NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
AS OF MARCH 31, 2020 AND DECEMBER 31, 2019, AND
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
1. The Company and Summary of Significant Accounting Principles
Synacor, Inc., together with its consolidated subsidiaries (collectively, the “Company” or “Synacor”), is a digital technology company that provides email and collaboration software, cloud-based identity management platforms, managed web and mobile portals, and advertising solutions. The Company’s customers include communications providers, media companies, government entities and enterprises. Synacor is a trusted partner for enterprise software platforms and monetization solutions that Synacor delivers through public and private cloud software-as-a-service, software licensing, and professional services. Synacor enables clients to deepen their engagement with their consumers and users.
Basis of Presentation —
The interim unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the interim unaudited condensed consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position for the periods presented. These interim unaudited condensed consolidated financial statements are not necessarily indicative of the results expected for the full fiscal year or for any subsequent period.
The accompanying condensed consolidated balance sheet as of December 31, 2019 was derived from the audited financial statements as of that date, but does not include all the information and footnotes required by U.S. GAAP. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Accounting Estimates —
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Actual results could differ materially from these estimates and judgments.
Many of our estimates require increased judgment due to the significant volatility, uncertainty and economic disruption of the recent global COVID-19 pandemic. We will continue to monitor the effects of the COVID-19 pandemic, and our estimates and judgments may change materially as new events occur or additional information becomes available to us.
Concentrations of Risk —
As of March 31, 2020 and December 31, 2019, the Company had concentrations equal to or exceeding 10% of the Company’s accounts receivable as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Portal & Advertising Customer A
|
*
|
|
|
14
|
%
|
* - Less than 10%
|
|
|
|
For the three months ended March 31, 2020 and 2019, the Company had concentrations equal to or exceeding 10% of the Company’s revenue as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Google search
|
|
*
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portal & Advertising Customer A
|
|
*
|
|
|
13
|
%
|
|
|
|
|
* - Less than 10%
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2020 and 2019, the following customers received revenue-share payments equal to or exceeding 10% of the Company’s cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Portal & Advertising Customer B
|
|
*
|
|
|
30
|
%
|
|
|
|
|
* - Less than 10%
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements —
Not Yet Adopted
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2016-13 ("ASU 2016-13") Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to certain available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes result in earlier recognition of credit losses. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements and related disclosures.
Recently Adopted
In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting For Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement with the requirements for capitalizing implementation costs incurred for an internal-use software license. Adoption of this guidance is required for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and early adoption is permitted. The amendments will be applied prospectively to all implementation costs incurred after adoption. There was no impact to the Company's condensed consolidation financial statements for the quarter ended March 31, 2020 as a result of adopting this standard update on January 1, 2020.
The Company considers the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable, or had or are expected to have minimal impact on the Company’s financial statements and related disclosures.
2. Revenue from Contracts with Customers
The Company generates all of its revenue from contracts with customers. Many of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices of software licenses are typically estimated using the residual approach. Standalone selling prices of services are typically estimated based on observable transactions when these services are sold on a standalone basis. The Company usually expects payment within 30 to 90 days from the invoice date (fulfillment of performance obligations or per contract terms). None of the Company’s contracts as of March 31, 2020 contained a significant financing component. Differences between the amount of revenue recognized and the amount invoiced are recognized as deferred revenue.
