,442,077
|
|
|
|
9,232,293
|
|
Less accumulated depreciation and amortization
|
|
|
5,690,265
|
|
|
|
5,682,286
|
|
Property and equipment, net
|
|
$
|
2,751,812
|
|
|
$
|
3,550,007
|
|
Depreciation and amortization expense for
the above noted property and equipment was approximately $1.0 million and $964 thousand for the years ended December 31, 2017 and
2016, respectively. The Company does not include depreciation and amortization expense in cost of services, sales and marketing
or general and administrative expense. Approximately $1.0 million of fully depreciated assets was written off during the year ended
December 31, 2017.
(6) Goodwill and Intangible Assets
The changes in the carrying amount of goodwill
for the years ended December 31, 2017 and 2016 were as follows:
Balance as of December 31, 2015
|
|
$
|
43,318,670
|
|
Impairment charge
|
|
|
(11,583,000
|
)
|
Exchange rate impact
|
|
|
(2,552,529
|
)
|
Balance as of December 31, 2016
|
|
|
29,183,141
|
|
Exchange rate impact
|
|
|
236,381
|
|
Balance as of December 31, 2017
|
|
$
|
29,419,522
|
|
During the year ended December 31, 2015,
the business was managed as a single segment where subscription and advertising products were sold throughout the Company, financial
results were reviewed on a consolidated basis and separate and discrete financial information was not available. During 2016, the
Company reassessed the identification of operating segments due to changes in key personnel, including the Chief Operating Decision
Maker, and during the fourth quarter of 2016 began to provide separate and discrete segment financial information. The Company
operates in three distinct operating segments: The Deal / BoardEx, RateWatch and Business to Consumer. These operating segments
also represent the Company’s reporting units.
|
|
The Deal/ BoardEx
|
|
|
RateWatch
|
|
|
Business to Consumer
|
|
|
Total
|
|
Balance December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,318,670
|
|
Exchange rate impact
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,897,318
|
)
|
Balance October 1, 2016
|
|
$
|
14,104,120
|
|
|
$
|
5,851,050
|
|
|
$
|
21,466,182
|
|
|
|
41,421,352
|
|
Exchange rate impact
|
|
|
(655,211
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(655,211
|
)
|
Impairment charge
|
|
|
(11,583,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,583,000
|
)
|
Balance December 31, 2016
|
|
|
1,865,909
|
|
|
|
5,851,050
|
|
|
|
21,466,182
|
|
|
|
29,183,141
|
|
Exchange rate impact
|
|
|
236,381
|
|
|
|
—
|
|
|
|
—
|
|
|
|
236,381
|
|
Balance December 31, 2017
|
|
$
|
2,102,290
|
|
|
$
|
5,851,050
|
|
|
$
|
21,466,182
|
|
|
$
|
29,419,522
|
|
The Company’s goodwill and intangible
assets and related accumulated amortization as of December 31, 2017 and 2016 consist of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Total goodwill
|
|
$
|
29,419,522
|
|
|
$
|
29,183,141
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
Trade name
|
|
$
|
720,000
|
|
|
$
|
720,000
|
|
Total intangible assets not subject to amortization
|
|
|
720,000
|
|
|
|
720,000
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
13,887,601
|
|
|
|
13,622,590
|
|
Software models
|
|
|
1,488,194
|
|
|
|
1,988,194
|
|
Product databases
|
|
|
9,590,096
|
|
|
|
8,608,166
|
|
Trade names
|
|
|
741,470
|
|
|
|
719,085
|
|
Capitalized website and software development
|
|
|
10,996,710
|
|
|
|
9,313,536
|
|
Domain names
|
|
|
160,425
|
|
|
|
160,425
|
|
Total intangible assets subject to amortization
|
|
|
36,864,496
|
|
|
|
34,541,996
|
|
Less accumulated amortization
|
|
|
(23,563,514
|
)
|
|
|
(20,134,178
|
)
|
Net intangible assets subject to amortization
|
|
|
13,300,982
|
|
|
|
14,407,818
|
|
Total intangible assets
|
|
$
|
14,020,982
|
|
|
$
|
15,127,818
|
|
Intangible assets were established through
business acquisitions and internally developed capitalized website and software development costs. Definite-lived intangible assets
are amortized on a straight-line basis over a weighted-average period of approximately 9.8 years for customer relationships, 5.0
years for software models, 9.9 years for product databases and 8.6 years for trade names.
Amortization expense totaled approximately
$4.2 million and $4.7 million for the years ended December 31, 2017 and 2016, respectively. The estimated amortization expense
for the next five years and thereafter is as follows:
For the Years
Ended
|
|
|
|
December 31,
|
|
Amount
|
|
2018
|
|
$
|
3,533,508
|
|
2019
|
|
|
2,717,005
|
|
2020
|
|
|
2,239,443
|
|
2021
|
|
|
1,653,378
|
|
2022
|
|
|
1,417,299
|
|
Thereafter
|
|
|
1,740,349
|
|
Total
|
|
$
|
13,300,982
|
|
(7) Accrued Expenses
Accrued expenses as of December 31, 2017
and 2016 consist of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Payroll and related costs
|
|
$
|
2,010,745
|
|
|
$
|
2,261,401
|
|
Professional fees
|
|
|
449,394
|
|
|
|
531,876
|
|
Tax related
|
|
|
296,606
|
|
|
|
531,609
|
|
Business development
|
|
|
173,840
|
|
|
|
440,668
|
|
Data related
|
|
|
129,483
|
|
|
|
338,064
|
|
All other
|
|
|
705,727
|
|
|
|
1,011,940
|
|
Total accrued expenses
|
|
$
|
3,765,795
|
|
|
$
|
5,115,558
|
|
(8) Income Taxes
The Tax Cuts and Jobs Act
(the “Tax Act”) was enacted on December 22, 2017. The income tax effects of changes in tax laws are recognized in
the period when enacted. The Tax Act provides for significant tax law changes and modifications with varying effective dates,
which include reducing the U.S. federal corporate income tax rate from 35% to 21%, creating a territorial tax system (with
a one-time mandatory repatriation tax on previously deferred foreign earnings), and allowing for immediate capital expensing
of certain qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.