Disaggregation of revenue
The following table provides information about disaggregated revenue for the three months ended March 31, 2020 and 2019 by the timing of revenue recognition, and includes a reconciliation of the disaggregated revenue by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Software & Services
|
|
|
|
|
|
|
|
|
Products and services transferred over time
|
|
$
|
8,330
|
|
|
$
|
8,875
|
|
|
|
|
|
Products transferred at a point in time
|
|
2,732
|
|
|
2,283
|
|
|
|
|
|
Total Software & Services
|
|
11,062
|
|
|
11,158
|
|
|
|
|
|
Portal & Advertising
|
|
|
|
|
|
|
|
|
Products and services transferred over time
|
|
1,224
|
|
|
1,506
|
|
|
|
|
|
Products transferred at a point in time
|
|
8,297
|
|
|
19,160
|
|
|
|
|
|
Total Portal & Advertising
|
|
9,521
|
|
|
20,666
|
|
|
|
|
|
Total Revenue
|
|
$
|
20,583
|
|
|
$
|
31,824
|
|
|
|
|
|
Revenue disaggregated by geography, based on the billing address of our customer, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
15,295
|
|
|
$
|
26,274
|
|
|
|
|
|
International
|
|
5,288
|
|
|
5,550
|
|
|
|
|
|
Total revenue
|
|
$
|
20,583
|
|
|
$
|
31,824
|
|
|
|
|
|
Remaining Performance Obligations
Deferred revenue is recorded when cash payments are received or due in advance of revenue recognition from software licenses, professional services, and maintenance agreements. The timing of revenue recognition may differ from the timing of billings to customers. The changes in deferred revenue, inclusive of both current and long-term, are as follows (in thousands):
|
|
|
|
|
|
Beginning balance - January 1, 2020
|
$
|
8,875
|
|
Recognition of deferred revenue
|
(2,793)
|
|
Deferral of revenue
|
2,254
|
|
Effect of foreign currency translation
|
(89)
|
|
Ending balance - March 31, 2020
|
$
|
8,247
|
|
The majority of the deferred revenue balance above relates to the maintenance and support contracts for the Company's email software licenses. These are recognized straight-line over the life of the contract, with the majority of the balance being recognized within the next twelve months.
Practical Expedients
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed.
3. Leases
The Company enters into various noncancelable operating lease agreements for certain of our offices, data centers, colocations and network equipment. The Company’s leases have original lease periods expiring between 2020 and 2025. Many leases include one or more options to renew. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. The Company’s variable lease payments are immaterial and its lease agreements do not contain any material residual value guarantees or material restrictive covenants. Operating lease costs are included in cost of revenue and general and administrative costs in the Company’s condensed consolidated statements of operations. Finance lease amortization costs are included in depreciation and amortization, and finance lease interest costs are included in interest expense in the Company’s condensed consolidated statements of operations.
The components of lease costs are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2020
|
|
Three Months Ended
March 31, 2019
|
Finance lease cost
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
1,012
|
|
|
$
|
628
|
|
Interest
|
|
42
|
|
|
189
|
|
Operating lease cost
|
|
717
|
|
|
1,090
|
|
Total lease cost
|
|
$
|
1,771
|
|
|
$
|
1,907
|
|
The lease term and discount rate are as follows :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
|
|
Operating leases
|
|
2.1
|
Years
|
|
2.0
|
Years
|
Finance leases
|
|
1.8
|
Years
|
|
1.2
|
Years
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
|
Operating leases
|
|
6.0
|
|
%
|
|
|
6.0
|
|
%
|
|
Finance leases
|
|
4.5
|
|
%
|
|
|
5.0
|
|
%
|
|
The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
The remainder of 2020
|
|
$
|
1,594
|
|
|
$
|
1,696
|
|
2021
|
|
1,601
|
|
|
701
|
|
2022
|
|
930
|
|
|
405
|
|
2023
|
|
434
|
|
|
66
|
|
2024
|
|
34
|
|
|
29
|
|
2025
|
|
—
|
|
|
2
|
|
Total undiscounted cash flows
|
|
4,593
|
|
|
2,899
|
|
Less imputed interest
|
|
(356)
|
|
|
(94)
|
|
Present value of lease liabilities
|
|
$
|
4,237
|
|
|
$
|
2,805
|
|
Supplemental cash flow information related to leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2020
|
|
Three Months Ended
March 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
778
|
|
|
$
|
1,202
|
|
Operating cash flows from finance leases
|
|
$
|
42
|
|
|
$
|
576
|
|
Financing cash flows from finance leases
|
|
$
|
1,107
|
|
|
$
|
48
|
|
|
|
|
|
|
Lease liabilities arising from obtaining right-of-use-assets:
|
|
|
|
|
Operating leases
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance leases
|
|
$
|
557
|
|
|
$
|
—
|
|
4. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the three months ended March 31, 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software & Services
|
|
Portal & Advertising
|
|
Total
|
December 31, 2019
|
$
|
11,804
|
|
|
$
|
4,144
|
|
|
$
|
15,948
|
|
Effect of foreign currency translation
|
(14)
|
|
|
—
|
|
|
(14)
|
|
March 31, 2020
|
$
|
11,790
|
|
|
$
|
4,144
|
|
|
$
|
15,934
|
|
The Company tests goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. As a result of the potential future financial impacts of the COVID-19 pandemic, particularly on our Portal & Advertising segment, the Company assessed its goodwill for impairment concluding that there was no impairment as of March 31, 2020. The Company has no accumulated impairment losses.
Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Customer and publisher relationships
|
$
|
14,780
|
|
|
$
|
14,780
|
|
Technology
|
2,330
|
|
|
2,330
|
|
Trademark
|
300
|
|
|
300
|
|
Intangible assets, gross
|
17,410
|
|
|
17,410
|
|
Less accumulated amortization
|
(9,535)
|
|
|
(8,999)
|
|
Intangible assets, net
|
$
|
7,875
|
|
|
$
|
8,411
|
|
The Company tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. As a result of the potential future financial impacts of the COVID-19 pandemic, the Company assessed its long-lived assets for impairment and concluded that there was no impairment as of March 31, 2020.
Amortization of intangible assets totaled $0.5 million for the three months ended March 31, 2020 and 2019. Based on acquired intangible assets recorded at March 31, 2020, amortization is expected to be $1.5 million for the remainder of 2020, $1.4 million in 2021, $1.3 million in 2022, $1.3 million in 2023, $1.3 million in 2024 and $0.9 million thereafter.
5. Property and Equipment – Net
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Computer equipment
|
$
|
25,784
|
|
|
$
|
25,392
|
|
Computer software
|
31,813
|
|
|
31,037
|
|
Furniture and fixtures
|
1,304
|
|
|
1,315
|
|
Leasehold improvements
|
1,097
|
|
|
1,116
|
|
Work in process (primarily software development costs)
|
253
|
|
|
187
|
|
Other
|
260
|
|
|
136
|
|
Property and equipment, gross
|
60,511
|
|
|
59,183
|
|
Less accumulated depreciation
|
(46,277)
|
|
|
(44,235)
|
|
Property and equipment, net
|
$
|
14,234
|
|
|
$
|
14,948
|
|
Depreciation expense totaled $1.7 million and $2.0 million for the three months ended March 31, 2020 and 2019, respectively.
Property and equipment includes computer equipment and software held under finance leases of $11.3 million and $10.8 million as of March 31, 2020 and December 31, 2019, respectively. Accumulated depreciation of computer equipment and software held under finance leases amounted to $7.0 million as of March 31, 2020. Accumulated depreciation of computer equipment and software held under capital leases amounted to $6.2 million as of December 31, 2019.
For the three months ended March 31, 2020 and 2019, respectively, the Company capitalized a total of $0.4 million and $0.7 million of costs that occurred during the application development phase, related to the development of internal-use software. The Company capitalized a total of $0.5 million and $0.3 million of costs related to the development of software for sale or license for the three months ended March 31, 2020 and 2019, respectively, that occurred after technological feasibility had been achieved.
Amortization of software capitalized for internal use was $0.7 million for the three months ended March 31, 2020 and $1.1 million for the three months ended March 31, 2019, and included in depreciation and amortization in the consolidated statement of operations. Amortization of software for sale or license was $0.5 million for the three months ended March 31, 2020 and is included in cost of revenue in the consolidated statement of operations. Amortization of software for sale or license was not material for the three months ended March 31, 2019.
There were no impairment charges during the three months ended March 31, 2020. Impairment charges related to software, previously capitalized for internal use, for the three months ended March 31, 2019 was $0.2 million and was included in general and administrative expense in the consolidated statement of operations. The impairment charges were a result of circumstances that indicated that the carrying values of the assets were not fully recoverable. The Company utilizes the discounted cash flow method to determine the fair value of the capitalized software assets.
The following table sets forth long-lived tangible assets by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Long-lived tangible assets:
|
|
|
|
United States
|
$
|
13,954
|
|
|
$
|
14,629
|
|
International
|
280
|
|
|
319
|
|
Total long-lived tangible assets
|
$
|
14,234
|
|
|
$
|
14,948
|
|
6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Accrued compensation
|
$
|
1,607
|
|
|
$
|
4,209
|
|
Accrued content fees and other costs of revenue
|
308
|
|
|
151
|
|
Accrued taxes
|
343
|
|
|
192
|
|
Other
|
1,055
|
|
|
1,326
|
|
Total
|
$
|
3,313
|
|
|
$
|
5,878
|
|
7. Segment Information
The Company operates its business in two reportable segments: 1) Software & Services and 2) Portal & Advertising. Software & Services generates revenue by providing cloud-based identity management solutions and email/collaboration products. Portal & Advertising generates managed portal fees and advertising revenue from its traffic on its Managed Portals and other advertising solutions it provides for publishers.
The Company’s operations are organized and managed by type of products and services and segment information is reported accordingly. The Company’s chief operating decision maker (the “CODM”) is its Chief Executive Officer. The CODM reviews financial performance and allocates resources by reportable segment. There have been no operating segments aggregated to arrive at the Company’s reportable segments.
The accounting policies of each segment are the same as those described in the summary of significant accounting policies, refer to Note 1— Summary of Significant Accounting Policies, for further details. The Company evaluates the performance of its segments and allocates resources to them based on Segment Adjusted EBITDA. Segment Adjusted EBITDA is defined as EBITDA (earnings before interest, income taxes, depreciation and amortization) adjusted for certain non-cash items and other non-recurring income and expenses.
Revenue for all operating segments include only transactions with unaffiliated customers and there is no intersegment revenue.
The Company does not account for, and does not report to management, its assets or capital expenditures by segment other than goodwill and intangible assets used for impairment analysis purposes.
The tables below summarize the financial information for the Company’s reportable segments for the three months ended March 31, 2020 and 2019 (in thousands). The “Corporate Unallocated Expenses” category, as it relates to Segment Adjusted EBITDA, primarily includes corporate overhead costs, such as rent, payroll and related benefit costs and professional services which are not directly attributable to any individual segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Cost of revenue (1)
|
|
Segment Adjusted
EBITDA
|
|
|
|
|
|
|
Software & Services
|
|
$
|
11,062
|
|
|
$
|
3,206
|
|
|
$
|
3,528
|
|
|
|
|
|
|
|
Portal & Advertising
|
|
9,521
|
|
|
7,523
|
|
|
(241)
|
|
|
|
|
|
|
|
Corporate Unallocated Expenses
|
|
—
|
|
|
—
|
|
|
(2,974)
|
|
|
|
|
|
|
|
Total Company
|
|
$
|
20,583
|
|
|
$
|
10,729
|
|
|
$
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Cost of revenue (1)
|
|
Segment Adjusted
EBITDA
|
|
|
|
|
|
|
Software & Services
|
|
$
|
11,158
|
|
|
$
|
3,503
|
|
|
$
|
2,794
|
|
|
|
|
|
|
|
Portal & Advertising
|
|
20,666
|
|
|
13,003
|
|
|
2,621
|
|
|
|
|
|
|
|
Corporate Unallocated Expenses
|
|
—
|
|
|
—
|
|
|
(3,711)
|
|
|
|
|
|
|
|
Total Company
|
|
$
|
31,824
|
|
|
$
|
16,506
|
|
|
$
|
1,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
(1)
|
Exclusive of depreciation and amortization shown separately on the condensed consolidated statements of operations
|
The following table reconciles total Segment Adjusted EBITDA to Net loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Total Segment Adjusted EBITDA
|
|
$
|
313
|
|
|
$
|
1,704
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
(331)
|
|
|
(277)
|
|
|
|
|
|
Interest expense
|
|
(59)
|
|
|
(64)
|
|
|
|
|
|
Other income, net
|
|
167
|
|
|
216
|
|
|
|
|
|
Depreciation and amortization
|
|
(2,732)
|
|
|
(2,487)
|
|
|
|
|
|
Asset impairment
|
|
—
|
|
|
(226)
|
|
|
|
|
|
Stock-based compensation expense
|
|
(377)
|
|
|
(331)
|
|
|
|
|
|
Restructuring costs
|
|
(60)
|
|
|
—
|
|
|
|
|
|
Certain professional services and legal fees*
|
|
(1,446)
|
|
|
(779)
|
|
|
|
|
|
Net loss
|
|
$
|
(4,525)
|
|
|
$
|
(2,244)
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
*
|
"Certain legal & professional services fees" includes legal fees and other related expenses outside the ordinary course of business, as well as fees and expenses related to merger and acquisition activities.