In response to the enactment of the Tax
Act in late 2017, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”)
to address situations where the accounting is incomplete for certain income tax effects of the Tax Act upon issuance of an entity’s
financial statements for the reporting period in which the Tax Act was enacted. Under SAB 118, a company may record provisional
amounts during a measurement period for specific income tax effects of the Tax Act for which the accounting is incomplete but a
reasonable estimate can be determined, and when unable to determine a reasonable estimate for any income tax effects, report provisional
amounts in the first reporting period in which a reasonable estimate can be determined. The Company has recorded the impact of
the tax effects of the Tax Act, relying on reasonable estimates where the accounting is incomplete as of December 31, 2017. As
guidance and technical corrections are issued in the upcoming quarters, the Company will record updates to its original provisional
estimates.
The Company remeasured certain U.S. deferred
tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However,
the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement
of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement
of the deferred tax balance was tax expense of $25.5 million which was offset by a reduction in the valuation allowance resulting
in no tax expense.
The Tax Act includes a transition tax
on the deemed distribution of previously untaxed accumulated and current earnings and profits of certain of foreign
subsidiaries. To determine the amount of the transition tax, the Company must determine, in addition to other factors, the
amount of post-1986 earnings and profits of relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on
such earnings. The amount of post-1986 undistributed net earnings and profits of the Company’s foreign subsidiaries is
approximately $0.9 million at December 31, 2017. The Company recorded a provisional amount for the one-time mandatory
repatriation tax liability of $139 thousand and a reduction to the valuation allowance to offset this expense. The
Company has not yet finalized its calculation of the total post-1986 E&P and non-U.S. income taxes paid on such earnings
for these foreign subsidiaries. Further, the transition tax is based on the amount of those earnings that are held in cash
and other specified illiquid assets. This amount may change when the calculation of post-1986 net accumulated foreign E&P
previously deferred from U.S. federal taxation and the amounts held in cash or other specified illiquid assets are finalized
and is subject to further refinement if further guidance is issued by federal and state taxing authorities.
The Company accounts for its income taxes
in accordance with ASC 740-10. Under ASC 740-10, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases.
ASC 740-10 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or
all of the deferred tax assets will not be realized based on all available positive and negative evidence. The Company has determined
that it files U.S. Federal, State and Foreign tax returns and has determined that its major tax jurisdictions are the United States,
India and the United Kingdom. Tax years through 2017 remain open due to net operating loss carryforwards and are subject to examination
by appropriate taxing authorities.
The Company had approximately $173
million and $160 million of federal and state net operating loss carryforwards (“NOL”) as of December 31, 2017
and 2016, respectively. The Company has a full valuation allowance against its U.S. deferred tax assets as management
concluded that it was more likely than not that the Company would not realize the benefit of its deferred tax assets by
generating sufficient taxable income in future years. The Company expects to continue to provide a full valuation allowance
until, or unless, it can sustain a level of profitability that demonstrates its ability to utilize these assets. The ability
of the Company to utilize its NOL in full to reduce future taxable income may become subject to various limitations under
Section 382 of the Internal Revenue Code of 1986 (“IRC”). The utilization of such carryforwards may be limited
upon the occurrence of certain ownership changes, including the purchase and sale of stock by 5% shareholders and the
offering of stock by the Company during any three-year period resulting in an aggregate change of more than 50% of the
beneficial ownership of the Company. In the event of an ownership change, Section 382 imposes an annual limitation on the
amount of these carryforwards that can reduce future taxable income.
Subject to potential Section 382
limitations, the federal losses are available to offset future taxable income through 2037 and expire from 2019 through 2037.
Since the Company does business in various states and each state has its own rules with respect to the number of years losses
may be carried forward, the state net operating loss carryforwards expire through 2037. The company also has approximately
$10.5 million in U.K. NOLs as of December 31, 2017. During the fourth quarter ended December 31, 2017, the Company released
its U.K. valuation allowance as it was concluded that this entity has cumulative income over the last three years
and Management believes it is more likely than not that the deferred the asset will be utilized.