|
8. Commitments and Contingencies
Litigation —The Company and its Chief Executive Officer and former Chief Financial Officer were named as defendants in a federal securities class action lawsuit filed on April 4, 2018 in the United States District Court for the Southern District of New York. The class includes persons who purchased the Company’s shares between May 4, 2016 and March 15, 2018. The plaintiff alleged that the Company made materially false and misleading statements regarding its contract with AT&T and the timing of revenue to be derived therefrom, and that as a result, class members suffered losses because Synacor shares traded at artificially inflated prices. The plaintiff sought an unspecified amount of damages, as well as interest, attorneys’ fees and legal expenses. The plaintiff filed an amended complaint on August 2, 2018, a second amended complaint on November 2, 2018, and the Company filed a motion to dismiss on December 17, 2018. The plaintiff filed an opposition to the motion to dismiss on January 19, 2019 and the Company filed its reply to plaintiff’s opposition on February 15, 2019. On August 28, 2019, the court granted the Company's motion to dismiss but permitted the plaintiff to seek leave to replead. On October 2, 2019, the plaintiff filed a letter application seeking the court's leave to file a third amended complaint. The Company filed a letter in opposition to the plaintiff's motion on October 21, 2019. The court denied plaintiffs’ application to file an amended complaint and ordered the case closed on November 15, 2019. The Clerk of the Court entered judgment in favor of the Company and the individual defendants and closed the case on November 19, 2019. Plaintiff filed its Notice of Appeal on December 16, 2019. Plaintiff-Appellant filed its brief in support of its appeal on March 20, 2020. The Company disputes these claims and intends to defend them vigorously. The Company cannot yet determine whether it is probable that a loss will be incurred in connection with this complaint, nor can the Company reasonably estimate the potential loss, if any. Legal fees and liabilities related to this lawsuit are covered by our D&O insurance policy now that the Company has reached its deductible.
In addition, the Company is, from time to time, party to litigation arising in the ordinary course of business. It does not believe that the outcome of these claims will have a material adverse effect on its consolidated financial position, results of operations or cash flows based on the status of proceedings at this time. However, these matters are subject to inherent uncertainties and the Company’s view of these matters may change in the future.
9. Stock-based Compensation
The Company has stock-based employee compensation plans for which compensation cost is recognized in its financial statements. The Company is authorized to grant key employees stock-based incentive awards, including options to purchase common stock, stock appreciation rights, restricted stock units ("RSUs"), performance stock units ("PSUs") or other stock units. The cost is measured at the grant date, based on the fair value of the award, determined using the Black-Scholes option pricing model, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).