The Company is subject to federal, state
and local corporate income taxes. The components of the provision for income taxes reflected on the consolidated statements of
operations are set forth below:
(in thousands)
|
|
2017
|
|
|
2016
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State and local
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
197
|
|
|
|
139
|
|
Total current tax expense
|
|
$
|
197
|
|
|
$
|
139
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
(335
|
)
|
|
$
|
38
|
|
State and local
|
|
|
231
|
|
|
|
92
|
|
Foreign
|
|
|
(1,975
|
)
|
|
|
—
|
|
Total deferred tax expense
|
|
$
|
(2,079
|
)
|
|
$
|
130
|
|
|
|
|
|
|
|
|
|
|
Total tax (benefit) provision
|
|
$
|
(1,882
|
)
|
|
$
|
269
|
|
A reconciliation of the statutory U.S. federal
income tax rate to the Company’s effective income tax rate is set forth below:
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
U.S. statutory federal income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
-217.8
|
%
|
|
|
10.2
|
%
|
Effect of permanent differences
|
|
|
6.6
|
%
|
|
|
-0.4
|
%
|
R&D credit
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
Foreign tax rate differential
|
|
|
50.3
|
%
|
|
|
-6.3
|
%
|
Change to valuation allowance
|
|
|
-2,824.7
|
%
|
|
|
-39.0
|
%
|
Change in federal rate
|
|
|
3,377.1
|
%
|
|
|
0
|
%
|
Foreign repatriation
|
|
|
18.7
|
%
|
|
|
0
|
%
|
Stock compensation
|
|
|
-716.2
|
%
|
|
|
0
|
%
|
U.S true-ups
|
|
|
81.3
|
%
|
|
|
0
|
%
|
Other
|
|
|
-62.3
|
%
|
|
|
-0.2
|
%
|
Effective income tax rate
|
|
|
-253.0
|
%
|
|
|
-1.6
|
%
|
As a result
of the U.S. Tax Cuts and Jobs Act, the Company included $0.9 million of accumulated earnings of the Non-U.S. subsidiary in
the calculation of 2017 taxable income. The Company has not provided for foreign withholding taxes on approximately $0.9
million of undistributed earnings from its non-U.S. subsidiary as of December 31, 2017 because such earnings are
intended to be reinvested indefinitely outside of the United States. If these earnings were distributed, foreign withholding
tax of approximately $155 thousand may become due. The foreign earnings that the Company may
repatriate to the United States in any year is limited to the amount of current year foreign earnings and are not made out
of historic undistributed accumulated earnings. The amount of current year foreign earnings that are available for
repatriation is determined after consideration of all foreign cash requirements including working capital needs, potential
requirements for litigation and regulatory matters, and merger and acquisition activities, among others.
Deferred income taxes reflect the net tax
effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Significant components of
the Company’s net deferred tax assets and liabilities are set forth below:
|
|
As of December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Operating loss carryforward
|
|
$
|
50,535
|
|
|
$
|
71,334
|
|
Windfall tax benefit carryforward
|
|
|
—
|
|
|
|
(5,332
|
)
|
Capital loss carryforward
|
|
|
432
|
|
|
|
152
|
|
Goodwill
|
|
|
1,919
|
|
|
|
3,089
|
|
Intangible assets
|
|
|
3,116
|
|
|
|
2,339
|
|
Accrued expenses
|
|
|
409
|
|
|
|
1,112
|
|
Depreciation
|
|
|
139
|
|
|
|
551
|
|
Other
|
|
|
820
|
|
|
|
1,935
|
|
Total deferred tax assets
|
|
|
57,370
|
|
|
|
75,180
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(1,711
|
)
|
|
|
(1,735
|
)
|
Trademarks
|
|
|
(568
|
)
|
|
|
(301
|
)
|
Total deferred tax liabilities
|
|
|
(2,279
|
)
|
|
|
(2,036
|
)
|
Less: valuation allowance
|
|
|
(55,048
|
)
|
|
|
(75,180
|
)
|
Net deferred tax asset (liability)
|
|
$
|
43
|
|
|
$
|
(2,036
|
)
|
The Company has no uncertain tax positions
pursuant to ASC 740-10 for the years ended December 31, 2017 and 2016.
(9) Stockholders’ Equity
Exchange Agreement
On November 10, 2017, the
Company entered into an Exchange Agreement (the “Exchange Agreement”) with TCV VI, L.P., a Delaware limited
partnership (“TCV VI”), and TCV Member Fund, L.P., a Cayman Islands exempted limited partnership (“TCV
Member Fund” and, together with TCV VI, the “TCV Holders”), which provided for, among other things, the
exchange by the TCV Holders of all shares of Series B Preferred Stock (see below) of the Company held by them for an
aggregate of (i) 6,000,000 shares of newly issued common stock, par value $0.01 per share of the Company (“Common
Stock”) having a value of $5,520,000, and (ii) cash consideration in the amount of $20,000,000 (the “Exchange
Transaction”). The Exchange Transaction closed on November 10, 2017. The retirement of the Series B Preferred Stock
removes, among other rights of the TCV Holders and restrictions on the Company, a $55 million liquidation preference
previously held by TCV. The company incurred approximately $891,000 of direct expenses related to the transaction. The
Company has reflected the exchange transaction as an extinguishment of the Series B Preferred Stock and recorded the
difference of approximately $22,368,000 between the carrying value of approximately $48,838,000 and the fair value of the
consideration, including direct expenses, as a capital contribution from the Company’s preferred stockholders in its
statement of operations and stockholders’ equity.
Purchase Agreement
On November 10, 2017, the Company entered
into a Securities Purchase Agreement (the “Purchase Agreement”) with 180 Degree Capital Corp. (“180 Degree Capital”)
and TheStreet SPV Series, a limited liability company series of 180 Degree Capital Management, LLC (the “Investors”),
pursuant to which the Company sold and issued 7,136,363 shares of its Common Stock, to the Investors at a purchase price of $1.10
per Common Stock in a closing that occurred on November 10, 2017 (the “Financing Transaction”). The closing bid price
of the Company’s Common Stock as reported by NASDAQ on November 9, 2017, was $0.92 per share, and the Financing Transaction
closed on November 10, 2017.