The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2020
|
|
Three Months Ended
March 31, 2019
|
Weighted average grant date fair value
|
|
$
|
0.88
|
|
|
$
|
0.99
|
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
Expected stock price volatility
|
|
63
|
%
|
|
61
|
%
|
Risk-free interest rate
|
|
2.1
|
%
|
|
2.6
|
%
|
Expected life of options (in years)
|
|
5.82
|
|
6.25
|
Total stock-based compensation expense included in the accompanying condensed consolidated statements of operations for the periods presented, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Technology and development
|
|
$
|
57
|
|
|
$
|
103
|
|
|
|
|
|
Sales and marketing
|
|
101
|
|
|
115
|
|
|
|
|
|
General and administrative
|
|
219
|
|
|
113
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
377
|
|
|
$
|
331
|
|
|
|
|
|
Stock Option Activity – A summary of the stock option activity for the three months ended March 31, 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
Outstanding at January 1, 2020
|
|
7,296,746
|
|
|
$
|
2.48
|
|
|
|
|
|
Granted
|
|
76,500
|
|
|
1.52
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
|
(43,917)
|
|
|
2.05
|
|
|
|
|
|
Expired
|
|
(331,996)
|
|
|
2.40
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
6,997,333
|
|
|
$
|
2.47
|
|
|
5.33
|
|
$
|
—
|
|
Vested and expected to vest at March 31, 2020
|
|
6,961,490
|
|
|
$
|
2.48
|
|
|
5.30
|
|
$
|
—
|
|
Vested and exercisable at March 31, 2020
|
|
5,872,722
|
|
|
$
|
2.54
|
|
|
4.76
|
|
$
|
—
|
|
Aggregate intrinsic value represents the difference between the Company’s closing stock price of its common stock and the exercise price of outstanding, in-the-money options. The Company’s closing stock price as reported on the Nasdaq Global Market as of March 31, 2020 was $1.02 per share. The total intrinsic value of options exercised for the three months ended March 31, 2020 was minimal. The weighted average fair value of options granted during the three months ended March 31, 2020 amounted to $0.88 per option share.
As of March 31, 2020, the unrecognized compensation cost related to options granted, for which vesting is probable, and adjusted for estimated forfeitures, was approximately $1.2 million. This cost is expected to be recognized over a weighted-average remaining period of 2.01 years.
RSU Activity —A summary of RSU activity for the three months ended March 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Fair Value
|
Unvested—January 1, 2020
|
|
677,354
|
|
|
$
|
1.54
|
|
Granted
|
|
87,506
|
|
|
1.10
|
|
Vested
|
|
(190,873)
|
|
|
1.52
|
|
Forfeited
|
|
(1,251)
|
|
|
1.76
|
|
Unvested—March 31, 2020
|
|
572,736
|
|
|
$
|
1.49
|
|
|
|
|
|
|
As of March 31, 2020, total unrecognized compensation cost, adjusted for estimated forfeitures, related to RSUs was $0.7 million. This cost is expected to be recognized over a weighted-average remaining period of 2.06 years.
PSU Activity — A summary of PSU activity for the three months ended March 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Fair Value
|
Unvested—January 1, 2020
|
|
297,789
|
|
|
|
$
|
1.36
|
|
Granted
|
|
—
|
|
|
|
—
|
|
Vested
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
(74,442)
|
|
|
|
—
|
|
Unvested—March 31, 2020
|
|
223,347
|
|
|
|
$
|
1.36
|
|
As of March 31, 2020, total unrecognized compensation cost, adjusted for estimated forfeitures, related to PSU's was $0.2 million. This cost is expected to be recognized over a weighted-average remaining period of 2.76 years.
10. Net Loss Per Common Share Data
Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. The Company’s potential common shares consist of the incremental common shares issuable upon the exercise of stock options, warrants, and to a lesser extent, shares issuable upon the release of RSUs. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method.