Registration Rights Agreement
In connection with the Exchange and Financing
Transaction, the Company agreed to register the shares for resale and the Company has filed a registration statement with the Securities
and Exchange Commission. The TCV Holders and the Investors received additional registration rights as set forth in the transaction
documents.
Convertible Preferred Stock
Securities Purchase Agreement
On November 15, 2007, the Company entered
into a Securities Purchase Agreement (the “Purchase Agreement”) with TCV VI, L.P., a Delaware limited partnership,
and TCV Member Fund, L.P., a Delaware limited partnership (collectively, the “Purchasers”).
Pursuant to the Purchase Agreement, the
Company sold the Purchasers an aggregate of 5,500 shares of its newly-created Series B convertible preferred stock, par value $0.01
per share (“Series B Preferred Stock”), that were immediately convertible into an aggregate of 3,856,942 shares of
its Common Stock at a conversion price of $14.26 per share, and warrants (the “Warrants”) to purchase an aggregate
of 1,157,083 shares of Common Stock for $15.69 per share. The Warrants have expired without any shares having been purchased. The
consideration paid for the Series B Preferred Stock and the Warrants was $55 million.
Treasury Stock
In December 2000, the Company’s Board
of Directors authorized the repurchase of up to $10 million of the Company’s Common Stock, from time to time, in private
purchases or in the open market. In February 2004, the Company’s Board of Directors approved the resumption of the stock
repurchase program (the “Program”) under new price and volume parameters, leaving unchanged the maximum amount available
for repurchase under the Program. However, the affirmative vote of the holders of a majority of the outstanding shares of Series
B Preferred Stock, voting separately as a single class, was necessary for the Company to repurchase its Common Stock (except as
described above). During the years ended December 31, 2017 and 2016, the Company did not purchase any shares of Common Stock under
the Program. Since inception of the Program, the Company has purchased a total of 5,453,416 shares of Common Stock at an aggregate
cost of approximately $7.3 million.
In addition, pursuant to the terms of the
Company’s 2007 Plan, and certain procedures adopted by the Compensation Committee of the Board of Directors, in connection
with the exercise of stock options by certain of the Company’s employees, and the issuance of shares of Common Stock in settlement
of vested restricted stock units, the Company may withhold shares in lieu of payment of the exercise price and/or the minimum amount
of applicable withholding taxes then due. Through December 31, 2017, the Company had withheld an aggregate of 2,045,065 shares
which have been recorded as treasury stock. In addition, the Company received an aggregate of 211,608 shares in treasury stock
resulting from prior acquisitions. These shares have also been recorded as treasury stock.
Dividends
Beginning with the first quarter of 2016,
the Company’s Board of Directors suspended the payment of a quarterly dividend and will continue to evaluate the uses of
its cash in connection with planned investments in the business.
Stock Options
Under the terms of the 1998 Stock Incentive
Plan (the “1998 Plan”), 8,900,000 shares of Common Stock of the Company were reserved for awards of incentive stock
options, nonqualified stock options, restricted stock, deferred stock, restricted stock units, or any combination thereof. Under
the terms of the 2007 Plan, 7,750,000 shares of Common Stock of the Company were reserved for awards of incentive stock options,
nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units or other stock-based awards. The
2007 Plan also authorized cash performance awards. Additionally, under the terms of the 2007 Plan, unused shares authorized for
award under the 1998 Plan are available for issuance under the 2007 Plan. No further awards will be made under the 1998 Plan. Awards
may be granted to such directors, employees and consultants of the Company as the Compensation Committee of the Board of Directors
shall select in its discretion or delegate to management to select. Only employees of the Company are eligible to receive grants
of incentive stock options. Awards generally vest over a three- to five-year period and stock options generally have terms of five
to seven years. As of December 31, 2017, there remained approximately 1.0 million shares available for future awards under the
2007 Plan. In connection with awards under both the 2007 Plan and awards issued outside of the Plan as inducement grants to new
hires, the Company recorded approximately $1.6 million and $1.6 million (inclusive of approximately $105 thousand included in restructuring
and other charges), of noncash stock-based compensation for the years ended December 31, 2017 and 2016, respectively.
A stock option represents the right, once
the option has vested and become exercisable, to purchase a share of the Company’s Common Stock at a particular exercise
price set at the time of the grant. A restricted stock unit (“RSU”) represents the right to receive one share of the
Company’s Common Stock (or, if provided in the award, the fair market value of a share in cash) on the applicable vesting
date for such RSU. Until the stock certificate for a share of Common Stock represented by an RSU is delivered, the holder of an
RSU does not have any of the rights of a stockholder with respect to the Common Stock. However, the grant of an RSU includes the
grant of dividend equivalents with respect to such RSU. The Company records cash dividends for RSUs to be paid in the future at
an amount equal to the rate paid on a share of Common Stock for each then-outstanding RSU granted. The accumulated dividend equivalents
related to outstanding grants vest on the applicable vesting date for the RSU with respect to which such dividend equivalents were
credited, and are paid in cash at the time a stock certificate evidencing the shares represented by such vested RSU is delivered.
A summary of the activity of the 2007 Plan,
and awards issued outside of the Plan pertaining to stock option grants is as follows:
|
|
Shares
Underlying
Awards
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
($000)
|
|
|
Weighted
Average
Remaining
Contractual Life
(In Years)
|
|
Awards outstanding, December 31, 2016
|
|
|
5,900,731
|
|
|
$
|
1.52
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
260,000
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(41,368
|
)
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(627,435
|
)
|
|
$
|
1.77
|
|
|
|
|
|
|
|
|
|
Awards outstanding, December 31, 2017
|
|
|
5,491,928
|
|
|
$
|
1.46
|
|
|
$
|
874
|
|
|
|
3.39
|
|
Awards vested and expected to vest at December 31, 2017
|
|
|
5,462,918
|
|
|
$
|
1.46
|
|
|
$
|
865
|
|
|
|
3.38
|
|
Awards vested at December 31, 2017
|
|
|
3,807,461
|
|
|
$
|
1.58
|
|
|
$
|
386
|
|
|
|
2.47
|
|
A summary of the activity of the 2007 Plan
pertaining to grants of restricted stock units is as follows:
|
|
Shares
Underlying
Awards
|
|
|
Aggregate
Intrinsic
Value
($000)
|
|
|
Weighted
Average
Remaining
Contractual
Life (In
Years)
|
|
Awards outstanding, December 31, 2016
|
|
|
717,995
|
|
|
|
|
|
|
|
|
|
Restricted stock units granted
|
|
|
597,788
|
|
|
|
|
|
|
|
|
|
Restricted stock units settled by delivery of Common Stock upon vesting
|
|
|
(818,282
|
)
|
|
|
|
|
|
|
|
|
Restricted stock units forfeited
|
|
|
(50,833
|
)
|
|
|
|
|
|
|
|
|
Awards outstanding, December 31, 2017
|
|
|
446,668
|
|
|
$
|
648
|
|
|
|
0.62
|
|
Awards vested and expected to vest at December 31, 2017
|
|
|
441,168
|
|
|
$
|
640
|
|
|
|
0.52
|
|
A summary of the status of the Company’s
unvested share-based payment awards as of December 31, 2017 and changes in the year then ended is as follows:
Unvested Awards
|
|
Awards
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Shares underlying awards unvested at December 31, 2016
|
|
|
3,936,427
|
|
|
$
|
0.62
|
|
Shares underlying options granted
|
|
|
260,000
|
|
|
$
|
0.28
|
|
Shares underlying restricted stock units granted
|
|
|
597,788
|
|
|
$
|
0.90
|
|
Shares underlying options vested
|
|
|
(1,752,597
|
)
|
|
$
|
0.38
|
|
Shares underlying restricted stock units settled by delivery of Common Stock upon vesting
|
|
|
(818,282
|
)
|
|
$
|
1.59
|
|
Shares underlying unvested options forfeited
|
|
|
(41,368
|
)
|
|
$
|
0.37
|
|
Shares underlying unvested restricted stock units forfeited
|
|
|
(50,833
|
)
|
|
$
|
1.20
|
|
Shares underlying awards unvested at December 31, 2017
|
|
|
2,131,135
|
|
|
$
|
0.48
|
|
For the years ended December 31, 2017 and
2016, approximately 260 thousand and 3.1 million stock options, respectively, were granted to employees of the Company. No options
were exercised during both years ended December 31, 2017 and 2016, resulting in $0 of cash proceeds to the Company. For the years
ended December 31, 2017 and 2016, approximately 598 thousand and 558 thousand restricted stock units, respectively, were granted
to employees of the Company, and 818 thousand and 478 thousand, respectively, were issued under restricted stock unit grants. For
the years ended December 31, 2017 and 2016, the total fair value of share-based awards vested was approximately $1.6 million and
$696 thousand, respectively. For the years ended December 31, 2017 and 2016, the total intrinsic value of options exercised was
$0 and $0, respectively. For the years ended December 31, 2017 and 2016, the total intrinsic value of restricted stock units that
vested was approximately $921 thousand and $484 thousand, respectively. As of December 31, 2017, there was approximately $780 thousand
of unrecognized stock-based compensation expense remaining to be recognized over a weighted-average period of 1.2 years.
(10) Commitments and Contingencies
Operating Leases and Employment Agreements
The Company is committed under operating
leases, principally for office space, which expire at various dates through January 2026. Certain leases contain escalation clauses
relating to increases in property taxes and maintenance costs. Rent expense was approximately $2.1 million and $2.1 million for
the years ended December 31, 2017 and 2016, respectively. Additionally, the Company has agreements with certain of its employees
and outside contributors, whose future minimum payments are dependent on the future fulfillment of their services thereunder. As
of December 31, 2017, total future minimum cash payments are as follows:
|
|
Payments Due by Year
|
|
Contractual Obligations:
|
|
Total
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
After 202
|
|
Operating leases
|
|
$
|
9,235,579
|
|
|
$
|
2,580,234
|
|
|
$
|
2,328,260
|
|
|
$
|
2,279,613
|
|
|
$
|
501,781
|
|
|
$
|
526,033
|
|
|
$
|
1,019,658
|
|
Employment agreement
|
|
|
10,000,000
|
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
—
|
|
|
|
—
|
|
Outside contributors
|
|
|
137,500
|
|
|
|
137,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total contractual cash obligations
|
|
$
|
19,373,079
|
|
|
$
|
5,217,734
|
|
|
$
|
4,828,260
|
|
|
$
|
4,779,613
|
|
|
$
|
3,001,781
|
|
|
$
|
526,033
|
|
|
$
|
1,019,658
|
|
Legal Proceedings
The Company is party to legal proceedings
arising in the ordinary course of business or otherwise, none of which is deemed material.