The following securities were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Anti-dilutive equity awards:
|
|
|
|
|
|
|
|
|
Stock options
|
|
7,147,040
|
|
|
7,612,104
|
|
|
|
|
|
Restricted stock units
|
|
625,045
|
|
|
202,888
|
|
|
|
|
|
Performance based stock units
|
|
260,568
|
|
|
—
|
|
|
|
|
|
11. Merger Agreement with Qumu Corporation
On February 11, 2020, the Company, Qumu Corporation, a Minnesota corporation (“Qumu”), and Quantum Merger Sub I, Inc., a Minnesota corporation and a direct, wholly owned subsidiary of Synacor (“Merger Sub”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) for a proposed “merger of equals” transaction, pursuant to which, and subject to the conditions in the Merger Agreement, Merger Sub will merge with and into Qumu (the “Merger”), with Qumu surviving the Merger as a wholly owned subsidiary of the Company. Pursuant to the Merger Agreement, each issued and outstanding share of common stock, par value $0.01 per share, of Qumu will be converted into the right to receive 1.61 newly issued shares of common stock, par value $0.01 per share, of Synacor. No fractional shares of Synacor common stock will be issued in the Merger, and Qumu stockholders will receive cash in lieu of fractional shares of Synacor common stock, as specified in the Merger Agreement.
The closing of the Merger is subject to customary closing conditions, including (i) the absence of any adverse law or order promulgated, entered, enforced, enacted or issued by any governmental entity that makes illegal or prohibits the Merger, (ii) the Securities and Exchange Commission (the “SEC”) shall have declared effective the Form S-4 Registration Statement of Synacor, (iii) the approval of the Merger Agreement by the affirmative vote of the holders of a majority of the outstanding shares of Qumu common stock entitled to vote thereon, (iv) the approval of the issuance of shares of Synacor common stock pursuant to the Merger Agreement by the affirmative vote of a majority of votes present or represented by proxy at Synacor’s stockholder meeting in connection with the Merger, (v) the authorization for listing on The Nasdaq Stock Market, subject to official notice of issuance, of the shares of Synacor Common Stock to be issued in the Merger, (vi) the receipt of certain opinions from legal counsel regarding the intended tax treatment of the Merger, (vii) subject to certain materiality exceptions, the accuracy of certain representations and warranties of each of Qumu and Synacor contained in the Merger Agreement and the compliance by each party with the covenants contained in the Merger Agreement, and (viii) the absence of a material adverse effect with respect to each of Qumu and Synacor.
The Merger Agreement also contains a non-solicitation provision pursuant to which neither Qumu nor Synacor is permitted to solicit, initiate, induce or knowingly encourage or facilitate, any acquisition proposal from third parties or to engage in discussions or negotiations with third parties regarding any acquisition proposal. Notwithstanding this limitation, prior to a party’s requisite shareholder approval, such party may under certain circumstances provide information to and participate in discussions or negotiations with third parties with respect to an acquisition proposal that its board of directors has determined in good faith constitutes or is reasonably likely to lead to a superior proposal. Each party’s board of directors may change its recommendation to its shareholders (subject to the other party’s right to terminate the Merger Agreement following such change in recommendation) in response to a superior proposal or an intervening event if the board of directors determines in good faith that the failure to take such action would reasonably be expected to be inconsistent with the directors’ fiduciary duties under the Minnesota Business Corporation Act or the General Corporation Law of the State of Delaware, as applicable.
If the Merger Agreement is terminated under certain circumstances as indicated in the Merger Agreement Qumu or Synacor, as applicable, may be required to pay the other party a termination fee of $2.0 million.
The parties expect the Merger will be completed in the third quarter of calendar year 2020. During the three months ended March 31, 2020, the Company recognized transaction-related expenses related to the Merger Agreement of $1.4 million, which are included within general and administrative expenses in the Company's condensed consolidated statement of operations.
12. Subsequent Event
On April 30, 2020, the Company entered into the First Amendment (the "Amendment") to the Loan and Security Agreement dated August 17, 2019, (the "Agreement"), with Silicon Valley Bank (the "Lender"). The Amendment changed the date from April 30, 2020 to May 31, 2020 for which the minimum Free Cash Flow target proposed by the Lender is to be agreed upon by the Company, as defined by the Agreement, with respect to any period from September 30, 2020 through and including December 31, 2020.