(11) Long Term Investment
During 2008, the Company made an investment
in Debtfolio, Inc. (“Debtfolio”), doing business as Geezeo, an online financial management solutions provider for banks
and credit unions. The investment totaled approximately $1.9 million for an 18.5% ownership stake. Additionally, the Company incurred
approximately $0.2 million of legal fees in connection with this investment. During the first quarter of 2009, the carrying value
of the Company’s investment was written down to fair value based upon an estimate of the market value of the Company’s
equity in light of Debtfolio’s efforts to raise capital at the time from third parties. The impairment charge approximated
$1.5 million. During the three months ended June 30, 2010, the Company determined it was necessary to record a second impairment
charge totaling approximately $555 thousand, writing the value of the investment to zero. This was deemed necessary by management
based upon their consideration of Debtfolio, Inc.’s continued negative cash flow from operations, current financial position
and lack of current liquidity. In October 2011, Debtfolio, Inc. repurchased the Company’s ownership stake in exchange for
a subordinated promissory note in the aggregate principal amount of $555 thousand payable on October 31, 2014. On October 28, 2014,
a revised subordinated promissory note with revised repayment terms was agreed to which required cash payments totaling $255 thousand
during 2014, and eight quarterly installments of approximately $48 thousand plus 5% simple interest during 2015 and 2016. As of
December 31, 2016, all required payments have been received.
(12) Restructuring and Other Charges
During the year months ended December 31,
2017, the Company implemented a targeted reduction in force which resulted in restructuring and other charges of approximately
$470 thousand.
During the three months ended March 31,
2016, the Company announced the resignation of the Company’s President and Chief Executive Officer, who was also a member
of the Company’s Board of Directors. In connection with this resignation, the Company paid severance, provided continuing
medical coverage for 18 months, and incurred recruiting fees, resulting in restructuring and other charges of approximately $1.5
million. Additionally, in August 2016 the Company received the lease termination fee from the landlord when The Deal’s office
space was vacated resulting in a reduction to restructuring and other charges of approximately $583 thousand.
During the year ended December 31, 2012,
the Company implemented a targeted reduction in force. Additionally, in accessing the ongoing needs of the organization, the Company
elected to discontinue using certain software as a service, consulting and data providers, and elected to write-off certain previously
capitalized software development projects. The actions were taken after a review of the Company’s cost structure with the
goal of better aligning the cost structure with the Company’s revenue base. These restructuring efforts resulted in restructuring
and other charges of approximately $3.4 million during the year ended December 31, 2012. Additionally, as a result of the Company’s
acquisition of The Deal LLC (“The Deal”) in September 2012, the Company discontinued the use of The Deal’s office
space and implemented a reduction in force to eliminate redundant positions, resulting in restructuring and other charges of approximately
$3.5 million during the year ended December 31, 2012. In August 2015, the Company received a one year notice of termination under
which the landlord elected to terminate The Deal’s office space lease. As a result, the Company was no longer obligated to
fulfill the original full lease term and the Company recorded an adjustment to its restructuring reserve totaling approximately
$1.2 million, which resulted in a restructuring and other charges credit on the Company’s Consolidated Statements of Operations.
Additionally, the Company received a lease termination credit of approximately $583 thousand from the landlord when the office
space was vacated in August 2016. Collectively, these activities are referred to as the “2012 Restructuring”.
The following table displays the activity
of the 2012 Restructuring reserve account from the initial charges during the first quarter of 2012 through its conclusion during
the year ended December 31, 2016.
|
|
Workforce
Reduction
|
|
|
Asset
Write-
Off
|
|
|
Termination
of Vendor
Services
|
|
|
Lease
Termination
|
|
|
Total
|
|
Restructuring charge
|
|
$
|
3,307,330
|
|
|
$
|
954,302
|
|
|
$
|
531,828
|
|
|
$
|
2,085,000
|
|
|
$
|
6,878,460
|
|
Noncash charges
|
|
|
(222,215
|
)
|
|
|
(954,302
|
)
|
|
|
(220,178
|
)
|
|
|
—
|
|
|
|
(1,396,695
|
)
|
Payments
|
|
|
(2,462,425
|
)
|
|
|
—
|
|
|
|
(148,816
|
)
|
|
|
(190,518
|
)
|
|
|
(2,801,759
|
)
|
Balance December 31, 2012
|
|
|
622,690
|
|
|
|
—
|
|
|
|
162,834
|
|
|
|
1,894,482
|
|
|
|
2,680,006
|
|
Adjustments to prior estimates
|
|
|
(7,586
|
)
|
|
|
—
|
|
|
|
5,446
|
|
|
|
27,130
|
|
|
|
24,990
|
|
(Payments)/sublease income, net
|
|
|
(615,104
|
)
|
|
|
—
|
|
|
|
(168,280
|
)
|
|
|
(640,200
|
)
|
|
|
(1,423,584
|
)
|
Balance December 31, 2013
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,281,412
|
|
|
|
1,281,412
|
|
Adjustment to prior estimates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,678
|
|
|
|
44,678
|
|
(Payments)/sublease income, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
58,646
|
|
|
|
58,646
|
|
Balance December 31, 2014
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,384,736
|
|
|
|
1,384,736
|
|
Adjustment to prior estimates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,196,834
|
)
|
|
|
(1,196,834
|
)
|
(Payments)/sublease income, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(88,593
|
)
|
|
|
(88,593
|
)
|
Balance December 31, 2015
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
99,309
|
|
|
|
99,309
|
|
Adjustment to prior estimates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(78,828
|
)
|
|
|
(78,828
|
)
|
(Payments)/sublease income, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,481
|
)
|
|
|
(20,481
|
)
|
Balance December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table shows, by reportable
segment, the amounts expensed and paid for our 2012 Restructuring and the remaining accrued balance of restructuring costs
as of December 31, 2016:
|
|
The Deal /
BoardEx
|
|
|
RateWatch
|
|
|
Business to
Consumer
|
|
|
Total
|
|
Restructuring charge
|
|
$
|
3,459,836
|
|
|
$
|
218,129
|
|
|
$
|
3,200,495
|
|
|
$
|
6,878,460
|
|
Noncash charges
|
|
|
—
|
|
|
|
(38,707
|
)
|
|
|
(1,357,988
|
)
|
|
|
(1,396,695
|
)
|
Payments
|
|
|
(1,295,452
|
)
|
|
|
(105,867
|
)
|
|
|
(1,400,440
|
)
|
|
|
(2,801,759
|
)
|
Balance December 31, 2012
|
|
|
2,164,384
|
|
|
|
73,554
|
|
|
|
442,068
|
|
|
|
2,680,006
|
|
Adjustments to prior estimates
|
|
|
27,130
|
|
|
|
(1,436
|
)
|
|
|
(704
|
)
|
|
|
24,990
|
|
Payments
|
|
|
(910,102
|
)
|
|
|
(72,119
|
)
|
|
|
(441,363
|
)
|
|
|
(1,423,584
|
)
|
Balance December 31, 2013
|
|
|
1,281,412
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,281,412
|
|
Adjustments to prior estimates
|
|
|
44,678
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,678
|
|
(Payments)/sublease income, net
|
|
|
58,646
|
|
|
|
—
|
|
|
|
—
|
|
|
|
58,646
|
|
Balance December 31, 2014
|
|
|
1,384,736
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,384,736
|
|
Adjustments to prior estimates
|
|
|
(1,196,834
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,196,834
|
)
|
(Payments)/sublease income, net
|
|
|
(88,593
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(88,593
|
)
|
Balance December 31, 2015
|
|
|
99,309
|
|
|
|
—
|
|
|
|
—
|
|
|
|
99,309
|
|
Adjustments to prior estimates
|
|
|
(78,828
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(78,828
|
)
|
(Payments)/sublease income, net
|
|
|
(20,481
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,481
|
)
|
Balance December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(13) Change in Fair Value of Contingent Consideration
During the three months ended December
31, 2016, the Company reduced its estimate of the acquisition contingent earn-out payable to the former owners of Management
Diagnostics LLC based upon revised 2017 revenue estimates, resulting in restructuring and other charges credit of
approximately $1.8 million. As of December 31, 2017, the remaining contingent earn-out has been earned.
(14) Other Liabilities
Other liabilities consist of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred rent
|
|
$
|
1,374,385
|
|
|
$
|
1,904,319
|
|
Acquisition contingent earn-out
|
|
|
—
|
|
|
|
907,657
|
|
Deferred revenue
|
|
|
687,632
|
|
|
|
460,748
|
|
Other liabilities
|
|
|
2,092
|
|
|
|
2,092
|
|
|
|
$
|
2,064,109
|
|
|
$
|
3,274,816
|
|
(15) Employee Benefit Plan
The Company maintains a noncontributory
savings plan in accordance with Section 401(k) of the Internal Revenue Code. The 401(k) plan covers all eligible employees. For
the year ended December 31, 2017, the plan provided an employer matching contribution of 50% of employee contributions, up to a
maximum employee contribution of 6% of their total compensation within statutory limits. The Company’s matching contribution
for the year ended December 31, 2017 totaled approximately $715 thousand. For the year ended December 31, 2016, the plan provided
an employer matching contribution of 100% of employee contributions, up to a maximum of 8% of each employee’s total compensation
within statutory limits. The Company’s matching contribution for the year ended December 31, 2016 totaled approximately $1.7
million.
(16) Selected Quarterly Financial Data (Unaudited)
|
|
For the Year Ended December 31, 2017
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
Total net revenue
|
|
$
|
15,280
|
|
|
$
|
15,960
|
|
|
$
|
15,253
|
|
|
$
|
15,977
|
|
Total operating expense
|
|
|
16,229
|
|
|
|
15,437
|
|
|
|
14,959
|
|
|
|
15,146
|
|
Net (loss) income
|
|
|
(1,127
|
)
|
|
|
344
|
|
|
|
190
|
|
|
|
3,219
|
|
Contributed capital attributable to preferred stockholders (Note 9)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,368
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(1,127
|
)
|
|
$
|
344
|
|
|
$
|
190
|
|
|
$
|
25,587
|
|
Basic net (loss) income attributable to common stockholders
|
|
$
|
(0.03
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.52
|
|
Diluted net (loss) income attributable to common stockholders
|
|
$
|
(0.03
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.51
|
|
|
|
For the Year Ended December 31, 2016
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
Total net revenue
|
|
$
|
16,069
|
|
|
$
|
16,293
|
|
|
$
|
15,214
|
|
|
$
|
15,924
|
|
Total operating expense (Note 1)
|
|
|
19,208
|
|
|
|
17,173
|
|
|
|
16,097
|
|
|
|
28,233
|
|
Net loss
|
|
|
(3,444
|
)
|
|
|
(1,211
|
)
|
|
|
(1,221
|
)
|
|
|
(11,639
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(3,444
|
)
|
|
$
|
(1,211
|
)
|
|
$
|
(1,221
|
)
|
|
$
|
(11,639
|
)
|
Basic and diluted net loss attributable to common stockholders
|
|
$
|
(0.10
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.33
|
)
|
Note 1: During the three months ended March 31, 2016, the Company
announced the resignation of the Company’s President and Chief Executive Officer resulting in restructuring and other charges
of approximately $1.4 million, with an additional $163 thousand charge recorded during the three months ended June 30, 2016. Additionally,
during the three months ended March 31, 2016, the Company recorded a $1.2 million provision as an estimate for state and municipal
sales tax not collected on sales to our customers or remitted to various states or municipalities, with an additional $120 thousand
recorded during the three months ended June 30, 2016. During the three months ended September 30, 2016, the Company received a
lease termination credit of approximately $583 thousand resulting from the termination of The Deal’s office space lease.
During the three months ended December 31, 2016, the Company reduced its estimate of the acquisition contingent earn-out payable
to the former owners of Management Diagnostics LLC based upon revised 2017 revenue estimates, resulting in a change in fair value
of contingent consideration credit of approximately $1.8 million. Additionally, during the three months ended December 31, 2016
the Company recorded an impairment of goodwill of approximately $11.6 million, reversed $700 thousand of the sales tax provision
that had been recorded earlier in the year, and recorded catch up amortization expense of $1.5 million related to capitalized software
and website development projects.
(17) Segment and Geographic Data
Segments
Effective October 1, 2016 as a result of
organizational changes related to the Company’s new management team in 2016, the Company changed its financial reporting
to better reflect how it gathers and analyzes business and financial information about its businesses. The Company now reports
its results in three segments: (i) The Deal / BoardEx and (ii) RateWatch, which comprise its business to business segment, and
(iii) business to consumer, which is primarily comprised of the Company’s premium subscription newsletter products and website
advertising.
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
- The Deal / BoardEx
|
|
$
|
23,776,149
|
|
|
$
|
22,130,695
|
|
- RateWatch
|
|
|
7,674,548
|
|
|
|
7,192,706
|
|
Total business to business
|
|
|
31,450,697
|
|
|
|
29,323,401
|
|
- Business to consumer
|
|
|
31,018,693
|
|
|
|
34,176,130
|
|
Total
|
|
$
|
62,469,390
|
|
|
$
|
63,499,531
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income:
|
|
|
|
|
|
|
|
|
- The Deal / BoardEx
|
|
$
|
(1,251,693
|
)
|
|
$
|
(14,714,304
|
)
|
- RateWatch
|
|
|
1,016,400
|
|
|
|
(484,439
|
)
|
Total business to business
|
|
|
(235,293
|
)
|
|
|
(15,198,743
|
)
|
- Business to consumer
|
|
|
933,013
|
|
|
|
(2,012,844
|
)
|
Total
|
|
$
|
697,720
|
|
|
$
|
(17,211,587
|
)
|
|
|
|
|
|
|
|
|
|
Net interest (expense) income:
|
|
|
|
|
|
|
|
|
- The Deal / BoardEx
|
|
$
|
(1,375
|
)
|
|
$
|
(90,867
|
)
|
- RateWatch
|
|
|
9,514
|
|
|
|
9,862
|
|
Total business to business
|
|
|
8,139
|
|
|
|
(81,005
|
)
|
- Business to consumer
|
|
|
38,668
|
|
|
|
46,884
|
|
Total
|
|
$
|
46,807
|
|
|
$
|
(34,121
|
)
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes:
|
|
|
|
|
|
|
|
|
- The Deal / BoardEx
|
|
$
|
(1,778,429
|
)
|
|
$
|
138,816
|
|
- RateWatch
|
|
|
—
|
|
|
|
6,978
|
|
Total business to business
|
|
|
(1,778,429
|
)
|
|
|
145,794
|
|
- Business to consumer
|
|
|
(1,103,881
|
)
|
|
|
123,213
|
|
Total
|
|
$
|
(1,882,310
|
)
|
|
$
|
269,007
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
- The Deal / BoardEx
|
|
$
|
525,361
|
|
|
$
|
(14,943,987
|
)
|
- RateWatch
|
|
|
1,025,914
|
|
|
|
(481,555
|
)
|
Total business to business
|
|
|
1,551,275
|
|
|
|
(15,425,542
|
)
|
- Business to consumer
|
|
|
1,075,562
|
|
|
|
(2,089,173
|
)
|
Total
|
|
$
|
2,626,837
|
|
|
$
|
(17,514,715
|
)
|
Due to the nature of the Company’s
operations, a majority of its assets are utilized across all segments. In addition, segment assets are not reported to, or used
by, the Chief Operating Decision Maker to allocate resources or assess performance of the Company’s segments. Accordingly,
the Company has not disclosed asset information by segment.
Geographic Data
In 2017 and 2016, substantially all of the
Company’s revenue were from customers in the United States and substantially all of its long-loved assets are located in
the United States. The remainder of the Company’s revenue and its long-lived assets are a result of its BoardEx operations
outside of the United States, which is headquartered in London, England.